WWW.EXFILE.COM, INC. -- 888-775-4789 -- CAS MEDICAL SYSTEMS, INC. -- FORM 10-Q
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 September 30, 2009
Commission
File Number 0-13839
CAS
MEDICAL SYSTEMS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
06-1123096
|
|
(State
or other jurisdiction of
|
(I.R.S.
employer
|
|
incorporation
or organization)
|
identification
no.)
|
44 East Industrial Road,
Branford, Connecticut 06405
(Address
of principal executive offices, including zip code)
(203)
488-6056
(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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
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 the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
|
Large
Accelerated Filer o
|
Accelerated
Filer o
|
Non-Accelerated
Filer o
|
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 o 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 11,513,875 shares as of
November 1, 2009.
Form
10-Q
Sept. 30,
2009
Page
2
INDEX
|
PART I
|
Financial Information
|
Page No.
|
|
|
|
|
|
Item
1
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2009 and December 31,
2008
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2009 and
2008
|
5
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2009 and 2008
|
6
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
|
|
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
|
|
|
|
|
Item
3
|
Quantitative
and Qualitative Disclosures about Market Risk
|
17
|
|
|
|
|
|
Item
4
|
Controls
and Procedures
|
17
|
|
|
|
|
|
PART II
|
Other Information
|
|
|
|
|
|
|
Item
1
|
Legal
Proceedings
|
18
|
|
|
|
|
|
Item
6
|
Exhibits
|
19
|
|
|
|
|
|
Signatures
|
|
20
|
Form
10-Q
Sept. 30,
2009
Page
3
PART I – FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
CAS
Medical Systems, Inc.
Condensed Consolidated
Balance Sheets
(Unaudited)
|
Assets
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
989,568 |
|
|
$ |
1,082,619 |
|
|
Accounts
receivable, net of allowance
|
|
|
4,274,013 |
|
|
|
3,681,355 |
|
|
Other
receivables
|
|
|
– |
|
|
|
715,769 |
|
|
Recoverable
income taxes
|
|
|
106,407 |
|
|
|
101,185 |
|
|
Inventories
|
|
|
8,407,524 |
|
|
|
9,786,538 |
|
|
Deferred
income taxes
|
|
|
656,019 |
|
|
|
791,493 |
|
|
Other
current assets
|
|
|
463,684 |
|
|
|
411,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
14,897,215 |
|
|
|
16,570,897 |
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
|
303,710 |
|
|
|
281,612 |
|
|
Property
and equipment
|
|
|
5,395,359 |
|
|
|
5,326,735 |
|
|
Equipment
at customers
|
|
|
1,171,216 |
|
|
|
1,132,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6,870,285 |
|
|
|
6,740,769 |
|
|
Accumulated
depreciation and amortization
|
|
|
(4,733,628 |
) |
|
|
(4,013,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,136,657 |
|
|
|
2,726,869 |
|
|
Other
assets (net):
|
|
|
|
|
|
|
|
|
|
Intangible
and other assets
|
|
|
619,560 |
|
|
|
757,378 |
|
|
Goodwill
|
|
|
3,379,021 |
|
|
|
3,379,021 |
|
|
Deferred
income taxes
|
|
|
1,016,105 |
|
|
|
250,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,014,686 |
|
|
|
4,386,769 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
22,048,558 |
|
|
$ |
23,684,535 |
|
Form
10-Q
Sept. 30,
2009
Page
4
CAS
Medical Systems, Inc.
Condensed Consolidated
Balance Sheets
(Unaudited)
|
|
|
September
30,
|
|
|
December
31,
|
|
|
Liabilities and Stockholders’
Equity
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
642,685 |
|
|
$ |
614,067 |
|
|
Line-of-credit
|
|
|
1,940,069 |
|
|
|
1,994,008 |
|
|
Notes
payable
|
|
|
126,695 |
|
|
|
– |
|
|
Accounts
payable
|
|
|
2,214,921 |
|
|
|
2,307,675 |
|
|
Accrued
expenses
|
|
|
1,157,260 |
|
|
|
835,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
6,081,630 |
|
|
|
5,751,618 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
1,223,153 |
|
|
|
1,708,493 |
|
|
Deferred
gain on sale and leaseback of property
|
|
|
1,067,723 |
|
|
|
1,168,701 |
|
|
Income
taxes payable
|
|
|
161,375 |
|
|
|
155,875 |
|
|
|
|
|
|
|
|
|
|
|
|
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, 11,599,875
and 11,419,535 shares issued at September 30, 2009 and December 31, 2008,
respectivey, including shares held in treasury
|
|
|
46,399 |
|
|
|
45,675 |
|
|
Common
stock held in treasury, at cost - 86,000 shares
|
|
|
(101,480 |
) |
|
|
(101,480 |
) |
|
Additional
paid-in capital
|
|
|
7,576,833 |
|
|
|
7,423,340 |
|
|
Retained
earnings
|
|
|
5,992,925 |
|
|
|
7,532,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
13,514,677 |
|
|
|
14,899,848 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
22,048,558 |
|
|
$ |
23,684,535 |
|
See
accompanying notes.
Form
10-Q
Sept. 30,
2009
Page
5
CAS
Medical Systems, Inc.
Condensed Consolidated
Statements of Operations
(Unaudited)
| |
|
Three
Months Ended September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
| |
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
9,165,561 |
|
|
$ |
11,708,082 |
|
|
$ |
26,139,500 |
|
|
$ |
31,212,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
5,964,848 |
|
|
|
7,407,603 |
|
|
|
17,881,335 |
|
|
|
20,740,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,200,713 |
|
|
|
4,300,479 |
|
|
|
8,258,165 |
|
|
|
10,472,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
688,656 |
|
|
|
553,888 |
|
|
|
1,892,694 |
|
|
|
1,531,853 |
|
|
Selling,
general and administrative
|
|
|
2,136,019 |
|
|
|
3,076,679 |
|
|
|
8,525,288 |
|
|
|
9,149,889 |
|
|
|
|
|
2,824,675 |
|
|
|
3,630,567 |
|
|
|
10,417,982 |
|
|
|
10,681,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
376,038 |
|
|
|
669,912 |
|
|
|
(2,159,817 |
) |
|
|
(209,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
60,974 |
|
|
|
72,546 |
|
|
|
173,493 |
|
|
|
215,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
315,064 |
|
|
|
597,366 |
|
|
|
(2,333,310 |
) |
|
|
(425,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
|
117,926 |
|
|
|
268,500 |
|
|
|
(793,922 |
) |
|
|
(192,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
197,138 |
|
|
$ |
328,866 |
|
|
$ |
(1,539,388 |
) |
|
$ |
(233,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
(0.14 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
(0.14 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,292,931 |
|
|
|
11,171,056 |
|
|
|
11,243,257 |
|
|
|
10,980,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
11,751,134 |
|
|
|
12,085,122 |
|
|
|
11,243,257 |
|
|
|
10,980,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
Form
10-Q
Sept. 30,
2009
Page 6
CAS
Medical Systems, Inc.
Condenses Consolidated
Statements of Cash Flows
(Unaudited)
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,539,388 |
) |
|
$ |
(233,033 |
) |
|
Adjustments
to reconcile net loss to net cash
provided
(used) by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
920,811 |
|
|
|
862,769 |
|
|
Deferred
income taxes
|
|
|
(801,016 |
) |
|
|
(218,668 |
) |
|
Impairment
of assets
|
|
|
99,309 |
|
|
|
– |
|
|
Provision
for doubtful accounts
|
|
|
– |
|
|
|
25,000 |
|
|
Non-cash
stock compensation
|
|
|
260,742 |
|
|
|
318,258 |
|
|
Amortization
of deferred gain on sale and
leaseback
of property
|
|
|
(100,978 |
) |
|
|
(100,978 |
) |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(592,658 |
) |
|
|
(70,481 |
) |
|
Other
receivable
|
|
|
715,769 |
|
|
|
– |
|
|
Inventories
|
|
|
1,379,014 |
|
|
|
(1,183,856 |
) |
|
Other
current assets
|
|
|
(51,746 |
) |
|
|
(82,644 |
) |
|
Recoverable
income taxes, net
|
|
|
(5,222 |
) |
|
|
186,159 |
|
|
Accounts
payable and accrued expenses
|
|
|
228,638 |
|
|
|
896,653 |
|
|
Income
taxes payable
|
|
|
5,500 |
|
|
|
8,000 |
|
|
Net
cash provided by operating activities
|
|
|
518,775 |
|
|
|
407,179 |
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Expenditures
for property and equipment
|
|
|
(220,431 |
) |
|
|
(1,215,442 |
) |
|
Purchase
of intangible assets
|
|
|
(71,659 |
) |
|
|
(375,799 |
) |
|
Net
cash used by investing activities
|
|
|
(292,090 |
) |
|
|
(1,591,241 |
) |
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Repayments
of long-term debt
|
|
|
(456,722 |
) |
|
|
(429,578 |
) |
|
Proceeds
from notes payable
|
|
|
228,052 |
|
|
|
298,704 |
|
|
Repayments
of notes payable
|
|
|
(101,357 |
) |
|
|
(306,039 |
) |
|
(Repayments)
advances from line-of-credit, net
|
|
|
(53,939 |
) |
|
|
733,476 |
|
|
Tax
effect from vesting of restricted stock
|
|
|
– |
|
|
|
(14,730 |
) |
|
Proceeds
from issuance of common stock
|
|
|
64,230 |
|
|
|
1,140,760 |
|
|
Net
cash (used) provided by financing activities
|
|
|
(319,736 |
) |
|
|
1,422,593 |
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents
|
|
|
(93,051 |
) |
|
|
238,531 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,082,619 |
|
|
|
666,722 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
989,568 |
|
|
$ |
905,253 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$ |
175,382 |
|
|
$ |
219,380 |
|
|
Cash
paid (collected) during the period for income taxes, net
|
|
$ |
6,818 |
|
|
$ |
(152,761 |
) |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
Form
10-Q
Sept. 30,
2009
Page 7
CAS
Medical Systems, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
September
30, 2009
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, 2008. The condensed consolidated balance sheet as
of December 31, 2008 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.
The Company has performed a review of
events subsequent to the balance sheet date through November 5, 2009, the date
the financial statements were issued.
(3) Inventories,
Property and Equipment, Intangible Assets and Goodwill
Inventories
are stated at the lower of cost or market on a first-in, first-out (FIFO)
basis. Inventories consisted of:
|
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
Raw
Materials
|
|
$ |
6,552,540 |
|
|
$ |
7,560,332 |
|
|
Work-in-process
|
|
|
48,745 |
|
|
|
24,560 |
|
|
Finished
goods
|
|
|
1,806,239 |
|
|
|
2,201,646 |
|
|
|
|
$ |
8,407,524 |
|
|
$ |
9,786,538 |
|
Property
and equipment are stated at cost. The Company has separately reported its
Fore-sight® cerebral oximetry monitors located at customer sites within the
United States. Such equipment is held under a no cost program whereby customers
purchase disposable sensors for use with the Company’s equipment. The
Company retains title to the monitors shipped to its customers under this
program. The monitors are depreciated on a straight-line basis over five years
to cost of sales. As of September 30, 2009, the Company has capitalized
$1,171,216 of
Form
10-Q
Sept. 30,
2009
Page 8
costs
pertaining to the monitors which have a net book value of $778,545. Other
property and equipment is depreciated using the straight-line method over the
estimated useful lives of the assets.
Intangible
assets consist of patents issued, patents pending, trademarks, purchased
technology and other deferred charges which are recorded at cost. Patents are
amortized on a straight-line basis over 1 to 20 years. Costs associated with the
development of new external use software products are expensed as incurred until
technological feasibility has been established in accordance with the Financial
Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”)
985-20 “Costs of Software to be Sold, Leased or Marketed.” Technological
feasibility is demonstrated by the completion of a detailed design
plan. Capitalization ceases when the product is available for general
release to customers. Capitalized costs are amortized over their estimated
useful lives. Deferred financing costs are amortized over the term of the
related debt. Other deferred charges are amortized over their estimated useful
lives.
The
Company reviews its long-lived assets including goodwill for impairment at least
annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company believes that
the carrying amounts of its long-lived assets are fully
recoverable.
(4) Principal
Products and Services
The
Company has categorized its sales of products and services into the following
categories:
|
·
|
Critical
care monitoring products – includes sales of the FORE-SIGHT® cerebral
monitor and accessories.
|
|
·
|
Bedside
monitoring 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.
|
|
·
|
Blood
pressure measurement technology – includes sales to Original Equipment
Manufacturers (“OEM”) of the Company’s proprietary non-invasive blood
pressure modules (MAXNIBP®), blood pressure cuffs and accessories for the
OEM market and related license
fees.
|
|
·
|
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.
|
(5) Income
(Loss) per Common Share
A summary of the denominators used to
compute basic and diluted income (loss) per share follows:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Weighted
average shares outstanding, net
of restricted shares – used to compute
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic income (loss) per share
|
|
|
11,292,931 |
|
|
|
11,171,056 |
|
|
|
11,243,257 |
|
|
|
10,980,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of restricted shares, and
outstanding
warrants and options
|
|
|
458,203 |
|
|
|
914,066 |
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities outstanding – used to compute
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted income (loss) per share
|
|
|
11,751,134 |
|
|
|
12,085,122 |
|
|
|
11,243,257 |
|
|
|
10,980,756 |
|
Form
10-Q
Sept. 30,
2009
Page 9
Diluted
common stock equivalents such as restricted shares, outstanding warrants and
options are excluded from the computation of diluted earnings per share where
there is a loss as their inclusion would be anti-dilutive.
(6) Stock-Based
Compensation
Stock compensation expense was $94,325
and $86,943, and $260,742 and $318,258, for the three-month and nine-month
periods ended September 30, 2009 and 2008, respectively.
As of
September 30, 2009, the unrecognized stock-based compensation cost related to
non-vested restricted stock and stock option awards was
$494,240. Such amount, before estimated forfeitures, will be
recognized in operations over a weighted average period of 1.8
years.
The following table summarizes the
Company’s stock option information as of, and for the nine-month period ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Weighted-Average
|
|
|
|
|
Option
|
|
|
Weighted-Average
|
|
|
Intrinsic
|
|
|
Contractual
Life
|
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Value
(1)
|
|
|
Remaining
in Years
|
|
|
Outstanding
at December 31, 2008
|
|
|
590,125 |
|
|
$ |
2.43 |
|
|
$ |
219,264 |
|
|
|
|
|
Granted
|
|
|
25,000 |
|
|
|
1.82 |
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(86,000 |
) |
|
|
3.85 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,000 |
) |
|
|
0.70 |
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2009
|
|
|
524,125 |
|
|
$ |
2.18 |
|
|
$ |
138,371 |
|
|
|
4.98 |
|
|
Exercisable
at September 30, 2009
|
|
|
470,790 |
|
|
$ |
2.09 |
|
|
$ |
71,402 |
|
|
|
4.53 |
|
(1)
The intrinsic value of a stock option is the amount by which the current market
value of the underlying stock as of September 30, 2009 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 typically 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.
During
the first nine months of 2009, non-qualified stock options to purchase an
aggregate of 25,000 shares of common stock were granted to several employees.
The stock options vest one-third per year over three years from the grant
date.
The weighted-average grant date fair
value of stock options granted during the nine-month periods ended September 30,
2009 and 2008 was $1.20 and $2.90 per share, respectively.
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:
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
Weighted-average
expected stock-price volatility
|
|
|
88.2 |
% |
|
|
63.4 |
% |
|
Weighted-average
expected option life
|
|
4.2
years
|
|
|
4.2
years
|
|
|
Average
risk-free interest rate
|
|
|
3.56 |
% |
|
|
3.81 |
% |
|
Average
dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Stock
options to purchase 5,000 shares of the Company’s common stock were exercised
during the nine months ended September 30, 2009. The total intrinsic value of
stock options exercised during the nine-month periods ended September 30, 2009
and 2008 were $4,950 and $62,731, respectively.
Form
10-Q
Sept. 30,
2009
Page
10
During
2009, the Company issued an aggregate of 173,528 shares of restricted common
stock under the 2003 Equity Incentive Plan to employees and outside members of
the Board of Directors. Of the total amount granted, 150,000 shares were issued
to employees of which 140,000 shares vest one-third per year over three years
and 10,000 shares vest one-half per year over a two-year period. The 23,528
shares of restricted common stock granted to outside directors vest quarterly
over twelve months from the grant date. Of the total amount granted
during 2009, 36,001 shares have been cancelled due to terminations of
employment.
On
June 10, 2009, the Company’s stockholders approved the CAS Medical Systems, Inc.
Employee Stock Purchase Plan. Accordingly, 150,000 shares of common stock have
been reserved for issuance under the Stock Purchase Plan. The initial offering
period began on July 1, 2009. The Stock Purchase Plan offers the Company’s
employees an opportunity to participate in a payroll-deduction based program
designed to incentivize them to contribute to the Company’s
success. The plan approved by the stockholders during June 2009
replaced a plan in effect since June 2004. The current plan contains certain
changes including a reduction of the discount under which participants purchase
shares of the Company’s common stock.
On June
10, 2009, the Company’s stockholders also approved an amendment to the CAS
Medical Systems, Inc. 2003 Equity Incentive Plan (the “Plan”) which increases
the maximum number of shares that can be issued under the Plan by 250,000 to
1,250,000. Awards that may be granted under the Plan include options, restricted
stock and restricted stock units, and other stock-based awards. The purposes of
the Plan are to make available to our key employees and directors, certain
compensatory arrangements related to growth in value of our stock so as to
generate an increased incentive to contribute to the Company’s financial
success; to enhance the Company’s ability to attract and retain exceptionally
qualified individuals whose efforts can affect the Company’s financial growth
and profitability; and align in general the interests of our employees and
directors with the interests of our stockholders. As of September 30, 2009,
376,523 shares remain available for issuance under the Plan.
(7)
Financing Arrangements
The
Company has a line of credit agreement with its bank lender, NewAlliance Bank,
which was amended on April 3, 2009 effective March 31, 2009 pursuant to a Second
Modification Agreement, (as amended, the “Agreement”). In accordance with the
Agreement, the maximum availability was modified from $10,000,000 to $5,000,000
subject to a borrowing base formula equal to the sum of (i) 75% of eligible
receivables and (ii) the lesser of $2,500,000 or 30% of eligible inventory.
Interest on outstanding amounts is at the Prime Rate plus 1.0% and is subject to
a floor of 4.0%. The Agreement expires on July 1, 2010. Borrowings
are secured by a first priority lien on all the business assets of the Company.
The Agreement contains customary non-financial covenants and financial
covenants, consisting of a debt service coverage ratio and a debt to tangible
net worth ratio. Under the terms of the Agreement, the debt service coverage
ratio was revised from a quarterly test to an annual test for the twelve months
ending December 31, 2009 and the minimum ratio revised from 1.5 to 1 to 1.0 to
1. As of the first quarter of 2010 and thereafter, the ratio returns to 1.5 to 1
with testing resumed on a quarterly basis. As of September 30, 2009, there was
$1,940,069 outstanding under the Agreement.
The
Company is presently in compliance with all terms of the Agreement, however it
does not currently believe that it will be in compliance with the debt service
coverage ratio covenant at December 31, 2009. While the Company expects to be
able to successfully negotiate an amendment or a waiver of the debt service
coverage ratio covenant, there can be no assurance that such an amendment or a
waiver will be obtained on satisfactory terms or at all. If an
amendment or waiver can not be successfully negotiated with the lender, the
entire amount of any indebtedness at that time under the Agreement and the term
note to NewAlliance described below could become due and payable at the lender’s
discretion, which could have a material adverse effect on the Company’s
financial position. In the event the Company is not successful in obtaining an
amendment or waiver from its current lender, the Company would seek alternative
sources of funding. The Company believes it will be able to obtain alternative
financing on terms favorable to the Company in part because its total debt
financing needs are substantially below the value of the Company’s assets. There
can no assurance however that the Company would be successful in obtaining such
financing on satisfactory terms or at all.
The
Company also has a term note to NewAlliance Bank which provides for monthly
installments of $61,533, which
includes interest at 6%. The balance pursuant to this note at September 30, 2009
was $1,865,838. The term note is payable in full on June 1,
2012.
Form
10-Q
Sept. 30,
2009
Page
11
During
May 2009, the Company entered into a note payable for the financing of certain
insurance coverage. A total of $228,052 was financed at 5.2% and is payable at
$25,339 per month including interest through February 2010. As of September 30,
2009, there was $126,695 outstanding under the note payable.
(8)
Income Taxes
The
income tax provision (benefit) recognized in operations for the periods
presented vary from the statutory rate as a result of anticipated state and
federal R&D tax credits partially offset by non-deductible stock
compensation expense.
Recoverable
income taxes consist of estimated state and federal tax refunds generated from
the carry back of net operating losses and exchanges of state tax credits for
reduced cash receipts payable to the Company.
We
have performed the required assessment of positive and negative evidence
regarding realization of our deferred tax assets in accordance with FASB ASC 740
“Income Taxes”, including our prior period operating results and our forecast
for future net income. Our assessment utilized assumptions about our revenues
and pre-tax income in future periods and considered a number of uncertainties
including the market acceptance for our products, competition, the potential
effects of our current litigation, and the current economic environment. As of
September 30, 2009, we concluded that it is more likely than not that our
deferred income taxes of $1,672,124 will be realized.
(9) Other
– Arbitration Settlement
On
May 8, 2007, the Company signed an exclusive distribution agreement (the
“Agreement”) with Analogic Corporation (“Analogic”) under which the Company
obtained worldwide exclusive rights to market the Analogic Lifegard® family of
non-invasive patient monitors. Under the Agreement, Analogic would co-brand the
devices and reconfigure its Lifegard II monitor to include the Company’s MAXNIBP
branded non-invasive blood pressure and other branded
technologies. Accordingly, the Company would reimburse Analogic approximately
$900,000 upon meeting agreed milestone dates for such efforts. The Company made
one payment to Analogic of $90,000.
On
November 24, 2008, Analogic commenced arbitration against the Company contending
that the Company breached the Agreement. Analogic was seeking damages
of approximately $765,000 for costs it allegedly incurred in performing under
the Agreement including winding down costs and additional remedies which could
have provided for relief totaling double or treble damages, in addition to
attorney fees. The Company denied Analogic’s claims and asserted a
counterclaim for damages in excess of those sought by Analogic. The arbitration
hearing was conducted on June 15, 2009. In August 2009, the Company reached a
settlement of its arbitration pursuant to which Analogic has paid the Company
the sum of $811,000 in full satisfaction of all matters raised in the
arbitration. The Company and Analogic have negotiated a conclusion to
their contractual relationship by way of an orderly process that will protect
the customers of the Company and Analogic by allowing the Company to continue
distributing products until July 31, 2010.
As a
result of the settlement, the Company wrote-off $99,309 of intangible assets
associated with the contract and recorded the $711,691 balance as a reduction of
general and administrative expenses to offset previously reported legal expenses
associated with this matter.
(10)
Contingencies
On August
7, 2009, Somanetics Corporation (“Somanetics”) filed an action against the
Company in the United States District Court for the Eastern District of Michigan
alleging patent infringement, false advertising, and common law unfair
competition and libel. The complaint requests injunctive relief and
unspecified monetary damages, including treble damages and reasonable attorneys’
fees. On October 19, 2009, the Company answered the
complaint, denying all allegations against it. In addition, the Company has
asserted counterclaims against Somanetics for violation of the antitrust laws
and for a declaration that the patents sued upon are invalid, unenforceable,
and/or have not been infringed by the Company.
Form
10-Q
Sept. 30,
2009
Page 12
(11)
Fair Value of Financial Instruments
The fair
value of the Company’s debt as of September 30, 2009 approximates its carrying
value of $3,805,907. Fair value was determined using unobservable inputs (i.e.
Level III as defined under FASB ASC 820, “Fair Value Measurements and
Disclosures”). The fair value of all other financial instruments such as
accounts receivable,
accounts payable and accrued expenses approximates their carrying value using
active market data (i.e. Level I as defined in FASB ASC 820).
(12)
Recent Issued Accounting Standards
In June
2009, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 105,
Generally Accepted Accounting Principles, which establishes the FASB Accounting
Standards Codification as the sole source of authoritative generally accepted
accounting principles. Pursuant to the provisions of FASB ASC 105, the
Company
has updated references to GAAP in its financial statements issued for the period
ended September 30, 2009. The adoption of FASB ASC 105 did not impact the
Company’s financial position or results of operations.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain
statements included in this report, including without limitation statements in
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
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
Operating
results for both the three and nine month periods ended September 30, 2009 have
been affected by the worldwide economic downturn and weakened demand for the
Company’s products particularly in U.S. capital equipment markets.
For the
three months ended September 30, 2009, the Company reported net income of
$197,000 or $0.02 per basic and diluted common share compared to net income of
$329,000 or $0.03 per basic and diluted common share reported for the three
months ended September 30, 2008. During the third quarter ended September 30,
2009, the Company recorded a recovery of legal expenses and reimbursements for
asset write-downs totaling $712,000 related to the Analogic settlement.
Excluding the benefit from the Analogic settlement, pre-tax income of $315,000
would have been a pre-tax loss of $397,000. Revenues for the third quarter of
2009 declined $2,542,000 or 22% from the third quarter of 2008 while operating
expenses,
Form
10-Q
Sept. 30,
2009
Page
13
excluding
the Analogic settlement, were largely unchanged. Pre-tax results for the third
quarter of 2009 included $124,000 of legal expenses related to the Somanetics
litigation. The three-month periods ended September 30, 2009 and 2008 were also
affected by approximately $95,000 and $87,000 respectively, of stock
compensation expense.
The
Company reported a net loss of $1,539,000 or ($0.14) per basic and diluted
common share for the nine months ended September 30, 2009 compared to a net loss
of $233,000 or ($0.02) per basic and diluted common share for first nine months
of 2008. Revenue shortfalls of $5,073,000 or 16% compared to the first nine
months of the prior year were largely responsible for the increased losses.
Excluding the benefit associated with the Analogic settlement in August 2009,
operating expenses were largely unchanged from the prior year. Pre-tax income
for the nine-month periods ended September 30, 2009 and 2008 was also affected
by $261,000 and $318,000 respectively, of stock compensation
expense.
The Company generated revenues of
$9,166,000 for the three months ended September 30, 2009, a decrease of
$2,542,000 or 22%, compared to revenues of $11,708,000 for the three months
ended September 30, 2008. The following table provides information
with respect to revenues by major category:
|
($000’s)
|
|
Three
Months
Ended
September
30, 2009
|
|
|
Three
Months
Ended
September
30, 2009
|
|
|
Increase/
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
Bedside
Monitoring Products
|
|
$ |
2,867 |
|
|
$ |
5,289 |
|
|
$ |
(2,422 |
) |
|
Critical
Care Monitoring Products
|
|
|
1,
066 |
|
|
|
831 |
|
|
|
235 |
|
|
Blood
Pressure Measurement Technology
|
|
|
1,781 |
|
|
|
2,195 |
|
|
|
(414 |
) |
|
Supplies
and Service
|
|
|
3,452 |
|
|
|
3,393 |
|
|
|
59 |
|
|
|
|
$ |
9,166 |
|
|
$ |
11,708 |
|
|
$ |
(2,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Sales
|
|
|
6,554 |
|
|
|
9,371 |
|
|
|
(2,817 |
) |
|
International
Sales
|
|
|
2,612 |
|
|
|
2,337 |
|
|
|
275 |
|
|
|
|
$ |
9,166 |
|
|
$ |
11,718 |
|
|
$ |
(2,542 |
) |
Bedside
monitoring product revenues for the three months ended September 30, 2009
decreased $2,422,000 or 46% to $2,867,000 from $5,289,000 reported for the same
three months of the prior year as a result of decreases in sales of vital signs
monitors and accessories to certain key U.S. customers primarily the Veterans
Administration and sales of co-branded Analogic products outside of the
U.S.
Critical care monitoring product
revenues of $1,066,000 represent sales of the Company’s Fore-Sight cerebral
oximetry monitors, sensors and accessories. During the third quarter ended
September 30, 2009, the Company placed or sold approximately 14 monitors with
customers bringing the installed base of Fore-Sight monitors worldwide to 192
monitors. Under the Company’s monitor placement arrangements, customers are
entitled to use the Company’s monitors at no cost in exchange for purchase
orders for Fore-Sight sensors.
Blood
pressure measurement technology sales of $1,781,000 for the three months ended
September 30, 2009 decreased $414,000 or 19% from $2,195,000 reported for the
same three months of the prior year. Reduced sales of OEM modules to the
Company’s largest OEM customer, Medtronic Physio-Control, accounted for
approximately $314,000 of the sales shortfall during this period. Sales to the
Company’s OEM partner in the veterinary market were also down $163,000 and were
partially offset by increased international shipments of OEM modules to one
significant customer.
Supplies
and service sales increased $59,000 or 2% to $3,452,000 for the three months
ended September 30, 2009 from $3,393,000 for the same three months of the prior
year. Sales of blood pressure cuffs to a new customer were partially offset by
reduced sales to a significant customer.
Form
10-Q
Sept. 30,
2009
Page
14
Sales to
the U.S. market accounted for $6,553,000 or 72% of the total revenues reported
for the three months ended September 30, 2009, a decrease of $2,818,000 or 30%
from the $9,371,000 of sales reported for the three months ended September 30,
2008. Sales in nearly all product categories to the U.S. market were down with
the exception of Fore-Sight monitors and sensors. International sales
accounted for $2,612,000 or 28% of the total revenues reported for the three
months ended September 30, 2009, an increase of $275,000 or 12% from
the $2,337,000 reported for the same period of the prior year. Increases in
international sales of Fore-Sight monitors and sensors and bedside monitoring
products were partially offset by reduced OEM module sales.
The
Company generated revenues of $26,140,000 for the nine months ended September
30, 2009, a decrease of $5,073,000 or 16%, compared to revenues of $31,213,000
for the nine months ended September 30, 2008. The following table
provides information with respect to revenues by major category:
|
($000’s)
|
|
Nine
Months
Ended
September
30, 2009
|
|
|
Nine
Months
Ended
September
30, 2009
|
|
|
Increase/
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
Bedside
Monitoring Products
|
|
$ |
8,509 |
|
|
$ |
12,700 |
|
|
$ |
(4,191 |
) |
|
Critical
Care Monitoring Products
|
|
|
2,933 |
|
|
|
1,482 |
|
|
|
1,451 |
|
|
Blood
Pressure Measurement Technology
|
|
|
4,741 |
|
|
|
5,739 |
|
|
|
(998 |
) |
|
Supplies
and Service
|
|
|
9,957 |
|
|
|
11,292 |
|
|
|
(1,335 |
) |
|
|
|
$ |
26,140 |
|
|
$ |
31,213 |
|
|
$ |
(5,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Sales
|
|
|
18,287 |
|
|
|
23,434 |
|
|
|
(5,147 |
) |
|
International
Sales
|
|
|
7,853 |
|
|
|
7,779 |
|
|
|
74 |
|
|
|
|
$ |
26,140 |
|
|
$ |
31,213 |
|
|
$ |
(5,073 |
) |
Bedside
monitoring product revenues for the nine months ended September 30, 2009
decreased $4,191,000 or 33% led by decreases in sales of vital signs monitors to
U.S. customers, primarily the Veterans Administration, sales into the veterinary
market and sales of co-branded Analogic products outside of the
U.S.
Critical
care product revenues which represent sales of the Company’s Fore-Sight cerebral
oximetry monitors, sensors and accessories, increased $1,451,000 or 98% to
$2,933,000 for the nine months ended September 30, 2009 compared to $1,482,000
for the same period of the prior year primarily as a result of increased sensor
sales on an expanded installed base. Sensor sales account for approximately 71%
of the total 2009 cerebral oximetry revenues.
Blood
pressure measurement technology sales of $4,741,000 for the nine months ended
September 30, 2009 decreased $998,000 or 17% from $5,739,000 reported for the
same nine months of the prior year. Sales of OEM modules to the Company’s
largest OEM customer, Medtronic Physio-Control, represented $468,000 of the
sales shortfall during this period. Sales to the Company’s OEM partner in the
veterinary market were also down $126,000 as were international shipments of OEM
modules.
Supplies
and service sales decreased $1,335,000 or 12% to $9,957,000 for the nine months
ended September 30, 2009 from $11,292,000 for the same nine months of the prior
year. Lower sales of blood pressure cuffs accounted for the entire
shortfall in this product category. Reduced sales of blood pressure cuffs to a
significant OEM customer which carry lower gross margins were partially offset
by sales to a new direct customer which offer improved gross margins to the
Company.
Sales to
the U.S. market accounted for $18,287,000 or 70% of the total revenues reported
for the nine months ended September 30, 2009, a decrease of $5,147,000 or 22%
from the $23,434,000 in sales reported for the nine months ended September 30,
2008. Sales of bedside monitoring products and blood pressure cuffs
sales were largely responsible for the reduction and were partially offset by
increased Fore-Sight product sales. International sales accounted for $7,853,000
or 30% of the total revenues reported for the nine months ended September 30,
2009, an increase of $74,000 or 1% from the $7,779,000 reported for the same
period of the prior year. Reductions in Analogic product sales and blood
pressure cuff sales were offset by increased Fore-Sight revenues.
Form
10-Q
Sept. 30,
2009
Page
15
Cost of
sales was $5,965,000 or 65.1% of revenues for the three months ended September
30, 2009 compared to $7,408,000 or 63.3% for the same three months of the prior
year. Cost of sales for the nine months ended September 30, 2009 was $17,881,000
or 68.4% of revenues compared to $20,740,000 or 66.4% of revenues for the nine
months ended September 30, 2008. The increase in cost of sales as a percentage
of revenues for both periods resulted primarily from unfavorable product
and geographical mix, inventory adjustments and unapplied manufacturing overhead
costs as a percentage of the reduced revenues for these periods. Cost
of sales as a percentage of revenues improved during the third quarter of 2009
as compared to both the first and second quarters of 2009 which averaged 70% for
these periods. Reductions in manufacturing departmental spending, spoilage and
rework, and inventory related adjustments together with increases in sales
levels accounted for the improvement.
Operating
expenses for the three months ended September 30, 2009 decreased $806,000 or 22%
to $2,825,000 from $3,631,000 for the three months ended September 30, 2008.
During the third quarter of 2009, $712,000 of amounts received from the
settlement of the Analogic arbitration reduced G&A expenses to offset
previously reported legal and other expenses. Operating expenses for the first
nine months of 2009 decreased $264,000 or 2% to $10,418,000 from $10,682,000
reported for the same period the prior year.
Research
and development (“R&D”) expenses increased $135,000 or 24% to $689,000 or 7%
of revenues for the three months ended September 30, 2009 compared to $554,000
or 5% of revenues for the three months ended September 30, 2008. Increases in
Fore-Sight project related expenses partially offset by increased reimbursements
from the National Institutes of Health (“NIH”) pertaining to the Company’s
Near-Infrared Spectroscopy (“NIRS”) technology compared to the same period of
the prior year were primarily responsible for the increase in net R&D
expenses. Increased Fore-Sight related clinical research expenses also
contributed to the overall increase in R&D expenses for this period. R&D
expenses for the first nine months of 2009 increased $361,000 or 24% to
$1,893,000 from $1,532,000 reported for the first nine months of the prior year.
Engineering project expenses and clinical expenses were responsible for the
increase and were partially offset by increased NIH
reimbursements. For the three months and nine months ended September
30, 2009, NIH reimbursements totaled $187,000 and $601,000, respectively,
compared to $108,000 and $363,000 for the three and nine-month periods ended
September 30, 2008. As of September 30, 2009, a maximum of approximately $1.2
million remains available under the $2.8 million multi-year NIH award received
during 2007.
Selling, general and administrative
expenses (“S,G&A”) decreased $941,000 or 31% to $2,136,000 for the three
months ended September 30, 2009 compared to $3,077,000 for the three months
ended September 30, 2008. Excluding the $712,000 of benefits
associated with the Analogic arbitration settlement, S,G&A expenses for the
third quarter of 2009 would have been $2,848,000, a decrease of $229,000 or 7%
from the $3,077,000 of S,G&A expenses recorded for the third quarter of
2008. G&A expenses decreased approximately $783,000 of which $712,000 was
related to the Analogic settlement. Salaries and related benefits and general
insurance also declined and were partially offset by increased non-Analogic
legal expenses including approximately $124,000 of Somanetics litigation related
costs. Sales and marketing expenses declined $158,000 for the third quarter of
2009 compared to the third quarter of the prior year primarily from reductions
in sales administration personnel costs and non-Fore-Sight related marketing
expenditures.
S,G&A
expenses for the first nine months of 2009 totaled $8,525,000, a decrease of
$625,000, or approximately 7%, from the $9,150,000 reported for the first nine
months of 2008. G&A expenses accounted for $524,000 of the
reduction while sales and marketing expenses accounted for the remainder of
$101,000. G&A expense reductions were primarily driven by decreases in
salaries and related benefits including incentive expenses, and 401(k) plan
company matching contributions, insurance expenses, accounting and
Sarbanes-Oxley internal control fees, partially offset by increased legal fees
related to the Somanetics litigation. Fore-Sight related sales and marketing
expenses were $2,807,000, an increase of $598,000 over expenses reported for the
same period of the prior year. Offsetting the increases in Fore-Sight
related sales and marketing expenses were decreases in non-Fore-Sight related
sales and marketing spending primarily driven by reductions in sales
administration and support and marketing salaries and .related fringe
benefits.
Form
10-Q
Sept. 30,
2009
Page
16
Interest
expense decreased to $61,000 and $173,000, respectively for the three and nine
months ended September
30, 2009 compared to $73,000 and $216,000, respectively for the three and nine
months ended September 30, 2008. The decrease in interest expense resulted
primarily from lower outstanding balances of long-term debt and lower average
balances outstanding under the Company’s line-of-credit together with reduced
interest rates.
The
income tax benefit of $794,000 for the nine months ended September 30, 2009
reflects a combined estimated federal and state effective tax benefit of 34%,
reduced for prior period adjustments of $75,000 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 income tax benefit of $192,000 recorded for the nine
months ended September 30, 2008 reflects a combined estimated federal and state
effective tax benefit of 46%, reduced for prior period adjustments of $43,000
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.
Financial Condition,
Liquidity and Capital Resources
At
September 30, 2009, the Company's cash and cash equivalents totaled $990,000
compared to $1,083,000 at December 31, 2008. Working capital decreased
$2,003,000 to $8,816,000 at September 30, 2009, from $10,819,000 on December 31,
2008. The Company’s current ratio decreased to 2.4 to 1 from 2.9 to
1.
Cash
provided by operations for the nine months ended September 30, 2009 was $519,000
compared to cash provided by operations of $407,000 for the first nine months of
the prior year. Reductions in inventories of $1,379,000 and other receivables
were primarily responsible for the increase and were partially offset by
increases in deferred income taxes and accounts receivable. Cash
provided by operations for the three months ended September 30, 2009 was
$1,614,000 driven by income before depreciation and amortization and reductions
in inventories. Cash provided by operations of $407,000 for the nine months
ended September 30, 2008 resulted primarily from increases in accounts payable
and accrued expenses of $897,000 and earnings before depreciation and
amortization of $847,000 and were partially offset by increases in inventory of
$1,184,000.
Cash used
in investing activities was $292,000 for the nine months ended September 30,
2009 compared to cash used in investing activities of $1,591,000 for the first
nine months of the prior year. Expenditures for property and equipment have been
modest for the nine months ended September 30, 2009 and were driven by
manufacturing requirements for tooling, dies and molds as well as increases in
Fore-Sight cerebral oximeter units at customer sites. Prior year expenditures
for property and equipment were largely comprised of placements of Fore-Sight
cerebral oximetry units at customer sites and Fore-Sight demonstration
equipment. Disposal of intangible assets related to the Analogic settlement
under which these amounts were recovered.
Cash
required by financing activities for the nine months ended September 30, 2009
was $320,000 compared to cash provided by financing activities of $1,423,000 for
the first nine months of the prior year. Bank debt repayment including payments
toward the line-of-credit totaled $511,000 while borrowings under an insurance
related note payable totaled $127,000 net of repayments and shares issued under
the Company’s employee stock purchase program and from stock option exercises
were $64,000. Cash provided from financing activities for the first nine months
of the prior year were generated primarily from a private placement of 333,333
shares of the Company’s common stock for aggregate proceeds of
$1,000,000.
The
Company has a line of credit agreement with its bank lender, NewAlliance Bank,
which was amended on April 3, 2009 effective March 31, 2009 pursuant to a Second
Modification Agreement, (as amended, the “Agreement”). In accordance with the
Second Modification Agreement, the maximum availability was modified from
$10,000,000 to $5,000,000 subject to a borrowing base formula equal to the sum
of (i) 75% of eligible receivables and (ii) the lesser of $2,500,000 or 30% of
eligible inventory. Interest on outstanding amounts is at the Prime Rate plus
1.0% and is subject to a floor of 4.0%. The Agreement expires on July
1, 2010. Borrowings are secured by a first priority lien on all the business
assets of the Company. The Agreement contains customary non-financial covenants
and financial covenants, consisting of a debt service coverage ratio and a debt
to tangible net worth ratio. Under the terms of the Agreement, the debt service
coverage ratio was revised from a quarterly test to an annual test for the
twelve months ending December 31, 2009 and the minimum ratio revised from 1.5 to
1 to 1.0 to 1. As of the first quarter of 2010 and thereafter, the ratio returns
to 1.5 to 1 with testing resumed on a quarterly basis. As of September 30, 2009,
there was $1,940,069 outstanding under the Agreement.
Form
10-Q
Sept. 30,
2009
Page
17
The
Company is presently in compliance with all terms of the Agreement however it
does not currently believe that it will be in compliance with the debt service
coverage ratio covenant at December 31, 2009. While the Company expects to be
able to successfully negotiate an amendment or a waiver of the debt service
coverage ratio covenant, there can be no assurance that such an amendment or a
waiver will be obtained on satisfactory terms or at all. If an
amendment or waiver can not be successfully negotiated with the lender, the
entire amount of any indebtedness at that time under the Agreement and the
Company’s term note to NewAlliance could become due and payable at the lender’s
discretion, which could have a material adverse effect on the Company’s
financial position. In the event the Company is not successful in obtaining an
amendment or waiver from its current lender, the Company would seek alternative
sources of funding. The Company believes it will be able to obtain alternative
financing on terms favorable to the Company in part because its total debt
financing needs are substantially below the value of the Company’s assets. There
can no assurance however that the Company would be successful in obtaining such
financing on satisfactory terms or at all.
The
Company believes that its sources of funds consisting of cash and cash
equivalents and funds available from the line of credit facility will be
sufficient to meet its current and expected short-term requirements. However,
future cash flows may be impacted by a number of factors, including changing
market conditions or failure to meet financial covenants under our current or
any future loan agreement. Changes in payment terms to one or more of our major
suppliers could also have a material adverse effect on our results of operations
and future liquidity. We believe that our current levels of working capital and
available debt financing are insufficient to fund major growth initiatives, such
as significant increases in our sales and marketing personnel, or material
acquisitions. There can be no assurance that we will be successful in securing
such funding for major initiatives, obtaining a new credit agreement or securing
additional sources or forms of capital for major 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, 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, 2008.
There were no significant changes in critical accounting policies and estimates
during the three months ended September 30, 2009.
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 $1,940,069 at September 30, 2009. The
line-of-credit agreement, amended on April 3, 2009 and effective as of March 31,
2009, 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.
ITEM
4. 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
Form
10-Q
Sept. 30,
2009
Page
18
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 September 30, 2009. 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 September 30, 2009 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
INFORMATION
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 may be scheduled for trial during late 2009. 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.
Somanetics
Litigation
On August 7,
2009, Somanetics Corporation filed an action against the Company in the United
States District Court for the Eastern District of Michigan alleging patent
infringement, false advertising, and common law unfair competition and
libel. The complaint requests injunctive relief and unspecified monetary
damages, including treble damages and reasonable attorneys’ fees. On
October 19, 2009, the Company answered the complaint, denying all allegations
against it. In addition, the Company has asserted counterclaims against
Somanetics for violation of the antitrust laws and for a declaration that the
patents sued upon are invalid, unenforceable, and/or have not been infringed by
the Company.
Analogic
Arbitration
On
May 8, 2007, the Company signed an exclusive distribution agreement (the
“Agreement”) with Analogic Corporation (“Analogic”) under which the Company
obtained worldwide exclusive rights to market the Analogic Lifegard® family of
non-invasive patient monitors. Under the Agreement, Analogic would co-brand the
devices and reconfigure its Lifegard II monitor to include the Company’s MAXNIBP
branded non-invasive blood pressure and other branded
technologies. Accordingly, the Company would reimburse Analogic approximately
$900,000 upon meeting agreed milestone dates for such efforts. The Company made
one payment to Analogic of $90,000.
Form
10-Q
Sept. 30,
2009
Page
19
On
November 24, 2008, Analogic commenced arbitration against the Company contending
that the Company breached the Agreement. Analogic was seeking damages
of approximately $765,000 for costs it allegedly incurred in performing under
the Agreement including winding down costs and additional remedies which could
have provided for relief totaling double or treble damages, in addition to
attorney fees. The Company denied Analogic’s claims and asserted a
counterclaim for damages in excess of those sought by Analogic. The arbitration
hearing was conducted on June 15, 2009. In August 2009, the Company reached a
settlement of its arbitration pursuant to which Analogic paid the Company the
sum of $811,000 in full satisfaction of all matters raised in the
arbitration. The Company and Analogic have negotiated a conclusion to
their contractual relationship by way of an orderly process that will protect
the customers of the Company and Analogic by allowing the Company to continue
distributing products until July 31, 2010.
Other
We may
become, in the normal course of our business operations, a party to other legal
proceedings in addition to those described in the paragraphs
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
Sept. 30,
2009
Page
20
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: November
5, 2009 |
|
| By: Andrew
E. Kersey |
|
|
|
|
President and Chief Executive Officer |
|
|
|
| |
|
|
|
| |
|
|
|
| /s/ Jeffery A.
Baird
|
|
Date: November
5, 2009 |
|
| By: Jeffery
A. Baird |
|
|
|
|
Chief Financial Officer |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|