BioCardia, Inc. - Quarter Report: 2009 September (Form 10-Q)

NOTE 1 — DESCRIPTION OF BUSINESS

Cardo Medical, Inc. ("Cardo" or the "Company") is an early-stage orthopedic medical device company specializing in designing, developing and marketing reconstructive joint devices and spinal surgical devices. Reconstructive joint devices are used to replace knee, hip and other joints that have deteriorated through disease or injury. Spinal surgical devices involve products to stabilize the spine for fusion and reconstructive procedures. Within these areas, Cardo intends to focus on the higher-growth sectors of the orthopedic industry, such as advanced minimally invasive instrumentation and bone-conserving high-performance implants. Cardo is focused on developing surgical devices that will enable surgeons to bridge the gap between soft tissue-driven sports medicine techniques and classical reconstructive surgical procedures.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated balance sheet as of December 31, 2008, which has been derived from Cardo's audited financial statements as of that date, and the unaudited condensed consolidated financial information of Cardo as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008, has been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company's financial position at such date and the operating results and cash flows for such periods. Operating results for the interim periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the entire year.

Certain information and footnote disclosure normally included in financial statements in accordance with generally accepted accounting principles have been omitted pursuant to the rules of the United States Securities and Exchange Commission ("SEC"). These unaudited financial statements should be read in conjunction with our audited financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 31, 2009.

The condensed consolidated financial statements include the accounts of Cardo, Accelerated Innovation, Inc. ("Accelerated"), Uni-Knee LLC ("Uni") and Cervical Xpand LLC ("Cervical"). All significant intercompany transactions have been eliminated in consolidation. The non-controlling and minority interests in these companies is represented by a single balance in the condensed consolidated balance sheets.

At September 30, 2009, we had $1.6 million in cash; however, subsequent to the balance sheet date, the Company used $1.17 million in order to complete the Vertebron, Inc, transaction (refer to Note 7) and raised net proceeds of approximately $3.2 million through a private placement (refer to Note 7). With this subsequent net cash infusion, the available funds are still not projected to meet all of the Company's working capital needs for the next twelve months. The fact that the Company will sustain losses through the remainder of 2009 and still requires outside sources of additional capital to supplement operations continues to create an uncertainty about the Company's ability to continue as a going concern.

Management intends to use borrowings and securities sales to mitigate the effects of our use of that cash. However, Cardo cannot assure you that debt or equity financing, if and when required, will be available. Cardo's ability to continue as a going concern is dependent upon receiving additional funds either through the issuance of debt or

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through common and/or preferred stock and the success of management's plan to expand sales. Although Cardo may obtain external financing through the sales of its own securities, there can be no assurance that such financing will be available, or if available, that any such financing would be on terms acceptable to the Company. If Cardo is unable to fund its cash flow needs, it may have to reduce or stop planned growth or scale back operations and reduce staff. The condensed consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

The basic loss per share is calculated by dividing the net loss attributable to common shareholders by the weighted average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional shares were dilutive. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.

For the three and nine months ended September 30, 2009, 2,358,400 potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share, respectively.

The Company had three customers that accounted for 24%, 21% and 11% of accounts receivable as of September 30, 2009. At December 31, 2008, the Company had five customers that accounted for 23%, 16%, 15%, 12% and 11% of its accounts receivable. The Company had three customers that accounted for 29%, 25% and 15% of sales during the nine months ended September 30, 2009. Three customers accounted for 24%, 21% and 15% of sales during the three months ended September 30, 2009. During the nine months ended September 30, 2008, four customers accounted for 49%, 11%, 11% and 10% of sales. Four customers accounted for 40%, 19%, 12% and 11% of sales during the three months ended September 30, 2008.

Certain amounts from prior periods have been reclassified to conform to the current period presentation.

In July 2009, the FASB issued ASC 105-10 (Prior authoritative literature: SFAS No. 168, The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles), which will become the single source of authoritative GAAP recognized by the FASB.  ASC 105-10 does not change current U.S. GAAP, but on the effective date, the FASB Accounting Standards Codification ("ASC")^TM will supersede all then existing non-SEC accounting and reporting standards.  The ASC is effective for interim and annual reporting periods ending after September 15, 2009.  Cardo adopted ASC 105-10 during the quarter ended September 30, 2009 and revised its referencing of GAAP accounting standards in these financial statements to reflect the new standards.

In May 2009, the FASB issued ASC 855-10 (Prior authoritative literature: SFAS No. 165, Subsequent Events) which provides guidance on management's assessment of subsequent events.  It is not expected to significantly change practice because its guidance is similar to that in American Institute of Certified Public Accountants Professional Standards U.S. Auditing Standards Section 560, Subsequent Events, with some modifications.  The Company adopted ASC 855-10 during the quarter ended June 30, 2009. The adoption of ASC 855-10 did not have a material impact on the Company's results of operations, financial position or cash flows.

In April 2009, FASB issued ASC 820-10 (Prior authoritative literature: FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly). It does not change the definition of fair value as previously detailed, but provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. Cardo adopted ASC 820-10 during the quarter ended June 30, 2009. The adoption of ASC 820-10 did not have a material impact on the Company's results of operations, financial position or cash flows.

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In April 2009, the FASB issued ASC 320-10 (Prior authoritative literature: FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments). ASC 320-10 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities and provides additional disclosure requirements for other-than-temporary impairments for debt and equity securities. ASC 320-10 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. Cardo adopted ASC 320-10 during the quarter ended June 30, 2009. The adoption of ASC 320-10 did not have a material impact on the Company's results of operations, financial position or cash flows.

In April 2009, the FASB issued ASC 825-10 (Prior authoritative literature: FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments). FASB ASC 825-10 requires that disclosures about the fair value of a company's financial instruments be made whenever summarized financial information for interim reporting periods is made. Cardo adopted ASC 825-10 during the quarter ended September 30, 2009. The adoption of ASC 825-10 did not have a material impact on the Company's results of operations, financial position or cash flows.

In June 2009, the FASB issued the following new accounting standards, which remain authoritative until such time that each is integrated into the Codification:

• SFAS No. 166, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140
• SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 amends FASB Interpretation No. ("FIN") 46, Consolidation of Variable Interest Entities (revised December 2003) - an interpretation of ARB No. 51

SFAS No. 166 seeks to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about transfers of financial assets; the effects of the transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor's interest in transferred financial assets. SFAS No. 166 is effective for interim and annual reporting periods beginning after November 15, 2009. The Company has not completed its evaluation, but does not expect the adoption of SFAS No. 166 to have a material impact on its consolidated financial statements.

SFAS No. 167 requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance, and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS No. 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS No. 167 is effective for interim and annual reporting periods beginning after November 15, 2009. The Company has not completed its evaluation, but does not expect the adoption of SFAS No. 167 to have a material impact on its consolidated financial statements.

Inventories consisted of the following at:

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NOTE 4 — SHARE BASED PAYMENT

On August 29, 2008, the Company issued options to certain employees and Board members to purchase membership units in Cardo. The options give the grantees the right to purchase up to 2,398,400 shares of the Company's common stock at an exercise price of $0.23 per share. The options vest 20% each year over a five-year period and expire after ten years. The weighted average grant date fair value of options granted was $0.13 per option, for a total fair value of $300,000, which will be reflected as an operating expense over the vesting period of the options. Stock option compensation recognized for the three and nine months ended September 30, 2009 in the accompanying condensed consolidated statements of operations amounted to $27,105 and $89,562, respectively. Stock option compensation was $11,103 for the three and nine months ended September 30, 2008.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Because the Black-Scholes option valuation model incorporate ranges of assumptions for inputs, those ranges are disclosed. To estimate volatility of the options over their expected terms, the Company measures the historical volatility of the components of the small cap sector of the Dow Jones medical equipment index for a period equal to the expected life of the Cardo options. It also measures the volatility of other public companies with similar size and industry characteristics to Cardo for the same period. These measurements are averaged and the result is used as expected volatility. As there is no history of option lives at Cardo, the expected term of options granted is the midpoint between the vesting periods and the contractual life of the options. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The forfeiture rate is based on an analysis of the nature of the recipients' jobs and relationships to the Company.

A summary of stock option activity as of September 30, 2009, and changes during the period then ended is presented below.

The aggregate intrinsic value represents the closing stock price as of September 30, 2009 less the exercise price, multiplied by the number of options that have an exercise price that is less than the closing stock price.

On June 30, 2009, Cardo completed a private placement with investors to purchase 8,689,319 shares ("Purchaser Shares") of the Company's common stock, par value $0.001 per share at a price of $0.35 per share for aggregate total proceeds of $3,023,013 (net of legal fees of $18,247). The Purchaser Shares have a 24-month lock up provision.

As of September 30, 2009, the Company had not yet issued a portion of the Purchaser Shares and has recorded this amount as common stock issuable. The Company subsequently issued these shares on October 6, 2009.

During the quarter ended September 30, 2009, the Company received $170,000 towards a private placement subject to the terms of the June 30, 2009 private placement. The private placement closed on September 21, 2009 but the common shares were not issued until October 6, 2009. Accordingly, the $170,000 is included in common stock issuable at the balance sheet date.

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NOTE 6 — SEGMENT INFORMATION

Cardo's businesses are currently organized into the following two reportable segments; reconstructive products (the "Reconstructive Division") and spine products (the "Spine Division"). The Reconstructive Division segment is comprised of activity relating to Cardo's unicompartmental knee, patella-femoral products, and reconstructive knee products. The Spine Division segment is comprised of the spinal lumbar fusion system and cervical plate and screw systems.

These reportable segments are based on the nature of the products offered. Management evaluates performance and allocates resources based on several factors, of which the primary financial measure is segment operating results. Due to the distinct nature of the products in the Reconstructive Division, and the fact that it has a more developed market for its products, it is considered by management as a separate segment. The Spine Division is still in the process of developing the market and obtaining instrumentation necessary to sell the products in greater quantities. As a result, the Spine Division is considered by management as a separate segment. The accounting policies of the reportable segments are the same as those described in Note 1.

As of September 30, 2009, the Reconstructive Division includes $1,232,823 of goodwill and $4,515,157 in other intangible assets relating to Cardo's unicompartmental knee product. These amounts are expected to be deductible for income tax purposes.

The following table sets forth financial information by reportable segment as of September 30, 2009 and for the nine and three months ended September 30, 2009 and 2008:

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At a hearing held on September 15, 2009, Cardo, the successful bidder at an auction sale, was authorized to purchase substantially all of the assets of Vertebron, Inc. ("Vertebron") free and clear of all liens by the United States Bankruptcy Court for the District of Connecticut (the "Bankruptcy Court"). On September 29, 2009, the Bankruptcy Court issued an order memorializing the hearing held on September 15, 2009 (the "Order").

As a result of the Order, on September 30, 2009, Cardo entered into an Asset Purchase Agreement (the "Agreement") with Vertebron, as a debtor-in-possession, to purchase substantially all of Vertebron's assets, excluding certain assets, such as accounts receivable, cash and cash equivalents as of the closing date. Pursuant to the Agreement, the purchase price for the assets is $1,300,000 to be paid in cash.

On October 1, 2009, the Company completed the transaction by wiring the $1.17 million balance due under the Agreement. Pursuant to the Agreement, Cardo did not establish control of the assets acquired in this transaction until full consideration was received by Vertebron; therefore, the condensed consolidated financial statements as of September 30, 2009 do not reflect this transaction. Included in deposits and other assets at September 30, 2009 are cash deposits required by the Bankruptcy Court totaling $130,000 and $29,033 of direct costs associated with the Vertebron transaction.

On October 27, 2009, the Company sold 9,949,276 shares of its common stock, par value $0.001 per share, at a price of $0.35 per share for aggregate gross proceeds of $3,482,250 as part of a private placement for maximum gross proceeds of $6,500,000. The placement agent is a related party through a significant common shareholder.

In connection with this private placement, the Company paid a finder's fee of 8% on a portion of the gross proceeds and granted 379,398 share purchase warrants. Each share purchase warrant entitles the holder to purchase one share of the Company's common stock at an exercise price of $0.44 per share for a period of up to five years.

The Company evaluated subsequent events through November 12, 2009, the date this Quarterly Report on Form 10-Q was filed with the SEC.

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The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The following discussion and analysis excludes the impact of clickNsettle.com, Inc. ("CKST")'s financial condition and results of operations prior to the Merger on August 29, 2008 because they were not material in relation to the financial information for any of the periods presented below.

All amounts, other that share amounts, are stated in thousands.

As used in this "Management's Discussion and Analysis of Financial Condition and Results of Operation," except where the context otherwise requires, the term "we," "us," "our" or "Cardo" refers to the business of Cardo Medical, Inc.

Cardo Medical, Inc. is an early-stage orthopedic medical device company specializing in designing, developing and marketing reconstructive joint devices and spinal surgical devices. Reconstructive joint devices are used to replace knee, hip and other joints that have deteriorated through disease or injury. Spinal surgical devices involve products to stabilize the spine for fusion and reconstructive procedures. Within these areas, Cardo intends to focus on the higher-growth sectors of the orthopedic industry, such as advanced minimally invasive instrumentation and bone-conserving high-performance implants. Cardo is focused on developing surgical devices that will enable surgeons to bridge the gap between soft tissue-driven sports medicine techniques and classical reconstructive surgical procedures. Cardo commercializes its reconstructive joint devices through its Cardo Orthopedics division and its spine devices through its Cardo Spine division. The Company launched and commenced sales of its first product in late 2006, which was a high-performance, unicompartmental knee replacement. The Company commenced sales of its reconstructive and spine products in 2008.

On June 18, 2008, Cardo entered into a Merger Agreement and Plan of Reorganization with CKST and Cardo Acquisition, LLC, a California limited liability company and wholly-owned subsidiary of CKST. Upon the consummation of the transactions contemplated by the Merger Agreement, CKST acquired Cardo through a merger of Cardo with Cardo Acquisition, with Cardo continuing as the surviving entity in the Merger and a wholly-owned subsidiary of CKST. Pursuant to the Merger Agreement, all of the issued and outstanding units of Cardo's membership interests were converted into the right to receive shares of the common stock of CKST.

We are headquartered in Beverly Hills, California. In connection with the consummation of the Merger, CKST proposed to its shareholders an amendment to its Amended and Restated Certificate of Incorporation to change its name from "clickNsettle.com, Inc." to "Cardo Medical, Inc." CKST's trading symbol was "CKST.OB," which has changed to "CDOM.OB" in connection with the name change. CDOM's common stock is quoted on the National Association of Securities Dealers, Inc.'s, Over-the-Counter Bulletin Board, or the OTC Bulletin Board.

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Critical Accounting Policies

Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management makes estimates relating to allowances for doubtful accounts, excess and obsolete inventory items, the estimated depreciable lives of property and equipment, the impairment of goodwill and other intangible assets, share-based payment, deferred tax assets and the allocation of the purchase price paid for the minority interests in Uni, Cervical and Accelerated. Given the short operating history of Cardo, actual results could differ from those estimates.

On August 29, 2008, Cardo consummated a reverse takeover of CKST thereby adopting CKST as the taxpaying entity.

The Company's deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. The estimated value of the deferred tax assets are subject to significant change based on the company's future profitability. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

In June 2008, the Financial Accounting Standards Board ("FASB") sought to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FASB prescribed a recognition threshold and measurement requirement for the financial statement recognition of a tax position that has been taken or is expected to be taken on a tax return and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As such, the Company may only recognize or continue to recognize tax positions that meet a "more likely than not" threshold. Based on this analysis, the Company's tax position is unlikely to change.

The Company recognizes revenue when it's realizable and earned. The Company considers revenue to be realizable and earned when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectability is reasonably assured. Persuasive evidence of the arrangements occurs when the Company receives a signed contract from the hospital in which the surgery will be performed. Within that contract is the price at which the hospital will buy the device. Delivery occurs on the day of surgery when the device is implanted by the surgeon. Collectability is reasonably assured as we have continuing relationships with the hospitals and we can pursue collections if necessary. As the Company does not accept returns and does not have any post-sale obligations, the date of revenue recognition is generally on the day of the surgery.

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. The Company's management currently believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company's products will continue. Either of these could result in future impairment of long-lived assets. The first step of the Company's goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount,

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goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is completed. The testing for impairment needs to be conducted at the reporting unit, or component level, which is one level below the operating unit. In Cardo's case, the operating units are the Reconstructive and Spine product lines. The reporting units are one level below that. In the case of the Reconstructive Division, the reporting units are the knee and hip products. For the Spine Division, the reporting units are the licensed and internally developed products.

Property and equipment are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives, which range from three to five years. This estimate is based on the useful life of the individual items. When items are retired or disposed of, income is charged or credited for the difference between the net book value of the asset and the proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized. This estimate is unlikely to experience any differences from what is reflected in the financial statements.

In order to determine compensation on options issued to consultants, and employees' options, the fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Company estimates the requisite service period used in the Black-Scholes calculation based on an analysis of vesting and exercisability conditions, explicit, implicit, and/or derived service periods, and the probability of the satisfaction of any performance or service conditions. The Company also considers whether the requisite service has been rendered when recognizing compensation costs. Because the Black-Scholes option valuation model incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on the historical volatility of the components of the small cap sector of the Dow Jones medical equipment index for a period equal to the expected life of the Cardo options. It also measures the volatility of other public companies with similar size and industry characteristics to Cardo for the same period. These measurements are averaged and the result is used as expected volatility. As there is no history of option lives at Cardo, the expected term of options granted is the midpoint between the vesting periods and the contractual life of the options. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The forfeiture rate is based on an analysis of the nature of the recipients' jobs and relationships to the Company.

Inventory is stated at the lower of cost or net realizable value as determined by assessing the gross profit less selling costs of each inventory item. Cost is determined on a first-in, first-out basis; and the inventory is comprised of work in process and finished goods. Work in process consists of fabrication costs paid relating to items not physically received. Finished goods are completed knee, spine and hip replacement products ready for resale to customers.

At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence. This evaluation includes an analysis of sales levels by product type. Among other factors, the Company considers current product configurations, historical and forecasted demand, market conditions and product life cycles when determining the net realizable value of the inventory. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventory. The Company did not have any inventory considered by management to be excess or obsolete as of December 31, 2008 and September 30, 2009. Based on the forecasted sales amounts, we do not expect any changes in net realizable value in the near future.

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Recent Accounting Pronouncements

In July 2009, the FASB issued ASC 105-10 (Prior authoritative literature: SFAS No. 168, The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles, which will become the single source of authoritative GAAP recognized by the FASB.  ASC 105-10 does not change current U.S. GAAP, but on the effective date, the FASB Accounting Standards Codification ("ASC")^TM will supersede all then existing non-SEC accounting and reporting standards.  The ASC is effective for interim and annual periods ending after September 15, 2009.  Cardo adopted ASC 105-10 during the quarter ended September 30, 2009 and revised the referencing of GAAP accounting standards in our financial statements to reflect the new standards.

In May 2009, the FASB issued ASC 855-10 (Prior authoritative literature: SFAS No. 165, Subsequent Events) which provides guidance on management's assessment of subsequent events.  It is not expected to significantly change practice because its guidance is similar to that in American Institute of Certified Public Accountants Professional Standards U.S. Auditing Standards Section 560, Subsequent Events, with some modifications.  The Company adopted ASC 855-10 during the quarter ended June 30, 2009. The adoption of ASC 855-10 did not have a material impact on our results of operations, financial position or cash flows.

In April 2009, FASB issued ASC 820-10 (Prior authoritative literature: FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly). It does not change the definition of fair value as previously detailed, but provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. Cardo adopted ASC 820-10 during the quarter ended June 30, 2009. The adoption of ASC 820-10 did not have a material impact on our results of operations, financial position or cash flows.

In April 2009, the FASB issued ASC 320-10 (Prior authoritative literature: FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments). ASC 320-10 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities and provides additional disclosure requirements for other-than-temporary impairments for debt and equity securities. ASC 320-10 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. Cardo adopted ASC 320-10 during the quarter ended June 30, 2009. The adoption of ASC 320-10 did not have a material impact on our results of operations, financial position or cash flows.

In April 2009, the FASB issued ASC 825-10 (Prior authoritative literature: FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments). FASB ASC 825-10 requires that disclosures about the fair value of a company's financial instruments be made whenever summarized financial information for interim reporting periods is made. Cardo adopted ASC 825-10 during the quarter ended September 30, 2009. The adoption of ASC 825-10 did not have a material impact on our results of operations, financial position or cash flows.

In June 2009, the FASB issued the following new accounting standards, which remain authoritative until such time that each is integrated into the Codification:

• SFAS No. 166, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140
• SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 amends FASB Interpretation No. ("FIN") 46, Consolidation of Variable Interest Entities (revised December 2003) - an interpretation of ARB No. 51

SFAS No. 166 seeks to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about transfers of financial assets; the effects of the transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor's interest in transferred financial assets. SFAS No. 166 is effective for interim and annual reporting periods beginning after November 15, 2009. The Company has not completed its evaluation, but does not expect the adoption of SFAS No. 166 to have a material impact on our consolidated financial statements.

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SFAS No. 167 requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance, and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS No. 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS No. 167 is effective for interim and annual reporting periods beginning after November 15, 2009. The Company has not completed its evaluation, but does not expect the adoption of SFAS No. 167 to have a material impact on our consolidated financial statements.

The following is a comparison of the consolidated results of operations for Cardo for the three months ended September 30, 2009 and 2008:

During the quarter ended September 30, 2009, we generated revenues of $436 compared to $411 for the same period in 2008. The wider acceptance of our Hip and Spine products by orthopedic and back surgeons has resulted in higher sales volume in the current year. Accordingly, sales of Hip and Spine products increased $122 in the current quarter as compared to 2008. We launched our Hip product in the first quarter of 2009 which resulted in $78 of sales during the quarter ended September 30, 2009. Comparable sales for the same period in 2008 were nominal. The increases in Hip and Spine sales were offset by a drop in Knee sales in 2009 compared to 2008. Our Knee and Hip products accounted for 79% of total sales during the three months ended September 30, 2009. During the quarter ended September 30, 2008, Knee products totaled 93% of sales.

During the quarter ended September 30, 2009, we had cost of sales of $84 compared to $66 during the quarter ended September 30, 2008. Our gross profit percentage was 80.7% for the three months ended September 30, 2009 compared to 83.9% for the corresponding period in 2008. This decrease is attributed to sales of Hip products in 2009, which generate lower margins than Knee products, and a slight decrease in the profit margin from Knee products. During the quarter ended September 30, 2008, there were minimal sales of Hip products so the profit margin was indicative of our Knee product. As Cardo moves forward, we expect that our current product costs will be maintained and the gross profits shall remain mostly in-line with the current year percentages.

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Research and Development Expenses

During the quarter ended September 30, 2009, we had research and development costs of $123 compared to $142 for the same period in 2008. The decrease in the current year is indicative of reduced research activity as most of our products are on the market. Research costs associated with our Total Knee product have slowed because it is nearing its launch in mid-2010; however, research is underway on a new Hip product so research and development expenses are likely to increase in the upcoming quarters.

During the quarter ended September 30, 2009, we had selling general and administrative expenses of $1,440 compared to $1,089 in the same period of 2008. During 2009, labor and labor-related expenses increased $342 compared to 2008 as we expanded our operations in order to meet current and anticipated growth. Depreciation and amortization expense increased by $93 during the quarter ended September 30, 2009 because of the acquisition of additional instrumentation required to support base inventory levels and expected future sales increases, and the purchase of the non-controlling interest in Accelerated Innovation, LLC in June 2008 which resulted in $5,328 of amortizable intangible assets. Rent, travel and office expenses were slightly higher in 2009 as we added office space and our overall business activity was greater than it was in 2008. These cost increases were partially offset by a drop in professional fees during 2009 of $154 and commission expense which was higher in 2008 due to greater incentives to initiate sales. There were significant legal and accounting costs associated with the purchase of the non-controlling interest in Accelerated Innovation, LLC in June 2008 and the reverse merger transaction with clickNsettle.com, Inc. which was completed in August 2008.

During the quarter ended September 30, 2009, we had interest income of $6 compared to $5 during the quarter ended September 30, 2008. Interest income is earned on our excess cash balances, which were comparable in both periods.

The following is a comparison of the consolidated results of operations for Cardo for the nine months ended September 30, 2009 and 2008:

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During the nine months ended September 30, 2009, we generated revenues of $1,314 compared to $932 for the same period in 2008. The increase of $382 was attributed to the wider acceptance of our Knee, Hip and Spine products by orthopedic and back surgeons that resulted in higher sales volume in the current year. We launched our Hip product in the first quarter of 2009 which resulted in $278 of sales thus far in 2009 compared to $45 in 2008. Our Knee and Hip products accounted for 89% of total sales during the nine months ended September 30, 2009. Knee was the primary product with 90% of total sales during the nine months ended September 30, 2008.

During the nine months ended September 30, 2009, we had cost of sales of $254 compared to $139 during 2008. Our gross profit percentage was 80.7% for the nine months ended September 30, 2009 compared to 85.1% for the corresponding period in 2008. This decrease was attributed to significant sales of Hip products in 2009, which generate lower margins than Knee products, and a slight decrease in the profit margin from Knee products. During the nine months ended September 30, 2008, sales of Hip products were minimal so the profit margin was mostly indicative of our Knee product. As Cardo moves forward, we expect that our current product costs will be maintained and the gross profits shall remain mostly in-line with the current year percentages.

During the nine months ended September 30, 2009, we had research and development costs of $329 compared to $1,288 for the same period in 2008. The decrease was primarily due to a one-time charge of $938 of in-process research and development acquired in connection with the purchase of the non- controlling interest in Accelerated Innovation, LLC in June 2008. The acquired in-process research and development related to development costs associated with our Uni Knee system. Aside from the in-process research and development, spending on research and development was fairly consistent from 2008 to 2009. During 2008, we incurred more costs associated with Hip products. Research costs associated with our Total Knee product have slowed because it is nearing its launch in mid-2010; however, research is underway on a new Hip product so research and development expenses are likely to increase some in the upcoming quarters.

During the nine months ended September 30, 2009 our selling general and administrative expenses were $4,521 compared to $2,488 for the same period in 2008, a net increase of $2,033. During 2009, labor and labor-related expenses increased $1,626 compared to 2008 as we expanded our operations in order to meet current and anticipated growth. Depreciation and amortization expense increased by $558 during the quarter ended September 30, 2009 because of the acquisition of additional instrumentation required to support base inventory levels and expected future sales increases, and the purchase of the non-controlling interest in Accelerated Innovation, LLC in June 2008 which resulted in $5,328 of amortizable intangible assets. Commission expense increased accordingly with the increase in sales. Rent, travel, warehouse, insurance and office expenses were also higher during the nine months ended September 30, 2009 as we added office space and our overall business activity was greater than it was in 2008. These cost increases were partially offset by a drop in professional fees during 2009 of $442. There were significant legal and accounting costs associated with the purchase of the non-controlling interest in Accelerated Innovation, LLC in June 2008 and the reverse merger transaction (the "Merger") with clickNsettle.com, Inc. which was completed in August 2008.

• We will need to raise additional funds in the future to fund our operations and research, and these funds may not be available on acceptable terms, if at all.
• We expect to incur significant losses, either directly or indirectly through the companies in which we develop our products, for at least the next several years, and we cannot assure you that we will ever be profitable.
• We have a limited number of products currently available for sale and there is a high risk that our research and development efforts might not successfully generate any viable product candidates in the future.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, our chief executive officer and chief financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009. Based upon their evaluation, and as a result of previously identified material weakness in internal control over financial reporting as discussed in our Annual Report on Form 10-K for the year ended December 31, 2008, they concluded that our disclosure controls and procedures were not effective as of September 30, 2009. The previously reported material weaknesses in internal control over financial reporting related to (1) adequate qualified staff necessary to effectively apply the process, and (2) methods and practices employed to report unusual transactions such as our reverse merger. Our management has discussed the material weakness in our internal control over financial reporting with our audit committee. In an effort to remediate the identified material weaknesses, we have documented our process and procedures governing our internal reporting. We also plan to implement further changes to our internal control over financial reporting, including (1) a re-evaluation of our staffing needs, and (2) analysis of unusual transactions as they are occurring to allow adequate time for multiple levels of review.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 6 — EXHIBITS

The following exhibits are filed as part of, or incorporated by reference into this Report:

Exhibit Number		Exhibit Title
31.1		Certification of Chief Executive Officer of Cardo Medical, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer of Cardo Medical, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer of Cardo Medical, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer of Cardo Medical, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CARDO MEDICAL, INC.
November 12, 2009	By:	/s/ Andrew Brooks
		Andrew Brooks
		Chief Executive Officer
November 12, 2009	By:	/s/ Derrick Romine
		Derrick Romine
		Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit Number		Exhibit Title
31.1		Certification of Chief Executive Officer of Cardo Medical, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     PDF
31.2		Certification of Chief Financial Officer of Cardo Medical, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     PDF
32.1		Certification of Chief Executive Officer of Cardo Medical, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     PDF
32.2		Certification of Chief Financial Officer of Cardo Medical, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     PDF