U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended February 28, 2001
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period from ________ to _________
Commission File Number: 0-11868
Cardiodynamics International Corporation
(Exact name of registrant as specified in its charter)
California 95-3533362
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6175 Nancy Ridge Drive, Suite 300, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
(858) 535-0202
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No [_]
---
As of April 10, 2001, 45,520,749 shares of common stock and no shares of
preferred stock were outstanding.
CardioDynamics International Corporation
FORM 10-Q
TABLE OF CONTENTS
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets at February 28, 2001 (unaudited) and
November 30, 2000 (audited) 3
Statements of Operations (unaudited) for the three
months ended February 28, 2001 and February 29, 2000 4
Statements of Cash Flows (unaudited) for the three
months ended February 28, 2001 and February 29, 2000 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CardioDynamics International Corporation
Balance Sheets
(In thousands, except share and per share data)
February 28, November 30,
2001 2000
Assets (Unaudited) (Audited)
---------- ----------
Current assets:
Cash and cash equivalents $ 8,848 $ 11,595
Accounts receivable, net of allowance for doubtful accounts
of $1,724 in 2001 and $1,649 in 2000 4,954 3,771
Inventory, net 2,528 2,255
Other current assets, net 1,661 1,142
--------- ----------
Total current assets 17,991 18,763
Property and equipment, net 552 575
Long-term receivables and note receivable, net 2,231 2,193
Deposits 30 30
--------- ----------
Total assets $ 20,804 $ 21,561
========= ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,615 $ 1,588
Accrued expenses 502 564
Accrued salaries, wages and benefits 556 671
Current maturities of long-term debt 80 85
--------- ----------
Total current liabilities 2,753 2,908
Long-term debt, less current maturities 58 87
--------- ----------
Total liabilities 2,811 2,995
Shareholders' equity:
Preferred Stock; no par value; 18,000,000 shares authorized; no shares
issued or outstanding at February 28, 2001 and November 30, 2000 -- --
Common stock; no par value; 100,000,000 shares authorized; issued
and outstanding 45,520,749 shares at February 28, 2001 and
45,518,475 shares at November 30, 2000 48,231 48,270
Accumulated deficit (30,238) (29,704)
--------- ----------
Total shareholders' equity 17,993 18,566
--------- ----------
Commitments and contingencies
Total liabilities and shareholders' equity $ 20,804 $ 21,561
========= ==========
See accompanying notes to financial statements.
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CardioDynamics International Corporation
Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
---------------------------
February 28, February 29,
2001 2000
------------ ------------
Net sales $ 3,964 $ 2,624
Cost of sales 1,215 789
----------- ----------
Gross margin 2,749 1,835
----------- ----------
Operating expenses:
Research and development 810 506
Selling, general, and administrative expenses 2,644 1,853
----------- ----------
Total operating expenses 3,454 2,359
----------- ----------
Loss from operations (705) (524)
Other income (expense):
Interest income 190 51
Interest expense (13) (82)
Other, net (5) (2)
----------- ----------
Total other income (expense) 172 (33)
Loss before income taxes (533) (557)
Income taxes (1) (1)
----------- ----------
Net loss $ (534) $ (558)
=========== ==========
Net loss per share, basic and diluted $ (.01) $ (.01)
=========== ==========
Weighted-average number of common shares outstanding 45,519,710 41,473,490
=========== ==========
See accompanying notes to financial statements.
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CardioDynamics International Corporation
Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
------------------------------------
February 28, February 29,
2001 2000
--------------- -----------------
Cash flows from operating activities:
Net loss $ (534) $ (558)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 68 39
Provision for warranty repairs 2 (17)
Provision for obsolete inventory 58 (113)
Provision for demonstration inventory 25 1
Provision for doubtful receivables 75 125
Provision for doubtful long-term receivables (81) --
Compensatory stock options granted 14 23
Changes in operating assets and liabilities:
Accounts receivable (1,258) (367)
Inventory (357) (93)
Other current assets (519) (167)
Long-term receivables and note receivable 43 12
Accounts payable 27 (347)
Accrued expenses (186) (16)
Deferred service revenue 122 --
Accrued salaries, wages and benefits (115) 25
--------------- -----------------
Net cash used in operating activities (2,614) (1,453)
--------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (45) (45)
--------------- -----------------
Net cash used in investing activities (45) (45)
--------------- -----------------
Cash flows from financing activities:
Repayment of long-term debt (34) (21)
Repayment of revolving line of credit -- (1,000)
Exercise of warrants and options 3 824
Issuance of common stock, net (57) 3,086
--------------- -----------------
Net cash (used) provided by financing activities (88) 2,889
--------------- -----------------
Net (decrease) increase in cash and cash equivalents (2,747) 1,391
Cash and cash equivalents at beginning of period 11,595 2,406
--------------- -----------------
Cash and cash equivalents at end of period $ 8,848 $ 3,797
=============== =================
See accompanying notes to financial statements.
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CardioDynamics International Corporation
Notes to Financial Statements
(Unaudited)
Description of Business
We were originally incorporated in California in June 1980 as Bomed Medical
Manufacturing, Ltd. and in October 1993 changed our name to CardioDynamics
International Corporation. We develop, manufacture and market heart-monitoring
devices that provide physicians with continuous data on a wide range of
parameters relating to blood flow and heart function. Unlike other cardiac
function monitoring technologies, our monitors are noninvasive. Our primary
products, the BioZ(R) System, the BioZ(TM) Portable, and the BioZ.com(R), use a
technology called impedance cardiography (ICG) to obtain data which is typically
available only through a time-consuming, costly and potentially dangerous
invasive procedure known as pulmonary artery catheterization, or PAC.
Many patients who might otherwise benefit from cardiac function monitoring are
often not monitored because the risks and costs associated with PAC outweigh the
potential benefits. The BioZ(R) Systems allow these patients to be monitored in
a safe, efficient and cost-effective manner. Since the BioZ(R) Systems provide
cardiac function monitoring noninvasively, they have the potential to expand the
number of clinical applications well beyond cardiology, intensive care and
surgery. These include applications for congestive heart failure, high blood
pressure, emergency, dialysis, immune suppressed, high risk obstetric and
pacemaker patients.
Basis of Presentation
The information contained in this report is unaudited, but in our opinion
reflects all adjustments necessary to make the financial position and results of
operations for the interim periods a fair statement of our operations and cash
flows. All such adjustments are of a normal recurring nature. These statements
should be read along with the Financial Statements and Notes that go along with
our audited financial statements, as well as the other financial information for
the fiscal year ended November 30, 2000 as presented in our Annual Report on
Form 10-KSB. Financial presentations for prior periods have been reclassified to
conform to current year presentation. The results of operations and cash flows
for the three months ended February 28, 2001 are not necessarily indicative of
the results that may be expected for the full fiscal year ended November 30,
2001.
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CardioDynamics International Corporation
Notes to Financial Statements
(Unaudited)
Inventories
Inventory consists of the following: (in thousands)
February 28, November 30,
2001 2000
----------------- -----------------
Electronic components and subassemblies $ 1,524 $ 1,643
Finished goods 1,036 624
Work in process 101 95
Demonstration units 659 602
Less provision for obsolete inventory (563) (505)
Less provision for demonstration inventory (229) (204)
----------------- -----------------
$ 2,528 $ 2,255
================= =================
Long-Term Receivables & Note Receivable
Commencing in the third fiscal quarter of 2000, we began offering no-interest
financing of our BioZ(TM) systems with maturities ranging from 24 to 60 months.
The long-term receivables are collateralized by the systems. During the first
fiscal quarter of 2001 we established a similar program through a third-party
financing company to replace the internal equipment financing program.
The fair value of each long-term receivable is estimated by discounting the
future cash flows using an interest rate of 8.5%. At February 28, 2001, the fair
value of the receivables approximated their carrying value.
In March 2000, we entered into a license and purchase agreement with Profiles in
Health, Inc., a privately held California corporation. Under the terms of the
agreement, we manufactured and provided custom ICG monitors called BioZ.pc(TM)
and disposable sensor sets. Under the terms of the agreement, we had a right to
suspend performance should Profiles in Health become delinquent on any amounts
due us. During the fourth quarter of fiscal 2000, when their inability to pay
became apparent, we suspended shipments and established a 100% allowance for the
receivables and inventory unique to this customer.
-7-
CardioDynamics International Corporation
Notes to Financial Statements
(Unaudited)
Long-Term Receivables & Note Receivable - (continued)
Long-term receivables and note consist of the following: (in thousands)
February 28, November 30,
2001 2000
-------------- ------------
Long-term receivables, net of deferred interest $ 3,787 $ 3,345
Secured note receivable 325 325
Less allowance for doubtful long-term receivables (485) (566)
---------- -----------
3,627 3,104
Less current portion of long-term receivables (1,396) (911)
---------- -----------
$ 2,231 $ 2,193
========== ===========
Net Loss Per Share
Net loss per share is computed by dividing the net loss to shareholders by the
weighted-average number of shares outstanding during the period. Diluted loss
per share is calculated by including the additional shares of common stock
issuable upon exercise of outstanding options and warrants in the weighted-
average share calculation. Basic and diluted loss per share are the same for the
three months ended February 28, 2001 and February 29, 2000 as all potentially
dilutive securities are antidilutive. For the three months ended February 28,
2001 and February 29, 2000, the following options and warrants, each convertible
into one share of common stock, were not included in the diluted earnings per
share calculation as their effect was antidilutive.
For the Three Months Ended
--------------------------------
Feb. 28, Feb. 29,
2001 2000
---------------- ---------------
Stock options.......................................... 3,807,004 3,855,231
Warrants............................................... 2,472,170 2,779,384
-8-
CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements include statements regarding our plans, goals,
strategies, intent, beliefs or current expectations. These statements are
expressed in good faith and we believe, had a reasonable basis when expressed,
but there can be no assurance that these expectations will be achieved or
accomplished. Sentences in this document containing verbs such as "plan,"
"intend," "anticipate," "target," "estimate," "expect," etc., and/or future-
tense or conditional constructions ("will," "may," "could," "should," etc.)
constitute forward-looking statements that involve risks and uncertainties.
Items contemplating, or making assumptions about, actual or potential future
sales, market size, collaborations, trends or operating results also constitute
such forward-looking statements.
Although forward-looking statements in this Report reflect the good faith
judgment of management, such statements can only be based on facts and factors
currently known by management. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in, or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include without limitation those
discussed in our Annual Report on Form 10-KSB for the year ended November 30,
2000. Readers are urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Report. We undertake no
obligation to revise or update any forward-looking statements in order to
reflect any event or circumstance that may arise after the date of this Report.
Readers are urged to carefully review and consider the various disclosures made
by us in our 10-KSB for the year ended November 30, 2000, which attempt to
advise interested parties of the risks and factors that may affect the our
business, financial condition, results of operations and prospects.
The following discussion should be read along with the Financial Statements and
Notes to our audited financial statements, as well as the other financial
information for the fiscal year ended November 30, 2000.
-9-
CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (continued)
OVERVIEW
CardioDynamics International Corporation is a medical technology and information
solutions company that develops, manufactures, and markets noninvasive heart-
monitoring devices using our proprietary impedance cardiography (ICG)
technology, DISQ(TM) technology, and ZMarc(TM) algorithm.
Our proprietary, patented technology noninvasively monitors the heart's ability
to deliver blood to the body. Our products measure 12 hemodynamic (blood flow)
parameters, the most significant of which is cardiac output, or the amount of
blood pumped by the heart each minute. Our lead product, the BioZ.com(R), has
been cleared by the Federal Drug Administration (FDA) and carries the CE mark.
We sell to US physicians through our own direct sales force and distribute our
products to domestic hospitals and targeted international markets through a
strategic alliance with GE Medical Systems Information Technologies and a
network of international distributors. In November 1998, Health Care Finance
Administration (HCFA) mandated Medicare reimbursement for our BioZ(R) procedures
and in January 2001, implemented uniform reimbursement throughout the United
States. To date, we have an installed base of over 1,200 units in over 700
physician offices and hospital sites throughout the world.
Our products help physicians assess, diagnose and treat cardiovascular disease,
which is the number one killer of adults in the United States. According to the
American Heart Association (AHA), approximately one in five Americans have some
form of cardiovascular disease. The AHA estimates that over $300 billion will be
spent in the United States during 2001 as a result of cardiovascular disease and
stroke. This figure includes both the direct costs associated with physicians
and other professionals, hospital and nursing home services, medication and the
indirect costs associated with lost productivity resulting from morbidity and
mortality.
Electrocardiography (EKG or ECG) is a widely used noninvasive assessment of the
heart, however, it is limited in that it only measures the electrical
characteristics of the heart. Our ICG technology makes it possible to
noninvasively measure the mechanical function of the heart. Conditions that can
impact the proper mechanical functioning of the heart include hypertension (high
blood pressure), congestive heart failure, pulmonary disease, high-risk
pregnancy and kidney dysfunction. Our technology complements the EKG and
supplements information obtained through the five vital signs - heart rate,
respiration rate, body temperature, blood pressure and oxygen saturation -
immediately, safely and cost effectively. We consider noninvasive cardiac output
to be the "Sixth Vital Sign(TM)."
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CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (continued)
The primary method currently being used to measure hemodynamic parameters is
pulmonary artery catheterization (PAC). The invasive, costly and risky PAC
procedure requires hospitalization and involves an incision into the patient's
neck or groin region and the insertion of a catheter (plastic tube) through the
heart directly into the pulmonary artery. Complications associated with this
procedure occur in as many as one in four reported cases and include irregular
heartbeats, infection, pulmonary artery rupture and death.
Because of the high risk of complications, physicians generally perform PAC only
on critically ill patients. Because PAC is not available in the physician's
office or outpatient clinic, in the great majority of situations the physician
seeking to diagnose cardiovascular disease must indirectly assess the patient's
hemodynamic status by measuring blood pressure, checking the pulse, looking at
neck veins and employing subjective examination techniques that are prone to
human error. A compelling need exists for objective, safe, cost-effective
noninvasive measurement tools, such as our BioZ(R) systems, that physicians can
safely prescribe more frequently and at an earlier stage in treatment.
During ICG monitoring using our BioZ(R) systems, an undetectable electrical
signal is transmitted through the chest via four proprietary sensors on the
patient's neck and chest. Our sophisticated Digital Impedance Signal Quantifier
(DISQ(TM)) technology and impedance modulating aortic compliance (ZMARC(TM))
algorithm analyze and record 12 hemodynamic parameters. Based on this data, a
physician can assess the patient's condition, customize treatment, monitor
patient compliance, analyze the effectiveness of prescribed medications and more
accurately identify potential complications.
RESULTS OF OPERATIONS
The three month periods ended February 28, 2001 and February 29, 2000.
- ----------------------------------------------------------------------
REVENUES. Net sales for the first fiscal quarter of 2000 were $3,964,000, an
increase of 51% over the same three-month period of fiscal 2000 in which net
sales were $2,624,000. The sales growth in the first fiscal quarter of 2001 is
primarily due to the expansion of our domestic direct sales force, a 20-unit
sale to the Romanian government through our international distributor network,
our strategic alliance with GE Medical Systems Information Technologies and the
medical community's growing recognition of the clinical usefulness and demand
for our BioZ(R) products. We sold 156 BioZ Systems during the quarter,
increasing our installed base to over 1,200 systems being used in over 700
customer sites.
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CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (continued)
RESULTS OF OPERATIONS - (continued)
Our direct sales force targets physician offices and hospitals in the US with
fewer than 100 beds. By February 28, 2001, we had 48 sales associates, including
33 territory managers (up from 25 at February 29, 2000) and eight clinical sales
specialists. Our direct sales force accounted for 80% of our net sales during
the first fiscal quarter of 2001, as compared with 62% during the first fiscal
quarter of 2000. Direct sales for the quarter increased 97% from $1,618,000 for
the three months ended February 28, 2000 to $3,182,000 for the current fiscal
period. Over the past several quarters we have supplemented our direct sales
force by adding clinical sales specialists to assist in three primary areas:
pre-sales activities including demonstrations, installation and training of
post-sale customers, and on-going customer support to increase customer
satisfaction and drive recurring revenues.
Corporate sales and sales to distributors, including GE Medical Systems
Information Technologies, were $783,000 during the quarter ended February 28,
2001 down from $1,006,000 for the same quarter last year primarily because
2000's first quarter included initial demo and stocking systems for GE Medical
Systems Information Technologies.
During the third quarter of fiscal 2000, we entered into an agreement with GE
Medical Systems Information Technologies to jointly develop a custom plug-in
module for the GE Solar(R) patient monitoring systems. The BioZ(R) ICG module
will extend the capabilities of the Solar 7000 product family to provide all of
the cardiac function parameters of the BioZ.com(R) to GE Medical System's
installed customer base of over 30,000 units. The module is to be built at GE
Medical System's facility in Milwaukee, Wisconsin using circuit board
assemblies, patient cables and sensors supplied by us. The product will be
distributed by the GE Medical System's direct sales force and we will receive a
royalty payment for each module sold. We expect the module to be introduced to
the market during the second quarter of 2001 following FDA 510(k) clearance. In
January 2001, GE Medical Systems Information Technologies committed to purchase
$3.5 million of our BioZ(R) products and modules during fiscal 2001.
Each time our BioZ products are used, disposable sets of four dual sensors are
required. The disposable sensors have a list price of $9.95 per application.
Recurring revenue, which is primarily related to sensor sales, for our first
quarter of 2001 was $359,000, an increase of 69% over last year's same quarter
revenue of $212,000. In May 2000, we received FDA 510(k) clearance for our new
proprietary "BioZtect(TM)" sensor. The BioZtect(TM) sensor offers notable
improvements in performance and safety. Its unique shape, chemical composition,
adhesion characteristics and more user-friendly design optimize signal
transmission and detection sensitivity. The new sensor and cable system has a
proprietary interface to ensure that customers exclusively use the BioZtect(TM)
with our BioZ systems. As the installed base of BioZ equipment grows, we expect
the revenue generated by our disposable sensors to continue to increase.
-12-
CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (continued)
RESULTS OF OPERATIONS - (continued)
GROSS MARGIN. Our gross margin for the quarter ended February 28, 2001,
increased 50%, to $2,749,000, or 69.3% of sales, up from $1,835,000, or 69.9% of
sales, in the first quarter of fiscal 2000. The first quarter 2000 gross margin
included a $150,000 reduction of inventory obsolescence reserves due to the
March 2000 sales agreement with Profiles in Health. The overall increase in our
gross margin during the first quarter of fiscal 2001 was due principally to the
higher sales volume and reduced direct material costs resulting from higher
quantity purchases and concerted material cost reduction efforts, along with a
higher average sales price per unit.
RESEARCH AND DEVELOPMENT. Our research and development expenses for the first
fiscal quarter of 2001 were 60% higher than the same period in fiscal 2000, up
from $506,000 to $810,000. We continue to invest a significant portion of our
resources into research, clinical studies, further enhancements to the
BioZ.com(TM) systems and new product development. During the past year, we have
increased our internal research and development personnel from 11 to 16, thereby
decreasing our reliance on outside engineering consulting services. We
anticipate that the expenses associated with research, clinical studies, further
enhancements to the Bioz.com(TM) systems and new product development will
continue to comprise a substantial portion of our overall expense structure in
the balance of 2001.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the first fiscal quarter of 2001 increased to $2,644,000, a 43%
increase over the same period in 2000, with expenditures of $1,853,000. The
majority of the increase is the result of continued expansion of both our
domestic direct sales force and our distribution support capabilities. In the
first quarter of fiscal 2001, we had 33 direct sales representatives, up from 25
in the first quarter of fiscal 2000. We intend to continue to expand our direct
sales force and clinical sales specialists during the balance of 2001 as we
identify qualified candidates in targeted metropolitan areas.
Included in selling, general and administrative expense for the first quarter of
fiscal 2001, is $450,000 of general and administrative expenses related to the
overall infrastructure and management of the company, an increase of 20% from
$375,000 incurred in the first quarter of fiscal 2000. We continue to target our
investments to areas of the business that directly contribute to revenue growth.
As a result, our general and administrative expenses continued to decrease as a
percentage of sales, from 14.3% for the first three months of fiscal 2000, to
11.1% for the first three months of fiscal 2001.
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CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (continued)
RESULTS OF OPERATIONS - (continued)
INTEREST INCOME AND EXPENSE. We earned $190,000 of interest income on our
invested funds in the first quarter of fiscal 2001, up from $51,000 earned in
the first quarter of fiscal 2000. The increase is primarily due to increased
funds available for investment for the period and interest earned on our in-
house equipment financing program that was offered in our fourth and the latter
part of our third fiscal quarters of 2000. During our third fiscal quarter of
2000 we repaid nearly $3 million of debt which resulted in an 84% reduction in
interest expense for the first quarter of 2001 at $13,000, from the $82,000
incurred in the same quarter of fiscal 2000.
NET LOSS. The net loss for the first quarter of fiscal 2001 was $534,000, or
$.01 per common share, compared with $558,000, or $.01 per common share for the
first quarter of fiscal 2000. The weighted average number of common shares
outstanding during the first three months of fiscal 2001, increased by 9.8% over
last year's amount, primarily due to the July 2000, private placement of common
stock, and the exercise of 810,000 stock options and warrants in the past year.
LIQUIDITY AND CAPITAL RESOURCES
In May of 1999, we raised $5.2 million through a private placement of common
stock to institutional and accredited investors, in December 1999, we raised
$3.3 million, and in July 2000, we raised $18.7 million (net $15.1 million)
through additional private placements of common stock. To date, these
financings, together with the lines of credit and the bank loan described below,
have provided the capital required to fund initial commercialization of our
BioZ(TM) products, ongoing research and development efforts, expansion of our
direct sales force and international sales presence, capital expenditures and to
meet our working capital requirements.
Net cash used in operating activities for the three months ended February 28,
2001 was $2.6 million, compared with $1.5 million used in the first three months
of fiscal 2000. The change from period to period was primarily due to increases
in accounts receivable and long-term receivables resulting from higher sales
volumes and an in-house equipment financing program we offered in the third and
fourth quarters of fiscal 2000 that provided a means for customers to purchase
our BioZ.com(R) systems and receive financing for up to 60 months. This program
was well received by our customers and accounted for approximately 40% of our
net sales in the last half of fiscal 2000. In the first quarter of fiscal 2001,
we established a similar program through a third-party financing company to
replace the internally financed program.
-14-
CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (continued)
LIQUIDITY AND CAPITAL RESOURCES - (continued)
For the first three months of fiscal 2000, $2,889,000 of cash was provided from
financing activities, primarily as a result of the issuance of common stock and
the exercise of options and warrants during the period, net of repayment of
long-term debt in the amount of $1,021,000. For the first three months of fiscal
2001 the net cash used in financing activities was $88,000, net of $3,000 of
funds received for the exercise of options during the period.
In March 1998, we entered into an 18-month unsecured private line of credit
agreement with the co-chairmen of our Board of Directors. Under the terms of the
agreement we could borrow up to $3,000,000 on an as-needed basis with at an
annual interest rate of 10.0%. In February 1999, this line of credit was
extended to September 30, 2000. In August 2000, the private line of credit was
repaid in full.
In January 1999, we established a secured revolving credit line with Imperial
Bank. The credit line provides for borrowings of up to $3,000,000 at the bank's
prime rate. Under the terms of the agreement, we are required to meet certain
loan covenants, including maximum quarterly losses. All the assets of our
company collateralize the credit line. The credit line has been extended through
April 14, 2001.
In February 1999 we entered into a three-year $2,000,000 unsecured term loan
agreement with City National Bank at the bank's prime rate. The co-chairmen of
our Board of Directors guaranteed the loan. Under the terms of the agreement we
initially made interest only payments. In May 2000, we began making monthly
principal installments of $83,333 each, plus interest at one percent above the
bank's prime rate. In August 2000, the bank term loan was repaid in full.
In December 1999, we sold $3.3 million of common stock in a private placement to
institutional investors who purchased unregistered shares with a four-month
holding restriction for $2.50 per share, representing a 9% discount from the 30-
day average closing bid price. On July 25, 2000 we sold $18.7 million of common
stock in a private placement of approximately 3.3 million shares of our common
stock to institutional and other accredited investors. The investors purchased
unregistered common stock at $5.59 per share, a 13% discount to the 20-day
weighted-average closing price as of the June 21, 2000 pricing date. In
addition, a portion of the proceeds were used to repurchase, at $5.59 per share,
and retire 418,908 shares from the estate of Allen E. Paulson.
We have operating loss carryforwards of approximately $29,000,000 for federal
income tax purposes. The Tax Reform Act of 1986 contains provisions which limit
the federal net operating loss carryforwards that can be used in any given year
in the event of specified occurrences, including significant ownership changes.
A valuation allowance has been recognized for the full amount of the deferred
tax asset created by these carryforwards.
-15-
CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES - (continued)
We expect our operating losses and cash usage to continue through at least the
short term, however, we believe that we have sufficient financial resources
available to support our anticipated working capital and capital expenditure
requirements with cash on hand and credit line borrowings. Longer term, our
liquidity will depend on our ability to successfully commercialize the BioZ(TM)
systems and other diagnostic products and raise additional funds through public
or private financings, bank loans, collaborative relationships or other
arrangements. We can give no assurance that such additional funding will be
available on terms attractive to us, or at all.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 requires
that entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This Statement was amended by SFAS 137, which deferred the effective date to
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133, as
amended by SFAS 137 and SFAS 138, was adopted by the Company in the quarter
ended February 28, 2001, and did not have a material effect on the financial
position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's staff views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. Adoption of this standard did not materially effect the Company's
financial position or results of operations.
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CardioDynamics International Corporation
Item 3. Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE SENSITIVITY
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. In the normal course of business, we
employ established policies and procedures to manage our exposure to changes in
the fair market value of our investments. Under our current policies, we do not
use interest rate derivative instruments to manage exposure to interest rate
changes. We ensure the safety and preservation of our invested principal funds
by limiting default risks, market risk and reinvestment risk. We mitigate
default risk by investing in investment grade securities. Some of the securities
that we have invested in may be subject to market risk. This means that a change
in prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed rate
equal to the then-prevailing interest rate and the prevailing interest rate
later rises, the fair value of our investment will decline. To minimize this
risk, we maintain our portfolio of cash equivalents in commercial paper,
certificates of deposit and money market funds. Our interest income is sensitive
to changes in the general level of U.S. interest rates, however, due to the
nature of our short-term investments, we have concluded that there is no
material market risk exposure.
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CardioDynamics International Corporation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None
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CardioDynamics International Corporation
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements include statements regarding our plans, goals,
strategies, intent, beliefs or current expectations. These statements are
expressed in good faith and we believe had a reasonable basis when expressed,
but there can be no assurance that these expectations will be achieved or
accomplished. Sentences in this document containing verbs such as "plan,"
"intend," "anticipate," "target," "estimate," "expect," etc., and/or future-
tense or conditional constructions ("will," "may," "could," "should," etc.)
constitute forward-looking statements that involve risks and uncertainties.
Items contemplating, or making assumptions about, actual or potential future
sales, market size, collaborations, trends or operating results also constitute
such forward-looking statements. These statements are only predictions and
actual results could differ materially. Certain factors that might cause such a
difference as well as other risks are detailed in the Company's annual report on
Form 10-KSB for the fiscal year ended November 30, 2000 and any later filed SEC
reports. Any forward-looking statement speaks only as of the date we made the
statement, and we do not undertake to update the disclosures contained in this
document or reflect events or circumstances that occur subsequently or the
occurrence of unanticipated events.
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 12, 2001 By: /s/ Michael K. Perry
-------------- ---------------------------------
Michael K. Perry
Chief Executive Officer
(Principal Executive Officer)
Date: April 12, 2001 By: /s/ Stephen P. Loomis
-------------- ---------------------------------
Stephen P. Loomis
Vice President, Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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