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 June 30, 2001
_______________
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
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(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
--------------
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 11,699,499 as of August 13, 2001.
CARESIDE, INC.
INDEX
Page
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Part I - Financial Information
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Item 1. Financial Statements
Balance Sheets at December 31, 2000 and June 30, 2001 (unaudited)...................... 3
Statements of Operations for the three and six months ended
June 30, 2000 and 2001(unaudited)..................................................... 4
Statements of Cash Flows for the six months ended
June 30, 2000 and 2001(unaudited)..................................................... 5
Notes to Financial Statements.......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 13
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................................... 15
Signatures........................................................................................ 16
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CARESIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
Assets
------
December 31, June 30,
2000 2001
----------- ----------
Current Assets: (unaudited)
Cash and cash equivalents $ 1,789 $ 5,624
Accounts receivable, net of allowance of $53 in 2000 and $106 in 2001 104 105
Inventory 2,698 2,767
Prepaid expenses and other 174 230
------------ ----------
Total current assets 4,765 8,726
------------ ----------
Property and Equipment, net of accumulated depreciation of $4,212 in
2000 and $5,286 in 2001 5,643 4,731
------------ ----------
Deposits and Other 24 24
Goodwill, net of accumulated amortization of $566 in 2000, ------------ ----------
and $850 in 2001 2,231 1,948
------------ ----------
$ 12,663 $ 15,429
============ ==========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilties:
Current portion of long-term debt $ 2,520 $ 2,556
Current portion of obligation under capital lease 13 14
Accounts payable 1,457 1,332
Accrued expenses 420 530
Accrued interest 334 433
------------ ----------
Total current liabilties 4,744 4,865
------------ ----------
Long-Term Debt, net of current portion 1,192 902
------------ ----------
Obligation Under Capital Lease, net of current portion 23 16
------------ ----------
Commitments
Manditorily Redeemable Series B Convertible Preferred Stock
290 and 100 shares issued and outstanding at
December 31, 2000 and June 30, 2001, respectively 1,054 481
Stockholders' Equity:
Preferred stock - Undesignated, $.01 par value:
4,836,117 authorized at June 30, 2001
zero shares issued and outstanding - -
Preferred stock - Series C Convertible Preferred Stock, $.01 par value:
zero and 517.3716 shares issued and outstanding at
December 31, 2000 and June 30, 2001 - 3,799
Common stock, $.01 par value:
50,000,000 shares authorized-
10,590,191 and 11,475,156 shares issued and outstanding at
December 31, 2000 and June 30, 2001 106 115
Additional paid-in capital 50,743 57,452
Accumulated Deficit (45,199) (52,200)
------------ ----------
Total stockholders' equity 5,650 9,166
------------ ----------
$ 12,663 $ 15,429
============ ==========
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,
--------------------------- --------------------------
2000 2001 2000 2001
---------- ----------- ---------- -----------
SALES, net .................................... $ 245 $ 192 $ 528 $ 376
COST OF SALES.................................. 109 1,032 252 2,035
---------- ----------- ---------- -----------
GROSS PROFIT................................... 136 (840) 276 (1,659)
OPERATING EXPENSES:
Research and development - product 2,309 808 4,772 1,614
Research and development - software 180 248 235 451
Sales and marketing......................... 998 1,010 1,942 1,863
General and administrative ................. 453 555 1,119 960
Goodwill amortization ...................... 142 142 283 283
---------- ----------- ---------- -----------
Operating Loss.............................. (3,946) (3,603) (8,075) (6,830)
INTEREST and OTHER INCOME, net................. 221 19 298 29
INTEREST EXPENSE............................... (107) (90) (253) (200)
---------- ----------- ---------- -----------
NET LOSS....................................... (3,832) (3,674) (8,030) (7,001)
DIVIDENDS ON PREFERRED STOCK:
BENEFICIAL CONVERSION FEATURE - (3,799) - (3,799)
ACCRETED AND ACCRUED.......................... (26) (892) (52) (939)
---------- ----------- ---------- -----------
NET LOSS TO COMMON
STOCKHOLDERS................................... $ (3,858) $ (8,365) $ (8,082) $ (11,739)
---------- ----------- ---------- -----------
BASIC AND DILUTED LOSS PER SHARE............... $ (0.44) $ (0.73) $ (0.97) $ (1.04)
---------- ----------- ---------- -----------
SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER SHARE........... 8,797,815 11,416,187 8,332,583 11,255,229
========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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CARESIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)(unaudited)
Six Months Ended
June 30,
---------------------
2000 2001
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Operating Activities:
Net loss $(8,030) $(7,001)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,356 1,358
Changes in operating assets and liabilties:
Accounts receivable (73) (1)
Inventory (839) (121)
Prepaid expenses and other (206) (56)
Accounts payable 1,217 (125)
Accrued expenses 83 117
Accrued interest (518) 99
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Net cash used in operating activities (7,010) (5,740)
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Investing Activities:
Purchases of property and equipment (1,651) (110)
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Net cash used in investing activities (1,651) (110)
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Financing Activities:
Proceeds from borrowings under
long-term debt 795 -
Payments on long-term debt (304) (254)
Payments on capital lease obligation (6) (6)
Deferred offering costs 2 -
Net proceeds from the issuance of
preferred and common stock 9,606 9,945
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Net cash provided by financing activities 10,093 9,685
Net Increase in Cash and
Cash Equivalents 1,432 3,835
Cash and Cash Equivalents, beginning
of period 4,905 1,789
------- -------
Cash and Cash Equivalents, end
of period $ 6,337 $ 5,624
======= =======
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 three
months and six months ended June 30, 2001 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 believes that the Company's existing sources
of liquidity are sufficient to fund its planned operations into 2002. However,
there are uncertainties 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 three months and six months
ended June 30, 2001 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/A for the year
ended December 31, 2000, as amended, and other areas included herein including
liquidity and capital resources. Certain prior period amounts have been
reclassified to conform to the current period presentation.
The financial statements as of and for the quarter and six months ended June 30,
2000 were prepared under a development stage presentation. The Company exited
the development stage in the fourth quarter of 2000. As such, certain costs and
expenses for the quarter and six months ended June 30, 2001 have been
reallocated accordingly.
Note 2: INVENTORIES
At June 30, 2001, inventories consisted of raw materials to be utilized in the
manufacturing of disposable test cartridges 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.
December 31, 2000 June 30, 2001
----------------- -------------
Raw materials $1,164,000 $1,396,000
Work in process 126,000 232,000
Finished goods 2,036,000 1,767,000
Reserve for Excess and Obsolescence (628,000) (628,000)
---------- ----------
Total $2,698,000 $2,767,000
========== ==========
Note 3: 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 4: 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 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.
-6-
Generally, 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 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, which 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.
Note 5: STATEMENTS OF CASH FLOWS
During the six-month periods ended June 30, 2001 and 2000 cash paid for interest
was approximately $99,000 and $77,000 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 cash flows:
For the six
months ended
June 30,
2000 2001
---------- ----------
Accrued Dividends $ 52,000 $ 20,000
Accreted Dividends - 919,000
Beneficial Conversion on Series C Preferred Stock - 3,799,000
Conversion of Series B Preferred Stock and Accrued
Dividends to Common Stock - 614,000
Transfer of Analyzers from Inventory to Fixed Assets - 52,000
Note 6: MANDATORILY REDEEMABLE PREFERRED STOCK
In September and November 2000, the Company issued 350 shares of mandatorily
redeemable Series B Convertible Preferred Stock. At June 30, 2001, 250 of Series
B shares had been converted to common stock and 100 shares remained outstanding.
The stock has a par value of $.01 per share and a liquidation preference of
$5,000 per share. The remaining 100 shares outstanding were converted to common
stock in July, 2001.
In March and May 2001, the Company issued 517.3716 shares of Series C
Convertible Preferred Stock ("Series C Preferred"), together with five-year
warrants to purchase 5,173,716 shares of Common Stock at an exercise price of
$2.55 per common share ("2001 Investors' Warrants"). The Company also issued
warrants to purchase 517,371 shares of Common Stock at an exercise price per
share of $1.94 ("2001 Agent's Warrants") to its placement agent in the
transaction. The estimated fair value of the warrants issued in these
transactions was $6,131,000, computed using the Black-Scholes option pricing
model. This amount was credited to additional paid-in capital.
Each share of Series C Preferred is convertible into a number of shares of
Common Stock at a conversion price between $1.55 and $1.94. On June 8, 2001,
the Company filed a registration statement registering for resale the maximum
number of shares of Common Stock issuable upon conversion of the Series C
Preferred and upon exercise of the 2001 Investors' Warrants and 2001 Agent's
Warrant. The Series C Preferred will automatically convert into Common Stock on
the day prior to the date of effectiveness of that registration statement. At
the floor conversion price of $1.55, a total of 13,774,130 shares of Common
Stock may be issued upon conversion of the Series C Preferred and exercise of
the 2001 Investors' Warrants and 2001 Agent's Warrants. This total number of
shares of Common Stock is greater than 20% of the total number of outstanding
shares of the Company's Common Stock on the date of issuance of the Series C
Preferred and related warrants. Also, these shares may be issued at less than
the book or market value of the Company's Common Stock. Because of this,
Section 7.13(a) of the American Stock Exchange Company Guide required
stockholder approval for the issuance of 13,774,130 shares of Common Stock upon
conversion of the Series C Preferred and exercise of the 2001 Investors'
Warrants and 2001 Agent's Warrants that have a below-market exercise price. If
stockholder approval were not obtained, the Company would have had to redeem all
of the outstanding shares of Series C Preferred for $24,250 per share of Series
C Preferred plus any accrued dividends.
-7-
The Company received stockholder approval at its Annual Meeting on May 24, 2001
for the sale and issuance of up to 13,774,130 shares of Common Stock upon
conversion or exercise of the Series C Preferred, the 2001 Investors' Warrants
and the 2001 Agent's Warrants that have an exercise price below the market price
of the Common Stock on the date of issuance. With this approval, the mandatory
redemption feature no longer exists. As a result, on May 24, the accretion to
redemption value associated with the previous mezzanine treatment of this
financing was discontinued and the Series C Preferred was recorded as Preferred
Stock in the equity section of the balance sheet. The Series C Preferred has a
liquidation preference of $19,400 per share over common stockholders but is
subordinate to other Preferred Stock.
Proceeds from the sale of Series C Preferred are being and will be used to fund
the Company's working capital needs and in particular, increasing sales and
marketing efforts.
The difference in the carrying value of the mandatorily redeemable Series B
Convertible Preferred Stock at the date of issuance and the redemption amount is
accreted, using the interest method, over the period from the issuance date to
the required redemption date as a charge to additional paid-in capital and as a
dividend, increasing the loss available to common stockholders.
Note 7: ISSUANCE OF SECURITIES
On May 31, 2001, at a third closing of the private placement of its Series C
Preferred, the Company sold 104.9248 shares of Series C Preferred to accredited
investors, together with five-year warrants to purchase 1,049,248 shares of
Common Stock at an exercise price of $2.55 per common share. The placement agent
in the transaction earned warrants to purchase approximately 104,925 shares of
Common Stock at an exercise price per share of $1.94 in connection with this
closing.
Note 8: SUBSEQUENT EVENTS
In July 2001, The remaining 100 shares of Series B Preferred Stock were
converted into 213,153 shares of Common Stock. This retires all of the Series B
Preferred Stock that in July and August, 3 calls were made on the callable
warrant issued in the Series B Preferred transaction. Total proceeds of $37,000
were received and resulted in the issuance of 11,190 shares of Common Stock.
In July 2001, the company entered into a purchase commitment with the supplier
of its analyzers for up to $2.0 million of product over a nine month period.
Note 9. NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, were recently issued. The
Company plans to adopt the standards effective January 1, 1002. The statements,
among other things, require the use of purchase accounting for business
combinations, discontinues amortization of goodwill, and requires an annual
assessment of goodwill for impairment. The statements require amortization of
goodwill recorded in connection with previous business combinations to cease
upon adoption of the statements by calendar year companies on January 1, 2002.
The Company is currently studying the impact of the statements on its financial
position, results of operations and cash flows.
-8-
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/A, as amended, for the year ended December 31, 2000.
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, an optional hematology device, the Careside H-2000 Hematology
Analyzer (the "H-2000") 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 and hematology testing in a
separate but integrated instrument. As of June 30, 2001, the Careside Analyzer
and 41 tests were cleared for marketing by the FDA or are exempt and can be
marketed for professional laboratory use. An additional 18 FDA approved
hematology tests are available on the H-2000. 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.
The following is a discussion of the financial condition and results of
operations for the Company for the three and six month periods ended June 30,
2001 and 2000. It should be read in conjunction with the Financial Statements
included on the Company's form 10-K/A, as amended, filed on July 27, 2001, and
the Notes thereto and other financial information included elsewhere in this
report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Sales. Sales decreased to $192,000 in the second quarter of 2001 compared to
$245,000 in 2000. Sales in 2001 were both Careside Analyzers and Careside H-
2000's to the U.S. medical market. Sales in 2000 were predominately sales of
Careside H-2000's to international and veterinary customers. The reduction in
sales versus prior year was caused by a shift in focus from the veterinary to
the human market in order to align our H-2000 sales efforts with the marketing
efforts of our sales staff which are directed to customers who might use all of
our products. The cost of sales represents the cost of instruments and reagents
sold and the fixed costs associated with manufacturing efforts. In 2000, the
Company was a development stage company. As a result, these fixed costs were
recognized as product development expense. In 2001, $917,000 is included in cost
of goods which was previously treted as product development. A like amount was
recorded as development expense for the quarter ended December 31, 2000.
-9-
Research and Development Expenses - Product. Research and development expenses
decreased to approximately $808,000 for the three months ended June 30, 2001
from $2.3 million for the three months ended June 30, 2000. This decrease of
$1.5 million, was primarily attributable to completion of third party contract
development work associated with producing the Careside Analyzer and the
allocation of certain fixed costs including depreciation and facility related
expenses to cost of sales.
Research and Development Expenses - Software. Software development expenses
increased to approximately $248,000 for the three months ended June 30, 2001
from $180,000 for the three months ended June 30, 2000. This increase of $68,000
was primarily attributable to software development associated with the
development of the Careside Connect.
Selling and Marketing Expenses. Sales and marketing expenses increased to
$1,010,000 for the three months ended June 30, 2001 from $998,000 for the three
months ended June 30, 2000. This increase of $12,000 is due to increased
marketing efforts.
General and Administrative Expenses. General and administrative expenses
increased to $555,000 for the three months ended June 30, 2001 from $453,000 for
the three months ended June 30, 2000. This increase of $102,000 is primarily
attributable to timing of the performance of certain activities from the first
three months versus prior year patterns and increased costs associated with the
proxy solicitation for Careside's annual shareholder meeting.
Goodwill. Goodwill amortization of $142,000 was recorded in both 2001 and 2000
and is associated with goodwill recorded from the December 1999 acquisition of
Texas International Laboratories, Inc.
Interest Income and Expense. Interest income decreased to approximately $19,000
for the three months ended June 30, 2001 compared to $221,000 for the three
months ended June 30, 2000. This decrease of $202,000 is attributable to lower
cash balances in 2001 than in 2000. Interest expense decreased to $90,000 in
2001 from $107,000 in 2000 due to lower remaining balances on the equipment
leases in 2001.
Net Loss. Net loss to common stockholders increased $4.5 million to
approximately $8.4 million for the three months ended June 30, 2001 from $3.9
million for the six months ended June 30, 2000. This increase is attributable
to the non-cash accretion, reflected as dividends on preferred stock of
$885,000, the beneficial conversion feature dividend of $3.8 million associated
with our Series C Preferred Stock and accrued dividends on preferred stock of
$7,000. Excluding these non-cash charges, the net loss decreased $158,000 from
period to period for the reasons discussed previously.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Sales. Sales decreased to $376,000 in the first half of 2001 compared to
$528,000 in 2000. Sales in 2001 were both Careside Analyzers and Careside H-
2000's to the U.S. medical market. Sales in 2000 were predominately sales of
Careside H-2000's to international and veterinary customers. The reduction in
sales versus prior year was caused by a shift in focus from the veterinary to
the human market in order to align our H-2000 sales efforts with the marketing
efforts of our sales staff which are directed to customers who might use all of
our products. The cost of sales represents the cost of instruments and reagents
sold and the fixed costs associated with manufacturing efforts. In 2000, the
Company was a development stage company. As a result, these fixed costs were
recognized as product development expense. In 2001, $1.8 million is included in
cost of goods which was previously treated as product development. A like amount
was recorded as development expense for the six months ended December 31, 2000.
Research and Development Expenses - Product. Research and development expenses
decreased to approximately $1.6 million for the six months ended June 30, 2001
from $4.8 million for the six months ended June 30, 2000. This decrease of $3.2
million, was primarily attributable to completion of third party contract
development work associated with producing the Careside Analyzer and the
allocation of certain fixed costs including depreciation and facility related
expenses to cost of sales.
Research and Development Expenses - Software. Software development expenses
increased to approximately $451,000 for the six months ended June 30, 2001 from
$235,000 for the six months ended June 30, 2000. This increase of $216,000 was
primarily attributable to software development associated with the development
of the Careside Connect.
Selling and Marketing Expenses. Sales and marketing expenses decreased to
$1,863,000 for the six months ended June 30, 2001 from $1,942,000 for the six
months ended June 30, 2000. This decrease of $79,000 is due to reduced
commission accruals and lower staffing in the first three months of 2001.
-10-
General and Administrative Expenses. General and administrative expenses
decreased to $1.0 million for the six months ended June 30, 2001 from $1.1
million for the six months ended June 30, 2000. This increase of $100,000 is
primarily attributable to expense reduction efforts.
Goodwill. Goodwill amortization of $283,000 was recorded in both 2001 and 2000
and is associated with goodwill recorded from the December 1999 acquisition of
Texas International Laboratories, Inc.
Interest Income and Expense. Interest income decreased to approximately $29,000
for the six months ended June 30, 2001 compared to $298,000 for the six months
ended June 30, 2000. This decrease of $269,000 is attributable to lower cash
balances in 2001 than in 2000. Interest expense decreased to $200,000 in 2001
from $253,000 in 2000 due to lower remaining balances on the equipment leases in
2001.
Net Loss. Net loss to common stockholders increased $3.6 million to
approximately $11.7 million for the six months ended June 30, 2001 from $8.1
million for the six months ended June 30, 2000. This increase is attributable
to the non-cash accretion, reflected as dividends on preferred stock of
$919,000, the beneficial conversion feature dividend of $3.8 million associated
with our Series C Preferred Stock and accrued dividends on preferred stock of
$20,000.
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, 2000, we had approximately $33.6 million and $1.0 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. 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 and preferred stock, long-term
debt and certain short-term borrowings that were subsequently converted into
equity securities. As of June 30, 2001, we have received net proceeds
aggregating approximately $55.8 million from equity transactions.
Net cash used in operating activities for the six months ended June 30, 2001 was
approximately $5.7 million. For the period ended June 30, 2001, cash used in
operating activities primarily represents the net loss for the period and
increases in inventory and prepaid expenses offset by increases in depreciation
and amortization and a net decrease in accounts payable and accrued expenses on
a combined basis. Net cash used in operating activities was approximately $7.0
million for the six months ended June 30, 2000. This represents the net loss for
the period offset by depreciation and amortization and increases in accounts
payable and accrued expense and partially offset by increases in inventory and
prepaid expenses. We provide reserves for doubtful accounts based on our
specific review of aged accounts receivable. As of June 30, 2001 the allowance
for doubtful accounts related primarily to reserves required in connection with
TIL, which we acquired in December 1999.
Cash used in investing activities for the purchase of property and equipment was
approximately $162,000 and $1.7 million for the six months ended June 30, 2001
and 2000, respectively. The cash used in 2000 and 2001 was primarily for the
acquisition of manufacturing equipment and laboratory equipment used in research
and development.
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Cash provided by financing activities was approximately $9.7 million for the six
months ended June 30, 2001, net of payments made on long term debt obligations.
Net cash provided by financing was a result of closing a private placement of
our Series C Convertible Preferred Stock ("Series C Preferred") at June 30,
2001.
At June 30, 2001, our principal source of liquidity was approximately $5.6
million in cash and cash equivalents.
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 the cartridge assembly lines
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, we borrowed $3 million, of which $1
million has been converted to 179,696 shares of common stock and warrants to
purchase 179,696 shares of common stock. The remaining $2.0 million of the loan
matures in November 2001. At that time, we expect either to repay the $2.0
million balance on the bridge financing with the proceeds of a new loan, 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. In connection with the bridge financing, we issued a bridge
warrant to S.R. One. As currently in effect, the bridge warrant is
exercisable for 235,294 shares of Common Stock, at $6.375 per share. It will
expire on June 16, 2004.
In March 2001, at a first closing of the private placement of its Series C
Preferred, the Company sold 77.6805 shares of Series C Preferred to accredited
investors, together with five-year warrants to purchase 776,805 shares of Common
Stock at an exercise price of $2.55 per common share. The gross proceeds of
this first closing were $1,507,000. In May 2001, at a second closing of the
private placement of its Series C Preferred, the Company sold 334.7663 shares of
Series C Preferred to accredited investors, together with five-year warrants to
purchase 3,347,663 shares of Common Stock at an exercise price of $2.55 per
common share. The gross proceeds of this second closing were $6.5 million. On
May 31, 2001, at a third closing of the private placement of its Series C
Preferred, the Company sold 104.9248 shares of Series C Preferred to accredited
investors, together with five-year warrants to purchase 1,049,248 shares of
Common Stock at an exercise price of $2.55 per common share. The placement
agent in the transaction earned warrants to purchase 517,371 shares of Common
Stock at an exercise price per share of $1.94 in connection with the three
closings.
Proceeds from the sale of Series C Preferred and related warrants are being and
will be used to fund our working capital needs and in particular our increasing
sales and marketing efforts.
At June 30, 2001, our current liquidity and sales revenue expected in 2001 are
projected to be sufficient to fund our operating expenses and capital
requirements for at least 8 months. To the extent that we need additional funds
in connection with generating our commercial product sales, we expect to borrow
funds to build sufficient cartridge inventory to meet the needs that would
result from anticipated sales. We also expect that the development of additional
tests will require research expenditures at a level lower than past spending for
test development. Sales and marketing activities will require hiring and
training additional staff in 2001. 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 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/A dated August 9, 2001, as amended, on file with the SEC dated June 8,
2001. In the event our capital requirements are greater than estimated, we may
need to raise additional capital to fund our research and development
activities, to scale-up manufacturing activities and to expand our sales and
marketing efforts. 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 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 our operations significantly or to obtain
funds through
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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.
Our independent public accountants report for the year ending December 31, 2000,
has an explanatory paragraph raising substantive doubt about our ability to
continue as a going concern.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
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PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Sale of Unregistered Securities; Changes in Securities
In March 2001, at a first closing of the private placement of its Series C
Preferred, the Company sold 77.6805 shares of Series C Preferred to accredited
investors, together with five-year warrants to purchase 776,805 shares of Common
Stock at an exercise price of $2.55 per common share. The gross proceeds of
this first closing were $1,507,000. In May 2001, at a second closing of the
private placement of its Series C Preferred, the Company sold 334.7663 shares of
Series C Preferred to accredited investors, together with five-year warrants to
purchase 3,347,663 shares of Common Stock at an exercise price of $2.55 per
common share. The gross proceeds of this second closing were $6.5 million. On
May 31, 2001, at a third closing of the private placement of its Series C
Preferred, the Company sold 104.9248 shares of Series C Preferred to accredited
investors, together with five-year warrants to purchase 1,049,248 shares of
Common Stock at an exercise price of $2.55 per common share. The placement
agent in the transaction earned warrants to purchase 517,371 shares of Common
Stock at an exercise price per share of $1.94 in connection with the three
closings.
On the basis of the sophistication of each of the investors in this private
placement, the issuance and sale of the securities in this transaction was
exempt from the registration provisions of the Securities Act pursuant to
Section 4(2) and Rule 506 of Regulation D promulgated thereunder.
Each share of Series C Preferred Stock is convertible into a number of shares of
Common Stock which is equal to $19,400 divided by a conversion price that is
equal to 80% of the five day average trading price prior to conversion, but not
less than $1.55. If the average closing price of the Company's Common Stock
during the five trading days prior to the conversion date is at least $2.43,
then the conversion price will be equal to $1.94 (80% of $2.43). If the average
closing price during the five trading days prior to the conversion date is less
than $2.43 then the conversion price will be the greater of 80% of such average
-------
closing price or $1.55 (64% of $2.43). The effect of this formula is that the
conversion price can never be less than $1.55 (64% of the five-day average
trading price prior to the first closing in the private placement) or more than
$1.94. The Company has filed a registration statement registering for resale
under the Securities Act for all of the shares of Common Stock issuable upon
conversion of the Series C Preferred and exercise of the 2001 Investors'
Warrants and the 2001 Agent's Warrant. The Series C Preferred will automatically
convert into Common Stock on the day prior to the date of effectiveness of that
registration statement.
Proceeds from the sale of Series C Preferred are being and will be used to fund
our working capital needs and in particular our increasing sales and marketing
efforts.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit.
Exhibit No. Description
4.1 Certificate of Designations of Series C Convertible Preferred
Stock.*
4.2 Form of Securities Purchase and Subscription Agreement dated as
of March 29, 2001 by and between Careside, Inc. and Purchasers.*
4.3 Form of Warrant Agreement dated as of March 29, 2001 executed by
Careside, Inc. and addressed to Purchasers (including Warrant
Certificate).*
4.4 1998 Director Stock Option Plan, as amended to date.**
__________________
* Incorporated herein by reference to Careside's Quarterly Report on Form
10-Q/A for the quarterly period ended March 31, 2001 filed on May 15, 2001 (SEC
File Number 001-15051).
** Incorporated herein by reference to Careside's Registration Statement on
Form S-8 filed on June 21, 2001 (SEC File Number 333-63570).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
CARESIDE, INC.
Date: August 14, 2001 By: /s/ W. Vickery Stoughton
------------------------
W. Vickery Stoughton
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ James R. Koch
-----------------
James R. Koch
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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