Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011, for Cardo Medical, Inc. (also referenced as Biocardia, Inc. in metadata). The company, formerly an orthopedic medical device manufacturer, has discontinued its Reconstructive and Spine Divisions due to insufficient working capital and an inability to secure financing. Management has placed substantially all assets up for sale, raising substantial doubt about the company's ability to continue as a going concern. Continuing operations are limited to administrative expenses required to maintain public company status.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Sales (Continuing) | $0 | $0 |
| Net Loss | $(321,000) | $(1,455,000) |
| Loss from Continuing Operations | $(125,000) | $(184,000) |
| Loss from Discontinued Operations | $(196,000) | $(1,271,000) |
| Cash and Cash Equivalents | $241,000 | $3,688,000 (End of Q1 2010) |
| Net Cash Used in Operating Activities | $(558,000) | $(935,000) |
| Total Debt (Notes Payable) | $1,224,000 | $0 (Q1 2010) |
| Assets Held for Sale | $4,713,000 | $4,765,000 |
Material Changes vs. Prior Period
- Revenue and Operations: The company reported zero net sales from continuing operations. The Reconstructive and Spine Divisions are classified as discontinued operations. Discontinued operations sales were $547,000 in Q1 2011 compared to $902,000 in Q1 2010.
- Profitability: The net loss improved significantly to $(321,000) from $(1,455,000) in the prior year, primarily due to a reduction in losses from discontinued operations and lower general and administrative expenses ($101,000 vs. $191,000).
- Liquidity and Debt: Cash balances decreased from $127,000 at year-end 2010 to $241,000 at March 31, 2011, driven by financing activities. The company incurred $1,224,000 in new debt (Arthrex Note) to repay prior related-party notes and fund working capital, whereas no debt was outstanding in Q1 2010.
- Asset Structure: Substantially all operating assets (inventory and property/equipment) are now classified as "Assets held for sale" totaling $4.7 million.
Outlook, Risks, and Unusual Items
- Asset Sales:
- Reconstructive Division: An Asset Purchase Agreement with Arthrex, Inc. was signed in January 2011 for approximately $9.9 million plus inventory value. Closing was expected in Q2 2011, with an amended deadline of June 24, 2011. The deal includes a 5% royalty on future sales.
- Spine Division: Sold in April 2011 (subsequent event) to Altus Partners, LLC for $3 million. Proceeds were used to repay $974,000 of the Arthrex Note.
- Going Concern: The filing explicitly states that the company's ability to continue as a going concern is in doubt. If the Reconstructive Division sale does not close, the company may need to immediately raise capital or cease operations.
- Cost Reductions: Management terminated over half of its employees, reduced office space, and had the CEO and President forego salaries from October 2010 to April 2011.
- Debt Terms: The Arthrex Note bears 6% interest (12% upon default) and is secured by all company assets. It is due upon the closing of the asset sale or termination of the agreement.
Investor Verification Checklist
- Verify the closing status of the Reconstructive Division asset sale to Arthrex, Inc., as the company's survival depends on this transaction.
- Confirm the final proceeds from the Spine Division sale and the full repayment status of the Arthrex Note.
- Review the company's cash burn rate for continuing operations (legal, accounting, insurance) to assess runway if asset sales are delayed.
- Check for any updates on the "End Date" for the Arthrex transaction, as failure to close by the deadline allows Arthrex to terminate the agreement.
- Monitor the status of the 5% royalty agreement with Arthrex as a potential future revenue stream.