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 May 31, 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 incorporation or organization) (IRS Employer Identification No.)
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 July 10, 2001, 45,554,127 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 May 31, 2001 (unaudited) and
November 30, 2000 (audited). 3
Statements of Operations (unaudited) for the three and
six months ended May 31, 2001 and May 31, 2000. 4
Statements of Cash Flows (unaudited) for the three and
six months ended May 31, 2001 and May 31, 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
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CardioDynamics International Corporation
Balance Sheets
(In thousands, except share data)
May 31, November 30,
2001 2000
Assets (Unaudited) (Audited)
------------------ -------------------
Current assets:
Cash and cash equivalents $ 7,166 $ 11,595
Accounts receivable, net of allowance for doubtful accounts
of $1,340 in 2001 and $1,649 in 2000 5,352 3,771
Inventory, net 2,702 2,255
Other current assets, net 1,979 1,142
------------------ -------------------
Total current assets 17,199 18,763
Property and equipment, net 528 575
Long-term receivables and note receivable, net 2,214 2,193
Deposits 30 30
------------------ -------------------
Total assets $ 19,971 $ 21,561
================== ===================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,127 $ 1,588
Accrued expenses 466 564
Accrued salaries, wages and benefits 629 671
Current maturities of long-term debt 84 85
------------------ -------------------
Total current liabilities 2,306 2,908
Long-term debt, less current maturities 36 87
------------------ -------------------
Total liabilities 2,342 2,995
Shareholders' equity:
Preferred Stock; no par value; 18,000,000 shares authorized; no shares
issued or outstanding at May 31, 2001 and November 30, 2000 -- --
Common stock; no par value; 100,000,000 shares authorized; issued
and outstanding 45,548,127 shares at May 31, 2001 and
45,518,475 shares at November 30, 2000 48,297 48,270
Accumulated deficit (30,668) (29,704)
------------------ -------------------
Total shareholders' equity 17,629 18,566
------------------ -------------------
Commitments and contingencies
Total liabilities and shareholders' equity $ 19,971 $ 21,561
================== ===================
See accompanying notes to financial statements.
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CardioDynamics International Corporation
Statements of Operations
(Unaudited, In thousands, except share and per share data)
Three Months Ended May 31, Six Months Ended May 31,
---------------------------------- ----------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales $ 4,480 $ 3,073 $ 8,445 $ 5,697
Cost of sales 1,284 1,060 2,500 1,849
-------------- -------------- -------------- --------------
Gross margin 3,196 2,013 5,945 3,848
-------------- -------------- -------------- --------------
Operating expenses:
Research and development 902 641 1,713 1,146
Selling, general, and administrative
expenses 2,866 1,863 5,509 3,717
-------------- -------------- -------------- --------------
Total operating expenses 3,768 2,504 7,222 4,863
-------------- -------------- -------------- --------------
Loss from operations (572) (491) (1,277) (1,015)
-------------- -------------- -------------- --------------
Other income (expense):
Interest income 164 63 355 114
Interest expense (16) (67) (29) (148)
Other, net (6) (1) (12) (4)
-------------- -------------- -------------- --------------
Total other income (expense) 142 (5) 314 (38)
-------------- -------------- -------------- --------------
Loss before income taxes (430) (496) (963) (1,053)
Income taxes -- -- (1) (1)
-------------- -------------- -------------- --------------
Net loss $ (430) $ (496) $ (964) $ (1,054)
============== ============== ============== ==============
Net loss per share, basic and diluted $ (.01) $ (.01) $ (.02) $ (.03)
============== ============== ============== ==============
Weighted-average number of common shares
outstanding 45,524,882 42,110,502 45,522,310 41,791,996
============== ============== ============== ==============
See accompanying notes to financial statements.
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CardioDynamics International Corporation
Statements of Cash Flows
(Unaudited, In thousands)
Six Months Ended May 31,
--------------------------------------
2001 2000
----------------- -----------------
Cash flows from operating activities:
Net loss $ (964) $ (1,054)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 139 85
Other non cash items -- (19)
Provision for warranty repairs 19 (17)
Provision for obsolete inventory 48 (187)
Provision for demonstration inventory 45 (55)
Provision for doubtful receivables (309) 111
Provision for doubtful long-term receivables (73) --
Compensatory stock options granted 31 23
Changes in operating assets and liabilities:
Accounts receivable (1,272) (334)
Inventory (540) (115)
Other current assets (837) (297)
Long-term receivables and note receivable 51 (201)
Accounts payable (461) (127)
Accrued expenses (361) (5)
Deferred service revenue 244 --
Accrued salaries, wages and benefits (42) 84
----------------- -----------------
Net cash used in operating activities (4,282) (2,108)
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (91) (114)
----------------- -----------------
Net cash used in investing activities (91) (114)
----------------- -----------------
Cash flows from financing activities:
Repayment of long-term debt (52) (41)
Repayment of revolving line of credit -- (1,000)
Repayment of note to bank -- (167)
Exercise of warrants and options 55 1,932
Issuance of common stock, net (59) 3,070
----------------- -----------------
Net cash (used in) provided by financing activities (56) 3,794
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (4,429) 1,572
Cash and cash equivalents at beginning of period 11,595 2,406
----------------- -----------------
Cash and cash equivalents at end of period $ 7,166 $ 3,978
================= ==================
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 many other cardiac
function monitoring technologies, our monitors are noninvasive. Our primary
products, the BioZ(R) System, the BioZ(TM) Portable, the BioZ.com(R) and the
BioZ ICG Module 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 financial position,
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 and six months ended May 31, 2001 are
not necessarily indicative of the results that may be expected for the full
fiscal year ending November 30, 2001.
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CardioDynamics International Corporation
Notes to Financial Statements
(Unaudited)
Inventories
Inventory consists of the following: (in thousands)
May 31, November 30,
2001 2000
----------------- ------------------
Electronic components and subassemblies $ 1,461 $ 1,643
Finished goods 1,082 624
Work in process 213 95
Demonstration units 748 602
Less provision for obsolete inventory (553) (505)
Less provision for demonstration inventory (249) (204)
----------------- ------------------
$ 2,702 $ 2,255
================= ==================
Long-Term Receivables & Note Receivable
In our third and fourth fiscal quarters of 2000, we offered no-interest
financing of our BioZ systems with maturities ranging from 24 to 60 months. The
long-term receivables are collateralized by the systems. In our first fiscal
quarter of 2001, we established a similar program through a third-party
financing company to replace the internal equipment financing program. Under
certain circumstances we continue to provide financing to our customers,
although the contracts now include market rate interest provisions.
The fair value of each below-market, long-term receivable is estimated by
discounting the future cash flows using our incremental borrowing rate.
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
receivable, note 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)
May 31, November 30,
2001 2000
----------------- -------------------
Long-term receivables, net of deferred interest $ 4,039 $ 3,345
Secured note receivable 333 325
Less allowance for doubtful long-term receivables (493) (566)
----------------- -------------------
3,879 3,104
Less current portion of long-term receivables (1,665) (911)
----------------- -------------------
$ 2,214 $ 2,193
================= ===================
Net Loss Per Share
Net loss per share is computed by dividing the net loss by the weighted-average
number of common 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 and
six months ended May 31, 2001 and May 31, 2000 as all potentially dilutive
securities are antidilutive. At May 31, 2001 and 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.
May 31, May 31,
2001 2000
-------------- --------------
Stock options.................................. 3,954,805 3,580,368
Warrants....................................... 2,472,170 2,522,170
-------------- --------------
Total.......................................... 6,426,975 6,102,538
============== ==============
-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.
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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 stand-alone 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 nearly 1,400 units in over 850 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 that 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)."
-10-
CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW (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 and six month periods ended May 31, 2001 and May 31, 2000.
- --------------------------------------------------------------------
REVENUES. Net sales for the three months ended May 31, 2001 were $4,480,000, an
increase of 46% over the same three-month period of fiscal 2000 in which net
sales were $3,073,000. Year to date sales were $8,445,000, up 48% over the same
period last year of $5,697,000. Sales growth during the second quarter of fiscal
2001 can be attributed to the expansion of our domestic direct sales force, a
15-unit sale to our Taiwanese distributor and initial shipments of 220 BioZ ICG
Module Kits to GE Medical Systems Information Technologies to be used in their
Solar(R) patient monitors. The medical community's recognition of the clinical
usefulness and demand for our BioZ(R) products continues to grow. We sold 131
BioZ Systems during the quarter, increasing our installed base to nearly 1,400
systems being used in over 850 customer sites worldwide.
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CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS - (Continued)
Our direct sales force targets physician offices and hospitals in the US with
fewer than 100 beds. Sales by our direct sales force increased by 113% in the
second quarter 2001 over direct sales during the second fiscal quarter of 2000.
During the past several quarters we have expanded and 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. At May 31, 2001, we had 50 sales
associates, including 36 territory managers, (up from 22 at May 31, 2000) and
eight clinical sales specialists. During the second quarter of fiscal 2001, we
entered into a co-promotional agreement with Vasomedical, Inc. which allows our
direct sales force, along with Vasomedical's sales force, to jointly market our
BioZ.com ICG monitoring systems and Vasomedical's EECP enhanced external
counterpulsation systems to physicians and hospitals throughout the United
States.
In January 2001, GE Medical Systems Information Technologies committed to
purchase $3.5 million of our BioZ(R) products and modules during fiscal 2001
with increasing quarterly commitments throughout the year. Corporate sales,
including sales to GE Medical Systems Information Technologies, were $771,000 in
the quarter ended May 31, 2001, down 28% from $1,064,000 for the same quarter
last year which included approximately $350,000 of shipments to Profiles In
Heath, Inc. During the second quarter of fiscal 2001, we commenced shipments of
the jointly developed BioZ(R) ICG module to GE Medical Systems Information
Technologies, the first and only patient monitoring system capable of non-
invasively acquiring and displaying hemodynamic information. The plug-in BioZ(R)
ICG module extends the capabilities of the GE Solar(R) patient monitoring
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 BioZ(R) ICG module is being sold by the GE Medical System's direct sales
force and is being assembled at GE Medical System's facility in Milwaukee,
Wisconsin using circuit board assemblies, patient cables and sensors that we
supply.
In March 2001, we entered into an agreement with The Heart-Lung Associates of
America, PC. for use of our BioZ ICG technology in their DiTEC(TM) program to
enhance the cardiac care of end stage chronic kidney failure patients. The
program links kidney disease specialists with cardiologists and aims to
significantly reduce cardiac event rates, decrease costs, and improve dialysis
patient outcomes. We have filed for FDA 510(k) clearance on a new lower cost
dialysis monitoring system, which will transmit hemodynamic data via the
Internet. In April 2001, we entered into an agreement with Spacelabs Medical,
Inc. for development of an interface using Spacelab's Universal Flexport to
integrate and display our ICG technology on their Ultraview Care Network
monitoring system.
-12-
CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS - (Continued)
Each time our BioZ products are used, disposable sets of four dual sensors are
required. 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) sensor with
our BioZ systems. The disposable sensors for our stand-alone systems have a list
price of $9.95 per application and $19.95 for the ICG module. Sensor revenue for
our second quarter of 2001 was $463,000, a three-fold increase over last year's
same quarter revenue of $154,000. Year to date sensor sales of $787,000
increased 151% over sensor sales in the same six-month period last year. As the
installed base of BioZ systems grows, we expect the revenue generated by our
disposable sensors to continue to comprise and increasingly larger portion or
our overall revenue stream.
GROSS MARGIN. Our gross margin for the quarter ended May 31, 2001, increased
59%, to $3,196,000, or 71% of sales, up from $2,013,000 or 66% of sales, in the
second quarter of fiscal 2000. Year to date we have generated $5,945,000 of
gross margin representing 70% of sales. For the same period last year, our gross
margin was $3,848,000, or 66% of sales. The overall increase in our gross margin
during the quarter and first six months of fiscal 2001 was due principally to
the higher sales volumes, reduced direct material cost per unit resulting from
higher quantity purchases and continued material cost reduction initiatives,
along with a higher average sales price per unit.
RESEARCH AND DEVELOPMENT. Our research and development expenses for the second
fiscal quarter of 2001 were 41% higher than the same period in fiscal 2000, up
from $641,000 to $902,000. Year to date research and development expenses were
$1,713,000 compared to $1,146,000 for the same period last year, an increase of
50%. We continue to invest a significant portion of our resources into research,
clinical studies, further enhancements to the BioZ systems and new product
development. During the past year, we have increased our internal research and
development personnel from nine engineers and clinical research associates to
14. We anticipate that the expenses associated with research, heart failure,
hypertension and emergency department clinical studies, further enhancements to
the BioZ systems and new product development will continue to comprise a
substantial portion of our overall expense structure in the balance of fiscal
2001.
During the quarter an important study was completed by the Mayo Clinic and the
results of this study were presented at the American Society of Hypertension
meeting. The study demonstrated a 65% improvement in treatment of high blood
pressure when our BioZ ICG technology was used. The results suggest that
sequential noninvasive hemodynamics provide effective guidance in drug selection
and titration in treatment of resistant hypertension.
-13-
CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS - (Continued)
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the second fiscal quarter of fiscal 2001 increased to $2,866,000, a
54% increase over the same period in fiscal 2000 with expenditures of
$1,863,000. For the six months ended May 31, 2001 selling, general and
administrative expenses were $5,509,000. Comparing this to the first six months
of fiscal 2000, selling, general and administrative expenses increased 48% from
$3,717,000. The majority of the increase is the result of continued expansion of
our domestic direct sales force, clinical support specialists and our
distribution support capabilities. At the end of our second quarter of fiscal
2001, we had 36 direct sales representatives and 8 clinical sales specialists,
up from 22 direct sales representatives and no clinical sales specialists at the
end of our second 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 second quarter
of fiscal 2001, is $396,000 of general and administrative expenses related to
the overall infrastructure and management of the company, which reflects an
increase of 9% from the $365,000 incurred during the second quarter of fiscal
2000. For the six-month period ended May 31, 2001, general and administrative
expenses were $846,000 compared to $740,000 for the six months ended May 31,
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 13%
for the first six months of fiscal 2000, to 10% for the first six months of
fiscal 2001.
INTEREST INCOME AND EXPENSE. We earned $164,000 of interest income on our
invested funds in the second quarter of fiscal 2001, up from $63,000 earned in
the second quarter of fiscal 2000. The increase is primarily due to increased
funds available for investment, offset somewhat by lower rates of interest
earned during the period and interest recognized on our in-house equipment
financing program that was offered in the latter half of fiscal 2000. During
our third quarter of fiscal 2000, we repaid nearly $3 million of debt which
resulted in an 80% reduction in interest expense for the first six months of
fiscal 2001 at $29,000, down from the $148,000 incurred in the same period of
fiscal 2000.
NET LOSS. The net loss for our second quarter of fiscal 2001 was $430,000, or
$.01 per share, down 13% from $496,000, or $.01 per share for the second quarter
of fiscal 2000. Year to date, our net loss was $964,000, or $.02 per share,
down 9% from $1,054,000, or $.03 per share in the first half of fiscal 2000.
The weighted average number of common shares outstanding during the first six
months of fiscal 2001, increased by 9% over last year's amount, primarily due to
the July 2000, private placement of common stock, and the exercise of stock
options and warrants.
-14-
CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
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 six months ended May 31, 2001 was
$4.3 million, compared with $2.1 million used during the first six months of
fiscal 2000. The change from period to period was primarily due to increases in
accounts receivable, long-term receivables and inventory primarily due to
increased sales volumes. We have also reduced our level of accounts payable and
accrued expenses from the November 30, 2000 levels.
For the first six months of fiscal 2001, the net cash used in financing
activities was $56,000, net of $55,000 of funds received from the exercise of
stock options during the period. Even after repaying $1,208,000 in long-term
debt, $3,794,000 of cash was provided from financing activities in the first six
months of fiscal 2000, primarily as a result of the issuance of 1,320,000 shares
of common stock in a private placement and receipt of $1,932,000 from the
exercise of options and warrants.
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 provided for borrowings of up to $3,000,000 at the bank's
prime rate. Subsequent to fiscal 2001, the credit facility was renewed and the
available credit was increased to $4,000,000. 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. At May 31,
2001, there were no borrowings outstanding under the line of credit.
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.
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CardioDynamics International Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES - (Continued)
In December 1999, we raised $3.3 million in a private placement to institutional
investors who purchased unregistered common 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 raised $18.7 million 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 $30,000,000 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.
We expect our 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 available 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.
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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: July 12, 2001 By: /s/ Michael K. Perry
------------- ----------------------------------
Michael K. Perry
Chief Executive Officer
(Principal Executive Officer)
Date: July 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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