CARDIAC SCIENCE INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


x		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended March 31, 2004

		OR

¨		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Commission file number 0-19567

CARDIAC SCIENCE, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE

33-0465681

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1900 Main Street, Suite 700, Irvine, California, 92614

(Address of principal executive offices)

Registrant’s telephone number, including area code: (949) 797-3800

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ¨

Indicate by check mark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨

The number of shares of the Common Stock of the registrant outstanding as of May 6, 2004 was 80,697,247.

INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION


		Page No.

Item 1.	Unaudited Financial Statements:

	Consolidated Condensed Balance Sheets as of March 31, 2004 and December 31, 2003	3

	Consolidated Condensed Statements of Operations for the three months ended March 31, 2004 and 2003	4

	Consolidated Condensed Statements of Comprehensive Loss for the three months ended March 31, 2004 and 2003	5

	Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2004 and 2003	6

	Notes to Consolidated Condensed Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4.	Controls and Procedures	18

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 2.	Not applicable

Item 3.	Not applicable

Item 4.	Not applicable

Item 5.	Other Information	19

Item 6.	Exhibits and Reports on Form 8-K	19

Signatures		20

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CARDIAC SCIENCE, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)


	March 31, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	6,641		$	8,871
Accounts receivable, net of allowance for doubtful accounts of $1,852 at March 31, 2004 and $1,626 at December 31, 2003		16,940			20,410
Inventories		10,895			9,575
Prepaid expenses and other current assets		2,880			2,154

Total current assets		37,356			41,010
Property and equipment, net		6,368			7,003
Goodwill, net		140,352			139,859
Intangible assets, net		11,139			11,626
Other assets		3,512			3,503

Total assets	$	198,727		$	203,001

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,712		$	8,955
Accrued expenses		5,556			6,542
Deferred revenue		2,696			2,479
Current portion of long term obligations		37			53

Total current liabilities		17,001			18,029
Senior secured promissory notes		46,595			46,481
Deferred revenue		819			859
Other long term obligations		35			41

Total liabilities		64,450			65,410

Commitments and contingencies
Stockholders’ equity:
Common stock—$.001 par value; 160,000,000 shares authorized, 80,587,744 and 80,465,585 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively		81			80
Additional paid-in capital		244,744			243,219
Accumulated other comprehensive income (loss)		(28	)		(20	)
Accumulated deficit		(110,520	)		(105,688	)

Total stockholders’ equity		134,277			137,591

Total liabilities and stockholders’ equity	$	198,727		$	203,001

The accompanying notes are an integral part of these unaudited financial statements.

CARDIAC SCIENCE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share data)


	Three Months Ended
	March 31, 2004			March 31, 2003
Net revenue	$	15,604		$	14,024
Cost of goods sold		6,508			6,089

Gross profit		9,096			7,935

Operating expenses:
Sales and marketing		6,003			4,417
Research and development		1,669			1,102
General and administrative		4,166			3,207
Amortization of intangible assets		503			449

Total operating expenses		12,341			9,175

Loss from operations		(3,245	)		(1,240	)
Interest and other income (expense), net		(1,587	)		(1,401	)

Loss before minority interest		(4,832	)		(2,641	)
Minority interest in consolidated subsidiary		—			(48	)

Loss from continuing operations		(4,832	)		(2,689	)
Income from discontinued operations		—			107

Net loss	$	(4,832	)	$	(2,582	)

Net loss per share (basic and diluted)	$	(0.06	)	$	(0.04	)

Weighted average number of shares used in the computation of net loss per share		80,532,811			66,932,228

The accompanying notes are an integral part of these unaudited financial statements.

CARDIAC SCIENCE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)


	Three Months Ended
	March 31, 2004			March 31, 2003
Net loss	$	(4,832	)	$	(2,582	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(8	)		120

Comprehensive loss	$	(4,840	)	$	(2,462	)

The accompanying notes are an integral part of these unaudited financial statements.

CARDIAC SCIENCE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except share and per share data)


	Three Months Ended
	March 31, 2004			March 31, 2003
Cash flows from operating activities:
Net loss	$	(4,832	)	$	(2,582	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		639			756
Amortization of intangible assets		503			449
Minority interest		—			48
Provision for doubtful accounts		239			76
Corporate relocation and restructuring costs, net of accelerated depreciation					292
Accrued interest and amortization of debt discount/issuance costs		1,612			1,431
Changes in operating assets and liabilities:
Accounts receivable		2,995			(906	)
Inventories		(1,320	)		202
Placement of Powerheart CRMs at customer locations		—			(447	)
Prepaid expenses and other assets		(638	)		275
Deferred revenue		177			(55	)
Accounts payable and accrued expenses		(1,229	)		(1,931	)
Assets and liabilities held-for-sale		—			(1,451	)

Net cash used in operating activities		(1,854	)		(3,843	)

Cash flows from investing activities:
Purchase of property and equipment		(447	)		(325	)
Funds in escrow to buy minority interest		—			(1,299	)
Proceeds from sale of assets at subsidiary, net of costs		—			767
Acquisition costs paid		(50	)		—
Purchase of intangible assets		(16	)		—

Net cash used in investing activities		(513	)		(857	)

Cash flows from financing activities:
Payments on long term obligations		(22	)		(60	)
Proceeds from exercise of common stock options and warrants		195			137
Costs of equity issuances		(28	)		—

Net cash provided by financing activities		145			77

Effect of exchange rates on cash and cash equivalents		(8	)		136

Net decrease in cash and cash equivalents		(2,230	)		(4,487	)
Cash and cash equivalents at beginning of period		8,871			15,598

Cash and cash equivalents at end of period	$	6,641		$	11,111

The accompanying notes are an integral part of these unaudited financial statements.

CONSOLIDATED CONDENSED NOTES TO FINANCIAL STATEMENTS

(In thousands, except share and per share data)

1. Organization and Description of the Business

Cardiac Science, Inc. (the “Company”) was incorporated in May 1991 and develops, manufactures and markets portable automated public access defibrillators and a fully-automatic in-hospital bedside defibrillator-monitor that continuously monitors cardiac patients, instantly detects the onset of life-threatening abnormal heart rhythms, and, when appropriate, delivers defibrillation shocks within seconds and without human intervention to convert the heart back to its normal rhythm. The Company’s core technology platform consists of its proprietary arrhythmia detection and discrimination software (“RHYTHMx^®”), which is combined with its proprietary STAR^® Biphasic defibrillation hardware and electrode technology to create the only fully automatic in-hospital cardioverter defibrillator (the “Powerheart^® CRM^®” or “CRM”) and a unique semi-automatic, or automated defibrillator, (the “Powerheart AED” or “G3 AED”) for use in out-of-hospital settings. The Company’s Powerheart^® Cardiac Rhythm Module^™ and Powerheart^® brand AEDs are marketed by its direct sales force and distribution network in the United States and around the world.

On July 1, 2000, the Company acquired Cadent Medical Corporation, a privately held company, for an aggregate of 4,500,000 shares of the Company’s common stock.

On September 26, 2001, the Company acquired Survivalink Corporation, a privately held company, for $10,500 in cash, $25,800 in senior secured promissory notes, and 18,150,000 shares of the Company’s common stock.

On November 30, 2001, the Company acquired 94.7% of Artema Medical AB and Subsidiaries (“Artema”) for 4,150,976 shares of common stock and approximately $215 in cash. During 2003, the Company acquired the remaining minority interest for $843 in cash. On September 1, 2003, the Company transferred ownership of the shares in Cardiac Science International A/S, its Danish operations and a subsidiary of Artema, from Artema to Cardiac Science, Inc. in exchange for forgiveness of intercompany debt. Then on September 21, 2003, the Company sold 100% of its shares in Artema to an outside party for $600 in cash.

On May 29, 2003, the Company acquired Lifetec Medical Limited, its U.K. distributor, for $383 in cash.

On October 21, 2003, the Company acquired substantially all of the assets and liabilities of Complient Corporation, a privately held company, for 10,250,000 shares of the Company’s common stock.

2. Continued Existence

Based on achieving its internal revenue growth targets, the Company believes its current cash balances, combined with net cash that it expects to generate from operations, the sale of two product lines, and continued access to its unused line of credit of $5,000, will sustain its ongoing operations for the next twelve months. In the event that the Company requires additional cash to support its operations during the next twelve months or thereafter, it will attempt to raise the required capital through either debt or equity arrangements. The Company cannot provide any assurance that the required capital will be available on acceptable terms, if at all, or that any financing activity will not be dilutive to current stockholders of the Company. If the Company is not able to raise additional funds, it may be required to significantly curtail its operations and this would have an adverse effect on its financial position, results of operations and cash flows.

3. Summary of Significant Accounting Policies

In the opinion of the Company’s management, the accompanying consolidated condensed unaudited financial statements include all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation of its financial position at March 31, 2004 and results of operations and cash flows for the periods presented. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted and should be read in conjunction with the Company’s audited financial statements included in the Company’s 2003 Annual Report on Form 10-K. Results of operations for the three months ended March 31, 2004 are not necessarily indicative of results for the full year.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of the following as of:


	March 31, 2004		December 31, 2003
Raw materials	$	3,572	$	3,728
Work in process		94		157
Finished goods		7,229		5,690

	$	10,895	$	9,575

Goodwill and Intangibles

In accordance with Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets, which became effective January 1, 2002, goodwill and other intangible assets with indeterminate lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. Other intangible assets with finite lives continue to be subject to amortization, and any impairment is determined in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Estimated future intangible asset amortization expense for the years ending December 31, 2004, 2005, 20

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