Business Context and Reporting Period
Company: Cardo Medical, Inc. (Note: Request metadata listed "Biocardia, Inc.", but the filing text identifies the registrant as Cardo Medical, Inc.)
Reporting Period: Quarterly period ended September 30, 2010 (Form 10-Q).
Business Overview: An orthopedic medical device company specializing in reconstructive joint devices (knee, hip) and spinal surgical devices. The company operates through two segments: Reconstructive Division and Spine Division.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Net Sales | $771,000 | $2,750,000 |
| Gross Profit (Deficit) | $(1,018,000) | $568,000 |
| Net Loss | $(8,113,000) | $(11,050,000) |
| Cash and Cash Equivalents (End of Period) | $196,000 | $196,000 |
| Net Cash Used in Operating Activities | N/A | $(3,707,000) |
| Total Assets | $5,643,000 | $5,643,000 |
| Total Liabilities | $1,905,000 | $1,905,000 |
| Accumulated Deficit | $(22,215,000) | $(22,215,000) |
Note: Gross profit for the three-month period is negative due to significant inventory reserves. Excluding the $1.62 million inventory reserve, the gross margin was approximately 78.4% for the quarter.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 77% for the quarter ($771k vs. $436k) and 109% for the nine-month period ($2.75M vs. $1.31M) compared to 2009, driven by wider acceptance of knee and spine products.
- Impairment Charges: The company recorded a non-cash impairment charge of $5.283 million in Q3 2010 ($4.05M for intangible assets and $1.233M for goodwill). There were no such charges in the comparable 2009 periods.
- Inventory Reserves: A $1.62 million inventory reserve was recorded in Q3 2010 due to reduced future projected revenues. No such reserve existed as of December 31, 2009.
- Liquidity Deterioration: Cash balances plummeted from $4.97 million at year-end 2009 to $196,000 at September 30, 2010.
- Operating Expenses: Selling, general, and administrative expenses increased significantly due to the impairment charges and higher sales commissions, though professional fees decreased as corporate expansion projects were deferred.
Guidance, Outlook, and Risks
Going Concern Warning: Management explicitly states there is "substantial doubt about the Company's ability to continue as a going concern." The company anticipates sustaining further losses in Q4 2010 and requires additional capital to supplement operations.
Management Actions: In October and November 2010, management took drastic measures including:
- Terminating over half of the employees.
- CEO and President foregoing salaries.
- Reducing office space by not renewing the headquarters lease.
- Scaling back R&D and deferring manufacturing of inventory.
- Engaging an investment adviser to seek capital or strategic alternatives (including asset sales).
Recent Financing: In November 2010, the company secured $500,000 via two promissory notes (one lender is the CEO's brother) bearing 12% interest, maturing in March 2011. Proceeds are pledged against all company assets except accounts receivable.
Risks: Key risks include the inability to raise further capital, dependence on a limited number of customers (two customers accounted for 38.9% of receivables), reliance on single-source manufacturers, and potential product liability claims.
Investor Verification Checklist
- Cash Runway: Verify if the $500,000 in subsequent financing and remaining cash ($196k) are sufficient to cover operating costs through the end of 2010 given the recent workforce reduction.
- Asset Valuation: Confirm the recoverability of remaining inventory ($3.045M) given the recent $1.62M write-down and the company's liquidity crisis.
- Debt Covenants: Review the terms of the November 2010 promissory notes, specifically the security interest granted on all assets and the 12% interest rate.
- Customer Concentration: Assess the risk of losing the two customers representing 28.6% and 10.3% of accounts receivable.
- Strategic Alternatives: Monitor progress on the engagement of the investment adviser regarding potential asset sales or strategic mergers.