SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2002
---------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934.
For the transition period from ___________ to ___________.
Commission file number 333-69207
---------------------------------
Careside, Inc.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2863507
-------- ----------
(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
6100 Bristol Parkway, Culver City, CA 90230
----------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (310) 338-6767
--------------
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days
Yes X No
--- ---
The number of shares outstanding of the Registrant's common Stock, par
value $.01 per share, was 19,066,336 as of May 13, 2002.
CARESIDE, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
--------------------
Balance Sheets at December 31, 2001 and March 31, 2002
(unaudited).......................................................... 3
Statements of Operations for the three months ended
March 31, 2001 and 2002 (unaudited)................................. 4
Statements of Cash Flows for the three months ended
March 31, 2001 and 2002 (unaudited)................................. 5
Notes to Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...................................................... 14
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds....................... 15
Item 4. Submission of Matters to a Vote of Security Holders............. 15
Item 6. Exhibits and Reports on Form 8-K................................ 16
Signatures.................................................................... 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CARESIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
Assets
------
December 31, March 31,
2001 2002
-------------- -------------
Current Assets: (unaudited)
Cash $ 39 $ 43
Accounts receivable, net of allowance of $27 in 2001 and $32 in 2002 158 330
Inventory 2,498 1,992
Prepaid expenses and other 481 472
------------- -------------
Total current assets 3,176 2,837
------------- -------------
Property and Equipment, net of accumulated depreciation of $6,186 in 3,964 3,676
2001 and $6,493 in 2002 ------------- -------------
Deposits and Other 24 24
------------- -------------
Goodwill 50 -
------------- -------------
$ 7,214 $ 6,537
============= =============
Liabilities and Stockholders' Investment
----------------------------------------
Current Liabilties:
Current portion of long-term debt $ 2,756 $ 3,155
Current portion of obligation under capital lease 15 15
Accounts payable 1,715 2,574
Accrued expenses 604 791
Accrued interest 554 598
------------- -------------
Total current liabilties 5,644 7,133
------------- -------------
Deferred Warranty Revenue 5 5
------------- -------------
Long-Term Debt, net of current portion 483 396
------------- -------------
Obligation Under Capital Lease, net of current portion 9 5
------------- -------------
Commitments and Contingencies
Stockholders' Investment:
Common stock, $.01 par value:
50,000,000 shares authorized-
16,904,193 and 19,066,366 shares issued and outstanding at
December 31, 2001 and March 31, 2002 169 191
Additional paid-in capital 61,772 62,415
Accumulated Deficit (60,868) (63,608)
------------- --------------
Total stockholders' investment 1,073 (1,002)
--------------- --------------
$ 7,214 $ 6,537
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
3
CARESIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
For the Three Months
Ended March 31,
----------------------------
2001 2002
-------------- ------------
Net Sales $ 184 $ 601
Cost of Sales 1,002 1,301
---------- ----------
Gross Profit (Loss) (818) (700)
Operating Expenses:
Research and development - products 806 383
Research and development - software 203 237
Selling and marketing 853 716
General and administrative 404 495
Goodwill amortization 142 -
Goodwill impairment - 50
---------- ----------
Operating Loss (3,226) (2,581)
Other income (expense):
Interest income 10 -
Interest expense (109) (159)
---------- ----------
Net Loss (3,325) (2,740)
Preferred stock dividends on Series A & B (13) -
Accreted dividend on Series B & C (34) -
---------- ----------
Net loss available to common stockholders $ (3,372) $ (2,740)
---------- ----------
Basic and Diluted Net Loss per Common Share $ (0.30) $ (0.16)
---------- ----------
Shares used in Computing Basic and Diluted
Net Loss per Common Share 11,092,483 17,504,788
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
4
CARESIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)(unaudited)
Three Months Ended
March 31,
---------
2001 2002
---- ----
Operating Activities:
Net loss $ (3,325) $ (2,740)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 684 307
Goodwill impairment - 50
Interest Expense for warrants issued with bridge financings - 60
Changes in operating assets and liabilities:
Accounts receivable (12) (172)
Inventory (194) 488
Prepaid expenses and other (34) 9
Accounts payable 99 859
Accrued expenses 99 187
Accrued interest 49 44
--------- ----------
Net cash used in operating activities (2,634) (908)
--------- ----------
Investing Activities:
Purchases of property and equipment (65) (1)
--------- ----------
Net cash used in investing activities (65) (1)
--------- ----------
Financing Activities:
Net Borrowings (Payments) on long-term debt and bridge financing (123) 917
Payments on capital lease obligation (3) (4)
Net proceeds from the issuance of 2,072 -
preferred and common stock
--------- ----------
Net cash provided by financing activities 1,946 913
--------- ----------
Net Increase (Decrease) in Cash (753) 4
Cash, beginning of period 1,789 39
--------- ----------
Cash, end of period $ 1,036 $ 43
========= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
5
CARESIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the three
months ended March 31, 2002 of Careside, Inc. (the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Management has secured bridge financing that is funding its planned
operations. Steps have been taken to reduce the monthly costs and management
continues to pursue additional sources of funding. Until these sources of
financing our secured, uncertainties will continue that may impact the Company's
ability to fund its planned operation and meet its operating objectives. In
management's opinion, all adjustments, consisting of normal recurring
adjustments, which are necessary for a fair presentation of the financial
position and results of operations, have been made. The results of operations
for the three months ended March 31, 2002 are not necessarily indicative of the
results expected for the entire year. These financial statements should be read
in conjunction with the auditors report on the Company's financial statements
and notes related thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 and other areas included herein including
liquidity and capital resources. Certain prior period amounts have been
reclassified to conform to the current period presentation.
Note 2: RISKS AND LIQUIDITY/GOING CONCERN
Careside was incorporated in July 1996 to acquire an ongoing, point-of-care
("POC") testing, development-stage product from SmithKline Beecham Corporation
and its affiliates ("SmithKline") and to complete the development of and to
manufacture, market and distribute POC diagnostic products. In the fourth
quarter of 2000, Careside had substantially completed the initial development
efforts of the Company's core product and began generating sales and increasing
its focus on marketing efforts. In 1998, 1999 and for the nine months ended
September 30, 2000, Careside was considered a development stage enterprise Since
its inception, Careside has generated minimal revenues and incurred significant
losses. Careside anticipates incurring additional losses over at least the next
year, and such losses are expected to increase as Careside expands its marketing
activities. The accompanying consolidated financial statements have been
prepared in conformity with principles of accounting applicable to a going
concern. These principles contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
accompanying consolidated financial statements for the three months ended March
31, 2002, the Company incurred a net loss of $2.7 million and has used cash in
operating activities of $1.0 million and at March 31, 2002, the Company had a
working capital deficit of $4.3 million and an accumulated deficit of $63.6
million. These factors raise substantial doubt about the ability of the Company
to continue as a going concern. Additional financing will be needed by Careside
to fund its operations. The Company is currently working to raise additional
funding through bridge loans, long-term debt financing and permanent equity
financing (see note 7). Further, the Company has reduced portions of its fixed
overhead expenses. In addition, the ability of Careside to commercialize its
products will depend on, among other things, the relative cost to the customer
of Careside's products compared to alternative products, its ability to obtain
necessary regulatory approvals and to manufacture the products in accordance
with Good Manufacturing Practices, and its ability to market and distribute its
products. The Company's failure to raise capital on acceptable terms could have
a material adverse effect on its business, financial condition or results of
operations. There can be no assurance that Careside's future product
enhancements will receive regulatory clearance, that the Company will be able to
obtain additional financing, be profitable in the marketplace, or will be able
to repay its current debt obligations. The failure of the Company to
successfully achieve one or all of the above items will have a material impact
on the Company's financial position and results of operations.
The Company's report of Independent Public Accountants issued in connection with
the December 31, 2001 consolidated financial statements was qualified as to the
Company's ability to continue as a going concern. The Company has been advised
by its Independent Public Accountants that, if prior to the completion of their
audit of the Company's financial statements for the year ending December 31,
2002, the Company is unable to demonstrate its ability to fund operations and
repay debt as it becomes due in the next 12 months, their auditor's report on
those financial statements will be modified for the contingency related to the
Company's ability to continue as a going concern.
6
Note 3: INVENTORIES
At March 31, 2002, inventories consisted of raw materials to be utilized in the
manufacturing of disposable test cartridges, work in process and finished goods
including test cartridges and analyzers. Inventories are carried at the lower
of cost or market computed on a first-in, first-out (FIFO) basis (in thousands).
As of
-----
December 31, 2001 March 31, 2002
----------------- --------------
Raw materials $ 932 $ 905
Work in process 123 124
Finished goods 1,967 1,555
Reserve for Excess and Obsolesce (524) (592)
--------- --------
Total $ 2,498 $ 1,992
========= ========
Note 4: NET LOSS PER COMMON SHARE
Basic and diluted loss per share was computed by dividing net loss applicable
to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Dilutive loss per share is the same as basic as
the impact of stock options, warrants, and convertible preferred stock is
excluded because the impact is anti-dilutive to the Company's loss per share.
Note 5: REVENUE RECOGNITION
The Company applies the provisions of Staff Accounting Bulletin No. 101 (SAB
101) when recognizing revenue. SAB 101 states that the revenue generally is
realized or realizable and earned when all of the following criteria are met:
a) persuasive evidence of an arrangement exists, b) delivery has occurred or
the services have been rendered, c) the seller's price to the buyer is fixed or
determinable and d) collectibility is reasonably assured.
The Company recognizes revenue from the sale of Analyzers to doctors, hospitals
and laboratories upon customer acceptance. The Company recognizes revenue on
the sale of test cartridges, supplies and hematology solutions once shipment
has occurred and all of the conditions of SAB 101 have been met.
The Company recognizes revenue from the sale of analyzers to distributors
according to the terms of the distributor agreements. The Company's
distributors do not have rights of return or cancellation or any price
protection provisions. Revenue from distributors that does not meet all of the
requirements of SAB 101 and SFAS 48 is deferred and recognized upon the sale or
acceptance, if applicable, of the product to the end user.
The Company has entered into sales agreements with leasing companies whereby
the Company sells its products directly to the leasing company, who then leases
the products to the end user. Sales to the leasing company are on a
non-recourse basis and are recognized at the later of shipment date or customer
acceptance, when applicable.
Revenues from extended warranty contracts are deferred at the list sales price
and are recognized over the term of the contract.
Note 6: STATEMENTS OF CASH FLOWS
During the three-month periods ended March 31, 2002 and 2001 cash paid for
interest was approximately $60,000 and $40,000 respectively. During the same
periods the company made no cash payments for income taxes.
The Company had the following non-cash investing and financing activities which
have been excluded from the consolidated statement of cashflows:
For the three
months ended
March 31,
2001 2002
---- ----
7
Accrued Dividends $ 13,000 $ -
Accreted Dividends 34,000 -
Conversion of Series C
to common stock 223,000 -
Transfer of Analyzers from Inventory
to Property and Equipment 48,000 17,600
Conversion of debt equity - 605,000
Note: 7 BRIDGE FINANCING:
In the first quarter of 2002 and in April and May 2002, the Company entered into
a series of bridge financing and other debt transactions with various investors,
including the Company's CEO and members of the board of directors. The total net
cash proceeds from the financings was $1,009,000 for the first quarter
transactions and $1.5 million (See Note 9) for the April and May transactions.
In connection with the first quarter financings, the Company has issued warrants
to purchase 188,000 shares of common stock. The value of these warrants, using
the Black-Scholes pricing model aggregated $60,000, and was recorded as a
discount on the debt. This discount was amortized and charged to interest
expense in the first quarter. In connection with the April and May financings no
warrants to purchase shares of common stock have been issued. A summary of the
first quarter bridge financings is shown below.
First Quarter Bridge Financings
-------------------------------
Amount Warrants Value of Warrants Date of Note Due Date
------ -------- ----------------- ------------ --------
Investor 1 $ 600,000 100,000 $44,000 January 14, 2002 Converted to
common stock
March 6, 2002
Investor 2 319,000 70,000 13,000 February 28, 2002 May 14, 2002
CEO 50,000 10,000 1,800 February 28, 2002 Earlier of May
29, 2002 or close
of debt financing
(as defined)
Director 1 20,000 4,000 700 February 28, 2002 Earlier of May
29, 2002 or close
of debt financing
(as defined)
Director 2 20,000 4,000 700 February 28, 2002 Earlier of May
---------- ------- 29, 2002 or close
$1,009,000 188,000 of debt financing
========== ======= (as defined)
The note issued to Investor 1 bore a flat interest amount of $5,400. The note
also carried a feature whereby the Company was required to grant an additional
50,000 warrants for each 30-day period the note was outstanding. The Company
issued 100,000 such warrants, which were valued at $44,000 and were charged to
interest expense.
The note to Investor 2 bears no interest. The note is partially convertible with
$150,000 of the note convertible to common stock at $0.30 per share at the
holder's option. This conversion feature is extended through a purchase option
whereby the holder may purchase 500,000 shares of common stock during the
ninety-day period following repayment of the note. For each 30 day period that
the note is outstanding; the Company is required to issue warrants to purchase
35,000 shares of common stock at $0.30 per share. The Company so far recognized
the obligation for 70,000 such warrants, which were valued at $13,000 and were
charged to interest expense. In the event the Company defaults on the note under
the note terms, the note holder has the right to require the Company to purchase
the warrants at a price of $3.33 per underlying common share up to $350,000. The
note to Investor 2 became due and payable on May 14, 2002. Although the Company
has not received any written extensions or modifications of terms from Investor
2, the Company believes that Investor 2 will extend the due date as needed until
the Company is able to close a long-term debt financing (See Note 9). If
Investor 2 decides not to extend the due date and demands payment, it would have
a material adverse impact on the Company's financial position and results of
operations and ability to continue as a going concern.
The CEO and director notes carry interest at 9%. These notes carry purchase
option features whereby the holders have the right to purchase shares of common
stock at $0.30 per share for a period of ninety days after repayment of the
notes. For each 30 day period that the note is outstanding; the Company is
required to issue warrants to purchase 5,000 and 2,000 shares of common stock at
$0.30 per share for the CEO and each director, respectively. The Company issued
10,000 and 4,000 such warrants to the CEO and each director, respectively. The
value of these warrants was not material and was charged to interest expense.
8
Note 8: Goodwill Impairment and Inventory Reserve
In April 2002, the Company continued to face liquidity challenges and further
reduced its workforce. As a result of limited financial resources and personnel,
the Company determined it could no longer focus efforts towards the sales of its
H-2000 Hematology products. The Company performed an analysis of the value of
its Hematology business and determined that the goodwill of $50,000 would not be
realized. Accordingly, the Company recorded an impairment charge of $50,000 on
the remaining goodwill during the quarter ended March 31, 2002.
In connection with the assessment of the Hematology business and the uncertainty
of the future realizability of the H-2000 inventory on hand, the Company
recorded a reserve of $68,000 to reduce H-2000 inventories to their estimated
net realizable value.
Note 9: SUBSEQUENT EVENTS
In order to, among other things, raise additional funds for working capital and
repay prior loans, the Company has undertaken an initial closing of a new
private placement (the "2002 Private Placement") to existing stockholders of up
to $5,000,000 worth of 10% secured notes (the "Investment Notes") pursuant to
the terms and conditions of investment letter agreements, all of the same form,
dated as of April 2002 (collectively, the "Investment Agreement"). Subject to
stockholder approval, each holder of an Investment Note will have the
opportunity to exchange such holder's Investment Note for a 10% secured
convertible note with the same principal amount as his, her or its Investment
Note within fifteen (15) days after the Company obtains such required
stockholder approval. As of May 15, 2002, the Company has sold $1.5 million in
Investment Notes.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q, including
statements regarding the anticipated development and expansion of the Company's
business and expenditures, the intent, belief or current expectations of the
Company, its directors or its officers, primarily with respect to the future
operating performance of the Company and other statements contained herein
regarding matters that are not historical facts, are "forward-looking
statements" (as such term is defined in the Private Securities Litigation Reform
Act of 1995). Because such statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements include, but
are not limited to, those discussed in other filings, including those contained
in the Company's Form 10-K for the year ended December 31, 2001.
GENERAL
The Company markets the Careside System, a proprietary blood testing system. It
is designed to decentralize laboratory operations and provides a solution to the
limitations of central blood testing laboratories. The Careside System consists
of a desktop testing instrument called the Careside Analyzer(R), disposable test
cartridges and a data management device, the Careside Connect. The Careside
System performs blood tests at the same location as the patient, or what is
commonly called point-of-care. It provides rapid test results within 10 to 15
minutes from the time the blood is drawn from the patient, in contrast to the
traditional method of sending blood samples to hospital or commercial
laboratories and waiting between 4 and 24 hours to obtain test results. Such
centralized laboratories are burdened by transportation time and volume
processing steps. In addition, the Careside System is cost competitive and
offers a comprehensive test menu, which the Company believes represents more
than 80% of all routine blood tests ordered on an out-patient basis. These
include all of the most commonly ordered blood tests, as well as blood tests
required for critical care testing, including chemistry, electrochemistry, and
coagulation tests within a single testing instrument. As of March 31, 2002, the
Careside Analyzer and 42 tests were cleared for marketing by the FDA or are
exempt and can be marketed for professional laboratory use. The Company believes
that no other product for decentralized blood testing currently in the market
offers nearly as broad a menu of tests or combines these test categories.
The Company initiated commercial sales in the fourth quarter of 2000. The
Company has incurred losses and expects to incur increasing losses for the
foreseeable future as the Company launches its products and its marketing
expenditures increase. The Company's revenue for the immediate future will be
dependent on market acceptance and the speed of unit placements with physicians
and clinics.
CRITICAL ACCOUNTING POLICIES
In accordance with recent Securities and Exchange Commission guidance, those
material accounting policies that we believe are most critical to an investor's
understanding of our financial results and condition and require complex
management judgement are discussed below.
Revenue Recognition. The Company applies the provisions of Staff Accounting
Bulletin No. 101 (SAB 101) when recognizing revenue. SAB 101 states that the
revenue generally is realized or realizable and earned when all of the following
criteria are met: a) persuasive evidence of an arrangement exists, b) delivery
has occurred or the services have been rendered, c) the seller's price to the
buyer is fixed or determinable and d) collectibility is reasonably assured. The
Company recognizes revenue from the sale of analyzers to doctors, hospitals and
laboratories upon customer acceptance. The Company recognizes revenue on the
sale of test cartridges, supplies and hematology solutions once shipment has
occurred and all of the conditions of SAB 101 have been met. The Company
recognizes revenue from the sale of analyzers to distributors according to the
terms of the distributor agreements. The Company's distributors do not have
rights of return or cancellation or any price protection provisions. Revenue
from distributors that does not meet all of the requirements of SAB 101 and SFAS
48 are deferred and recognized upon the sale or acceptance, if applicable, of
the product to the end user. The Company has entered into sales agreements with
leasing companies whereby the Company sells its products directly to the leasing
company, who then leases the products to the end user. Sales to the leasing
company are on a non-recourse basis and are recognized at the later of shipment
date or customer acceptance, when applicable. Revenues from extended warranty
contracts are deferred at the list sales price and are recognized over the term
of the contract. Should changes in conditions cause management to determine
these criteria are not met for certain future transactions, revenue recognized
for any reporting period could be adversely affected.
10
Accounts Receivable. The Company's accounts receivable are unsecured, and the
Company is at risk to the extent such amounts become uncollectible. The Company
continually monitors account receivable balances, and provides for an allowance
of doubtful accounts at the time collection may become questionable based on
payment history or age of the receivable and other factors related to the
customer's ability to pay.
Inventories. The Company continually monitors inventories for both movement and
realized margins, and provides reserves for excess and obsolete inventories and
net realizable value issues at the time such analyses are performed.
The following is a discussion of the financial condition and results of
operations for the Company for the three months ended March 31, 2002 and 2001.
It should be read in conjunction with the Financial Statements included on the
Company's form 10-K filed on March 29, 2002, as amended, and the Notes thereto
and other financial information included elsewhere in this report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Sales. Sales increased to $601,000 in the first quarter of 2002 compared to
$184,000 in 2001. Sales in 2002 were predominately sales of The Careside
Analyzer and disposable cartridges. Our increase in sales and related accounts
receivable is due to our sales force having worked with approximately 1,000
distributor representatives calling on physician offices, clinics and hospitals.
The cost of sales represents the cost of instruments and reagents sold and the
fixed costs associated with manufacturing efforts. In 2002 our fixed costs
represented $909,000 of cost of goods. A like amount was recorded as fixed costs
for the first quarter ended March 31, 2002 and March 31, 2001.
Research and Development Expenses - Product. Research and development expenses
decreased to approximately $383,000 for the three months ended March 31, 2002
from $806,000 for the three months ended March 31, 2001. This decrease of
$423,000 was primarily attributable to completion of third party contract
development work associated with producing the Careside Analyzer.
Research and Development Expenses - Software. Research and development expenses
increased to approximately $237,000 for the three months ended March 31, 2002
from $203,000 for the three months ended March 31, 2001. This increase of
$34,000 was primarily attributable to software development associated with the
launch of the Careside Connect.
Selling and Marketing Expenses. Sales and marketing expenses decreased to
$716,000 for the three months ended March 31, 2002 from $853,000 for the three
months ended March 31, 2001. This decrease of $137,000 is primarily attributable
to cost control efforts in 2002.
General and Administrative Expenses. General and administrative expenses
increased to $495,000 for the three months ended March 31, 2002 from $404,000
for the three months ended March 31, 2001. This increase of $91,000 is primarily
attributable to increased use of outside services including accounting and legal
services.
Goodwill. No goodwill amortization was recorded for the three months ended March
31, 2002 compared to $142,000 for the three months ended March 31, 2001. A
goodwill impairment charge of $50,000 was taken in 2002 associated with the
reduced value resulting from fewer resources and the Company's inability to
devote efforts to the H2000 Hematology analyzer. Goodwill was recorded from the
December 1999 acquisition of Texas International Laboratories, Inc. A previous
impairment charge recognized in December 2001 caused the reduction versus prior
year.
Interest Income and Expense. Interest income decreased to less than $1,000 for
the three months ended March 31, 2002 compared to $10,000 for the three months
ended March 31, 2001. This decrease is attributable to lower cash balances in
2002 than in 2001. Interest expense increased to $159,000 in 2002 from $109,000
in 2001 due to lower remaining balances on the equipment leases in 2002 offset
by interest expense from new bridge loans taken in the three months ended March
31, 2002.
Net Loss. Net loss to common stockholders decreased $0.7 million to $2.7 million
for the three months ended March 31, 2002 from $3.4 million for the three months
ended March 31, 2001. This decrease reflects the overall reduction in R&D,
selling and marketing offset by increases in cost of goods sold and interest
expenses.
The Company expects that results of operations in the future will fluctuate
significantly from period to period. Such fluctuations may result from numerous
factors, including the amount and timing of revenues earned from sales,
11
proceeds from existing or future collaborative distribution relationships or
joint ventures, if any, the cost of preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims and other intellectual property rights,
the status of competing products and technologies and the timing and
availability of financing for the Company. In the near term, the Company
believes that comparisons of its quarterly and annual historical results may not
be meaningful and should not be relied upon as an indication of future
performance.
INCOME TAXES
As of December 31, 2001, The Company had approximately $48.6 million and $1.2
million of net operating loss and research and development credit carryforwards,
respectively, for federal income tax purposes, which begin to expire in 2011.
These amounts reflect different treatment of expenses for tax reporting than are
used for financial reporting. The Tax Reform Act of 1986 contains certain
provisions that may limit our ability to utilize net operating loss and tax
credit carryforwards in any given year. We experienced a change in ownership
interest in excess of 50% as defined under the Tax Reform Act upon the first
closing of our 1997 equity financing and by means of the private placements in
2000 and 2001. We do not believe that these changes in ownership will have a
significant impact on our ability to utilize our net operating loss and tax
credit carryforwards. There can be no assurance that ownership changes in future
periods will not significantly limit our use of existing or future net operating
loss and tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through the net
proceeds generated from the issuance of common stock, long-term debt and certain
short-term borrowings that were subsequently converted into equity securities or
which remain outstanding. As of March 31, 2002, we have received net proceeds
aggregating approximately $61.6 million from these transactions.
Net cash used in operating activities for the three months ended March 31, 2002
was approximately $908,000. For the period ended March 31, 2002, cash used in
operating activities primarily represents the net loss for the period and
decreases in inventory offset by increases in accounts payable. Net cash used in
operating activities was approximately $2.6 million for the three months ended
March 31, 2001. This represented the net loss for that year offset by increases
in accounts payable, accrued expenses and accounts receivable partially offset
by decreases in inventory. We provide reserves for doubtful accounts based on
our specific review of aged accounts receivable. As of March 31, 2002, allowance
for doubtful accounts related primarily to cartridge sales to customers.
Cash used in investing activities for the purchase of property and equipment
was approximately $1,000 and $65,000 for the three months ended March 31, 2002
and March 31, 2001. The cash used in 2001 was primarily for the acquisition of
manufacturing equipment and laboratory equipment used in research and
development.
Cash provided by financing activities was approximately $913,000 for the three
months ended March 31, 2002, net of payments made on long term debt obligations.
Net cash provided by financing was a result of closing of $1,009,000 of bridge
loans at March 31, 2002.
At March 31, 2002, our principal source of liquidity was approximately $43,000
in cash.
In December 1998, we entered into an agreement with an equipment lease financing
company regarding a $2.5 million facility secured by specific equipment. Each
draw was a separate loan under the facility. We drew the remaining amount in
early 2000 secured by manufacturing equipment for cartridge assembly that we had
previously purchased. Each equipment loan has a 48-month term and bears an
interest rate of approximately 14%-15% per annum adjusted for an index rate
based on four-year U.S. Treasury Notes at the time of borrowing.
We entered into an agreement for bridge financing with S.R. One, Limited in
December 1998. Under this agreement, $1.5 million was funded in December 1998
and $1.5 million was funded in January 1999. All of this funding was used to
fund research and development activities and for working capital. In June 1999,
S.R. One agreed to convert $1.0 million of the $3.0 million loan, together with
accrued interest at the rate of 8% on $1.0 million, into shares of Series A
Convertible Preferred Stock. The conversion price was $6.375, which was 85% of
the initial public offering price per unit. S.R. One received 162,914 shares of
Series A Convertible Preferred Stock. Each share of Series A Convertible
Preferred Stock was in turn converted on July 1, 2000, at the option of the
holder, into units comprised of one share of Common Stock and one warrant to
purchase an additional share of Common Stock. All accrued and unpaid dividends
with respect to shares of Series A Convertible Preferred Stock converted by S.R.
One were also converted into units at
12
$7.50 per unit. The exercise price and other terms of the warrant received on
the conversion were the same as the warrants included in the Units. The
remaining $2.0 million of the loan matures in June 2002. At that time, we expect
either to repay the $2.0 million balance on the bridge financing with the
proceeds of a new loan or to negotiate to extend the term or convert the balance
of it into preferred or common equity. The annual interest rate on the
remaining $2.0 million increased to 10% on July 1, 2000. S. R. One has the
option to convert all or any portion of the remaining loan, plus accrued
interest thereon, into shares of Series A Convertible Preferred Stock. This
Series A Convertible Preferred Stock would be issued to S.R. One on the same
basis as the Series A Convertible Preferred Stock that was issued to S. R. One
in connection with the $1.0 million conversion discussed above.
We issued a bridge warrant to S.R. One in connection with the bridge financing.
The bridge warrant was exercisable for the number of shares of Common Stock
equal to $750,000 divided by $6.375, which was 85% of the initial public
offering price or our Common Stock. The number of warrants doubled if the loan
was not repaid by June 30, 1999. As part of the conversion of a portion of the
bridge financing into shares of Series A Convertible Preferred Stock, the bridge
warrant was modified such that it will be exercisable in all events for the
number of shares of Common Stock which is equal to $1,500,000 divided by $6.375.
Following completion of our initial public offering, the bridge warrant became
exercisable for 235,294 shares of Common Stock, at $6.375 each. It will expire
on June 16, 2004.
In March 2000, we sold 1,184,091 shares of Common Stock in a private placement
for $8.77 per share. Proceeds, net of approximately $840,000 of offering costs,
amounted to approximately $9.5 million. These shares were subsequently
registered with the SEC in April 2000. As part of this transaction, we issued
warrants to purchase 101,305 shares of Common Stock to the placement agent and
contingent warrants to purchase 154,247 shares of Common Stock. During the third
quarter of 2000, the conditions triggering exercisability of these contingent
warrants were met. A total of 130,092 of these contingent warrants were
exercised prior to their expiration on December 15, 2000 and the remainder
lapsed. We used the proceeds from this financing to expand our sales and
marketing effort and to fund research and development costs associated with the
Careside Analyzer. In addition, our demand for devices was increasing at that
time. The proceeds were also used to purchase Analyzers and H-2000s from our
manufacturers.
In September 2000, we raised $615,000 of net proceeds in a private placement of
150 shares of Series B Convertible Preferred Stock and 75,000 five-year warrants
to purchase Common Stock $5.63 per share. That financing also included the
placement of a warrant to purchase an additional $1,000,000 of Series B
Convertible Preferred Stock. The Company used the proceeds of this financing to
expand sales and marketing efforts as well as to fund research and development
cost. It was also used to build our cartridge inventory. In addition, our
manufacturing costs were increasing at that time and the proceeds were used to
purchase Analyzers and H-2000s from our manufacturers. The same financing also
included the placement of callable two year warrants exercisable for up to
4,000,000 shares of Common Stock, subject to conditions, in multiples of twenty
shares of Common Stock at an exercise price of $14.00 per share ("Callable
Common Warrants"). We can, subject to volume limitations, call the Callable
Common Warrants at a price equal to 95% of the average trading price over the
two days prior to the date of delivery of our call notice. As of March 31, 2002,
none of the Callable Common Warrants had been called. The Series B Convertible
Preferred Stock was convertible into Common Stock at 95% of an average of the
ten lowest trading prices during the thirty days before the date of conversion.
All of it was converted in 2002, resulting in our issuance of 782,586 shares of
common stock.
In a series of related transactions in November 2000, December 2000 and January
2001, the Company raised $3,942,000 of net proceeds in a private placement of
1,742,951 shares of Common Stock to a single investor. We also issued 87,148
warrants to purchase Common Stock. The Company used the proceeds of this
financing primarily to expand sales and marketing efforts and to fund purchases
from our manufacturers of Careside Analyzers and H-2000s.
In the first quarter of 2002, the Company entered into a series of bridge
financing transactions including the Company's CEO and members of the Board of
Directors. The total net cash proceeds were $1,009,000. In connection with the
issuance of this debt, the Company issued warrants to purchase 188,000 shares of
common stock. In March 2002, a bridge note totaling $600,000 was converted to
common stock. Of the remaining $409,000 raised in the first quarter, $319,000
became due and payable on May 14, 2002. Although the Company has not received
any written extensions or modifications of terms from the Investor, the Company
believes that the Investor will extend the due date as needed until the Company
is able to close a long-term debt financing (See Note 9). If the Investor
decides not to extend the due date and demands payment, it would have a material
adverse impact on the Company's financial position and results of operations and
ability to continue as a going concern.
In April and May 2002, in order to, among other things, raise additional funds
for working capital and repay prior loans, the Company has undertaken an initial
closing of a new private placement (the "2002 Private Placement") to existing
stockholders of up to $5,000,000 worth of 10% secured notes (the "Investment
Notes") pursuant to the terms and conditions of investment letter agreements,
all of the same form, dated as of April 2002 (collectively, the "Investment
Agreement"). Subject to stockholder approval, each holder of an Investment Note
will have the opportunity to exchange such holder's Investment Note for a 10%
secured convertible note with the same principal amount as his, her or its
Investment Note within fifteen (15) days after the Company obtains such required
stockholder approval. As of May 15, 2002, the Company has sold $1.5 million in
Investment Notes.
At March 31, 2002, our current liquidity and sales revenue expected in 2002 were
projected to be sufficient to fund our operating expenses and capital
requirements through the second quarter of 2002. We will need additional funds
to support our commercial activities. The estimate of the period for which we
expect our available sources of cash to be sufficient to meet our funding needs
is a forward looking statement that involves risks and uncertainties. There can
be
13
no assurance that we will be able to meet our capital requirements for this
period as a result of certain factors set forth under "Risk Factors--Additional
Funding May Not Be Available" and elsewhere in our registration statement on
Form S-3 on file with the SEC dated December 2001. We will need to raise
additional capital to maintain our operations, as well as expand our sales and
marketing efforts, to scale-up manufacturing activities and to fund our
remaining research and development activities. Our future liquidity and capital
funding requirements will depend on numerous factors, including the extent to
which our products gain market acceptance, the exercise of outstanding warrants
to purchase common stock, the timing of regulatory actions regarding our
products, the costs and timing of expansions of sales, marketing and
manufacturing activities, procurement and enforcement of patents important to
our business, and the impact of competitors' products. There can be no assurance
that such additional capital will be available on terms acceptable to us, if at
all. Furthermore, any additional equity financing and exercise of existing
warrants may be dilutive to stockholders, and debt financing, if available, may
include restrictive covenants. If adequate funds are not available, we may be
forced to curtail or cease our operations significantly or to obtain funds
through entering into collaborative agreements or other arrangements on
unfavorable terms. Our failure to raise capital on acceptable terms could have a
material adverse effect on our business, financial condition or results of
operations and our ability to continue as a going concern.
The Company's report of Independent Public Accountants issued in connection with
the December 31, 2001 consolidated financial statements was qualified as to the
Company's ability to continue as a going concern. The Company has been advised
by its Independent Public Accountants that, if prior to the completion of their
audit of the Company's financial statements for the year ending December 31,
2002, the Company is unable to demonstrate its ability to fund operations and
repay debt as it becomes due in the next 12 months, their auditor's report on
those financial statements will be modified for the contingency related to the
Company's ability to continue as a going concern.
RECENT PRONOUNCEMENTS
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". In connection with continued changes in the Company's
financial and personnel resources and the assessment of existing goodwill, the
Company recorded an impairment charge of $50,000 in the quarter ended March 31,
2002.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
14
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Sale of Unregistered Securities; Changes in Securities
In March 2002, Paulson & Company loaned $600,000 to the Company in January 2002.
Paulson agreed to convert the bridge loan into 2,162,143 shares of common stock
at a price equivalent to $0.28 per share, the market price on the date of
conversion. Paulson also received a 5 year warrant to purchase 100,000 shares of
stock for $0.90 per share. The imputed interest associated with this warrant was
approximately $44,000.
Item 4. Submission of Matters to a Vote of Security Holders
Certain terms of the investor notes bridge financing undertaken at the end of
the First Quarter and in the Second Quarter.
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit.
Exhibit No. Description
10.1 Form of Note and Warrant Purchase Agreement dated as of
January 14, 2002 by and between Careside, Inc. and
Paulson Investment, Inc.
10.2 Form of Note and Warrant Purchase Agreement dated as of
February 28, 2002 by and between Careside, Inc. and
Crestview Capital Fund, L.P.
10.3 Form of Intellectual Property Security Agreement by and
between Careside, Inc. and Crestview Capital Fund, L.P.
(b) Reports on Form 8-K
A report on Form 8K was filed on February 26, 2002.
16
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 hereunto duly authorized.
CARESIDE, INC.
Date: May 15, 2002 By: /s/ W. Vickery Stoughton
------------------------
W. Vickery Stoughton
Chairman and Chief Executive Officer
(Principal Executive Officer and
Financial and Accounting
Officer)