Notes to Consolidated Financial Statements
CAS Medical Systems, Inc. ("CASMED" or the "Company") is a medical technology company that develops, manufactures, and distributes non-invasive patient monitoring products that are vital to patient care and are consistent with our vision that no patient is harmed by undetected tissue hypoxia. The Company's products include the FORE-SIGHT® series of absolute tissue oximeters and sensors, including the FORE-SIGHT ELITE® oximeter. We also perform service repairs that are separately reported as Service/Other. CASMED markets its products worldwide through its sales force, distributors, and manufacturers' representatives. The Company's main facility and manufacturing operations are located in the United States.
(2)
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Estimates that are particularly sensitive to change in the near-term are inventory valuation allowances, deferred income tax asset valuation allowances, allowance for doubtful accounts, and warranty accrual. Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of CASMED and one inactive subsidiary.
Cash and cash equivalents
The Company considers all highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost, determined by the first-in-first-out method, or market.
Property and equipment
Property and equipment, including leasehold improvements, are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets, which range from two to five years for machinery and equipment. Leasehold improvements are amortized over the life of the improvement or the lease term, whichever is shorter. Maintenance and repairs are charged to expense when incurred.
The Company owns certain FORE-SIGHT tissue oximetry monitors primarily located at customer sites within the United States. Such equipment is typically held under a no-cost program whereby customers purchase disposable sensors for use with the Company's equipment. The Company retains title to the monitors shipped to its customers under this program. The monitors are depreciated to cost-of-sales on a straight-line basis over five years.
Depreciation expense on property and equipment was $1,013,000 in 2018 and $987,000 in 2017.
Intangible and other assets
The Company reviews its intangible and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During 2018 and 2017, the Company charged-off $21,340 and $17,276, respectively, of capitalized costs related to certain abandoned patents and trademarks. The Company believes that the carrying amounts of its long-lived assets are fully recoverable.
Intangible and other assets at December 31, 2018 and 2017 consist of:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Patents and other assets
|
|
$
|
782,566
|
|
|
$
|
738,805
|
|
Patents pending
|
|
|
301,564
|
|
|
|
297,746
|
|
|
|
|
1,084,130
|
|
|
|
1,036,551
|
|
Accumulated amortization
|
|
|
(262,589
|
)
|
|
|
(234,160
|
)
|
Total
|
|
$
|
821,541
|
|
|
$
|
802,391
|
|
Intangible and other assets are stated at cost. Patents are amortized on a straight-line basis over 20 years.
Expected amortization expense of intangible assets as of December 31, 2018, over the next five calendar years follows:
2019
|
|
$
|
38,000
|
|
2020
|
|
$
|
38,000
|
|
2021
|
|
$
|
37,000
|
|
2022
|
|
$
|
37,000
|
|
2023
|
|
$
|
36,000
|
|
Sales and accounts receivable recognition
In April 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-10,
Topic 606, Revenue from Contracts with Customers
. ASU 2016-10 amends the revenue recognition standard it had issued in May 2014 (ASU 2014-09). The Company adopted the new revenue standard effective January 1, 2018, using the Modified Retrospective method, under which prior-year results are not restated; however, supplemental information regarding the impact of the new standard must be provided, if material. The standard, including the cumulative effect of its adoption, did not have a material impact on the Company's financial statements.
The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which an entity is expected to be entitled in exchange for those goods and services. The amendments in ASU 2016-10 clarify the identification of performance obligations and the licensing implementation guidance. In adopting ASU 2016-10, the Company reviewed the five steps considered fundamental to determining when to recognize revenue. Those five steps are as follows: (1) Identify the contract(s) with a customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations in the contract; and (5) Recognize revenue when (or as) the entity satisfied a performance obligation.
Terms of sale for most domestic sales are FOB origin and for most international sales are EX-Works, reflecting that ownership and risk-of-loss are assumed by the buyer at the shipping point. In addition, the Company has certain agreements with its customers to ship FOB destination, reflecting that ownership and risk-of-loss are assumed by the buyer upon receipt. While the Company accepts returns of products from its customers from time to time for various reasons, including defective goods, order entry, shipping, or other errors, the Company's business practices do not include providing a right-of-return at the time of sale. Historically, such returns have not been significant. Payment terms range from prepayment to net 90 days, depending upon certain factors, including customer credit worthiness, geographic location, and customer type (i.e., end-user, distributor, government, or private entity) and also includes irrevocable letters of credit for certain international shipments. Price discounts that may be taken by customers under contractual arrangements for payment of invoices within specified periods are recorded as reductions to net sales. Further, the Company accrues expected payment discounts based upon specific customer accounts receivable balances. The Company does not incur post-shipment obligations with the exception of product warranties, which are generally fulfilled from the Company's corporate facility and which costs are not material, relative to the sale of the product. Accounts receivable are charged to the allowance for doubtful accounts when deemed uncollectible.
In the normal course of business, the Company grants credit to its customers and does not require collateral. Credit losses are provided for in the period the related sales are recognized, based upon experience and an evaluation of the likelihood of collection. Credit losses have been within management's expectations.
The Company's five largest customers accounted for approximately 16% and 14% of sales from continuing operations in 2018 and 2017, respectively. Sales to each of these customers accounted for less than 10% of sales from continuing operations.
Income taxes
On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation in the form of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act established new tax laws that affected 2017 and beyond. One of the principal new tax laws effective January 1, 2018, was the reduction on the U.S. Federal corporate income tax rate from 35% to 21%.
The Company recognizes deferred income tax assets and liabilities for future tax consequences resulting from differences between the book and tax bases of existing assets and liabilities as well as for loss carryforwards. A valuation allowance is provided for that portion of deferred income tax assets which may not be realized.
The Company accrues for uncertain tax positions in accordance with accounting standards which prescribe a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The Company files U.S. Federal and multiple State income tax returns. The Company's U.S. Federal and State income tax returns prior to 2015 are closed for audit. There have been no interest and penalties related to uncertain tax positions for any periods reported herein.
Warranty costs
The Company generally warrants products against defects and failures for up to two years and records the estimated cost of such warranties at the time the sale is recorded. Estimated warranty costs are based upon actual past experiences of product returns and the related estimated cost of labor and material to make the necessary repairs.
A summary of the changes in the Company's warranty accrual at December 31, 2018 and 2017 follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
65,000
|
|
|
$
|
100,000
|
|
Provision
|
|
|
14,752
|
|
|
|
27,616
|
|
Warranty costs incurred
|
|
|
(29,752
|
)
|
|
|
(62,616
|
)
|
Ending balance
|
|
$
|
50,000
|
|
|
$
|
65,000
|
|
Research and development costs
The Company expenses all research and development costs as incurred. Research and development ("R&D") includes, among other expenses, direct costs for salaries, employee benefits, professional services, clinical studies, materials, and facility-related expenses.
Advertising costs
Non-direct response advertising costs are expensed as incurred and include product promotion, samples, meetings and conventions, and print media. Advertising expense related to continuing operations was $710,000 and $696,000 in 2018 and 2017, respectively.
Loss per common share applicable to common stockholders
Basic loss per share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if common stock equivalents, such as unvested restricted common shares, outstanding warrants and options, or convertible preferred stock were exercised or converted into common stock. For all periods reported, the Company incurred net losses from continuing operations. Therefore, for each period reported, diluted loss per share is equal to basic loss per share because the effect of including such common stock equivalents or other securities would have been anti-dilutive.
At December 31, 2018, stock options and warrants to purchase 3,238,250 and 472,782 shares of common stock, respectively, were excluded from the diluted earnings per share calculation as they would have been anti-dilutive. On an as-converted basis, 10,635,019 shares of common stock pertaining to the private placement of 150,000 shares of Series A convertible and exchangeable preferred stock issued on June 8, 2011, were also excluded as they would have been anti-dilutive.
(3)
|
DISCONTINUED OPERATIONS
|
On July 25, 2017, the Company entered into an agreement pursuant to which it sold assets related to its NIBP technology product line in exchange for $4,500,000 in cash at closing and an additional payment for the purchase of inventory following a short transition services period, which concluded during September 2017. The final inventory purchased by the buyer was $86,000. In accordance with that agreement, the Company is also entitled to an additional payment in August 2019 not to exceed $2,000,000, following a 24-month period ending June 30, 2019.
On March 28, 2016, the Company consummated an agreement under which it sold certain assets related to its neonatal intensive care disposable product line for $3,350,000, including $3,035,000 in cash at closing after deductions of $100,000 for funds held in escrow for 12 months following the closing and $215,000 for inventory to be purchased following a transition services agreement which was effectively concluded at December 31, 2016. The inventory to be purchased from the Company was $167,000 as of that date. During March 2017, the funds in escrow were paid to the Company while payments on the inventory were scheduled to be made through year-end 2017, according to a promissory note executed between the Company and the seller. The Company reserved the amounts due under the note during the first quarter of 2017. As of December 31, 2018, the Company had not received any further payments under the note.
There were no assets or liabilities associated with the discontinued operations in the consolidated balance sheet as of December 31, 2018. As of December 31, 2017, there were $35,000 of accrued expenses.
The following table represents the results of the discontinued operations for years ended December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
2,147,741
|
|
Cost of sales
|
|
|
—
|
|
|
|
1,340,089
|
|
Gross profit
|
|
|
—
|
|
|
|
807,652
|
|
Operating expenses
|
|
|
—
|
|
|
|
62,256
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
before income taxes
|
|
|
—
|
|
|
|
745,396
|
|
Gain on sale of discontinued operations
|
|
|
—
|
|
|
|
4,388,254
|
|
Income tax expense
|
|
|
—
|
|
|
|
(1,745,441
|
)
|
Income from discontinued operations
|
|
$
|
—
|
|
|
$
|
3,388,209
|
|
(4)
|
ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
The allowance for doubtful accounts was $125,000 at December 31, 2018 and 2017.
Inventories at December 31, 2018 and 2017 consist of:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
657,019
|
|
|
$
|
559,737
|
|
Work in process
|
|
|
2,086
|
|
|
|
1,633
|
|
Finished goods
|
|
|
352,489
|
|
|
|
514,891
|
|
Total
|
|
$
|
1,011,594
|
|
|
$
|
1,076,261
|
|
(6)
|
FINANCING ARRANGEMENTS
|
Private Placement of Preferred Stock
As of December 31, 2018, 95,500 shares of Series A Convertible Preferred Stock and 54,500 shares of Series A Exchangeable Preferred Stock, issued on June 8, 2011, in connection with a 2011 private placement (collectively, the "Preferred Stock"), are outstanding. The Company received an aggregate cash purchase price of $15,000,000, representing a per-share purchase price of $100 for the Series A Convertible Preferred Stock and $100 for the Series A Exchangeable Preferred Stock. The Company received net proceeds, after transaction costs and expenses, of $13,825,000.
The Preferred Stock has a par value of $0.001 per share and is convertible into common stock of the Company at a price of $2.389 per share. The Company can force conversion of all of the outstanding Preferred Stock if the closing price of its common stock meets certain share price, trading volume requirements, and other conditions.
The stated value ($100 per share) of the Preferred Stock accretes at an annual rate of 7% compounded quarterly. While such accretion may be paid in cash at the Company's option, the Company's current loan agreement prohibits the payment of cash dividends.
As of December 31, 2018, dividend accretion of $10,407,061 had accumulated on the Preferred Stock.
The Preferred Stock is entitled to a liquidation preference equal to the greater of 100% of the total accreted value for each share of Preferred Stock, outstanding on the date of a liquidation, plus all accrued and unpaid dividends, or the amount a holder would have been entitled to had the holder converted the shares of Preferred Stock into common stock immediately prior to the liquidation.
Accordingly, based upon the liquidation value of the Preferred Stock at December 31, 2018, there were 10,635,019 shares of common stock issuable upon conversion of the Preferred Stock.
The Preferred Stock votes together with the common stock as if converted on the original date of issuance. Holders of Preferred Stock are entitled to purchase their pro rata share of additional stock issuances in certain future financings.
The Company can force conversion of all, and not less than all, of the outstanding Preferred Stock into Company common stock as long as the closing price of its common stock is at least 250% of the Conversion Price, or $5.9725 per common share, for at least 20 of the 30 consecutive trading days immediately prior to the conversion and the average daily trading volume is greater than 50,000 shares per day over the 30 consecutive trading days immediately prior to such conversion. The Company's ability to cause a conversion is subject to certain other conditions as provided pursuant to the terms of the Preferred Stock described above.
Bank Financing
On May 8, 2018, the Company consummated a Loan and Security Agreement (the "Loan Agreement") with East West Bank (the "Bank"). Pursuant to the Loan Agreement, the Bank has provided a 48-month term loan (the "Term Loan") in the amount of $10,000,000 and a revolving loan (the "Revolver") in the maximum of $2,000,000, each of which expires May 8, 2022. The obligations under the Loan Agreement are secured by a lien on substantially all of the non-intellectual property assets of the Company. As of December 31, 2018, there was no outstanding balance under the Revolver. Available borrowings under the Revolver were $2,000,000 as of that date.
The Term Loan bears interest at a floating rate equal to the Bank's prime rate (not less than 4.75%) plus 3.65% (9.15% as of December 31, 2018). Under the Term Loan, 30 equal payments of $333,333 are scheduled to commence on December 1, 2019, following an 18-month period during which the Company shall make interest-only payments. The interest-only period may be extended to 21 months or 24 months under certain circumstances.
Revolver advances will bear interest at a floating rate equal to the Bank's prime rate (not less than 4.75%) plus 2.40% (7.90% as of December 31, 2018). Maximum borrowings under the Revolver are based upon the Company's eligible accounts receivable, as defined in the Loan Agreement, and subject to other terms and conditions.
The Company has the right to prepay the loan under the Loan Agreement in full at any time; however, if the Term Loan is prepaid prior to the first or second anniversaries of the Loan Agreement or prior to maturity, a fee of 3%, 2%, or 1%, respectively, of the Term Loan amount is due. Amounts prepaid under the Term Loan may not be re-borrowed. Upon repayment of the Term Loan at any time, the Bank is entitled to an additional fee equal to 4% of the Term Loan amount, or $400,000. Such amount has been accrued as of December 31, 2018.
The Loan Agreement contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements, and compliance with applicable laws and regulations. Further, the Loan Agreement contains customary negative covenants limiting the ability of the Company and its subsidiaries, among other things, to grant liens on the pledged collateral or the Company's intellectual property, incur additional indebtedness, make certain investments and acquisitions, and dispose of assets outside the ordinary course of business. The Loan Agreement also contains financial covenants requiring the Company to achieve certain sales results and to maintain a continuing level of cash plus available borrowing capacity based on a formula. Management believes the Company was in compliance with all covenants under the Loan Agreement as of December 31, 2018.
Upon an event of default, the Bank may declare all outstanding principal and accrued but unpaid interest under the Loan Agreement immediately due and payable and may exercise the other rights and remedies provided under the Loan Agreement. The events of default under the Loan Agreement include payment defaults, breaches of covenants or representations and warranties, a material adverse change, certain adverse regulatory events, specified change of control events, and bankruptcy events.
In connection with the Loan Agreement, on May 8, 2018, the Company issued a warrant (the "Warrant") to the Bank, which provides for the right to purchase an aggregate of 218,914 shares of the Company's common stock for a five-year period, expiring on May 8, 2023, at an exercise price of $1.142 per share.
The number of shares issuable pursuant to the Warrant and the exercise price thereof are subject to adjustment only in the event of stock splits, subdivisions, reclassifications, exchanges, combinations, and similar transactions. The Warrant also contains a cashless exercise provision.
The shares associated with the Warrant were fully vested at the time of issuance. The value of the Warrant was estimated on the date of grant to be $0.57 per share using the Black-Scholes option pricing model, assuming a weighted-average expected stock price volatility of 54.8%, an expected warrant life of five years, an average risk-free interest rate of 2.76%, and a 0.0% average dividend yield. The value of the Warrant of $124,248, as calculated above, has been recorded as a debt discount and is being recognized as interest expense over the 48-month term of the Loan Agreement.
The Company incurred debt issuance costs and discounts of $895,000 associated with the Loan Agreement, including $120,000 of commitment fees together with legal and brokerage costs paid at the closing, $400,000 of final payment fees to be accrued, and $124,248 of non-cash expenses pertaining to the Warrant. The debt issuance costs and discounts will be amortized through May 8, 2022, the maturity date of the Loan Agreement. As a result of the debt issuance costs, the effective rate of the Term Loan was 11.23% at May 8, 2018 (11.96% at December 31, 2018). In addition, unamortized debt issuance costs of $264,539 together with a prepayment fee of $69,333, each pertaining to the Company's prior loan agreement, were recorded as interest expense during the second quarter of 2018 corresponding with the termination of that agreement. Finally, the accrued final payment fee of $320,000 owed to the former lenders, was repaid concurrently with the execution of the new Loan Agreement.
The outstanding balance of the bank term loan at December 31, 2018 and prior term loan at 2017 was as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Principal
|
|
|
Unamortized Debt Issuance Cost and Discounts
|
|
|
Debt, Net
|
|
|
Principal
|
|
|
Unamortized Debt Issuance Cost and Discounts
|
|
|
Debt, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of term loan
|
|
$
|
10,000,000
|
|
|
$
|
710,927
|
|
|
$
|
9,289,073
|
|
|
$
|
8,000,000
|
|
|
$
|
322,974
|
|
|
$
|
7,677,026
|
|
Less current portion
|
|
|
333,333
|
|
|
|
283,870
|
|
|
|
49,463
|
|
|
|
2,933,333
|
|
|
|
199,502
|
|
|
|
2,733,831
|
|
Long-term portion
|
|
$
|
9,666,667
|
|
|
$
|
427,057
|
|
|
$
|
9,239,610
|
|
|
$
|
5,066,667
|
|
|
$
|
123,472
|
|
|
$
|
4,943,195
|
|
The Company financed its directors' and officers' insurance premiums during 2018 under a note payable in the amount of $100,841. The note payable requires ten payments of $10,335, including interest, and is scheduled to be repaid in full by September 2019.
Accrued expenses at December 31, 2018 and 2017 consist of:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Payroll
|
|
$
|
435,372
|
|
|
$
|
394,527
|
|
Employee compensation
|
|
|
735,763
|
|
|
|
275,236
|
|
Professional fees
|
|
|
398,821
|
|
|
|
316,057
|
|
Warranty
|
|
|
50,000
|
|
|
|
65,000
|
|
Sales and use tax
|
|
|
208,765
|
|
|
|
215,086
|
|
Other
|
|
|
370,331
|
|
|
|
385,967
|
|
|
|
$
|
2,199,052
|
|
|
$
|
1,651,873
|
|
(8)
|
SHARE-BASED PAYMENT PLANS
|
On June 20, 2018, the Company's stockholders approved the CAS Medical Systems, Inc. 2018 Equity Incentive Plan (the "Plan"). The maximum number of shares of common stock that may be granted under the Plan is 2,500,000. Awards that may be granted under the Plan include options, restricted stock and restricted stock units, and other stock-based awards. The purposes of the Plan are to make available to our key employees and directors certain compensatory arrangements related to growth in value of our stock so as to generate an increased incentive to contribute to the Company's financial success and prosperity; to enhance the Company's ability to attract and retain exceptionally qualified individuals, whose efforts can affect the Company's financial growth and profitability; and to align, in general, the interests of employees and directors with the interests of our stockholders. As of December 31, 2018, there remained a total of 2,120,988 shares available for issuance pursuant to our equity incentive plans, including 44,812 shares remaining under the 2011 Equity Incentive Plan.
The Plan is administered by the Compensation Committee of the Board of Directors, which in turn determines the employees, officers, and directors to receive awards and the terms and conditions of these awards.
Stock Options
As of December 31, 2018, options to purchase 3,238,250 shares remain outstanding, of which 72,500 pertain to options granted under the 2018 Plan and 2,475,250 pertain to options granted under the 2011 Plan; 340,500 pertain to stock options granted under the now-expired 2003 Equity Incentive Plan; and 350,000 were issued as a non-plan inducement grant to the CEO commensurate with the start of his employment with the Company.
The unamortized stock compensation expense associated with the stock options at December 31, 2018, was $269,000 and will be recognized through 2022.
A summary of the Company's stock options and changes during the years follow:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
Option
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Option
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
3,573,250
|
|
|
$
|
1.83
|
|
|
|
|
|
|
3,229,500
|
|
|
$
|
1.97
|
|
|
|
|
Granted
|
|
|
87,500
|
|
|
|
1.42
|
|
|
|
|
|
|
465,000
|
|
|
|
0.84
|
|
|
|
|
Exercised
|
|
|
(53,824
|
)
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Cancelled
|
|
|
(368,676
|
)
|
|
|
2.31
|
|
|
|
|
|
|
(121,250
|
)
|
|
|
1.79
|
|
|
|
|
Outstanding at end of year
|
|
|
3,238,250
|
|
|
$
|
1.77
|
|
|
$
|
411,325
|
|
|
|
3,573,250
|
|
|
$
|
1.83
|
|
|
$
|
31,968
|
|
Exercisable at end of year
|
|
|
2,671,375
|
|
|
$
|
1.92
|
|
|
$
|
111,775
|
|
|
|
2,698,875
|
|
|
$
|
2.03
|
|
|
$
|
—
|
|
Vested and expected to vest at end of year
|
|
|
3,221,243
|
|
|
$
|
1.78
|
|
|
$
|
402,339
|
|
|
|
3,547,018
|
|
|
$
|
1.83
|
|
|
$
|
31,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant-date fair value of options granted during the year
|
|
|
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
$
|
0.72
|
|
|
|
|
|
During 2018, the Company granted non-qualified stock options to employees to purchase 87,500 shares of common stock at a weighted-average exercise price of $1.42. The stock options were granted at exercise prices based upon the Nasdaq official closing price on the date of each grant. The fair values of the options were estimated on the grant dates using the Black-Scholes option pricing model. Similar to other option pricing models, the Black-Scholes model requires the input of highly subjective assumptions which may materially affect the estimated fair value of the Company's stock options. The fair value of the stock options granted was $0.79 and assumed a weighted-average expected stock volatility of 56.3%, a weighted-average expected option term of 6.25 years, an average risk-free interest rate of 2.6%, and a 0.0% dividend yield. The risk-free interest rate approximated U.S. Treasury yields in effect at the time of the grant. The expected life of the stock options was determined using historical data adjusted for the estimated exercise dates of unexercised options. Volatility was determined using both current and historical implied volatilities of the underlying stock which are obtained from public data sources.
During 2018, stock options to purchase 53,824 shares of common stock were exercised, and options to purchase 368,676 shares were cancelled.
Additional information about stock options outstanding and exercisable at December 31, 2018, follows:
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
Average
|
Range of
|
|
Number
|
|
Contractual
|
|
|
Exercise
|
|
Number
|
|
|
Exercise
|
Exercise Prices
|
|
Outstanding
|
|
Life in Years
|
|
|
Price
|
|
Exercisable
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.67 - $1.26
|
|
532,500
|
|
5.4
|
|
$
|
0.84
|
|
166,250
|
|
$
|
0.93
|
1.43 - 1.98
|
|
1,680,250
|
|
8.6
|
|
|
1.74
|
|
1,479,625
|
|
|
1.76
|
2.09 - 2.54
|
|
847,500
|
|
5.3
|
|
|
2.15
|
|
847,500
|
|
|
2.15
|
2.95 - 3.16
|
|
178,000
|
|
2.0
|
|
|
3.04
|
|
178,000
|
|
|
3.04
|
|
|
3,238,250
|
|
6.8
|
|
$
|
1.77
|
|
2,671,375
|
|
$
|
1.92
|
Restricted Stock
During 2018, members of the management team were granted 332,500 shares of restricted common stock, which primarily vest 25% per year on each anniversary of the grant date, and 90,000 restricted common shares were granted to outside members of the Board of Directors, which vest 50% per year on each anniversary of the grant date.
As of December 31, 2018, there were 1,202,562 restricted shares issued to employees, a consultant, and outside members of the Board of Directors, which remained issued and non-vested.
A summary of the restricted shares outstanding and changes for the years follow:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
1,107,250
|
|
|
|
418,500
|
|
Granted
|
|
|
422,500
|
|
|
|
798,250
|
|
Cancelled
|
|
|
—
|
|
|
|
(10,000
|
)
|
Vested
|
|
|
(327,188
|
)
|
|
|
(99,500
|
)
|
Outstanding at end of year
|
|
|
1,202,562
|
|
|
|
1,107,250
|
|
The fair value of the restricted common share grants has been calculated based upon the market value of the common stock on the date of issuance. Restricted stock granted to employees typically vests over a period of not less than three years, while restricted stock granted to members of the Board of Directors typically vests over a period of not more than two years from date of grant.
Stock compensation expense of $450,000 and $374,000 related to restricted shares was recorded for 2018 and 2017, respectively. The unamortized stock compensation expense associated with the restricted shares at December 31, 2018, was $1,233,000 and will be recognized through 2022.
Total stock compensation expense was $759,504 and $844,339 for 2018 and 2017, respectively.
Warrants
Warrants to purchase 472,782 shares of common stock at a weighted-average exercise price of $1.39 per share were outstanding at December 31, 2018. The warrants have an exercise price range of $0.38 to $1.98 per share. A total of 75,000 shares issued to former members of the board of directors have no expiration date. The balance of the outstanding warrants have been granted to the Company's current and former bank lenders and have expiration dates ranging from five to ten years from date of grant.
In connection with the Loan Agreement executed on May 8, 2018, the Company issued a warrant to the Lender, which provides for the right to purchase an aggregate of 218,194 shares of the Company's common stock for a five-year period, expiring on May 8, 2023, at an exercise price of $1.142 per share.
Stock Purchase Plan
The Company maintains an employee stock purchase plan. The CAS Medical Systems, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan") was approved by stockholders on June 10, 2009, and accordingly, 150,000 shares of common stock were reserved for issuance under the Stock Purchase Plan. The initial offering period began on July 1, 2009. As of December 31, 2018, there were 105,148 shares issued under the Stock Purchase Plan, and certain amounts had been withheld from employees' compensation to purchase an additional 8,778 shares which were issued during January 2019. The Stock Purchase Plan offers the Company's employees an opportunity to participate in a payroll-deduction-based program designed to incentivize them to contribute to the Company's success.
The Company maintains a 401(k) benefit plan for its employees, which generally allows participants to make contributions via salary deductions up to allowable Internal Revenue Service limits on a tax-deferred basis. Such deductions may be matched in part by discretionary contributions by the Company. The matching contributions for 2018 and 2017 were $110,738 and $109,151, respectively.
There are no current and deferred Federal and state income tax benefits for the years ended December 31, 2018 and 2017.
On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation in the form of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act establishes new tax laws that affect 2017 and beyond. One of the principal new tax laws effective January 1, 2018, is the reduction of the U.S. Federal corporate income tax rate from 35% to 21%. As a result of the reduction in the Federal income tax rate, the Company revalued its net deferred tax assets as of December 31, 2017.
A reconciliation of U.S. Federal income taxes computed at the statutory rate to income taxes shown in the statement of operations for the years ended December 31, 2018 and 2017 follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Income tax benefit at the statutory rate
|
|
$
|
(1,250,231
|
)
|
|
$
|
(2,540,040
|
)
|
State income taxes, net of Federal effect
|
|
|
(128,169
|
)
|
|
|
(33,130
|
)
|
R&D and other tax credits
|
|
|
(95,666
|
)
|
|
|
(106,772
|
)
|
Federal rate change
|
|
|
—
|
|
|
|
5,897,964
|
|
Change in valuation allowance
|
|
|
1,454,683
|
|
|
|
(4,997,595
|
)
|
Other
|
|
|
19,383
|
|
|
|
34,132
|
|
Income tax benefit from continuing operations
|
|
$
|
—
|
|
|
$
|
(1,745,441
|
)
|
Deferred income tax assets and (liabilities) at December 31 relate to:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
130,140
|
|
|
$
|
106,537
|
|
Warranty accrual
|
|
|
11,093
|
|
|
|
22,185
|
|
Allowance for doubtful accounts
|
|
|
27,731
|
|
|
|
66,903
|
|
Tax credits
|
|
|
1,268,490
|
|
|
|
1,172,824
|
|
Restricted stock
|
|
|
957,375
|
|
|
|
938,157
|
|
Net operating loss carryforwards
|
|
|
10,732,452
|
|
|
|
9,531,339
|
|
Other
|
|
|
362,101
|
|
|
|
258,822
|
|
|
|
|
13,489,382
|
|
|
|
12,096,767
|
|
Prepaid expenses
|
|
|
(28,457
|
)
|
|
|
(31,170
|
)
|
Fixed assets
|
|
|
(444,752
|
)
|
|
|
(504,106
|
)
|
Deferred income tax assets and liabilities
|
|
|
13,016,173
|
|
|
|
11,561,491
|
|
Valuation allowance
|
|
|
(13,016,173
|
)
|
|
|
(11,561,491
|
)
|
Net deferred income tax assets and liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company has performed the required analysis of both positive and negative evidence regarding the realization of its deferred income tax assets, including our past results of operations, recent cumulative losses, and our forecast for future taxable income. The assessment required the use of assumptions about future sales and pre-tax income, making allowance for uncertainties surrounding the rate of adoption of its products in the marketplace, competitive influences, and the investments required to increase market share in certain markets for its products. As of December 31, 2018, we have concluded that it is more likely than not that such deferred income tax assets will not be realized and, accordingly, have established a deferred income tax asset valuation allowance in the amount of $13,016,173.
The Company's Federal net operating loss carryforward of $42,089,000 is scheduled to expire beginning in 2031. State net operating loss carryforwards of $11,729,000 are scheduled to expire between 2028 and 2038. The amount of the net operating loss carryforwards that may be utilized annually to offset future taxable income and tax liabilities may be limited as a result of certain ownership changes pursuant to Section 382 of the Internal Revenue Code as well as limitations imposed by the Tax Act. The Company has not completed a study to determine if there have been one or more ownership changes due to the costs associated with such study.
The Company does not believe that there are unrecognized income tax benefits for December 31, 2018 or 2017, and expects no significant changes in 2019.
(11)
|
COMMITMENTS AND CONTINGENCIES
|
Product Litigation
The manufacture and sale of our products expose us to product liability claims and product recalls, including those which may arise from misuse or malfunction of, or design flaws in, our products or use of our products with components or systems not manufactured or sold by us. We are currently a defendant in a product liability action related to our former sleep apnea product line. Product liability claims, regardless of their ultimate outcome, could require us to spend significant time and money in litigation or to pay significant damages.
We believe that our product liability insurance is sufficient to cover any damages and costs that may be incurred, with respect to this matter.
Merger-Related Litigation
On or about March 7, 11, 14 and 21, 2019, four putative class action complaints challenging the Merger were filed in the United States District Court for the District of Delaware, captioned
Adam Franchi v. CAS Medical Systems, Inc., et al.,
Shiva Stein v. CAS Medical Systems, Inc., et al.
,
Thomas Torreano v. CAS Medical Systems, Inc. et al.
and
Joseph Rish Jr. v. CAS Medical Systems, Inc. et al.
, respectively, and on or about March 11, 2019 an additional putative class action complaint challenging the merger was filed in the Superior Court for the State of Connecticut, Judicial District of New Haven at New Haven, captioned
Charles New v. CAS Medical Systems, Inc., et al
. The complaints were filed on behalf of the public shareholders of CASMED and name as defendants CASMED and the members of its board of directors. The complaints generally allege violations of federal securities laws with respect to purported disclosure deficiencies in the preliminary proxy statement for the merger that CASMED filed with the SEC on March 1, 2019. The complaint in the
Stein
action also alleges that CASMED's directors agreed to sell CASMED for inadequate consideration, the complaint in the
New
action also alleges that CASMED's directors agreed to sell CASMED for an unfair price as a result of an unfair sale process and the complaint in
Torreano
also alleges that the Merger contains preclusive deal protection provisions. The
Torreano
complaint also alleges claims against Edwards Lifesciences Holding, Inc. Crown Merger Sub, Inc. and Edwards Lifesciences Corporation. The complaints seek a variety of relief, including an injunction preventing the consummation of the Merger, rescission of the Merger if it is consummated or rescissory damages, attorneys' fees and expenses. The defendants have not yet responded to the complaints, but believe that the claims asserted against them are without merit.
Operating Leases
The Company currently leases one corporate facility and certain equipment under non-cancellable operating leases. Rent expense under these leases was $353,000 in 2018 and $393,000 in 2017. Future annual minimum rental payments as of December 31, 2018, to the expiration of the leases follow:
2019
|
|
$
|
294,000
|
|
2020
|
|
|
291,000
|
|
2021
|
|
|
297,000
|
|
2022
|
|
|
25,000
|
|
2023
|
|
|
—
|
|
Total
|
|
$
|
907,000
|
|
(12)
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
In February 2016, the FASB issued ASU 2016-02,
Leases - Topic 842.
The amendment
improves transparency
and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. The new standard is effective for consolidated financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued.
The Company will apply the new guidance at the effective date of January 1, 2019. Management will also make an accounting policy election to not recognize on its balance sheet right-of-use assets and liabilities arising from short-term leases which are generally characterized as those leases less than one-year in length from commencement date. Management estimates that the adoption of the guidance will result in the recognition of additional right-of-use assets and lease liabilities for operating leases of approximately $863,000 as of January 1, 2019. The Company does not believe the guidance will have a material impact on its statements of operations.
In April 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-10,
Topic 606, Revenue from Contracts with Customers
. ASU 2016-10 amends the revenue recognition standard it had issued in May 2014 (ASU 2014-09). The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which an entity is expected to be entitled in exchange for those goods and services. The amendments in ASU 2016-10 clarify the identification of performance obligations and the licensing implementation guidance. In adopting ASU 2016-10, the Company reviewed the five steps considered fundamental to determining when to recognize revenue. Those five steps are as follows: (1) Identify the contract(s) with a customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations in the contract; and (5) Recognize revenue when (or as) the entity satisfied a performance obligation.
The Company adopted the new revenue standard effective January 1, 2018, using the Modified Retrospective method, under which prior-year results are not restated; however, supplemental information regarding the impact of the new standard must be provided, if material. The standard, including the cumulative effect of its adoption, did not have a material impact on the Company's financial statements.
The Merger Agreement
On February 11, 2019, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the Company would become a wholly-owned subsidiary of Edwards Lifesciences Corporation (the "Merger"). The Board of Directors of the Company has unanimously approved the Merger Agreement, the Merger, and the other transactions contemplated thereby.
As a result of the Merger, and at the effective time (the "Effective Time") each share of Company common stock issued and outstanding immediately prior to the Effective Time will be converted into the right to receive $2.45 per share in cash (the "Merger Consideration").
The Merger Agreement also provides that each holder of Company Series A Convertible Preferred Stock and Series A Exchangeable Preferred Stock shall provide a consent to convert such preferred stock, outstanding immediately prior to the Effective Time, into the right to receive the Merger Consideration as holders of the Company's common stock.
The Merger is subject to stockholder approval and certain additional customary closing conditions, including, among other things, the expiration of a required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
The Merger Agreement contains certain termination rights for each party, including the right of the Company to terminate the Merger Agreement to accept a company superior proposal after complying with certain requirements. In addition, either party may terminate the Merger Agreement if the Merger is not consummated on or before November 8, 2019. The Merger Agreement further provides that the Company may be required to pay Edwards Lifesciences Holding, Inc. ("Edwards") a termination fee of $3.5 million under certain circumstances, including if Edwards terminates the Merger Agreement due to a change in the recommendation by the Company's Board of Directors for the Merger or due to the Company's material breach of its non-solicitation obligations set forth in the Merger Agreement. The Merger Agreement also provides that in case it is terminated by either Edwards or the Company following a failure to obtain the required vote of the Company's stockholders to adopt the Merger Agreement, the Company shall reimburse Edwards up to $1.0 million of certain of its transaction expenses, which would reduce on a dollar-for-dollar basis any termination fee otherwise owed to Edwards.
The Merger is expected to close during the second quarter of 2019 and is not subject to a financing condition.