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, 2002
---------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ___________.
Commission file number 333-69207
Careside, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2863507
(State or other jurisdiction (IRS employer 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 19,066,336 as of September 13, 2002.
CARESIDE, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Balance Sheets at December 31, 2001 and September 30, 2002
(unaudited) ................................................. 3
Statements of Operations for the three and nine months ended
September 30, 2001 and 2002 (unaudited) ..................... 4
Statements of Cash Flows for the nine months ended
September 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 ................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk .... 17
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds ..................... 18
Item 5. Other information ............................................. 18
Item 6. Exhibits and Reports on Form 8-K .............................. 18
Signatures ................................................................ 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CARESIDE, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, September 30,
2001 2002
------------ -------------
(unaudited)
Assets
Current Assets:
Cash $ 39 $ 11
Accounts receivable, net of allowance of $27 in 2001 and $35 in 2002 158 97
Inventory 2,498 1,665
Prepaid expenses and other 481 310
-------- --------
Total current assets 3,176 2,083
-------- --------
Property and Equipment, net of accumulated depreciation of $6,186 in
2001 and $7,244 in 2002 3,964 2,916
-------- --------
Deposits and Other 24 24
-------- --------
Goodwill 50 --
-------- --------
$ 7,214 $ 5,023
======== ========
Liabilities and Stockholders' Investment (defecit)
Current Liabilties:
Convertible debt, net of discount $696 $ -- $ 2,304
Current portion of long-term debt 2,756 3,127
Current portion of obligation under capital lease 15 15
Accounts payable 1,715 2,399
Accrued expenses 604 826
Accrued interest 554 819
-------- --------
Total current liabilties 5,644 9,490
-------- --------
Deferred Warranty Revenue 5 5
-------- --------
Long-Term Debt, net of current portion 483 --
-------- --------
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 September 30, 2002 169 191
Additional paid-in capital 61,772 66,467
Accumulated Deficit (60,868) (71,135)
-------- --------
Total stockholders' investment (deficit) 1,073 (4,477)
-------- --------
$ 7,214 $ 5,023
======== ========
The accompanying notes are an integral part of these financial statements.
3
CARESIDE, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
SALES, net ................................. $ 305 $ 78 $ 681 $ 1,088
COST OF SALES .............................. 1,046 525 3,081 2,673
------------ ------------ ------------ ------------
GROSS PROFIT ............................... (840) (447) (2,400) (1,585)
OPERATING EXPENSES:
Research and development - product ..... 675 397 2,289 1,085
Research and development - software .... 316 162 767 579
Sales and marketing .................... 919 228 2,782 1,658
General and administrative ............. 473 596 1,433 1,508
Goodwill amortization .................. -- -- 425 50
Goodwill impairment .................... -- -- -- --
------------ ------------ ------------ ------------
Operating Loss ................... (3,266) (1,830) (10,096) (6,465)
Other income (expense):
Interest income ........................ 32 -- 60 --
Interest expense - Beneficial
conversion feature on convertible debt -- -- -- (3,000)
Interest expense ....................... (106) (493) (305) (802)
------------ ------------ ------------ ------------
NET LOSS ................................... (3,340) (2,323) (10,341) (10,267)
DIVIDENDS ON PREFERRED STOCK
Beneficial conversion feature .......... -- -- (3,799) --
Accreted and Accrued ................... (2) -- (942) --
------------ ------------ ------------ ------------
NET LOSS TO COMMON STOCKHOLDERS ............ $ (3,342) $ (2,323) $ (15,082) $ (10,267)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE ....... $ (0.29) $ (0.12) $ (1.32) $ (.55)
============ ============ ============ ============
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE ................. 11,664,957 19,066,336 11,393,306 18,551,540
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
CARESIDE, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
-------------
2001 2002
---------- ----------
Operating Activities:
Net loss $ (7,001) $ (10,267)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,358 767
Fixed Asset impairment -- 291
Amortization of discount -- 356
Interest expense beneficial conversion feature
on convertible debt -- 3,000
(Gain)Loss on Disposal of PP&E -- 9
Goodwill impairment -- 50
Interest Expense for warrants issued with
bridge financings -- 60
Changes in operating assets and liabilties:
Accounts receivable (1) 61
Inventory (121) 815
Prepaid expenses and other (56) 170
Accounts payable (125) 684
Accrued expenses 117 26
Accrued expenses - Loss on Lease Commitments -- 200
Accrued interest 99 265
---------- ----------
Net cash used in operating activities (5,740) (3,513)
---------- ----------
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 (28)
Cash, beginning of period 1,789 39
---------- ----------
Cash, end of period $ 5,624 $ 11
========== ==========
The accompanying notes are an integral part of these financial statements.
5
CARESIDE, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the nine months
ended September 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 nine months ended September 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: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 nine months ended September 30, 2002, the Company incurred a
net loss of $10.3 million and has used cash in operating activities of $3.5
million and at September 30, 2002, the Company had a working capital deficit of
$7.4 million and an accumulated a deficit of $71.1 million. On October 11, 2002
Careside filed a voluntary petition under chapter 11 of the Bankruptcy Code in
the Central District of California. These factors raise substantial doubt about
the ability of the Company to continue as a going concern. On October 24, 2002
the company filed a motion for Approval of Secured Post-petition Financing
seeking approval, pursuant to section 364 (C) of the Bankruptcy Code. The Court
approved on October 29, 2002 a loan of up to $225,000 (Interim Loan) to support
ongoing operations until the next hearing scheduled for November 13, 2002 Beyond
these loans additional financing will be needed by Careside to fund its
operations. The Company is currently working to raise additional funding which
would be included in its future petition to the court to allow it to resume
normal operations post bankruptcy (see note 7). Further, the Company has reduced
portions of its fixed overhead expenses. In addition, the ability of Careside to
commercialize its products will depend on, among other things, the relative cost
to the customer of Careside's products compared to alternative products, its
ability to obtain necessary regulatory approvals and to manufacture the products
in accordance with Good Manufacturing Practices, and its ability to market and
distribute its products. The Company's failure to raise capital on acceptable
terms could have a material adverse effect on its business, financial condition
or results of operations and its ability to get Court approval for its operating
plan. 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
6
Company's financial statements for the year ending December 31, 2002, the
Company is unable to demonstrate its ability to fund operations and repay debts
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. On October 11, 2002, the Company filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Central District of California (See Note
9).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost, as defined, was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002 with earlier application encouraged. The Company does not expect adoption
of SFAS No. 146 to have a material impact, if any, on its financial position or
results of operations
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition, this statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. This statement is not applicable to the
Company.
Note 3: INVENTORIES
At September 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 $739,000
in Finished Goods inventory to Work in Process inventory until additional
upgrades to the Careside analyzer have been completed. The company increased
obsolescence reserves approximately $153,000 for slow movement of H2000 analyzer
inventory. 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 September 30, 2002
----------------- ------------------
Raw materials $ 932 $ 772
Work in process 123 875
Finished goods 1,967 763
Reserve for Excess and Obsolesce (524) (745)
------- -------
Total $ 2,498 $ 1,665
======= =======
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
7
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 nine-month periods ended September 30, 2002 and 2001 cash paid for
interest was approximately $156,000 and $113,000 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 Nine
months ended
September 30,
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
Note 7: BRIDGE FINANCING
In the first nine 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.
8
During the second quarter in 2002, the Company authorized $5,000,000 of
convertible debt to be issued subject to stockholder approval, the debt will, in
effect, be convertible into common stock. The debt matures July 1, 2003, 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 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 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 notes
payable.
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 beneficial conversion
feature of the debt of $3,000,000. Because the company has filed for voluntary
bankruptcy protection, future funding will be in the context of Debtor-in
Possession financing and the company will not issue the remaining $2,000,000 of
debt authorized.
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 is required to issue
9
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 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 third 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. Accordingly, to reduce H-2000 analyzers to their estimated net realizable
value, the Company recorded an inventory reserve of $68,000 during the first
quarter of 2002. A further reserve of $153,000 was taken in the third quarter of
2002 to fully reserve the H-2000 inventory.
Note 9: SUBSEQUENT EVENTS
On October 11,2002, the company filed voluntary petition under Chapter 11 of the
US Bankruptcy Code in the United States Bankruptcy Court for the Central
District of California. Chapter 11 provides a debtor an opportunity to continue
its business operations and to serve its customers while it reorganizes. On
October 24, 2002 the company filed a petition with the Bankruptcy Court for
Debtor-In-Possession (DIP) financing based on a loan commitment from Palm
Finance Corporation. Palm had loaned the company $60,000 on October 3, 2002 and
$40,000 on October 11, 2002 in a pre-petition secured loan. Palm committed to
loan the company $350,00 post petition and up to a total of $1,900,000 post
petition, subject to certain conditions and subject to court approval for the
proposed DIP financing. The company requested an early hearing from the court on
this petition and the court granted this request. On November 5, 2002 the court
granted the company the right to receive from Palm Finance up to $225,000 post
petition in the form of a secured loan. The court scheduled a further hearing
date on November 13, 2002 to make a decision on the full DIP petition. On
November 13, 2002 the court ruled that certain conditions of the DIP financing
proposal could only be decided in the context of a full operational plan that
would be submitted to creditors as part the Chapter 11 process. At the hearing
the lender agreed to amend the DIP proposal and the court set a date of November
19, 2002 to rule on the amended proposal. The DIP proposal provides the
potential for funds that will provide operating capital that will fund general
operations through the first eight months of 2003 based on the company's
projections. Additional capital amounting to $1,200,000 to $2,000,00 will have
to be raised to build inventory and provide the necessary cash to to operate the
business. There can be no assurances that the court will approve the DIP
proposal or any additional financing proposal. If the court approves any such
proposal it could result in substantial dilution to existing shareholders.
Failure to obtain any such financing could have a material adverse effect on the
company.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS
This quarterly report on From 10-Q (the "Report"), including the disclosures
below, contains certain forward-looking statements that involve substantial
risks and uncertainties. When used herein, the terms "anticipates," "expects,"
"estimates," "believes" and similar expressions, as they relate to us or our
management, are intended to identify such forward-looking statements.
Forward-looking statements in this Report or hereafter included in other
publicly available documents filed with the Securities and Exchange Commission
(the "Commission"), reports to the stockholders of Careside, Inc., a Delaware
corporation ("we", "us" or "our") and other publicly available statements issued
or released by us involve known and unknown risks, uncertainties and other
factors which could cause our actual results, performance (financial or
operating) or achievements to differ from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Such future results are based upon management's best
estimates based upon current conditions and the most recent results of
operations. These risks include, but are not limited to, the risks set forth in
our Annual Report on Form 10-K for the year ended December 31, 2001, and in such
other documents filed with the Commission, each of which could adversely affect
our business and the accuracy of the forward-looking statements contained
herein. Our actual results, performance or achievements may differ materially
from those expressed or implied by such forward-looking statements.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
Report.
GENERAL
The Company markets the Careside System, a proprietary blood testing system
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 believe 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 September 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 our marketing
expenditures increase. Our revenue for the immediate future will be dependent on
market acceptance and the speed of unit placements with physicians and clinics.
BANKRUPTCY FILING
On October 11, 2002, the Company filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Central District of California (Case No. LA02-38985-BB).
As of the date of the voluntary bankruptcy petition, the United States
Bankruptcy Court for the Central District of California assumed jurisdiction
over our assets. As a "debtor-in-possession", we remain in control of our assets
and are authorized to operate our business, subject to the supervision of the
Bankruptcy Court.
No assurance can be given that we will remain a "debtor-in-possession" and that
a trustee will not be appointed to operate our business. In addition, although
the Company has begun the process of formulating a plan of reorganization to be
submitted eventually to the Bankruptcy Court, no assurance can be given that the
Bankruptcy Court will confirm
11
our plan of reorganization or that we will remain in control of our assets
throughout the tendency of the bankruptcy case.
The fact that we filed a voluntary bankruptcy petition may adversely affect our
ability to maintain certain present business arrangements and may also affect
the Company's ability successfully negotiate future business arrangements. Among
the relationships that may be materially affected by the commencement of a
bankruptcy case is our relationship with other suppliers of goods and services
vital to the Company's financing and business operations.
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 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 without
company approval. 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.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Sales. Sales decreased to $78,000 during the three months ended September 30,
2002 from $305,000 during the three months ended September 30, 2001. These
amounts primarily consisted of sales of the disposable test cartridges. Our
decrease in sales was primarily due to the transition to a new equipment
manufacturer and the lack of funds to manufacture additional Careside Analyzers.
Cost of sales represents the cost of analyzers and disposable test cartridges
sold and the fixed costs associated with manufacturing efforts. In the third
quarter of 2002, our fixed costs represented $501,000 of cost of goods for the
quarter from $852,000 during the three months ended September 30, 2001. The
decrease in fixed costs for the three months ended September 30, 2002, was
primarily attributable to the company's efforts associated with cost reduction
in 2002.
Research and Development Expenses - Product. Research and development expenses
decreased to approximately $397,000 for the three months ended September 30,
2002 from $675,000 for the three months ended September 30, 2001. This decrease
of $278,000 was primarily attributable to completion of third party contract
development work associated with producing the Careside Analyzer and the
company's efforts associated with cost reduction in 2002.
12
Research and Development Expenses - Software. Research and development expenses
decreased to approximately $162,000 for the three months ended September 30,
2002 from $316,000 for the three months ended September 30, 2001. This decrease
was primarily attributable to the near completion of software development
associated with the launch of the Careside Connect and the company's efforts
associated with cost reduction in 2002.
Sales and Marketing Expenses. Sales and marketing expenses decreased to $228,000
for the three months ended September 30, 2002 from $919,000 for the three months
ended September 30, 2001. This decrease was primarily attributable to continued
cost control efforts in 2002.
General and Administrative Expenses. General and administrative expenses
increased to $596,000 for the three months ended September 30, 2002 from
$473,000 for the three months ended September 30, 2001. This net increase was
primarily attributable to a one-time charge on a defaulted office building
lease, fixed asset impairment charges in office equipment at our corporate
headquarters and some investor related expenses associated with the second
quarter 2002 financing offset by the company's efforts associated with cost
reduction in 2002.
Goodwill. No goodwill amortization was recorded for the three months ended
September 30, 2002 and June 30, 2001.
Interest Expense. Interest income decreased to less than $1,000 for the three
months ended September 30, 2002 compared to $32,000 for the three months ended
September 30, 2001. This decrease is attributable to lower cash balances in 2002
than in 2001. Interest expense increased to $493,000 for the three months ended
September 30, 2002 from $106,000 for the three months ended September 30, 2001.
The increase was due to a $3,000,000 interest charge on the discounted notes
payable associated with $3.0 million debt financing in the second quarter of
2002, the interest expense associated with the bridge loans taken in the first
quarter 2002 and offset by the lower remaining balances on the equipment leases
in 2002.
Net Loss. Net loss to common stockholders decreased $1.0 million to $2.3 million
for the three months ended September 30, 2002, as compared to a net loss to
common stockholders of approximately $3.3 million for the three months ended
September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Sales. Sales increased to $1,088,000 for the nine months ended September 30,
2002 from $681,000 for the nine months ended September 30, 2001. Sales in the
nine months of 2002 were predominately sales of the Careside Analyzer and
disposable test cartridges. Our increase in sales is due to our sales force
having worked with approximately 1,000 distributor representatives calling on
physician offices, clinics and hospitals. Cost of sales represents the cost of
analyzers and disposable test cartridges sold and the fixed costs associated
with manufacturing efforts. In the nine months ended September 30, 2002, our
fixed costs represented $2.0 of cost of goods for the quarter from $2.7 million
during the three months ended September 30, 2001. The decrease in fixed costs
for the nine months ended September 30, 2002, was primarily attributable to the
company's efforts associated with cost reduction in 2002.
Research and Development Expenses - Product. Research and development expenses
decreased to approximately $1.1 million for the nine months ended September 30,
2002 from $2.3 million for the nine months ended September 30, 2001. This
decrease of $1.2 million was primarily attributable to completion of third party
contract development work associated with producing the Careside Analyzer and
the company's efforts associated with cost reduction in 2002.
Research and Development Expenses - Software. Research and development expenses
decreased to approximately $579,000 for the nine months ended September 30, 2002
from $767,000 for the nine months ended September 30, 2001. This decrease was
primarily attributable to the near completion of software development associated
with the launch of the Careside Connect the company's efforts associated with
cost reduction in 2002.
Selling and Marketing Expenses. Sales and marketing expenses decreased to $1.7
million for the nine months ended September 30, 2002 from $2.8 million for the
nine months ended September 30, 2001. This decrease of $1.1 million is primarily
attributable to continued cost control efforts in 2002.
General and Administrative Expenses. General and administrative expenses
increased to $1.5 million for the nine months ended September 30, 2002 from $1.4
million for the nine months ended September 30, 2001. The increase was primarily
attributable to a one-time charge on our defaulted office building lease and
fixed asset impairment charges in office equipment at our corporate headquarters
as a result of the company's voluntary petition for Chapter 11. In addition to
investor related expenses associated with the second quarter 2002 financing
offset by the company's efforts associated with cost reduction in 2002.
13
Goodwill. We recorded a goodwill impairment charge of $50,000 in the nine months
ended September 30, 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 nine months ended September 30, 2002 compared to $60,000 for the nine months
ended June 30, 2001. This decrease is attributable to lower cash balances in
2002 than in 2001. Interest expense increased to $3,802,000 for the nine months
ended September 30, 2002 from $305,000 for the nine months ended September 30,
2001. The increase is primarily due to $3,000,000 interest expense on beneficial
conversion feature on convertible notes, interest on discounted notes payable,
remaining balances on the equipment leases in 2002 and interest expense from new
bridge loans taken in the nine months ended September 30, 2002.
Net Loss. Net loss to common stockholders decreased $4.8 million to $10.3
million for the nine months ended September 30, 2002 from $15.1 million for the
nine months ended September 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.
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 costs associated with the Chapter 11 bankruptcy process, 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 future 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 September 30, 2002, we had received net proceeds
aggregating approximately $64.1 million from these transactions.
Net cash used in operating activities for the nine months ended September 30,
2002 was approximately $3.5 million. For the period ended September 30, 2002,
cash used in operating activities primarily represented the net loss for the
period offset by increases in prepaid expense, inventory, accounts payable,
accrued interest and accrued expense. Net cash used in operating activities was
approximately $5.7 million for the nine months ended September 30, 2001. This
represented the net loss for that year and accounts receivable, inventory,
property plant and equipment, accounts payable offset by increases in accrued
expenses and accrued interest and depreciation and amortization. We provide
reserves for doubtful accounts based on our specific review of aged accounts
receivable. As of September 30, 2002, allowance for doubtful accounts related
primarily to cartridge sales to customers.
14
Cash used in investing activities for the purchase of property and equipment
consisted of $110,000 for the nine months ended September 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
nine months ended September 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 September 30, 2002, our principal source of liquidity was approximately
$11,000 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. This
has been fully drawn. Each draw was a separate loan under the facility. We drew
the remaining amount in early 2000 secured by manufacturing equipment for
cartridge assembly that we had previously purchased. Each equipment loan has a
48-month term and bears an interest rate of approximately 14%-15% per annum
adjusted for an index rate based on four-year U.S. Treasury Notes at the time of
borrowing.
We entered into an agreement for bridge financing with S.R. One, Limited in
December 1998. Under this agreement, $1.5 million was funded in December 1998
and $1.5 million was funded in January 1999. All of this funding was used to
fund research and development activities and for working capital. In June 1999,
S.R. One agreed to convert $1.0 million of the $3.0 million loan, together with
accrued interest at the rate of 8% on $1.0 million, into shares of Series A
Convertible Preferred Stock. The conversion price was $6.375, which was 85% of
the initial public offering price per unit. S.R. One received 162,914 shares of
Series A Convertible Preferred Stock. Each share of Series A Convertible
Preferred Stock was in turn converted on July 1, 2000, at the option of the
holder, into units comprised of one share of common stock and one warrant to
purchase an additional share of common stock. All accrued and unpaid dividends
with respect to shares of Series A Convertible Preferred Stock converted by S.R.
One were also converted into units at $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
15
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
convertible 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 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 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
seven-year exercisable life of the warrants.
On October 11,2002, the company filed voluntary petition under Chapter 11 of the
US Bankruptcy Code in the United States Bankruptcy Court for the Central
District of California. Chapter 11 provides a debtor an opportunity to continue
its business operations and to serve its customers while it reorganizes. On
October 24, 2002 the company filed a petition with the Bankruptcy Court for
Debtor-In-Possession (DIP) financing based on a loan commitment from Palm
Finance Corporation. Palm had loaned the company $60,000 on October 3, 2002 and
$40,000 on October 11, 2002 in a pre-petition secured loan. Palm committed to
loan the company $350,00 post petition and up to a total of $1,900,000 post
petition, subject to certain conditions and subject to court approval for the
proposed DIP financing. The company requested an early hearing from the court on
this petition and the court granted this request. On November 5, 2002 the court
granted the company the right to receive from Palm Finance up to $225,000 post
petition in the form of a secured loan. The court scheduled a further hearing
date on November 13, 2002 to make a decision on the full DIP petition. On
November 13, 2002 the court ruled that certain conditions of the DIP financing
proposal could only be decided in the context of a full operational plan that
would be submitted to creditors as part the Chapter 11 process. At the hearing
the lender agreed to amend the DIP proposal and the court set a date of November
19, 2002 to rule on the amended proposal. The DIP proposal provides the
potential for funds that will provide operating capital that will fund general
operations through the first eight months of 2003 based on the company's
projections. Additional capital amounting to $1,200,000 to $2,000,00 will have
to be raised to build inventory and provide the necessary cash to to operate the
business. There can be no assurances that the court will approve the DIP
proposal or any additional financing proposal. If the court approves any such
proposal it could result in substantial dilution to existing shareholders.
Failure to obtain any such financing could have a material adverse effect on the
company.
At September 30, 2002, proposed equity investments, and 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. When the equity investments fell through the company filed
for Chapter 11. At this time the Debtor-in-Possession financing proposal before
the court is a forward-looking statement that involves risks and uncertainties.
There is the potential that the court will make a ruling that will not be
acceptable to the Lender thereby resulting in the company being forced into
Chapter 7 of the US Bankruptcy Code. In addition to the Debtor-in-Possession
proposal we will need to raise additional capital to maintain our operations, as
well as expand our sales and marketing efforts and activities. Our future
liquidity and capital funding requirements will depend on numerous factors,
including the extent to which our products gain market acceptance, the timing of
regulatory actions regarding our
16
products, the costs and timing of expansions of sales, marketing and
manufacturing activities, procurement and enforcement of patents important to
our business, the impact of competitors' products and the impact on our debt of
the operating plan approved by the bankruptcy court. There can be no assurance
that the court will approve the DIP financing proposal as submitted or that
additional capital will be available on terms acceptable to us and to the court,
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 or approved
by the court we may be required to move to a Chapter 7 involuntary bankruptcy
proceeding and liquidate all company assets.
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 in view of the Chapter 11 filing that
it will be reported as a going concern, for the year ending December 31, 2002.
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 Financial Accounting Standards Board ("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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost, as defined, was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002 with earlier application encouraged. The Company does not expect adoption
of SFAS No. 146 to have a material impact, if any, on its financial position or
results of operations
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition, this statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. This statement is not applicable to the
Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
17
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 5. Other Information
On October 11, 2002, the company filed voluntary petition under Chapter 11 of
the US Bankruptcy Code in the United States Bankruptcy Court for the Central
District of California. The AMEX suspended trading of our stock and warrants on
October 24, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
99.1 Certificate pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes - Oxley
Act of 2002
(b) Reports on Form 8-K
We filed a report on Form 8-K on October 24, 2002 to report our
filing a voluntary petition for relief under chapter 11 of the
United States Code.
18
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: November 18, 2002 By: /s/ W. Vickery Stoughton
------------------------
W. Vickery Stoughton
Chairman and Chief Executive Officer
(Principal Executive Officer and
Financial and Accounting
Officer)
19
CARESIDE, INC.
a Delaware corporation
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
Section 302 Certification
I, W. Vickery Stoughton, Chief Executive Officer and Chief Financial Officer of
Careside, Inc., a Delaware corporation (the "Company"), do hereby certify, in
accordance with Rules 13a-14 and 15d-14, as created pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002, with respect to the Quarterly Report on Form
10-QSB of the Company for the quarterly period ended September 30, 2002 (the
"Quarterly Report"), as filed with the Securities and Exchange Commission
herewith under Section 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), that:
1. I have reviewed this quarterly report on Form 10-QSB of Careside, , Inc., a
Delaware corporation (the "Company") for the quarterly period ended September
30, 2002 (the "Quarterly Report");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the company and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The Company's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 18, 2002 By: /s/ W. Vickery Stoughton
-------------------------
W. Vickery Stoughton
Chief Executive Officer
Chief Financial Officer
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