Business Context and Reporting Period
Company: Cardo Medical, Inc. (Note: Request metadata listed "Biocardia," but the filing is for Cardo Medical, Inc.)
Reporting Period: Quarterly period ended September 30, 2009 (Form 10-Q).
Business Overview: An early-stage orthopedic medical device company specializing in reconstructive joint devices (knee, hip) and spinal surgical devices. The company operates two reportable segments: Reconstructive Division and Spine Division.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Sales | $436,000 | $1,314,000 |
| Gross Profit | $352,000 (80.7% margin) | $1,060,000 (80.7% margin) |
| Net Loss | $(1,205,000) | $(3,768,000) |
| Cash and Cash Equivalents (Sep 30, 2009) | $1,607,000 | |
| Net Cash Used in Operating Activities (9 Months) | $(3,630,000) | |
| Total Assets | $11,239,000 | |
| Total Liabilities | $1,028,000 (Current only) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 6% in the quarter ($436k vs. $411k) and 41% in the nine-month period ($1.314m vs. $932k) compared to 2008. Growth was driven by the launch of Hip products and wider acceptance of Spine products, partially offset by a decline in Knee product sales.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses increased significantly, rising 32% in the quarter ($1.44m vs. $1.09m) and 82% in the nine-month period ($4.52m vs. $2.49m). Increases were attributed to higher labor costs, depreciation/amortization from new instrumentation, and expanded operations.
- R&D Expenses: R&D expenses decreased 13% in the quarter ($123k vs. $142k) and 74% in the nine-month period ($329k vs. $1.288m). The nine-month decrease was primarily due to a one-time $938k in-process R&D charge in 2008 related to the acquisition of a non-controlling interest.
- Inventory Build-up: Inventory increased from $942k to $1.99m, resulting in a $1.051m cash outflow in operating activities to support anticipated sales growth.
Outlook, Risks, and Unusual Items
- Liquidity and Going Concern: Management has expressed substantial doubt about the company's ability to continue as a going concern. As of September 30, 2009, cash was $1.6m. Subsequent to the balance sheet date, the company used $1.17m to complete the Vertebron, Inc. asset purchase and raised approximately $3.2m via private placement. Despite this, funds are not projected to meet working capital needs for the next twelve months without additional financing.
- Subsequent Events:
- Vertebron Acquisition: On October 1, 2009, the company completed the purchase of substantially all assets of Vertebron, Inc. for $1.3m. This transaction is not reflected in the September 30 financial statements.
- Private Placement: On October 27, 2009, the company sold approximately 9.95 million shares at $0.35 per share for gross proceeds of $3.48m.
- Internal Controls: The company concluded that disclosure controls and procedures were not effective as of September 30, 2009, due to material weaknesses regarding qualified staff and reporting of unusual transactions.
- Risks: Key risks include the need for additional capital, dependence on third-party reimbursement, reliance on single-source manufacturers, and the early-stage nature of the business with a history of losses.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $3.2m raised in October 2009 against the company's burn rate and the $1.3m Vertebron acquisition cost.
- Going Concern Status: Confirm if the company has secured additional debt or equity financing to cover the projected 12-month working capital deficit.
- Vertebron Integration: Assess the strategic value and integration progress of the Vertebron assets acquired in October 2009.
- Internal Controls: Review the remediation plan for the material weaknesses in internal controls over financial reporting.
- Product Mix Margins: Monitor the impact of the shifting product mix (lower-margin Hip products vs. higher-margin Knee products) on future gross margins.