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 September 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 16,885,952 as of November 12, 2001.
CARESIDE, INC.
INDEX
Page
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Part I - Financial Information
Item 1. - Financial Statements
--------------------
Consolidated Balance Sheets at December 31, 2000 and September 30, 2001 (unaudited)........... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 and 2001(unaudited)...................................................... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 2001(unaudited)...................................................... 5
Notes to Consolidated 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
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CARESIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, September 30,
2000 2001
------------- -------------
(unaudited)
Assets
------
Current Assets:
Cash and cash equivalents $ 1,789 $ 2,263
Accounts receivable, net of allowance of $53 at
December 31, 2000 and $33 at September 30, 2001, respectively 104 237
Inventory 2,698 2,673
Prepaid expenses and other 174 562
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Total current assets 4,765 5,735
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Property and Equipment, net of accumulated depreciation and
amortization of $4,212 at December 31, 2000 and
$5,755 at September 30, 2001, respectively 5,643 4,292
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Deposits and Other 24 24
------- -------
Goodwill, net of accumulated amortization of $566 at December 31,
2000 and $991 at September 30, 2001, respectively 2,231 1,806
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$12,663 $11,857
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Current portion of long-term debt $ 2,520 $ 2,577
Current portion of obligation under capital lease 13 15
Accounts payable 1,457 1,216
Accrued expenses 420 470
Accrued interest 334 483
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Total current liabilities 4,744 4,761
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Long-Term Debt, net of current portion 1,192 749
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Obligation Under Capital Lease, net of current portion 23 12
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Commitments
Mandatorily Redeemable Series B Convertible Preferred Stock
290 and zero shares issued and outstanding at
December 31, 2000 and September 30, 2001, respectively 1,054 -
Stockholders' Equity:
Preferred stock - Undesignated, $.01 par value:
4,836,117 authorized at September 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 September 30, 2001, respectively - 3,799
Common stock, $.01 par value:
50,000,000 shares authorized-
10,590,191 and 11,712,236 shares issued and outstanding at
December 31, 2000 and September 30, 2001, respectively 106 117
Additional paid-in capital 50,743 57,959
Accumulated Deficit (45,199) (55,540)
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Total stockholders' equity 5,650 6,335
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$12,663 $11,857
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
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CARESIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
2000 2001 2000 2001
---------- ----------- ---------- -----------
SALES, net $ 108 $ 305 $ 636 $ 681
COST OF SALES 59 1,046 311 3,081
---------- ----------- ---------- -----------
GROSS PROFIT 49 (741) 325 (2,400)
OPERATING EXPENSES:
Research and development - product 2,427 675 7,199 2,289
Research and development - software 154 316 389 767
Sales and marketing 921 919 2,858 2,782
General and administrative 440 473 1,560 1,433
Goodwill amortization 142 142 425 425
---------- ----------- ---------- -----------
Operating Loss (4,035) (3,266) (12,106) (10,096)
INTEREST and OTHER INCOME, net 57 32 356 60
INTEREST EXPENSE (123) (106) (377) (305)
---------- ----------- ---------- -----------
NET LOSS (4,101) (3,340) (12,127) (10,341)
DIVIDENDS ON PREFERRED STOCK
Beneficial conversion feature - - - (3,799)
Accrued and accreted dividends. (2) (2) (54) (942)
---------- ----------- ---------- -----------
NET LOSS TO COMMON
STOCKHOLDERS $ (4,103) $ (3,342) $ (12,181) $ (15,082)
========== =========== ========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.46) $ (0.29) $ (1.42) $ (1.32)
========== =========== ========== ===========
SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER SHARE 8,988,069 11,664,957 8,553,329 11,393,306
========== =========== ========== ===========
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)
Nine Months Ended
September 30,
--------------------
2000 2001
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Operating Activities:
Net loss $(12,127) $(10,341)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,139 1,968
Changes in operating assets and liabilities:
Accounts receivable 19 (133)
Inventory (1,914) (27)
Prepaid expenses and other (211) (388)
Accounts payable 1,124 (241)
Accrued expenses (573) 65
Accrued interest 127 149
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Net cash used in operating activities (11,416) (8,948)
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Investing Activities:
Purchases of property and equipment (1,829) (140)
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Net cash used in investing activities (1,829) (140)
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Financing Activities:
Proceeds from borrowings under
long-term debt 796 -
Payments on long-term debt (419) (386)
Payments on capital lease obligation (20) (9)
Deferred offering costs 2 -
Net proceeds from the issuance of 10,303 9,919
preferred and common stock
Net proceeds from exercise of callable warrants - 38
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Net cash provided by financing activities 10,662 9,562
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Net Increase(Decrease) in Cash and
Cash Equivalents (2,583) 474
Cash and Cash Equivalents, beginning
of period 4,905 1,789
-------- --------
Cash and Cash Equivalents, end
of period $ 2,322 $ 2,263
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the three
months and nine months ended September 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 for
three to four months. 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 nine months ended September 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 three and nine months ended September
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 three and nine months ended September 30, 2001 have
been reallocated as required due to the Company's post-development stage status.
Note 2: INVENTORIES
At December 31, 2000 and September 30, 2001, inventories consisted primarily 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 September 30, 2001
----------------- ------------------
Raw materials $1,164,000 $1,227,000
Work in process 126,000 226,000
Finished goods 2,036,000 1,848,000
Reserve for Excess and Obsolescence (628,000) (628,000)
---------- ----------
Total $2,698,000 $2,673,000
========== ==========
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 and when all other conditions of SAB 101 have been met. 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 end user's
acceptance, when applicable.
Note 5: STATEMENTS OF CASH FLOWS
During the nine-month periods ended September 30, 2000 and 2001 cash paid for
interest was approximately $247,000 and $156,000 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 nine
months ended
September 30,
----------------------
2000 2001
------- ----------
Accrued Dividends $54,000 $ 22,000
Accreted Dividends - 920,000
Beneficial Conversion Feature of Series C Preferred Stock - 3,799,000
Conversion of Series B Preferred Stock and accrued
dividends to common stock - 1,077,000
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 September 30, 2001, all of
the Series B shares had been converted to common stock.
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 was 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. On October 10, 2001, this registration statement was withdrawn. In
October 2001, the Series C Preferred Stock was converted by means of an exchange
into shares of Common Stock at $1.94. All of the shares of Series C Preferred
were converted by October 26, 2001. On October 30, 2001, the Company filed a
registration statement registering for resale the Common Stock issued as a
result of this exchange and upon exercise of the 2001 Investors' Warrants and
2001 Agent's Warrant, representing a total of 12,894,155 shares of Common Stock.
-7-
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.
Note 7: ISSUANCE OF SECURITIES
In a series of four transactions during July and August, 2001, the Company sold
11,190 shares of Common Stock at an average price of $3.31 per common share as a
result of the Company's exercise of 11,190 callable warrants that were issued in
2000 in connection with the sale of Series B Preferred Stock. At September 30,
2001, 188,810 of the callable warrants remained outstanding.
Note 8: SUBSEQUENT EVENTS
As discussed above, the Series C Preferred stockholders converted, by means of
an exchange, their shares into 5,173,716 shares of Common Stock in October 2001.
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, 2002. 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.
Accounting for Asset Retirement Obligations - Statement of Financial Accounting
Standards (SFAS) No. 143 was issued in June 2001. SFAS No. 143 establishes
accounting standards for recognition and measurement of a liability for an asset
retirement obligation and the associated asset retirement cost. This statement
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. The company plans to adopt this standard on January 1, 2003. As
the Company currently does not have any legal obligations associated with the
retirement of long-lived assets within the scope of SFAS No. 143, the potential
future impact statements is not known.
Accounting for the Impairment of Disposal of Long-Lived Assets - SFAS No. 144,
was issued in August 2001. This statement addresses financial accounting and
reporting of long-lived assets and for long-lived assets to be disposed of. The
provisions of this statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years. The Company will adopt this statement on January 1, 2002. The
Company is currently evaluating the impact of SFAS No. 144.
-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,
and those stated in its prospectus dated October 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 September 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 nine month periods ended September
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 SEPTEMBER 30, 2001 AND 2000
Sales. Sales increased to $305,000 in the second quarter of 2001 compared to
$108,000 in 2000. Sales in 2001 were both Careside Analyzers and Careside H-
2000s to the U.S. medical market. Sales in 2000 were predominately sales of
Careside H-2000s to international and veterinary customers. The increase in
sales versus the prior year was due to this shift in focus. 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, $1.5 million of these fixed costs were recognized
as product development expense. In 2001, $852,000 is included in cost of goods
which was previously treated as product development.
-9-
Research and Development Expenses - Product. Research and development expenses
decreased to approximately $675,000 for the three months ended September 30,
2001 from $2.4 million for the three months ended September 30, 2000. This
decrease of $1.7 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 $316,000 for the three months ended September 30,
2001 from $154,000 for the three months ended September 30, 2000. This increase
of $162,000 was primarily attributable to software development associated with
the Careside Connect and planned revisions to the H-2000 software.
Selling and Marketing Expenses. Sales and marketing expenses were virtually
unchanged at $919,000 for the three months ended September 30, 2001 compared to
$921,000 for the three months ended September 30, 2000.
General and Administrative Expenses. General and administrative expenses
increased to $473,000 for the three months ended September 30, 2001 from
$440,000 for the three months ended September 30, 2000. This increase of
$33,000 is primarily attributable to increased legal and accounting expenses.
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 and Other Income and Expense. Interest and other income decreased to
approximately $32,000 for the three months ended September 30, 2001 compared to
$57,000 for the three months ended September 30, 2000. This decrease of $25,000
is attributable to lower average cash balances in 2001 than in 2000. Interest
expense decreased to $106,000 in 2001 from $123,000 in 2000 due to lower
remaining balances on long-term debt in 2001.
Net Loss. Net loss to common stockholders decreased $800,000 to approximately
$3.3 million for the three months ended September 30, 2001 from $4.1 million for
the three months ended September 30, 2000. This decrease is attributable to
reductions in operating expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Sales. Sales increased to $681,000 in the first half of 2001 compared to
$636,000 in 2000. Sales in 2001 were both Careside Analyzers and Careside H-
2000s to the U.S. medical market. Sales in 2000 were predominately sales of
Careside H-2000s to international and veterinary customers. The increase in
sales versus the prior year due to 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, $3.4 million of these
fixed costs were recognized as product development expenses for the nine months
ended September 31,2000. The cost of sales for the nine months ended September
30, 2001, represents $2.7 million of fixed costs associated with manufacturing
efforts.
Research and Development Expenses - Product. Research and development expenses
decreased to approximately $2.3 million for the nine months ended September 30,
2001 from $7.2 million for the nine months ended September 30, 2000. This
decrease of $4.9 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 $767,000 for the nine months ended September 30, 2001
from $389,000 for the nine months ended September 30, 2000. This increase of
$378,000 was primarily attributable to software development associated with the
development of the Careside Connect.
Selling and Marketing Expenses. Sales and marketing expenses decreased to $2.8
million for the nine months ended September 30, 2001 from $2.9 million for the
nine months ended September 30, 2000. The decrease of $76,000 is
-10-
due to reduced commissions due to a change in commission policy associated with
revenue recognition and lower staffing in the first three months of 2001.
General and Administrative Expenses. General and administrative expenses
decreased to $1.4 million for the nine months ended September 30, 2001 from $1.6
million for the nine months ended September 30, 2000. The decrease of $127,000
is primarily attributable to overall expense reduction efforts offset by
increases in legal and accounting expenses.
Goodwill. Goodwill amortization of $425,000 was recorded in both 2001 and 2000
and is associated with goodwill recorded from the December 1999 acquisition of
Texas International Laboratories, Inc.
Interest and Other Income and Expense. Interest and other income decreased to
approximately $60,000 for the nine months ended September 30, 2001 compared to
$356,000 for the nine months ended September 30, 2000. This decrease of
$296,000 is attributable to $100,000 of other income in connection with the
termination of our contract with Quest Diagnostics in June 2000 and lower
average cash balances in 2001 than in 2000. Interest expense decreased to
$305,000 in 2001 from $377,000 in 2000 due to lower remaining balances on long-
term debt in 2001.
Net Loss. Net loss to common stockholders increased $2.9 million to
approximately $15.1 million for the nine months ended September 30, 2001 from
$12.2 million for the nine months ended September 30, 2000. This increase is
attributable to the non-cash accretion, reflected as dividends on preferred
stock of $920,000, the beneficial conversion feature dividend of $3.8 million
associated with our Series C Preferred and accrued dividends on our Series B
Preferred Stock of $22,000, offset by reductions in operating expenses.
The Company expects that results of operations in the future will fluctuate
significantly from period to period. Such fluctuations may result from numerous
factors, including the amount and timing of revenues earned from sales, 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 September 30, 2001, we have received net proceeds
aggregating approximately $60.6 million from equity transactions.
Net cash used in operating activities for the nine months ended September 30,
2001 was approximately $8.9 million. For the period ended September 30, 2001,
cash used in operating activities primarily represents the net loss for the
period, decreases in accounts payable and increases in inventory and prepaid
expenses offset by depreciation and amortization and a decrease in accrued
expenses and accrued interest. Net cash used in operating activities was
approximately $11.4 million for the nine months ended September 30, 2000. This
represents the net loss for the period offset by depreciation and amortization
and increases in accounts payable and accrued interest and partially
-11-
offset by increases in inventory and prepaid expenses and decreases in accrued
expenses. We provide reserves for doubtful accounts based on our specific review
of aged accounts receivable.
Cash used in investing activities for the purchase of property and equipment was
approximately $140,000 and $1.8 million for the nine months ended September 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.
Cash provided by financing activities was approximately $9.6 million for the
nine months ended September 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 Preferred in the first half of 2001.
At September 30, 2001, our principal source of liquidity was approximately $2.3
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
was first converted to Series A preferred stock and later 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 November 30, 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 is 10%. 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 September 16, 2004.
Prior to the end of the second quarter of 2001, the Company sold 517.3716 shares
of Series C Preferred Stock in a series of closings. As part of this private
placement, the Company also sold five-year warrants to purchase 5,173,716 shares
of Common Stock at an exercise price of $2.55 per common share. The gross
proceeds of this private placement were $10,037,000. 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 September 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 3 to 4 months. We will need additional funds to support our
commercial activities. Sales and marketing activities will require hiring and
training additional staff in 2001 and 2002. 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 on file with the SEC dated October 2000.
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
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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 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.
Our independent public accountants report for the year ended December 31, 2000,
has an explanatory paragraph raising substantive doubt about our ability to
continue as a going concern. If substantial doubt about our ability to continue
as going concern remains at the date our independent public accountants issue
their report on our financial statements for the year ending December 31, 2001,
based on conditions in existence at that time, the audit report on those
financial statements will include an explanatory paragraph describing such
doubt.
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
None.
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) Exhibits.
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Report to be duly signed on its behalf by the
undersigned duly authorized officers of the Company.
CARESIDE, INC.
Date: November 13, 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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