Criticare March 31, 2007 Form 10-Q
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
__________

Form 10-Q

__X__   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
                For the quarterly period ended March 31, 2007

OR

_____   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

               For the transition period from ____________ to ____________

Commission file number  1-31943

 CRITICARE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 


Delaware
  
39-1501563
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
20925 Crossroads Circle, Suite 100, Waukesha, Wisconsin
 
 53186
(Address of principal executive offices)
 
 (Zip Code)

Registrant's telephone number including area code (262) 798-8282

N/A  
Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes    X      No _____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.   
Large accelerated filer _____  Accelerated filer _____  Non-accelerated filer    X   

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).         Yes ____     No    X   

Number of shares outstanding of each class of the registrant's classes of common stock as of March 31, 2007: Voting Common Stock, 12,301,071 shares.


CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND JUNE 30, 2006

(UNAUDITED)
 
 
  
March 31,
2007
  
June 30,
2006
  
ASSETS
              
               
CURRENT ASSETS:
              
Cash and cash equivalents
  
$
4,038,871
  
$
3,793,781
  
Accounts receivable, less allowance for doubtful accounts
              
of $586,388 and $829,700, respectively
    
5,642,413
   
6,187,351
 
Other receivables
    
349,740
   
591,008
 
Short-term note receivable
    
50,000
   
50,000
 
Inventories
   
8,326,103
   
9,464,037
 
Prepaid expenses
    
199,524
   
227,606
 
Total current assets
    
18,606,651
   
20,313,783
 
               
Property, plant and equipment - net
    
2,287,258
   
2,452,314
  
               
License rights and patents - net
   
57,730
   
62,981
  
Long-term note receivable
    
87,500
   
150,000
  
Total other assets
    
145,230
   
212,981
 
               
TOTAL ASSETS
  
$
21,039,139
  
$
22,979,078
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
              
               
CURRENT LIABILITIES:
              
Accounts payable
  
$
3,002,653
  
$
5,408,746
  
Accrued liabilities:
            
Compensation and commissions
    
740,128
   
914,889
 
Product warranties
   
370,000
   
425,000
 
Obligations under capital lease
   
72,616
   
68,205
 
Other
   
130,133
   
174,667
 
Total current liabilities
    
4,315,530
   
6,991,507
 
               
LONG-TERM LIABILITIES:
              
Obligations under capital lease
    
78,799
   
133,826
 
Other long-term obligations
   
—
    
659
 
Total long-term liabilities
    
78,799
   
134,485
 
               
TOTAL LIABILITIES
    
4,394,329
   
7,125,992
 
               
STOCKHOLDERS' EQUITY:
              
Preferred stock - $.04 par value, 500,000 shares authorized
              
no shares issued or outstanding
    
—
    
—
  
Common stock - $.04 par value, 15,000,000 shares authorized, 12,399,631 and
              
12,398,131 shares issued, and 12,301,071 and 12,291,454 shares outstanding, respectively
    
495,985
    
495,925
  
Additional paid-in capital
    
26,261,311
    
26,156,864
  
Common stock held in treasury at cost (98,560 and 106,677 shares, respectively)
    
(360,693
)
  
(375,813
)
Retained earnings (accumulated deficit)
    
(9,723,059
)
  
(10,436,794
)
Other comprehensive income (loss)
    
(28,734
)
  
12,904
  
Total stockholders' equity
    
16,644,810
    
15,853,086
  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  
$
21,039,139
  
$
22,979,078
  

See notes to consolidated financial statements.
2

CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED MARCH 31, 2007 AND 2006
 
(UNAUDITED)
   
 2007
  
 2006
  
NET SALES
  
$
23,790,883
  
$
24,254,956
  
               
COST OF GOODS SOLD
    
14,376,860
    
14,653,789
  
               
GROSS PROFIT
    
9,414,023
    
9,601,167
  
               
OPERATING EXPENSES:
              
Sales and marketing
   
4,284,603
    
5,005,091
  
Research, development and engineering
    
1,813,672
    
1,913,355
  
Administrative
    
2,699,106
    
2,450,762
  
Total
    
8,797,381
    
9,369,208
  
               
INCOME FROM OPERATIONS
    
616,642
    
231,959
  
               
OTHER INCOME (EXPENSE):
              
Interest expense
    
(11,303
)
  
(15,360
)
Interest income
    
94,983
    
66,999
  
Other (expense) income
    
13,414
    
452,740
  
Total
    
97,094
    
504,379
  
               
INCOME BEFORE INCOME TAXES
   
713,736
    
736,338
  
               
INCOME TAX PROVISION
   
—
    
—
  
               
NET INCOME
 
$
713,736
  
$
736,338
  
               
NET INCOME PER COMMON SHARE:
              
Basic
  
$
0.06
  
$
0.06
  
Diluted
  
$
0.06
  
$
0.06
  
               
WEIGHTED AVERAGE NUMBER OF COMMON
              
SHARES OUTSTANDING:
              
Basic
    
12,297,011
    
11,997,319
  
Diluted
    
12,361,484
    
12,215,149
  

See notes to consolidated financial statements.

3

CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
 
(UNAUDITED)
   
 2007
  
 2006
  
NET SALES
  
$
7,121,548
  
$
7,811,830
  
               
COST OF GOODS SOLD
    
4,244,719
    
4,722,411
  
               
GROSS PROFIT
    
2,876,829
    
3,089,419
  
               
OPERATING EXPENSES:
              
Sales and marketing
   
1,470,988
    
1,712,397
  
Research, development and engineering
    
613,978
    
613,688
  
Administrative
    
816,760
    
836,863
  
Total
    
2,901,726
    
3,162,948
  
               
LOSS FROM OPERATIONS
    
(24,897
)
  
(73,529
)
               
OTHER INCOME (EXPENSE):
              
Interest expense
    
(3,414
)
  
(4,794
)
Interest income
    
32,323
    
25,024
  
Other income
   
26,115
    
45,323
  
Total
    
55,024
    
65,553
  
               
INCOME (LOSS) BEFORE INCOME TAXES
   
30,127
    
(7,976
)
               
INCOME TAX PROVISION
   
—
    
—
  
               
NET INCOME (LOSS)
  
$
30,127
  
$
(7,976
)
               
NET INCOME (LOSS) PER COMMON SHARE:
              
Basic
  
$
0.00
  
$
(0.00
)
Diluted
  
$
0.00
  
$
(0.00
)
               
WEIGHTED AVERAGE NUMBER OF COMMON
              
SHARES OUTSTANDING:
              
Basic
    
12,300,136
    
12,122,819
  
Diluted
    
12,358,827
    
12,122,819
  

See notes to consolidated financial statements.


4


CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2007 AND 2006

(UNAUDITED)

   
2007
  
2006
  
OPERATING ACTIVITIES:
              
Net income
 
$
713,736
  
$
736,338
  
Adjustments to reconcile net income to net cash provided by (used in)
              
operating activities:
              
Depreciation
    
354,817
    
488,231
  
Amortization
    
5,251
    
5,251
  
Share based compensation
    
92,421
    
129,194
  
Provision for doubtful accounts
    
7,454
    
23,510
  
Provision for obsolete inventory
    
120,144
    
(93,300
)
Changes in assets and liabilities:
              
Accounts receivable
    
494,893
    
(358,703
)
Note receivable
    
62,500
    
—
  
Other receivables
    
241,268
    
40,791
  
Inventories
    
1,113,193
    
(2,340,217
)
Prepaid expenses
    
28,082
    
37,966
  
Accounts payable
    
(2,406,093
)
  
406,991
  
Accrued liabilities
    
(274,954
)
  
(110,697
)
Net cash provided by (used in) operating activities
    
552,712
    
(1,034,645
)
               
INVESTING ACTIVITIES:
              
Purchases of property, plant and equipment, net
    
(285,165
)
  
(535,236
)
Net cash used in investing activities
    
(285,165
)
  
(535,236
)
               
FINANCING ACTIVITIES:
              
Retirement of obligations under capital lease
    
(50,616
)
  
(46,559
)
Proceeds from issuance of common stock
   
27,206
    
1,180,956
  
Net cash (used in) provided by financing activities
    
(23,410
)
  
1,134,397
  
               
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
953
    
1,079
  
               
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
245,090
    
(434,405
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
3,793,781
    
3,680,965
  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  
$
4,038,871
  
$
3,246,560
  
               
SUPPLEMENTAL CASH FLOW INFORMATION:
              
Cash paid for:
              
Income taxes paid-net
  
$
10,547
  
$
4,385
  
Interest
  
$
11,303
  
$
15,360
  

See notes to consolidated financial statements.


5

CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The accompanying unaudited financial statements have been prepared by Criticare Systems, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of the Company, include all adjustments necessary for a fair statement of results for each period shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to prevent the financial information given from being misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report and previously filed Form 10-K. The three and nine month results represent past performance, and are not necessarily indicative of results for an entire year. Certain amounts from the fiscal 2006 financial statements have been reclassified to conform to the 2007 presentation.

2. Inventory Valuation

Inventory is stated at the lower of cost or market, with cost determined on the first-in, first-out method. Components of inventory consisted of the following at March 31, 2007 and June 30, 2006, respectively:
 
   
March 31, 2007
  
June 30, 2006
  
Component parts
  
$
2,795,980
  
$
2,605,751
  
Work in process
    
1,282,173
    
1,470,893
  
Finished units
    
4,575,950
    
5,747,393
  
Total inventories
    
8,654,103
    
9,824,037
  
Less: reserve for obsolescence
    
328,000
    
360,000
  
Net inventory
  
$
8,326,103
  
$
9,464,037
  

3. Property, Plant and Equipment

Property, plant and equipment consist of the following:

   
March 31, 2007
  
June 30, 2006
  
Machinery and equipment
  
$
3,342,815
  
$
3,157,328
  
Furniture and fixtures
    
942,872
    
952,193
  
Leasehold improvements
    
269,423
    
243,604
  
Production tooling
    
2,362,382
    
2,294,360
  
Demonstration and loaner monitors
    
2,111,351
    
1,997,844
  
Property, plant and equipment - cost
    
9,028,843
    
8,645,329
  
Less: accumulated depreciation
    
(6,741,585
)
  
(6,193,015
)
Property, plant and equipment - net
  
$
2,287,258
  
$
2,452,314
  


6

4. Stock Options

The Company has adopted the fair value recognition provisions of SFAS No. 123 (R), “Share-Based Payment”. Under the modified prospective method of adoption selected by the Company, compensation cost recognized is the same as that which would have been recognized had the recognition provisions of SFAS No. 123 been applied from its original effective date. Stock-based employee compensation expense included in reported net income totaled $35,876 and $48,054 for the three months ended March 31, 2007 and 2006, respectively. Stock-based employee compensation expense included in reported net income totaled $92,421 and $129,194 for the nine months ended March 31, 2007 and 2006, respectively.

For the three and nine months ended March 31, 2007, the Company granted options totaling 39,000 shares at a weighted average exercise price of $3.47, which have a fair value of $81,166. The fair value of stock options is the estimated fair value at the grant date using the Black-Scholes option-pricing model. The assumptions used when calculating the option-pricing model include the expected volatility of Criticare’s common stock at 45.0%, the risk-free interest rate of 4.79%, the expected option life of 8.88 years and the forfeiture rate of option grants at 0%.

5. Income Taxes

No income tax provision has been made in the consolidated statements of income due to federal and state net operating loss carry forwards that will be utilized to offset taxable income earned. At March 31, 2007, the Company had federal net operating loss carry forwards of approximately $17,706,000 (which expire from 2008 through 2026) and state net operating loss carry forwards of approximately $11,930,000 (which expire from 2007 through 2021) available to offset future taxable income. The Company has recorded a valuation allowance to offset the related deferred income tax assets arising from these net operating loss carry forwards due to the uncertainty of realizing the benefits of these assets in future years.

6. Line of Credit Facility

At March 31, 2007, the Company had a $2,000,000 demand line of credit facility with a commercial bank to meet its short-term borrowing needs. Borrowings against the line were payable on demand with interest payable monthly at the bank's reference rate, less 0.25% (8.00% as of March 31, 2007). As of March 31, 2007 and June 30, 2006, there were no borrowings against the line. Borrowings under the line of credit facility are collateralized by substantially all assets of the Company. The credit facility has covenants, which require minimum income or liquidity levels. The Company was in compliance with the covenants at March 31, 2007.

7. Net Income (Loss) Per Common Share

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the periods. Diluted net income (loss) per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Additionally, antidilution occurs when the exercise price of the option is higher than the average market price of the common stock. The diluted weighted average common shares outstanding would be higher by 112,750 shares for the three and nine months ended March 31, 2007 and by 28,000 shares for the three and nine months ended March 31, 2006 without this anti-dilutive impact.

7

CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Nine Months Ended March 31, 2007 and 2006

Results of Operations

Net sales of $23,790,883 for the nine months ended March 31, 2007 decreased 1.9% from $24,254,956 for the same period in fiscal 2006. A 1.2% increase in the number of units shipped was offset by a 1.2% reduction in average sales price, due to variations in the product mix, and a 0.7% decrease in the accessory sales in the current period. The decreased net sales were the result of a $1,583,888 decrease in international sales, which was partially offset by a $1,017,315 increase in domestic alternate care sales.

The gross profit percentage remained at 39.6% for the nine months ended March 31, 2007 and March 31, 2006.

Operating expenses for the nine months ended March 31, 2007 decreased $571,827 from the same period in fiscal 2006 due mainly to a decrease of $720,488 in sales and marketing expenses, which was partially offset by an increase of $248,344 in administrative expenses. The increase of $248,344 in administrative expenses was due to the $442,116 of expenses incurred during the period in connection with the two consent solicitation actions initiated by BlueLine Partners and the subsequent settlement of those actions in the third quarter. The decrease of $720,488 in sales and marketing expenses was due mainly to a $328,989 decrease in India operation expenses, a $134,095 decrease in advertising and trade show expenses and a $59,148 decrease in commissions earned for the nine months ended March 31, 2007.

Total other income for the nine months ended March 31, 2007 decreased $407,285 from the same period in fiscal 2006. This decrease was mainly due to the $300,000 received pursuant to a patent license agreement in fiscal 2006 with no corresponding income in fiscal 2007 and a decrease of $114,050 in royalty income received during the first nine months of fiscal 2007.

Income from operations of $616,642 for the nine months ended March 31, 2007 increased $384,683 as compared to income from operations of $231,959 for the same period in fiscal 2006, which was the result of a $571,827 decrease in operating expenses, partially offset by a decrease in gross profit of $187,144. The increased income from operations was offset by the decrease in other income of $407,285, resulting in net income of $713,736 for the nine months ended March 31, 2007 as compared to net income of $736,338 for the same period in fiscal 2006. 

8

CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended March 31, 2007 and 2006

Results of Operations

Net sales of $7,121,548 for the three months ended March 31, 2007 decreased 8.8% from $7,811,830 for the same period in fiscal 2006. A 0.7% increase in average sales price, due to variations in the product mix, was offset by an 8.3% decrease in the number of units shipped and a 10.3% decrease in the accessory sales. The decrease in net sales was the result of a $761,666 decrease in international sales and a $267,903 decrease in domestic acute care sales , which was partially offset by a $293,928 increase in domestic alternate care sales and a $252,230 increase in OEM sales.

The gross profit percentage of 40.4% for the three months ended March 31, 2007 increased from 39.6% for the same period in fiscal 2006. The increased margins in the current period were mainly due to the small variations in the product mix.

Operating expenses for the three months ended March 31, 2007 decreased $261,222 from the same period in fiscal 2006 due mainly to a decrease of $241,409 in sales and marketing expenses. The decrease in sales and marketing expenses was due mainly to a $119,957 decrease in India operation expenses, a $28,335 decrease in commissions earned, a $26,557 decrease in operating supplies and a $26,555 decrease in advertising and trade show expenses for the three months ended March 31, 2007.

Total other income for the three months ended March 31, 2007 decreased $10,529 from the same period in fiscal 2006. This decrease was driven by decreased royalty income received during the third quarter in fiscal 2007.

Loss from operations of $(24,897) for the three months ended March 31, 2007 decreased $48,632 as compared to loss from operations of $(73,529) for the same period in fiscal 2006, which was the result of the decreased operating expenses of $261,222, partially offset by a $212,590 decrease in gross profit. With the decreased loss from operations, despite a decrease in other income of $10,529, the Company had net income of $30,127 for the three months ended March 31, 2007 as compared to a net loss of $(7,976) for the same period in fiscal 2006. 
 

9

CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition

Liquidity and Capital Resources

As of March 31, 2007, the Company had a cash balance of $4,038,871, which was $1,363,421 higher than its balance at September 30, 2006 of $2,675,450, $91,574 higher than its balance at December 31, 2006 of $3,947,297 and $245,090 higher than its balance at June 30, 2006 of $3,793,781. The Company continues to maintain a long-term bank debt free balance sheet since August 30, 2002 when it sold its building and used the proceeds from the sale to retire the long-term bank debt on the facility.

The Company’s cash position increased by $245,090 for the nine months ended March 31, 2007 mainly due to $555,226 of cash provided by operating activities, which was partially offset by $285,165 of capital expenditures. Cash provided by operations was $555,226 for the nine months ended March 31, 2007 as a decrease of $2,406,093 in accounts payable was offset by a $1,113,193 decrease in inventory, a $494,893 decrease in accounts receivable, depreciation of $354,817 and net income of $713,736.

The Company believes all future capital and liquidity requirements will be satisfied by cash generated from operations, proceeds received from the issuance of common stock related to the exercise of stock options, and its current cash balances. No major capital equipment expenditures are expected in the Company’s current fiscal year ending June 30, 2007. The Company also has a $2,000,000 line of credit currently in place that could be utilized, if necessary. At both March 31, 2007 and June 30, 2006, there were no borrowings outstanding under this line of credit. The credit facility has covenants that require minimum income or liquidity levels. The Company was in compliance with the covenants at March 31, 2007. This line expires in June 2007.

Recently Issued Accounting Pronouncements

FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement 109 (Accounting for Income Taxes). FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the pronouncement and the potential impact of this accounting change on the financial statements.


10

Forward Looking Statements

A number of the matters and subject areas discussed in this report that are not historical or current facts deal with potential future circumstances and developments. These include anticipated product introductions, expected future financial results, liquidity needs, financing ability, management's or the Company's expectations and beliefs and similar matters discussed in Management's Discussion and Analysis or elsewhere in this report. These statements may be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect," "intend," "may," "hope," "plan," "potential," "should," "estimate," "predict," "continue," "future," "will," "would" or the negative of these terms or other words of similar meaning.

Such forward-looking statements are inherently subject to known and unknown risks and uncertainties. The Company's actual results and future developments could differ materially from the results or developments expressed in, or implied by, these forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, general economic conditions, demand for the Company's products, costs of operations, the development of new products, the reliance on single sources of supply for certain components in the Company's products, government regulation, health care cost containment programs, the effectiveness of the Company's programs to manage working capital and reduce costs, competition in the Company's markets, compliance with product safety regulations and product liability and product recall risks, risks relating to international sales and compliance with U.S. export regulations, unanticipated difficulties in outsourcing the manufacturing of the majority of its products to foreign manufacturers and risks related to foreign manufacturing, including economic and political instability, trade and foreign tax laws, production delays and cost overruns and quality control. Such uncertainties and other risks that may affect the Company's performance are discussed further in Part I, Item 1A, "Risk Factors," in the Company's Form 10-K for the year ended June 30, 2006. The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this report or to update them to reflect events or circumstances occurring after the date of this report.

Quantitative and Qualitative Disclosures about Market Risk

The Company has a demand line of credit facility with a commercial bank with interest payable monthly at 25 basis points below the bank's reference rate. The Company had no borrowings outstanding under this bank facility at March 31, 2007 and June 30, 2006. Due historically to the lack of need to borrow from this credit facility and due to the Company’s current cash position, the Company is not subject to financial risk on this obligation if interest rates in the market change significantly.

The Company’s net sales are primarily denominated in United States dollars, except for a small amount of net sales from the Company’s operation in India denominated in Indian rupees. As a result, part of the Company’s accounts receivable are denominated in rupees and translated into U.S. dollars for financial reporting purposes. A 10% change in the exchange rate of the U.S. dollar with respect to the Indian rupee would not have a material adverse effect on the Company’s financial condition or results of operations for the quarter ended March 31, 2007. The Company does not use any hedges or other derivative financial instruments to manage or reduce exchange rate risk.


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Controls and Procedures

As of the end of the period covered by this report, 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 Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in reports that the Company files with or submits to the Securities and Exchange Commission. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized 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 was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives and based upon the evaluation described above, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at reaching that level of reasonable assurance.

There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II - OTHER INFORMATION
 
 
Item 1A.  Risk Factors.
 
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, "Risk Factors," of the Company's Form 10-K for the year ended June 30, 2006. Please refer to that section for disclosures regarding the risks and uncertainties relating to the Company's business.
 
Item 6.  Exhibits.

   
3.1
Restated Certificate of Incorporation of the Company (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).

   
3.2
By-Laws of the Company (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).

 
4.1
Specimen Common Stock certificate (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).
 
 
4.2
Amended and Restated Rights Agreement, dated as of March 27, 2007, between the Company and LaSalle Bank National Association, as rights agent (incorporated by reference to the Company’s Current Report on Form 8-K filed on March 30, 2007).

 
31.1
Certification of Emil H. Soika, President and Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
31.2
Certification of Joel D. Knudson, Chief Financial Officer and Secretary (Principal Financial Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
32*
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

__________________
* This Exhibit is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.



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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.

CRITICARE SYSTEMS, INC.
(Registrant)

Date: May 10, 2007           BY   /s/ Joel D. Knudson                                       _
Joel D. Knudson
Chief Financial Officer
(Chief Accounting Officer and
Duly Authorized Officer)
 
 

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