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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2008
Commission File Number 0-13839
CAS MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1123096
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
44 East Industrial Road, Branford, Connecticut 06405
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(Address of principal executive offices, including zip code)
(203) 488-6056
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
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 [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller
Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $.004 par value
11,304,235 shares as of August 1, 2008.
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INDEX
PART I Financial Information Page No.
------ --------------------- --------
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2008 and December 31, 2007 3
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2008
and 2007 5
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2008 and 2007 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 16
Item 4 Controls and Procedures 16
PART II Other Information
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Item 1 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 6 Exhibits 18
Signatures 19
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
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CAS Medical Systems, Inc.
Condensed Consolidated Balance Sheets
-------------------------------------
(Unaudited)
Assets June 30, December 31,
------ 2008 2007
------------ ------------
Current Assets:
Cash and cash equivalents $ 910,793 $ 666,722
Accounts receivable, net of allowance 4,484,316 4,947,300
Recoverable income taxes 174,922 230,458
Inventories 11,128,086 10,021,118
Deferred income taxes 873,265 474,265
Other current assets 560,709 414,204
------------ ------------
Total current assets 18,132,091 16,754,067
Property and equipment:
Property and equipment 5,399,502 5,055,395
Equipment at customers 848,878 272,360
------------ ------------
6,248,380 5,327,755
Accumulated depreciation and amortization (3,504,138) (2,987,030)
------------ ------------
2,744,242 2,340,725
Other Assets (net):
Intangible and other assets 1,143,012 846,602
Goodwill 3,379,021 3,379,021
Deferred income taxes 531,083 567,971
------------ ------------
5,053,116 4,793,594
Total assets $ 25,929,449 $ 23,888,386
============ ============
3
CAS Medical Systems, Inc.
Condensed Consolidated Balance Sheets
-------------------------------------
(Unaudited)
June 30, December 31,
Liabilities and Stockholders' Equity 2008 2007
------------------------------------ ------------ ------------
Current Liabilities:
Current portion of long-term debt $ 595,669 $ 577,453
Line-of-credit 2,544,925 2,249,349
Notes payable 160,505 71,537
Accounts payable 3,753,498 2,505,460
Accrued expenses 964,799 962,154
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Total current liabilities 8,019,396 6,365,953
Long-term debt, less current portion 2,020,010 2,322,561
Deferred gain on sale and leaseback of property 1,236,019 1,303,338
Income taxes payable 150,625 145,125
Stockholders' Equity:
Series A cumulative convertible preferred stock, $.001 par value per
share, 1,000,000 shares authorized, no
shares issued or outstanding -- --
Common stock, $.004 par value per share, 40,000,000
shares authorized, 11,369,432 and 10,984,785 shares
issued at June 30, 2008 and December 31, 2007,
respectively, including shares held in treasury 45,054 43,575
Common stock held in treasury, at cost - 86,000 shares (101,480) (101,480)
Additional paid-in capital 7,201,417 5,889,007
Retained earnings 7,358,408 7,920,307
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Total stockholders' equity 14,503,399 13,751,409
------------ ------------
Total liabilities and stockholders' equity $ 25,929,449 $ 23,888,386
============ ============
See accompanying notes.
4
CAS Medical Systems, Inc.
Condensed Consolidated Statements of Operations
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(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
------------ ------------ ------------ ------------
Net Sales $ 10,542,919 $ 7,962,396 $ 19,504,470 $ 17,251,728
Cost of Sales 7,051,041 5,447,781 13,332,437 11,195,402
------------ ------------ ------------ ------------
Gross Profit 3,491,878 2,514,615 6,172,033 6,056,326
Operating Expenses:
Research and development 466,639 430,683 977,965 1,285,400
Selling, general and administrative 3,052,337 2,472,621 6,073,210 4,983,117
------------ ------------ ------------ ------------
3,518,976 2,903,304 7,051,175 6,268,517
Operating loss (27,098) (388,689) (879,142) (212,191)
Interest expense 71,160 59,995 143,257 117,927
------------ ------------ ------------ ------------
Loss before income taxes (98,258) (448,684) (1,022,399) (330,118)
Income tax benefit (66,250) (148,066) (460,500) (108,939)
------------ ------------ ------------ ------------
Net Loss $ (32,008) $ (300,618) $ (561,899) $ (221,179)
============ ============ ============ ============
Loss per common share:
Basic $ (0.00) $ (0.03) $ (0.05) $ (0.02)
============ ============ ============ ============
Diluted $ (0.00) $ (0.03) $ (0.05) $ (0.02)
============ ============ ============ ============
Weighted average number of Common shares outstanding:
Basic 10,989,920 10,671,575 10,885,606 10,638,250
============ ============ ============ ============
Diluted 10,989,920 10,671,575 10,885,606 10,638,250
============ ============ ============ ============
See accompanying notes.
5
CAS Medical Systems, Inc.
Condensed Consolidated Statements of Cash Flows
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(Unaudited)
Six Months Ended
June 30,
2008 2007
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (561,899) $ (221,179)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation and amortization 573,779 341,474
Deferred income taxes (362,112) 147,000
Non-cash stock compensation 231,315 131,134
Amortization of deferred gain on sale and leaseback of property (67,319) --
Changes in operating assets and liabilities:
Accounts receivable 462,984 87,906
Inventories (1,106,968) (1,348,491)
Other current assets (146,505) (167,765)
Recoverable income taxes, net 55,536 (444,445)
Income taxes payable 5,500 --
Accounts payable and accrued expense 1,250,683 63,702
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Net cash provided (used) by operating activities 334,994 (1,410,664)
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INVESTING ACTIVITIES:
Expenditures for property and equipment (920,625) (537,586)
Purchase of intangible assets (353,081) (264,256)
----------- -----------
Net cash used by investing activities (1,273,706) (801,842)
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FINANCING ACTIVITIES:
Repayments of long-term debt (284,335) (300,503)
Proceeds from notes payable 298,704 329,010
Repayments of notes payable (209,736) (171,483)
Borrowings from line-of-credit, net 295,576 1,044,305
Tax benefits from exercise of warrants -- 340,956
Tax effect from vesting of restricted stock (2,949) --
Proceeds from issuance of common stock 1,085,523 150,276
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Net cash provided by financing activities 1,182,783 1,392,561
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Change in cash and cash equivalents 244,071 (819,945)
Cash and cash equivalents, beginning of period 666,722 1,334,535
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Cash and cash equivalents, end of period $ 910,793 $ 514,590
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest $ 143,053 $ 119,842
Cash collected during the period for income taxes, net $ (156,475) $ (157,450)
See accompanying notes.
6
CAS Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2008
(1) The Company
CAS Medical Systems, Inc. ("CAS") and its wholly-owned subsidiary,
Statcorp, Inc. ("Statcorp") operate as one reportable business segment.
Together, CAS and Statcorp (collectively, the "Company" or "CASMED") develop,
manufacture and distribute diagnostic equipment and medical products for use in
the healthcare and medical industry. These products - specifically blood
pressure measurement technology, vital signs measurement equipment,
cardio-respiratory monitoring equipment, cerebral oximetry monitoring, and
supplies for neonatal intensive care - are sold by CASMED through its own sales
force, via distributors, manufacturers representatives and pursuant to original
equipment manufacturer agreements both internationally and in the United States.
The Company has several other products in various stages of development that it
believes will add to and complement its current product lines.
(2) Basis of Presentation
The financial statements included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2007. The condensed
consolidated balance sheet as of December 31, 2007 was derived from the audited
financial statements for the year then ended.
In the opinion of the Company, all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position of the
Company and the results of its operations and its cash flows have been included
in the accompanying financial statements. The results of operations for interim
periods are not necessarily indicative of the expected results for the full
year.
(3) Inventories, Properties and Intangible Assets
Inventories are stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventories consisted of:
June 30, December 31,
2008 2007
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Raw materials $ 8,440,072 $ 7,481,065
Work-in-process 76,334 187,134
Finished goods 2,611,680 2,352,919
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$ 11,128,086 $ 10,021,118
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Property and equipment are stated at cost. The Company has separately
reported its Fore-sight(R) cerebral oximetry monitors located at customer sites
within the U.S. 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 three years to cost of
sales. As of June 30, 2008, the Company has capitalized $848,878 of costs
pertaining to the monitors which have a net book value of $717,674. Other
property and equipment is depreciated using the straight-line method over the
estimated useful lives of the assets.
7
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 17 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 SFAS No. 86 "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise 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:
o High acuity products - includes sales of the Fore-Sight(R) cerebral
monitor, sensors and accessories.
o Low acuity products - includes sales of cardio-respiratory monitors
and accessories used to monitor apnea in home-based and hospital
settings; the Company's dual platform of vital signs monitors and
accessories incorporating various combinations of measurement
parameters for both human and veterinary use including pulse oximetry,
electro-cardiography, temperature, non-invasive blood pressure, and
capnography; co-branded products developed and manufactured by
Analogic Corporation including vital signs monitors utilizing
parameters as described above and additionally monitors which measure
non-invasive cardiac output and hemodynamic status, and fetalgard
monitors.
o Blood Pressure Measurement Technology - includes sales to Original
Equipment Manufacturers ("OEM") of the Company's proprietary
non-invasive blood pressure modules (MAXNIBP(R)), blood pressure cuffs
and accessories for the OEM market and related license fees.
o Supplies and Service - includes sales of blood pressure cuffs and
rapid infusor cuffs, neonatal intensive care supplies including
electrodes and skin temperature probes, and service repair revenues.
(5) Loss per Common Share
A summary of the denominators used to compute basic and diluted loss per
share follows:
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
----------- ----------- ----------- -----------
Weighted average shares outstanding, net
of restricted shares - used to compute
basic loss per share 10,989,920 10,671,575 10,885,806 10,638,250
Dilutive effect of restricted shares, and
outstanding warrants and options -- -- -- --
----------- ----------- ----------- -----------
Weighted average shares of dilutive
securities outstanding - used to compute
diluted loss per share 10,989,920 10,671,575 10,885,806 10,638,250
=========== =========== =========== ===========
8
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 $90,822 and $37,333 and $231,315 and
$131,134 for the three-month and six month periods ended June 30, 2008 and 2007,
respectively.
As of June 30, 2008, the unrecognized stock-based compensation cost related
to non-vested restricted stock and stock option awards was $619,100. Such
amount, reduced for forfeiture related estimates, will be recognized in
operations over a weighted average period of 1.68 years.
The following table summarizes the Company's stock option information as
of, and for the six-month period ended June 30, 2008:
Aggregate Weighted-Average
Option Weighted-Average Intrinsic Contractual Life
Shares Exercise Price Value(1) Remaining in Years
-----------------------------------------------------------------
Outstanding at December 31, 2007 524,425 $ 2.11 $ 3.39
Granted 40,000 3.92
Cancelled (10,000) 4.99
Exercised (21,800) 0.81
--------
Outstanding at June 30, 2008 532,625 $ 2.25 $ 0.95 6.04
Exercisable at June 30, 2008 489,291 $ 2.08 $ 1.12 5.72
(1) The intrinsic value of a stock option is the amount by which the
current market value of the underlying stock (as of June 30, 2008) exceeds the
option exercise price.
The exercise period for all outstanding stock options may not exceed ten
years from the date of grant. Stock options granted to employees and
non-employee directors vest ratably not less than two years from the grant date.
The Company attributes stock-based compensation cost to operations using the
straight-line method over the applicable vesting period.
During the first six months of 2008, non-qualified stock options to
purchase an aggregate of 40,000 shares of common stock were granted to an
employee and a recently appointed member of the board of directors. 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 six-month period ended June 30, 2008 and 2007 was $3.92 and $6.43 per share,
respectively. The total intrinsic value of stock options exercised during the
six-month periods ended June 30, 2008 and 2007 was $55,981 and $85,735,
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:
Six Months Ended
June 30, 2008 June 30, 2007
------------- -------------
Weighted-average expected stock-price volatility 6.3% 30.0%
Weighted-average expected option life 4.2 years 7.0 years
Average risk-free interest rate 3.81% 4.72%
Average dividend yield 0.0% 0.0%
9
During March 2008, the Company issued an aggregate of 35,000 shares of
restricted stock to its officers under its 2003 Equity Incentive Plan. The
restricted stock vests ratably over thirty-six months from date of grant. The
weighted average unit market value of the restricted stock on the date of these
grants was $4.35. As of June 30, 2008, 146,900 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
as of June 30, 2008 is $514,521 and will be recognized ratably through June 30,
2011.
(7) Income Taxes
The income tax benefits 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 in 2007 by non-deductible stock compensation
expense.
During the second quarter of 2007, warrants to purchase 146,300 shares of
the Company's common stock were exercised by a former outside director and the
Chairman of the Board of Directors of the Company. The exercise of the warrants
resulted in income tax deductions in excess of compensation expense recognized
of $1,023,892. As a result, the Company has reduced its federal and state income
tax obligations by $340,956 and credited additional paid-in capital.
Recoverable income taxes consist of estimated state and federal tax refunds
generated from net operating losses.
(8) Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring the fair value of assets and
liabilities, and expands disclosure requirements regarding the fair value
measurement. SFAS 157 does not expand the use of fair value measurements. This
statement, as issued, is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. FASB Staff Position (FSP) FAS No. 157-2 was issued in February 2008 and
deferred the effective date of SFAS 157 for nonfinancial assets and liabilities
to fiscal years beginning after November 2008. As such, the Company adopted SFAS
157 as of January 1, 2008 for financial assets and liabilities only. There was
no significant effect on the Company's financial statements. The Company does
not believe that the adoption of SFAS 157 to non-financial assets and
liabilities will significantly affect its financial statements.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for
Financial Assets and Liabilities--including an amendment of FASB Statement No.
115" ("SFAS 159"). SFAS 159 expands the use of fair value accounting but does
not affect existing standards which require assets or liabilities to be carried
at fair value. The objective of SFAS 159 is to improve financial reporting by
providing companies with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. Under SFAS 159, a company
may elect to use fair value to measure eligible items at specified election
dates and report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. Eligible
items include, but not are limited to, accounts receivable, accounts payable,
and issued debt. If elected, SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company has not elected to measure any additional
assets or liabilities at fair value that are not already measured at fair value
under existing standards.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141(R)"). SFAS 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. SFAS 141(R)
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141(R) is effective for
fiscal years beginning after
10
December 15, 2009. The Company will apply the provisions of SFAS 141 (R) to any
acquisition after January 1, 2008.
In December 2007, the FASB issued SFAS No. 160, "Accounting for
Non-controlling Interests." SFAS 160 clarifies the classification of
non-controlling interests in consolidated balance sheets and reporting
transactions between the reporting entity and holders of non-controlling
interests. Under this statement, non-controlling interests are considered equity
and reported as an element of consolidated equity. Further, net income
encompasses all consolidated subsidiaries with disclosure of the attribution of
net income between controlling and non-controlling interests. SFAS No. 160 is
effective prospectively for fiscal years beginning after December 15, 2008.
Currently, there are no non-controlling interests in any of the Company's
subsidiaries.
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 the Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts, are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements represent the Company's current expectations
regarding future events. The Company cautions that such statements are qualified
by important factors that could cause actual results to differ materially from
expected results which may be contained in the forward-looking statements. All
forward-looking statements involve risks and uncertainties, including, but not
limited to, the following: foreign currency fluctuations, regulations and other
economic and political factors which affect the Company's ability to market its
products internationally, new product introductions by the Company's
competitors, increased price competition, dependence upon significant customers,
availability and cost of components for the Company's products, the impact of
any adverse litigation, marketplace acceptance for the Company's new products,
FDA and other governmental regulatory and enforcement actions, changes to
federal research and development grant programs presently utilized by the
Company and other factors described in greater detail in the Company's most
recent annual report on Form 10-K.
Results of Operations
---------------------
For the three months ended June 30, 2008, the Company reported a net loss
of $32,000 or ($0.00) per basic and diluted common share compared to a net loss
of $301,000 or ($0.03) per basic and diluted common share reported for the three
months ended June 30, 2007. Sales and marketing expenses related to the
Fore-Sight cerebral oximeter products approximated $825,000. Pre-tax losses for
the three-month periods ended June 30, 2008 and 2007 were also affected by
approximately $91,000 and $37,000 respectively, of stock compensation expense.
Pre-tax losses of $98,000 for the second quarter of 2008 reflect a significant
improvement over pre-tax losses of $924,000 for the first quarter of 2008 as a
result of improved revenues, reductions in cost of sales as a percentage of
sales, and controlled operating expenses.
The Company reported a net loss of $562,000 or ($0.05) per basic and
diluted common share for the six months ended June 30, 2008 compared to a net
loss of $221,000 or ($0.02) per basic and diluted common share for first six
months of 2007. Sales and marketing expenditures related to the Fore-Sight
cerebral oximeter products approximated $1,500,000. Pre-tax losses for the
six-month periods ended June 30, 2008 and 2007 were also affected by $231,000
and $131,000 respectively, of stock compensation expense.
The Company generated revenues of $10,543,000 for the three months ended
June 30, 2008, an increase of $2,581,000 or 32%, compared to revenues of
$7,962,000 for the three months ended June 30, 2007. The following table
provides information with respect to revenues by major category:
11
Three Months Ended Three Months Ended Increase/
($000's) June 30, 2008 June 30, 2007 (Decrease)
------------- ------------- ----------
Low Acuity Products $ 3,900 $ 3,177 $ 723
High Acuity Products 377 28 349
Blood Pressure Measurement Technology 2,204 1,386 818
Supplies/Service 4,062 3,371 691
-------- -------- --------
$ 10,543 $ 7,962 $ 2,581
======== ======== ========
Domestic Sales 7,730 5,893 1,837
International Sales 2,813 2,069 744
-------- -------- --------
$ 10,543 $ 7,962 $ 2,581
======== ======== ========
Low acuity product revenues for the three months ended June 30, 2008
increased $723,000 or 23% as a result of increases in sales of vital signs
monitors and accessories to U.S. customers and sales of products developed and
manufactured by Analogic Corporation and sold by CASMED under an exclusive
worldwide sales and marketing agreement executed during May 2007.
High-acuity product revenues represent sales of the Company's Fore-Sight
cerebral oximetry monitors, sensors and accessories. During the second quarter
ended June 30, 2008, the Company placed approximately 25 monitors with customers
bringing the installed base of Fore-Sight monitors worldwide to 93 monitors.
Under these arrangements, customers are entitled to use the Company's monitors
at no cost in exchange for purchase orders for Fore-Sight sensors. Approximately
$377,000 of sales were recorded in the three months ended June 30, 2008. The
Company began marketing the Fore-Sight technology during the second quarter of
2007.
Blood pressure measurement technology sales of $2,204,000 for the three
months ended June 30, 2008 increased $818,000 or 59% from $1,386,000 reported
for the same three months of the prior year. Sales to the Company's largest OEM
customer, Medtronic Physio-Control, accounted for approximately $493,000 of the
increase in sales during this period. Sales to this customer during the prior
year period were affected by their voluntary suspension of U.S. product
shipments during January 2007.
Supplies and service sales increased $691,000 or 21% to $4,062,000 for the
three months ended June 30, 2008 from $3,371,000 for the same three months of
the prior year. Sales of blood pressure cuffs accounted for the majority of the
increase in sales in this category and increased 20% for the three months ended
June 30, 2008 compared to the same three months of the prior year. Sales of the
Company's Klear-Trace(R) electrodes accounted for the balance of the increase.
Sales to the U.S. market accounted for $7,730,000 or 73% of the total
revenues reported for the three months ended June 30, 2008, an increase of
$1,837,000 or 31% from the $5,893,000 in sales reported for the three months
ended June 30, 2007. International sales accounted for $2,813,000 or 27% of the
total revenues reported for the three months ended June 30, 2008, an increase of
$744,000 or 36% from the $2,069,000 reported for the same period of the prior
year.
The Company generated revenues of $19,504,000 for the six months ended June
30, 2008, an increase of $2,253,000 or 13%, compared to revenues of $17,252,000
for the six months ended June 30, 2007. The following table provides information
with respect to revenues by major category:
12
Six Months Ended Six Months Ended Increase/
($000's) June 30, 2008 June 30, 2007 (Decrease)
------------- ------------- ----------
Low Acuity Products $ 7,408 $ 7,645 $ (237)
High Acuity Products 650 28 622
Blood Pressure Measurement Technology 3,563 2,756 807
Supplies/Service 7,883 6,823 1,060
-------- -------- --------
$ 19,504 $ 17,252 $ 2,252
======== ======== ========
Domestic Sales 14,062 12,891 1,171
International Sales 5,442 4,361 1,081
-------- -------- --------
$ 19,504 $ 17,252 $ 2,252
======== ======== ========
Low acuity product revenues for the six months ended June 30, 2008
decreased $237,000 or 3% as a result of decreases in sales of vital signs
monitors and accessories to U.S. customers during the first quarter of 2008
including products sold into the veterinary market. Sales during the first
quarter of 2007 had included several significant shipments for orders received
but not shipped during the fourth quarter of 2006. Partially offsetting these
shortfalls were increases in sales of Analogic products.
High-acuity product revenues which represent sales of the Company's
Fore-Sight cerebral oximetry monitors, sensors and accessories, increased
$622,000 for the six months ended June 30, 2008 compared to the same period of
the prior year.
Blood pressure measurement technology sales of $3,563,000 for the six
months ended June 30, 2008 increased $807,000 or 29% from $2,756,000 reported
for the same six months of the prior year. Sales to the Company's largest
customer, Medtronic Physio-Control, accounted for nearly all of the increase in
sales during this period.
Supplies and service sales increased $1,060,000 or 16% to $7,883,000 for
the six months ended June 30, 2008 from $6,823,000 for the same six months of
the prior year. Sales of blood pressure cuffs increased 18% for this period and
accounted for the majority of the increase in sales in this category. Sales of
the Company's Klear-Trace(R) electrodes accounted for the balance of the
increase.
Sales to the U.S. market accounted for $14,062,000 or 72% of the total
revenues reported for the six months ended June 30, 2008, an increase of
$1,171,000 or 9% from the $12,891,000 in sales reported for the six months ended
June 30, 2007. International sales accounted for $5,442,000 or 28% of the total
revenues reported for the six months ended June 30, 2008, an increase of
$1,081,000 or 25% from the $4,361,000 reported for the same period of the prior
year.
Costs of sales were $7,051,000 or 66.9% of revenues for the three months
ended June 30, 2008 compared to $5,448,000 or 68.4% for the same three months of
the prior year. The decrease in costs of sales as a percentage of revenues
resulted from favorable product mix which was partially offset by various
inventory related adjustments including scrap and manufacturing overhead
absorption. Favorable product mix resulted from increased OEM module sales and
U.S. sales of vital signs monitors and accessories. Costs of sales for the three
months ended June 30, 2007 were negatively affected by a number of factors
including shortfalls in OEM module sales which normally carry gross margin rates
favorable to other products sold by the Company; Fore-sight cerebral oximetry
manufacturing start-up costs; increased blood pressure cuff sales as a
percentage of total revenues which normally carry lower relative gross margin
rates; and unapplied manufacturing overhead costs as a percentage of the reduced
revenues for that period.
13
Costs of sales were $13,332,000 or 68.4% of revenues for the six months
ended June 30, 2008 compared to $11,195,000 or 64.9% of revenues for the six
months ended June 30, 2007. Inventory adjustments referred to above and
unfavorable product mix primarily related to the first quarter of 2008 affected
gross profit levels for the six months ended June 30, 2008. U.S. sales of the
Company's vital signs monitors during the first three months of 2008 were
substantially below the first three months of 2007 while international vital
signs product sales were significantly ahead of the prior year. The Company is
presently focused on a number of initiatives to improve gross profit rates for
the balance of 2008 including raw material and component cost reductions, price
increases where appropriate, improved inventory management including inventory
controls, product procurement and organizational changes, and enhancements to
manufacturing productivity.
Operating expenses for the three months ended June 30, 2008 increased
$616,000 or 21.2% to $3,519,000 from $2,903,000 for the three months ended June
30, 2007. Operating expenses for the first six months of 2008 increased $783,000
or 12.5% to $7,051,000 from $6,269,000 reported for the same period the prior
year.
Research and development ("R&D") expenses increased $36,000 or 8.4% to
$467,000 or 4.4% of revenues for the three months ended June 30, 2008 compared
to $431,000 or 5.4% of revenues for the three months ended June 30, 2007.
Decreases in 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. As of June 30, 2008, a maximum of approximately
$2.0 million remains available under the $2.7 million multi-year NIH award
received during 2007. R&D expenses for the first six months of 2008 decreased
$307,000 or 23.9% from $1,285,000 reported for the first six months of the prior
year. Increases in NIH refunds of $255,000 for the first six months of 2008
compared to $179,000 for the first six months of the prior year accounted for
$76,000 of the decrease in net R&D expenses. Also during 2007, the Company
incurred significant costs surrounding the development of the Fore-sight
cerebral monitor and sensors which was launched during the second quarter of
that year. Such spending included project material costs and outside engineering
technical support.
Selling, general and administrative expenses ("S,G&A") increased $579,000
or 23.5% to $3,052,000, representing 28.9% of revenues for the three months
ended June 30, 2008 compared to $2,473,000 or 31.1% of revenues for the three
months ended June 30, 2007. Sales and marketing expenses directly associated
with the Fore-Sight cerebral oximetry effort totaled $823,000 and accounted for
$479,000 or 93.0% of the overall increase in sales and marketing expenses of
$516,000. Other sales and marketing expenses not related to the Fore-Sight
effort increased approximately $36,000 or 2.3%. G&A expenses increased $64,000
or 7.3% as a result of increases in salaries and related benefits primarily from
increased administrative headcount, patent related legal costs, professional
services costs and board of director fees, partially offset by decreases in
investor relations expenses, Sarbanes-Oxley consulting costs and insurance
premiums. S,G&A expenses for the first six months of 2008 were $6,073,000, an
increase of $1,090,000 or 21.9% over the $4,983,000 reported for the first six
months of 2007. Sales and marketing expenses increased $843,000 of which
$699,000 directly related to the Company's Fore-Sight cerebral oximetry efforts.
Other sales expenses increased approximately $202,000 or 10.6% primarily as a
result of increased customer service support and expanded global field sales
operations. Other marketing expenses decreased approximately $58,000 as a result
of advertising and promotional related costs. G&A expenses increased
approximately $247,000 primarily as a result of increased salaries and related
benefits associated with increased personnel, patent related legal costs,
strategic planning costs, and board of director fees partially offset by
decreased company-wide bonus accruals recorded during the first quarter of 2007
and outside investor relations costs.
Interest expense increased to $71,000 and $143,000, respectively for the
three and six months ended June 30, 2008 compared to $60,000 and $118,000,
respectively for the three and six months ending June 30, 2007. The increase in
interest expense resulted primarily from advances under the Company's
line-of-credit partially offset by long-term debt repayments.
The income tax benefit of $66,000 for the six months ended June 30, 2008
reflects a combined estimated federal and state effective tax rate of 45.7% 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 for the six months ended June 30, 2007
resulted in an effective tax rate of 33% due to anticipated state and federal
R&D tax credits, partially offset by non-deductible stock compensation expense.
14
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
At June 30, 2008, the Company's cash and cash equivalents totaled $911,000
compared to $667,000 at December 31, 2007. Working capital decreased $275,000 to
$10,113,000 at June 30, 2008, from $10,388,000 on December 31, 2007. The
Company's current ratio decreased to 2.26 to 1 from 2.63 to 1.
Cash provided by operations for the six months ended June 30, 2008 was
$335,000 compared to cash used of $1,411,000 for the first six months of the
prior year. Increases in accounts receivable of $463,000 and accounts payable
and accrued expenses of $1,251,000 and depreciation and amortization of $574,000
were partially offset by increases in inventory of $1,107,000, deferred income
taxes of $362,000 and net losses of $562,000. Increases in inventories since
December 31, 2007 were primarily caused by purchases of blood pressure cuff raw
materials, purchases of finished products from Analogic and Fore-Sight cerebral
oximeter components offset slightly by reductions in vital signs monitoring and
accessories inventories. The Company has initiated an inventory reduction
program to reduce its inventory related working capital requirements and expects
to achieve reductions in inventory levels by its 2008 fiscal year end.
Cash used in investing activities was $1,274,000 for the six months ended
June 30, 2008 compared to cash used of $802,000 for the first six months of the
prior year. Expenditures for property and equipment during the six months ended
June 30, 2008 were driven by increases in Fore-Sight cerebral oximeter units at
customer sites of $576,000 and other purchases of $345,000 largely caused by
production equipment expenditures required to support Fore-sight sensor
manufacturing and increase blood-pressure cuff production capacity as well as
various information technology related expenditures. Prior year expenditures
reflected $538,000 of spending for leasehold improvements and manufacturing and
engineering equipment. Spending for intangible assets of $353,000 for the first
six months of 2008 primarily included accrued contract costs, deferred finance
charges associated with the Company's amended line-of-credit agreement and
patent costs.
Cash provided by financing activities for the six months ended June 30,
2008 was $1,183,000 compared to cash provided of $1,393,000 for the first six
months of the prior year. During May 2008, the Company consummated a private
placement of 333,333 shares of its common stock for an aggregate sum of
$1,000,000. Repayments of long-term debt and insurance notes of $284,000 and
$210,000, respectively, were partially offset by advances from the Company's
line-of-credit of $296,000 and additional insurance related financings of
$299,000.
On February 11, 2008, the Company amended and restated its existing line of
credit with NewAlliance Bank (the "Bank"). The Company entered into a new
Commercial Loan Agreement (the "Loan Agreement") and related Commercial
Revolving Promissory Note (the "Note") which provide for borrowings on a
revolving basis, at the Bank's discretion up to $10,000,000. Loans in excess of
$2,000,000 up to $10,000,000 can be made only if the maximum principal amount
outstanding does not exceed a borrowing base equal to the sum of (i) 75% of
eligible receivables (as defined in the Loan Agreement) and (ii) the lesser of
$2,500,000 or 30% of eligible inventory (as defined in the Loan Agreement.)
Interest on the outstanding loans pursuant to the Note is at the Prime Rate (as
defined in the Loan Agreement) minus 0.5%. Borrowings under the Loan Agreement
and the Note are secured by a first priority lien in all the business assets of
the Company pursuant to a Security Agreement (the "Security Agreement"). The
Credit Agreement, which contains customary non-financial covenants and financial
covenants consisting of a debt service coverage ratio and a debt to tangible net
worth ratio, expires on the final maturity date of May 1, 2009.
During May 2008, the Company consummated a private placement of 333,333
shares of its common stock with jVen Capital, LLC at $3.00 per share for a total
consideration of $1,000,000. Immediately following the closing, the Company
announced the appointment of Evan Jones, managing director of jVen Capital, LLC,
to its Board of Directors.
15
During the second quarter of 2008, the Company's management implemented
cost reduction efforts to improve its income levels and cash from operations.
Such reductions include personnel, planned consolidation of leased space,
product cost reductions, and reductions in advertising, promotions and other
non-discretionary spending and a reorganization of its Jacksonville, Florida
manufacturing operations to achieve productivity gains. Further, the Company's
management has initiated a program to reduce inventory levels. To successfully
achieve its goals, the Company has reorganized its manufacturing operations
management team in the areas of materials planning and procurement and inventory
control and strengthened our quality management resources. The Company expects
to continue to incur expenditures associated with the NIRS cerebral oximetry
technology and the related Fore-Sight oximeter market penetration. Such spending
includes on-going R&D and further clinical studies, sales and marketing
expenses. As a result of the changes and plans referred to above, management
expects to limit its further borrowing needs under the line-of-credit for the
remainder of 2008. The Company believes that its sources of funds consisting of
cash and cash equivalents and funds available from the revolving credit facility
will be sufficient to meet its current and expected short-term requirements. The
Company may also pursue other financing alternatives to meet its capital needs
although it is uncertain that, if needed, it would be able to find additional
sources of funds on commercially acceptable terms to support the Company's
long-term initiatives.
Critical Accounting Policies and Estimates
------------------------------------------
The Company's discussion and analysis of financial condition and results of
operations are based on the condensed financial statements. The preparation of
these financial statements requires the Company to make estimates and judgments
that affect the amounts reported in them. The Company's critical accounting
policies and estimates include those related to revenue recognition, the
valuations of inventories and deferred income tax assets, measuring stock
compensation, and warranty costs, determining useful lives of intangible assets,
and making asset impairment valuations. The Company bases its estimates on
historical experience and on various other assumptions that management believes
to be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. For additional information
about the Company's critical accounting policies and estimates, see Note 3 to
the financial statements included in the Company's Form 10-K for the year ended
December 31, 2007. There were no significant changes in critical accounting
policies and estimates during the three months ended June 30, 2008.
New accounting pronouncements and the Company's assessment of their impact
on the financial statements are disclosed in Note 7 to the notes to condensed
consolidated financial statements contained herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
The Company has certain exposures to market risk related to changes in
interest rates. The Company has an outstanding line-of-credit agreement, under
which there were borrowings of $2,544,925 at June 30, 2008. The line-of-credit
agreement, amended as of February 11, 2008, bears interest at variable rates
based on prime rate indices. The Company holds no derivative securities for
trading purposes and is not subject in any material respect to currency or other
commodity risk.
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.
16
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, 2008. Based upon the foregoing evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of that date.
There have been no changes in the Company's internal control over financial
reporting during the quarter ended June 30, 2008 that have materially affected,
or are reasonably likely to materially affect the Company's internal control
over financial reporting.
Reference is made to the Certifications of the Chief Executive Officer and
the Chief Financial Officer about these and other matters attached as Exhibits
31.1, 31.2 and 32.1 to this report.
PART II - OTHER INFORMATIION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
-------------------------
The manufacture and sale of our products exposes us to product liability
claims and product recalls, including those which may arise from misuse or
malfunction of, or design flaws in, our products or use of our products with
components or systems not manufactured or sold by us. Product liability claims
or product recalls, regardless of their ultimate outcome, could require us to
spend significant time and money in litigation or to pay significant damages. We
are currently a defendant in a pending product liability action, which is likely
to be scheduled for trial in late 2008. Although we believe that our product
liability insurance is sufficient to cover any damages and costs that are likely
with respect to this matter, there can be no assurance that this will be the
case with respect to any future matters. Furthermore, we may not be able to
obtain insurance in the future at satisfactory rates or in adequate amounts. In
addition, publicity pertaining to the misuse or malfunction of, or design flaws
in, our products could impair our ability to successfully market and sell our
products and could lead to product recalls.
In addition, we may become, in the normal course of our business
operations, a party to other legal proceedings in addition to those described in
the paragraph above. None of these other proceedings would be expected to have a
material adverse impact on our results of operations, financial condition, or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
At the Company's annual meeting of stockholders held on June 18, 2008,
two proposals were voted upon and approved by the Company's stockholders. A
brief description of each proposal voted upon at the annual meeting and the
number of votes cast for, against and withheld, as well as the number of
abstentions where applicable are set forth below.
1) Election of members of the Board of Directors, each for a term of one
year
Nominee For Withheld
------- --- --------
Jerome S. Baron 8,715,283 1,153,680
Lawrence S. Burstein 8,719,883 1,149,080
Andrew Kersey 8,252,469 1,616,494
Saul S. Milles 8,425,755 1,443,208
Louis P. Scheps 8,487,858 1,381,105
17
2) Ratification of the appointment of UHY LLP as auditor for the Company
for the fiscal year ending December 31, 2008
For Against Abstain
--- ------- -------
9,733,678 122,918 12,366
There were no broker non-votes with respect to the matters described above.
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
18
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: August 6, 2008
----------------------------
By: Andrew E. Kersey
President and Chief Executive Officer
/s/ Jeffery A. Baird Date: August 6, 2008
----------------------------
By: Jeffery A. Baird
Chief Financial Officer
19