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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, 2007
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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $.004 par value
10,876,785 shares as of August 1, 2007.
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Form 10-Q
June 30, 2007
Page 2
INDEX
PART 1 Financial Information Page No.
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Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2007
and December 31, 2006 3
Condensed Consolidated Statements of Income for the Three
and Six Months Ended June 30, 2007 and 2006 5
Condensed Consolidated Statements of Cash Flow for the Six
Months Ended June 30, 2007 and 2006 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 14
Item 4T Controls and Procedures 14
PART II Other Information
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Item 4 Submission of Matters to a Vote of Security Holders 16
Item 6 Exhibits 16
Signatures 17
Form 10-Q
June 30, 2007
Page 3
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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CAS Medical Systems, Inc.
Condensed Consolidated Balance Sheets
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(Unaudited)
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Assets June 30, December 31,
------ 2007 2006
------------ ------------
Current Assets:
Cash and cash equivalents $ 514,590 $ 1,334,535
Accounts receivable, net of allowance 4,818,397 4,906,303
Inventories 8,156,684 6,808,193
Deferred income taxes 294,708 329,458
Recoverable income taxes 765,388 320,943
Other current assets 575,936 408,171
Total current assets 15,125,703 14,107,603
Property, plant and equipment 7,398,579 6,859,759
Accumulated depreciation (3,837,606) (3,535,915)
3,560,973 3,323,844
Intangible and other assets, net 680,591 457,352
Goodwill 3,379,021 3,379,021
Deferred income taxes 63,361 175,611
Total assets $ 22,809,649 $ 21,443,431
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Form 10-Q
June 30, 2007
Page 4
CAS Medical Systems, Inc.
Condensed Consolidated Balance Sheets
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(Unaudited)
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June 30, December 31,
Liabilities and Stockholders' Equity 2007 2006
------------------------------------ ------------ ------------
Current Liabilities:
Current portion of long-term debt $ 627,668 $ 609,615
Line-of-credit 1,044,305 --
Notes payable 226,768 69,241
Accounts payable 3,374,620 3,228,265
Accrued expenses 1,022,073 1,104,726
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Total current liabilities 6,295,434 5,011,847
Other liabilities 134,375 --
Long-term debt, less current portion 3,488,031 3,806,587
Stockholders' Equity:
Series A cumulative convertible preferred
stock, $.001 par value per share,
1,000,000 shares authorized, shares
issued or outstanding - none -- --
Common stock, $.004 par value per share,
40,000,000 shares authorized, 10,853,884
and 10,679,307 shares issued at June 30,
2007 and December 31, 2006, respectively,
including shares held in treasury 43,415 42,717
Treasury stock - 86,000 shares (101,480) (101,480)
Additional paid-in capital 5,557,206 4,935,538
Retained earnings 7,392,668 7,748,222
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Total stockholders' equity 12,891,809 12,624,997
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Total liabilities and stockholders' equity $ 22,809,649 $ 21,443,431
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See accompanying notes.
Form 10-Q
June 30, 2007
Page 5
CAS Medical Systems, Inc.
Condensed Consolidated Statements of Income
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(Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
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NET SALES: $ 7,962,396 $ 8,029,256 $ 17,251,728 $ 15,585,941
COST OF SALES: 5,447,781 4,564,210 11,195,402 9,168,447
OPERATING EXPENSES:
Research and development 430,683 628,255 1,285,400 1,233,131
Selling, general and administrative 2,472,621 2,181,600 4,983,117 4,195,082
------------ ------------ ------------ ------------
2,903,304 2,809,855 6,268,517 5,428,213
OPERATING INCOME (LOSS) (388,689) 655,191 (212,191) 989,281
Interest expense 59,995 63,340 117,927 127,710
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Income (loss) before income taxes (448,684) 591,851 (330,118) 861,571
Income taxes (benefit) (148,066) 241,010 (108,939) 370,475
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NET INCOME (LOSS) $ (300,618) $ 350,841 $ (221,179) $ 491,096
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON
SHARE:
Basic $ (0.03) $ 0.03 $ (0.02) $ 0.05
============ ============ ============ ============
Diluted $ (0.03) $ 0.03 $ (0.02) $ 0.04
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WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 10,671,575 10,353,306 10,638,250 10,301,124
============ ============ ============ ============
Diluted 10,671,575 12,043,121 10,638,250 12,116,176
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See accompanying notes.
Form 10-Q
June 30, 2007
Page 6
CAS Medical Systems, Inc.
Condensed Consolidated Statements of Cash Flow
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(Unaudited)
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Six Months Ended
June 30
2007 2006
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OPERATING ACTIVITIES:
Net income (loss) $ (221,179) $ 491,096
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 341,474 248,410
Deferred income taxes 147,000 36,771
Provision for doubtful accounts -- 9,546
Non-cash stock compensation 131,134 201,167
Changes in operating assets and liabilities:
Accounts receivable 87,906 (884,116)
Inventories (1,348,491) (456,531)
Other current assets (167,765) 18,528
Recoverable income taxes (444,445) --
Retirement benefit obligation -- (174,774)
Accounts payable and accrued expenses 63,702 291,126
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Net cash used by operating activities (1,410,664) (218,777)
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INVESTING ACTIVITIES:
Purchase of property and equipment (537,586) (383,534)
Purchase of intangible assets (264,256) (87,064)
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Net cash used by investing activities (801,842) (470,598)
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FINANCING ACTIVITIES:
Repayments under long-term debt (300,503) (333,065)
Proceeds from notes payable 329,010 187,788
Repayments under notes payable (171,483) (170,974)
Borrowings from line-of-credit 1,044,305 --
Tax benefits from exercise of warrants 340,956 --
Proceeds from issuance of common stock 150,276 316,184
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Net cash provided (used) financing activities 1,392,561 (67)
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Change in cash and cash equivalents (819,945) (689,442)
Cash and cash equivalents, beginning of period 1,334,535 1,892,584
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Cash and cash equivalents, end of period $ 514,590 $ 1,203,142
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest $ 119,842 $ 108,380
Cash paid during the period for income taxes, net ($ 157,450) $ 112,650
See accompanying notes.
Form 10-Q
June 30, 2007
Page 7
CAS Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2007
(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 and supplies for neonatal intensive care
- are sold by CASMED through its own sales force, via distributors 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-KSB for the year ended December 31, 2006. The condensed
consolidated balance sheet as of December 31, 2006 was derived from the audited
financial statements for the year then ended.
In the opinion of the Company, all adjustments 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
Inventories consisted of:
June 30, December 31,
2007 2006
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Raw materials $ 5,748,956 $ 5,161,884
Work-in-process 57,099 99,663
Finished goods 2,350,629 1,546,646
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$ 8,156,684 $ 6,808,193
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(4) Warranty Costs
The Company warranties its products for up to three years; such costs are
not material to these financial statements.
Form 10-Q
June 30, 2007
Page 8
(5) Earnings (Loss) per Common Share
A summary of the denominators used to compute basic and diluted earnings
(loss) per share follow:
Three Months Ended Six Months Ended
June 30, June 30,
2007(a) 2006 2007(a) 2006
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Weighted average shares outstanding, net
of restricted shares - used to compute
basic earnings (loss) per share 10,671,575 10,353,306 10,638,250 10,301,124
Dilutive effect of restricted shares, and
outstanding warrants and options -- 1,689,815 -- 1,815,052
---------- ---------- ---------- ----------
Weighted average shares of dilutive
securities outstanding - used to compute
diluted earnings (loss) per share 10,671,575 12,043,121 10,638,250 12,116,176
========== ========== ========== ==========
(a) 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 $37,333 and $131,134 and $67,495 and
$201,167 for the three-month and six-month periods ended June 30, 2007 and June
30, 2006, respectively.
As of June 30, 2007, the unrecognized stock-based compensation cost related
to non-vested stock awards was $232,297. Such amount, reduced for forfeiture
related estimates, will be recognized in operations over a weighted average
period of 2.11 years.
The following table summarizes the Company's stock option information as
of, and for the six-month period ended June 30, 2007:
Aggregate Weighted-Average
Option Weighted-Average Intrinsic Contractual Life
Shares Exercise Price Value(1) Remaining in Years
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Outstanding at December 31, 2006 537,650 $ 1.98
Granted at fair value 5,000 6.93
Exercised (15,625) 1.75
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Outstanding at June 30, 2007 527,025 2.05 $ 5.19 6.65
Exercisable at June 30, 2007 509,525 $ 1.94 $ 5.30 6.58
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(1) The intrinsic value of a stock option is the amount by which the
current market value of the underlying stock exceeds the option exercise price.
The exercise period for all outstanding stock options may not exceed ten
years from the date of grant. Stock options granted to employees and
non-employee directors vest ratably over 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.
Form 10-Q
June 30, 2007
Page 9
The weighted-average grant date fair value of stock options granted during
the six-month periods ended June 30, 2007 and 2006 was $6.43 and $8.83 per
share, respectively. The total intrinsic value of stock options exercised during
the six-month periods ended June 30, 2007 and 2006 was $100,479 and $1,090,338,
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, 2007 June 30, 2006
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Weighted-average expected stock-price volatility 30.0% 32.0%
Weighted-average expected option life 7.0 years 7.0 years
Average risk-free interest rate 4.72% 4.325%
Average dividend yield 0.0% 0.0%
During 2006, the Company issued an aggregate of 55,000 shares of restricted
stock to employees under its 2003 Equity Incentive Plan. During 2006, 8,000
shares were forfeited due to employee terminations and 47,000 shares remain
outstanding and non-vested as of June 30, 2007. The restricted stock vests
thirty-six months from date of grant. The weighted average value of the stock
was $6.04 per share and the aggregate fair value of the stock issued was
$332,100. Stock compensation expense of $95,253 has been recognized from date of
issuance to June 30, 2007 related to the restricted shares. The unamortized
stock compensation expense, net of cancellations, associated with the restricted
shares as of June 30, 2007 is $190,507 and will be recognized ratably through
2009.
During the first six months of 2007, warrants were exercised to purchase a
total of 146,300 shares of common stock at a weighted average exercise price of
$0.46 per share. Of such warrants, 60,000 shares were exercised by a former
director of the Company and warrants to purchase 86,300 shares were exercised by
Louis P. Scheps, the Company's Chairman of the Board of Directors. On March 12,
2007, Mr. Scheps entered into a stock sale plan under Rule 10b5-1 of the
Securities Exchange Act pursuant to which Mr. Scheps may sell up to 250,000
shares of common stock from time to time prior to March 31, 2008. As of June 30,
2007, warrants to purchase 1,082,700 shares of common stock were outstanding at
a weighted average exercise price of $0.49 per share.
(7) New Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 159, THE FAIR VALUE
OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT
OF FASB STATEMENT NO. 115. Under SFAS 159, a company may elect to use fair value
to measure certain financial assets and financial liabilities. The fair value
election is irrevocable and generally made on an instrument-by-instrument basis
even if a company has similar instruments that it elects not to measure at fair
value. At the adoption date, unrealized gains and losses on existing items for
which the fair value option has been elected are reported as a cumulative
adjustment to beginning retained earnings. Subsequent to the adoption of SFAS
159, changes to fair value are recognized in earnings. SFAS 159 is effective for
fiscal years beginning after November 15, 2007 and is required to be adopted by
the Company in the first quarter of 2008. The Company is currently determining
if fair value accounting is appropriate for any eligible items and cannot
currently estimate the effect, if any, which SFAS 159 will have on its
consolidated financial statements.
(8) Income Taxes
The income tax benefit of $108,939 recorded for the six months ended June
30, 2007 reflects an expected effective rate of approximately 33% for 2007. The
combined estimated federal and state effective tax rate is lower than the
statutory rate as a result of anticipated state and federal R&D tax credits
partially offset by non-deductible stock compensation expense. The provision for
income taxes of $370,475 for the first six months of 2006 reflected an
Form 10-Q
June 30, 2007
Page 10
effective tax rate of 43% resulting primarily from non-deductible stock
compensation expense partially offset by estimated state and federal R&D tax
credits.
During the first six months of 2007, warrants to purchase 146,300 shares of
the Company's common stock were exercised by a former outside director and a
current director of the Company. The exercise of the warrants resulted in income
tax deductions in excess of compensation expense recognized of $1,023,892. Such
amount shall be included in the taxable income of the applicable directors and
deducted by the Company for federal and state income tax reporting purposes. 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 tax deposits in excess of the
current provision and the income tax effect of the warrant exercise noted above.
On January 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109" ("FIN 48"). FIN 48 prescribes a more-likely-than-not
threshold for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This interpretation also provides
guidance on de-recognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, accounting for income
taxes interim periods and income tax disclosures. In conjunction with the
adoption of FIN 48, the Company recognized approximately $134,000 in uncertain
tax positions as non-current income tax liabilities and a reduction in retained
earnings.
The Company files income tax returns in the U.S. federal and various state
jurisdictions. With few exceptions, the Company is no longer subject to U.S.
federal, state and local income tax examinations by tax authorities for years
prior to 2004. During 2006, the Company concluded an examination with U.S.
federal tax authorities for the tax year ended December 31, 2004 which resulted
in a refund to the Company.
The Company's policy is to recognize interest related to unrecognized tax
benefits as interest expense and penalties as operating expense. Accrued
interest is insignificant and there are no penalties accrued at June 30, 2007.
The Company believes that it has appropriate support for the income tax
positions taken and to be taken on its tax returns and that its accruals for tax
liabilities are adequate for all open years based upon an assessment of many
factors including past experience and interpretations of tax law as applied.
The Company's adoption of FIN 48 has not affected the consolidated
financial results of operations or the cash flows of the Company.
(9) Material Commitments
On June 18, 2007, the Company entered into agreements for the sale and
leaseback of the Company's headquarters and manufacturing facility (the
"Property"). Under the agreement, the Company will sell the Property for $3.0
million. The Company expects the sale transaction to net approximately $1.4
million of working capital after taxes and repayment of the remaining mortgage
balance on the Property. The completion of the transaction is subject to a
number of closing conditions and is expected to close during the third quarter
of 2007. Upon closing of the sale of the Property, the Company will lease back
the Property for a ten year initial term with the option to extend the term for
two additional successive periods of five years, subject to certain notice and
financial covenants requirements (the "Lease"). The Lease is triple net, and
provides for an annual base rent in years 1-5 of $244,800, and years 6-10 of
$268,800, payable monthly. In addition, the Company is responsible for 100% of
the costs of utilities, insurance, taxes and maintenance expenses, and other
operating costs. The Company will be required to comply with certain financial
covenants throughout the term of the Lease. These covenants require the Company
to maintain at least $600,000 with a U.S. banking institution in cash or cash
equivalents, which required amount, shall increase by 3% per annum; and net
current assets of not less than $3,600,000.
Form 10-Q
June 30, 2007
Page 11
In addition, the Company will have a right of first offer to lease any
additional space or building built by on the lessor on the Property, subject to
certain restrictions. The Company will also have the right to require the lessor
to build an addition or additional building ("Expansion Premises"), subject to
certain restrictions. Upon the delivery of any Expansion Premises, the term of
the Lease would extend for a ten year term. The base rent for the Expansion
Premises shall be the greater of the then prevailing market rent or an amount
equal to a return on actual costs of construction of greater than 250 basis
points over the rate on ten year U.S. Treasury Notes, or 8%. Upon delivery of
the Expansion Premises, the lessor would assume obligations under the Company's
existing lease of the Property, in exchange for a payment equal to three months
rent and certain unamortized costs incurred in entering into the existing
leases.
Effective July 1, 2007, the Company entered into a five-year agreement with
the lessor to lease approximately 13,000 square feet of office space adjacent to
the Company's corporate offices. The lease provides for average annual base rent
of $112,500 and requires the Company to pay its proportionate share of annual
operating expenses including utilities, insurance, taxes and maintenance.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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Certain statements included in this report, including without limitation
statements in the Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts, are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements represent the Company's current expectations
regarding future events. The Company cautions that such statements are qualified
by important factors that could cause actual results to differ materially from
expected results which may be contained in the forward-looking statements. All
forward-looking statements involve risks and uncertainties, including, but not
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, 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-KSB.
Results of Operations
---------------------
For the three months ended June 30, 2007, the Company reported a net loss
of ($301,000), or ($0.03) per basic and diluted common share compared to net
income of $351,000 or $0.03 per diluted common share reported for the three
months ended June 30, 2006. Increases in sales and marketing spending and
manufacturing start-up costs for the Company's recently launched Fore-sight
cerebral oximeter combined with shortfalls in original equipment manufacturer
("OEM") revenues primarily from a key customer, Medtronic, significantly
affected the three months ended June 30, 2007. Pre-tax loss/income for the
three-month periods ended June 30, 2007 and 2006 was also affected by
approximately $37,000 and $67,000, respectively, of stock compensation expense.
Pre-tax income for the three months ended June 30, 2006 was favorably affected
by a reduction in accrued retirement benefit costs of $87,000 related to changes
to the Company's post-retirement health benefit plan during 2005.
For the six months ended June 30, 2007, the Company reported a net loss of
($221,000) or ($0.02) per basic and diluted common share compared to net income
of $491,000 or $0.04 per diluted common share for the six months ended June 30,
2006. Pre-tax loss/income for the six-month periods ended June 30, 2007 and 2006
was also affected by approximately $131,000 and $201,000, respectively, of stock
compensation expense. Increases in Fore-sight related sales and marketing
expenditures and manufacturing start-up costs for the first six months of 2007
and shortfalls in OEM sales for the second quarter ended June 30, 2007 accounted
for the net loss recorded. Pre-tax income for the six months ended June 30, 2006
was favorably affected by a reduction in accrued retirement benefit costs of
$175,000 related to changes to the Company's post-retirement health benefit plan
during 2005.
Form 10-Q
June 30, 2007
Page 12
The Company generated revenues of $7,962,000 for the three months ended
June 30, 2007, a decrease of $67,000 or 1%, compared to revenues of $8,029,000
for the three months ended June 30, 2006. Reductions in sales of OEM products to
Medtronic of approximately $1,005,000 accounted for the entire shortfall in OEM
sales and were largely offset by increases in vital signs monitor and
accessories sales and blood pressure cuff sales of approximately 27%. During
January of 2007, Medtronic announced a voluntary suspension of U.S. product
shipments from its Physio-Control division. Medtronic represented approximately
11% of the Company's revenues for the full year 2006 and approximately 19% of
revenues for the three months ended June 30, 2006. The Company's management is
in regular discussions with Medtronic and continues to monitor the situation and
while it does see some improvement in their order levels for future deliveries,
it remains uncertain as to when their U.S. shipments will resume.
Revenues for the six months ended June 30, 2007 were $17,252,000, an
increase of $1,666,000 or 10.7% above revenues of $15,586,000 reported for the
first six months of 2006. Reductions in OEM sales of $1,164,000 were offset by
increases in sales of vital signs monitors and accessories of approximately 39%.
Sales of OEM products to Medtronic decreased approximately $1,424,000 and were
partially offset by increased sales to other OEM partners.
Costs of products sold was $5,448,000 or 68.4% of revenues for the three
month period ended June 30, 2007 compared to $4,564,000 or 56.8% for the same
period of 2006. The increase in cost of products sold as a percentage of
revenues is related to a number of factors including lost gross margins on the
shortfall in OEM business which carries rates substantially favorable to other
products sold by the Company, Fore-sight cerebral oximetry manufacturing
start-up costs, increased blood pressure cuff and accessories sales as a
percentage of total revenues which normally carry lower gross margin rates and
increased unapplied manufacturing overhead costs as a percentage of the reduced
revenues. Cost of products sold for the three months ended June 30, 2006 was
favorably affected by reductions in accrued retirement benefit costs of $63,000
related to changes to the Company's post-retirement health plan during 2005.
Costs of products sold for the six months ended June 30, 2007 was
$11,195,000 or 64.9% of revenues compared to $9,168,000 or 58.8% of revenues for
the six months ended June 30, 2006. The increase in cost of products sold as a
percentage of revenues is related to the factors referred to above including -
OEM lost gross margins, NIRS start-up costs and increased unapplied
manufacturing overhead expenses. Cost of products sold for the six months ended
June 30, 2006 was favorably affected by reductions in accrued retirement benefit
costs of $127,000 previously referred to above.
R&D expenses decreased $197,000 or 31% to $431,000 or 5.4% of revenues for
the three months ended June 30, 2007 compared to $628,000 or 7.8% of revenues
for the three months ended June 30, 2006. Reimbursements from the National
Institutes of Health ("NIH") approximating $173,000 for remaining amounts
available under active grants was primarily responsible for the decrease in R&D
spending. R&D expenses for the first six months of 2007 increased $52,000 or
4.2% to $1,285,000 or 7.5% of revenues compared to $1,233,000 or 7.9% of
revenues for the first six months of the prior year. Reimbursements from the NIH
referred to above were offset by increases in salaries and related benefits and
engineering project costs related to the NIRS effort.
Selling, general and administrative expenses ("S,G&A") increased $291,000
or 13.3% to $2,473,000, representing 31.1% of revenues for the three months
ended June 30, 2007 compared to $2,182,000 or 27.2% of revenues for the three
months ended June 30, 2006. Sales and marketing expenses associated with the
NIRS effort totaled $342,000 and accounted for $268,000 of the increase in S,G&A
expenses. Such expenses included clinical specialist salaries and related
benefits and travel and entertainment expenses and increased convention and
advertising costs. International sales expenses increased approximately $150,000
reflecting expanded sales consulting costs, increased travel and entertainment
and advertising expenses. The Company also incurred certain expenses including
sales training resulting from its agreement with Analogic Corporation whereby it
will be the exclusive distributor of a family of co-branded vital signs monitors
developed, manufactured, and previously marketed by Analogic. General and
administrative ("G&A") expenses declined approximately $115,000 due to
reductions in accrued company-wide 2007 bonuses, bad debt expenses and Statcorp
administrative costs partially offset by increased insurance and depreciation
expenses. G&A expenses for the three months ended June 30, 2007 include $50,000
of consulting fees
Form 10-Q
June 30, 2007
Page 13
pertaining to Sarbanes Oxley Section 404 compliance efforts which were initiated
during the second quarter of 2007 and are expected to continue throughout the
balance of 2007.
S,G&A expenses for the six months ended June 30, 2007 increased $788,000 or
18.8% to $4,983,000 or 28.9% of revenues compared to $4,195,000 or 26.9% of
revenues for the six months ended June 30, 2006. Sales and marketing expenses
related to NIRS reached $800,000 and accounted for $685,000 of the increase in
S,G&A. International sales expenses accounted for $185,000 of the increase
resulting from additional sales consultant costs and increased travel and
entertainment expenses. G&A expenses declined $171,000 due to reductions in
accrued bonuses, bad debt expenses and Statcorp administrative costs partially
offset by increased insurance costs and Sarbanes-Oxley consulting fees.
Interest expense decreased to $60,000 and $118,000, respectively for the
three and six months ended June 30, 2007 compared to $63,000 and $128,000,
respectively for the three and six months ending June 30, 2006. The decrease in
interest expense resulted primarily from long-term debt repayments partially
offset by advances under the Company's line-of-credit.
The income tax benefit of $109,000 for the six-months ended June 30, 2007
reflects an effective tax rate of 33%. The combined estimated federal and state
effective tax rate is lower than the statutory rate as a result of anticipated
state and federal R&D tax credits partially offset by non-deductible stock
compensation expense. The provisions for income taxes for the six months ended
June 30, 2006 resulted in an effective tax rate of 43% due to non-deductible
stock compensation expense partially offset by state and federal R&D tax
credits.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
At June 30, 2007, the Company's cash and cash equivalents totaled $515,000
compared to $1,335,000 at December 31, 2006. Working capital decreased by
$266,000 to $8,830,000 at June 30, 2007, from $9,096,000 on December 31, 2006.
The Company's current ratio decreased to 2.40 to 1 from 2.60 to 1.
Cash used by operations for the six months ended June 30, 2007 was
$1,411,000 compared to $219,000 for the first six months of the prior year.
Increases in inventories of $1,348,000 were largely responsible for the cash
used by operations for the first six months of 2007 and were primarily driven by
purchases required to support the Fore-sight cerebral oximeter product launched
in May 2007.
Cash used by investing activities was $802,000 for the six months ended
June 30, 2007 compared to $471,000 for the first six months of the prior year.
Expenditures for property and equipment of $538,000 during the six months ended
June 30, 2007 were driven by Fore-Sight cerebral oximeter demonstration units,
information technology and manufacturing equipment. Prior year expenditures
reflected $384,000 of spending for leasehold improvements, manufacturing
equipment and engineering equipment. Spending for intangible assets of $264,000
for the first six months of 2007 primarily included deposits to secure new
leased office space, contract advances, deferred legal fees and patent costs.
Cash provided by financing activities for the six months ended June 30,
2007 was $1,392,000 compared to cash used of $100 for the first six months of
the prior year. During the second quarter of 2007, the Company received advances
from its line-of-credit in the amount of $1,044,000, received $150,000 of
proceeds from the issuance of common stock related to the exercise of stock
options and non-employee warrants, and realized $341,000 of federal and state
income tax benefits from the exercise of warrants. During the first six months
of 2007, the Company repaid $301,000 of long-term debt and $171,000 of insurance
notes.
For the remainder of 2007, the Company expects moderate increases in
spending associated with the NIRS cerebral oximetry technology and the related
Fore-Sight oximeter market penetration over amounts incurred for the first six
months of 2007. Such spending includes additional R&D, on-going clinical
studies, marketing expenses, manufacturing start-up costs and capital
expenditures. In addition, the Company expects to incur certain expenditures
related to the hiring of additional sales and marketing personnel effective with
the third quarter of 2007 to support the
Form 10-Q
June 30, 2007
Page 14
Company's newly acquired family of co-branded Analogic products. The Company
believes that its sources of funds consisting of cash and cash equivalents, cash
flow from operations and funds available from the revolving credit facility will
be sufficient to meet its current and expected short-term requirements. In
addition, the Company expects to realize approximately $1,400,000 in net
proceeds from the sale and leaseback of its corporate headquarters and
manufacturing facilities, after taxes and payoff of the remaining mortgage
balance on the property. This transaction is expected to be consummated during
the third quarter of 2007 and is subject to a number of closing conditions. The
Company may also pursue other debt or equity financing alternatives to meet its
capital needs. Management believes that, if needed, it would be able to find
additional sources of funds on commercially acceptable terms which may be
required to support the Company's long-term initiatives.
Critical Accounting Policies and Estimates
------------------------------------------
The Company's discussion and analysis of financial condition and results of
operations are based on the condensed financial statements. The preparation of
these financial statements requires the Company to make estimates and judgments
that affect the amounts reported in them. The Company's critical accounting
policies and estimates include those related to revenue recognition, the
valuations of inventories and deferred income tax assets, measuring stock
compensation, post-retirement health benefit, and warranty costs, determining
useful lives of intangible assets, and making asset impairment valuations. The
Company bases its estimates on historical experience and on various other
assumptions that management believes to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions. For additional information about the Company's critical accounting
policies and estimates, see Note 3 to the financial statements included in the
Company's Form 10-KSB for the year ended December 31, 2006. There were no
significant changes in critical accounting policies and estimates during the
three months ended June 30, 2007.
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
------------------------------------------------------------------
In the normal course of business, the Company is exposed to fluctuations in
interest rates and fluctuations in foreign currency exchange rates. We do not
use derivative instruments or hedging to manage our exposures and do not
currently hold any market risk sensitive instruments for trading purposes.
ITEM 4T. CONTROLS AND PROCEDURES
--------------------------------
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based on the definition of "disclosure
controls and procedures" in Rule 13a-15(e). In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of June 30, 2007. 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.
Form 10-Q
June 30, 2007
Page 15
There have been no changes in the Company's internal control over financial
reporting during the quarter ended June 30, 2007 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.
Form 10-Q
June 30, 2007
Page 16
PART II - OTHER INFORMATIION
----------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
At the Company's annual meeting of stockholders held on June 13, 2007,
three 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 and broker non-votes to each proposal are set forth below.
1) Election of members of the Board of Directors, each for a term of one
year
Nominee For Against
------- --- -------
Jerome S. Baron 9,885,437 40,301
Lawrence S. Burstein 9,881,537 44,201
Andrew Kersey 9,841,618 84,120
Saul S. Milles 9,828,344 97,394
Louis P. Scheps 9,659,679 266,059
2) Amendment of the 2003 Equity Incentive Plan
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
3,966,183 469,695 23,884 5,465,976
3) Ratification of the appointment of UHY LLP as auditor for the Company
for the fiscal year ending December 31, 2007
For Against Abstain
--- ------- -------
9,884,090 5,632 36,014
ITEM 6. EXHIBITS
----------------
31.1 Certification pursuant to Rule 13a-14(a) of Andrew E. Kersey, President
and Chief Executive Officer
31.2 Certification pursuant to Rule 13a-14(a) of Jeffery A. Baird, Chief
Financial Officer
32.1 Certification pursuant to 18 U.S.C. 1350 of Periodic Financial Report of
Andrew E. Kersey, President and Chief Executive Officer and Jeffery A.
Baird, Chief Financial Officer
Form 10-Q
June 30, 2007
Page 17
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 14, 2007
----------------------------
By: Andrew E. Kersey
President and Chief Executive Officer
/s/ Jeffery A. Baird Date: August 14, 2007
----------------------------
By: Jeffery A. Baird
Chief Financial Officer