As of March 15, 2019, there were 29,340,787 shares of common stock outstanding.

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This report contains information that includes or is based on forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties.  These statements may be identified by the use of words such as "anticipates", "expects", "estimates", "projects", "goal", "intends", and "believes", and variations thereof, and other terms of similar meaning.  Factors that could cause the Company's actual results and financial condition to differ from the Company's expectations include, but are not limited to, risks relating to the potential merger with Edwards, potential liquidity constraints, price and product competition, rapid technological changes, dependence on new product development, failure to introduce new products effectively or on a timely basis, the mix of products sold, supply and prices of raw materials and products, customer demand for the Company's products, regulatory actions, changes in reimbursement levels from third-party payors, product liability or other litigation claims, changes in economic conditions that adversely affect the level of demand for the Company's products, changes in foreign exchange markets, changes in financial markets, changes in the competitive environment, and other risks described in Item 1A "Risk Factors" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K.  While the Company believes that the assumptions underlying such forward-looking statements are reasonable, there can be no assurance that future events or developments will not cause such statements to be inaccurate.  All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement.

 

The Company cautions you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. The Company undertakes no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events, except as required by law.

Unless the context indicates otherwise, as used in this report, the terms "CAS", "CASMED", the "Company", "we", "us", and "our" refer to CAS Medical Systems, Inc.

On February 11, 2019, the Company, Edwards Lifesciences Holding, Inc., a Delaware corporation and a wholly-owned subsidiary of Edwards Lifesciences Corporation ("Edwards" or the "Acquiror") and Crown Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Acquiror ("Merger Sub"), entered into an Agreement and Plan of  Merger (the "Merger Agreement") pursuant to which, subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into the Company (the "Merger"), with the Company continuing as the surviving company and a wholly-owned subsidiary of the Acquiror.  The Board of Directors of the Company has unanimously approved the Merger Agreement, the Merger, and the other transactions contemplated thereby.

On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (the "Effective Time") and as a result of the Merger, each share of Company common stock issued and outstanding immediately prior to the Effective Time (other than shares of Company common stock owned by the Company as treasury stock or owned directly by the Acquiror or any of its subsidiaries (including Merger Sub) or shares of Company common stock the holders of which have properly perfected their appraisal rights under Delaware law) will be converted into the right to receive $2.45 per share in cash (the "Merger Consideration") without interest or dividends thereon.

The Merger Agreement also provides that, as a condition to the Acquiror's obligation to effect the Merger, each holder of Company Series A Convertible Preferred Stock and Series A Exchangeable Preferred Stock outstanding, immediately prior to the Effective Time, shall consent to the conversion of such stock into Company common stock.  Subject to such conversion, at the Effective Time, the holders of such preferred stock will be entitled to receive the Merger Consideration as holders of the Company's common stock.

 

 

The parties' obligations to consummate the Merger, which is expected to close during the second quarter of 2019, are subject to stockholder approval and certain additional customary closing conditions, including, among other things, (i) the accuracy of the other party's representations and warranties contained in the Merger Agreement (subject to certain materiality or material adverse effect qualifiers, as described in the Merger Agreement) and the other party's compliance with its covenants and agreements contained in the Merger Agreement in all material respects; (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of other required antitrust approvals; and (iii) no law having been enacted after the date of the Merger Agreement that prohibits the Merger and no order having been issued after the date of the Merger Agreement preventing the consummation of the Merger. The obligations of the Acquiror and Merger Sub to consummate the Merger are further subject to the following conditions: (i) no pending proceeding brought by a governmental entity in a U.S. federal district court seeking to restrain, prohibit, challenge, or otherwise materially limit the parties' or their subsidiaries' ability to consummate the Merger or the other transactions contemplated by the Merger Agreement; and (ii) the absence of any effect, change, development, event, circumstance, occurrence, condition, fact, or state of facts that has had or would reasonably be expected to have a "company material adverse effect" (as defined in the Merger Agreement) with respect to the Company and its subsidiaries, taken as a whole.  The closing of the Merger is not subject to a financing condition.

The Merger Agreement contains certain termination rights for the Company and the Acquiror, including the right of the Company to terminate the Merger Agreement to accept a "company superior proposal" (as defined the Merger Agreement) 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 the Acquiror a termination fee of $3.5 million under certain specified circumstances, including if the Acquiror 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 the Acquiror 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 the Acquiror up to $1.0 million of certain of its transaction expenses, which payment, if any, will reduce on a dollar-for-dollar basis any termination fee otherwise owed to the Acquiror.

We are a medical technology company that develops, manufactures, and markets non-invasive cerebral and tissue oximeters used in patient monitoring that are consistent with our Vision:

"That no patient is harmed by undetected tissue hypoxia."

Our principal products are the FORE-SIGHT® and FORE-SIGHT ELITE® brand tissue oximeters and sensors.  With a simple non-invasive adhesive sensor applied to the skin, these products alert clinicians to the oxygenation levels of a patient's brain or other body tissue under the sensor during medical procedures to avoid harm caused by insufficient oxygen, otherwise known as hypoxia.  The FORE-SIGHT product line represented nearly all of our 2018 sales from continuing operations.  We also sell a small volume of service repairs for legacy products.

We believe our FORE-SIGHT tissue oximetry products are best-in-class and place CASMED in a unique position both to gain accounts from competitors and expand the clinical application for monitoring tissue oxygenation. Standard non-invasive parameters, such as pulse oximetry and blood pressure, provide only surrogate markers of tissue oxygen delivery.  The indirect or systemic nature of these parameters forces clinicians to infer the adequacy of oxygenation in vital organs, including the brain, during medical procedures.  However, data convincingly show that clinician inferences of cerebral oxygenation during medical procedures often do not correlate with actual tissue oxygenation levels. Therefore, potentially dangerously low levels of cerebral oxygenation often go unrecognized, correlating to high levels of patient harm.  However, direct monitoring of cerebral and tissue oxygenation with FORE-SIGHT oximeters provides a unique and powerful tool that empowers clinicians to recognize and treat potentially dangerous tissue hypoxia to avoid adverse clinical outcomes.

 

 

We believe the FORE-SIGHT tissue oximeter provides clinicians the most accurate and reliable readings and is well-positioned to compete in an expanding market.

Our products are typically sold to hospitals. Clinician users include anesthesiologists, perfusionists, and surgeons in an operating room, and intensivists and nurses in intensive care units.

CASMED has completed significant product line divestitures in recent years and has successfully executed its multi-year strategic goal of solely focusing on the market opportunity for FORE-SIGHT oximetry.  With the divestiture of its last two non-FORE-SIGHT legacy product lines completed in 2017, the Company's transformation from a low-margin, commodity, capital medical equipment business into a high-growth, high-margin business is complete, with disposable sensor sales representing 88% of 2018 sales from continuing operations.

Our 2018 achievements include the following:

·	Worldwide FORE-SIGHT sales rebounded in 2018, increasing 18% over 2017.

·	Worldwide sensor revenue growth accelerated to greater than 20% in the third and fourth quarters, with full-year growth of 18%.

·	We shipped a net of 363 FORE-SIGHT ELITE monitors worldwide in 2018, including 203 net monitors in the U.S., raising the U.S. adjusted installed base to 1,458 FORE-SIGHT ELITE monitors, an increase of 17% over the adjusted installed base at December 31, 2017.

·	The five-year FORE-SIGHT sales compound average growth rate was 19% at the end of 2018 for overall sales and 20% for U.S. sales.

·	We completed a multi-year effort to redesign our FORE-SIGHT ELITE disposable sensors for manufactur-ability, realizing substantial cost reductions beginning in the second quarter of 2018.

·	We received FDA 510(k) clearance for our FORE-SIGHT OEM Oximetry Module.  The OEM module permits the use of FORE-SIGHT oximetry without a standalone FORE-SIGHT monitor.  The design allows tissue oximetry values to be displayed on a third-party monitor with minimal user-interface modifications.

The Company reports two categories of sales within one reportable business unit:

·	Tissue Oximetry Monitoring – includes sales of the Company's FORE-SIGHT tissue oximeter monitors, sensors, and accessories.

·	Service and Other – includes sales of service parts and repairs and other miscellaneous sales.

Tissue Oximetry Monitoring

CASMED's FORE-SIGHT tissue oximeter technology provides clinicians with a simple, non-invasive, quantitative measurement of oxygenation of cerebral tissue typically during surgery or critical care situations.  The percentage saturation of cerebral hemoglobin with oxygen is obtained by placing a sensor on the skin on both the right and the left side of the patient's forehead. The FORE-SIGHT ELITE sensors emit five different wavelengths of infrared light that harmlessly penetrate into the cerebral tissue and are partially reflected back to photo-detectors in the same sensor.  An exclusive algorithm then determines the percentage of hemoglobin that is saturated with oxygen in the blood of the brain tissue underlying each sensor. Through these proprietary and patented processes, FORE-SIGHT provides clinicians with an accurate, absolute numerical measure of tissue oxygenation.

In addition to cerebral monitoring, FORE-SIGHT can also be used to monitor the oxygenation of other tissues such as muscle tissues of adults and the abdominal tissues in newborns even weighing less than four kilograms.

 

By non-invasively and continuously measuring absolute cerebral and tissue oxygen levels, our FORE-SIGHT tissue oximeter enables clinicians to identify and quickly react to dangerously low brain oxygen levels and empowers them to provide better care.

We believe that FORE-SIGHT incorporates a combination of features that permit obtained oxygenation values to be more accurate and, therefore, more actionable by clinicians in critical care environments.  Special design features include the following:

·	CASMED's FORE-SIGHT ELITE sensors emit five wavelengths of light, permitting an increased level of signal acquisition, thus providing sufficient data to solve for other optical variables in the tissue sample, such as melanin in the skin, which would otherwise confound a tissue oximetry reading.

·	CASMED's FORE-SIGHT sensors for adults are designed with a preferred geometry, maximizing the distance between the light source and the farthest photo-detector, thereby providing a light pathway that penetrates deeper into the tissue, giving a greater tissue sample for interrogation.

·	CASMED'S FORE-SIGHT sensors also are maximized for children and come in different configurations with each being tailored precisely to the size of the patient to maximize accuracy and ease of use, all with the preservation of skin integrity in mind.

·	CASMED's FORE-SIGHT patented and proprietary algorithm utilizes a combination of methods including a unique on-patient calibration to sort out optical signals created by non-critical background tissue that otherwise can confound measurement of oxygenated hemoglobin levels.

·

CASMED's FORE-SIGHT algorithms are specifically designed for different body locations given that we believe clinicians' expected levels of accuracy cannot be met with the same algorithm for such materially different physiologies as, for example, that of an adult forehead and that of a newborn's flank.

We believe our FORE-SIGHT oximeter helps clinicians solve a serious deficit in the care of many critical care patients.  Unrecognized and dangerous desaturation events occur with much greater frequency than previously known and can only be properly identified with the direct measurement that tissue oximeters provide.  Given this evidence, we believe our best-in-class FORE-SIGHT technology continues to gain clinical adoption in new and existing accounts and is well-positioned in the market for future growth.

During 2018, a net total of 363 monitors were shipped worldwide. As of December 31, 2018, the adjusted installed base of U.S. monitors was 1,458 monitors, up 17% from the adjusted installed base at December 31, 2017. The adjusted installed base includes only FORE-SIGHT ELITE monitors and excludes first-generation devices which are no longer in use by U.S. customers. The quantity of "net units shipped" that we report each fiscal quarter adds to this cumulative total and reflects the number of monitors shipped to customers less returns.  The cumulative total reported installed base is not affected by exchanges or monitor upgrades.

The Need for Tissue Oxygenation Monitoring

Oxygen is necessary to keep cells viable.  The brain has a very high metabolic rate, consuming approximately 20% of the body's oxygen at rest.  The brain, of course, through cognitive function and memory, defines who we are.  It is also the organ that is least resistant to oxygen deprivation. Lack of sufficient oxygenation in the brain can cause neurologic injury such as cognitive impairment, stroke, paralysis, coma, and/or hypoxic encephalopathy.  These injuries can result in severe morbidity or even death. Dangerous deficits in brain hemoglobin saturation (reflecting decreased brain oxygen levels) are termed "desaturation events" because the hemoglobin of the blood is no longer sufficiently "saturated" with oxygen molecules.  Desaturations can be caused by many factors.  The brain responds to insufficient levels of oxygen by increasing ventilation, cardiac output, and blood pressure in order to increase oxygen delivery.  It also vasodilates to increase brain blood flow.  These biologic processes of optimizing oxygen delivery vs. demand can be compromised by illness, surgical intervention, trauma, and anesthesia; and neonates and children have immature auto-regulation capabilities.

Most conventional monitoring is ultimately employed to assure an adequate balance between oxygen supply and demand.  Standard parameters, such as pulse oximetry, heart rate and blood pressure determinations, capnometry, and cardiac output assessment, each provide only indirect predictions of cerebral oxygenation.  From that information, a clinician can only infer that a patient's brain inadequately oxygenated.  Data from cerebral oximetry convincingly shows that the estimations clinicians make about cerebral oxygenation based solely on these indirect measures are frequently wrong and that threatening cerebral desaturation events occur without recognition.   Thus, in many acute care settings, such as surgery, intensive care, and other critical care environments, patients are exposed to potentially damaging cerebral hypoxia that might be prevented if recognized.

Data in support of this clinical proposition is substantial.  FORE-SIGHT and FORE-SIGHT ELITE have been well validated with FDA-compliant methods.  FORE-SIGHT also has proven to have high levels of accuracy even when compared to competitive technologies.  The incidence rate of cerebral desaturation events (CDE's) is very high and is prevalent in many common surgeries as indicated in the sampling of studies cited in the following table.

The harm associated with these cerebral desaturations is well documented. Low levels of cerebral oxygen saturation correlate to poorer outcomes such as:  post-operative nausea; cognitive impairment including memory loss; longer lengths of stay; stroke; and even death. Yet, very simple interventions are available to clinicians to successfully reverse these low levels of oxygen.  Standard interventions include eliminating mechanical blockage, increasing inspired oxygen levels, increasing blood flow or blood pressures, or transfusing units of blood.

This solid and growing body of clinical evidence substantiates the premise that measuring cerebral oximetry offers valuable insight to clinicians during the management of critical care patients which could permit them to increase safety, improve clinical outcomes, and reduce costs.

The Market for Tissue Oximetry

Cerebral desaturation events occur with much greater frequency than previously believed.  The large and growing body of published literature in support of cerebral oximetry provides a solid academic and data-driven support for

 

 

the expanded use of the product in a variety of critical care settings including: heart surgery; lung surgery; major vascular surgery; neurosurgery; surgeries that provide a risk of large blood loss, such as orthopedic hip and spine; surgeries on elderly patients or those with compromised vascular systems or other co-morbidities; surgeries with non-supine patient positioning, such as orthopedic "beach chair" shoulder surgery and bariatric surgery; trauma care; cardiac arrest; and intensive care patient management in adult, pediatric, and neonatal wards, among others. Therefore, in the U.S. alone, cerebral monitoring could prove valuable for millions of patients each year.

While we believe the eventual addressable market for tissue oximetry exceeds $800 million, we estimate current total worldwide annual sales of tissue oximetry to be approximately $125 million.  Given the broad potential applicability of this parameter and the small current rate of market penetration, we also believe that market rates of growth can accelerate, particularly as the use of oximetry moves toward becoming a standard of care.

The literature in support of tissue oximetry, in general, and FORE-SIGHT oximetry, in particular, will play an increasingly important role in the expansion of the tissue oximetry market as clinicians continue to be educated regarding the potential benefits of this parameter.  Consequently, a significant part of our longer-term strategy is to continue to encourage and support research related to the need for cerebral oximetry and its efficacy in improving care.  FORE-SIGHT has already been referenced in hundreds of papers, abstracts, and posters, and the literature in support of the product grows every year.

Service and Other

The Company provides various repair services from its corporate facility in Branford, Connecticut, to its customers for legacy and FORE-SIGHT monitors installed in the field.

The Company markets its products globally, primarily to hospitals, surgery centers, and outpatient facilities.

The Company's FORE-SIGHT tissue oximeters are sold via a direct sales force in the U.S. (with the exception of a single manufacturer's representative), and stocking distribution partners outside the U.S.  As of December 31, 2018, the Company's U.S. selling organization was comprised of 25 management, sales, sales operations, and clinical support personnel in 16 territories.  The international sales organization included one executive vice president and four sales consultants located in Europe, the Middle East, Latin America, and the Pacific Rim, all managing FORE-SIGHT sales through our distribution partners.

The Company continues to invest significant resources in hiring, engaging, educating, and supporting its FORE-SIGHT field sales organization.

Total sales from continuing operations for the years ended December 31, 2018 and 2017 are as follows:

 

		Financial Information Relating to Sales
		Year Ended December 31,
										%
		2018				2017				Change
Domestic Sales		$	18,439,354			$	16,063,173				15%
International Sales			3,480,633				2,699,963				29%
Total		$	21,919,987			$	18,763,136				17%

The Company competes in the broader medical equipment market for patient monitoring equipment and supplies. We believe that our reputation for producing innovative, accurate, and reliable products that are user-friendly and contain best-in-class technology are key factors in our ability to successfully compete with larger organizations in the medical products market.

 

We believe that the principal competitive factors that our Company and other companies competing in our markets face are:

·	FDA clearance and other regulatory approvals;

·	The accuracy, reliability, and precision of any biologic measurements provided;

·	Publication of peer-reviewed clinical studies in support of the clinical use of product;

·	Acceptance by thought-leaders in anesthesia, surgery, perfusion, and other key clinical roles for new technologies, such as cerebral oxygenation monitoring;

·	Documented correlation to improved patient outcomes and lower costs;

·	The cost effectiveness of monitoring solutions and overall pricing;

·	Data interfaces with multi-parameter patient monitoring and data solutions;

·	The overall ease-of-use and product quality;

·	The scale, access, and capability of sales and marketing organizations, including established sales distribution channels;

·	Contractual arrangements with hospitals, hospital systems, buying groups, and professional service providers; and

·	Proprietary technology.

Competitors for our Tissue Oximetry products include Medtronic, Masimo, Nonin Medical, and Hamamatsu.

As of December 31, 2018, our Research and Development ("R&D") organization consisted of a staff of 14 engineers and scientists focused on the following primary areas:

·	Advanced algorithm research,

·	Sensor and optical development,

·	Hardware and OEM development and support, and

·	Clinical research.

Our R&D efforts in 2018 were primarily focused on the development of our FORE-SIGHT OEM Oximetry Module and reducing FORE-SIGHT ELITE sensor manufacturing costs. During 2018 and 2017, the Company incurred R&D expenses of approximately $3,182,000 and $3,234,000, or 15% and 17% of sales, respectively.

Certificates of Registration have been issued to the Company by the United States Patent and Trademark Office for the following marks:  CAS®, CASMED®, FORE-SIGHT®, FORE-SIGHT ELITE®, COOL-LIGHT®, FOR WHAT'S VITAL®, INTELLIGENT MONITORING DEFINED®, and THE CONFIDENCE OF KNOWING^®.

                                                                                                                                                                                           

The Company holds 24 U.S. patents and 14 non-U.S. patents and has multiple pending patent applications for its FORE-SIGHT technologies, which it believes provide it with a competitive market advantage.  The Company believes the design concepts covered in its patents, patent applications, and provisional patent applications are important to providing a tissue oximeter capable of absolute tissue oxygen saturation measurements with the FORE-SIGHT oximeter level of accuracy. Although the Company holds such patents and has patents pending related to certain products, it does not believe that its business as a whole is significantly dependent upon patent protection.  The Company also relies on trade secret, copyright, and other laws and on confidentiality agreements to protect its technology.  The Company has copyright protection for the software used in its tissue oximeter monitors.

The Company will continue to seek patent, trademark, and copyright protections as it deems advisable to protect the markets for its products and its R&D efforts.

As of December 31, 2018, the Company had 73 employees, nearly all of which were full-time.  The Company has no collective bargaining agreements and believes that relations with its employees are good.

 

Medical products of the type currently being marketed and under development by the Company are subject to regulation under the Food, Drug and Cosmetic Act (the "FD&C Act") and numerous acts and amendments such as the Quality System Regulations ("QSR").

In addition, depending upon product type, the Company must also comply with those regulations governing the Conduct of Human Investigations, Pre‑Market Notification Regulations, and other requirements, as promulgated by the FDA.  The FDA is authorized to inspect a device, its labeling and advertising, and the facilities in which it is manufactured, in order to ensure that the device is not manufactured or labeled in a manner which could cause it to be in violation of the FD&C Act.

The FDA has adopted regulations which classify medical devices based upon the degree of regulation believed necessary to assure safety and efficacy.  A device is classified as a Class I, II, or III device.  Class I devices are subject only to general controls.  Class II devices, in addition to general controls, are or will be subject to "performance standards."  Most devices are also subject to the 510(k) pre‑market notification provision.  In addition, some Class III devices require FDA pre‑market studies before they may be marketed commercially because their safety and effectiveness cannot be assured by the general controls and performance standards of Class I or II devices.

The Company's products are Class II devices, and most require FDA clearance under Section 510(k) of the FD&C Act.

The last factory inspection of the Company by the FDA occurred during April 2016.  The inspection resulted in an FDA-483 Inspection Observation Report which listed various non-conformities.  The Company provided a written response to those observations.  The FDA, satisfied with the Company's response and the related actions taken, closed the inspection on June 2, 2016.

CASMED maintains certification to ISO 13485:2016 by the Notified Body, BSI Inc., for its manufacturing facility. These certifications and compliance with the Medical Device Directive allow CASMED to use the "CE" mark on its products.  The CE mark is required for medical devices to gain access to the European Union ("EU") common market and other non-EU markets as well.  The FDA, recognizing the value of this universally-accepted quality system, has patterned its Quality System Regulations after ISO 9001 and ISO 13485. CASMED believes it maintains full compliance with ISO 13485:2016 and the EU's Medical Device Directive, as evaluated by annual assessment.

The Company assembles, tests, packages, or ships its products from its facility in Branford, Connecticut.  The various finished goods or components for the products, which include plastic moldings, wire, printed circuit boards, sub-assemblies, and many other parts, are obtained from outside vendors, some of which are outside of the United States.  The Company has not experienced any sustained interruption in production or the supply of components and does not anticipate any difficulties in obtaining the components necessary to manufacture its products.

Quality assurance procedures are performed by the Company at its Branford, Connecticut, facility and at its suppliers' facilities to standards set forth in the FDA's "Quality System Regulations".  These procedures include the initial qualification of the supplier, inspection of components, and testing of finished goods.

Our five largest customers accounted for approximately 16% and 14% of sales from continuing operations in 2018 and 2017, respectively.  Each of these customers accounted for less than 10% of sales from continuing operations.

 

The Company's backlog generally includes orders for products shippable on a current basis.  The majority of the Company orders are shipped within several days of customer purchase order acceptance. Total backlog, therefore, is not a meaningful indicator of the Company's future sales.

CAS Medical Systems, Inc. is a Delaware corporation organized in 1984. Our corporate offices are located at 44 East Industrial Road, Branford, CT 06405, and our telephone number is (203) 488-6056. Our website address is www.casmed.com. The information available on our website is not a part of this Annual Report on Form 10-K.

Our business faces many risks.  If any of the events or circumstances described in the following risk factors actually occur, our business, financial condition, or results of operations could suffer, and the trading price of our common stock could decline.  The risks described below may not be the only risks we face.  Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our business operations.  You should consider the following risks, as well as the other information included or incorporated by reference in this Form 10-K, before deciding to invest in our common stock.

Our merger with Edwards could be delayed or fail to close, which could adversely affect our financial condition and could negatively impact our stock price.

On February 11, 2019, we entered into a Merger Agreement pursuant to which we agreed to be merged into a wholly-owned subsidiary of Edwards. We will incur significant transaction costs relating to the Merger, including legal, financial advisory, and other expenses.  In general, these expenses are payable by us whether or not the Merger is completed.  If the Merger is not completed under specific circumstances provided in the Merger Agreement, we may be required to pay Edwards a termination fee of $3.5 million or reimburse Edwards for certain expenses up to $1 million.  The payment of such transaction costs or termination fees and expense would have an adverse effect on our financial condition, results of operations, and cash flows.  In addition, we could be subject to litigation in the event the Merger is not consummated, which could subject us to significant liability for damages and result in the incurrence of substantial legal fees.  The current price of our stock may reflect an assumption that the pending Merger will occur, and failure to complete the Merger could result in a decline in our stock price.

In addition, the Merger presents the following additional risks and uncertainties for the Company:

 

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the occurrence of any event, change, or other circumstances that could give rise to the termination of the Merger Agreement;

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the outcome of any legal proceeding that has been or may be instituted against CASMED and others relating to the Merger Agreement;

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the inability to complete the Merger due to the failure to obtain stockholder approval, the failure to obtain regulatory approvals, or the failure to satisfy other conditions to consummation of the Merger;

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the failure of the Merger to close for any other reason;

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risks that the proposed transactions disrupt current business plans and operations and the potential difficulties in attracting and retaining senior management or employees as a result of the Merger;

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business uncertainty and contractual restrictions during the pendency of the Merger;

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the fact that, under the terms of the Merger Agreement, we are unable to solicit certain other acquisition proposals during the pendency of the Merger;

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the diversion of management's attention from ongoing business concerns;

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the effect of the announcement of the Merger on our customer and supplier relationships, operating results, and business generally; and

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the timing of the completion of the Merger and the impact of the merger on our indebtedness, capital resources, cash requirements, profitability, management resources, and liquidity.

 

 

We have a recent history of net losses and are subject to risks regarding future liquidity.

We have experienced operating losses during our last ten fiscal years.  The loss from continuing operations was approximately $5,961,000 for the 2018 calendar year, and the accumulated deficit was approximately $49,388,000 as of December 31, 2018.  We do not anticipate a return to operating profits in the near-term, and there can be no assurance that we will be able to improve our results of operations in the near-term or at all.

As of December 31, 2018, the Company had cash-on-hand and amounts available under its Loan Agreement totaling $5,272,000.  As such, our ordinary short-term capital needs are expected to be met from cash-on-hand and borrowings available from the revolving line-of-credit under our Loan Agreement, which was unused as of December 31, 2018.  Management also believes its cash balances and available borrowings are sufficient to support operations through March 31, 2020. Management further believes that, given the Company's current and expected rate of cash consumption over the next 12 months together with the principal repayments required under its Loan Agreement, it should, nonetheless, if the merger transaction with Edwards is not completed, take action to improve its liquidity until such time that the Company can generate positive cash flow from operations.  Management estimates it will not achieve positive cash flow until late 2020.  Such actions to enhance liquidity may include seeking further changes in its debt instruments (including waivers, modifications, and/or replacement of current agreements), reducing otherwise planned expenditures and operating expenses, or raising additional funds through the issuance of equity securities.

Cash flows may be impacted by a number of factors, including changing market conditions; market acceptance of the FORE-SIGHT system; and U.S. government regulations, including the continued imposition of substantial tariffs, and other trade barriers imposed by foreign governments on our exports, and the loss of one or more key customers. There can be no assurance that we will be successful in modifying or refinancing our debt instruments or raising additional capital if the need arises.  The failure to raise any necessary additional capital on acceptable terms, or at all, would have a material adverse effect on our business and results of operations.

We are a small company in a highly competitive industry.

Competition from other medical device companies, diversified healthcare companies, and research and academic institutions is intense and expected to increase.  Many companies engaged in the medical device sector have substantially greater financial and other resources, as well as greater development capabilities, and substantially greater experience in testing products, obtaining regulatory approvals, and manufacturing, marketing, and distributing medical devices than we do.

Other companies may succeed in developing and commercializing products earlier than we do.  In addition to competing with universities and other research institutions in the development of products, technologies, and processes, the Company may compete with other companies in acquiring rights to products or technologies from universities.  Also, the medical device market is experiencing increasing customer concentration, due to the emergence of large purchasing groups and hospital systems.  We cannot assure you that we will develop products that are more effective or achieve greater market acceptance than competitive products or that our competitors will not succeed in developing products and technologies that are more effective than those being developed by us or that would render our products and technologies less competitive or obsolete.  Moreover, there can be no assurance that we will be able to successfully sell to large purchasing groups, which are increasingly looking to suppliers that can provide a broader range of products than we currently offer.

Our business is almost entirely dependent on our FORE-SIGHT tissue oximetry products.

Sales of our FORE-SIGHT tissue oximetry products represented nearly all of our net sales from continuing operations for both 2018 and 2017.  Our business strategy in recent years has been to transform CASMED from a low-margin commodity capital medical equipment business into a high-growth, high-margin medical disposables business.  A key aspect of this strategy has been to focus on the growth of our FORE-SIGHT tissue oximetry products, while exiting or de-emphasizing our other various lines of business.  However, this strategy results in additional concentration risks.  In the absence of significant other lines of business, we are subject to a greater degree on the success of our FORE-SIGHT tissue oximetry products.  Any adverse business or other events relating to our FORE-SIGHT tissue oximetry products, including the inability to obtain sufficient levels of product from our overseas or U.S. based suppliers due to manufacturing disruptions, transportation delays, new or substantial customs or tariffs on the manufacture of foreign goods, or other risks as described elsewhere in this Item 1A, will result in a proportionately greater potential negative impact on our business and financial condition.

The Company's five largest customers accounted for approximately 16% and 14% of sales from continuing operations in 2018 and 2017, respectively.  The loss of significant customers, especially in the aggregate, could have a material adverse effect on our financial position and results of operations.

Our operations depend on a small number of key suppliers.

A significant percentage of our product components are purchased from a few suppliers located outside of the United States.  Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunctions, labor shortages, or environmental factors.  In addition, we purchase both raw materials used in our products and finished goods from various suppliers and may have to rely on a single-source supplier for certain components of our products where there are no alternatives available.  Although we anticipate that we have adequate sources of supply and/or inventory of these components to handle our production needs for the foreseeable future, if we are unable to secure on a timely basis sufficient quantities of the products we use for manufacture or for sale, if we encounter delays or contractual or other difficulties in our relationships with these suppliers, or if we cannot find suppliers at an acceptable cost, then the manufacture or sale of our products may be disrupted, which could have a material adverse effect on our business.

We are devoting substantial resources to the development and marketing of our tissue oximetry products.

We expect to devote a significant amount of resources to continue the development and marketing of our FORE-SIGHT tissue oximetry products. We believe that substantial additional resources are required to further penetrate the markets for these products.  Such investments include further research and development, involving significant expenditures for clinical studies, equipment for placements at customer sites, further expansion of our selling organization, marketing expenditures, and general working capital requirements. Due to our limited financial resources, there can be no assurance that we will be successful in these endeavors.

The sale of our products may result in significant product liability exposure.

As a manufacturer of medical equipment and products, we face product liability claims.  We maintain product liability insurance in an aggregate amount of $5 million.  We cannot assure you that this insurance coverage will be adequate to cover any product liability claims that occur in the future or that product liability insurance will continue to be available at reasonable prices. Any product liability judgments or settlements in excess of insurance coverage could have a material adverse effect on our business and results of operations.

Our business could be adversely affected if we cannot protect our proprietary technology or if we infringe on the proprietary technology of others.

Our proprietary technology aids our ability to compete effectively with other companies in certain markets in which we compete. Although we have been awarded or have filed applications for numerous patents, these patents may not fully protect our technology or competitive position. Further, our competitors may apply for and obtain patents that will restrict our ability to make and sell our products.

Our competitors may intentionally infringe our patents.  Third-parties may also assert infringement claims against us.  Litigation may be necessary to enforce patents issued to us, to protect our trade secrets or know-how, to defend ourselves against claimed infringement of the rights of others, or to determine the scope and validity of the proprietary rights of others.  The defense and prosecution of patent suits are both costly and time-consuming, even if the outcome is favorable to us. Such proceedings can be extremely expensive, and their outcome very unpredictable.

An adverse outcome in the defense of a patent suit could cause us to lose proprietary rights, subject us to significant liabilities to third-parties, or require us to license rights from third-parties or to cease selling our products. Any of these events could have a material adverse effect on our business, operating results, and financial condition.  We also rely on unpatented proprietary technology that others may independently develop or otherwise obtain access to.

Our inability to maintain the proprietary nature of our technologies could negatively affect our sales and earnings.

Cost-containment efforts of our customers, purchasing groups, third-party payors, and governmental organizations could adversely affect our sales and profitability.

Many existing and potential customers for our products within the United States have become members of group purchase organizations (GPOs) and integrated delivery networks (IDNs) in an effort to reduce costs. GPOs and IDNs negotiate pricing arrangements with healthcare product manufacturers and distributors and offer the negotiated prices to affiliated hospitals and other members. GPOs and IDNs typically award contracts on a category-by-category basis through a competitive bidding process. In addition, competitors often approach GPO's and IDN's with attractive discounts for the purchase of bundles of products offered by those competitors that may also include tissue oximetry. Bids are generally solicited from multiple manufacturers with the intention of driving down pricing. Due to the highly competitive nature of the GPO and IDN contracting processes, we may not be able to obtain or maintain contract positions with major GPOs and IDNs and we may lose customers as they enter into contracts with our competitors. Furthermore, the increasing leverage of organized buying groups may reduce market prices for our products, thereby reducing our profitability.

The members of such groups may choose to purchase from our competitors due to the price or quality offered by such competitors, or due to additional or "bundled" products that can be offered by our competitors to these same IDN's and GPO's.  Any of these actions could result in a decline in our sales and profitability.

Distributors of our products outside of the United States and hospital purchasers also negotiate terms of sale aggressively to increase their profitability. Reductions in our average selling prices or failure to negotiate arrangements having advantageous pricing and other terms of sale could adversely affect our business, results of operations, financial condition, and cash flows.

Outside of the United States, we have also experienced pricing pressure from centralized governmental healthcare authorities and increased efforts by such authorities to lower healthcare costs. We frequently are required to engage in competitive bidding for the sale of our products to governmental purchasing agents. Our failure to offer acceptable prices to these customers could adversely affect our sales and profitability in these markets.

Defects or failures associated with our products could lead to recalls or safety alerts and negative publicity.

Manufacturing flaws, component failures, design defects, off-label uses, or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. These problems could lead to a recall of, or issuance of a safety alert relating to, our products and result in significant costs and negative publicity. Due to the strong name recognition of our brands, an adverse event involving one of our products could result in reduced market acceptance and demand for all products within that brand and could harm our reputation and our ability to market our products in the future. In some circumstances, adverse events arising from or associated with the design, manufacture, or marketing of our products could result in the suspension or delay of regulatory reviews of our applications for new product approvals. We also may undertake a voluntary recall of products or temporarily shut down production lines based on performance relative to our own internal safety and quality monitoring and testing data. Any of the foregoing problems could disrupt our business and have a material effect on our business, results of operations, financial condition, and cash flows.

We depend on international distributors for a substantial portion of our sales. Failure to establish and maintain relationships with distributors could materially and adversely affect our business, financial condition, and results of operations.

We depend on international distributors for a substantial percentage of our sales.  Certain of our distribution agreements may contain terms that are not favorable to us, and as our existing distribution agreements expire, we may be unable to renew with our desired distributors on favorable terms or at all.  Furthermore, competition for distributors is intense.  We compete for distributors internationally with other leading medical equipment and device companies that may have higher visibility, greater name recognition and financial resources, and a broader product selection than we do. Our competitors also often enter into long-term distribution agreements that effectively prevent their distributors from selling our products.  At times, we may also become engaged in contract disputes or other negotiations with distributors. Consequently, establishing relationships with new distributors, maintaining relationships with existing distributors, and replacing distributors may be difficult and time-consuming.  Any disruption of our distribution network, including our failure to renew distribution agreements at favorable terms or our failure to successfully negotiate contract disputes, could negatively affect our ability to effectively sell our products and could materially and adversely affect our business, financial condition, and results of operations.

If we are unable to effectively structure and manage our distribution network, actions taken by our distributors could harm our corporate image and cause us to fail to meet our sales goals.

We have limited ability to manage the activities of our independent international distributors. Our distributors could take one or more of the following actions, some of which we have previously experienced and any of which could have a material adverse effect on our business, prospects, and brand:

·

sell products that compete with products that they have contracted to sell for us;

·

sell our products outside of our pricing guidelines, distorting the market price of our products;

·

sell our products outside their designated territory or to non-authorized end-users, possibly in violation of the exclusive distribution rights of other distributors;

·

directly or indirectly distribute products lacking necessary certifications into markets in violation of applicable in-country laws;

·

fail to adequately promote our products; and/or

·

fail to provide proper training, repair, and service to our end-users.

Failure to adequately manage our distribution network, or non-compliance by distributors with our distribution agreements or applicable law, could harm our corporate image among end-users of our products and disrupt our sales, resulting in a failure to meet our sales goals.

Our direct sales operations are costly, and the related ongoing operational costs could have a material adverse effect on our business.

We maintain direct sales operations in the United States and rely on direct sales for nearly all of our sales from the United States. Maintaining a direct sales force is costly. In the United States, we typically provide our direct operations personnel with payroll and other benefits that we do not provide independent distributors or manufacturer representatives. Many of these benefits are fixed costs that do not depend on sales generation. Maintaining these direct operations is costly, and if we are unable to generate sales as planned, such ongoing operational costs could have a material adverse effect on our business.

We are subject to significant government regulation.

Our business is subject to varying degrees of governmental regulation in the countries in which we operate.  In the United States, our products are subject to regulation as medical devices by the FDA and by other federal and state agencies.  These regulations pertain to the manufacturing, labeling, development, and testing of our devices, as well as to the maintenance of required records. An FDA regulation also requires prompt reporting by all medical device manufacturers of an event or malfunction involving a medical device where the device caused or contributed to death or serious injury or is likely to do so.

Federal law provides for several routes by which the FDA reviews medical devices before the product enters the marketplace.  Medical products of the type currently being marketed and under development by us are subject to regulation under the FD&C Act and numerous acts and amendments such as the Quality System Regulations which replaced the regulations formerly called Good Manufacturing Practices.  In addition, depending upon product type, we must also comply with those regulations governing the Conduct of Human Investigations, Pre-Market Regulations, and other requirements, as promulgated by the FDA. The FDA is authorized to inspect a device, its labeling and advertising, and the facilities in which it is manufactured in order to ensure that the device is not manufactured or labeled in a manner which could cause it to be injurious to health.

The FDA has adopted regulations which classify medical devices based upon the degree of regulation believed necessary to assure safety and efficacy. A device is classified as a Class I, II, or III device.  Class I devices are subject only to general controls. Class II devices, in addition to general controls, are or will be subject to "performance standards".  Most devices are also subject to the 510(k) pre-market notification provision. In addition, some Class III devices require FDA pre-market approval before they may be marketed commercially because their safety and effectiveness cannot be assured by the general controls and performance standards of Class I or II devices.  Our products are primarily Class II devices, and several of them have required FDA notification under Section 510(k) of the FD&C Act.

Satisfaction of clearance or approval requirements may take up to several years or more and may vary substantially based upon the type, complexity, and novelty of the product.  The effect of government regulation may be to delay marketing of new products for a considerable or indefinite period of time, to impose costly procedures upon our activities, and to furnish a competitive advantage to larger companies that compete with us.  We cannot assure you that FDA or other regulatory clearance or approval for any products we develop will be granted on a timely basis, if at all, or, once granted, that clearances or approvals will not be withdrawn or other regulatory action taken which might limit our ability to market our proposed products.  Any delay in obtaining, failure to obtain, or revocation of these clearances or approvals would adversely affect the manufacturing and marketing of our products and the ability to generate additional product sales. The FDA also has the authority to, among other things, deny marketing approval until all regulatory protocols are deemed acceptable, halt the shipment of defective products, and seize defective products sold to customers.  Adverse action or publicity from the FDA, if any, could have a negative impact upon our results from operations.

Our business is impacted by tariffs.

Effective July 2018, the U.S. government imposed additional duties of 25% on certain imports from China under Section 301 of the Trade Act of 1974.  All of our FORE-SIGHT ELITE sensor products provided by our contract manufacturer and certain of our monitor product components are subject to the tariffs.  While management has considered strategies to mitigate any negative financial impact if the tariffs persist, we cannot be certain that we will be successful in our efforts to reduce or eliminate any additional costs imposed by the new tariffs or whether a financial impact will be of a short-term or long-term nature. Our gross margins were negatively affected by $355,000 of tariff costs, or 1.6% of sales during 2018. Tariff costs for the fourth quarter of 2018 were $253,000, or 4.4% of sales and at current levels of sales may exceed $1.0 million for 2019 if tariffs are levied for a full year.  Other non-sensor components also have or may increase as vendors of component parts pass on tariff costs to end-users.

In response to the U.S. government tariffs on imports, the government of China imposed tariffs on certain U.S. products entering China, including products shipped to our China distributor.  These tariff costs may also impact exports to China of FORE-SIGHT finished goods.

Federal regulatory reforms may adversely affect our ability to successfully market our products and impact our financial condition.

Efforts to reform the U.S. healthcare industry have resulted in legislation such as the Patient Protection and Affordable Care Act ("Affordable Care Act") and other measures which will effect changes in healthcare delivery and coverage and public and private reimbursements for services performed.  Federal initiatives may also affect state programs. Legislative changes may affect hospital market expenditures for medical devices, the type and volume of procedures performed, and the demand for new and innovative products. These changes could be significant and may adversely affect the demand for our products, our results of operations, cash flows, and our overall financial condition.

Outside of the U.S., healthcare delivery and reimbursement systems vary by country. Efforts to control rising healthcare costs, changes in government-sponsored programs and participation, and various other economic factors may impact our ability to successfully market our products outside of the U.S.

Our products may become rapidly obsolete.

The markets in which we compete involve rapidly developing technology. Others may develop products that might cause products being developed, distributed, or licensed by us to become obsolete, uneconomical, or result in products superior to our products.

Our international business is subject to currency, regulatory, and related risks.

Our international sales subject us to currency and related risks.  We expect that international sales will continue to constitute a significant portion of our business.  Although we sell our products in United States dollars and have only limited currency risks, an increase in the value of the United States dollar, relative to foreign currencies in our international markets, could make our products less price competitive in these markets. Our international sales accounted for 16% and 14% of our total net sales from continuing operations for the 2018 and 2017 fiscal years, respectively.

Substantial levels of products and components purchased by us are sourced from outside the U.S.  Changes in importation laws, regulations, duties or taxes by the U.S. or by other countries could have a material adverse impact on the costs and/or availability of our products.

Our business practices in countries other than the United States are governed by U.S. laws, including the Foreign Corrupt Practices Act, as well as local laws and regulatory schemes.  While we believe we maintain a robust compliance program requiring adherence by our employees and distribution partners to all U.S. and foreign laws and regulatory schemes, there can be no assurances that our foreign distribution partners comply; therefore, failure could cause us to suffer the loss of the ability to sell in those jurisdictions or other liability.

An acquisition of the Company may be hindered.

Subject to the limitations set forth in the Merger Agreement with Edwards, our Board of Directors is authorized to issue from time to time, without stockholder authorization, shares of preferred stock, in one or more designated series or classes.  We are also subject to a Delaware statute regulating business combinations.  These provisions could discourage, hinder, or preclude an unsolicited acquisition of the Company and could make it less likely that stockholders receive a premium for their shares as a result of any takeover attempt.

We have outstanding shares of preferred stock with rights and preferences superior to those of our common stock.

The issued and outstanding shares of Series A Convertible Preferred Stock and Series A Exchangeable Preferred Stock grant the holders of such preferred stock voting, accretion, dividend, and liquidation rights that are superior to those held by the holders of our common stock.

Ownership of our shares is concentrated in the hands of a few investors which could limit the ability of our other stockholders to influence the direction of the company.

As calculated by SEC rules of beneficial ownership, Thomas, McNerney & Partners and their affiliates, and Acuta Capital Partners, LLC, each beneficially owned 31.3% and 18.0%, respectively, of our common stock as of the dates of their most recent public filings with the SEC and other available data. Accordingly, although they are not affiliated with one another, they collectively may have the ability to significantly influence or determine the election of all of our directors or the outcome of most corporate actions requiring stockholder approval. They may exercise this ability in a manner that advances their best interests and not necessarily those of our other stockholders.

Sales of a substantial number of shares of our common stock in the public market, originally issued through the conversion of preferred stock, exercise of options or warrants, or additional financing transactions, could adversely affect the market price of our common stock and would have a dilutive effect upon our stockholders.

Historically, our common stock has been thinly traded.  This low trading volume may have had a significant effect on the market price of our common stock, which may not be indicative of the market price in a more liquid market. As of December 31, 2018, options and warrants for the purchase of 3,711,032 shares of our common stock were outstanding, and 10,635,019 shares of common stock were issuable upon conversion of our outstanding Series A Convertible Preferred Stock and Series A Exchangeable Preferred Stock.

We depend highly on certain key management personnel.

We believe that our future success will depend to a significant extent on the efforts and abilities of our senior management, in particular, Thomas Patton, our President and Chief Executive Officer; Dr. Paul Benni, our Chief Scientific Officer; Dr. John Gamelin, our Vice President of Research and Development; and Jeffery Baird, our Chief Financial Officer.  The loss of the services of these executives could have a material adverse effect on our business and results of operations.

 

 

 

We do not expect to pay cash dividends.

We have not paid cash dividends on our common stock since inception, and at this time, we do not anticipate that we will pay cash dividends on our common stock in the foreseeable future.  Furthermore, we are currently precluded from issuing dividends on our common stock pursuant to the Merger Agreement with Edwards and unless we receive the consent of holders of a majority of our outstanding Series A Convertible Preferred Stock and Series A Exchangeable Preferred Stock.

Furthermore, our agreement with our secured lender prohibits the payment of cash dividends to both common and preferred stockholders. As of December 31, 2018, $10,407,061 in dividend accretion had accumulated on the Series A Convertible Preferred Stock and the Series A Exchangeable Preferred Stock.

None.

The Company is leasing its headquarters and manufacturing facility in Branford, Connecticut (the "Property"), which is comprised of approximately 24,000 square feet of office and manufacturing space.  The lease had an initial term of ten years, expired on September 6, 2017, and contained an option for two additional five-year periods.  In January 2017, the Company executed a five-year extension on the lease effective February 1, 2017, through January 31, 2022.  Annual base rent was $274,000 for the first year of the lease and is subject to annual increases of 2% for the remaining term of the lease.  Under the lease, the Company is responsible for the costs of utilities, insurance, taxes, and maintenance expenses.  Further, the Company is required to maintain at least $600,000 in cash and cash equivalents (increasing at 3% per annum) and net current assets of not less than $3,600,000.

The Company had leased approximately 5,000 square feet of office space adjacent to its corporate facility until such lease expired on May 31, 2018. The Company consolidated its resources into one corporate facility, following completion of approximately $118,000 of needed leasehold improvements to its main facility.

The Company believes that the corporate facility meets its current and expected operating needs and is adequately insured.

The manufacture and sale of our products exposes 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.  Product liability claims or product recalls, regardless of their ultimate outcome, could require us to spend significant time and money in litigation or to pay significant damages. We are currently a defendant in a product liability action related to our former sleep apnea product line.  We believe that our insurance is sufficient to cover any damages and costs that are likely, with respect to these matters.  There can be no assurance, however, that this will be the case with respect to these matters or any future matters.

In addition, we are or may become, in the normal course of our business operations, a party to other legal proceedings in addition to those described in the paragraph above.  None of these other proceedings would be expected to have a material adverse impact on our results of operations, financial condition, or cash flows.

 

 

 

PART II

The common stock of the Company trades on the Nasdaq Capital Market, under the symbol "CASM".

The following table sets forth the approximate number of beneficial owners of common stock of the Company on December 31, 2018.

 

Title of Class		Number of Stockholders
Common stock, $.004 par value		2,402

 

 

To date, no cash dividends have been declared on the Company's common stock.  The Company does not currently intend to pay a cash dividend on its common stock in the near future. Furthermore, we are currently precluded from issuing dividends on our common stock unless we receive the consent of Edwards pursuant to the Merger Agreement and holders of a majority of our outstanding Series A Convertible Preferred Stock and Series A Exchangeable Preferred Stock and are precluded from paying cash dividends on both common and preferred stock pursuant to our secured loan agreement.

As of December 31, 2018, a dividend accretion of $10,407,061 had accumulated on the Series A Convertible Preferred Stock and the Series A Exchangeable Preferred Stock.

The Company did not issue any shares of common stock during the fourth quarter of 2018 that were not registered under the Securities Act of 1933, as amended.  In addition, the Company did not repurchase any of its common stock during the fourth quarter of 2018.

Information is not required for smaller reporting company filers.

Certain statements in this report, including without-limitation statements in the Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts, are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements represent the Company's current expectations regarding future events.  The Company cautions that such statements are qualified by important factors that could cause actual results to differ materially from expected results which may be contained in the forward-looking statements.  All forward-looking statements involve risks and uncertainties, including, but not limited to, the following: risks relating to the potential merger with Edwards; potential liquidity constraints; price and product competition; rapid technological changes; dependence on new product development; failure to introduce new products effectively, or on a timely basis; the mix of products sold; supply and prices of raw materials and products; customer demand for the Company's products; regulatory actions; changes in reimbursement levels from third-party payors; product liability or other litigation claims; changes in economic conditions that adversely affect the level of demand for the Company's products; changes in foreign exchange markets; changes in financial markets; changes in the competitive environment; and other risks described in Item 1A of this filing.

On February 11, 2019, the Company, Edwards Lifesciences Holding, Inc., a Delaware corporation and a wholly-owned subsidiary of Edwards Lifesciences Corporation ("Edwards" or the "Acquiror") and Crown Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Acquiror ("Merger Sub"), entered into an Agreement and Plan of  Merger (the "Merger Agreement") pursuant to which, subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into the Company (the "Merger"), with the Company continuing as the surviving company and a wholly-owned subsidiary of the Acquiror. The Board of Directors of the Company has unanimously approved the Merger Agreement, the Merger, and the other transactions contemplated thereby.

On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (the "Effective Time") and as a result of the Merger, each share of Company common stock issued and outstanding immediately prior to the Effective Time (other than shares of Company common stock owned by the Company as treasury stock or owned directly by the Acquiror or any of its subsidiaries (including Merger Sub) or shares of Company common stock the holders of which have properly perfected their appraisal rights under Delaware law) will be converted into the right to receive $2.45 per share in cash (the "Merger Consideration") without interest or dividends thereon.

The Merger Agreement also provides that, as a condition to the Acquiror's obligation to effect the Merger, each holder of Company Series A Convertible Preferred Stock and Series A Exchangeable Preferred Stock outstanding, immediately prior to the Effective Time, shall provide a consent or other instrument to effectuate the conversion of such stock into Company common stock pursuant to the Company's certificate of incorporation.  Subject to such conversion, at the Effective Time, the holders of such preferred stock will be entitled to receive the Merger Consideration as holders of Company's common stock.

The parties' obligations to consummate the Merger, which is expected to close during the second quarter of 2019, are subject to stockholder approval and certain additional customary closing conditions, including, among other things, (i) the accuracy of the other party's representations and warranties contained in the Merger Agreement (subject to certain materiality or material adverse effect qualifiers, as described in the Merger Agreement) and the other party's compliance with its covenants and agreements contained in the Merger Agreement in all material respects; (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of other required antitrust approvals; and (iii) no law having been enacted after the date of the Merger Agreement that prohibits the Merger and no order having been issued after the date of the Merger Agreement preventing the consummation of the Merger. The obligations of the Acquiror and Merger Sub to consummate the Merger are further subject to the following conditions: (i) no pending proceeding brought by a governmental entity in a U.S. federal district court seeking to restrain, prohibit, challenge, or otherwise materially limit the parties' or their subsidiaries' ability to consummate the Merger or the other transactions contemplated by the Merger Agreement; and (ii) the absence of any effect, change, development, event, circumstance, occurrence, condition, fact, or state of facts that has had or would reasonably be expected to have a "company material adverse effect" (as defined in the Merger Agreement) with respect to the Company and its subsidiaries, taken as a whole.  The closing of the Merger is not subject to a financing condition.

The Merger Agreement contains certain termination rights for the Company and the Acquiror, including the right of the Company to terminate the Merger Agreement to accept a "company superior proposal" (as defined the Merger Agreement) 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 the Acquiror a termination fee of $3.5 million under certain specified circumstances, including if the Acquiror 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 the Acquiror 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 the Acquiror up to $1.0 million of certain of its transaction expenses, which payment, if any, will reduce on a dollar-for-dollar basis any termination fee otherwise owed to the Acquiror.

The following discussion and analysis should be read together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

Management Summary

CASMED has completed significant product line divestitures in recent years and has successfully executed its multi-year strategic goal of solely focusing on the market opportunity for FORE-SIGHT oximetry.  With the divestiture of its last two non-FORE-SIGHT legacy product lines completed in 2017, the Company's transformation from a low-margin, commodity, capital medical equipment business into a high-growth, high-margin business is complete, with disposable sensor sales representing 88% of 2018 sales from continuing operations.

Our 2018 achievements include the following:

·	Worldwide FORE-SIGHT sales rebounded in 2018, increasing 18% over 2017.

·	Worldwide sensor revenue growth accelerated to greater than 20% in the third and fourth quarters, with full-year growth of 18%.

·	We shipped a net of 363 FORE-SIGHT ELITE monitors worldwide in 2018, including 203 net monitors in the U.S., raising the U.S. adjusted installed base to 1,458 FORE-SIGHT ELITE monitors, an increase of 17% over the adjusted installed base at December 31, 2017.

·	The five-year FORE-SIGHT sales compound average growth rate was 19% at the end of 2018 for overall sales and 20% for U.S. sales.

·	We completed a multi-year effort to redesign our FORE-SIGHT ELITE disposable sensors for manufactur-ability, realizing substantial cost reductions beginning in the second quarter of 2018.

·	We received FDA 510(k) clearance for our FORE-SIGHT OEM Oximetry Module.  The OEM module permits the use of FORE-SIGHT oximetry without a standalone FORE-SIGHT monitor.  The design allows tissue oximetry values to be displayed on a third-party monitor with minimal user-interface modifications.

Results of Operations

The Company incurred a loss from continuing operations before income taxes for 2018 of $5,961,000, which represents an improvement of $1,510,000, or 20%, from the $7,471,000 of losses from continuing operations before income taxes reported for 2017.  Increased revenues, higher gross profit margins, and controlled spending accounted for the improvement in operating results. There was no income from discontinued operations for 2018 compared to $3,388,000, net of income taxes, for 2017.  Income tax expense of $1,745,000 for 2017 was offset by income tax benefits recorded against continuing operations.  The Company does not expect to pay income taxes for 2018, and none were paid for 2017.

The Company incurred a net loss applicable to common stockholders of $7,664,000 for 2018, or ($0.28) per basic and diluted common share, compared to a net loss applicable to common stockholders of $3,926,000, or ($0.14) per basic and diluted common share, for 2017.

Total worldwide sales from continuing operations of $21,920,000 for 2018 increased $3,157,000, or 17%, over 2017 sales of $18,763,000.  The following table provides comparative results of net sales by product and geographic category:

 

($000's)
		Year Ended December 31, 2018				Year Ended December 31, 2017				Increase / (Decrease)				% Change
Tissue Oximetry:
Sensors		$	19,365			$	16,373			$	2,992				18%
Monitors and Accessories			2,046				1,727				319				18%
			21,411				18,100				3,311				18%
Service and Other			509				663				(154	)			(23%	)
		$	21,920			$	18,763			$	3,157				17%
Domestic Sales		$	18,439			$	16,063			$	2,376				15%
International Sales			3,481				2,700				781				29%
		$	21,920			$	18,763			$	3,157				17%

 

Worldwide tissue oximetry product sales of $21,411,000 for 2018 increased $3,311,000 or 18% over 2017 sales of $18,100,000.

Service and Other sales were $509,000 for 2018, compared to $663,000 for 2017.

Total U.S. sales increased $2,376,000, or 15%, to $18,439,000 from $16,063,000 for 2017 driven by U.S. tissue oximetry sales.  Total U.S. sales accounted for 84% of total worldwide sales for 2018, compared to 86% for 2017.

International sales increased $781,000, or 29%, to $3,481,000, or 16% of total sales from continuing operations for 2018, from $2,700,000, or 14% of total sales from continuing operations for 2017. Tissue oximetry sales were responsible for the increase.

The following table provides tissue oximetry details by geographic category:

 

($000's)
		Year Ended December 31, 2018				Year Ended December 31, 2017				Increase / (Decrease)				% Change
Sensor Sales:
Domestic		$	16,673			$	14,298			$	2,375				17%
International			2,693				2,075				618				30%
		$	19,366			$	16,373			$	2,993				18%
Monitor and Accessory Sales:
Domestic		$	1,337			$	1,207			$	130				11%
International			708				520				188				36%
		$	2,045			$	1,727			$	318				18%
Total Domestic Sales		$	18,010			$	15,505			$	2,505				16%
Total International Sales			3,401				2,595				806				31%
		$	21,411			$	18,100			$	3,311				18%

 

 

Gross profit as a percentage of net sales from continuing operations was 58.0% for 2018 and 54.7% for 2017. The improvement was primarily related to the production and sales of lower cost disposable sensors which were partially offset by increased U.S. tariff charges effective July 2018.  The tariff costs negatively impacted our gross profit by $355,000, or 1.6% of sales, for 2018.   Slightly lower average selling prices also affected our 2018 gross profit margins.

Research and development ("R&D") expenses were $3,182,000 and $3,234,000, respectively for 2018 and 2017.  The decrease of $52,000, or 2%, in 2018 was due to lower R&D project expenses.  R&D expenses were approximately 15% of sales from continuing operations in 2018, down from 17% in 2017.

Selling, general, and administrative ("S,G&A") expenses increased $598,000, or 4%, to $14,016,000 for 2018 from $13,418,000 for 2017. The increases in spending resulted primarily from additional investments in our international sales effort and from certain G&A expenses including legal, consulting, and incentives.

Interest expense for 2018 was $1,470,000, an increase of $393,000 over 2017, reflecting increased debt levels, higher interest rates, and amortization of deferred finance charges.

There was no income tax benefit in the aggregate recorded for either 2018 or 2017.  The Company does not expect to record taxable income during its 2018 fiscal year.  Income tax benefits that have been recorded during 2018 have been offset by a deferred income tax asset valuation allowance.

Management established the valuation allowance as of December 31, 2009, as a result of then recent cumulative pre-tax losses and its estimates of future taxable income. Management has continued to perform the required analysis regarding the realization of our deferred income tax assets, concluding that a full valuation allowance is warranted.  As of December 31, 2018, the deferred income tax asset valuation allowance balance was $13,016,000.

The Company's continuing operations used $2,598,000 of cash for 2018, compared to $4,675,000 used in continuing operations during 2017, largely due to favorable changes in working capital items, such as accounts payable and accrued expense.

Net cash used in investing activities of continuing operations was $863,000 for 2018, compared to net cash provided of $3,863,000 for 2017.  Cash provided by investing activities for 2017 included $4,527,000 pertaining to the sale of the Company's non-invasive blood pressure product line.  The Company incurred $783,000 of capital expenditures during 2018, compared to $596,000 for 2017. For both periods, the expenditures were primarily related to placements of FORE-SIGHT oximeter monitors at customer locations.  The 2018 expenditures included approximately $118,000 of leasehold improvements incurred to provide additional office space.  The Company also expended $80,000 and $67,000 during 2018 and 2017, respectively, primarily related to patent registrations.

Net cash provided by financing activities of continuing operations was $1,115,000 for 2018, compared to cash used of $215,000 for 2017. During 2018, the Company entered into a bank agreement with a new lender, as described below, and repaid the outstanding balance under its previous loans together with associated payoff fees.

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.

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 Agreement.

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.

As of December 31, 2018, the Company had cash-on-hand and amounts available under its Loan Agreement totaling $5,272,000.  As such, our ordinary short-term capital needs are expected to be met from cash-on-hand and borrowings available from the revolving line-of-credit under our Loan Agreement which was unused as of December 31, 2018.  In addition, the Company is anticipating an earn-out payment from the sale of its non-invasive blood pressure technology in July 2017.  In accordance with that agreement, the Company is entitled to a payment in August 2019 not to exceed $2,000,000, following a 24-month period ending June 30, 2019.  The Company has not recorded any amounts potentially due from the earn-out payment but believes that the Company will earn all, or nearly all, of the entire amount.   Management believes its cash balances and available borrowings are sufficient to support operations through March 31, 2020. Management further believes that given the Company's current and expected rate of cash consumption over the next 12 months, together with the principal repayments required under its Loan Agreement, it should, nonetheless, if the merger transaction with Edwards is not completed, take action to improve its liquidity until such time that the Company can generate positive cash flow from operations.  Management estimates it can achieve positive cash flow in late 2020.  Such actions to enhance liquidity may include seeking further changes in its debt instruments (including waivers, modifications, and/or replacement of current agreements), reducing otherwise planned expenditures and operating expenses, or raising additional funds through the issuance of equity securities.

Cash flows may be impacted by a number of factors, including changing market conditions, market acceptance of the FORE-SIGHT system, the loss of one or more key customers, and other factors, including those detailed in Item 1A of this report, entitled Risk Factors.  There can be no assurance that the Company will be successful in modifying or refinancing our debt instruments or raising additional capital if the need arises.  The failure to raise any necessary additional capital on acceptable terms, or at all, could have a material adverse effect on the Company's business and results of operations.

The Company's 2019 business plans call for operating expenditures to be slightly above 2018 levels. Capital expenditures for 2019 are expected to approximate 2018 levels. Capital expenditures include the Company's placement of FORE-SIGHT monitors in customer accounts, whereby the Company retains title to the monitor in exchange for customer purchases of disposable sensors.

The Company's results of operations were not significantly affected by inflation during 2018.

The Company has no off-balance sheet arrangements other than operating leases for office and warehouse space.

The Company's financial statements have been prepared in accordance with generally accepted accounting principles in the United States. In preparing the financial statements, the Company is required to make estimated judgments. Such judgments are based upon historical experience and certain assumptions that are believed to be reasonable in the particular circumstances. Those judgments affect both balance sheet and income statement accounts and disclosures. The Company evaluates its assumptions on an ongoing basis by comparing actual results with its estimates. Actual results may differ from the original estimates. The following accounting policies are those that the Company believes to be most critical to the preparation of its financial statements.

Inventory Valuation – The Company's inventories are stated at the lower of cost or market. The Company provides allowances on inventories for any material that has become obsolete or may become unsalable based on estimates of future demand and the sale price in the market.  Judgments with respect to salability and usage of inventories, estimated market value, and recoverability upon sale are complex and subjective.  Such assumptions are reviewed periodically, and adjustments are made, as necessary, to reflect changed conditions.  There were no significant inventory write-offs for any period presented.

Deferred Income Tax Assets – The Company has recorded deferred income tax assets for the estimated benefit of future tax deductions on inventories, property and equipment, and other accruals, as well as net operating loss carryforwards and tax credits.  Based on recent cumulative pre-tax losses and the Company's estimates of future taxable income, management has established a deferred tax asset valuation allowance.

Stock-based Compensation – The Company records the fair value of stock-based compensation awards as expenses in its consolidated statements of operations. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected dividend yield, risk-free interest rate, expected stock-price volatility, expected term, and forfeiture rate. Restricted stock awards are generally based upon the closing price of the common stock on the date of the grant. Amortization of stock-based awards takes place over the vesting period associated with the award.

Sales and Accounts Receivable Recognition – Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2016-10, Topic 606, Revenue from Contracts with Customers.  The Company used the Modified Retrospective method, under which prior-year results are not restated.  The standard, including the cumulative effect of its adoption, did not have a material impact on the Company's financial statements.

The Company holds no derivative securities for trading purposes and is not subject in any material respect to currency or other commodity risk.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors

CAS Medical Systems, Inc.

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of CAS Medical Systems, Inc. and Subsidiary (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in stockholders' equity (deficiency), and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. Federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ CohnReznick LLP

We have served as CAS Medical Systems, Inc.'s auditor since 2010.

Roseland, New Jersey

 

 

 

 

 

 

CAS Medical Systems, Inc.

Consolidated Balance Sheets

As of December 31, 2018 and 2017

 

 

 

 

 

 

ASSETS		2018				2017
CURRENT ASSETS:
Cash and cash equivalents		$	3,271,999			$	5,652,996
Accounts receivable, net			3,182,821				2,918,950
Inventories			1,011,594				1,076,261
Other current assets			620,419				353,079
Total current assets			8,086,833				10,001,286
PROPERTY AND EQUIPMENT:
Leasehold improvements			147,373				151,377
Equipment at customers			3,938,022				3,506,386
Machinery and equipment			4,422,720				4,593,473
			8,508,115				8,251,236
Accumulated depreciation and amortization			(6,566,877	)			(6,080,350	)
Property and equipment, net			1,941,238				2,170,886
Intangible and other assets, net			821,541				802,391
Total assets		$	10,849,612			$	12,974,563

 

 

 

 

 

 

 

 

CAS Medical Systems, Inc.

Consolidated Balance Sheets

 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)		2018				2017
CURRENT LIABILITIES:
Accounts payable		$	1,133,874			$	691,596
Accrued expenses			2,199,052				1,651,873
Note payable			90,959				86,079
Current portion of long-term debt, less unamortized debt issuance costs			49,463				2,733,831
Liabilities associated with discontinued operations			—				35,000
Total current liabilities			3,473,348				5,198,379
Long-term debt, less current portion and unamortized debt issuance costs			9,239,610				4,943,195
Other long-term liability			400,000				320,000
Total liabilities			13,112,958				10,461,574
Commitments and contingencies (Note 11)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $.001 par value per share, 1,000,000 shares authorized
Series A convertible preferred stock, 95,500 shares issued and
outstanding, liquidation value of $16,175,829 and $15,091,377 at
December 31, 2018 and December 31, 2017, respectively			8,802,000				8,802,000
Series A exchangeable preferred stock, 54,500 shares issued and
outstanding, liquidation value of $9,231,232 and $8,612,356 at
December 31, 2018 and December 31, 2017, respectively			5,135,640				5,135,640
Common stock, $.004 par value per share, 60,000,000 shares authorized,
29,341,211 and 28,621,697 shares issued at December 31, 2018
and December 31, 2017, respectively, including shares held in treasury			117,365				114,487
Common stock held in treasury, at cost - 86,000 shares			(101,480	)			(101,480	)
Additional paid-in capital			33,171,165				31,989,207
Accumulated deficit			(49,388,036	)			(43,426,865	)
Total stockholders' equity (deficiency)			(2,263,346	)			2,512,989
Total liabilities and stockholders' equity (deficiency)		$	10,849,612			$	12,974,563

 

 

 

 

 

See accompanying notes.

 

CAS Medical Systems, Inc.

 

 

		2018				2017
Net sales from continuing operations		$	21,919,987			$	18,763,136
Cost of sales			9,213,763				8,505,010
Gross profit			12,706,224				10,258,126
Operating expenses:
Research and development			3,181,915				3,234,101
Selling, general and administrative			14,015,583				13,418,332
Total operating expenses			17,197,498				16,652,433
Operating loss			(4,491,274	)			(6,394,307	)
Interest expense, net			1,469,897				1,076,400
Loss from continuing operations before income taxes			(5,961,171	)			(7,470,707	)
Income tax benefit			—				(1,745,441	)
Loss from continuing operations			(5,961,171	)			(5,725,266	)
Discontinued operations:
Income from discontinued operations			—				745,396
Gain on sale of discontinued operations			—				4,388,254
Income tax expense			—				1,745,441
Income from discontinued operations			—				3,388,209
Net loss			(5,961,171	)			(2,337,057	)
Preferred stock dividend accretion			1,703,327				1,589,134
Net loss applicable to common stockholders		$	(7,664,498	)		$	(3,926,191	)
Loss per common share from continuing
operations - basic and diluted		$	(0.28	)		$	(0.27	)
Income per common share from discontinued
operations - basic and diluted			—				0.13
Per share basic and diluted net loss applicable to
common stockholders		$	(0.28	)		$	(0.14	)
Weighted-average number of common shares outstanding:
Basic and diluted			27,769,706				27,260,688

 

 

 

 

See accompanying notes.

 

CAS Medical Systems, Inc.

Consolidated Statements of Changes in Stockholders' Equity (Deficiency)

For the Years Ended December 31, 2018 and 2017

 

 

		Preferred Stock								Common Stock Issued								Common Stock Held in Treasury								Additional Paid-in				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Total
BALANCE, December 31, 2016			150,000			$	13,937,640				27,428,752			$	109,715				86,000			$	(101,480	)		$	30,557,093			$	(41,089,808	)		$	3,413,160
Net loss																															(2,337,057	)			(2,337,057	)
Common stock issued under stock purchase plan											14,455				58												18,836								18,894
Issuance of common stock to settle accrued liability											390,240				1,561												572,092								573,653
Restricted stock granted											788,250				3,153												(3,153	)							—
Stock compensation																											844,339								844,339
BALANCE, December 31, 2017			150,000				13,937,640				28,621,697				114,487				86,000				(101,480	)			31,989,207				(43,426,865	)			2,512,989
Net loss																															(5,961,171	)			(5,961,171	)
Common stock issued under stock purchase plan											16,157				65												16,235								16,300
Common stock issued - options exercised											53,824				215												10,510								10,725
Warrants exercised											34,000				136												31,484								31,620
Issuance of common stock to settle accrued liability											193,033				772												241,667								242,439
Restricted stock granted											422,500				1,690												(1,690	)							—
Warrant issued to lender																											124,248								124,248
Stock compensation																											759,504								759,504
BALANCE, December 31, 2018			150,000			$	13,937,640				29,341,211			$	117,365				86,000			$	(101,480	)		$	33,171,165			$	(49,388,036	)		$	(2,263,346	)

 

 

 

See accompanying notes.

 

CAS Medical Systems, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2018 and 2017

 

 

		2018				2017
OPERATING ACTIVITIES:
Net loss		$	(5,961,171	)		$	(2,337,057	)
Income from discontinued operations			—				3,388,209
Loss from continuing operations			(5,961,171	)			(5,725,266	)
Adjustments to reconcile loss from continuing operations to net cash
used in operating activities of continuing operations:
Depreciation and amortization			1,052,476				1,025,786
Amortization of debt issuance costs and discounts			507,127				255,705
Deferred income taxes			—				(1,745,441	)
Provision for doubtful accounts			—				191,567
Stock compensation			759,504				844,339
Impairment of capitalized costs			21,340				17,276
Amortization of gain on sale and leaseback of property			—				(91,603	)
Changes in operating assets and liabilities:
Accounts receivable			(263,871	)			(151,966	)
Inventories			64,668				297,603
Other current assets			(10,082	)			720,459
Accounts payable and accrued expenses			1,231,894				(313,839	)
Net cash used in operating activities of continuing operations			(2,598,115	)			(4,675,380	)
INVESTING ACTIVITIES:
Expenditures for property and equipment			(783,483	)			(596,381	)
Proceeds from sale of discontinued operations			—				4,527,206
Additions to intangible assets			(79,834	)			(67,480	)
Net cash (used in) provided by investing activities of continuing operations			(863,317	)			3,863,345
FINANCING ACTIVITIES:
Proceeds from long-term debt			2,000,000				—
Payment of end-of-term loan fee			(320,000	)			—
Deferred debt issuance costs			(370,832	)			—
Proceeds from line-of-credit			—				1,000,000
Repayment of line-of-credit			—				(1,000,000	)
Repayments of notes payable			(252,378	)			(234,087	)
Proceeds from issuance of common stock			58,645				18,894
Net cash provided by (used in) financing activities of continuing operations			1,115,435				(215,193	)
Net decrease in cash and cash equivalents from continuing operations			(2,345,997	)			(1,027,228	)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Cash (used in) provided by operating activities of discontinued operations			(35,000	)			1,191,518
Net cash (used in) provided by discontinued operations			(35,000	)			1,191,518
Net change in cash and cash equivalents			(2,380,997	)			164,290
Cash and cash equivalents, beginning of year			5,652,996				5,488,706
CASH AND CASH EQUIVALENTS, END OF YEAR		$	3,271,999			$	5,652,996
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest		$	946,649			$	808,544
Accrued liability settled with common stock		$	242,439			$	573,653
Insurance premiums funded with note payable		$	257,258			$	250,151
End-of-term fee payable to lender		$	400,000			$	—
Warrant issued to lender		$	124,248			$	—

See accompanying notes.

 

CAS Medical Systems, Inc.

Notes to Consolidated Financial Statements

 

(1)	THE COMPANY

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

 

 

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.

(5)	INVENTORIES

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.

(7)	ACCRUED EXPENSES

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.

 

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