BCDA

Business Context and Reporting Period

Company: Cardo Medical, Inc. (formerly clickNsettle.com, Inc.)
Reporting Period: Quarter and nine months ended September 30, 2008
Business Overview: An early-stage orthopedic medical device company specializing in reconstructive joint devices (knee, hip) and spinal surgical devices. The company operates as a "smaller reporting company."
Key Event: On August 29, 2008, the company consummated a reverse takeover of clickNsettle.com, Inc. to become a publicly traded entity. The financial statements reflect the accounts of Cardo Medical, LLC carried forward as the acquiring entity.

Key Financial Metrics

Cash Flow (Nine Months Ended Sep 30, 2008):
- Operating Activities: $(1,967,000) used
- Investing Activities: $(1,130,000) used
- Financing Activities: $6,775,000 provided

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 101.1% for the nine months ended September 30, 2008, compared to the same period in 2007. This was driven by increased adoption of the Align 360 unicompartmental knee device and the introduction of licensed products.
• Expense Surge:
  • R&D Expenses: Increased 1,035.8% (nine months) primarily due to $937,500 in in-process R&D expenses acquired from Accelerated Innovation, LLC.
  • SG&A Expenses: Increased 336.6% (nine months) due to $1.184 million in merger-related legal and accounting fees, increased salaries, and amortization of intangible assets.
• Loss Expansion: Net loss for the nine months increased from $(199,000) in 2007 to $(3,522,000) in 2008, largely attributable to the acquisition costs and merger expenses.
• Balance Sheet Transformation: Total assets grew from $2.155 million (Dec 31, 2007) to $14.23 million (Sep 30, 2008), driven by cash inflows from financing and the recognition of goodwill ($2.69 million) and intangible assets ($5.165 million) from acquisitions.

Outlook, Risks, and Management Commentary

Management Commentary:

• The company expects to incur significant losses for the next several years as it accelerates R&D and product development.
• The Align 360 Total Knee System received FDA 510(k) approval and is planned for commercial release in Q2 2009.
• Management projects that cash on hand ($3.9 million as of Nov 13, 2008) is sufficient to meet working capital needs for the next 12 months.

Risks and Contingencies:

• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of September 30, 2008, due to material weaknesses. Remediation efforts include hiring additional accounting staff.
• Liquidity: The company may need to raise additional funds in the future, which may not be available on acceptable terms.
• Customer Concentration: As of September 30, 2008, four customers accounted for 82% of sales.
• Regulatory: Subject to FDA regulations; failure to comply could interrupt manufacturing and sales.
• Single Source Manufacturing: Reliance on single-source manufacturers creates supply chain risks.

Investor Verification Checklist

• Reverse Merger Accounting: Verify the treatment of the reverse takeover of clickNsettle.com, Inc. and the conversion of share counts (203,360,271 shares outstanding).
• Material Weaknesses: Review the specific nature of the internal control weaknesses disclosed in the Form 8-K (Sept 9, 2008) and the progress of remediation.
• Acquisition Valuation: Scrutinize the $937,500 in-process R&D expense and the $5.165 million in intangible assets recognized from the Accelerated Innovation acquisition.
• Cash Burn Rate: Confirm the sustainability of the $1.967 million operating cash burn over the nine-month period against the $4.582 million cash balance.
• Customer Concentration: Assess the risk associated with 82% of revenue coming from only four customers.