---

 

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 March 31, 2016

Commission File Number 0-13839

 

 

 

(Exact name of registrant as specified in its charter)

 

 

Delaware		06-1123096
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

  

(Address of principal executive offices, including zip code)

(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 ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒   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 ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

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   27,327,559 shares as of May 6, 2016.

---

 

 

PART I	Financial Information	Page No.
Item 1	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015	5
	Condensed Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended March 31, 2016	6
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosures about Market Risk	19
Item 4	Controls and Procedures	19
PART II	Other Information
Item 6	Exhibits	20
	Signatures	21

 

 

 

 

 

 

 

 

CAS Medical Systems, Inc.

		March 31,				December 31,
Assets		2016				2015
Current assets:
Cash and cash equivalents		$	8,364,773			$	7,528,292
Accounts receivable, net			3,347,721				2,921,720
Inventories			1,673,837				1,428,425
Other current assets			444,244				416,112
Assets associated with discontinued operations			993,123				1,239,344
Total current assets			14,823,698				13,533,893
Property and equipment:
Leasehold improvements			139,970				139,970
Equipment at customers			3,640,359				3,513,617
Machinery and equipment			4,911,384				4,753,062
			8,691,713				8,406,649
Accumulated depreciation and amortization			(6,271,419	)			(6,173,823	)
Property and equipment, net			2,420,294				2,232,826
Intangible and other assets, net			773,992				813,017
Total assets		$	18,017,984			$	16,579,736

		March 31,				December 31,
Liabilities and Stockholders' Equity		2016				2015
Current liabilities:
Accounts payable		$	1,657,576			$	1,459,798
Accrued expenses			2,126,757				1,833,502
Notes payable			55,242				82,377
Current portion of long-term debt, less unamortized debt issuance cost			2,623,400				2,616,992
Liabilities associated with discontinued operations			177,122				199,940
Total current liabilities			6,640,097				6,192,609
Deferred gain on sale and leaseback of property			192,581				226,240
Long-term debt, less current portion and unamortized debt issuance cost			3,549,302				4,207,629
Other long-term liability			300,000				300,000
Total liabilities			10,681,980				10,926,478
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value per share, 1,000,000 shares authorized
Series A convertible preferred stock, 95,500 shares issued and
outstanding, liquidation value of $13,365,584 and $13,135,709 at
March 31, 2016 and December 31, 2015, respectively			8,802,000				8,802,000
Series A exchangeable preferred stock, 54,500 shares issued and
outstanding, liquidation value of $7,627,480 and $7,496,295 at
March 31, 2016 and December 31, 2015, respectively			5,135,640				5,135,640
Common stock, $.004 par value per share, 60,000,000 shares authorized,
27,394,806 and 27,391,722 shares issued at March 31, 2016 and
December 31, 2015, respectively, including shares held in treasury			109,579				109,567
Common stock held in treasury, at cost - 86,000 shares			(101,480	)			(101,480	)
Additional paid-in capital			29,837,985				29,636,087
Accumulated deficit			(36,447,720	)			(37,928,556	)
Total stockholders' equity			7,336,004				5,653,258
Total liabilities and stockholders' equity		$	18,017,984			$	16,579,736

 

		Three Months Ended
		March 31,
		2016				2015
Net sales from continuing operations		$	5,455,526			$	4,520,887
Cost of sales			2,574,871				2,255,780
Gross profit			2,880,655				2,265,107
Operating expenses:
Research and development			955,407				833,489
Selling, general and administrative			3,367,884				2,883,485
Total operating expenses			4,323,291				3,716,974
Operating loss			(1,442,636	)			(1,451,867	)
Interest expense			199,248				217,814
Other income			(4,873	)			(349	)
Loss from continuing operations before income taxes			(1,637,011	)			(1,669,332	)
Income tax benefit			(1,091,246	)			(58,808	)
Loss from continuing operations			(545,765	)			(1,610,524	)
Discontinued operations:
Income from discontinued operations			175,752				151,084
Gain on sale of discontinued operations			2,942,095				—
Income taxes			1,091,246				58,808
Income from discontinued operations			2,026,601				92,276
Net income (loss)			1,480,836				(1,518,248	)
Preferred stock dividend accretion			361,060				336,854
Net income (loss) applicable to common stockholders		$	1,119,776			$	(1,855,102	)
Loss per common share from continuing
operations - basic and diluted		$	(0.03	)		$	(0.09	)
Income (loss) per common share from discontinued
operations - basic and diluted		$	0.07			$	0.01
Per share basic and diluted net income (loss) applicable to
common stockholders		$	0.04			$	(0.08	)
Weighted-average number of common shares outstanding:
Basic and diluted			26,800,433				22,804,979

 

 

 

See accompanying notes.

 

		Preferred Stock								Common Stock Issued								Common Stock Held in Treasury								Additional Paid-in				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Total
BALANCE, December 31, 2015			150,000			$	13,937,640				27,391,722			$	109,567				86,000			$	(101,480	)		$	29,636,087			$	(37,928,556	)		$	5,653,258
Net income																															1,480,836				1,480,836
Common stock issued under stock purchase plan											3,084				12												4,089								4,101
Stock compensation																											197,809								197,809
BALANCE, March 31, 2016			150,000			$	13,937,640				27,394,806			$	109,579				86,000			$	(101,480	)		$	29,837,985			$	(36,447,720	)		$	7,336,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

CAS Medical Systems, Inc.

 

(Unaudited)

 

 

		Three Months Ended
		March 31,
		2016				2015
OPERATING ACTIVITIES:
Net income (loss)		$	1,480,836			$	(1,518,248	)
Income from discontinued operations			2,026,601				92,276
Loss from continuing operations			(545,765	)			(1,610,524	)
Adjustments to reconcile net loss from continuing operations to net cash
used in operating activities of continuing operations:
Depreciation and amortization			292,519				360,460
Deferred income taxes			(1,091,246	)			—
Stock compensation			197,809				198,962
Impairment of capitalized costs			33,944				—
Amortization of gain on sale and leaseback of property			(33,659	)			(33,659	)
Changes in operating assets and liabilities:
Accounts receivable			(426,001	)			(67,854	)
Inventories			(245,412	)			120,408
Other current assets			(28,134	)			(26,729	)
Accounts payable and accrued expenses			491,033				(122,881	)
Net cash used in operating activities of continuing operations			(1,354,912	)			(1,181,817	)
INVESTING ACTIVITIES:
Expenditures for property and equipment			(402,032	)			(195,076	)
Additions to intangible assets			(2,495	)			(18,380	)
Net cash used in investing activities of continuing operations			(404,527	)			(213,456	)
FINANCING ACTIVITIES:
Repayments of note payable			(27,134	)			(28,638	)
Repayment of long-term debt			(704,515	)			—
Repayment of line-of-credit			—				(1,000,000	)
Proceeds from issuance of common stock			4,101				8,571,567
Net cash (used) provided by financing activities of continuing operations			(727,548	)			7,542,929
Net (decrease) increase in cash and cash equivalents from continuing operations			(2,486,987	)			6,147,656
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Cash provided by operating activities of discontinued operations			3,323,468				442,016
Net cash provided by discontinued operations			3,323,468				442,016
Net change in cash and cash equivalents			836,481				6,589,672
Cash and cash equivalents, beginning of period			7,528,292				4,494,663
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	8,364,773			$	11,084,335
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest		$	111,528			$	184,492

 

 

 

 

 

See accompanying notes.

CAS Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2016

(1)      The Company

CAS Medical Systems, Inc. ("CASMED®" or the "Company") is a medical technology company that develops, manufactures, and markets non-invasive patient monitoring products that are vital to patient care.  Our principal products are the FORE-SIGHT® and FORE-SIGHT ELITE® brand tissue oximeters and sensors, which comprised 78% of our March 31, 2016, year-to-date sales from continuing operations.  We also sell non-invasive blood pressure measurement technologies and service parts that we group into a category entitled Traditional Monitoring.

(2)      Basis of Presentation

The condensed consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report filed on Form 10‑K for the year ended December 31, 2015.  The condensed consolidated balance sheet as of December 31, 2015, was derived from the audited financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Estimates that are particularly sensitive to change in the near-term are inventory valuation allowances, deferred income tax asset valuation allowances, and allowances for doubtful accounts. Actual results could differ from those estimates. In the opinion of the Company, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations and cash flows have been included in the accompanying financial statements.  The results of operations for interim periods are not necessarily indicative of the expected results for the full year.

The Company changed its method of accounting for debt issuance costs effective with the first quarter of 2016. In April 2015, the Financial Accounting Standards Board, (the "FASB") ASB issued Accounting Standards Update 2015-03, Interest – Imputation of Interest, to simplify the presentation of debt issuance costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt obligation be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the treatment of debt discounts, rather than being presented as an asset. ASU 2015-03 became effective for financial statements issued for fiscal years beginning after December 15, 2015. The Company has reclassified $402,783 and $455,379 of other assets for the periods ending March 31, 2016, and December 31, 2015, respectively, and reported those amounts as reductions in the principal amounts of term debt liabilities outstanding.

As further discussed in Note (3) below, the Company has reclassified its vital signs monitoring and neonatal intensive care disposables product lines results to discontinued operations. Accordingly, the consolidated financial statements for all periods reported reflect those results as discontinued, and all assets and liabilities related to the product lines and held as of December 31, 2015, are stated as assets and liabilities associated with discontinued operations.

As of March 31, 2016, the Company had cash and cash equivalents plus available borrowings under its revolving loan with its lender, totaling $10,605,000, which the Company believes are sufficient to support the Company's operations for at least the next 12 months. The Company expects to continue to use cash from operations during these periods.  The Company's term loan agreement with General Electric Capital Corporation ("GECC") was consummated on June 27, 2014, (see Note 6) and contains an interest-only payment feature which enabled the Company to defer principal repayments until January 1, 2016. On December 1, 2015, pursuant to a sale of its healthcare financial services business to Healthcare Financial Solutions, LLC ("HFS"), GECC assigned its interest in the Loan Agreement to HFS.

The Company may seek additional capital to support its operations should the need arise. Management believes that it can obtain additional financing; however, there can be no assurance that such additional financing can be obtained on acceptable terms or at all.

On October 26, 2015, the Company entered into an agreement (the "Agreement") pursuant to which it sold certain assets related to its 740 SELECT® vital signs monitoring product line in exchange for $220,000 in cash at closing and a one-year, interest-bearing promissory note in the principal amount of $329,967. The Agreement also provides for royalty payments to the Company for sales of 740 SELECT products during the three-year period following the closing. In accordance with the Company's agreement with HFS, the closing proceeds and the promissory note payments will be applied to the outstanding balance on the Company's term loan.

On March 28, 2016, the Company consummated an agreement pursuant to which it sold certain assets related to its neonatal intensive care disposable product line for $3,350,000, including $3,035,000 in cash at closing after deductions of $100,000 for funds held in escrow for 12 months following the closing and $215,000 for inventory to be purchased following a transition services agreement expected to conclude at December 31, 2016.

The following table presents the assets and liabilities related to the vital signs monitoring and neonatal intensive care product lines classified as assets and liabilities associated with discontinued operations in the consolidated balance sheets as of the periods below:

 

		March 31,				December 31,
		2016				2015
Accounts receivable		$	340,564			$	697,726
Non-trade receivable			315,318				—
Note receivable			337,241				333,005
Inventories			—				190,830
Property and equipment, net			—				6,681
Intangible assets			—				11,102
Total assets associated with
discontinued operations		$	993,123			$	1,239,344
Accounts payable		$	61,617			$	144,106
Accrued expenses			115,505				55,834
Total liabilities associated with
discontinued operations		$	177,122			$	199,940

 

 

 

 

 

 

 

 

 

 

 

The following table represents the financial results of the discontinued operations for the three months ended March 31^st:

 

		Three Months Ended
		March 31,
		2016				2015
Net sales		$	608,161			$	1,286,343
Cost of sales			422,550				882,379
Gross profit			185,611				403,964
Operating expenses			9,859				252,880
Income from discontinued operations
before income taxes			175,752				151,084
Gain on sale of discontinued operations			2,942,095				—
Income taxes			1,091,246				58,808
Income from discontinued operations		$	2,026,601			$	92,276

 

 

 

(4)      Principal Products and Services

The Company has categorized its sales of products and services into the following categories:

·	Tissue oximetry monitoring products – includes sales of the Company's FORE-SIGHT cerebral monitors, sensors, and accessories.

·	Traditional monitoring products – non-invasive blood pressure technology for sale to OEMs and service repairs.

(5)      Inventories, Property and Equipment, and Intangible and Other Assets

Inventories consist of:

 

		March 31,				December 31,
		2016				2015
Raw materials		$	1,189,518			$	919,870
Work-in-process			42,595				20,917
Finished goods			441,724				487,638
Total		$	1,673,837			$	1,428,425

 

 

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets.  Property and equipment includes FORE-SIGHT cerebral oximetry monitors primarily located at customer sites within the United States.  Such equipment, categorized as "Equipment at Customers", is typically held under a no-cost program whereby customers purchase disposable sensors for use with the Company's FORE-SIGHT equipment.  Under this program, the Company retains title to the monitors shipped to its customers and amortizes the monitors using the straight-line method over their estimated useful lives.  Equipment at Customers includes first-generation FORE-SIGHT cerebral oximeters, the net book value of which was reduced to an estimated fair value during the third quarter of 2013 upon the launch of the Company's next-generation FORE-SIGHT ELITE monitor.

Intangible assets consist of patents issued, patents pending, trademarks, and purchased technology which are recorded at cost. Patents are amortized on a straight-line basis over 20 years. Capitalized costs are amortized over their estimated useful lives. Deferred financing costs are amortized over the term of the related agreement.

Intangible and other assets consist of the following:

		March 31,				December 31,
		2016				2015
Patents and other assets		$	907,639			$	905,454
Patents pending			293,294				315,826
			1,200,933				1,221,280
Accumulated amortization			(426,941	)			(408,263	)
Total		$	773,992			$	813,017

 

Amortization expense of intangible and other assets for the three months ended March 31, 2016, was $18,678. Estimated amortization expense for the calendar year 2016 is $68,115. Expected amortization expense of intangible and other assets for the next five calendar years and beyond follows:

2017		$	31,700
2018			28,900
2019			26,600
2020			26,100
2021			26,100
Thereafter			516,100
		$	655,500

 

 

The Company reviews its intangibles and other assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company believes that the carrying amounts of its remaining long-lived assets are fully recoverable.

(6)      Financing Arrangements

Common Stock Public Offering

On February 17, 2015, the Company completed an underwritten public offering (the "Offering") of 7,130,000 shares of its common stock at a price to the public of $1.30 per share, resulting in gross proceeds of $9,269,000. The Offering included an over-allotment option exercised by the underwriter in full to purchase up to 930,000 shares. Pursuant to the underwriting agreement, the underwriter purchased the shares of common stock from the Company at a price of $1.222 per share.  Net proceeds to the Company from the transaction, after fees and expenses, were $8,517,000.  Proceeds from the offering are being used for general corporate purposes.

Private Placement of Preferred Stock

On June 9, 2011, the Company issued 95,500 shares of  Series A Convertible Preferred Stock and 54,500 shares of Series A Exchangeable Preferred Stock (collectively, the "Series A Preferred Stock"), each with a par value $0.001 per share and which are convertible into authorized but unissued shares of common stock, par value $0.004 per share, of the Company. The Series A Exchangeable Preferred Stock has substantially identical terms to the Series A Convertible Preferred Stock.

The Company received an aggregate cash purchase price of $15,000,000, representing a per-share purchase price of $100 for the Series A Convertible Preferred Stock and $100 for the Series A Exchangeable Preferred Stock. The Company received net proceeds, after transaction costs and expenses, of $13,825,000.

The shares of Series A Preferred Stock were initially convertible at the option of the holder into common stock at a conversion price of $2.82 (the "Conversion Price").  The Conversion Price was subject to standard weighted-average anti-dilution adjustments. On July 22, 2013, upon completion of a public offering of the Company's common stock, the Conversion Price was adjusted to $2.389 per share. Any further anti-dilution rights expired during June 2014.

The stated value ($100 per share) of the Series A Preferred Stock accretes at an annual rate of 7% compounded quarterly.  Effective from the third anniversary of the closing, June 9, 2014, such accretion may be paid in cash at the Company's option.  The Series A Preferred Stock is subject to certain default provisions whereby the dividend rate would be increased by an additional 5% per annum.

The Company can force conversion of all, and not less than all, of the outstanding Series A Preferred Stock into Company common stock as long as the closing price of its common stock is at least 250% of the Conversion Price, or $5.9725 per common share, for at least 20 of the 30 consecutive trading days immediately prior to the conversion, and the average daily trading volume is greater than 50,000 shares per day over the 30 consecutive trading days immediately prior to such conversion.  The Company's ability to cause a conversion is subject to certain other conditions as provided pursuant to the terms of the Series A Preferred Stock.

The Series A Preferred Stock is entitled to a liquidation preference equal to the greater of 100% of the accreted value for each share of Series A Preferred Stock, outstanding on the date of a liquidation, plus all accrued and unpaid dividends, or the amount a holder would have been entitled to had the holder converted the shares of Series A Preferred Stock into common stock immediately prior to the liquidation.  Accordingly, based upon the liquidation value of the preferred stock at March 31, 2016, there were 8,787,386 shares of common stock issuable upon conversion of the Series A Preferred Stock. The Series A Preferred Stock votes together with the common stock as if converted on the original date of issuance.  Holders of Series A Preferred Stock are entitled to purchase their pro rata share of additional stock issuances in certain future financings.

The Company's bank agreement with HFS prohibits the payment of cash dividends.  As of March 31, 2016, $5,993,064 in dividend accretion has accumulated on the Series A Preferred Stock.

Debt Financing

On June 27, 2014, the Company entered into a Loan and Security Agreement (the "Loan Agreement") with GECC.  Pursuant to the Loan Agreement, GECC provided the Company with a 48-month secured term loan in the amount of $7,500,000 (the "Term Loan") and a Revolving Loan in the maximum amount of $2,500,000 (the "Revolver").  The Term Loan and the Revolver each mature on June 27, 2018.  The obligations under the Loan Agreement are secured by a lien on substantially all assets of the Company.  On December 1, 2015, pursuant to a sale of its healthcare financial services business to Healthcare Financial Solutions, LLC ("HFS"), GECC assigned its interest in the Loan Agreement to HFS.

The Term Loan bears interest on the outstanding daily balance at a fixed rate of 9.29%.  Under the Term Loan, principal payments were deferred until January 1, 2016, at which time the repayment of principal commenced. Thirty (30) equal payments of $234,838 are scheduled for 30 months with one final payment due in an amount equal to the remaining principal balance on the final maturity date. During the three months ended March 31, 2016, the Company made principal payments totaling $704,515. The outstanding balance at March 31, 2016, also reflects the application of $220,000 of proceeds received by the Company upon the sale of its 740 SELECT vital signs monitoring product line during October 2015.  During 2016, further proceeds of $330,000 from the product line sale are expected to be received by the Company and may be applied by HFS toward the outstanding balance which shall cause the principal amortization to be amended accordingly.

Revolver advances bear interest at a floating rate equal to 5.5% plus the higher of 1.5% per annum or HFS's base rate determined by a LIBOR-based formula.  Amounts not borrowed against the Revolver up to the commitment amount of $2,500,000 bear interest at an annual rate of 0.30%. Maximum borrowings under the Revolver are based upon the Company's eligible accounts receivable as defined in the Loan Agreement. There were no borrowings under the Revolver as of March 31, 2016, and the amount available for borrowing was $2,240,000 as of that date.

The Company has the right to prepay loans under the Loan Agreement in full at any time.  Effective from June 27, 2015, if the Term Loan is prepaid prior to maturity, an additional fee of 1% of the Term Loan amount is due.  Amounts prepaid under the Term Loan may not be re-borrowed.  Upon repayment of the Term Loan at any time, HFS is entitled to an additional fee equal to 4% of the Term Loan amount, or $300,000.

The Loan Agreement contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements, and compliance with applicable laws and regulations. Further, the Loan Agreement contains customary negative covenants limiting the ability of the Company and its subsidiaries, among other things, to grant liens on the pledged collateral, incur additional indebtedness, make certain investments and acquisitions, and dispose of assets outside the ordinary course of business. The Loan Agreement also

 

 

 

 

contains a financial covenant requiring the Company to maintain a continuing level of cash plus available borrowing capacity in an amount not less than three times the Company's monthly cash burn, as defined. Management believes that the Company was in compliance with the Loan Agreement's covenants as of March 31, 2016.

In connection with the Loan Agreement, the Company issued a warrant pursuant to which an affiliate of HFS has the right to purchase 114,213 shares of Company common stock for a ten-year period, expiring on June 27, 2024, at an exercise price of $1.97 per share. The shares associated with the warrant were fully vested at the time of issuance.  The value of the warrant was estimated on the date of grant to be $1.67 per share, using the Black-Scholes option pricing model assuming a weighted-average expected stock price volatility of 86.1%, an expected warrant life of ten years, an average risk-free interest rate of 2.63%, and a 0.0% average dividend yield. The warrant cost of $190,840, as calculated above, has been recorded as a debt issuance cost and is being recognized as interest expense over the 48 months of the Loan Agreement.

The outstanding balance of the Company's term loan is stated for the following periods:

		March 31, 2016												December 31, 2015
		Principal				Unamortized Debt Issuance Cost				Debt, Net of Issuance				Principal				Unamortized Debt Issuance Cost				Debt, Net of Issuance
Balance of term loan		$	6,575,485			$	402,783			$	6,172,702			$	7,280,000			$	455,379			$	6,824,621
Less current portion			2,818,059				194,659				2,623,400				2,817,940				200,948				2,616,992
Long-term portion		$	3,757,426			$	208,124			$	3,549,302			$	4,462,060			$	254,431			$	4,207,629

 

The Company incurred debt issuance costs of $780,810 associated with the Loan Agreement, including $300,000 of accrued fees payable upon repayment of the Term Loan, $190,840 pertaining to the warrant referred to above, and other legal and brokerage costs. The unamortized balance of the debt issuance costs at March 31, 2016, was $402,783 and will be amortized through June 27, 2018, the maturity date of the Term Loan.

(7)     Income (Loss) per Common Share Applicable to Common Stockholders

Basic loss per share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if common stock equivalents such as unvested restricted common shares, outstanding warrants and options, or convertible preferred stock were exercised or converted into common stock.  Therefore, for each period for which a loss is reported, diluted loss per share is equal to basic loss per share because the effect of including such common stock equivalents or other securities would have been anti-dilutive.  Although the Company generated net income applicable to common stockholders for the three months ended March 31, 2016, the Company incurred a loss from continuing operations for the same period.  As such, the Company has excluded potentially dilutive shares from the calculation of income per common share applicable to common stockholders.

At March 31, 2016, stock options and warrants to purchase 3,354,875 and 386,803 shares of common stock, respectively, were excluded from the diluted earnings per share calculation as they would have been anti-dilutive. On an as-converted basis, 8,787,386 shares of common stock pertaining to the private placement of 150,000 shares of Series A Preferred Stock were also excluded as they would have been anti-dilutive.

(8)     Stock Compensation Expense and Share-based Payment Plans

Stock compensation expense was $197,809 and $199,513 for the three-month periods ended March 31, 2016 and 2015, respectively.

As of March 31, 2016, the unrecognized stock-based compensation cost related to stock option awards and unvested restricted common stock was $1,846,000.  Such amount, net of estimated forfeitures, will be recognized in operations through the fourth quarter of 2019.

 

 

 

 

 

The following table summarizes the Company's stock option information as of and for the three-month period ended March 31, 2016:

 

						Weighted-				Aggregate				Weighted-Average
		Option				Average				Intrinsic				Contractual Life
		Shares				Exercise Price				Value (1)				Remaining in Years
Outstanding at December 31, 2015			3,374,875			$	1.95			$	235,443				7.2
Granted			—				—				—
Cancelled or expired			(20,000	)			1.82
Exercised			—				—
Outstanding at March 31, 2016			3,354,875				1.95				47,781				7.0
Exercisable at March 31, 2016			2,000,000			$	2.12			$	3,581				5.8
Vested and expected to vest at March 31, 2016			3,314,247			$	1.95			$	46,455				7.0

 

(1)	The intrinsic value of a stock option is the amount by which the market value, as of the applicable date, of the underlying stock exceeds the option exercise price.

The exercise period for all outstanding stock options may not exceed ten years from the date of grant. Stock options granted to employees typically vest over a four-year period. The Company attributes stock-based compensation cost to operations using the straight-line method over the applicable vesting period.

On June 25, 2014, the Company's stockholders approved an amendment to the CAS Medical Systems, Inc. 2011 Equity Incentive Plan (the "Plan") which increased the maximum number of shares that can be issued under the Plan by 1,000,000 to 3,000,000. Awards that may be granted under the Plan include options, restricted stock and restricted stock units, and other stock-based awards. The Plan limits the issuance of restricted stock to 500,000 shares. As of March 31, 2016, there remained 30,070 shares available for issuance as restricted stock and restricted stock units. The purposes of the Plan are to make available to our key employees and directors, certain compensatory arrangements related to growth in value of our stock so as to generate an increased incentive to contribute to the Company's financial success and prosperity; to enhance the Company's ability to attract and retain exceptionally qualified individuals whose efforts can affect the Company's financial growth and profitability; and to align, in general, the interests of employees and directors with the interests of our stockholders. As of March 31, 2016, there were 43,161 shares remaining available for issuance under the Plan, as amended.

Effective with the Company's 2015 calendar year, each new non-employee member of the Board of Directors is granted a ten-year stock option to purchase 30,000 shares of common stock upon initial appointment to the Board. Further, each member of the Board, after the initial year of service, shall be granted a ten-year, non-qualified stock option to purchase 15,000 shares of common stock, which shall vest in two equal annual installments on each anniversary of the date of the grant.

As of March 31, 2016, 508,000 restricted shares were outstanding at a weighted-average fair-value of $1.78.  Of the total amount outstanding, 150,000 restricted shares of common stock issued to the Company's Chief Executive Officer during August 2010 remained issued and non-vested. Such shares have been fully amortized as of March 31, 2016.

Certain statements included in this report, including without limitation statements in Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the Company's current expectations regarding future events. The Company cautions that such statements are qualified by important factors that could cause actual results to differ materially from expected results which may be contained in the forward-looking statements. All forward-looking statements involve risks and uncertainties, including, but not limited to, the following:  foreign currency fluctuations, regulations and other economic and political factors which affect the Company's ability to market its products internationally, changes in economic conditions that adversely affect demand for the Company's products, potential liquidity constraints, new product introductions by the Company's competitors, increased price competition, rapid technological changes, dependence upon significant customers, availability and cost of components for the Company's products, the impact of any product liability or other adverse litigation, marketplace acceptance for the Company's new products, FDA and other governmental regulatory and enforcement actions, changes in reimbursement levels from third-party payers, changes to federal research and development grant programs utilized by the Company, and other factors described in greater detail in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

On March 28, 2016, the Company entered into an agreement (the "Agreement") pursuant to which it sold its neonatal intensive care disposables product line assets in exchange for $3,350,000 of consideration, including $3,035,000 paid in cash at closing.  The closing proceeds are net of $100,000 to be held in escrow for 12 months following the closing and $215,000 for inventory to be held by the Company and purchased at the conclusion of a transition period, under which the Company will provide various certain services, including materials procurement, inventory control, manufacturing, and order processing and fulfilment throughout the remainder of 2016. The Company recorded a gain on the sale of the neonatal product line assets of $2,942,000 as of March 31, 2016.

On October 26, 2015, the Company entered into an agreement pursuant to which it sold certain assets related to its 740 SELECT vital signs monitoring product line in exchange for $220,000 in cash at closing and a one-year promissory note in the principal amount of $329,967. The agreement also provides for royalty payments to the Company for sales of 740 SELECT products during the three-year period following the closing. In accordance with the Company's agreement with HFS, the closing proceeds and the promissory note payments are being applied to the outstanding loan balance on the Company's term loan.

 

The Company incurred losses from continuing operations before income taxes for the three months ended March 31, 2016 and 2015 of $1,637,000 and $1,669,000, respectively.  Increases in sales from continuing operations, higher gross profit levels, and increased gross profit margin rates were offset by increased operating expenses.  Operating expenses rose primarily as a result of the Company's sales force expansion which occurred during the second quarter of 2015.  The loss from continuing operations was $546,000, or ($0.03) per basic and diluted common share, for the first quarter of 2016 compared to $1,611,000, or ($0.09) per basic and diluted common share, for the first quarter of 2015.

During the first quarter of 2016, the Company sold its neonatal intensive care disposables product line assets for $3,350,000, resulting in a pre-tax gain of approximately $2,942,000. Total income from discontinued operations net of income taxes was $2,027,000, or $0.07 per basic and diluted common share, for the first quarter of 2016 compared to $0.01 per basic and diluted common share for the first quarter of 2015.

Income tax expense of $1,091,000, resulting from the gain on the sale, was offset by an income tax benefit for $1,091,000 recorded against losses generated from continuing operations. The Company does not expect to pay income taxes in 2016.

For the three months ended March 31, 2016, the Company incurred net income applicable to common stockholders of $1,120,000, or $0.04 per basic and diluted common share, compared to a net loss applicable to common stockholders of $1,855,000, or ($0.08) per basic and diluted common share, for the three months ended March 31, 2015.

The following table provides information with respect to net sales by major category for the three months ended March 31^st:

 

		Three Months				Three Months
		Ended				Ended				Increase /				%
		March 31, 2016				March 31, 2015				(Decrease)				Change
Tissue Oximetry Monitoring		$	4,277			$	3,275			$	1,002				31%
Traditional Monitoring			1,179				1,246				(67	)			(5%	)
		$	5,456			$	4,521			$	935				21%
Domestic Sales		$	4,565			$	3,545			$	1,020				29%
International Sales			891				976				(85	)			(9%	)
		$	5,456			$	4,521			$	935				21%

 

Total sales from continuing operations were $5,456,000 for the three months ended March 31, 2016, an increase of $935,000, or 21%, over sales of $4,521,000 for the same three months of the prior year. Worldwide tissue oximetry product sales of $4,277,000 for the three months ended March 31, 2016, were $1,002,000, or 31%, above the $3,275,000 reported for the same period in the prior year led by increased U.S. sales. Sales of traditional monitoring products were $1,179,000 for the three months ended March 31, 2016, a decrease of $67,000, or 5%, from sales of $1,246,000 for the same prior-year period.

Sales of all products to the U.S. market accounted for $4,565,000, or 84%, of the total sales reported for the three months ended March 31, 2016, an increase of $1,020,000, or 29%, from the $3,545,000 of U.S. sales reported for the three months ended March 31, 2015. International sales of all products accounted for $891,000, or 16%, of the total sales reported for the three months ended March 31, 2016, a decrease of $85,000, or 9%, from the $976,000 reported for the same period of the prior year.

The following table provides additional information with respect to tissue oximetry sales for the three months ended March 31^st:

 

		Three Months				Three Months
		Ended				Ended				Increase /				%
		March 31, 2016				March 31, 2015				(Decrease)				Change
Sensor Sales		$	3,734			$	2,923			$	811				28%
Monitors & Accessories			543				352				191				54%
		$	4,277			$	3,275			$	1,002				31%
Domestic Sales		$	3,534			$	2,570			$	964				38%
International Sales			743				705				38				5%
		$	4,277			$	3,275			$	1,002				31%

 

Worldwide sales of tissue oximetry products increased 31% for the first quarter of 2016, led by increased domestic sensor and monitor sales which were partially offset by lower sales of monitors to our international distributors. The Company shipped a net of 80 FORE-SIGHT monitors to customers in the first quarter, bringing the Company's worldwide net cumulative shipments of oximetry monitors, as of March 31, 2016, to 1,788 units, an increase of 27% above the net cumulative shipments of 1,408 units as of March 31, 2015, including the U.S. installed base which expanded to 960, a 26% increase over March 31, 2015.

U.S. tissue oximetry product sales increased 38% to $3,534,000, driven by increases in both sensor and monitor sales. Domestic sensor sales increased 30% over the first quarter of the prior year. International tissue oximetry product sales increased $38,000, or 5%.  Lower international sales of monitors were more than offset by increases in sensor sales.

 

 

 

Gross profit was $2,881,000, or 52.8% of sales, for the three months ended March 31, 2016, compared to $2,265,000, or 50.1% of sales for the three months ended March 31, 2015. The gross profit improvement resulted primarily from favorable product mix driven by increased FORE-SIGHT sales both in total and as a percentage of the Company's overall sales. Tissue oximetry sales continue to grow as a percentage of the Company's overall sales reaching 78% of total sales for the first quarter of 2016 led by disposable sensor sales which accounted for 68% of all Company sales. FORE-SIGHT sensor sales contain more favorable gross margin rates compared to our traditional monitoring products. Management expects gross profit rates to continue to improve as FORE-SIGHT ELITE sensor sales expand and become an increasing percentage of overall sales.

Total operating expenses for the three months ended March 31, 2016, increased $606,000, or 16%, to $4,323,000, from $3,717,000 for the three months ended March 31, 2015.  Operating expenses for the first quarter of 2016 more closely reflected the quarterly spending levels incurred for the remaining three quarters of 2015, following the Company's expansion of its U.S. FORE-SIGHT sales force in the second quarter of 2015. Management expects operating expenses for the full-year 2016 to increase only modestly over 2015 levels.

Research and development ("R&D") expenses increased for the three months ended March 31, 2016, to $955,000, from $833,000 for the three months ended March 31, 2015.  The increase for the three-month period was primarily related to increased clinical studies and higher salaries and related benefits which were partially offset by reductions in engineering project spending and clinical studies.

Selling, general and administrative ("S,G&A") expenses increased $484,000, or 17%, to $3,368,000 for the three months ended March 31, 2016, compared to $2,883,000 for the three months ended March 31, 2015.  The increases resulted primarily from the expansion of the U.S. FORE-SIGHT sales force completed during the second quarter of 2015.

Interest expense of $199,000 for the three months ended March 31, 2016, reflected the borrowing costs associated with the Company's loan agreement with HFS, including interest on the term debt and the line-of-credit and amortization of both the final payment fee and the warrants granted to HFS.

The Company does not expect to generate taxable income for its 2016 fiscal year.  Income tax benefits that may be generated during 2016 would be offset by a deferred income tax asset valuation allowance. Management established the valuation allowance as a result of cumulative pre-tax losses and its estimates of future taxable income. Management has continued to perform the required analysis regarding the realization of our deferred income tax assets, concluding that a full valuation allowance is warranted.

As of March 31, 2016, the Company's cash and cash equivalents totaled $8,365,000, compared to $7,528,000 as of December 31, 2015. Working capital increased $843,000 to $8,184,000 as of March 31, 2016, from $7,341,000 as of December 31, 2015, as a result of the proceeds of $3,035,000 received from the sale of the Company's neonatal product line assets.

Cash used in operating activities of continuing operations for the three months ended March 31, 2016, was $1,355,000, compared to cash used in operating activities of continuing operations of $1,182,000 for the same period in the prior year. The increase in cash used from operations resulted from unfavorable changes in various working capital items, primarily accounts receivable and inventory.

Cash used in investing activities of continuing operations was $405,000 for the three months ended March 31, 2016, compared to cash used in investing activities of continuing operations of $213,000 for the same period in the prior year.

Cash used in financing activities of continuing operations was $728,000 for the three months ended March 31, 2016, primarily due to the repayment of principal effective January 1, 2016, under the Company's term debt agreement.  Cash provided by financing activities of continuing operations for the three months ended March 31, 2015, of $7,543,000, largely reflected the net proceeds after transaction costs of $8,517,000 from the Company's public offering consummated in February 2015 and repayment of $1,000,000 of borrowings from the line-of-credit.

 

 

 

On June 27, 2014, the Company entered into a Loan and Security Agreement (the "Loan Agreement") with GECC.  Pursuant to the Loan Agreement, GECC provided the Company with a 48-month secured term loan in the amount of $7,500,000 (the "Term Loan") and a Revolving Loan in the maximum amount of $2,500,000 (the "Revolver").  The Term Loan and the Revolver each mature on June 27, 2018.  The obligations under the Loan Agreement are secured by a lien on substantially all assets of the Company.  On December 1, 2015, pursuant to a sale of its healthcare financial services business to Healthcare Financial Solutions, LLC ("HFS"), GECC assigned its interest in the Loan Agreement to HFS.

The Term Loan bears interest on the outstanding daily balance at a fixed rate of 9.29%.  Under the Term Loan, principal payments were deferred until January 1, 2016, at which time the repayment of principal commenced. Equal payments of $234,828 are scheduled for 30 months with one final payment due in an amount equal to the remaining principal balance on the final maturity date.  During the three months ended March 31, 2016, the Company made principal payments totaling $704,515. The outstanding balance at March 31, 2016, also reflects the application of $220,000 of proceeds received by the Company upon the sale of its 740 SELECT vital signs monitoring product line during October 2015.  During 2016, further proceeds of $330,000 from the product line sale are expected to be received by the Company and may be applied by HFS toward the outstanding balance which shall cause the principal amortization to be amended accordingly.

Revolver advances bear interest at a floating rate equal to 5.5% plus the higher of 1.5% per annum or HFS's base rate determined by a LIBOR-based formula.  Amounts not borrowed against the Revolver up to the commitment amount of $2,500,000 bear interest at an annual rate of 0.30%. Maximum borrowings under the Revolver are based upon the Company's eligible accounts receivable as defined in the Loan Agreement. There were no borrowings under the Revolver as of March 31, 2016, and the amount available for borrowing was $2,240,000 as of that date.

The Company has the right to prepay loans under the Loan Agreement in full at any time.  Effective from June 27, 2015, if the Term Loan is prepaid prior to maturity, an additional fee of 1% of the Term Loan amount is due.  Amounts prepaid under the Term Loan may not be re-borrowed.  Upon repayment of the Term Loan at any time, HFS is entitled to an additional fee equal to 4% of the Term Loan amount, or $300,000.

The Loan Agreement contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements, and compliance with applicable laws and regulations. Further, the Loan Agreement contains customary negative covenants limiting the ability of the Company and its subsidiaries, among other things, to grant liens on the pledged collateral, incur additional indebtedness, make certain investments and acquisitions, and dispose of assets outside the ordinary course of business. The Loan Agreement also contains a financial covenant requiring the Company to maintain a continuing level of cash plus available borrowing capacity in an amount not less than three times the Company's monthly cash burn, as defined.  Management believes that the Company was in compliance with the Loan Agreement's covenants as of March 31, 2016.

The Company has also financed various insurance premiums with notes payable aggregating $237,000 which will be repaid by December 2016.

As of March 31, 2016, the Company had cash and cash equivalents plus available borrowings under its revolving loan totaling $10,605,000, which the Company believes are sufficient to support the Company's operations for at least the next 12 months. The Company expects to continue to require cash for its operations during these periods.  The Company may seek additional capital to support its operations should the need arise. Management believes that it can obtain additional financing; however, there can be no assurance that such additional financing can be obtained on acceptable terms or at all.

The Company's discussion and analysis of financial condition and results of operations are based on the consolidated financial statements.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the amounts reported in them.  The Company's critical accounting policies and estimates include those related to revenue recognition, the valuations of inventories and deferred income tax assets, measuring stock compensation and warranty costs, determining useful lives of intangible assets, and making asset impairment valuations.    The Company bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.  For additional information about the Company's critical accounting policies and estimates, see Item 7 and Note 2 to the financial statements included in the Company's Form 10-K for the year ended December 31, 2015.  There were no significant changes in critical accounting policies and estimates during the three months ended March 31, 2016.

On August 27, 2014, the Financial Accounting Standards Board (the "FASB") issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern.  Prior to the new guidance, there was no specific guidance in US GAAP about management's responsibility to evaluate and report on going concern.  ASU 2014-15 requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related disclosures.  The new standard is effective for the Company for the year ending December 31, 2016.

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest – Imputation of Interest, to simplify the presentation of debt issuance costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt obligation be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the treatment of debt discounts, rather than being presented as an asset. The recognition and measurement guidance for debt issuance costs are not affected by the amendment in ASU 2015-03 which becomes effective for financial statements issued for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The Company adopted ASU 2015-03 during the three months ended March 31, 2016. The new standard did not have a material impact on the Company's financial statements. The Company has reclassified $402,783 and $455,379 of assets for the periods ending March 31, 2016, and December 31, 2015, respectively, and reported those amounts as reductions in the principal amounts of term debt liabilities outstanding.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases - Topic 842. ASU 2016-02 which requires the recognition by lessees on the balance sheet of lease assets and lease liabilities for those leases classified as operating leases. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued.

The Company at times has certain exposures to market risk related to changes in interest rates. The Company holds no derivative securities for trading or other purposes and is not subject in any material respect to currency or other commodity risk.

 

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 March 31, 2016. 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 March 31, 2016, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Reference is made to the Certifications of the Chief Executive Officer and the Chief Financial Officer about these and other matters attached as Exhibits 31.1, 31.2, and 32.1 to this quarterly report on Form 10-Q.

 

 

 

2.1	Asset Purchase Agreement dated March 28, 2016 by and among Trinity Medical Devices Inc. and CAS Medical Systems, Inc.

 

31.1	Certification pursuant to Rule 13a-14(a) of Thomas M. Patton, President and Chief Executive Officer

 

31.2	Certification pursuant to Rule 13a-14(a) of Jeffery A. Baird, Chief Financial Officer

 

32.1	Certification pursuant to 18 U.S.C. 1350 of Periodic Financial Report of Thomas M. Patton, President and Chief Executive Officer, and Jeffery A. Baird, Chief Financial Officer

 

101	Interactive data files pursuant to Rule 405 of Regulation S-T.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.