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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2008
Commission File Number 0-13839
CAS MEDICAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1123096
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
44 East Industrial Road, Branford, Connecticut 06405
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(Address of principal executive offices, including zip code)
(203) 488-6056
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large
Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller
Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $.004 par value
10,937,799 shares as of April 30, 2008.
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Form 10-Q
March 31, 2008
Page 2
INDEX
Page
PART I Financial Information No.
------ --------------------- ----
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2008
and December 31, 2007 3
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2008 and 2007 5
Condensed Consolidated Statements of Cash Flow for the Three
Months Ended March 31, 2008 and 2007 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
Item 4T Controls and Procedures 15
PART II Other Information
Item 1 Legal Proceedings 15
Item 6 Exhibits 15
Signatures 16
Form 10-Q
March 31, 2008
Page 3
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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CAS Medical Systems, Inc.
Condensed Consolidated Balance Sheets
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(Unaudited)
Assets
------ March 31, December 31,
2008 2007
------------ ------------
Current Assets:
Cash and cash equivalents $ 713,690 $ 666,722
Accounts receivable, net of allowance 4,401,639 4,947,300
Recoverable income taxes 328,366 230,458
Inventories 10,489,201 10,021,118
Deferred income taxes 793,265 474,265
Other current assets 384,174 414,204
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Total current assets 17,110,335 16,754,067
Property and equipment 5,742,547 5,327,755
Accumulated depreciation and amortization (3,231,417) (2,987,030)
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2,511,130 2,340,725
Intangible and other assets, net 958,445 846,602
Goodwill 3,379,021 3,379,021
Deferred income taxes 543,527 567,971
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Total assets $ 24,502,458 $ 23,888,386
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Form 10-Q
March 31, 2008
Page 4
CAS Medical Systems, Inc.
Condensed Consolidated Balance Sheets
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(Unaudited)
March 31, December 31,
Liabilities and Stockholders' Equity 2008 2007
------------------------------------ ------------ ------------
Current Liabilities:
Current portion of long-term debt $ 586,626 $ 577,453
Line-of-credit 2,355,752 2,249,349
Notes payable 17,577 71,537
Accounts payable 3,509,449 2,505,460
Accrued expenses 1,014,448 962,154
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Total current liabilities 7,483,852 6,365,953
Long-term debt, less current portion 2,172,080 2,322,561
Deferred gain on sale and leaseback of property 1,269,679 1,303,338
Income taxes payable 147,875 145,125
Stockholders' Equity:
Series A cumulative convertible preferred stock,
$.001 par value per share, 1,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock, $.004 par value per share, 40,000,000
shares authorized, 11,031,399 and 10,984,785 shares
issued at March 31, 2008 and December 31, 2007,
respectively, including shares held in treasury 43,646 43,575
Common stock held in treasury, at cost - 86,000 shares (101,480) (101,480)
Additional paid-in capital 6,096,390 5,889,007
Retained earnings 7,390,416 7,920,307
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Total stockholders' equity 13,428,972 13,751,409
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Total liabilities and stockholders' equity $ 24,502,458 $ 23,888,386
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See accompanying notes.
Form 10-Q
March 31, 2008
Page 5
CAS Medical Systems, Inc.
Condensed Consolidated Statements of Income
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(Unaudited)
Three Months Ended
March 31,
2008 2007
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Net sales $ 8,961,551 $ 9,289,332
Cost of sales 6,281,396 5,747,621
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Gross profit 2,680,155 3,541,711
Operating expenses:
Research and development 511,326 854,717
Selling, general and administrative 3,020,873 2,510,496
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3,532,199 3,365,213
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Operating (loss) income (852,044) 176,498
Interest expense 72,097 57,932
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(Loss) income before income taxes (924,141) 118,566
Income taxes (benefit) (394,250) 39,127
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Net (loss) income $ (529,891) $ 79,439
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(Loss) earnings per common share:
Basic ($ 0.05) $ 0.01
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Diluted ($ 0.05) $ 0.01
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Weighted average number of common shares
outstanding:
Basic 10,781,292 10,604,925
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Diluted 10,781,292 12,057,423
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See accompanying notes.
Form 10-Q
March 31, 2008
Page 6
CAS Medical Systems, Inc.
Condensed Consolidated Statements of Cash Flow
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(Unaudited)
Three Months Ended
March 31,
2008 2007
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OPERATING ACTIVITIES:
Net (loss) income $ (529,891) $ 79,439
Adjustments to reconcile net (loss) income
to net cash provided (used) by operating activities:
Depreciation and amortization 269,828 158,847
Deferred income taxes (294,556) (37,675)
Non-cash stock compensation 140,493 93,801
Amortization of deferred gain on sale and leaseback of property (33,659) --
Changes in operating assets and liabilities:
Accounts receivable 545,661 444,378
Inventories (468,083) (414,728)
Other current assets 30,030 75,908
Recoverable income taxes, net (97,908) (75,178)
Income taxes 2,750 --
Accounts payable and accrued expense 1,056,283 (469,822)
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Net cash provided (used) by operating activities 620,948 (145,030)
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INVESTING ACTIVITIES:
Purchase of property and equipment (414,792) (380,363)
Purchase of intangible assets (137,284) (62,206)
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Net cash used by investing activities (552,076) (442,569)
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FINANCING ACTIVITIES:
Repayments of long-term debt (141,308) (149,666)
Repayments of notes payable (53,960) (40,167)
Borrowings from line-of-credit, net 106,403 --
Tax benefits from exercise of warrants -- 146,979
Tax effect from vesting of restricted stock (7,347) --
Proceeds from issuance of common stock 74,308 110,452
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Net cash (used) provided by financing activities (21,904) 67,598
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Change in cash and cash equivalents 46,968 (520,001)
Cash and cash equivalents, beginning of period 666,722 1,334,535
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Cash and cash equivalents, end of period $ 713,690 $ 814,534
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest $ 68,432 $ 57,932
Cash paid during the period for income taxes, net $ 2,812 $ 5,600
See accompanying notes.
Form 10-Q
March 31, 2008
Page 7
CAS Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2008
(1) The Company
CAS Medical Systems, Inc. ("CAS") and its wholly-owned subsidiary,
Statcorp, Inc. ("Statcorp") operate as one reportable business segment.
Together, CAS and Statcorp (collectively, the "Company" or "CASMED") develop,
manufacture and distribute diagnostic equipment and medical products for use in
the healthcare and medical industry. These products - specifically blood
pressure measurement technology, vital signs measurement equipment,
cardio-respiratory monitoring equipment, cerebral oximetry monitoring, and
supplies for neonatal intensive care - are sold by CASMED through its own sales
force, via distributors, manufacturers representatives and pursuant to original
equipment manufacturer agreements both internationally and in the United States.
The Company has several other products in various stages of development that it
believes will add to and complement its current product lines.
(2) Basis of Presentation
The financial statements included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2007. The condensed
consolidated balance sheet as of December 31, 2007 was derived from the audited
financial statements for the year then ended.
In the opinion of the Company, all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position of the
Company and the results of its operations and its cash flows have been included
in the accompanying financial statements. The results of operations for interim
periods are not necessarily indicative of the expected results for the full
year.
(3) Principal Products and Services
The Company has categorized its sales of products and services into the
following categories:
o High acuity products - includes sales of the Fore-Sight(R) cerebral
monitor and accessories.
o Low acuity products - includes sales of cardio-respiratory monitors
and accessories used to monitor apnea in home-based and hospital
settings; the Company's dual platform of vital signs monitors and
accessories incorporating various combinations of measurement
parameters for both human and veterinary use including pulse oximetry,
electro-cardiography, temperature, non-invasive blood pressure, and
capnography; co-branded products developed and manufactured by
Analogic Corporation including vital signs monitors utilizing
parameters as described above and additionally monitors which measure
non-invasive cardiac output and hemodynamic status, and fetalgard
monitors.
o Blood Pressure Measurement Technology - includes sales to Original
Equipment Manufacturers ("OEM") of the Company's proprietary
non-invasive blood pressure modules (MAXNIBP(R)), blood pressure cuffs
and accessories for the OEM market and related license fees.
o Supplies and Service - includes sales of blood pressure cuffs and
rapid infusor cuffs, neonatal intensive care supplies including
electrodes and skin temperature probes, and service repair revenues.
Form 10-Q
March 31, 2008
Page 8
(4) Inventories
Inventories consisted of:
March 31, December 31,
2008 2007
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Raw materials $ 7,685,108 $ 7,481,065
Work-in-process 35,482 187,134
Finished goods 2,768,611 2,352,919
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$10,489,201 $10,021,118
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(5) Earnings per Common Share
A summary of the denominators used to compute basic and diluted earnings
per share follows:
Three Months Ended
March 31,
2008 2007
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Weighted average shares outstanding, net
of restricted shares - used to compute
basic (loss) earnings per share 10,781,292 10,604,925
Dilutive effect of restricted shares, and
outstanding warrants and options -- 1,452,498
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Weighted average shares of dilutive
securities outstanding - used to compute
diluted (loss) earnings per share 10,781,292 12,057,423
========== ==========
(6) Stock-Based Compensation
Stock compensation expense was $140,693 and $93,801 for the three-month
periods ended March 31, 2008 and 2007.
As of March 31, 2008, the unrecognized stock-based compensation cost
related to non-vested restricted stock awards was $739,389. Such amount, reduced
for forfeiture related estimates, will be recognized in operations over a
weighted average period of 2.10 years.
Form 10-Q
March 31, 2008
Page 9
The following table summarizes the Company's stock option information as
of, and for the three-month period ended March 31, 2008:
Aggregate Weighted-Average
Option Weighted-Average Intrinsic Contractual Life
Shares Exercise Price Value(1) Remaining in Years
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Outstanding at December 31, 2007 524,425 $ 2.11 $ 3.39
Granted 20,000 4.63
Cancelled (10,000) 2.17
Exercised (3,000) 4.99
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Outstanding at March 31, 2008 531,425 2.15 $ 2.15 6.04
Exercisable at March 31, 2008 509,758 $ 2.04 $ 2.26 5.88
(1) The intrinsic value of a stock option is the amount by which the
current market value of the underlying stock exceeds the option exercise price.
The exercise period for all outstanding stock options may not exceed ten
years from the date of grant. Stock options granted to employees and
non-employee directors vest ratably not less than two years from the grant date.
The Company attributes stock-based compensation cost to operations using the
straight-line method over the applicable vesting period.
The weighted-average grant date fair value of stock options granted during
the three-month period ended March 31, 2008 was $3.74 per share. The total
intrinsic value of stock options exercised during the three-month period ended
March 31, 2008 was $9,785.
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
Three Months Ended
March 31, 2008 March 31, 2007
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Weighted-average expected stock-price volatility 65.0% 130.0%
Weighted-average expected option life 4.2 years 7.0 years
Average risk-free interest rate 3.74% 4.72%
Average dividend yield 0.0% 0.0%
During the first quarter of 2008, the Company issued an aggregate of 35,000
shares of restricted stock to its officers under its 2003 Equity Incentive Plan.
The restricted stock vests ratably over thirty-six months from date of grant.
The weighted average value of the stock and the aggregate fair value of the
stock issued was $4.35. Stock compensation expense of $4,229 has been recognized
at March 31, 2008 related to the restricted shares. The unamortized stock
compensation expense associated with the restricted shares as of March 31, 2008
is $148,021 and will be recognized ratably through March 31, 2011.
(7) Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring the fair value of assets and
liabilities, and expands disclosure requirements regarding the fair value
measurement. SFAS 157 does not expand the use of fair value measurements. This
statement, as issued, is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. FASB Staff Position (FSP) FAS No. 157-2 was issued in February 2008 and
deferred the effective date of SFAS 157 for nonfinancial assets and liabilities
to fiscal years beginning after November 2008. As such, the Company adopted SFAS
157 as of January 1, 2008 for financial assets and liabilities only. There was
no significant effect on the Company's financial
Form 10-Q
March 31, 2008
Page 10
statements. The Company does not believe that the adoption of SFAS 157 to
non-financial assets and liabilities will significantly effect its financial
statements.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for
Financial Assets and Liabilities--including an amendment of FASB Statement No.
115" ("SFAS 159"). SFAS 159 expands the use of fair value accounting but does
not affect existing standards which require assets or liabilities to be carried
at fair value. The objective of SFAS 159 is to improve financial reporting by
providing companies with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. Under SFAS 159, a company
may elect to use fair value to measure eligible items at specified election
dates and report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. Eligible
items include, but not are limited to, accounts receivable, accounts payable,
and issued debt. If elected, SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company has not elected to measure any additional
assets or liabilities at fair value that are not already measured at fair value
under existing standards.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141(R)"). SFAS 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. SFAS 141(R)
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141(R) is effective for
fiscal years beginning after December 15, 2008. The Company will apply the
provisions of SFAS 141 (R) to any acquisition after January 1, 2008.
In December 2007, the FASB issued SFAS No. 160, "Accounting for
Non-controlling Interests." SFAS 160 clarifies the classification of
non-controlling interests in consolidated balance sheets and reporting
transactions between the reporting entity and holders of non-controlling
interests. Under this statement, non-controlling interests are considered equity
and reported as an element of consolidated equity. Further, net income
encompasses all consolidated subsidiaries with disclosure of the attribution of
net income between controlling and non-controlling interests. SFAS No. 160 is
effective prospectively for fiscal years beginning after December 15, 2008.
Currently, there are no non-controlling interests in any of the Company's
subsidiaries.
(8) Income Taxes
The income tax benefit of $394,250 recorded for the three months ended
March 31, 2008 reflects an expected effective income tax rate of approximately
43% for 2008 and varies from the statutory rate as a result of anticipated state
and federal R&D tax credits partially offset by non-deductible stock
compensation expense. The provision for income taxes of $39,127 for the three
months ended March 31, 2007 reflects an effective tax rate of 33% resulting
primarily from estimated state and federal R&D tax credits partially offset by
non-deductible stock compensation expense.
Recoverable income taxes consist of state tax carryforwards exchanged for
reduced cash receipts payable to the Company and estimated state and federal tax
refunds generated from net operating losses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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Certain statements included in this report, including without limitation
statements in the Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts, are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements represent the Company's current expectations
regarding future events. The Company cautions that such statements are qualified
by important factors that could cause actual results to differ materially from
expected results which may be contained in the forward-looking statements. All
forward-looking statements involve risks and uncertainties, including, but not
Form 10-Q
March 31, 2008
Page 11
limited to, the following: foreign currency fluctuations, regulations and other
economic and political factors which affect the Company's ability to market its
products internationally, new product introductions by the Company's
competitors, increased price competition, dependence upon significant customers,
availability and cost of components for the Company's products, the impact of
any adverse litigation, marketplace acceptance for the Company's new products,
FDA and other governmental regulatory and enforcement actions, changes to
federal research and development grant programs presently utilized by the
Company and other factors described in greater detail in the Company's most
recent annual report on Form 10-K.
Results of Operations
For the three months ended March 31, 2008, the Company reported a net loss
of $530,000 or ($0.05) per basic and diluted common share compared to net income
of $79,000 or $0.01 per diluted common share reported for the three months ended
March 31, 2007. The net loss resulted largely from shortfalls in sales to U.S.
customers, significant effects of product mix which affected gross margins, and
on-going sales and marketing related spending for the Company's Fore-Sight
cerebral oximeter products. Pre-tax (loss) income for the three-month periods
ended March 31, 2008 and 2007 was also affected by approximately $140,000 and
$94,000 respectively, of stock compensation expense.
Orders received for the Company's products for the three months ended March
31, 2008, totaled $10.8 million compared to $7.7 million for the first three
months of the prior year. This resulted in a backlog of orders for the Company's
products totaling $4.4 million (an increase of $1.9 million over the beginning
of the first quarter of 2008) of which approximately $3.0 million is planned for
shipment during the second quarter ending June 30, 2008.
The Company generated revenues of $8,962,000 for the three months ended
March 31, 2008, a decrease of $327,000 or 4%, compared to revenues of $9,289,000
for the three months ended March 31, 2007. The following table provides
information with respect to revenues by major category:
Three Months Ended Three Months Ended Increase/
($000's) March 31, 2008 March 31, 2007 (Decrease)
-------------- -------------- ----------
Low Acuity Products $ 3,508 $ 4,471 $ (963)
High Acuity Products 274 0 274
Blood Pressure Measurement
Technology 1,360 1,368 (8)
Supplies/Service 3,820 3,450 370
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$ 8,962 $ 9,289 $ (327)
======= ======= =======
Domestic Sales 6,333 6,998 (665)
International Sales 2,629 2,291 338
------- ------- -------
$ 8,962 $ 9,289 $ (327)
======= ======= =======
Low acuity product revenues for the three months ended March 31, 2008
decreased $963,000 or 22% as a result of decreases in sales of vital signs
monitors and accessories to U.S. customers. Sales for the first three months of
2008 were substantially lower than sales for the first three months of 2007.
Prior year sales included several significant shipments for orders received but
not shipped during the fourth quarter of 2006 including a large sale to the
Department of Veterans Affairs ("VA"), a major customer group of the Company.
Reductions in sales of vital signs products to U.S. customers were partially
offset by increases in sales of these products to our international customers.
Vital signs sales include Analogic products developed and manufactured by
Analogic Corporation and sold by CASMED under its exclusive worldwide sales and
marketing agreement with Analogic. Also, vital signs product sales into the
veterinary market, which accounted for approximately 19% of low-acuity product
sales, were approximately 2% below veterinarian product sales for the first
three months of the prior year.
Form 10-Q
March 31, 2008
Page 12
High-acuity sales represent sales of the Company's Fore-Sight cerebral
oximetry monitors and sensors. During the first quarter ended March 31, 2008,
the Company placed approximately thirty monitors with customers at no charge.
Under these arrangements, customers are entitled to use the Company's monitors
at no charge in exchange for purchase orders for Fore-Sight sensors.
Approximately $245,000 of sensor sales were recorded in the three months ended
March 31, 2008. The Company began marketing the Fore-Sight technology during the
second quarter of 2007.
Blood pressure measurement technology sales of $1,360,000 for the first
three months of 2008 approximated those sales for the same three months of the
prior year.
Supplies and service sales increased $370,000 or 11% to $3,820,000 for the
three months ended March 31, 2008 from $3,450,000 for the first three months of
the prior year. Sales of blood pressure cuffs accounted for the entirety of the
increase in sales in this category and increased 17% for the three months ended
March 31, 2008 compared to the first three months of the prior year.
Sales to the U.S. market accounted for $6,333,000 or 71% of the total
revenues reported for the three months ended March 31, 2008, a decrease of
$665,000 or 10% from the $6,998,000 reported for the three months ended March
31, 2007. International sales accounted for $2,629,000 or 29% of the total
revenues reported for the three months ended March 31, 2008, an increase of
$338,000 or 42% over the first three months of the prior year at which time
international sales accounted for approximately 25% of total revenues.
Costs of sales was $6,281,000 or 70.0% of revenues for the three months
ended March 31, 2008 compared to $5,748,000 or 61.9% for the first three months
of the prior year. The increase in cost of sales as a percentage of revenues was
largely related to the shortfall in U.S. vital signs products sales and a
significant increase in sales of vital signs products sales to international
customers which normally carries lower average gross margins than sales to U.S.
customers. Further, sales of blood pressure cuffs which historically carry lower
gross margins than our monitor products, increased by 17% for the three months
ended March 31, 2008 over the first three months of the prior year and accounted
for nearly 31% of total sales versus approximately 25% for the prior year.
Indirect manufacturing expenses also increased as a percentage of cost of sales
as a result of the lower shipment levels. The Company is presently focused on a
number of initiatives to improve gross profit rates for the balance of 2008
including raw material and component cost reductions, price increases where
appropriate, improved inventory management including inventory controls, product
procurement and organizational changes, and enhancements to manufacturing
productivity.
Operating expenses for the three months ended March 31, 2008 increased
$167,000 or 5.0% to $3,532,000 from $3,365,000 for the three months ended March
31, 2007.
R&D expenses decreased $344,000 or 40.1% to $511,000 or 5.7% of revenues
for the three months ended March 31, 2008 compared to $855,000 or 9.2% of
revenues for the three months ended March 31, 2007. Reductions in project
materials, outside professional services, stock compensation amortization and
NIH reimbursements of $130,000 were partially offset by increases in facilities
costs and depreciation expense. During 2007, the Company incurred substantial
expenses finalizing the development of the Fore-sight cerebral oximeter monitor
and sensors which was launched during the second quarter of 2007. R&D expenses
are reported on a net basis, after reimbursements from the National Institutes
of Health ("NIH") pertaining to the Company's Near-Infrared Spectroscopy
("NIRS") technology. As of March 31, 2008, a maximum of approximately $2.1
million remains available under the $2.7 million multi-year NIH award received
during 2007.
Selling, general and administrative expenses ("S,G&A") increased $511,000
or 20.3% to $3,021,000, representing 33.7% of revenues for the three months
ended March 31, 2008 compared to $2,510,000 or 27.0% of revenues for the three
months ended March 31, 2007. Sales and marketing expenses directly associated
with the NIRS cerebral oximetry effort totaled $675,000 and accounted for
$218,000 or 67.0% of the overall increase in sales and marketing expenses of
$327,000. Such expenses included clinical specialist salaries and related
benefits and travel and entertainment expenses and increased tradeshows,
advertising and product sample expenses. Marketing expenses not associated with
the NIRS effort decreased $59,000 as a result of decreased salaries and related
expenses, product literature costs and facilities expense. Sales expenses
increased $169,000 or 17.6% as a result of certain U.S. field
Form 10-Q
March 31, 2008
Page 13
sales restructuring costs including severance payments, recruitment costs and
increased salesmen product sample expenses, and increased international selling
expenses including travel and entertainment expenses, consultant fees and
commission expenses partially driven by increased personnel levels. Partially
offsetting these increases were reductions in U.S. field sales commissions
resulting from lower sales levels. General and administrative ("G&A") expenses
increased $183,000 or 23.3% to $969,000 during the three months ended March 31,
2008 compared to $786,000 for the first three months of the prior year as a
result of increased salaries and related benefits primarily driven by additional
personnel, insurance costs, Sarbanes Oxley and strategic planning consulting
costs, patent related legal fees, recruitment fees and stock compensation
expense partially offset by reduced investor relations costs and company-wide
bonuses for 2007 accrued in the first quarter of that year .
Interest expense increased to $72,000 for the three months ended March 31,
2008 compared to $58,000 for the three months ending March 31, 2007. The
increase in interest expense resulted primarily from advances under the
Company's line-of-credit partially offset by long-term debt repayments.
The income tax benefit of $394,000 for the three-months ended March 31,
2008 reflects a combined estimated federal and state effective tax rate of 43%
and varies from the statutory rate as a result of anticipated state and federal
R&D tax credits partially offset by non-deductible expenses including stock
compensation expense. The provision for income taxes for the three months ended
March 31, 2007 resulted in an effective tax rate of 33% due to non-deductible
stock compensation expense partially offset by state and federal R&D tax
credits.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
At March 31, 2008, the Company's cash and cash equivalents totaled $714,000
compared to $667,000 at December 31, 2007. Working capital decreased $762,000 to
$9,626,000 at March 31, 2008, from $10,388,000 on December 31, 2007. The
Company's current ratio decreased to 2.29 to 1 from 2.81 to 1.
Cash provided by operations for the three months ended March 31, 2008 was
$621,000 compared to cash used of $145,000 for the first three months of the
prior year. Increases in accounts payable and accrued expenses of $1,056,000 and
reductions in accounts receivable of $546,000 were largely responsible for the
cash provided by operations for the first three months of 2008 and were
partially offset by increases in inventories of $468,000 and deferred income
taxes of $295,000. Increases in inventories since December 31, 2007 were
primarily caused by purchases of Fore-Sight cerebral oximeter components and
Fore-Sight sales demonstration equipment requirements, purchases of finished
products from Analogic and shortfalls in overall planned sales for the first
three months of 2008. The Company has made significant investments in Fore-Sight
inventories based upon sales expectations, long-lead time items and the ability
to respond rapidly to customer evaluation opportunities. During the twelve
months ended March 31, 2008, inventories have increased $3,266,000 of which
approximately $2,745,000 is related to Fore-Sight and Analogic products which
were not being marketed for sale as of that date. The balance of the inventory
build-up is related to our vital signs component parts which levels would have
been reduced if the Company had achieved its sales goals for the first quarter
of 2008.
Cash used in investing activities was $552,000 for the three months ended
March 31, 2008 compared to cash used of $443,000 for the first three months of
the prior year. Expenditures for property and equipment of $415,000 during the
three months ended March 31, 2008 were driven by Fore-Sight cerebral oximeter
units at customer sites and clinical research locations. Prior year expenditures
reflected $380,000 of spending for leasehold improvements, manufacturing
equipment and engineering equipment. Spending for intangible assets of $137,000
for the first three months of 2008 primarily included accrued contract costs,
deferred finance charges associated with the Company's amended line-of-credit
agreement and patent costs.
Cash used in financing activities for the three months ended March 31, 2008
was $22,000 compared to cash provided of $68,000 for the first three months of
the prior year. Repayments of long-term debt of $141,000 and $54,000 of
repayments of insurance notes were partially offset by advances from the
Company's line-of-credit of $106,000.
Form 10-Q
March 31, 2008
Page 14
On February 11, 2008, the Company amended and restated its existing line of
credit with NewAlliance Bank (the "Bank"). The Company entered into a new
Commercial Loan Agreement (the "Loan Agreement") and related Commercial
Revolving Promissory Note (the "Note") which provide for borrowings on a
revolving basis, at the Bank's discretion, in an amount up to $10,000,000. Loans
in excess of $2,000,000 up to $10,000,000 can be made only if the maximum
principal amount outstanding does not exceed a borrowing base equal to the sum
of (i) 75% of eligible receivables (as defined in the Loan Agreement) and (ii)
the lesser of $2,500,000 or 30% of eligible inventory (as defined in the Loan
Agreement.) Interest on the outstanding loans pursuant to the Note is at the
Prime Rate (as defined in the Loan Agreement) minus 0.5%. Borrowings under the
Loan Agreement and the Note are secured by a first priority lien in all the
business assets of the Company pursuant to a Security Agreement (the "Security
Agreement"). The Credit Agreement, which contains customary non-financial
covenants and financial covenants consisting of a debt service coverage ratio
and a debt to tangible net worth ratio, expires on the final maturity date of
May 1, 2009.
Subsequent to March 31, 2008, the Company's management implemented cost
reduction efforts to improve its income levels and cash from operations. Such
reductions include personnel, planned consolidation of leased space, product
cost reductions, and reductions in advertising, promotions and other
non-discretionary spending. The Company has achieved certain component cost
reductions and is implementing price increases where appropriate. The Company
expects to continue to incur expenditures associated with the NIRS cerebral
oximetry technology and the related Fore-Sight oximeter market penetration. Such
spending includes on-going R&D and further clinical studies, sales and marketing
expenses. As a result of the changes and plans referred to above, management
expects to limit its further borrowing needs under the line-of-credit for the
remainder of 2008. The Company believes that its sources of funds consisting of
cash and cash equivalents and funds available from the revolving credit facility
will be sufficient to meet its current and expected short-term requirements. The
Company may also pursue other financing alternatives to meet its capital needs
although it is uncertain that, if needed, it would be able to find additional
sources of funds on commercially acceptable terms to support the Company's
long-term initiatives.
Critical Accounting Policies and Estimates
------------------------------------------
The Company's discussion and analysis of financial condition and results of
operations are based on the condensed financial statements. The preparation of
these financial statements requires the Company to make estimates and judgments
that affect the amounts reported in them. The Company's critical accounting
policies and estimates include those related to revenue recognition, the
valuations of inventories and deferred income tax assets, measuring stock
compensation, post-retirement health benefit, and warranty costs, determining
useful lives of intangible assets, and making asset impairment valuations. The
Company bases its estimates on historical experience and on various other
assumptions that management believes to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions. For additional information about the Company's critical accounting
policies and estimates, see Note 3 to the financial statements included in the
Company's Form 10-K for the year ended December 31, 2007. There were no
significant changes in critical accounting policies and estimates during the
three months ended March 31, 2008.
New accounting pronouncements and the Company's assessment of their impact
on the financial statements are disclosed in Note 8 to the notes to condensed
consolidated financial statements contained herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
The Company has certain exposures to market risk related to changes in
interest rates. The Company has an outstanding line-of-credit agreement, under
which there were borrowings of $2,355,752 at March 31, 2008. The line-of-credit
agreement, amended as of February 11, 2008 bears interest at variable rates
based on prime rate indices. The Company holds no derivative securities for
trading purposes and is not subject in any material respect to currency or other
commodity risk.
Form 10-Q
March 31, 2008
Page 15
ITEM 4T. CONTROLS AND PROCEDURES
--------------------------------
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based on the definition of "disclosure
controls and procedures" in Rule 13a-15(e). In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of March 31, 2008. Based upon the foregoing evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of that date.
There have been no changes in the Company's internal control over financial
reporting during the quarter ended March 31, 2008 that have materially affected,
or are reasonably likely to materially affect the Company's internal control
over financial reporting.
Reference is made to the Certifications of the Chief Executive Officer and
the Chief Financial Officer about these and other matters attached as Exhibits
31.1, 31.2 and 32.1 to this report.
PART II - OTHER INFORMATIION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
-------------------------
The manufacture and sale of our products exposes us to product liability
claims and product recalls, including those which may arise from misuse or
malfunction of, or design flaws in, our products or use of our products with
components or systems not manufactured or sold by us. Product liability claims
or product recalls, regardless of their ultimate outcome, could require us to
spend significant time and money in litigation or to pay significant damages. We
are currently a defendant in a pending product liability action, which is likely
to be scheduled for trial in late 2008. Although we believe that our product
liability insurance is sufficient to cover any damages and costs that are likely
with respect to this matter, there can be no assurance that this will be the
case with respect to any future matters. Furthermore, we may not be able to
obtain insurance in the future at satisfactory rates or in adequate amounts. In
addition, publicity pertaining to the misuse or malfunction of, or design flaws
in, our products could impair our ability to successfully market and sell our
products and could lead to product recalls.
In addition, we may become, in the normal course of our business
operations, a party to other legal proceedings in addition to those described in
the paragraph above. None of these other proceedings would be expected to have a
material adverse impact on our results of operations, financial condition, or
cash flows.
ITEM 6. EXHIBITS
----------------
31.1 Certification pursuant to Rule 13a-14(a) of Andrew E. Kersey, President
and Chief Executive Officer
31.2 Certification pursuant to Rule 13a-14(a) of Jeffery A. Baird, Chief
Financial Officer
32.1 Certification pursuant to 18 U.S.C. 1350 of Periodic Financial Report of
Andrew E. Kersey, President and Chief Executive Officer and Jeffery A.
Baird, Chief Financial Officer
Form 10-Q
March 31, 2008
Page 16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAS MEDICAL SYSTEMS, INC.
-------------------------
(Registrant)
/s/ Andrew E. Kersey Date: May 6, 2008
---------------------------------
By: Andrew E. Kersey
President and Chief Executive Officer
/s/ Jeffery A. Baird Date: May 6, 2008
---------------------------------
By: Jeffery A. Baird
Chief Financial Officer