ITEM 1. FINANCIAL STATEMENTS
CAS Medical Systems, Inc.
Condensed Consolidated Balance Sheets
|
|
June 30,
|
|
|
December 31,
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|
Assets
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
6,022,405 |
|
|
$ |
9,245,094 |
|
Short-term investments
|
|
|
757,973 |
|
|
|
1,250,794 |
|
Accounts receivable, net of allowance
|
|
|
2,638,326 |
|
|
|
2,197,513 |
|
Inventories
|
|
|
3,449,327 |
|
|
|
3,543,325 |
|
Other current assets
|
|
|
610,720 |
|
|
|
612,082 |
|
Total current assets
|
|
|
13,478,751 |
|
|
|
16,848,808 |
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
311,320 |
|
|
|
311,320 |
|
Equipment at customers
|
|
|
3,564,803 |
|
|
|
3,407,836 |
|
Machinery and equipment
|
|
|
5,635,683 |
|
|
|
5,439,521 |
|
|
|
|
9,511,806 |
|
|
|
9,158,677 |
|
Accumulated depreciation and amortization
|
|
|
(6,854,108 |
) |
|
|
(6,443,303 |
) |
Property and equipment, net
|
|
|
2,657,698 |
|
|
|
2,715,374 |
|
|
|
|
|
|
|
|
|
|
Intangible and other assets, net
|
|
|
850,804 |
|
|
|
830,245 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
16,987,253 |
|
|
$ |
20,394,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAS Medical Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
Liabilities and Stockholders' Equity
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
1,058,666 |
|
|
$ |
1,906,327 |
|
Accrued expenses
|
|
|
1,327,505 |
|
|
|
1,625,923 |
|
Current portion of long-term debt
|
|
|
— |
|
|
|
697,834 |
|
Total current liabilities
|
|
|
2,386,171 |
|
|
|
4,230,084 |
|
|
|
|
|
|
|
|
|
|
Deferred gain on sale and leaseback of property
|
|
|
562,833 |
|
|
|
630,152 |
|
Long-term debt less current portion
|
|
|
4,884,132 |
|
|
|
2,685,560 |
|
Total liabilities
|
|
|
7,833,136 |
|
|
|
7,545,796 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value per share, 1,000,000
|
|
|
|
|
|
|
|
|
shares authorized -
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, 95,500 shares
|
|
|
|
|
|
|
|
|
issued and outstanding, liquidation value of
|
|
|
|
|
|
|
|
|
$11,018,756 at June 30, 2013
|
|
|
8,802,000 |
|
|
|
8,802,000 |
|
Series A exchangeable preferred stock, 54,500 shares
|
|
|
|
|
|
|
|
|
issued and outstanding, liquidation value of
|
|
|
|
|
|
|
|
|
$6,327,160 at June 30, 2013
|
|
|
5,135,640 |
|
|
|
5,135,640 |
|
Common stock, $.004 par value per share, 40,000,000
|
|
|
|
|
|
|
|
|
shares authorized, 13,821,221 and 13,767,192 shares
|
|
|
|
|
|
|
|
|
issued at June 30, 2013, and December 31, 2012,
|
|
|
|
|
|
|
|
|
respectively, including shares held in treasury
|
|
|
55,285 |
|
|
|
55,069 |
|
Common stock held in treasury, at cost - 86,000 shares
|
|
|
(101,480 |
) |
|
|
(101,480 |
) |
Additional paid-in capital
|
|
|
12,550,043 |
|
|
|
12,023,721 |
|
Accumulated deficit
|
|
|
(17,287,371 |
) |
|
|
(13,066,319 |
) |
Total stockholders' equity
|
|
|
9,154,117 |
|
|
|
12,848,631 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$ |
16,987,253 |
|
|
$ |
20,394,427 |
|
See accompanying notes.
CAS Medical Systems, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
5,042,420 |
|
|
$ |
5,198,300 |
|
|
$ |
10,618,258 |
|
|
$ |
10,607,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
3,124,411 |
|
|
|
3,015,656 |
|
|
|
6,475,267 |
|
|
|
6,389,401 |
|
Gross profit
|
|
|
1,918,009 |
|
|
|
2,182,644 |
|
|
|
4,142,991 |
|
|
|
4,217,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,029,533 |
|
|
|
949,704 |
|
|
|
2,082,393 |
|
|
|
1,839,821 |
|
Selling, general and administrative
|
|
|
3,460,829 |
|
|
|
2,897,182 |
|
|
|
6,542,582 |
|
|
|
6,004,703 |
|
|
|
|
4,490,362 |
|
|
|
3,846,886 |
|
|
|
8,624,975 |
|
|
|
7,844,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,572,353 |
) |
|
|
(1,664,242 |
) |
|
|
(4,481,984 |
) |
|
|
(3,626,806 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
76,824 |
|
|
|
735 |
|
|
|
142,554 |
|
|
|
883 |
|
Other expense (income)
|
|
|
(15,308 |
) |
|
|
(15,368 |
) |
|
|
(403,487 |
) |
|
|
(31,988 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,633,869 |
) |
|
|
(1,649,609 |
) |
|
|
(4,221,051 |
) |
|
|
(3,595,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend accretion
|
|
|
298,333 |
|
|
|
278,332 |
|
|
|
591,534 |
|
|
|
551,877 |
|
Net loss applicable to common stockholders
|
|
$ |
(2,932,202 |
) |
|
$ |
(1,927,941 |
) |
|
$ |
(4,812,585 |
) |
|
$ |
(4,147,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share basic and diluted loss applicable to common stockholders:
|
|
$ |
(0.22 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
13,425,416 |
|
|
|
13,260,345 |
|
|
|
13,408,584 |
|
|
|
13,239,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
CAS Medical Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$ |
(4,221,051 |
) |
|
$ |
(3,595,701 |
) |
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
576,964 |
|
|
|
501,892 |
|
Amortization of debt discount
|
|
|
32,617 |
|
|
|
— |
|
Stock compensation
|
|
|
463,106 |
|
|
|
466,778 |
|
Cash received from demutualization of insurance provider
|
|
|
(396,156 |
) |
|
|
— |
|
Impaired capitalized costs
|
|
|
1,323 |
|
|
|
27,262 |
|
Amortization of gain on sale and leaseback of property
|
|
|
(67,319 |
) |
|
|
(67,319 |
) |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(440,813 |
) |
|
|
(461,182 |
) |
Inventories
|
|
|
93,998 |
|
|
|
(334,617 |
) |
Other current assets
|
|
|
1,360 |
|
|
|
(129,003 |
) |
Accounts payable and accrued expenses
|
|
|
(1,124,079 |
) |
|
|
(195,851 |
) |
Net cash used in operating activities
|
|
|
(5,080,050 |
) |
|
|
(3,787,741 |
) |
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(466,735 |
) |
|
|
(964,510 |
) |
Short-term investments
|
|
|
492,821 |
|
|
|
(7,952 |
) |
Cash received from demutualization of insurance provider
|
|
|
396,156 |
|
|
|
— |
|
Purchase of intangible assets
|
|
|
(62,935 |
) |
|
|
(39,390 |
) |
Net cash provided by (used in) investing activities
|
|
|
359,307 |
|
|
|
(1,011,852 |
) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Deferred financing costs
|
|
|
(11,500 |
) |
|
|
— |
|
Proceeds from long-term debt and warrants
|
|
|
1,500,000 |
|
|
|
— |
|
Proceeds from issuance of common stock
|
|
|
9,554 |
|
|
|
10,741 |
|
Net cash provided by financing activities
|
|
|
1,498,054 |
|
|
|
10,741 |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(3,222,689 |
) |
|
|
(4,788,852 |
) |
Cash and cash equivalents, beginning of period
|
|
|
9,245,094 |
|
|
|
11,387,300 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
6,022,405 |
|
|
$ |
6,598,448 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$ |
102,556 |
|
|
$ |
883 |
|
Accrued liability settled with common stock
|
|
$ |
22,000 |
|
|
$ |
— |
|
See accompanying notes.
CAS Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2013
(1) The Company
CAS Medical Systems, Inc. (the “Company” or “CASMED”) is a medical technology company that develops, manufactures, and distributes non-invasive patient monitoring products that are vital to patient care. Our products include the FORE-SIGHT® Absolute Tissue Oximeter and sensors and our Traditional Monitoring products which include MAXNIBP® blood pressure measurement technology, bedside monitoring products, and supplies for neonatal intensive care. These products are designed to provide accurate, non-invasive, biologic measurements that guide healthcare providers to deliver improved patient care. CASMED markets its products worldwide through its sales force, distributors, manufacturers’ representatives, and original equipment manufacturers.
(2) Basis of Presentation
The condensed consolidated 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, 2012. The condensed consolidated balance sheet as of December 31, 2012 was derived from the audited financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Estimates that are particularly sensitive to change in the near-term are inventory valuation allowances, deferred income tax asset valuation allowances, and allowances for doubtful accounts. Actual results could differ from those estimates. In the opinion of the Company, all adjustments (consisting of normal recurring accruals) necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations and 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) Stockholders’ Equity
Series A Preferred Stock
On June 9, 2011, the Company issued) 95,500 shares of “Series A Convertible Preferred Stock” and 54,500 shares of “Series A Exchangeable Preferred Stock” (the “Series A Preferred Stock”), each with a par value $0.001 per share and which are convertible into authorized but unissued shares of common stock, par value $0.004 per share, of the Company. The Series A Exchangeable Preferred Stock has substantially identical terms to the Series A Convertible Preferred Stock.
The shares of Series A Preferred Stock were initially convertible at the option of the holder into common stock at a conversion price of $2.82 (the “Conversion Price”). The Conversion Price is subject to standard weighted-average anti-dilution adjustments. On July 22, 2013, upon completion of the Company’s public offering of common stock, the Conversion Price was adjusted to $2.389 per share.
Following the date of issuance, the stated value ($100.00 per share) of the Series A Preferred Stock accretes at an annual rate of 7% compounded quarterly. On an annual basis, prior to the third anniversary of the original date of issuance, the holders may elect, pursuant to certain requirements, to receive the following 12 months of accretion in the form of a dividend of 7% per annum, payable quarterly in cash at the holder’s option. After the third anniversary of the closing, such accretion may be made in cash at the Company’s option. The Series A Preferred Stock is subject to certain default provisions whereby the dividend rate would be increased by an additional 5% per annum.
After the third anniversary of the original date of issuance, the Company can force conversion of all, and not less than all, of the outstanding Series A Preferred Stock into Company common stock as long as the closing price of its common stock is at least 250% of the Conversion Price, or $5.9725 per common share, for at least 20 of the 30 consecutive trading days immediately prior to the conversion and the average daily trading volume is greater than 50,000 shares per day over the 30 consecutive trading days immediately prior to such conversion. The Company’s ability to cause a conversion is subject to certain other conditions as provided pursuant to the terms of the Series A Preferred Stock.
The Series A Preferred Stock is entitled to a liquidation preference equal to the greater of 100% of the accreted value for each share of Series A Preferred Stock outstanding on the date of a liquidation plus all accrued and unpaid dividends or the amount a holder would have been entitled to had the holder converted the shares of Series A Preferred Stock into common stock immediately prior to the liquidation. The Series A Preferred Stock votes together with the common stock as if converted on the original date of issuance. Holders of Series A Preferred Stock are entitled to purchase their pro rata share of additional stock issuances in certain future financings.
Pursuant to the terms of the Series A Preferred Stock, a holder must issue a written request to the Company by June 15th of 2011, 2012, or 2013 to receive cash dividends for the applicable succeeding four fiscal quarters ending June 30th, September 30th, December 31st, and March 31st. The holders have elected in writing not to receive cash dividends for the fiscal quarters through June 30, 2013. Further, the holders have irrevocably waived their cash dividend rights for the four fiscal quarters ended June 30, 2014, in accordance with the Company’s agreement with East West Bank executed on July 31, 2012. The bank agreement prohibits the payment of dividends. The holders’ waiver of their cash dividend rights for the four fiscal quarters ended June 30, 2014, may be revoked if the Company’s obligations to East West Bank are terminated at any time prior to June 30, 2014. As of June 30, 2013, $2,345,916 in dividend accretion has accumulated on the Series A Preferred Stock and the Series A Exchangeable Preferred Stock.
Common Stock Public Offering
On July 16, 2013, the Company entered into a purchase agreement with Northland Securities, Inc. (“Northland”) related to the public offering (the “Offering”) of 5,200,000 shares of its common stock at $1.25 per share resulting in gross proceeds of $6,500,000. The Company executed an underwriting agreement with Northland under which Northland purchased the shares of common stock from the Company at a price of $1.16875. Net proceeds to the Company under the transaction including fees and expenses were approximately $5,879,000. Proceeds from the transaction are intended to be used for general corporate purposes.
The Series A Preferred Stock terms referred to above contain anti-dilution provisions which modify the Conversion Price of the Series A Preferred Stock in the event that the Company issues any common stock at a price less than the Conversion Price during the three years after the original issue date of the Series A Preferred Stock. As a result of the Offering, the Conversion Price has been modified from $2.82 per share to $2.389 per share. Accordingly, based upon the liquidation value of the preferred stock at June 30, 2013, the number of shares of common stock issuable upon conversion of the Series A Preferred Stock increased from 6,151,034 to 7,260,743.
(4) Bank Financing
On July 31, 2012, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with East West Bank (the “Bank”). Pursuant to the Loan Agreement, the Bank provided the Company with a secured three-year $3,500,000 term loan (the “Term Loan”) which bears interest at 5.5% and contained a 12-month interest-only feature. On May 10, 2013, the Company amended the Loan Agreement which increased the principal to $5,000,000 and extended the maturity date of the Term Loan to July 31, 2016, with principal payable in 24 equal installments of approximately $221,000 including interest commencing on August 1, 2014. The interest rate was modified to 5.75%.
The Loan Agreement, as amended, also contains a revolving line-of-credit (the “Revolver”) facility with maximum borrowings of $2,000,000 and an expiration date of July 31, 2014. Under the amended Loan Agreement, advances under the Revolver bear interest at a floating rate equal to 2.00% above the Bank’s prime rate, with a 3.25% floor on the prime rate, representing an effective rate of 5.25%, as of June 30, 2013. Interest on the loan is payable monthly. The Company is permitted to borrow against eligible accounts receivable as defined under the Revolver according to pre-established criteria. The amount available for borrowing under the Revolver as of June 30, 2013, was $1,469,000. There were no borrowings under the Revolver as of June 30, 2013.
The obligations under the Loan Agreement, as amended, are secured by a lien on substantially all assets of the Company, excluding intellectual property, provided that, following an event of default, such security interest would also include intellectual property.
The Loan Agreement, as amended, contains customary negative covenants limiting the ability of the Company and its subsidiaries, among other things, to grant liens on the pledged collateral, pay cash dividends, make certain investments and acquisitions, and dispose of assets outside the ordinary course of business. The amended agreement also contains financial covenants, measured quarterly, providing a minimum level of the Company’s tangible net worth, and non-financial covenants with respect to the timing of certain new product approvals. As of June 30, 2013, the Company was in compliance with the Loan Agreement covenants.
In connection with the Loan Agreement, on July 31, 2012, the Company issued to the Bank a warrant to purchase 133,333 shares of Company common stock for a five-year period expiring on July 31, 2017, at an exercise price of $1.80 per share which approximated the market value of the common stock at the grant date. The warrant was valued at $145,732, using the Black-Scholes option pricing model with the following assumptions: fair value of the underlying common stock of $1.80, a weighted-average expected stock price volatility of 75.5%, an expected option life of five years, an average risk-free interest rate of 0.62%, and a 0.0% average dividend yield.
In connection with the amendment dated May 10, 2013, the Company issued to the Bank a warrant to purchase 30,257 shares of common stock for a five-year period expiring on May 10, 2018, at an exercise price of $1.98 per share which approximated the market value of the common stock at the grant date. The warrant was valued at $31,878 using the Black-Scholes option pricing model using the following assumptions: fair value of the underlying common stock of $1.98, a weighted-average expected stock price volatility of 63.6%, an expected warrant life of five years, an average risk-free interest rate of 0.71%, and a 0.0% average dividend yield.
Each of the warrants issued to the Bank were fully vested at time of issuance. The warrant cost is being recorded as a debt discount and recognized as interest expense over the three-year period of the Term Loan using the effective interest method.
The outstanding balance of the bank term loan is as follows:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Balance of bank term loan
|
|
$ |
5,000,000 |
|
|
$ |
3,500,000 |
|
Debt discount
|
|
|
(115,868 |
) |
|
|
(116,606 |
) |
|
|
|
4,884,132 |
|
|
|
3,383,394 |
|
Current portion
|
|
|
— |
|
|
|
697,834 |
|
Long-term portion
|
|
$ |
4,884,132 |
|
|
$ |
2,685,560 |
|
|
|
|
|
|
|
|
|
|
(5) Inventories, Property and Equipment, Intangible and Other Assets
Inventories consist of:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$ |
2,577,333 |
|
|
$ |
2,489,750 |
|
Work in process
|
|
|
13,343 |
|
|
|
34,384 |
|
Finished goods
|
|
|
858,651 |
|
|
|
1,019,191 |
|
|
|
$ |
3,449,327 |
|
|
$ |
3,543,325 |
|
Property and equipment are stated at cost and include FORE-SIGHT cerebral oximetry monitors primarily located at customer sites within the United States. Such equipment is typically 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. 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, and purchased technology which are recorded at cost. Patents are amortized on a straight-line basis over 20 years. Capitalized costs are amortized over their estimated useful lives.
Intangible and other assets consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Patents and other assets
|
|
$ |
809,608 |
|
|
$ |
714,810 |
|
Patents pending
|
|
|
308,266 |
|
|
|
348,256 |
|
Purchased technology
|
|
|
43,893 |
|
|
|
46,026 |
|
Deferred financing costs
|
|
|
159,431 |
|
|
|
147,931 |
|
|
|
|
1,321,198 |
|
|
|
1,257,023 |
|
Accumulated amortization
|
|
|
(470,394 |
) |
|
|
(426,778 |
) |
|
|
$ |
850,804 |
|
|
$ |
830,245 |
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangible and other assets for the six months ended June 30, 2013, was $52,553. Estimated amortization expense for the calendar year 2013 is $103,200. Expected amortization expense of intangible and other assets for the next five calendar years and beyond follows:
|
|
|
|
|
|
|
|
2014
|
|
$ |
76,800 |
|
2015
|
|
|
66,500 |
|
2016
|
|
|
46,500 |
|
2017
|
|
|
21,500 |
|
2018
|
|
|
19,900 |
|
Thereafter
|
|
|
183,700 |
|
|
|
$ |
414,900 |
|
|
|
|
|
|
The Company reviews its intangibles and other assets 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 remaining long-lived assets are fully recoverable.
(6) Principal Products and Services
The Company has categorized its sales of products and services into the following categories:
·
|
Tissue oximetry monitoring products – includes sales of the FORE-SIGHT cerebral monitors, sensors, and accessories.
|
·
|
Traditional vital signs monitoring products – includes:
|
1)
|
Vital signs bedside monitors and accessories, incorporating various combinations of measurement parameters for both human and veterinary use. Parameters found in these monitors include the Company’s proprietary MAXNIBP non-invasive blood pressure, pulse oximetry, electro-cardiography, temperature, and capnography.
|
2)
|
Blood pressure measurement technology – includes sales to OEM manufacturers of the Company’s proprietary MAXNIBP non-invasive blood pressure technology, sold as a discrete module to be included in the OEM customers’ own multi-parameter monitors, and related license fees.
|
3)
|
Supplies and service – includes sales of neonatal intensive care supplies, including electrodes, skin temperature probes, and service repair.
|
(7) Loss per Common Share Applicable to Common Stockholders
Basic earnings per share is calculated by dividing net loss applicable to common stockholders by the weighted- average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if common stock equivalents such as unvested restricted common shares, outstanding warrants and options, or convertible preferred stock were exercised or converted into common stock. For all periods reported, the Company incurred net losses. Therefore, for each period reported, diluted loss per share is equal to basic loss per share because the effect of including such common stock equivalents or other securities would have been anti-dilutive.
At June 30, 2013, stock options and warrants to purchase 2,007,125 and 1,052,991 shares of common stock, respectively, were excluded from the diluted earnings per share calculation as they would have been anti-dilutive. On an as-converted basis, 6,151,034 shares of common stock pertaining to the private placement of 150,000 shares of Series A convertible and exchangeable preferred stock issued on June 9, 2011, were also excluded as they would have been anti-dilutive.
The following table presents a reconciliation of the numerators and denominators of basic and diluted loss per share:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,633,869 |
) |
|
$ |
(1,649,609 |
) |
|
$ |
(4,221,051 |
) |
|
$ |
(3,595,701 |
) |
Preferred stock dividend accretion
|
|
|
298,333 |
|
|
|
278,332 |
|
|
|
591,534 |
|
|
|
551,877 |
|
Net loss applicable to common stockholders
|
|
$ |
(2,932,202 |
) |
|
$ |
(1,927,941 |
) |
|
$ |
(4,812,585 |
) |
|
$ |
(4,147,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of unvested restricted common shares -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used to compute basic and diluted loss per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share applicable to common stockholders
|
|
|
13,425,416 |
|
|
|
13,260,345 |
|
|
|
13,408,584 |
|
|
|
13,239,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) Stock Compensation Expense and Share-based Payment Plans
Stock compensation expense was $234,687 and $238,130 and $463,106 and $466,778 for the three- and six-month periods ended June 30, 2013 and 2012, respectively.
As of June 30, 2013, the unrecognized stock-based compensation cost related to stock option awards and unvested restricted common stock was $1,697,000. Such amount, net of estimated forfeitures, will be recognized in operations through the fourth quarter of 2016.
The following table summarizes the Company’s stock option information as of and for the six-month period ended June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
Weighted-Average
|
|
|
|
Option
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Contractual Life
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Value (1)
|
|
|
Remaining in Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
2,007,125 |
|
|
$ |
2.25 |
|
|
$ |
307,406 |
|
|
|
8.0 |
|
Granted
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cancelled
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Outstanding at June 30, 2013
|
|
|
2,007,125 |
|
|
|
2.25 |
|
|
|
18,726 |
|
|
|
7.5 |
|
Exercisable at June 30, 2013
|
|
|
869,166 |
|
|
$ |
2.36 |
|
|
$ |
18,726 |
|
|
|
6.1 |
|
Vested and expected to vest at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
1,973,032 |
|
|
$ |
2.25 |
|
|
$ |
18,726 |
|
|
|
7.5 |
|
(1) |
The intrinsic value of a stock option is the amount by which the market value, as of the applicable date, 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 members of the Board of Directors vest typically not less than three years from the grant date. The Company attributes stock-based compensation cost to operations using the straight-line method over the applicable vesting period.
On June 20, 2013, the Company’s stockholders approved an amendment to the CAS Medical Systems, Inc. 2011 Equity Incentive Plan (the “Plan”) which increased the maximum number of shares that can be issued under the Plan by 1,000,000 to 2,000,000. 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 and prosperity; 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 employees and directors with the interest of our stockholders. As of June 30, 2013, 1,079,950 shares remain available for issuance under the Plan, as amended.
There were no stock options issued during the six months ended June 30, 2013.
During the first quarter of 2013, the Company’s President and Chief Executive Officer received a grant of 11,000 shares of common stock in lieu of a cash payment for a portion of his 2012 management bonus.
During the second quarter of 2013, the Company issued 37,266 shares of restricted stock to its non-employee members of the Board of Directors which vest quarterly over 12 months from the date of grant. The grants were intended to approximate $10,000 in cash value based upon the market price of the Company’s stock on the date of grant. The grants are typically issued following our annual shareholders meeting and form a standard part of our Board of Directors annual compensation. As of June 30, 2013, 300,600 restricted shares issued to employees and members of the Board of Directors remain issued and non-vested. The unamortized stock compensation expense associated with the restricted shares at June 30, 2013, was $276,000 and will be recognized through the first quarter of 2015.
A summary of the restricted shares outstanding and changes for the relevant periods follow:
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Weighted-Average
|
|
|
|
Ended
|
|
|
Grant Date
|
|
|
|
June 30, 2013
|
|
|
Fair-Value
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
320,476 |
|
|
$ |
2.19 |
|
Granted
|
|
|
37,266 |
|
|
|
1.61 |
|
Cancelled
|
|
|
— |
|
|
|
— |
|
Vested
|
|
|
(57,142 |
) |
|
|
2.15 |
|
Outstanding at end of period
|
|
|
300,600 |
|
|
$ |
2.12 |
|
|
|
|
|
|
|
|
|
|
(9) Short-term Investments
The Company’s short-term investments are held in certificates of deposit (“CDs”) with maturities greater than three months. These investments are recorded at amortized cost.
(10) Income Taxes
The Company does not expect to record taxable income during its 2013 fiscal year. As such, income tax benefits that may be generated during 2013 would be offset by a deferred income tax asset valuation allowance. Management established the valuation allowance at December 31, 2009, as a result of cumulative pre-tax losses and its estimates of future taxable income. Management has continued to perform the required analysis regarding the realization of our deferred income tax assets concluding that a full valuation allowance is warranted. As of June 30, 2013, the deferred income tax asset valuation allowance balance was $7,561,000.
(11) Legal Proceedings
On December 29, 2011, Nellcor Puritan Bennett, LLC, (“Nellcor”) filed an action against the Company in the United States District Court for the Eastern District of Michigan alleging (i) breach of the settlement agreement with respect to a prior litigation matter between the parties, (ii) violation of the Lanham Act, (iii) common law unfair competition and (iv) trade libel. The complaint requested injunctive relief and unspecified monetary damages, including compensatory damages and reasonable attorneys’ fees. On February 24, 2012, the Company answered the complaint and denied substantially all of the claims and set forth certain affirmative defenses. On April 25, 2013, both Nellcor and the Company filed motions for summary judgment on the Lanham Act, unfair competition, and trade libel claims. On June 11, 2013, the Court granted the Company’s motion for summary judgment regarding the breach of contract claim and also found that the Company was entitled to attorney’s fees in an amount to be determined. If the remaining issues are not resolved at summary judgment, a trial will occur sometime after the Court rules on the pending summary judgment motions. The matter remains pending, and while there can be no assurance as to the ultimate outcome, the Company does not believe at this time that its disposition would result in a material adverse effect on the Company.
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, changes in economic conditions that adversely affect demand for the Company’s products, potential liquidity constraints, new product introductions by the Company’s competitors, increased price competition, rapid technological changes, dependence upon significant customers, availability and cost of components for the Company’s products, the impact of any product liability or other adverse litigation, marketplace acceptance for the Company’s new products, FDA and other governmental regulatory and enforcement actions, changes in reimbursement levels from third-party payors, 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 June 30, 2013, the Company reported a net loss applicable to common stockholders of $2,932,000, or ($0.22) per basic and diluted common share, compared to a net loss applicable to common stockholders of $1,928,000, or ($0.15) per basic and diluted common share, for the three months ended June 30, 2012.
For the six months ended June 30, 2013, the Company incurred a net loss applicable to common stockholders of $4,813,000, or ($0.36) per basic and diluted common share, compared to a net loss applicable to common stockholders of $4,148,000, or ($0.31) per basic and diluted common share, for the first six months of 2012.
The Company generated revenues of $5,042,000 for the three months ended June 30, 2013, a decrease of $156,000, or 3%, compared to revenues of $5,198,000 for the three months ended June 30, 2012. The following table provides information with respect to revenues by major category:
Total Revenues ($000’s)
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Increase /
|
|
|
%
|
|
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tissue Oximetry Monitoring
|
|
$ |
2,215 |
|
|
$ |
1,930 |
|
|
$ |
285 |
|
|
|
15% |
|
Traditional Vital Signs Monitoring
|
|
|
2,827 |
|
|
|
3,268 |
|
|
|
(441 |
) |
|
|
(13%) |
|
|
|
$ |
5,042 |
|
|
$ |
5,198 |
|
|
$ |
(156 |
) |
|
|
(3%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Sales
|
|
$ |
3,964 |
|
|
$ |
3,834 |
|
|
$ |
130 |
|
|
|
3% |
|
International Sales
|
|
|
1,078 |
|
|
|
1,364 |
|
|
|
(286 |
) |
|
|
(21%) |
|
|
|
$ |
5,042 |
|
|
$ |
5,198 |
|
|
$ |
(156 |
) |
|
|
(3%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tissue oximetry product revenues of $2,215,000 for the three months ended June 30, 2013, were $285,000, or 15%, above the $1,930,000 reported for the same period in the prior year led by increased sensor sales. As of June 30, 2013, the Company’s worldwide installed base of oximetry monitors was 804 units, an increase of 26% above the installed base of 638 as of June 30, 2012.
Traditional vital signs monitoring product revenues for the three months ended June 30, 2013, decreased $441,000, or 13%, to $2,827,000 from $3,268,000 reported for the same period in the prior year. Decreases in OEM technology product sales were responsible for the reduction and were partially offset by increases in vital signs monitor sales to U.S. customers.
Sales of all products to the U.S. market accounted for $3,964,000, or 79%, of the total revenues reported for the three months ended June 30, 2013, an increase of $130,000 from the $3,834,000 of U.S. sales reported for the three months ended June 30, 2012. International sales of all products accounted for $1,078,000, or 21%, of the total revenues reported for the three months ended June 30, 2013, a decrease of $286,000, or 21%, from the $1,364,000 reported for the same period of the prior year.
The following table provides information with respect to tissue oximetry revenues:
Tissue Oximetry Revenues ($000’s)
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Increase /
|
|
|
%
|
|
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensor Sales
|
|
$ |
1,944 |
|
|
$ |
1,722 |
|
|
$ |
222 |
|
|
|
13% |
|
Monitors & Accessories
|
|
|
271 |
|
|
|
208 |
|
|
|
63 |
|
|
|
30% |
|
|
|
$ |
2,215 |
|
|
$ |
1,930 |
|
|
$ |
285 |
|
|
|
15% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Sales
|
|
$ |
1,692 |
|
|
$ |
1,586 |
|
|
$ |
106 |
|
|
|
7% |
|
International Sales
|
|
|
523 |
|
|
|
344 |
|
|
|
179 |
|
|
|
52% |
|
|
|
$ |
2,215 |
|
|
$ |
1,930 |
|
|
$ |
285 |
|
|
|
15% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide sales of tissue oximetry products increased 15% for the second quarter of 2013 led by increased sensor sales. Worldwide sensor sales increased 13%, to $1,944,000 for the second quarter of 2013 from $1,722,000 for the second quarter of 2012. Domestic tissue oximetry product sales were $1,692,000, an increase of $106,000, or 7%, from the $1,586,000 recorded for the second quarter of 2012. Increases in domestic sensor sales were impacted by lower monitor and accessories sales. International tissue oximetry product sales were $523,000, an increase of 179,000, or 52%, from the second quarter of 2012 as a result of increases in both monitors and sensor sales.
Total Revenues ($000’s)
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
Increase /
|
|
|
%
|
|
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tissue Oximetry Monitoring
|
|
$ |
4,449 |
|
|
$ |
3,634 |
|
|
$ |
815 |
|
|
|
22% |
|
Traditional Vital Signs Monitoring
|
|
|
6,169 |
|
|
|
6,973 |
|
|
|
(804 |
) |
|
|
(12%) |
|
|
|
$ |
10,618 |
|
|
$ |
10,607 |
|
|
$ |
11 |
|
|
|
0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Sales
|
|
$ |
8,189 |
|
|
$ |
8,045 |
|
|
$ |
144 |
|
|
|
2% |
|
International Sales
|
|
|
2,429 |
|
|
|
2,562 |
|
|
|
(133 |
) |
|
|
(5%) |
|
|
|
$ |
10,618 |
|
|
$ |
10,607 |
|
|
$ |
11 |
|
|
|
0% |
|
Tissue oximetry product revenues of $4,449,000 for the six months ended June 30, 2013, were $815,000, or 22%, above the $3,634,000 reported for the same period in the prior year reflecting solid gains in monitor and sensor sales.
Traditional vital signs monitoring product revenues for the six months ended June 30, 2013, decreased $804,000, or 12%, to $6,169,000 from $6,973,000 reported for the same period in the prior year as a result of reductions in sales of OEM technology products.
Sales of all products to the U.S. market accounted for $8,189,000, or 77%, of the total revenues reported for the six months ended June 30, 2013, an increase of $144,000, or 2%, from the $8,045,000 of U.S. sales reported for the six months ended June 30, 2012. The increase represents the net effect of higher sales of tissue oximetry products which were mostly offset by lower OEM technology product sales. International sales of all products accounted for $2,429,000, or 23%, of the total revenues reported for the six months ended June 30, 2013, a decrease of $133,000, or 5%, from the $2,562,000 reported for the same period of the prior year. Increases in tissue oximetry sales were offset by reductions in vital signs monitoring sales which occurred during the first quarter of 2013.
The following table provides information with respect to tissue oximetry revenues:
Tissue Oximetry Revenues ($000’s)
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
Increase /
|
|
|
%
|
|
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensor Sales
|
|
$ |
3,802 |
|
|
$ |
3,168 |
|
|
$ |
634 |
|
|
|
20% |
|
Monitor and Accessories Sales
|
|
|
647 |
|
|
|
466 |
|
|
|
181 |
|
|
|
39% |
|
|
|
$ |
4,449 |
|
|
$ |
3,634 |
|
|
$ |
815 |
|
|
|
22% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Sales
|
|
$ |
3,485 |
|
|
$ |
2,916 |
|
|
$ |
569 |
|
|
|
20% |
|
International Sales
|
|
|
964 |
|
|
|
718 |
|
|
|
246 |
|
|
|
34% |
|
|
|
$ |
4,449 |
|
|
$ |
3,634 |
|
|
$ |
815 |
|
|
|
22% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide tissue oximetry product sales increased 22% to $4,449,000 for the first six months of 2013 from $3,634,000 for the first six months of 2012 reflecting solid gains in monitor and sensor sales both inside and outside of the United States. Domestic tissue oximetry product sales were $3,485,000, an increase of $569,000, or 20%, from the $2,916,000 recorded for the first six months of 2012. International tissue oximetry product sales were $964,000, an increase of $246,000, or 34%, from the first six months of 2012.
Gross profit was $1,918,000, or 38.0% of sales, for the three months ended June 30, 2013, compared to $2,183,000, or 42.0% of sales for the same period of the prior year. The reduction resulted primarily from the impact of lower sales volumes on manufacturing productivity. Gross profit was $4,143,000, or 39.0% of sales, for the first six months of 2013 compared to $4,218,000, or 39.8% of sales, for the first six months of 2012.
Total operating expenses for the three months ended June 30, 2013, increased $643,000, or 17%, to $4,490,000 from $3,847,000 for the three months ended June 30, 2012. Operating expenses for the first six months of 2013 increased $780,000, or 10%, to $8,625,000 from $7,845,000 for the same period of the prior year.
Research and development expenses increased $80,000, or 8%, to $1,030,000 for the three months ended June 30, 2013, compared to $950,000 for the three months ended June 30, 2012. R&D expenses for the three months ended June 30, 2012, were net of $100,000 of reimbursements from the National Institutes of Health (“NIH”). The Company’s NIH grant expired in late 2012, and no further reimbursements are available. R&D expenses increased $243,000, or 13%, to $2,082,000 for the six months ended June 30, 2013, compared to $1,840,000 for the same period of the prior year. NIH reimbursements totaled $230,000 for the six months ended June 30, 2012.
Selling, general, and administrative (“S,G&A”) expenses increased $564,000, or 19%, to $3,461,000 for the three months ended June 30, 2013, compared to $2,897,000 for the three months ended June 30, 2012. The increase in S,G&A for the three months ended June 30, 2013, was primarily related to the recently enacted medical device excise tax and increased legal fees. S,G&A expenses for the six months ended June 30, 2013, were $6,543,000 compared to $6,005,000 for the six months ended June 30, 2012, an increase of $538,000, or 9%. Management expects operating expenses could increase for the duration of the 2013 calendar year primarily due to increases in R&D and selling expenses.
Interest expense of $77,000 and $143,000 for the three- and six-month periods ended June 30, 2013, respectively, primarily reflects the Company’s term debt agreement with its bank lender executed July 31, 2012, as amended May 10, 2013.
Other income of $403,000 for the six months ended June 30, 2013, included $396,000 of income related to the sale and demutualization of one of the Company’s commercial insurance providers.
The Company does not expect to record taxable income during its 2013 fiscal year. Income tax benefits that may be generated during 2013 would be offset by a deferred income tax asset valuation allowance.
Management established the valuation allowance as of December 31, 2009, as a result of cumulative pre-tax losses and its estimates of future taxable income. Management has continued to perform the required analysis regarding the realization of our deferred income tax assets concluding that a full valuation allowance is warranted. As of June 30, 2013, the deferred income tax asset valuation allowance balance was $7,561,000.
Financial Condition, Liquidity and Capital Resources
As of June 30, 2013, the Company's cash and cash equivalents and short-term investments totaled $6,780,000 compared to $10,496,000 as of December 31, 2012. Working capital decreased $1,526,000 to $11,093,000 as of June 30, 2013, from $12,619,000 as of December 31, 2012.
Cash used in operations for the six months ended June 30, 2013, was $5,080,000 compared to cash used in operations of $3,788,000 for the same period in the prior year. The increase in cash used from operations over the prior year period primarily related to increased net losses and decreases in accounts payable and accrued expenses.
Cash provided by investing activities was $359,000 for the six months ended June 30, 2013, compared to cash used in investing activities of $1,012,000 for the same period in the prior year. Short-term investments of $493,000 for the six-months ended June 30, 2013, pertains to the transfer of funds from fully-matured certificates of deposit classified as short-term investments to the Company’s principal operating account. Expenditures for property and equipment of $467,000 for the six-months ended June 30, 2013, were primarily comprised of manufacturing equipment and FORE-SIGHT cerebral oximeter customer placements. Cash flows from investing activities for the six months ended June 30, 2013, include $396,000 of cash from the sale and demutualization of the Company’s insurance provider during January 2013.
Cash provided by financing activities included $1,500,000 in proceeds from the Company’s amendment of its Loan and Security Agreement (the “Loan Agreement”) with East West Bank (the “Bank”). The Company originally entered into the Loan Agreement on July 31, 2012. Pursuant to the Loan Agreement, the Bank provided the Company with a secured three-year $3,500,000 term loan (the “Term Loan”) which bears interest at 5.5% and contained a 12-month interest-only feature. On May 10, 2013, the Company amended the Loan Agreement which increased the principal to $5,000,000 and extended the maturity date of the Term Loan to July 31, 2016, with principal payable in 24 equal installments of approximately $221,000 including interest commencing August 1, 2014. The interest rate was modified to 5.75%.
The Loan Agreement, as amended, also contains a revolving line-of-credit (the “Revolver”) facility with maximum borrowings of $2,000,000 and an expiration date of July 31, 2014. Under the amended Loan Agreement, advances under the Revolver bear interest at a floating rate equal to 2.00% above the Bank’s prime rate with a 3.25% floor on the prime rate, representing an effective rate of 5.25%, as of June 30, 2013. Interest on the loan is payable monthly. The Company is permitted to borrow against eligible accounts receivable as defined under the Revolver according to pre-established criteria. The amount available for borrowing under the Revolver as of June 30, 2013, was $1,469,000. There were no borrowings under the Revolver during the six months ended June 30, 2013.
On July 16, 2013, the Company entered into a purchase agreement with Northland Securities, Inc. (“Northland”) related to the public offering (the “Offering”) of 5,200,000 shares of its common stock at $1.25 per share resulting in gross proceeds of $6,500,000. The Company executed an underwriting agreement with Northland under which Northland purchased the shares of common stock from the Company at a price of $1.16875. Net proceeds to the Company under the transaction including fees and expenses were $5,879,000. Proceeds from the transaction are intended to be used for general corporate purposes.
Our 2013 business plans call for increased operating expenditures primarily to develop and market our FORE-SIGHT® technology and our other product lines. Our ordinary short-term capital needs are expected to be met from our current cash on hand, the net proceeds from the recently completed Offering, and amounts available under the Loan Agreement.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of financial condition and results of operations are based on the condensed consolidated 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 Item 7 and Note 2 to the financial statements included in the Company’s Form 10-K for the year ended December 31, 2012. There were no significant changes in critical accounting policies and estimates during the three months ended June 30, 2013.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company at times has certain exposures to market risk related to changes in interest rates. The Company holds no derivative securities for trading or other 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 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 June 30, 2013. 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 June 30, 2013, 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 quarterly report on Form 10-Q.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 29, 2011, Nellcor Puritan Bennett, LLC, (“Nellcor”) filed an action against the Company in the United States District Court for the Eastern District of Michigan alleging (i) breach of the settlement agreement with respect to a prior litigation matter between the parties, (ii) violation of the Lanham Act, (iii) common law unfair competition and (iv) trade libel. The complaint requested injunctive relief and unspecified monetary damages, including compensatory damages and reasonable attorneys’ fees. On February 24, 2012, the Company answered the complaint and denied substantially all of the claims and set forth certain affirmative defenses. On April 25, 2013, both Nellcor and the Company filed motions for summary judgment on the Lanham Act, unfair competition, and trade libel claims. On June 11, 2013, the Court granted the Company’s motion for summary judgment regarding the breach of contract claim and also found that the Company was entitled to attorney’s fees in an amount to be determined. If the remaining issues are not resolved at summary judgment, a trial will occur sometime after the Court rules on the pending summary judgment motions. The matter remains pending, and while there can be no assurance as to the ultimate outcome, the Company does not believe at this time that its disposition would result in a material adverse effect on the Company.
ITEM 5. OTHER INFORMATION
On August 5, 2013, the Company entered into an Employment Agreement with John K. Gamelin (the “Employment Agreement”), the Company’s Vice President of Research and Development. Mr. Gamelin’s employment under the Employment Agreement is “at will” and is terminable at any time by either party, subject to an obligation of the Company to provide separation pay benefits under certain circumstances as described in greater detail below. Mr. Gamelin will receive an annual base salary of One Hundred Ninety Thousand Dollars ($190,000), which may be subject to increase at the discretion of the Compensation Committee of the Board of Directors of the Company. Mr. Gamelin will also be eligible for an annual bonus with a target equal to 30% of his base salary in the form of cash or Company common stock as determined at the sole discretion of the Compensation Committee of the Board of Directors. Mr. Gamelin will be entitled to participate in all employee benefit programs of the Company applicable to employees of the Company, as such programs may be in effect from time to time.
If the Company terminates Mr. Gamelin’s employment without Serious Cause (as defined in the Employment Agreement) or Mr. Gamelin terminates his employment for Good Reason (as defined in the Employment Agreement), the Company shall pay him a separation pay benefit equal to six (6) months of his base salary. Payment of severance shall be made in equal fixed installments during the period of payment in accordance with the Company’s standard payroll procedures and normal payroll dates then in effect. In the event the value of the aforementioned payments exceeds two times the lesser of Mr. Gamelin’s annualized compensation or the maximum amount that may be taken into account for qualified plan purposes (in each case, as determined in accordance with Treasury Regulation Section 1.409A-1(b)(9)(iii)(A)), the excess shall not be paid as provided above, but instead shall be withheld and paid on the first regularly scheduled payroll date immediately following the date that is six months after the separation from service date, without adjustment for the delay in payment.
If the Company terminates Mr. Gamelin’s employment without Serious Cause, or he terminates employment with the Company for Good Reason, and, in either case, his employment is terminated within the period beginning on the date that a Change of Control (as defined in the Employment Agreement) is formally proposed to the Company’s Board of Directors and ending on the six-month anniversary of the date on which such Change of Control occurs, the Company will pay Mr. Gamelin a separation pay benefit equal to six (6) months of his base salary. Payment of such severance shall be made in equal fixed installments during the period of payment in accordance with the Company’s standard payroll procedures and normal payroll dates then in effect. In the event the value of the payments exceeds two times the lesser of Mr. Gamelin’s annualized compensation or the maximum amount that may be taken into account for qualified plan purposes (in each case, as determined in accordance with Treasury Regulation Section 1.409A-1(b)(9)(iii)(A)), the excess shall not be paid as provided above, but instead shall be withheld and paid on the first regularly scheduled payroll date immediately following the date that is six months after the separation from service date, without adjustment for the delay in payment.
In the event that the provisions of Internal Revenue Code Section 280G relating to “excess parachute payments” shall be applicable to any payment or benefit received or to be received by Mr. Gamelin, then the total amount of payments or benefits payable (the “Payments”) shall be reduced to an amount which would result in no portion of the Payments being subject to the excise tax imposed pursuant to Section 4999 of the Internal Revenue Code.
The Employment Agreement also contains customary confidentiality covenants and covenants not to compete or solicit during the term of employment or in the twelve month period thereafter.
The foregoing description of the Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the Employment Agreement, a copy of which is filed as Exhibit 10.1 hereto and incorporated herein by reference.
ITEM 6. EXHIBITS
10.1
|
Employment Agreement with John K. Gamelin dated August 5, 2013
|
10.2
|
Employment Agreement with Paul Benni dated May 1, 2008
|
31.1
|
Certification pursuant to Rule 13a-14(a) of Thomas M. Patton, 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 Thomas M. Patton, President and Chief Executive Officer, and Jeffery A. Baird, Chief Financial Officer
|
101
|
Interactive data files pursuant to Rule 405 of Regulation S-T.
|
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/ Thomas M. Patton |
Date: August 7, 2013
|
By: Thomas M. Patton
|
|
President and Chief Executive Officer |
|
|
|
|
|
/s/ Jeffery A. Baird |
Date: August 7, 2013
|
By: Jeffery A. Baird
|
|
Chief Financial Officer |
|
|
|
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