SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
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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 identification no.)
of incorporation or organization)
6100 Bristol Parkway, Culver City, CA 90230
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (310) 338-6767
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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 August 13, 2002.
CARESIDE, INC.
INDEX
Page
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Part I - Financial Information
Item 1. Financial Statements
Balance Sheets at December 31, 2001 and June 30, 2002 (unaudited).................................3
Statements of Operations for the three and six months ended
June 30, 2001 and 2002 (unaudited)..............................................................4
Statements of Cash Flows for the six months ended
June 30, 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 5. Other Information..........................................................................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)
December 31, June 30,
2001 2002
------------ -----------
(unaudited)
Assets
Current Assets:
Cash $ 39 $ 336
Accounts receivable, net of allowance of $27 in 2001 and $35 in 2002 158 232
Inventory 2,498 1,772
Prepaid expenses and other 481 342
-------- --------
Total current assets 3,176 2,682
-------- --------
Property and Equipment, net of accumulated depreciation of $6,186 in
2001 and $6,738 in 2002 3,964 3,431
-------- --------
Deposits and Other 24 24
-------- --------
Goodwill 50 --
-------- --------
$ 7,214 $ 6,137
======== ========
Liabilities and Stockholders' Investment (defecit)
Current Liabilties:
Convertible debt, net of discount $1,029 $ - $ 1,971
Current portion of long-term debt 2,756 2,823
Current portion of obligation under capital lease 15 15
Accounts payable 1,715 2,120
Accrued expenses 604 354
Accrued interest 554 693
-------- --------
Total current liabilties 5,644 7,976
-------- --------
Deferred Warranty Revenue 5 5
-------- --------
Long-Term Debt, net of current portion 483 305
-------- --------
Obligation Under Capital Lease, net of current portion 9 5
-------- --------
Commitments and Contingencies
Stockholders' Investment (deficit):
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 June 30, 2002 169 191
Additional paid-in capital 61,772 66,467
Accumulated Deficit (60,868) (68,812)
-------- --------
Total stockholders' investment (deficit) 1,073 (2,154)
-------- --------
$ 7,214 $ 6,137
======== ========
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)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
SALES, net ..................................... $ 192 $ 409 $ 376 $ 1,010
COST OF SALES .................................. 1,032 847 2,035 2,148
----------- ----------- ----------- -----------
GROSS PROFIT ................................... (840) (438) (1,659) (1,138)
OPERATING EXPENSES:
Research and development - product .......... 808 305 1,614 688
Research and development - software ......... 248 180 451 417
Sales and marketing ......................... 1,010 714 1,863 1,430
General and administrative .................. 555 417 960 912
Goodwill amortization ....................... 142 -- 283 --
Goodwill impairment ......................... -- -- -- 50
----------- ----------- ----------- -----------
Operating Loss ........................... (3,603) (2,054) (6,830) (4,635)
Other income (expense):
Interest income ............................. 19 -- 29 --
Interest expense - Beneficial conversion
feature on convertible debt -- (3,000) -- (3,000)
Interest expense ............................ (90) (150) (200) (309)
----------- ----------- ----------- -----------
NET LOSS ....................................... (3,674) (5,204) (7,001) (7,944)
DIVIDENDS ON PREFERRED STOCK
Beneficial conversion feature ............... (3,799) -- (3,799) --
Accreted and Accrued ........................ (892) -- (939) --
----------- ----------- ----------- -----------
NET LOSS TO COMMON STOCKHOLDERS ................ $ (8,365) $ (5,204) $ (11,739) $ (7,944)
----------- ----------- ----------- -----------
BASIC AND DILUTED NET LOSS PER SHARE ........... $ (0.73) $ (0.27) $ (1.04) $ (.43)
----------- ----------- ----------- -----------
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE ..................... 11,416,187 19,066,336 11,255,229 18,289,876
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
4
CARESIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)(unaudited)
Six Months Ended
June 30,
-----------------
2001 2002
------- -------
Operating Activities:
Net loss $(7,001) $(7,944)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,358 552
Goodwill impairment -- 50
Interest Expense for warrants issued with bridge financings -- 60
Amortization of discount -- 23
Interest Expense beneficial conversion feature on convertible debt -- 3,000
Changes in operating assets and liabilties:
Accounts receivable (1) (74)
Inventory (121) 708
Prepaid expenses and other (56) 138
Accounts payable (125) 405
Accrued expenses 117 (245)
Accrued interest 99 139
------- -------
Net cash used in operating activities (5,740) (3,188)
------- -------
Investing Activities:
Purchases of property and equipment (110) --
------- -------
Net cash used in investing activities (110) --
------- -------
Net Borrowings Financing Activities:
Receipts(Payments) on long-term debt and net bridge financing (254) 3,489
Payments on capital lease obligation (6) (4)
Net proceeds from the issuance of
preferred and common stock 9,945 -
------- -------
Net cash provided by financing activities 9,685 3,485
------- -------
Net Increase (Decrease) in Cash and
Cash Equivalents 3,835 297
Cash, beginning of period 1,789 39
------- -------
Cash, end of period $ 5,624 $ 336
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the six months
ended June 30, 2002 of Careside, Inc. (the "Company" or "Careside") 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 operations 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 six months ended June 30, 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 GlaxoSmithKline
(f/k/a)SmithKline Beecham Corporation, and its affiliates ("GlaxoSmithKline")
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 six months ended June 30, 2002, the Company incurred a net
loss of $7.9 million and has used cash in operating activities of $3.2 million
and at June 30, 2002, the Company had a working capital deficit of $5.2 million
and an accumulated deficit of $68.8 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 plans to reduce 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, the 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 June 30, 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. The Company transferred $739,200 in
Finished Goods inventory to Work in Process inventory until additional upgrades
to the Careside analyzer have been completed. 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 June 30, 2002
----------------- -------------
Raw materials $ 932 $ 773
Work in process 123 866
Finished goods 1,967 725
Reserve for Excess and Obsolesce (524) (592)
------ ------
Total $2,498 $1,772
====== ======
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 six-month periods ended June 30, 2002 and 2001 cash paid for interest
was approximately $139,000 and $99,000 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 six
months ended
June 30,
7
2001 2002
---------- --------
Accrued Dividends $ 20,000 $ --
Accreted Dividends 919,000 --
Conversion of Series C
to common stock 3,799,000 --
Transfer of Analyzers 4,000 17,600
Conversion of debt to equity -- 605,000
Note7 : BRIDGE FINANCING
In the first six months of 2002, the Company entered into a series of bridge
financing 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 $3.0 million
for the second quarter 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.
During the second quarter in 2002, the Company authorized $5,000,000 of debt to
be issued. Subject to stockholder approval, the debt will, in effect, be
convertible into common stock. The debt matures three years from the date of
issuance, and accrues interest at 10% per annum, which is payable on an annual
basis. The debt is convertible at the option of the holder at anytime until
maturity into the number of shares of common stock at a price (the "Conversion
Price") which yields 90% (assuming the conversion of the entire $5,000,000) of
the post conversion shares outstanding. In addition, the debt holders are
entitled to receive upon stockholder approval 45,000 warrants to purchase one
share of common stock for each $100,000 invested, which will be exercisable at
the Conversion Price during a seven-year period of time. As of June 30, 2002,
$3,000,000 of the authorized $5,000,000 debt was issued in a private placement,
and commitments to issue 1,350,000 warrants subject to stockholder approval were
made in connection with the debt. These warrants have been deemed to have an
aggregate fair value, using the Black-Scholes pricing model, of $1,684,000. In
accordance with generally accepted accounting principles, the Company allocated
a portion of the proceeds of the private placement to the warrants based on the
relative pro-rata values of the debt and warrants, which resulted in $1,052,000
being allocated to the warrants. This discount is being amortized as interest
expense over the term of the debt.
At the time that the $3,000,000 debt was issued during the second quarter, the
fair value of the Company's common stock exceeded the Conversion Price, and as a
result, the Company recognized interest expense on the contingent beneficial
conversion feature of the debt of $3,000,000. Should the Company issue the
remaining $2,000,000 of debt authorized, and the fair value of the Company's
common stock at the time of issuance exceeds the Conversion Price, the Company
will recognize additional interest expense on the contingent beneficial
conversion feature of the debt assuming stockholder approval.
A summary of the bridge financings is shown below.
First Six Months Bridge Financings
Amount Warrants Date of Note Due Date
---------- --------- ----------------- -------------
Investor 1 $ 600,000 100,000 January 14, 2002 Converted to
common stock
March 6, 2002
Investor 2 319,000 70,000 February 28, 2002 Note Repaid
May 23, 2002
CEO 50,000 10,000 February 28, 2002 Note Repaid
May 1, 2002
Director 1 20,000 4,000 February 28, 2002
Director 2 20,000 4,000 February 28, 2002
Investor 3 500,000 225,000 April 5, 2002
Investor 4 100,000 45,000 April 16, 2002
Investor 5 100,000 45,000 April 17, 2002
Investor 5 300,000 135,000 April 22, 2002
Investor 6 500,000 225,000 April 30, 2002
Investor 7 500,000 225,000 May 23, 2002
Investor 8 1,000,000 450,000 June 24, 2002
---------- ---------
$4,009,000 1,538,000
========== =========
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 of such warrants, which were valued at $44,000 and were charged
to interest expense.
The note issued to Investor 2 bore no interest. The note was 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 was 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 commencing on May 23, 2002 the Company was required to issue warrants to
purchase 35,000 shares of common stock at $0.30 per share. The Company
recognized the obligation for 70,000 such warrants, which were
8
valued at $13,000 and were charged to interest expense. On May 23, 2002, the
company repaid Investor 2.
The CEO and director notes bear 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 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. That value of these
warrants was not material and was charged to interest expense.
Note 8: Goodwill Impairment and Inventory Reserve
In the second quarter 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
Not applicable.
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 June 30, 2002, the
Careside Analyzer(R) 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 using the
straight line method 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 six months ended June 30, 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 JUNE 30, 2002 AND 2001
Sales. Sales increased to $409,000 in the first quarter of 2002 compared to
$192,000 in 2001. Sales in the quarter were predominately sales of the Careside
Analyzer and disposable test 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 analyzers and disposable
test cartridges sold and the fixed costs associated with manufacturing efforts.
In the second quarter our fixed costs represented $627,000 of cost of goods. The
decrease in our fixed costs for the quarter is attributed to the cost reductions
implemented during the quarter compared to amount that was recorded as fixed
costs for the second quarter ended June 30, 2001.
Research and Development Expenses - Product. Research and development expenses
decreased to approximately $305,000 for the three months ended June 30, 2002
from $808,000 for the three months ended June 30, 2001. This decrease of
$503,000 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
decreased to approximately $180,000 for the three months ended June 30, 2002
from $248,000 for the three months ended June 30, 2001. This decrease of $68,000
was primarily attributable to the near completion of software development
associated with the launch of the Careside Connect.
Selling and Marketing Expenses. Sales and marketing expenses decreased to
$714,000 for the three months ended June 30, 2002 from $1,010,000 for the three
months ended June 30, 2001. This decrease of $296,000 is primarily attributable
to continued cost control efforts in 2002.
General and Administrative Expenses. General and administrative expenses
increased to $417,000 for the three months ended June 30, 2002 from $555,000 for
the three months ended June 30, 2001. This decrease of $138,000 is primarily
attributable to decreased use of outside services including accounting and legal
services.
Goodwill. No goodwill amortization was recorded for the three months ended June
30, 2002 and June 30, 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 June 30, 2002 compared to $19,000 for the three months
ended June 30, 2001. This decrease is attributable to lower cash balances in
2002 than in 2001. Interest expense increased to $3,150,000 for the three months
ended June 30, 2002 from $90,000 for the three months ended June 30, 2001 due to
$3,000,000 interest expense on beneficial conversion Feature on convertible
notes and remaining balances on the equipment leases in 2002 offset by interest
expense from new bridge loans taken in the six months ended June 30, 2002.
Net Loss. Net loss to common stockholders decreased $3.2 million to $5.2 million
for the three months ended June 30, 2002 from $8.4 million for the three months
ended June 30, 2001. This decrease reflects the overall reduction in R&D,
selling and marketing, cost of goods sold and offset by increases in interest
expenses.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Sales. Sales increased to $1,009,000 in the first half of 2002 compared to
$376,000 in 2001. Sales in the first six months were predominately sales of the
Careside Analyzer and disposable test 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 analyzers and
disposable test cartridges sold and the fixed costs associated with
manufacturing efforts. In the first six months of 2002, our fixed costs
represented $1.5 million of cost of goods. The decrease in our fixed costs for
the six months is attributed to the cost reductions implemented during the
quarter compared to amount that was recorded as fixed costs for the six months
ended June 30, 2001.
Research and Development Expenses - Product. Research and development expenses
decreased to approximately $689,000 for the six months ended June 30, 2002 from
$1.6 million for the six months ended June 30, 2001. This decrease of $911,000
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
decreased to approximately $417,000 for the six months ended June 30, 2002 from
$451,000 for the six months ended June 30, 2001. This decrease of $34,000 was
primarily attributable to the near completion of software development associated
with the launch of the Careside Connect.
Selling and Marketing Expenses. Sales and marketing expenses decreased to
$1,429,000 for the six months ended June 30, 2002 from $1,863,000 for the six
months ended June 30, 2001. This decrease of $434,000 is primarily attributable
to continued cost control efforts in 2002.
General and Administrative Expenses. General and administrative expenses
increased to $912,000 for the six months ended June 30, 2002 from $1.0 million
for the six months ended June 30, 2001. This decrease of $88,000 is primarily
attributable to decreased use of outside services including accounting and legal
services.
Goodwill. No goodwill amortization was recorded for the six months ended June
30, 2002 and June 30, 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 six months ended June 30, 2002 compared to $29,000 for the six months ended
June 30, 2001. This decrease is attributable to lower cash balances in 2002 than
in 2001. Interest expense increased to $3,309,000 for the six months ended June
30, 2002 from $200,000 for the three months ended June 30, 2001. The increase is
due to $3,000,000 interest expense on beneficial conversion feature on
convertible notes and remaining balances on the equipment leases in 2002 offset
by interest expense from new bridge loans taken in the six months ended June 30,
2002.
Net Loss. Net loss to common stockholders decreased $3.8 million to $7.9 million
for the six months ended June 30, 2002 from $11.7 million for the six months
ended June 30, 2001. This decrease reflects the overall reduction in R&D,
selling and marketing, cost of goods sold and offset by increases in interest
expense of non-cash beneficial conversion feature of $3,000,000.
11
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, 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 losses 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
losses 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
losses 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 losses 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 June 30, 2002, we have received net proceeds
aggregating approximately $64.1 million from these transactions.
Net cash used in operating activities for the six months ended June 30, 2002 was
approximately $3.2 million. For the period ended June 30, 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 $5.7 million for the six months ended
June 30, 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 June 30, 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 $162,000 for the six months ended June 30, 2002 and
June 30, 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 $3.5 million for the six
months ended June 30, 2002, net of payments made on long term debt obligations.
Net cash provided by financing was a result of a closing of $3,000,000 in bridge
loans at June 30, 2002.
At June 30, 2002, our principal source of liquidity was approximately $336,000
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
12
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 $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 October 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 as of $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 June 30, 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 and single investor. It 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.
Paulson & Company loaned $600,000 to the Company in January 2002. In March 2002,
Paulson converted the bridge loan into 2,162,143 shares of common stock at a
price equivalent to $0.28 per share, 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.
During the second quarter in 2002, the Company authorized $5,000,000 of debt to
be issued. Subject to stockholder approval, the debt will, in effect, be
convertible into common stock. The debt matures three years from the date of
issuance, and accrues interest at 10% per annum, which is payable on an annual
basis. The debt is convertible at the option of the holder at anytime until
maturity into the number of shares of common stock at a price (the "Conversion
Price") which yields 90% (assuming the conversion of the entire $5,000,000) of
the post conversion shares outstanding. In addition, the debt holders are
entitled to receive upon stockholder approval 45,000 warrants to purchase one
share of common stock for each $100,000 invested, which will be exercisable at
the Conversion Price during a seven-year period of time. As of June 30, 2002,
$3,000,000 of the authorized $5,000,000 debt was issued in a private placement,
and commitments to issue 1,350,000 warrants subject to stockholder approval were
made in connection with the debt. These warrants have been deemed to have an
aggregate fair value, using the Black-Scholes pricing model, of $1,684,000. In
accordance with generally accepted accounting principles, the Company allocated
a portion of the proceeds of the private placement to the warrants based on the
relative pro-rata values of the debt and warrants, which resulted in $1,052,000
being allocated to the warrants. This discount is being amortized as interest
expense over the term of the debt.
At the time that the $3,000,000 debt was issued during the second quarter, the
fair value of the Company's common stock exceeded the Conversion Price, and as a
result, the Company recognized interest expense on the contingent beneficial
conversion feature of the debt of $3,000,000. Should the Company issue the
remaining $2,000,000 of debt authorized, and the fair value of the Company's
common stock at the time of issuance exceeds the Conversion Price, the Company
will recognize additional interest expense on the contingent beneficial
conversion feature of the debt assuming stockholder approval.
13
At June 30, 2002, our current liquidity, cost reductions and sales revenue
expected in 2002 were projected to be sufficient to fund our operating expenses
and capital requirements through the remainder 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. We
will need to raise additional capital to maintain our operations, as well as
expand our sales and marketing efforts, to increase 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 updates, clarifies, and simplifies existing accounting
pronouncements. This statement rescinds SFAS No. 4, which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No.
145 amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
The Company does not expect adoption of SFAS No. 145 to have a material impact,
if any, on its financial position or results of operations. or This statement is
not applicable to the Company.
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
Recent Sales of Unregistered Securities
In the second quarter of 2002, we issued seven Investment Notes, exchangeable
for Convertible Notes in same principal amount upon approval of the holders of a
majority of our outstanding common stock, to three current stockholders and to
three accredited investors in the aggregate principal amount of $3,000,000. We
have authorized the issuance of up to $5,000,000 of debt. The Convertible
Notes (and Investment Notes) mature three years from the date of issuance, and
accrue interest at 10% per annum, which is payable on an annual basis. The
Convertible Notes, if approved, will be convertible at the option of the holder
at anytime until maturity into the number of shares of common stock at a price
(the "Conversion Price") which yields 90% (assuming the issuance of all
$5,000,000 of Investment Notes and the conversion of the entire $5,000,000 of
Convertible Notes) of the post conversion shares outstanding. In addition, in
the second quarter of 2002, we agreed to issue, subject to stockholder approval,
to the three current stockholders and the three accredited investors warrants to
purchase shares of common stock, exercisable at the Conversion Price during a
seven-year period of time. The table below sets forth the summary of these
transactions.
Class of Person Date of Note(s) Number of Warrants Aggregate Consideration
--------------- --------------- ------------------ -----------------------
Stockholder 1 April 5, 2002 225,000 $500,000
Stockholder 2 April 30, 2002 225,000 $500,000
Stockholder 3 May 23, 2002 225,000 $500,000
Investor A April 16, 2002 45,000 $100,000
Investor B April 17, 2002 180,000 $400,000
April 22, 2002
Investor C June 24, 2002 450,000 $1,000,000
The sale of securities listed above were or will be deemed to be exempt from
registration under Section 4(2) of the Securities Act or Regulation D
promulgated thereunder. The recipients of securities in each such transaction
represented or will be required to represent their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were or will be affixed to
the instruments representing such securities issued in such transactions. All
recipients had adequate access to information about us, either through their
relationship with us or through publicly available filings.
Item 5. Other Information
In May 2002, Careside received a letter from the American Stock Exchange (AMEX)
indicating that the company is below certain of the AMEX's continuing listing
standards due to losses in the two of its most recent fiscal years with equity
below $2 million as set forth in Section 103 of the AMEX company guide. Careside
submitted a plan of compliance to AMEX and responded to questions from their
staff. On August 13, 2002 the AMEX notified the company that it had accepted the
Company's Plan of compliance and granted the Company an extension of time to
regain compliance with the continued listing standards. The Company will be
subject to periodic review by the AMEX staff during the plan period. Failure to
make progress consistent with the plan or to regain compliance with the listing
standards, could result in the company being delisted from the AMEX.
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit.
Exhibit No. Description
10.1 Form of Letter of Agreement, Re: Private Placement of up to $5
million of investment notes and exhibits thereto
99.1 Certificate pursuant to 18 U.S.C. Section 1350, as adopted-
pursuant to Section 906 of the Sarbones - Oxley Act of 2002
(b) Reports on Form 8-K
A report on Form 8K under Item 5 was filed on February 26, 2002 to
report the company's fourth quarter and year-end results.
A report on Form 8K under Item 4 was filed on June 4, 2002 to report
the dismissal of Arthur Andersen LLP and the engagement of Singer
Lewak Greenbaum & Goldstein LLP as the company's outside auditors.
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: August 19, 2002 By: /s/ W. Vickery Stoughton
------------------------------------
W. Vickery Stoughton
Chairman and Chief Executive Officer
(Principal Executive Officer and
Financial and Accounting
Officer)
17