Biocardia, Inc. annual report, Q4 FY2008

Business Context and Reporting Period

Company: Cardo Medical, Inc. (formerly clickNsettle.com, Inc. via reverse merger)

Reporting Period: Fiscal year ended December 31, 2008

Business Overview: Cardo is an early-stage orthopedic medical device company specializing in reconstructive joint devices (knee, hip) and spinal surgical devices. The company operates through two divisions: Cardo Orthopedics and Cardo Spine. In August 2008, Cardo completed a reverse merger with clickNsettle.com, Inc. (CKST) to become a publicly traded entity on the OTC Bulletin Board under the symbol "CDOM.OB."

Key Transactions: During 2008, Cardo acquired 100% ownership of its subsidiaries (Accelerated Innovation, LLC, Cervical Xpand, LLC, and Uni-Knee, LLC) and raised approximately $12.975 million in private placements to fund these acquisitions and operations.

Key Financial Metrics

Metric (in thousands) 2008 2007 (Pro Forma)
Net Sales $1,268 $800
Gross Profit $1,071 $706
Gross Margin 84.5% 88.3%
Operating Loss $(5,632) $(471)
Net Loss $(5,800) $(298)
Cash and Cash Equivalents (Year End) $3,095 $904
Total Assets $11,474 $2,155
Total Liabilities $777 $233

Segment Performance (2008): The Reconstructive Division generated $1,188 in sales with a net income of $496. The Spine Division generated $80 in sales with a net income of $54. Corporate expenses resulted in a net loss of $(6,350).

Material Changes vs. Prior Period

  • Revenue Growth: Net sales increased 58.5% to $1.268 million, driven by increased sales of unicompartmental knee products and the introduction of patellofemoral, hip, and spine products.
  • Expense Surge: Operating expenses increased significantly due to the reverse merger transaction costs ($978k), increased R&D spending ($1.332 million, including $938k in acquired in-process R&D), and higher SG&A related to new hires and amortization of intangible assets.
  • Impairment Charges: The company recognized a $1.457 million goodwill impairment charge related to the Cervical Xpand reporting unit, as the technology was deemed not to be used for future revenue generation.
  • Liquidity Position: Cash balances increased from $904k to $3.095k due to financing activities, though the company reported a substantial doubt about its ability to continue as a going concern as of March 2009 due to cash burn.

Guidance, Outlook, Risks, and Unusual Items

Going Concern Uncertainty: Management explicitly states that the company sustained losses in 2008 and requires outside capital to sustain operations. As of March 2009, cash on hand was approximately $1.6 million, which is not projected to meet working capital needs for the next 12 months. The company plans to raise additional funds through debt or equity sales.

Internal Control Weaknesses: The company identified material weaknesses in internal control over financial reporting, including a lack of documentation for financial reporting processes, insufficient qualified staff, and inadequate review of unusual transactions (such as the reverse merger).

Risks:

  • Capital Availability: No assurance that debt or equity financing will be available on acceptable terms.
  • Regulatory: Products are subject to FDA regulation; failure to maintain compliance could halt sales.
  • Competition: Highly competitive market dominated by larger companies with greater resources.
  • Intellectual Property: Risks of patent infringement litigation and inability to protect proprietary technology.

Unusual Items: The $1.457 million goodwill impairment and the $938 million in-process R&D expense (expensed upon acquisition) were significant non-recurring or acquisition-related items impacting the 2008 bottom line.

Investor Verification Checklist

  • Cash Runway: Verify current cash balances and the status of any new financing efforts post-March 2009 to confirm the company can meet its 12-month working capital needs.
  • Internal Controls: Review subsequent filings (10-Q) to determine if the material weaknesses in internal controls have been remediated.
  • Revenue Concentration: Note that three customers comprised 67.5% of net sales in 2008; verify if this concentration persists.
  • Product Pipeline: Assess the commercial viability of the Spine Division, given the goodwill write-off associated with its technology.
  • Stock Liquidity: Confirm trading status on the OTC Bulletin Board and any progress toward listing on a national exchange (NYSE Amex).