SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2001 Commission file number: 001-15051
Careside, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware
(State or other jurisdiction 23-2863507
of incorporation or organization) (IRS Employer Identification No.)
6100 Bristol Parkway, Culver City, CA 90230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 338-6767
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
and
Redeemable Common Stock Purchase Warrants
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark 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 _.
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 22, 2002, the aggregate market value of the Registrant's Common Equity,
par value $.01 per share, held by non-affiliates of the Registrant was
approximately $3.6 million, based upon the closing sale price reported for such
date on the American Stock Exchange. For purposes of this disclosure, shares of
Common Stock held by persons who hold more than 5% of the outstanding shares of
Common Stock and shares held by officers and directors of the registrant have
been excluded because
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily conclusive for other purposes.
On March 22, 2002, 19,066,335 shares of the Registrant's Common Stock, par value
$.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the Commission in
connection with the Annual Meeting of Shareholders scheduled to be held on May
15, 2002 are incorporated by reference into Part III of this Form 10-K.
-2-
PART I
The Company's forward-looking statements in this Annual Report on Form
10-K and those that may be made in the future by or on behalf of Careside, Inc.,
including statements about the market and opportunity for the Company's
products, revenue growth and profitability potential, regulatory approvals,
competition, the ability to control expenses and international expansion, are
based on assumptions about many important factors. Several important factors may
cause the Company's actual results to differ materially from those contemplated
by these forward-looking statements. These factors include the Company's limited
operating history, and lack of profitability, its need for additional financing,
the acceptance of the Company's products by the medical community, product
development risks, the level of third party reimbursement for medical tests,
reliance on third party manufacturers, suppliers and distributors, retention of
key personnel, competitive risks, protection of the Company's proprietary
technology, and government regulation.
Item 1. Business
General
We have developed and sell a proprietary blood testing system. It is
designed to decentralize laboratory operations. The system provides
cost-effective, accurate test results within 10 to 15 minutes at the
point-of-care, for a comprehensive menu of routine blood tests. Because it
provides rapid test results, the Careside system can also perform blood tests
required for critical care testing. The Careside system performs chemistry,
electrochemistry, coagulation and hematology tests. Tests in these different
test categories comprise the vast majority of blood tests ordered. No other
point-of-care product currently in the market offers as broad a menu of tests or
combines these test categories. Our goal is to make the Careside system the
standard for routine and critical care blood testing. If we are successful,
diagnostic information will travel more rapidly and healthcare costs for
physicians, providers and payers will be reduced.
The Careside system consists of the Careside Analyzer and disposable test
cartridges, the H-2000 and the Careside Connect. The Careside Analyzer is easy
to use and can be operated by a non-technical person with appropriate training
in connection with use of the device. Its software will enable the user to
capture all data required to comply with the Clinical Laboratory Improvement
Amendments of 1988. This law, commonly called CLIA, governs quality assurance
and quality control processes and reporting for healthcare providers. The H-2000
is our hematology testing device. The Careside Connect is a data interface,
which will link the Analyzer with the H-2000 and any other testing device. It
also enables the electronic transmission of blood test results to our customers'
information systems.
The FDA has granted pre-market clearance for the Careside Analyzer and the
H-2000, and pre-market clearance or exemption for 42 blood tests performed by
the Analyzer and an 18-parameter hematology test for the H-2000, including tests
for professional laboratory use. We have received FDA approval for point-of-care
testing for the Careside Analyzer, thereby enabling non-technical personnel with
appropriate training to use it. Similar approvals will be sought for the H-2000
in 2002.
Our concept and technology originated with SmithKline Beecham Clinical
Laboratories, Inc. (SBCL). In 1993, SBCL conducted extensive surveys of the
point-of-care market. As a result, in 1994, SBCL started our predecessor
business to develop the technology we use today. In November 1996, we acquired
the assets and contracts used in the predecessor business, including
intellectual property, equipment and other assets to continue the development of
point-of-care diagnostic technology and to create a commercial product. Several
senior members of our management team worked on this point-of-care project at
SBCL, including W. Vickery Stoughton, our Chief Executive
-1-
Officer, and Thomas H. Grove, Executive Vice President--Chief Technology
Officer. Quest Diagnostics Incorporated later acquired SBCL.
Careside's Strategy
Our goal is to make point-of-care testing with the Careside system the
standard of care for routine and critical care blood testing. If we are
successful, diagnostic information will travel more rapidly and reduce
healthcare costs for physicians, providers and payers. Most point-of-care
companies have focused solely on the critical care testing market with a limited
number of tests. In contrast, we have developed the Careside system to replace
large analyzers and decentralize testing to the point-of-care, reducing reliance
on centralized testing services.
Careside's Technology and Products
We designed the Careside system as a platform for solving the limitations
of central blood testing laboratories and a means for healthcare providers not
currently conducting blood tests to start providing this service. The advantages
of our system can be summarized as follows:
.. Cost-Effective Results-- The Careside system is designed to provide test
results that are cost competitive with commercial laboratories.
.. Rapid Test Results--The Careside system furnishes test results within
10-15 minutes from the time blood is drawn from the patient. The Careside
system can test from one to six cartridges in this time period. By
comparison, 24 hours or more may elapse before a healthcare provider has
in hand the results of blood tests performed at commercial laboratories,
and four to five hours may elapse before results are in the provider's
hands for a blood test performed at a hospital laboratory.
.. Comprehensive Test Menu--The Careside system offers a broad menu of the
most commonly ordered blood tests, including critical care tests. The
Careside system is designed to perform hematology, chemistry,
electrochemistry, coagulation and immunochemistry tests. Our Careside
system has clearance or approval for 60 tests, including 18 hematology
tests. This, we believe, substantially exceeds the capabilities of any
point-of-care system currently on the market.
.. Ease of Use--The Careside system can be easily operated and maintained by
non-technical personnel with appropriate training in connection with use
of the device. The test process does not require separate centrifuging or
sample splitting, and automatically doses and mixes the patient's blood
sample with reagents within the cartridges or with the reagents in the
H-2000. Data transfer is easily accomplished using the Careside Connect
product to connect data into local area networks or through the Internet.
.. Industry Standard Technology--The Careside system uses many test methods
that are the same as those used in hospital and commercial laboratories.
The Careside system's technology is a miniaturization of the
state-of-the-art technology in larger testing devices utilized by
centralized laboratories.
.. Embedded Quality Assurance and Quality Control--The Careside Analyzer and
the H-2000 have operating software designed to assist in meeting the
quality assurance and quality control documentation requirements of the
Clinical Laboratory Improvement Amendments of 1988.
.. Ability for Practice Enhancement-- The Careside system's rapid test
results enable a provider to make clinical decisions more quickly, see
more patients, eliminate time spent reviewing records and
-2-
making follow-up telephone calls, and improve patient satisfaction and
quality of care. Healthcare providers can also increase their revenue by
performing and billing for tests themselves. Currently it is the
laboratory, not the physician, which gets paid for performing blood tests.
The disadvantages of our system stem from the fact that it is a new way of
providing laboratory testing services, so we cannot predict with certainty how
fast or whether the market will adopt it. We have spent more than $60 million
through 2001 and we will need one or more further financings before the Company
will be profitable. As with any new technology, it involves an expenditure of
cash and some learning time by physicians and other healthcare providers.
Furthermore, our system does not perform all in vitro tests. More complex tests
that are not supported by our decentralized testing system, such as
microbiology, genetic and other less common tests will still be referred to
commercial laboratories or to a core laboratory supporting multiple hospitals.
Centralized laboratories that continue to provide such complex testing should,
with routine tests handled elsewhere, be able to streamline procedures. We think
this will lower the cost of complex testing. With lower costs of centralized
testing and the Careside system for decentralized testing, we expect that the
entire testing process will become more efficient and cost effective.
-3-
PRODUCT DEVELOPMENT AND REGULATORY STATUS
The following chart summarizes the status of development of each of our
products.
PRODUCT DEVELOPMENT AND REGULATORY STATUS
=====================================================================================================
TECHNOLOGY
PRODUCT REGULATORY/DEVELOPMENT STATUS PARTNER/.SUPPLIER
-----------------------------------------------------------------------------------------------------
Careside Analyzer Cleared under Section 510(k) of the Food, Drug and UMM
Cosmetic Act for use in licensed laboratories and Electronics,
for Point-of Care (POC). The Analyzer is offered Inc.
for sale to customers.
-----------------------------------------------------------------------------------------------------
Disposable Test Chemistry, electrochemistry and coagulation Battelle
Cartridges cartridges have been developed and are offered for
sale to customers. The immunochemistry test
cartridge is in development.
=====================================================================================================
Test Category Cleared/exempt for Planned 2002-3
------------- ------------------ --------------
Laboratory and POC Use Submissions
-----------------------------------------------------------------------------------------------------
Chemistry Glucose Lactate Fuji Photo Film Co., Ltd.
BUN (Urea Nitrogen) Direct LDL-cholesterol
Creatinine Direct HDL-cholesterol
BUN/Creatinine Ratio
Albumin
A/G Ratio (calc.)
Globulin (calc.)
Creatine Kinase
Creatine Kinase MB
% CKMB (calc.)
Total Cholesterol
HDL-Cholesterol*
LDL-Cholesterol (calc.)
Cholesterol/HDL Chol Ratio
GGT
ALT
Cholinesterase*
Total Bilirubin
Phosphorus
Total Protein
Total Calcium
Uric Acid
Triglycerides
LDH
Bilirubin, Direct
Bilirubin, Indirect (calc.)
Ammonia*
Carbon Dioxide, Total
Anion Gap (CO2+Echem)
Magnesium
Osmolality
Hemoglobin*
Hematocrit (calc.)
Alkaline Phosphatase
AST
ALT/AST Ratio
Amylase
-----------------------------------------------------------------------------------------------------
Electrochemistry Chloride Ionized Calcium Fuji Photo Film Co., Ltd.
Potassium
Sodium
-----------------------------------------------------------------------------------------------------
Coagulation PT* Fibrinogen Third party suppliers
APTT Thrombin Time
-----------------------------------------------------------------------------------------------------
-4-
=====================================================================================================
TECHNOLOGY
PRODUCT REGULATORY/DEVELOPMENT STATUS PARTNER/.SUPPLIER
-----------------------------------------------------------------------------------------------------
Immunochemistry Theophylline Third party suppliers
Phenytoin
Digoxin
Phenobarbital
T4
T3 Uptake
Carbamazepine
=====================================================================================================
* Requires separate clearance or exemption for point-of-care.
Product Development and Regulatory Status
===========================================================================================
HEMATOLOGY STATUS OF DEVELOPMENT TECHNOLOGY
PARTNER/SUPPLIER
-------------------------------------------------------------------------------------------
CARESIDE H-2000
18 parameter, 3 part FDA Cleared; orrered for Third Party Manufacturer
differential sale to customers Tjhior
-------------------------------------------------------------------------------------------
Hematology Tests
WBC All hematology tests have Aqua Solutions
RBC been FDA cleared under
Platelet count Section 510(k)
Lymphocyte
% Lymphocyte
Monocyte
% Monocyte
Granulocytes
% Granulocytes
Hematocrit
Hemoglobin
MCV
MCH
MCHC
RDW
MPV
PCT**
PDW**
===========================================================================================
** For diagnostic use outside U.S., for quality control use within U.S.
===========================================================================================
COMMUNICATION STATUS OF DEVELOPMENT TECHNOLOGY PARTNER
PRODUCT
-------------------------------------------------------------------------------------------
CARESIDE CONNECT Offered for sale to customers Third Party Manufacturer
provides an electronic link
between the Careside Analyzer
and the Careside H-2000 testing
device
===========================================================================================
The Careside System
The Careside system currently consists of two desktop testing instruments,
called the Careside Analyzer and the Careside H-2000, and patented disposable
test cartridges. The Careside Analyzer combines chemistry, electrochemistry,
coagulation and, in the future, immunochemistry testing in a single testing
instrument. Careside's H-2000 is a hematology testing device. We are not aware
of any point-of-care blood testing system on the market that has this combined
capability. We have also developed a data
-5-
interface, called the Careside Connect, which allows the electronic transmission
of blood test results in a standard data format.
The Careside Analyzer
The Careside Analyzer is approximately 14 inches tall by 12 inches wide
and 11 inches deep and weighs about 24 pounds. The exterior is made of high
impact resin plastic. The top of the Careside Analyzer consists primarily of a
touch screen, on an ergonometric angle, on which the user inputs patient,
physician and billing information, the tests to be conducted and any desired
commentary. We believe that the Careside Analyzer's user interface software is a
significant strategic advantage. For example, its quality assurance and quality
control capabilities are equal to those required of central laboratories. The
quality assurance and quality control software stores and interprets the quality
control data generated using the embedded electronic quality control system in
the Careside Analyzer as well as the traditional wet testing quality control
approach for test cartridges. After testing, quality control data is flagged
when out of limits and plotted on graphs for easy review. A set of five
re-usable and proprietary quality control test cartridges will be provided with
each instrument which allow the user to perform automated, electronic quality
control for all electrochemistry, chemistry and coagulation tests. These
reusable quality control test cartridges will replace traditional quality
control which involved running multiple levels of commercial plasma specimens
for all the tests on the system. The software utilized by the Careside Analyzer
is designed to govern testing of one patient at a time, perform quality
assurance and quality control documentation and conduct the test ordering
processes. It also contains a security system that is compliant with the
Clinical Laboratory Improvement Amendments of 1988. The user interface system
can be customized for each particular customer.
The Careside system can be operated by non-technical personnel with
appropriate training in connection with the use of the device. The operator will
first select one or more test cartridges from inventory depending on the tests
ordered by the attending healthcare provider. Most cartridges will contain one
test, but some cartridges will contain two or three tests. Up to six cartridges
of a single patient's blood can be tested at the same time. The Careside system
is currently capable of conducting a maximum of eight tests per patient in a
single 10 to 15 minute test cycle. To prepare a cartridge, the operator will
place a small amount of the patient's drawn blood into the test cartridge with a
pipette or other standard transfer device. The operator will then simply load
the test cartridges into the instrument. Any combination of cartridges can be
loaded in any order, thus enabling the operator flexibility to perform
individual tests or customized panels. This flexibility is designed to minimize
waste by allowing the operator to run only the tests ordered by the provider
rather than traditional pre-set panels that may contain unnecessary tests. This
feature is particularly responsive to the current and expected future
requirements of third-party payers.
After the operator inputs patient information and test orders, the
instrument will automatically perform the tests and record and display or print
the results. To perform the tests, the Careside Analyzer undertakes cycles for
heating, centrifuging and several types of reading. The cycle time from the
moment the cartridge is dosed with whole blood and placed into the Careside
Analyzer to final test result is approximately 10 to 15 minutes for chemistry,
electrochemistry, immunochemistry or coagulation tests, or any combination of
these tests. A standard Chem 7 panel, comprised of sodium, potassium, chloride,
carbon dioxide, glucose, creatinine and urea nitrogen tests, can be performed in
approximately ten minutes and will utilize five cartridges. Sodium, potassium
and chloride tests are on one cartridge as they are always ordered in
combination. At the conclusion of the test, the Careside Analyzer ejects the
cartridges into a waste container for later disposal in appropriate biohazard
vessels.
The Careside Analyzer provides test results to the healthcare professional
in several ways. A self-adhesive label can be printed with test results for
direct transfer to the patient's chart. Each Careside Analyzer also incorporates
a floppy disk drive so that information can be downloaded from the instrument
for analysis. An additional electronic output method is through use of the
rs-232 port on the rear of the
-6-
machine. Our data interface, called the Careside Connect, allows the electronic
transmission of blood test results in a standard data format.
The Analyzer's Disposable Test Cartridges
Each test cartridge is designed to perform one test and may only be used
once. Each test cartridge is designed to facilitate the flow of the blood, serum
or plasma specimen onto chemicals packaged in the cartridge. These chemicals,
which are called reagents, react with the specimen and change. The changes are
then read by the Careside Analyzer to yield the test result. Its various
channels and pools assure proper reagent and specimen temperature equilibration,
sample separation, sample metering, sample dispensing, test incubation and
facilitate result detection. Each cartridge contains all reagents necessary to
perform a reagent measurement on a serum, plasma or whole blood sample for a
particular test. The proprietary cartridges are each approximately 2.5 inches
long and 1.5 inches wide and are comprised of layers of molded plastic with
channels for application of the sample to the reagent. When stored in
refrigerators, the cartridges are expected to have a 9 to 18 month shelf life.
The cartridges are placed in the Careside Analyzer directly from the
refrigerator after sample dosing. The first four minutes of the test cycle warms
the test cartridges to the appropriate test temperature. If necessary, the
Careside Analyzer then spins the cartridges using centrifugal force to push the
sample through small channels, separating it into serum or plasma. Excess sample
is deposited in an overflow well. A measured amount of sample remains in the
metering passage and is dispensed onto the reagent film or mixed with wet
reagent pushed from an interior pouch. Each test cartridge is designed to be
airtight to prevent ventilation spoilage of the specimen sample.
The three basic types of measurements that will be made are spectral
transmittance, reflectance and electrochemical. Chemistry tests are used to
assess general health status as well as to diagnose and monitor diseases of the
major organ systems such as the heart, liver, kidney, blood, pancreas, endocrine
and bone. The film chemistry cartridges contain dry chemistry reagents which are
stacked as required for the test. The Careside Analyzer's platter spins the
cartridge containing the dry film, which will turn color from reaction with the
blood element, over LED/photodiode pairs. The LED lights reflect the colors of
the reagent. Multiple reflectance measurements are performed to yield a result.
In the case of coagulation and immunochemistry tests, the cartridge is spun over
the same LED/photodiode pairs which shine through a small rectangular hollowed
prism, called a prismatic cuvette, built into the cartridge. The light
transmission is then read by the Careside Analyzer.
Electrochemistry Tests. Like chemistry tests, electrochemistry tests are
used to assess general health status and to diagnose and monitor diseases of the
major organ systems such as the heart, liver, kidney, blood, pancreas, endocrine
and bone. The electrochemistry cartridge contains an ion specific electrode
slide. When the slide reacts with the sample, which in this case is whole blood,
it generates values that correlate to the concentration of sodium, potassium and
chloride in the sample. The test compares an electrochemical signal generated
from a reference solution to a similar signal generated from the patient's
blood. The reference solution is a liquid contained in a pre-filled pouch
embedded in the cartridge. One side of an ion specific electrode slide is
exposed to a reference solution during the testing sequence and the other side
is exposed to the patient's whole blood. The Careside Analyzer reads the
difference between the two, thereby generating the test result.
Coagulation Tests. Coagulation testing assesses the ability of a patient's
blood to coagulate. Coagulation is the series of events that leads to the
formation of a blood clot. Tests of prothrombin time, or PT, and activated
partial thromboplastin time, or aPTT, are the primary coagulation tests used by
both physicians and hospitals. Reagents from the coagulation test cartridge are
contained inside a small hollowed prism, called a prismatic cuvette, and in a
pouch. Plasma is delivered to the cuvette by pressurization of the membrane on
the cartridge. A second reagent, such as a buffer or calcium chloride, is added
via the pouch. Light is then transmitted through the cuvette. The coagulation
reaction causes a
-7-
change in the cloudiness, or turbidity, of the plasma that is detected optically
by the Careside Analyzer. The time it takes for this optical change to occur is
reported out as the coagulation time.
Immunochemistry Tests. Immunochemistry tests are used for the diagnosis of
drug effectiveness for heart, thyroid analysis and for other purposes. To date,
immunochemistry systems have had limited penetration in the point-of-care
market. Generally, they are difficult to use, involve expense instrumentation
and costly reagents and have long assay times. We are in the process of
developing an immunochemistry test cartridge.
The immunochemistry test cartridge is identical in form and function to
the coagulation test cartridge except that a much smaller sample size is
delivered to the prismatic cuvette. The reagents in the cuvette and pouch are
different for each immunochemistry test. The Careside Analyzer measures a rate
of change or endpoint in cloudiness depending on the test. The rate of change or
endpoint is converted from calibration information coded in the Analyzer and on
the test cartridge, generating a test result.
The disposable test cartridges have a number of key features that we
believe contribute to the Careside system's reliability, speed, low cost and
accuracy of analysis:
.. Unique Cartridge Design. Specimen preparation, calibration and test
performance are incorporated in an inexpensive plastic cartridge. Where
necessary, the cartridge stores and measures delivery of reagents and
electrolytes for mixing with the patient's sample prior to analysis.
Cartridges are loaded into the instrument manually and are designed so
that they can be inserted in only one direction to avoid error.
.. Ease of Sampling. Sampling is automatic and requires small volumes using
approximately 75 to 150 microliters (ul) of whole blood, as compared to
current approaches requiring much larger amounts. The dosing process
requires the tester to fill the cartridge well to a point indicated on the
cartridge. No precise measurement of the blood sample is required by the
tester, as the cartridges' channels measure how much sample is applied to
the reagent.
.. Built-in Centrifuge. Separation of plasma from whole blood, as required
for many tests, is accomplished in the cartridge after placement in the
Careside Analyzer, so that a separate centrifugation step is unnecessary.
.. Flexibility in Testing. One, two or three tests may be contained in each
cartridge. Single test cartridges and a three test cartridge have been
designed, manufactured and used in testing. Two test cartridges have been
designed, but have not yet been manufactured or used in testing. The added
cost and complications of using test panels containing unnecessary tests
is avoided.
.. Quality Assurance and Quality Control Features. All test cartridges are
bar-coded for test identification. The bar codes identify the type of test
contained in cartridge, as well as a lot number, expiration date and
self-calibration information, which are all CLIA requirements. The data
from the cartridge's bar code is read and stored in the Careside Analyzer.
As each test is completed, it becomes part of the CLIA documentation.
Because each cartridge contains an identifying bar code which is read by
the instrument, the order in which the cartridges are loaded is
immaterial. The Careside system will check that the ordered tests and the
cartridges entered in the device match.
The H-2000 Hematology Testing Device
Hematology testing determines various attributes of a patient's blood,
such as how many platelets, monocytes or lymphocytes it has. The H-2000 is a
high quality, low cost hematology analyzer that was designed for both human and
animal testing. Its hematology tests are equally applicable in the
-8-
veterinary and human markets. The H-2000 weighs 37 lbs. and measures only
slightly larger than a cubic foot. It can provide 18 hematology diagnostic tests
in approximately 2 minutes from the time whole blood is drawn from a patient.
The H-2000 uses fluid reagents that can be purchased from us or other
manufacturers. The architecture is an open system that allows the H-2000 to
operate with a number of different reagent brands, giving it a high level of
flexibility. The H-2000 is automatic and self-cleaning. It is designed to flag
suspected abnormalities in various cell populations.
The H-2000 is easy to operate. A few drops of blood are drawn into the
H-2000 through an aperture from either a normal test tube or a capillary tube
used in a finger prick. The blood is automatically distributed into counting
chambers. Reagents are mixed or used in counting chambers in combination with
both optical and electronic counting methods which perform up to four
cross-referenced measurements per sample, thereby ensuring accurate counts. The
reagents and cleaning fluids are flushed into a disposal bottle for standard
blood sample disposal.
The Careside Connect
We have partnered with Advanced Medical Information Technologies, Inc.,
also known as AdMIT, to develop a link between the Careside Analyzer and the
H-2000 and between the Careside system and other medical devices and information
systems. This cabled interface will enable users of the Careside Analyzer to
connect hematology devices (including the H-2000) and other diagnostic test
devices into the Careside Analyzer, thereby allowing the users to further avail
themselves of the Careside Analyzer's extensive ordering, data storage, clinical
records and quality assurance and quality control capabilities. AdMIT is
controlled by our Chief Information Officer, Dennis Rieger. We will have
exclusive rights to use the Careside Connect in the point-of-care market for
laboratory testing services.
In addition to linking the Careside Analyzer and the H-2000 or other
diagnostic testing devices, Careside Connect can be connected directly into
laboratory or clinical information systems, physician practice management
systems or other information systems, either directly through a local area
network or via the Internet.
The Laboratory Testing Market
General
The annual U.S. market for laboratory testing services is about $30 to $35
billion according to industry research. Clinical Laboratory Improvement
Amendments (CLIA) data and Washington G-2 reports show that hospitals do 60-65%
of this testing, physician offices 7-8% and independent commercial labs 25-30%.
The lab services market can be divided into three primary segments: routine
clinical testing (blood or urine testing), anatomic pathology (tissue) and
complex testing (DNA and genetic testing). All three comprise in vitro testing,
which means the testing is done on a sample outside the body. In vivo testing is
done in the body. Annual expenditures for routine in vitro testing are over $25
billion in the U.S. and it is this segment that is served by the Careside
system. Routine in vitro tests are semi-automated on our system and can be
conducted by non-technical personnel. Therefore, our market opportunity is
virtually wherever blood is drawn from patients for standardized blood tests.
Based on industry data and estimates, we believe the worldwide market for our
blood tests is expected to be over $7 billion.
Most routine blood tests are currently sent to a central location, either
a commercial or hospital laboratory, for processing, although some physicians do
the testing in their offices.
Commercial Laboratories. Commercial laboratories have been the low cost
-----------------------
provider of in vitro blood testing services due primarily to economies of scale
in testing multiple samples in large analyzers. Commercial laboratories' testing
expenditures relate predominantly to labor intensive functions such as
-9-
distribution, customer service, general administration, communication technology
and preparation of the blood sample. There are numerous steps involved in
obtaining test results from commercial laboratories. Blood samples are collected
throughout the day from a variety of sources including hospitals, physicians'
offices, nursing homes and home care agencies. The samples are transported to
the laboratory, usually with special care in packaging to preserve sample
integrity. After the samples arrive at the laboratory, several administrative
tasks are necessary as thousands of samples are processed daily. Each sample is
split into tubes that are then sorted for testing in multiple large analyzers.
The high throughput analyzers require the attention of highly skilled
technicians to prepare reagents, prime multiple pumps, calibrate, prepare and
load blood samples, conduct centrifuge operations, process measurement data and
report results. This complex process must be tightly controlled at each step to
ensure both administrative and analytical accuracy. Tests are generally run
overnight and results are sent back to the healthcare provider the following
day. This factory-like process limits the ability to provide test results in
less than 24 hours. If results are required sooner, certain laboratory
operations must be interrupted, resulting in significantly increased costs.
Hospital Laboratories. The process in hospital laboratories is very
---------------------
similar. Blood samples are typically collected in the early morning with tests
performed late morning and early afternoon. Results are generally returned
within four to five hours. However, in many instances, hospitals must respond to
critical patient conditions and conduct tests on an immediate basis in order to
support the healthcare provider when a patient's condition is life threatening.
A hospital must be able to process these critical care tests 24 hours a day.
This requires the hospital laboratory to remain open whether or not any tests
are being conducted. With insufficient testing volume to absorb laboratory
operating expenses and capital costs, tests performed in hospital laboratories
are more expensive.
Physicians' Offices. Many physicians' offices currently outsource their
-------------------
testing to commercial or hospital laboratories. This practice is largely the
result of the enactment of the Clinical Laboratory Improvement Amendments in
1988. CLIA was an attempt to ensure the quality and reliability of laboratory
test results by placing more stringent administrative and regulatory burdens on
testing conducted in the physician's office. Under CLIA, technicians conducting
complex tests must meet detailed proficiency requirements and must have
established well-defined quality assurance and quality control programs. As a
result, for most individual physicians, diagnostic testing became too burdensome
and costly to justify being done in the office.
Managed Care's Impact on Blood Testing
Managed care has put substantial pressure on healthcare providers to
reduce costs and to treat patients using clinical treatment protocols for many
chronic and acute illnesses. These protocols frequently contain diagnostic tests
that are used to help avoid the occurrence of acute episodes of illness.
Diagnostic blood and urine testing are two of the major tools used in these
protocols for early detection and ongoing evaluation of treatment efficacy. On
the one hand, these pressures should increase testing volume. On the other hand,
managed care providers and other payers are becoming more stringent by only
reimbursing tests for which there is a clear medical need. Medicare and other
third party insurance reimbursement for diagnostic tests flow directly to the
laboratories performing the testing, not the healthcare professional ordering
the test, but the laboratories are responding with making only single analyte
and approved panel testing available to providers. We expect these pressures to
continue to cause healthcare providers to order individual diagnostic tests
instead of "panels," or pre-determined groups, of tests performed at one time.
Managed care providers and payers will reimburse all tests in a panel only if
there is a clear medical need for each. As managed care pressures mount to
perform only medically necessary tests, reimbursement rates for individual tests
have decreased, requiring the healthcare provider and the testing laboratory to
be even more cost-effective. Designed with these phenomena in mind, the Careside
system performs single reagent testing and offers packages of tests that are
based on third-party payer approved panels.
-10-
Many managed care entities dictate to their member physicians which
laboratories they must use for blood testing. Physicians have the opportunity to
utilize exceptions to these mandates to conduct in-office testing. The Careside
system enables physicians to offer laboratory testing services and take
advantage of these exceptions to the managed care organizations' policies. We
expect to facilitate this by working closely with the physicians and the managed
care organizations to demonstrate cost effectiveness and cost reduction from use
of our system.
Even with the focus on managed care, a very significant portion
(approximately 70%) of all testing is reimbursed on a fee for service basis.
Industry experts expect this number to increase further as commercial
laboratories renew managed care contracts. Previously, managed care companies
pushed for capitated testing services. Many commercial labs lost money on these
contracts, and, as the contracts come up for renewal, will push to convert them
to fee for service contracts, pay higher capitation amounts or not renew them.
We expect these factors to contribute significantly to making the Careside
system a desired alternative to central lab testing.
Marketing Strategy
Our marketing strategy is to position the Careside system as the blood
testing system of choice by demonstrating to hospitals the benefits of
decentralized blood testing, and by providing other healthcare providers, such
as physicians/physician groups and nursing homes, with a profitable and
cost-effective alternative to central laboratory testing.
Our key targeted market segments are as follows:
Physicians and Physician Groups. There are over 400,000 physicians and
-------------------------------
more than 27,000 physician groups in the United States. 21,000 of these groups
have three to ten doctors and over 3,500 have more than 35 physicians.
Physicians usually obtain their laboratory testing services from the hospital
laboratories with which the physicians are affiliated or from a commercial
laboratory. In either case, patient samples are collected from the physician's
office and sent via courier to the applicable laboratory, with results delivered
to the physician, either electronically, by fax or by telephone. For physician
group practices, the Careside system will offer improvements in daily office
routine, greater convenience, enhanced patient satisfaction and new revenue
opportunities.
Hospitals. There are over 5,000 acute care hospitals in the United States.
---------
Laboratory testing services required by hospitals are usually provided by a
central hospital laboratory, which services all of the hospital's testing needs
as well as the testing service needs of hospital physician groups. Hospital
laboratories are expensive to maintain because they have to be maintained on a
24 hour basis, they require specially trained personnel to be present at all
times to operate high volume analyzers and they demand significant amounts of
capital to equip and maintain. Furthermore, hospitals are often reimbursed by
institutional payers for patient admissions based on specific diagnoses
reflecting the complexity of the care needed and a predetermined payment for
such care. While laboratory testing services are an essential part of diagnosis
and monitoring the beneficial results of treatment, they also represent a cost
to the hospital as it seeks to generate a profit by completing the care and
treatment of patients before their costs exceed the level of reimbursement. The
Careside system provides hospitals with the opportunity to decentralize
laboratory testing to the patient floors and bedside, as routine and stat tests
can be conducted at the time the patient is being evaluated by providers.
Consequently, the Careside system is expected to enable some hospitals to
eliminate their central laboratories or replace certain costly analyzers and
outsource non-routine testing not done on the Careside Analyzer to a centralized
laboratory.
Nursing Homes. There are approximately 15,000 nursing homes in the United
-------------
States comprising more than 1.6 million licensed beds. Occupancy rates average
over 90%. Common diagnostic tests ordered for nursing home patients are complete
blood counts, Chem 7 panels, electrolytes, blood glucose, prostate specific
antigen, therapeutic drug monitoring and urinalysis. Nursing homes generally
obtain
-11-
their testing services from commercial laboratories and encounter the same
delays and reimbursement issues as physicians. The Careside system provides a
profit opportunity to the nursing home by allowing it to conduct and bill for
laboratory services, while simultaneously enhancing the nursing home's ability
to provide better care.
Home Care. In the 1990s, the number of home care agencies nearly doubled
---------
and home care visits increased dramatically to over 300 million annually.
Industry experts expect the increase to continue. On average, 30% of home care
patients visited each week require laboratory testing. There are currently over
20,000 home care agencies in the United States, with approximately 9,600
Medicare certified. Common laboratory tests ordered for home care include, among
others, Chem 7 panels, iron, blood glucose, magnesium, prothrombin time and
immunochemistry tests for monitoring phenobarbital, phenytoin and digoxin.
Patient samples are drawn from the patient, gathered from the home care
providers and delivered via courier to a commercial laboratory for testing. Test
results are made available the next day or on a premium price basis by fax,
telephone or written report delivered four or five hours later. The Careside
Analyzer is expected to enable the home healthcare provider to draw the
patient's sample, run the test and deliver the results without having the sample
delivered via courier to a commercial laboratory. Home care agencies would
benefit from increased revenue opportunities and client service by using the
Careside system to conduct blood testing in their base offices.
Other Market Opportunities. Field military hospitals, ships, employee
--------------------------
health clinics, drop-in clinics, surgi-centers, dialysis units and other
alternate sites where blood is drawn and routine tests are ordered are all
potential customer opportunities for Careside.
Sales Strategy
Domestic
Careside has hired a small sales force to launch and train customers on
its products in the United States. We supplement our domestic sales force with
distributors. Our sales force is compensated on a base plus commission basis.
The commission increases with volume sold. We sell to distributors at a
discounted purchase price. We have created a distribution network with more than
1000 distributor reps under contract working through our distribution partners
in the United States, including 750 distributor reps who joined the distribution
force in the last quarter of 2001.
Our focus is currently the US market and on selling decentralized lab
operations and not just testing devices. The Clinical Laboratory Improvement
Amendments (CLIA) require all providers who provide testing services to
demonstrate quality control (QC) and quality assurance (QA) processes that are
standard to the industry. Prior to CLIA, only commercial and hospital labs had
demonstrated these standards. CLIA added both cost and administrative difficulty
to those labs that did not meet these operating requirements. Our products are
easy to use and address the regulatory issues required by CLIA. They also
greatly lower the cost of QA/QC processes by automatically providing
documentation required by CLIA. We are selling a lab that can be operated at the
point of care and our sales force has been trained to prepare our customers to
operate a lab using our products. This means calibration of each test at the
customer site, initial documentation for QA/QC data files, and other preparation
work that is related to lab operations. We have trained our sales force with the
knowledge needed to sell and install cost-effective lab systems in our customer
sites. These sites include hospitals, large physician group practices, managed
care organizations, home care agencies and nursing homes, either directly or
through institutional pharmaceutical service organizations which serve them.
We focused our domestic sales strategy during 2001 on sales of Analyzers
and H-2000s in the human blood testing market. This represents a shift away from
international and veterinary sales for the H-2000.
-12-
International
International markets are not affected by the same regulatory requirements
as in the U.S. market. Because we have received FDA clearance and UL
certification for the Careside Analyzer, the Careside system is ready to be sold
in almost all international markets once the appropriate documentation has been
made available to country authorities. We are in discussions with potential
distributors for a number of foreign territories. Our strategy is to pick
distributors that are selling products into the health care market, but not
competitive products. Further, we are in discussions with country specific
distributors as opposed to distributors that are more international. Fuji Photo
Film Co., Ltd. has a right of first refusal to be our Analyzer distributor on an
exclusive basis in Japan and a non-exclusive basis in other Asian countries. The
current agreement with Fuji expires in 2003 and permits automatic annual
renewals thereafter subject to cancellation by either party. Careside has
distribution partners for its hematology product in the Middle East and in
China, Mexico, Turkey, and certain South American countries. We are analyzing
the possibility of adding the entire Careside system to these distribution
agreements.
Distribution Partners
We supplement our own sales force with distribution agreements. In 2001,
we had sales through distributors in three different countries. All distributor
sales were on a discounted purchase price basis with no price protections or
rights of return. Each of our distributors can sell only in its own country and
is responsible for compliance with all local or import regulations. These
distributors are also responsible for customer support.
Except for Fuji's right to distribute Analyzers in Japan on an exclusive
basis, none of our distribution agreements represents an exclusive arrangement
and all are terminable by us or the distributor upon giving appropriate notice.
The cancellation or termination of any one distribution agreement would not be
material to our future operations, with the exception of the time it would take
to train distribution staff, because we could use other distributors in each of
the countries where we currently use distributors.
Sales
Careside Analyzers
In December 1999 through the beginning of 2000, we initiated a number of
Analyzer installations in pilot sites. These pilots involved assessing both the
economic opportunity provided to the customer from the use of the Careside
system, refining an instruction manual which is intended to provide customers
with the information they need to operate a lab using the Careside system,
reviewing user interface software and making changes, and working out bugs.
Careside also used this time to improve mechanical components and manufacturing
processes. One pilot was started at a small group practice that had never run a
lab. Another was with a larger group that has been operating a lab prior to
becoming a pilot site. Other pilots were initiated in a hospital emergency room
and in larger health care systems.
Careside sold four Analyzers during the first nine months of 2000. During
the second quarter of 2000, Careside was experiencing issues in both the
software and hardware of the Careside Analyzer that made it question the
reliability of the device in the field. It also experienced technical problems
with electrochemistry tests. As a result, Careside pulled back from the market
and corrected the issues that gave rise to the reliability concerns. Careside
did not lose any customers and it did not have to repurchase any devices as a
result of these technical difficulties. Rather, it worked with the customers to
ensure the reliability of the test results each customer received from its
Analyzer. We completed the revisions to the electrochemistry tests and
modifications to the Analyzer by November 2000. Devices in inventory were
corrected before being sold, placed in the field or becoming demonstration
units. As a result of these events, our backlog of Analyzer orders was
immaterial. After the re-launch of the Analyzer, three additional units were
sold in 2000.
-13-
Careside began to expand its customer base in 2001. Careside installed its
products in 44 beta sites in the first four months of 2001. During the following
six months we worked closely with these customers and responded to their
observations by making further software improvements and some mechanical changes
to the Careside Analyzer. In the last quarter of 2001, we began to aggressively
expand our distribution force and signed up more than 750 additional distributor
reps half of which were trained by mid December 2001. Careside also began
selling its products both directly and through our distributors in the last two
months of 2001 so that it ended the year with 57 Careside Analyzers sold and
purchases orders for another 8 units.
H-2000s
In 2000, all of our H-2000 sales were into the veterinary market.
Approximately, 81% of these sales were sales into foreign countries. 64% of our
international sales were to distributors in China. In 2001, our focus on the
human market meant reduced sales into the veterinary market. We expect these
reduced levels to continue in the future. In order to be competitive in the
human market, Careside began to upgrade the software, electronics and certain
other features of the H-2000 during fiscal 2001. These changes will improve the
performance of the H-2000, decrease the cost of manufacturing and better
position the product in a very competitive market. As a result of the loss of
the key employee important to the hematology business in October 2001, the
Company determined that it would no longer focus additional efforts toward the
development and sale of the H-2000. The Company intends to cease production of
the H-2000 use the sales force and customer base in place to sell the remaining
H-2000 units on hand. It is uncertain if the Company will devote resources to
the ongoing development and sales of the H-2000 in future periods. The Company
will continue to produce and sell the reagents necessary to support the H-2000
units currently in the marketplace.
Careside Connect
We had no sales of the Careside Connect in 2001 as it was under
development until late 2001.
Significant Customers
In 2001, the Company had no sales to customers that were individually
greater than 10 percent of net sales. The loss of any one of our customers would
not be material to our results of operations. We expect our future revenues to
be derived predominantly from the sale of Analyzers and cartridges in the U.S.
market through distributors. As a result, we may develop concentration with
these distributors in the future.
Research and Development
In addition to our own research and development employees, we have entered
into a series of research and development agreements with third parties relating
to the Analyzer and its disposable test cartridges. As is customary in the
industry, these agreements are short term and provide for termination for any
reason by either party on relatively short notice. Battelle Memorial Institute,
a leader in developing industrial technology, has designed the disposable
testing cartridge according to specifications which we provided. All applicable
patent rights under this contract have been assigned to us.
We continue to pursue development work with other contract partners,
including further development of cartridge design with Battelle and software
development services of AdMIT for interfaces between the Careside Analyzer and
other medical devices and information systems. This work will continue
throughout much of 2002.
Each of our ongoing development agreements provides for payment to our
development partners at market or below market rates. Each is terminable upon
notice to the other party and in the event of
-14-
breach. We are not aware of any intention of any of our contract partners to
terminate their agreements with us. In each case, we believe the cancellation of
any one of our development agreements would not be material to us.
Manufacturing and Supply
Analyzers
We have a contract with UMM Electronics, Inc. for the manufacture of the
Careside Analyzer at UMM Electronics' facility in Indianapolis, Indiana. The
contract with UMM covers both development services and manufacturing after
development is completed. The development services component of our UMM contract
is complete. To date, UMM has manufactured all of our Analyzers pursuant to this
contract. The agreement provides for pricing to be renegotiated annually, has a
term of four years from market introduction and is terminable by either party
upon one year's notice. We own or have the perpetual right to use all
intellectual property necessary to manufacture Analyzers in the event of
termination of the UMM contract. In 2001, we renegotiated our pricing under the
UMM contract. We also took steps toward achieving a second supply source, which
are continuing in 2002.
Our inventories of Analyzers were sufficient in 2001 for internal
validation and sales to customers. In 2002, as sales are expected to increase,
we expect to start using software to track ordering and utilization patterns for
Analyzers and cartridges which will assist us in determining proper inventory
levels. Pending the data gathering, we are inventorying those Analyzers and
cartridges and components used to make cartridges which our management
estimates, based on their knowledge of the healthcare field, will be ordered by
providers.
Cartridges
We designed and outfitted a building in Culver City, California, of
approximately 16,000 square feet in December 1996 as our development facility
and offices. The building contains space for our automated assembly system which
Battelle Memorial Institute has designed. The assembly system will mount the
reagents in the test cartridges, and package and label the cartridges. This
facility has been set up to comply with all applicable state and federal
regulatory requirements, including registration with the state and federal
governments in accordance with applicable laws governing medical devices prior
to commercial distribution. The facility is subject to periodic FDA inspection
to determine whether our manufacturing processes comply with federal GMP
regulations for medical devices. In the fall of 2001 Careside underwent its
first FDA inspection and passed the inspection.
We assemble and package at our Culver City facility all cartridges used by
the Analyzer. The cartridges are assembled in two main stages. Initially, those
components which are not sensitive to humidity, such as plastic parts, are
assembled in a normal humidity environment. The second stage of the cartridge
assembly process involves the mounting of dry film chemistry strips or pouched
reagents in the cartridges, which must be done in a low humidity environment to
preserve the film. This step will be performed in an automated assembly line at
our facility. We have purchased the equipment necessary for this process. In
addition, during the cartridge manufacturing process, our equipment must test
the pressure of the ultrasonic seal between the base plate and the upper plates
of the test cartridges. Our equipment allows for several inspection steps during
the assembly process. Battelle has assisted us in developing the fully automated
assembly line for the cartridges with these steps built in. The production
capacity of the pilot cartridge production line for chemistry and
immunochemistry is approximately 1,800 units per hour or 13,000 units per shift.
Depending on the specific tests ordered, our current facility, with additional
equipment, will support between $40 and $60 million of test cartridge sales
annually. The automated production line utilizes proprietary process technology,
designed by Battelle and owned by us, that is scalable to meet increasing
demand.
-15-
We outsource the manufacturing of the plastic components of our
cartridges. We use a third party to manufacture these components using injection
molding processes.
We have a long-term supply contract with Fuji Photo Film Co., Ltd. for the
use of its dry film chemistry reagent technology. Although in dry form, the film
uses the same technology as the wet reagent technology used in high volume
commercial analyzers. The agreement replaces an earlier agreement with Fuji that
was applicable only during the development stage of the Careside system. The new
agreement continues to provide us with an exclusive supply of Fuji's dry film
chemistry reagents for use in our point-of-care system for more than 30
chemistry tests. We have agreed to purchase our dry chemistry reagents
exclusively from Fuji. Fuji is also developing additional chemistry tests at its
expense. Any additional tests that Fuji develops may be available to us over the
period of the existing agreement, which runs through 2003 and thereafter is
automatically renewed on an annual basis.
We purchase other chemistry, electrochemistry, coagulation and
immunochemistry reagents from International Technidyne Corporation and
Diagnostic Reagents, Inc. We pay for these on a per order basis in accordance
with pricing which is periodically revised by the supplier.
Providers will order test cartridges based on the tests they expect to
require for patient care. This will vary with the type of provider. At present,
we maintain inventories based on management's estimate of the tests that
providers will order. In 2002, we expect to start using software which will
capture provider's utilization patterns by type of provider. With this data, we
expect to be able to refine the level of inventories which we will need to
maintain.
H-2000s
Our hematology testing device, the H-2000, is manufactured by Ysebaert
pursuant to a contract which we assumed when we acquired Texas International
Laboratories, Inc. (TIL) in 1999. Typical of many contracts with European
manufacturers, this contract does not contain material terms other than pricing.
We believe the pricing available to us from Ysebaert to be competitive. Pricing
is periodically renegotiated with Ysebaert. We own or have the right to use all
intellectual property rights necessary to manufacture the H-2000 in the event
the Ysebaert contract is terminated.
The reagent solutions used with the H-2000 are currently supplied to us by
Aqua Solutions, Inc. We do not have commitments to purchase any minimum
quantities of solutions from them. Rather, we submit purchase orders on an as
needed basis.
As a result of the loss of the key employee important to the hematology
business in October 2001, the Company determined that it would no longer focus
additional efforts toward the development and sale of the H-2000. The Company
intends to cease production of the H-2000 use the sales force and customer base
in place to sell the remaining H-2000 units on hand. It is uncertain if the
Company will devote resources to the ongoing development and sales of the H-2000
in future periods. The Company will continue to produce and sell the reagents
necessary to support the H-2000 units currently in the marketplace.
Careside Connect
The Connect is a cabled interface that does not require any significant
manufacturing components as it is primarily software that interfaces between the
Analyzer and H-2000 or either of those devices and providers' information
systems.
-16-
Competition
We principally compete with manufacturers of traditional diagnostic
testing equipment used by centralized laboratories and current point-of-care
diagnostic companies whose products perform testing for patients in critical
condition. Historically, most clinical testing has been performed in a
centralized laboratory setting. These laboratories provide analyses similar to
those to be conducted by our system and have traditionally been effective at
processing large panels of tests using skilled technicians and complex
equipment. While the Careside Analyzer is not designed to provide the same range
of tests, we believe that our products offer several advantages over centralized
laboratories, including lower costs, mobility, faster results, simplified
specimen preparation, reduced opportunity for error through decreased specimen
handling, ease of regulatory compliance and increased patient satisfaction.
The lack of timely test results from central laboratories has given rise
to a growing market for point-of-care tests. The initial products in the market
have targeted point-of-care tests for use in emergency rooms or critical care
units and have focused on the testing for critical care patients or tests that
are disease specific. Examples of disease specific tests are glucose and digoxin
which measure blood sugar levels in diabetic patients or heart complications. In
all cases, these companies perform a limited number of tests and their systems
are not designed to have their test menus increase. While immediate test results
benefit the patient and the healthcare provider, current point-of-care testing
devices have added costs to the system as the hospitals must continue to operate
a central laboratory using equipment that conducts the same critical care tests
as well as a much broader menu of tests required for routine care. Furthermore,
current point-of-care devices have not attempted to provide customers with the
quality assurance and quality control data storage and retrieval capabilities
necessary for CLIA requirements.
We believe that our system offers distinct competitive advantages over
these products, including the ability to conduct tests in multiple test
categories in a single device, internal centrifugation, convenience and ease of
use. Several companies, including i-STAT Corporation, Abaxis, Inc., Diametrics
Medical, Inc. and PharmaNetics, Inc., are currently making or developing
products that will compete with our tests although not with our system. Some of
these companies also provide disease specific tests which we expect will be
added later to our test menu.
Some large pharmaceutical companies also have point-of-care blood testing
devices and could, given their resources, develop systems which compete with the
Careside system. Abbott Laboratories, Inc., Clinical Diagnostic Systems (a
division of Johnson & Johnson) and Roche Diagnostic Systems, Inc. all have
products which perform point-of-care testing. To date, we believe that none has
developed a point-of-care testing system comparable to our system.
Patents and Proprietary Rights
Our policy is to seek patent protection, both in the United States and
abroad, for each of the areas of invention embodied in our products. To date, we
have filed nine patent applications on various components of our technology with
the U.S. Patent and Trademark Office. We have also sought international patent
protection with respect to certain of these U.S. patents and patent
applications. One patent was filed with International Technidyne Corp. and
covers a coagulation reagent that was discovered jointly. The other eight
patents cover the technology that is built into the Careside Analyzer and the
test cartridges. To date we have been issued three U.S. patents. These patents
as well as those still pending form a very strong portfolio that protects our
development investment. One patent issued covers our invention of the
spectrophotometric analytical cartridge, which allows our product to perform
light transmission based tests, such as coagulation and immunochemistry in the
Careside Analyzer. Another patent covers the fundamental analytical reagent
cartridge invention that underlies all of our cartridge technology. The third
patent covers our electrochemistry cartridge. Four of the patent applications
cover inventions that are components of the Careside Analyzer, and one covers an
additional discovery in another type of cartridge.
-17-
Our agreements with UMM, Battelle Memorial Institute and International
Technidyne Corporation, assign to us certain proprietary rights that result from
the research conducted under the agreements. The Fuji agreement gives us
non-exclusive rights to use Fuji's proprietary technology in the Careside system
outside of Japan. Only Fuji will sell our system in Japan. The other agreements
provide that the technology used in the Careside system is owned either by us or
jointly by us and our partner. These agreements do not restrict us, if we
choose, from seeking other suppliers of competitive technologies. We will seek
to protect any such proprietary rights assigned to us by our technology
partners. Battelle and International Technidyne have agreed to share expenses or
otherwise assist us in prosecuting patent applications.
In addition to patent protection, if any, we will rely upon trade secrets,
know-how and continuing technological innovation. All of our employees are bound
by confidentiality/non-disclosure policies or agreements. We have also protected
our name by trademarking "Careside" and the name "Careside Analyzer."
Government Regulation
The FDA regulates the development, manufacture, and marketing of medical
devices including diagnostic tests. The FDA requires testing of the Careside
system in accordance with regulatory requirements in the laboratory and, as
appropriate, in clinical settings to establish product performance before
marketing. FDA clearance must be obtained before making certain types of product
changes. The Careside Analyzer and tests have received marketing clearance for
point-of-care and physician office laboratory use.
The FDA has regulations that set varying requirements for medical devices
according to potential risk class. Class I devices represent the lowest
potential risk devices and are therefore subject only to the general controls
that include establishment registration, product listing, the prohibition of
mislabeling or adulteration, and a requirement to comply with federal Good
Manufacturing Practices regulations. Pre-market notification is required for
some Class I clinical diagnostic devices. Class II devices present greater risk
than Class I devices and are subject to special controls, such as guidelines or
performance standards, as well as the same general controls that are applicable
to Class I devices. Class II devices require pre-market clearance to demonstrate
that the FDA accepts the manufacturer's claims that the device is substantially
equivalent to other legally marketed devices, and meets generally accepted
performance criteria that may be required to demonstrate that the device is safe
and effective. Class III devices present a higher level of risk and are
additionally subject to rigorous demonstration of safety and effectiveness
through the pre-market approval process.
For some Class I and most Class II devices, a pre-market notification must
be submitted to the FDA. Usually within 90 days of the receipt of this
notification, the FDA makes the determination whether the device submitted is
substantially equivalent to a legally marketed device. A legally marketed device
is one which was marketed prior to the passage of the Medical Device Amendments
of 1976, or a post-1976 device that has been determined by the FDA to be
substantially equivalent to previously cleared devices. A determination of
substantial equivalence requires several FDA findings: first, that the device
has the same intended use as the legally marketed device; and second, either
that the device has the same technological characteristics as the legally
marketed device or, if it does not, that the device is as safe and effective as
the legally marketed device and does not present different questions about
safety and effectiveness. Class III devices require extensive clinical testing
to prove safety and effectiveness, and submission of the resulting data to the
FDA as a pre-market approval application. The FDA ordinarily will refer a new
device pre-market approval application to an advisory panel of outside experts
for a recommendation on whether to approve the application or to request
additional testing.
The Careside Analyzer and all 42 tests, along with the 18-parameter
hematology test performed by the Careside H-2000, are already cleared or exempt
by the FDA and have been classified in Class II.
-18-
Certain future tests, such as prostate specific antigen, are expected to require
pre-market approval. Only the H-2000 is used for in vitro animal testing. We are
not required to be licensed as a veterinarian and are not subjected to any
additional regulation by reason of our veterinary sales.
Where a pre-market approval application is required, FDA regulations
require the demonstration of safety and effectiveness, typically based upon
extensive clinical trials. Fulfilling the requirements of the pre-market
approval application are costly and both the preparation and review are time
consuming, commonly taking from one to several years. Before granting pre-market
approval, the FDA must inspect and find acceptable the proposed manufacturing
procedures and facilities. The pre-market approval regulations also require FDA
approval of most changes made after the tests have been approved.
Manufacturing Regulation
For products either cleared through the pre-market notification process or
approved through the pre-market approval process, our manufacturing facility
must also be and is registered with the FDA. The manufacture of products subject
to Section 510(k) of the Federal Food, Drug, and Cosmetic Act or to Section 515
pre-market approval requirements must be in accordance with quality system
regulations and current federal Good Manufacturing Practices regulations. We are
also subject to various post-marketing requirements, such as complaint handling
and reporting of adverse events. Pre-market approval products are also subject
to annual reports. The FDA typically inspects manufacturing facilities every two
years. We intend to seek and maintain ISO 9001 certification. As a result,
inspections by notified bodies may be more frequent.
The Careside Analyzer is being manufactured by UMM Electronics, Inc. UMM
is an FDA registered and inspected facility. UMM is also ISO 9001 certified. In
adherence to FDA and ISO 9001 requirements, UMM follows a structured design
control process. The H-2000 is being manufactured for Careside by Ysebaert in
France though Careside is the designated manufacturer under FDA regulation. The
Ysebaert facility is ISO 9002 certified.
Third-Party Safety
Third-party safety certification is not required for FDA marketing
permission, but will be required by our customers and to enter markets in other
countries. In this regard, in 2000, we obtained an Underwriters Laboratories, or
UL, listing for the instrument Careside Analyzer. UL has reviewed the Careside
Analyzer according to UL 3101-1 that is equivalent to the international standard
IEC 1010. The Careside Analyzer is also being designed to comply with
requirements that ultimately will facilitate marketing of the product in Europe
and Japan. These requirements include the Low Voltage Directive (73/23/EEC), the
Electromagnetic Compatibility Directive (89/336/EEC), and the In Vitro
Diagnostic Medical Device Directive (98/79/EC). The H-2000 is in the process of
UL review.
Clinical Laboratory Improvement Amendments of 1988
All medical testing in the United States is regulated by the Centers for
Medicare & Medicaid Services (CMS) according to the complexity of the testing as
specified under the Clinical Laboratory Improvement Amendments of 1988. CLIA
regulations establish three categories of laboratory tests, for which regulatory
requirements become increasingly stringent as the complexity of the test rises:
(1) tests that require little or no operator skill, which allows for a
certificated waiver of the regulations; (2) tests of moderate complexity; and
(3) high complexity tests which require significant operator skill or training.
CLIA regulatory requirements apply to facilities such as clinical laboratories,
hospitals, and physician offices which perform laboratory tests. All
laboratories are subject to periodic inspection. In addition, all laboratories
performing tests of moderate or high complexity must register with CMS or an
organization to whom CMS has delegated such authority. They also must meet
requirements relating to personnel qualifications, proficiency testing, quality
assurance, and quality control. Both the Careside Analyzer and
-19-
the H-2000 were categorized as test systems of moderate complexity. In practical
terms, performing a test of moderate complexity means that the individual
supervising the test, i.e., the physician, pathologist or laboratory director,
must be appropriately educated and trained, whereas the individual who operates
the Careside Analyzer requires either formal laboratory education or a
high-school education and training in the skills required to perform testing
with the Careside Analyzer, such as specimen collection and quality control.
State Regulation
We and our products are subject to a variety of state laws and regulations
in those states where our products are marketed, sold or used. Thirteen states
currently restrict or control, to varying degrees, the use of medical devices
such as the Careside system outside the clinical laboratory by persons other
than doctors or licensed technicians. For example, California, New York and
Florida all have unique requirements that define which steps in the testing
process can be performed by physicians, nursing or other personnel who are not
licensed technicians. We have designed our testing system to comply with these
requirements, while minimizing the need for higher cost labor to run the test
process. However, these restrictions may add labor costs to the customer, and
such costs may hinder our ability to market our products in these locations.
Although we plan to seek interpretations, rulings or changes in relevant laws
and regulations to remove or ameliorate these restrictions, there can be no
assurance that we will be successful.
International Regulation
In addition to the United States market, we intend to pursue markets in
Asia and Europe through select strategic alliances. The recently published
European Community In Vitro Diagnostic Directive places our products within a
category that has a low regulatory burden. Manufacturers are allowed entry into
the market based upon self-certification that they complied with published
directives, similar to existing United States requirements, containing
performance, labeling, and other quality requirements. Japan has its own
requirements for in vitro diagnostics.
Product Liability and Property Insurance
Sale of our products entails risk of product liability claims. The medical
testing industry has historically been litigious, and we face financial exposure
to product liability claims in the event that use of our products results in
personal injury. We also face the possibility that defects in the design or
manufacture of our products might necessitate a product recall. There can be no
assurance that we will not experience losses due to product liability claims or
recalls in the future. We have purchased product liability insurance in
reasonable and customary amounts. Such insurance can be expensive, difficult to
obtain and may not be available in the future on acceptable terms, or at all. No
assurance can be given that product liability insurance can be maintained in the
future at a reasonable cost or in sufficient amounts to protect us against
losses due to liability. An inability to maintain insurance at an acceptable
cost or to otherwise protect against potential product liability could prevent
or inhibit the commercialization of our products. We believe that our insurance
coverage is adequate for the risks we face. However, a product liability claim
in excess of relevant insurance coverage or product recall could have a material
adverse effect on our business, financial condition and results of operations.
We have liability insurance covering our property and operations with
coverage and deductible amounts and exclusions that we believe are customary for
companies of our size and adequate for our industry. There can be no assurance
that our current insurance coverage is adequate or that we will be able to
maintain insurance at an acceptable cost or otherwise to protect against
liability.
-20-
Employees
We had 72 employees as of December 31, 2001. Sales and Marketing staff
totaled 24 people, 29 people worked in manufacturing, quality
assurance/regulatory or distribution activities, 9 people in product
development, 6 in information technology and 4 in administration/general
management.
Item 2. Properties
We lease approximately 16,000 square feet of space in Culver City,
California for the research and development, validation, manufacture and
assembly of disposable test cartridges and for product development. This lease
has a term of seven years and expires in August 2005. It has a current monthly
rent of $19,228, gradually increasing to $23,233 per month in the final lease
year. We have an option to renew the lease for one additional five-year term at
95% of the fair market rental value. We believe that the Culver City facility is
suitable to expand to $40 million in test cartridge revenues and will adequately
serve our needs for the immediate future.
We also lease approximately 6,200 square feet of space in Culver City,
California for use as our executive offices. This lease has a term of seven
years and expires in April 2007. It has a current monthly rent of $9,288,
gradually increasing to $11,000 per month in the final lease year. We have an
option to renew the lease for one additional five-year term at 95% of the fair
market rental value.
We also lease approximately 1,500 square feet of office space in Houston,
Texas which is used solely to support our activities in the veterinary market.
This lease has a term of two years and expires in January 2003. It has a current
monthly rent of $877. In February 2002, this office was closed and the Company
is in the process of terminating this lease.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the vote of security holders during the
fourth quarter of 2001.
-21-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
We completed our initial public offering of units on June 16, 1999. Each
unit consisted of a share of common stock and a warrant to purchase a share of
common stock. Since July 17, 1999, when each unit was split into a share of
common stock and a warrant to purchase a share of common stock, our common stock
has traded on the American Stock Exchange under the symbol "CSA" and our
warrants have traded on the American Stock Exchange under the symbol "CSA.WA."
The following table sets forth, for the fiscal quarters indicated, the
high and low closing sales prices per share for our common stock and our
warrants, as reported on the American Stock Exchange:
Common Stock Warrants
------------ --------
Fiscal 2001 High Low High Low
----------- ------ ------ ------ ------
First Quarter $ 3.75 $ 2.04 $ 0.63 $ 0.18
Second Quarter $ 2.70 $ 2.00 $ 0.60 $ 0.22
Third Quarter $ 4.10 $ 2.15 $ 0.59 $ 0.25
Fourth Quarter $ 2.65 $ 0.70 $ 0.40 $ 0.06
Fiscal 2000 High Low High Low
----------- ------ ------ ------ ------
First Quarter $13.56 $ 8.81 $ 4.50 $ 2.56
Second Quarter $11.00 $ 4.88 $ 2.69 $ 1.25
Third Quarter $ 5.63 $ 3.38 $ 1.63 $ 0.80
Fourth Quarter $ 3.50 $ 1.81 $ 0.81 $ 0.19
Fiscal 1999 High Low High Low
----------- ------ ------ ------ ------
Third Quarter $ 6.06 $ 4.88 $ 3.00 $ 0.94
Fourth Quarter $ 9.75 $ 4.94 $ 2.00 $ 1.00
As of March 22, 2002, there were 385 holders of record of our common stock
and an estimated number of beneficial owners of our common stock of
approximately 2,086.
We have not declared or paid any cash dividends or distributions on our
capital stock. We currently intend to retain any future earnings to fund
operations and the continued development of our business and, therefore, do not
anticipate paying any cash dividends on our common equity in the foreseeable
future. Future cash dividends, if any, will be determined by our Board of
Directors, and will be based upon our earnings, capital requirements, financial
condition and other factors deemed relevant by the Board of Directors.
In closings held on November 29, 2000, December 21, 2000, and January 24,
2001, we privately placed with Venturetec, Inc. and Pine, Inc., an affiliate of
Venturetec, an aggregate of 1,742,951 shares of Common Stock at an average
purchase price of $2.49 per share under Regulation S of the Securities Act of
1933. Gross proceeds to the Company from this transaction were $4,334,879.
Friedli Corporate Finance received a cash commission of $368,465 for its role as
advisor in the transaction. The proceeds from this transaction were used for
general corporate purposes. In connection with this transaction, warrants to
purchase common stock were granted to Pine, Inc., an affiliate of Venturetec,
totaling 87,148 shares, 41,324 of which have an exercise price of $2.75 per
share and expire November 2004, 25,000 of
-22-
which have an exercise price of $2.25 per share and expire December 2004, and
20,824 of which have an exercise price of $2.25 per share and expire January
2005.
In March and May 2001, the Company sold 517.3716 shares of Series C
Convertible Preferred stock to various investors in a private placement, in
which Dougherty & Company, LLC served as placement agent, for $1.94 per share,
which was 80 percent of fair market value at the March closing date. This
financing resulted in net proceeds to us of $9.0 million, after $1.0 million of
cash offering costs. In conjunction with the placement, warrants to purchase an
aggregate of 5,173,716 shares of common stock were issued with an average
exercise price of $2.55. The placement agent received warrants to purchase
517,371 shares of Careside's common stock at $1.94 per share. The proceeds from
this transaction were used for general corporate purposes. The shares of Series
C preferred stock were exchanged for 5,173,716 shares of common stock in October
2001. These shares of Common Stock were registered for resale on a Form S-3
registration statement which became effective in December 2001.
-23-
Item 6. Selected Financial Data
-----------------------
The following table presents our summary consolidated financial
information.
Careside, Inc.
(in thousands except share and per share amounts)
Years End December 31,
Operating Results Data: 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Net Sales $ - $ - $ 61 $ 741 $ 1,025
Cost of Sales - - 31 1,001 4,088
----------- ----------- ----------- ----------- ------------
Gross profit (loss) - - 30 (260) (3,063)
Operating Expenses
Research and Development -products 5,896 8,298 8,252 9,074 2,878
Research and Development-software - - 313 898 1,165
Sales and Marketing 85 249 1,204 3,657 3,915
General and Administrative 555 601 1,135 2,124 2,130
Impairment of goodwill - - - - 1,662
Amortization of Goodwill - - 37 567 520
----------- ----------- ----------- ----------- ------------
Operating loss (6,536) (9,148) (10,911) (16,580) (15,333)
Interest Income 213 234 291 372 65
Interest Expense (8) (22) (971) (495) (401)
----------- ----------- ----------- ----------- ------------
Net loss (6,331) (8,936) (11,591) (16,703) (15,669)
Preferred stock dividends - - (55) (69) (21)
Accreted dividend on Preferred Stock - - - (83) (919)
Beneficial conversion feature on
Preferred Stock - - - (84) (3,799)
----------- ----------- ----------- ----------- ------------
Net Loss available to common
stockholders $ (6,331) $ (8,936) $ (11,646) $ (16,939) $ (20,408)
Basic and diluted Net Loss per Common
Share $ (2.04) $ (1.93) $ (1.88) $ (1.92) $ (1.64)
Shares used in computing Basic and
Diluted Net Loss per Common Share 3,098,980 4,629,916 6,210,496 8,800,171 12,423,439
Years End December 31,
Balance Sheet Data: 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Cash and cash equivalents $ 1,237 $ 3,927 $ 4,905 $ 1,789 $ 39
Total assets 3,140 7,911 14,389 12,663 7,214
Total current liabilities 703 1,717 4,214 4,744 5,644
Long-term debt, net of current portion - 2,045 1,060 1,192 483
Mandatorily Redeemable Series B
Convertible Preferred Stock - - - 1,054 -
Accumulated deficit (7,969) (16,905) (28,496) (45,199) (60,868)
Total stockholders' equity 2,438 4,149 9,079 5,650 1,073
-24-
The following table presents our summary consolidated quarterly financial
information.
2000 2001
-------------------------------------------- ------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-- -- -- -- -- -- -- --
Net Sales $ 283 $ 245 $ 108 $ 105 $ 184 $ 192 $ 305 $ 344
Gross profit (loss) 140 136 49 (585) (818) (840) (741) (664)
Net loss (4,200) (3,832) (4,102) (4,569) (3,325) (3,674) (3,340) (5,330)
Net loss available to (4,226) (3,858) (4,103) (4,752) (3,372) (8,365) (3,342) (5,330)
common stockholders
Net loss per share $ (0.54) $ (0.44) $ (0.46) $ (0.48) $ (0.30) $ (0.73) $ (0.29) $ (0.34)
Shares used in 7,867 8,798 8,988 9,535 11,092 11,416 11,665 15,480
computing basic and
diluted net loss per share
-25-
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
.. Overview
Since our inception, we have devoted substantially all of our resources to
research and development activities, establishment of a sales force and the
administrative structures necessary to support operations. We have incurred
losses since inception and generated minimal revenues. As of December 31, 2001,
the aggregate loss incurred was approximately $60.9 million. In 1998, 1999 and
for the first nine months of 2000, Careside was considered a development stage
enterprise. In the fourth quarter of 2000, Careside had substantially completed
the development efforts of the Company's core product and began generating sales
and increasing its focus on marketing efforts. Careside anticipates incurring
additional losses over at least the next year.
In 2001, the Company began to aggressively pursue both the hospital and
physician office markets. It became clear that the time to close sales in the
hospital market was lengthy due to the number of committees and individuals
involved in the qualification and approval process. It also became clear that to
pursue the physician office market, it would be necessary to distribute our
products with large distribution partners who were already calling these
customers. In the first half of 2001, we signed agreements with a number of
regional distributors and one national distributor. During the third quarter, we
invested significant time and effort training the representatives of these
distributors. In the late third quarter, we signed a distribution agreement with
Physicians Sales & Service (PSS), the largest physician office distribution
organization in the United States. During the fourth quarter of 2001, we began
training their 750 distributor reps and had trained approximately half by year
end. With these additional reps, at the close of 2001, we had more than 1,000
distributor reps.
.. Results of Operations
.. Years Ended December 31, 2001 and 2000
Sales and Cost of Sales. Sales increased to $1.0 million in 2001 compared
to $741,000 in 2000. The sales in the last two quarters were predominately sales
of Careside Analyzers. Orders for H-2000's decreased from quarter to quarter in
2001, reflecting Careside's shift in focus from the H-2000 to the Careside
Analyzer and from the veterinary to the human market. This aligns our H-2000
sales efforts with the marketing efforts of our sales staff which is directed to
consumers who might use all of our products. Hence, Careside does not interpret
the decreasing sales of H-2000s as decreasing market interest in Careside
products. The cost of sales for fiscal 2001 represents the cost of instruments
and reagents sold. In the fourth quarter of 2000, the company exited the
development stage. Cost of sales in 2001 includes a full year's expense of
certain fixed costs that were recorded as development expense in the first three
quarters of 2000. This results in additional expense of $2.7 million compared to
prior year.
Research and Development Expenses - Product. Research and development
expenses decreased to $2.9 million for the year ended December 31, 2001. This
compared to approximately $9.1 million in the same period in 2000. This
reduction was due to the completion of development activities in 2000 prior to
the launch of the Careside Analyzer and to the effect of a full year allocation
of certain costs to cost of sales in 2001 which were recorded as development
expense for three quarters in 2000.
Research and Development Expenses - Software. Research and development
expenses related to software increased to $1.2 million for 2001 compared to
$898,000 in the same period in 2000. This increase reflects the increase in
staff costs.
-26-
Selling and Marketing Expenses. Selling and marketing expenses increased
to $3.9 million for 2001 compared to $3.7 million in the same period in 2000.
This increase reflects increased travel expense in 2001, and expenses associated
with training distributor representatives to augment Careside's sales force
efforts.
General and Administrative Expenses. General and administrative expenses
remained the same at $2.1 million for 2001 compared to $2.1 million in the same
period in 2000. This reflects reduced travel, insurance and consulting expenses
partially offset by increased legal and accounting fees.
Goodwill. Goodwill amortization was $520,000 in 2001 compared to $567,000
in 2000. The decrease is due to the reduction in the carrying amount of goodwill
that resulted from the impairment charge recorded in the fourth quarter of 2001.
As a result of the loss of the key employee important to the hematology business
in October 2001 and the resulting impact on the financial performance of
Careside Hematology, the goodwill was reviewed for future recovery. This review
resulted in a $1.7 million impairment charge in 2001.
Net Interest Income (Expense). Interest income was $65,000 for the year
ended December 31, 2001 as compared to $372,000 for the same period in 2000.
This reflects lower average levels of cash and cash equivalents available for
investment. Interest expense was $401,000 for 2001 compared to $495,000 for
2000. This decrease is due to lower remaining balances on Careside' existing
equipment leases.
Net Loss. The net loss increased to approximately $20.4 million for the
twelve months ended December 31, 2001 compared to $16.9 million for the same
period in 2000. This increase reflects non-cash charges of approximately 4.8
million associated with beneficial conversion features and accrued dividend
expense associated with financings completed or converted in 2001. These
non-cash charges obscure the decrease of $1.1 million in net loss from
operations to $15.6 million in 2001 compared to a net loss from operations of
$16.7 million in 2000.
.. Years Ended December 31, 2000 and 1999
Sales and Cost of Sales. Sales increased to $741,000 in 2000 compared to
$61,000 in 1999. The sales were predominately sales of Careside H-2000s, a
product of the Company we acquired in December 1999. Sales of the Careside
H-2000 were primarily related to orders for the international markets. These
orders tend to fluctuate from quarter to quarter depending upon timing of
distributor orders. Orders decreased from quarter to quarter in 2000, reflecting
Careside's shift in focus from the H-2000 to the Careside Analyzer and 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 is directed to consumers who
might use all of our products. Hence, Careside does not interpret the decreasing
sales of H-2000s as decreasing market interest in Careside products. The cost of
sales for fiscal 2000 represents the cost of instruments and reagents sold and
the establishment of a reserve of $628,000 for excess film and cartridge
inventory and old analyzers.
Research and Development Expenses - Product. Research and development
expenses increased to $9.1 million for the year ended December 31, 2000 from
$8.3 million in the same period in 1999. The increased expenditure was related
to changes in some of the mechanical components of the Careside Analyzer and the
software that controls the operation of these components. These changes were the
result of the outcome of the testing process in customer sites prior to market
launch.
Research and Development Expenses - Software. Research and development
expenses related to software increased to $898,000 for 2000 compared to $313,000
in the same period in 1999. This increase reflected the increase in staff of
approximately $300,000 and expenditures, approximately $280,000 in expenditures
related to development of the Careside Connect, a new product developed by
Careside to provide interfaces with customer information systems and the
Careside Analyzer and H-2000. The
-27-
Company also expanded its facilities to a second location adjacent to its
primary facility and this resulted in the need to modify the internal computer
systems and the network information system between the two sites.
Selling and Marketing Expenses. Selling and marketing expenses increased
to $3.7 million for 2000 compared to $1.2 million in the same period in 1999.
This increase reflected the preparations for the launch of the Careside system
in 2000, including the full year effect of sales force salaries.
General and Administrative Expenses. General and administrative expenses
increased to $2.1 million for 2000 compared to $1.1 million in the same period
in 1999. This increase reflected staff additions, of approximately $110,000,
additional office space of approximately $80,000, liability insurance increases
of approximately $75,000, legal expenses of approximately $135,000 and investor
relations, of approximately $65,000.
Goodwill. Goodwill amortization of $567,000 was recorded in 2000
associated with goodwill recorded related to the December 1999 acquisition of
TIL. This compared with amortization of $37,000 which was recorded for part of
December in 1999. This decrease was due to a one time interest charge in 1999 in
connection with the modification of the S.R. One Bridge Warrant in the amount of
$290,000 and amortization of the discount on the S.R. One Bridge Note in the
amount of $309,000 that only was incurred in 1999. These decreases were offset
by increases due to additional borrowings under our equipment facility and an
increase in the interest rate on the S.R. One Bridge Note.
Net Interest Income (Expense). Interest income was $372,000 for the year
ended December 31, 2000 as compared to $291,000 for the same period in 1999.
This reflected slightly higher average levels of cash and cash equivalents
available for investment. Interest expense was $495,000 for 2000 compared to
$971,000 for 1999. This decrease was due to a one time interest charge in 1999
in connection with the modification of the S.R. One Bridge Warrant in the amount
of $290,000 and amortization of the discount on the S.R. One Bridge Note in the
amount of $309,000 that only was incurred in 1999. These decreases were offset
by increases due to additional borrowings under our equipment facility and an
increase in the interest rate on the S.R. One Bridge Note.
Net Loss. The net loss increased to approximately $16.7 million for the
twelve months ended December 31, 2000 compared to $11.6 million for the same
period in 1999. This increase reflected the increase in cost of sales due to the
inventory reserve, increases in selling and marketing, goodwill amortization and
administrative expenses partially offset by a decrease in interest expense
associated with the S.R. One bridge loan.
.. 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. From inception through December 31, 2001, we have received
net proceeds aggregating approximately $60.8 million from equity transactions.
Net cash used in operating activities for the year ended December 31, 2001
was approximately $11.1 million. For the period ended December 31, 2001, cash
used in operating activities primarily represents the net loss for the period,
offset by depreciation and amortization, increases in accounts payable, accrued
expenses and accrued interest and decreases in inventory. These were offset by
increases in accounts receivable and prepaid expenses. Net cash used in
operating activities was approximately $15.7 million for the year ended December
31, 2000. This represents the net loss for the period offset by depreciation and
amortization and increases in accounts payable and accrued interest and
partially 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.
-28-
Cash used in investing activities for the purchase of property and
equipment was approximately $191,000 and $2.1 million for the twelve months
ended December 31, 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 $9.5 million for
the twelve months ended December 31, 2001, net of payments made on long term
debt obligations. Net cash provided by financing in 2001 was a result of closing
a private placement of our Series C Preferred stock in the first half of 2001.
Cash provided by financing activities was approximately $14.6 million for the
twelve months ended December 31, 2000.
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. As a result of various extensions, the remaining $2.0 million of the loan
matures May 31, 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, 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 June 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 were
used to fund our working capital needs and in particular our increasing sales
and marketing efforts.
At December 31, 2001 cash on hand was $39,000. Our current liquidity and
sales revenue expected in 2002 are projected to be sufficient to fund our
operating expenses and capital requirements for at least the first quarter of
2002. We will need additional funds to sustain our activities. 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 December 2001. We will need to raise additional capital
to expand our sales and marketing efforts, to scale-up manufacturing activities
and to fund our research and development activities. Our future liquidity and
capital funding requirements will depend on numerous factors, including the
extent to which our products gain market acceptance, the exercise of outstanding
warrants to purchase common stock, the timing of regulatory actions regarding
our products, the costs and timing of expansions of sales, marketing and
manufacturing activities,
-29-
procurement and enforcement of patents important to our business, and the impact
of competitors' products. There can be no assurance that such additional capital
will be available to us or that the terms of it will be acceptable to us.
Furthermore, any additional equity financing and exercise of existing warrants
will likely be very dilutive to stockholders, and debt financing, if available,
may include restrictive covenants. If adequate funds are not available, we may
be forced to curtail or even cease our operations significantly or to obtain
funds through entering into collaborative agreements or other arrangements on
unfavorable terms. If we do not raise a substantial amount of capital, we will
not be able to sustain operations. If we are able to raise capital, the terms of
such capital could have a material adverse effect on our business, financial
condition or results of operations and our ability to continue as a going
concern. Subsequent to year-end, the Company obtained $1,040,000 through the
issuance of bridge notes. The Company continues to seek additional funding,
however, as stated above, there is no assurance that the Company will be able to
successfully raise such funds. The Company's auditors have included an
explanatory paragraph in their Report of Independent Public Accountants included
in the Company's annual report on Form 10K for each of the last three years in
the period ended December 31, 2001 to the effect that the Company's losses from
operations for the year ended December 31, 2001, and the working capital deficit
and the accumulated deficit at December 31, 2001 raise substantial doubt about
the Company's ability to continue as a going concern.
.. Income Taxes
As of December 31, 2001, we had approximately $48.6 million and $1,167,000
of net operating loss and research and development credit carryforwards,
respectively, for federal income tax purposes, which expire on various dates
between 2011 and 2014. These amounts reflect different treatment of expenses for
tax reporting than are used for financial reporting. The Tax Reform Act of 1986
contains certain provisions that may limit our ability to utilize net operating
loss and tax credit carryforwards in any given year. We experienced a change in
ownership interest in excess of 50% as defined under the Tax Reform Act upon the
first closing of our 1997 equity financing and by means of the private
placements in 2000 and 2001. We do not believe that these changes in ownership
will have any 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.
.. Significant 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 does not expect these standards will have a
material impact on our financial position or results of operations.
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
-30-
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not believe that it is subject to significant market risk
exposure. Its debt instruments carry fixed interest rates and its investments
are in cash equivalent instruments that deliver fixed rates of return. The
Company also believes that the effects of inflation have not had a significant
impact on its results of operations.
Item 8. Financial Statements
The Company's consolidated financial statements appear at pages F-1 through
F-24, as set forth in Item 14.
Item 9. Changes in and Disagreements With Accountants On Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
-31-
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The following table sets forth certain information concerning the
individuals who serve as our directors, executive officers and key employees:
NAME AGE POSITION
---- --- --------
Directors and Executive
Officers:
W. Vickery Stoughton .... 55 Chairman of the Board of Directors and Chief
Executive Officer
Thomas H. Grove.......... 52 Chief Technology Officer, Executive Vice President,
Secretary
James R. Koch............ 47 Chief Financial Officer, Executive Vice President,
Treasurer
Dennis E. Rieger......... 56 Senior Vice President, Information Technology and
Chief Information Officer
Sandra P. Twyon.......... 63 Vice President Operations
Anthony P. Brenner (1)... 44 Director
William F. Flatley (2)(3) 60 Director
Kenneth N. Kermes (2)(3). 66 Director
C. Alan MacDonald (2)(3). 68 Director
Diana Mackie (1)......... 54 Director
Bruce C. Vladeck 52 Director
Key Employees:
Kenneth Asarch........... 44 Vice President--Quality Systems and Regulatory Affairs
David Crais 38 Vice President--Sales
Grant Frazier............ 40 Vice President--Marketing
George M. Saiz........... 48 Vice President--Manufacturing
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Nominating Committee
Directors and Executive Officers
W. Vickery Stoughton, Chairman of the Board of Directors and Chief
Executive Officer. Mr. Stoughton has served as our Chairman of the Board of
Directors and the Chief Executive Officer since our formation in July 1996.
Prior to that, he served as President of SmithKline Beecham Diagnostics Systems
Co. (SBDS), a diagnostic services and product company, from October 1995 to July
1996, and was President of SmithKline Beecham Clinical Laboratories, Inc.
(SBCL), a provider of diagnostic laboratory services, from August 1992 to
September 1995. As President of SBDS, Mr. Stoughton had responsibility for SBCL,
SmithKline Beecham Clinical Laboratories International and SBDS's genetic
testing and point-of-care testing projects. In addition, Mr. Stoughton served as
Chief Executive Officer and Vice Chancellor for Health Affairs of Duke
University Hospital from 1991 to 1992, Chief Executive Officer of Toronto
Hospital in Toronto, Canada from 1981 to 1991, Chief Operating Officer of
Brigham and Women's Hospital in Boston from 1980 to 1981 and Chief Executive
Officer of Peter Bent Brigham Hospital in Boston from 1978 to 1980. Mr.
Stoughton holds a B.S. in Chemistry from St. Louis University and a M.B.A. from
the University of Chicago. He is currently a director of Sun Life Assurance
Company of Canada, a financial services company, and Biomira, Inc., a
pharmaceutical company.
-32-
Thomas H. Grove, Executive Vice President--chief Technology Officer,
Secretary. Dr. Grove has served as our Executive Vice President--Chief
Technology Officer, Secretary and as one of our directors since our formation in
July 1996 until January 2001. From April 1984 to July 1996, he served in a
number of management positions at SmithKline Beecham Clinical Laboratories, Inc.
involving research and development activities, including the position of Vice
President of Scientific Affairs from January 1991 to July 1996, where, among
other things, he was in charge of National Quality Control and Quality Assurance
for SBCL. Dr. Grove has received a number of awards, including a NATO Science
Fellowship to attend Oxford University from 1978 to 1979. He was also named
Young Investigator of the Year in 1980 by the American Association for Clinical
Chemistry and was elected to the National Academy of Clinical Biochemistry in
1977. Dr. Grove holds a B.S. in Biology from SUNY-Albany and a Ph.D. in
Biochemistry from Syracuse University.
James R. Koch, Chief Financial Officer, Executive Vice President,
Treasurer. Mr. Koch has served as our Chief Financial Officer, Treasurer,
Executive Vice President since July 1998 and as one of our directors From July
1998 until January 2001. Prior to joining us, Mr. Koch served as Vice President
and Chief Financial Officer of ILEX Oncology, Inc., a company which develops
oncology drugs, from August 1996 to July 1998. In addition, Mr. Koch served as
Vice President, Finance and Chief Financial Officer for two start-up specialty
pharmaceutical companies, Symphony Pharmaceuticals, Inc., from September 1993 to
August 1996, and Neose Pharmaceuticals, Inc., currently Neose Technologies,
Inc., from September 1991 to September 1993. His prior experience also includes
ten years in senior financial management positions with G.D. Searle
Pharmaceutical, a manufacturer of pharmaceutical products. Mr. Koch holds a B.S.
in Mechanical Engineering from General Motors Institute and a M.S. from the
Krannert School of Management at Purdue University.
Dennis E. Rieger, Senior Vice President Information Technology and Chief
Information Officer. Mr. Rieger joined us in December 1999. Mr. Rieger's
professional experience includes over 29 years in the high technology products
industry. Mr. Rieger is also serving as President and CEO of Advanced Medical
Information Technologies (AdMIT), a company he founded in 1992 that developed a
mobile, bedside clinical information system, and a new universal medical and
laboratory device data acquisition system. Prior to AdMIT, Mr. Rieger served as
President and Chief Operating Officer of Compare Data Systems, an insurance and
telecommunications software company, from 1987 to 1992; President of TRG, Inc.,
a technology based consulting and venture funding firm, from 1981 to 1987; and
held several management positions in research and development, strategic
planning and marketing at Apple Computer, Hewlett Packard and Procter and Gamble
from 1971 to 1981. Mr. Rieger has a B.Sc. in Computer Information Science, with
honors, from California State University at Sacramento, and served with the U.S.
NAVY. Mr. Rieger is also serving on the board of directors of two companies, an
embedded software products company and a publishing company, and is one of the
Industry Advisory Board members for the new Biomedical Engineering
Interdepartmental program at the UCLA School of Engineering and Applied Science.
Sandra P. Twyon - Vice President Operations. Ms. Twyon joined us in
January 2000. Prior to that she held positions as Vice President for Patient
Services with the Mercy Health System in Pittsburgh, PA (1994-1999); Vice
President for Nursing at the Toronto Hospital in Toronto, Canada (1989-1993) and
Chairman of Nursing at Tufts New England Medical Center in Boston, MA
(1977-1989). In addition she was President and founder of the Center for Case
Management (1989-1992), an original developer of critical pathways which
consulted widely throughout the U.S. and Canada. Ms. Twyon received a B.S.
Degree from the College of Saint Rose and holds a M.S. from Boston College.
Anthony P. Brenner, Director. Mr. Brenner has served as one of our
directors since November 1996. Since January 1998, he has served as a Managing
Director with Crosslink Capital (formerly Omega Ventures), a venture capital
firm, where he oversees investment activities in the information and business
services industries. Prior to that, Mr. Brenner served as Senior Managing
Director of Advanta Partners LP, a private equity investment partnership, and as
a member of the Board of Directors of Advanta
-33-
Corporation, a financial services company, from 1992 to 1996. In addition, since
1989 Mr. Brenner has served as President of Cedar Point Partners, a private
equity investment partnership. Mr. Brenner earned a B.A. from Yale University
and a M.B.A. from Stanford University. In addition, Mr. Brenner is currently a
director of Eloquent, Inc.
William F. Flatley, Director. Mr. Flatley has served as one of our
directors since November 1996. Since July 1997, he has served as the President
and Chief Executive Officer of Executive Health Group, a provider of preventive
healthcare services to corporations. From 1980 to December 1994, he held a
number of senior management positions with Bristol-Myers Squibb Corporation, a
pharmaceutical company, including President of a multi-division medical device
business, the Health Care Group, and President of the Drackett Company, a
household product manufacturer. Mr. Flatley retired from Bristol-Myers Squibb at
the end of 1994 but continued to provide the company with certain consulting
services after his retirement. Mr. Flatley obtained a B.S. from Villanova
University and a M.B.A. from the Wharton School of the University of
Pennsylvania.
Kenneth N. Kermes, Director. Mr. Kermes has served as one of our directors
since February 1997. Since June 2001 he has served as Chairman of the Board of
BNS Co., a NASDAQ listed company, which was the successor to Brown & Sharpe
Manufacturing Company after the sale of substantially all of its assets in April
2001. BNS Co. is engaged in the development and marketing of CAD-CAM Software
Systems and the management of several pieces of real estate. From April 2000
until May 2001, Mr. Kermes has served as President, Chief Executive Officer of
Brown & Sharpe Manufacturing Company, a NYSE listed manufacturer of measuring
systems used in the automotive, aircraft manufacturing and industrial equipment
industries. He also continues as a partner in Sea View Capital, LLC, a
Providence, RI based private equity investment company. Prior to that, he served
as a principal of Riparian Partners Limited and Bay View Equity Partners, two
related investment banking and private equity investment partnerships. He served
as Vice President of Business and Finance for the University of Rhode Island
from December 1994 to June 1998 and as Chief Financial Officer for SmithKline
Beecham Corporation from October 1986 to July 1989 and as Senior Vice President
and Group Director of Corporate Development from July 1989 to 1991. From 1991 to
1994, Mr. Kermes was a consultant and an investor in the venture capital
industry. Mr. Kermes obtained a B.A. from Amherst College and attended the New
York University Graduate School of Business and the Harvard Business School
Advanced Management Program. In addition to Careside, Mr. Kermes serves as
director of four private, closely held manufacturing companies in the Northeast
and as a director of BNS Company.
C. Alan Macdonald, Director. Mr. MacDonald has served as one of our
directors since November 1996. Mr. MacDonald is the principle of CAM Consulting
where he has been since his retirement in 1991 from Stouffer/Nestle where he was
the President and CEO of Stouffer Foods and later Nestle Foods from 1971. Mr.
MacDonald has also served as a Managing Director of Directorship, Inc., a
consulting firm specializing in corporate governance issues from 1997 to 2000.
Mr. MacDonald holds a B.S. in Hotel Administration from Cornell. In addition to
Careside, Mr. MacDonald also serves on the boards of Lord Abbett & Co., Seix
Investments, J.B. Williams Co., Lincoln Snacks Co., and Fountainhead Bottled
Water Co.
Diana J. Mackie, Director. Ms. Mackie has served as one of our directors
since February 1997. From January 24 until December 27, 2000, Ms. Mackie
accepted a special assignment to co-lead the merger integration process for
GlaxoSmithKline (GSK). She is now Vice President Switch and New Innovations at
GSK. From June 1999 to January 2000, she held the position of Vice President and
Director, Category Management, Dermatologicals, Phytomedicines and Vitamins at
SmithKline Beecham Consumer Healthcare (SBCH). From November 1996 to May 1999,
she held various positions of Vice President at SmithKline Beecham Healthcare
Services where her responsibilities included developing business plans,
long-range strategy and negotiating external alliances and investments. From
March 1996 to November 1996, she was General Manager of Diversified Prescription
Delivery, a pharmaceutical mail services company and a wholly owned subsidiary
of Diversified Pharmaceutical Services, a
-34-
pharmaceutical benefit management group. Prior to March 1996, she served as Vice
President in a variety of strategy or corporate development positions for
SmithKline Beecham. Ms. Mackie holds a B.S. in Chemistry from the University of
Illinois, a M.B.A. from The Massachusetts Institute of Technology Sloan School
of Management and a M.S. in Polymer and Fiber Engineering from The Massachusetts
Institute of Technology.
Bruce C. Vladeck, Director. Dr. Vladeck is Senior Vice President for
Policy of Mount Sinai NYU Health as well as Director of the Institute for
Medicare Practice and Professor of Health Policy and Geriatrics at the Mount
Sinai School of Medicine. He also serves as a director of a number of non-profit
and for-profit organizations. From 1993 through September 1997, Dr. Vladeck was
Administrator of the Health Care Financing Administration (now CMS) of the U.S.
Department of Health and Human Services. Before joining the federal government,
Dr. Vladeck served ten years as President of the United Hospital Fund of New
York. He has also held positions on the faculty of Columbia University, at the
Robert Wood Johnson Foundation, and, from 1979 through 1982, as Assistant
Commissioner for Health Planning and Resources Development of the New Jersey
State Department of Health. At the Institute of Medicine of the National Academy
of Sciences, to which he was elected in 1986, Dr. Vladeck chaired the Committee
on Health Care for Homeless People. He received his BA, magna cum laude, from
Harvard College, and an MA and Ph.D. in Political Science from the University of
Michigan.
Other Key Employees
Kenneth Asarch, Vice President--quality Systems and Regulatory Affairs.
Dr. Asarch has served as our Vice President--Quality Systems and Regulatory
Affairs since November 1996. From June 1995 to October 1996, Dr. Asarch served
as Director of Regulatory Affairs for SmithKline Beecham Clinical Laboratories,
Inc. and SmithKline Beecham Diagnostics Systems Co. Prior to that, he served as
Director of Regulatory Affairs, Quality Assurance and Clinical Affairs with
Diagnostic Products Corporation, an immuno-diagnostic testing company, from 1987
to 1995, where his duties included overseeing the FDA regulatory clearance and
approval process for approximately 150 blood testing products. Dr. Asarch holds
a B.S. in Biochemistry from the University of California at Los Angeles and
doctoral degrees in both Clinical Pharmacy (Pharm.D.) and Pharmaceutical
Sciences (Ph.D.) from the University of Southern California.
David Crais, Vice President - Sales. Mr. Crais joined Careside in
September 1999 as a Regional Sales Director and was promoted to Vice President
in September 2001. Prior to joining Careside, Mr. Crais was a Strategic Sales
Representative for I-STAT Corporation from 1993 to 1999. Previously he had
started an import/export company, and a marketing consulting company. Mr. Crais
has served as an appointee for the State of Louisiana Imports and Exports
Authority. He has a combined BA/BS degree from Loyola University, New Orleans,
LA and has done graduate studies at Universidad Iberoamericana in Mexico City.
Grant Frazier, Vice President-marketing. Mr. Frazier has served as our
Vice President-Marketing since November 1999. Prior to joining us, Mr. Frazier
served as Vice President-Marketing & Business Development at Mobile Technology
Inc., a provider of magnetic resonance imaging, lithotripsy and cancer therapy
services. Mr. Frazier joined MTI in December 1991 and was responsible for
developing the first mobile radiation therapy cancer care service deployed
within the United States. He led this strategic business unit until August 1998
before assuming his corporate marketing and business development
responsibilities. Mr. Frazier holds a B.S. in Industrial Engineering from
Stanford University and a M.B.A. from UCLA's Anderson School of Management.
George M. Saiz, Vice President - Manufacturing. Mr. Saiz has served as our
Vice President-Manufacturing since January 2001. Prior to joining us, Mr. Saiz
served from 1998 as Vice President & General Manager for Micro Motors, a private
label supplier of powered and electronic devices for the specialty surgical and
dental markets. From 1988 to 1998, he held general and operations management
-35-
positions with the Shutt Medical Technologies division of Linvatec and the Hall
Surgical division of Zimmer, both Bristol-Myers Squibb companies. His
manufacturing experience at these companies included implants, power and hand
equipment, electronic controllers and disposables. Mr. Saiz has a BS Business
Administration from West Coast University and a MBA from University of La Verne.
Classified Board of Directors
The Board of Directors is divided into three classes. In 2001, two classes
contained two directors and one class contained three directors. Directors
within each class are elected to serve three-year terms and approximately
one-third of the directors sit for election at each annual meeting of our
stockholders. Mr. Stoughton, and Mr. MacDonald serve in the class whose term
expires in 2002, and Mr. Brenner and Mr. Kermes serve in the class whose term
expires in 2003. Mr. Flatley and Ms. Mackie serve in the class whose term
expires in 2004. Mr. Vladeck joined the Board of Directors in July 2001, filling
the vacancy created by the departure of Mr. Smith, a member of the class of
directors whose term expires in 2003. Mr. Vladeck's term thus expires in 2003. A
classified board of directors may have the effect of deterring or delaying any
attempt by any group to obtain control of us by a proxy contest since such third
party would be required to have its nominees elected at two separate annual
meetings of our Board of Directors in order to elect a majority of the members
of our Board of Directors.
Information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement is incorporated herein by reference
in response to this Item 10.
Item 11. Executive Compensation
----------------------
The information contained in the section titled "Executive Compensation"
in the Proxy Statement, with respect to executive compensation, and the
information contained in the section entitled "Director Compensation" in the
Proxy Statement, with respect to director compensation, is incorporated herein
by reference in response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information contained in the section titled "Security Ownership of
Certain Beneficial Owners" in the Proxy Statement, with respect to security
ownership of certain beneficial owners and management, is incorporated herein by
reference in response to this Item 12.
PART III
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information contained in the section titled "Certain Relationships and
Transactions" in the Proxy Statement, with respect to certain relationships and
related transactions, is incorporated herein by reference in response to this
Item 13.
-36-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K
---------------------------------------------------------------
(a) (1) Financial Statements
The financial statements listed in the accompanying Index to Consolidated
Financial Statements are filed as part of this Form 10-K, commencing on page
F-1.
1. Financial Statement Schedules - none applicable
Other financial statement schedules are not included because they are not
required or the information is otherwise shown in the financial statements or
notes thereto.
(3) Exhibits
Exhibit No. Description
----------- -----------
2.1* Agreement and Plan of Merger dated as of December 7, 1999 by and
among Careside, Inc., Careside Hematology, Inc., Texas
International Laboratories, Inc., Yves LeBihan and Jean-Yves
LeBihan.
3.1** Amended and Restated Certificate of Incorporation of Careside,
Inc.
3.2** Certificate of Designations of Series A Convertible Preferred
Stock
3.3** Amended and Restated Bylaws of Careside, Inc.
3.4+ Certificate of Designations of Series B Convertible Preferred
Stock
3.5++ Certificate of Designations of Series C Convertible Preferred
Stock
4.1*** Specimen Stock Certificate
4.1a** Specimen Warrant Certificate
4.1b** Specimen Unit Certificate
4.2*** Placement Agent Warrant Agreement dated as of January 31, 1997
by and between Careside, Inc. and Spencer Trask Securities
Incorporated (including Form of Warrant)
4.3*** Placement Agent Warrant Agreement dated as of March 6, 1998 by
and between Careside, Inc. and Spencer Trask Securities
Incorporated (including Form of Warrant)
4.4*** Securities Purchase Agreement dated as of December 17, 1998 by
and between S.R. One, Limited and Careside, Inc. (including Form
of Note) (as amended)
4.5*** Warrant Issued to S.R. One, Limited on December 17, 1998
-37-
Exhibit No. Description
----------- -----------
4.6** Warrant Agreement dated June 21, 2000, by and between Careside,
Inc. and Paulson Investment Company, Inc.
4.7** Warrant Agreement dated June 21, 2000, by and between Careside,
Inc. and American Stock Transfer & Trust Company, as Warrant
Agent
4.8** Warrant issued to S.R. One, Limited dated June 21, 1999
4.9** New Note issued to S.R. One, Limited dated as of June 21, 1999
4.11*** Securities Purchase and Subscription Agreement dated as of March
8, 2000 by and between Careside, Inc. and Purchasers
4.12*** Warrant Agreement dated as of March 8, 2000 by and between
Careside, Inc. and H. C. Wainwright & Co., Inc. (including
Warrant certificate)
4.13*** Contingent Warrant Agreement dated as of March 8, 2000
by and between Careside, Inc. and Purchasers (including
Form of Warrant)
4.14 + Securities Purchase Agreement dated as of September 13,
2000 by and between RoyCap, Inc. and Careside, Inc.
4.15 + Series B Convertible Preferred Warrant issued to
RoyCap, Inc. on September 13, 2000
4.16 + Warrant Agreement by and between RoyCap, Inc. and
Careside, Inc. dated as of September 13, 2000
(including Warrant Certificate)
4.17 + Common Stock Purchase issued to RoyCap, Inc. on
September 13, 2000
4.18 + Warrant Agreement By and between Brighton Capital, Ltd.
and Careside, Inc. dated as of September 13, 2000
(including Warrant Certificate)
4.19 ++ Form of Securities Purchase and Subscription Agreement
dated as of March 29, 2001 by and between Careside,
Inc. and Purchasers
4.20 ++ Form of Warrant dated as of March 29, 2001 executed by
Careside, Inc. and addressed to Purchasers (including
Warrant Certificates)
10.1*** Registration Rights Agreement dated as of November 7,
1996 by and among SmithKline Beecham Diagnostic Systems
Co., SmithKline Beecham Corporation and Careside, Inc.
10.2*** Registration Rights Agreement dated as of December 4,
1996 by and among Careside, Inc., Exigent Partners,
L.P., W. Vickery Stoughton, Thomas H. Grove, Kenneth B.
Asarch, William S. Knight, Donald S. Wong, Ashok K.
Sawhney and Philip B. Smith
-38-
Exhibit No. Description
----------- -----------
10.3*** Amendment No. 1 to Registration Rights Agreement dated
as of January 31, 1997 by and among Careside, Inc.
Exigent Partners, L.P., W. Vickery Stoughton, Thomas H.
Grove, Kenneth B. Asarch, William S. Knight, Donald S.
Wong, Ashok K. Sawhney and Philip B. Smith
10.4*** 1996 Key Executive Stock Option Plan, as amended and
restated
10.5*** 1998 Incentive and Non-Qualified Stock Option Plan
10.6*** 1998 Director Stock Option Plan
10.7*** Standard Industrial/Commercial Single-Tenant Lease -
NET dated as of October 14,1996, by and between Fox Hills
Business Park, a California limited partnership and Careside,
Inc.
10.8*** Agreement dated as of August 31, 1996, by and between
Fuji Photo Film Co., Ltd. and Careside, Inc.
10.9*** Product Development and Supply Agreement dated as of
July 18, 1997, by and between Careside, Inc. and UMM
Electronics, Inc.
10.10*** Agreement Number CPO 32284 Cost Type executed December 5 and 17,
1996 by and between Battelle Memorial Institute and Careside,
Inc.
10.11*** Joint Research & Development Agreement dated as of
October 28, 1996 by and between Careside, Inc. and
International Technidyne Corporation.
10.12*** Employment Agreement dated as of March 3, 1997 between
Careside, Inc. and W. Vickery Stoughton.
10.13*** Employment Agreement dated as of March 3, 1997 between
Careside, Inc. and Thomas H. Grove
10.14*** Employment Agreement dated as of July 30, 1998 between
Careside, Inc. and James R. Koch
10.15*** Securities Conversion Agreement dated as of June 14,
1999 between S.R. One, Limited and Careside, Inc.
10.16*** Form of Amended and Restated Registration Rights
Agreement dated as of June 21, 1999 between S.R. One,
Limited and Careside, Inc.
23.1 Consent of Arthur Andersen LLP, Independent Auditors
99.1 Letter of Arthur Andersen LLP Representation
------------------
* Incorporated herein by reference to Careside's current report on Form 8-K
filed on December 22, 1999.
** Incorporated herein by reference to Careside's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999 filed on August 13, 1999.
-39-
*** Incorporated herein by reference to the Registration Statement on Form S-1
of Careside, Inc., as amended. Registration No. 333-69207.
**** Incorporated herein by reference to Careside's Annual Report on Form 10-K
filed on March 31, 2000.
+ Incorporated herein by reference to the Registration Statement on Form
S-3 of Careside, Inc. filed on September 27, 2000. Registration No.
333-46746.
++ Incorporated herein by reference to Careside's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2001 filed on May 15, 2001 (SEC
File Number 001-15051).
---------
(b) Reports on Form 8-K.
None.
-40-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in Culver
City, California, on the 28th day of March, 2002.
CARESIDE, INC.
By: /s/ W. Vickery Stoughton
------------------------------------
W. Vickery Stoughton
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ W. Vickery Stoughton Chairman of the Board of Directors, Chief March 28, 2002
------------------------------- Executive Officer and Director (principal
W. Vickery Stoughton executive officer)
/s/ James R. Koch Chief Financial Officer, Treasurer, Executive March 28, 2002
------------------------------- Vice President (principal financial and
James R. Koch accounting officer)
/s/ Anthony P. Brenner Director March 28, 2002
-------------------------------
Anthony P. Brenner
/s/ William F. Flatley Director March 28, 2002
-------------------------------
William F. Flatley
/s/ Kenneth N. Kermes Director March 28, 2002
-------------------------------
Kenneth N. Kermes
/s/ C. Alan MacDonald Director March 28, 2002
-------------------------------
C. Alan MacDonald
/s/ Diana J. Mackie Director March 28, 2002
-------------------------------
Diana J. Mackie
/s/ Bruce C. Vladeck Director March 28, 2002
-------------------------------
Bruce C. Vladek
-41-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Careside, Inc.:
We have audited the accompanying consolidated balance sheets of Careside, Inc.
(a Delaware corporation) as of December 31, 2000 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Careside, Inc. as of
December 31, 2000 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, for the year ended December 31, 2001, the
Company incurred a loss from operations of $15,669,000 and at December 31, 2001,
the Company had a working capital deficit of $2,468,000 and an accumulated
deficit of $60,868,000 which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 7, 2002
F-1
CARESIDE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(in thousands except share and per share amounts)
Assets 2000 2001
------ ------------- -------------
Current Assets:
Cash and cash equivalents $ 1,789 $ 39
Accounts receivable, net of allowance of $54 in 2000 and $27 in 2001 104 158
Inventories 2,698 2,498
Prepaid expenses and other 174 481
------------- -------------
Total current assets 4,765 3,176
Property and Equipment, net of accumulated depreciation and amortization 5,643 3,964
of $4,213 in 2000 and $6,186 in 2001
Deposits and Other 24 24
Goodwill, net of accumulated amortization of $603 in 2000, 2,231 50
and none in 2001
------------- -------------
$ 12,663 $ 7,214
============= =============
Liabilities and Stockholders' Equity
Current Liabilties:
Current portion of long-term debt $ 2,520 $ 2,756
Current portion of obligation under capital lease 13 15
Accounts payable 1,456 1,715
Accrued expenses 421 604
Accrued interest 334 554
------------- -------------
Total current liabilties 4,744 5,644
------------- -------------
Deferred Warranty Revenue - 5
------------- -------------
Long-Term Debt, net of current portion 1,192 483
------------- -------------
Obligation Under Capital Lease, net of current portion 23 9
------------- -------------
Manditorily Redeemable Series B Convertible Preferred Stock 290 and 0 shares
issued and outstanding at
December 31, 2000 and 2001, respectively 1,054 -
------------- -------------
Stockholders' Equity:
Preferred stock, $.01 par value: 5,000,000 shares authorized-
0 shares issued and outstanding - -
Common stock, $.01 par value:
50,000,000 shares authorized-
10,590,191 and 16,904,193 shares issued and outstanding at
December 31, 2000 and 2001, respectively 106 169
Additional paid-in capital 50,743 61,772
Accumulated Deficit (45,199) (60,868)
------------- -------------
Total stockholders' equity 5,650 1,073
------------- -------------
$ 12,663 $ 7,214
============= =============
The accompanying notes are an integral part of these consolidated statements.
F-2
CARESIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share amounts)
For the Years Ended December 31,
1999 2000 2001
------------ ------------ ------------
Sales $ 61 $ 741 $ 1,025
Cost of Sales 31 1,001 4,088
------------ ------------ ------------
Gross Profit (Loss) 30 (260) (3,063)
Operating Expenses:
Research and development - products 8,252 9,074 2,878
Research and development - software 313 898 1,165
Selling and marketing 1,204 3,657 3,915
General and administrative 1,135 2,124 2,130
Impairment of goodwill - - 1,662
Goodwill amortization 37 567 520
------------ ------------ ------------
Operating Loss (10,911) (16,580) (15,333)
Other income (expense):
Interest Income 291 372 65
Interest Expense (971) (495) (401)
------------ ------------ ------------
Net Loss (11,591) (16,703) (15,669)
Preferred stock dividends (55) (69) (21)
Accreted dividend on Preferred Stock - (83) (919)
Beneficial conversion feature on Preferred Stock - (84) (3,799)
------------ ------------ ------------
Net loss available to common stockholders $ (11,646) $ (16,939) $ (20,408)
============ ============ ============
Basic and Diluted Net Loss per Common Share $ (1.88) $ (1.92) $ (1.64)
============ ============ ============
Shares used in Computing Basic and Diluted
Net Loss per Common Share 6,210,496 8,800,171 12,423,439
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-3
CARESIDE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Total
Common Stock Preferred Stock Accumulated Stockholders'
Shares Amount Shares Amount APIC Deficit Equity
---------- --------- --------- --------- --------- --------- ------------
Balance, December 31, 1998 5,084,340 $ 51 - $ - $ 21,003 $ (16,905) $ 4,149
Shares issued in connection with initial public 2,000,000 20 - - 12,341 - 12,361
offering, net
Shares issued in connection with issuance of - - 162,914 2 1,037 - 1,039
preferred stock in exchange for bridge debt
Issuance of warrant with bridge conversion - - - - 290 - 290
Series A Preferred dividend - - - - (55) - (55)
Shares issued in connection with acquisition of 521,739 5 - - 2,864 - 2,869
Texas International Laboratories, Inc.
Shares issued in connection with ESPP 3,502 0 - - 17 - 17
Net loss - - - - - (11,591) (11,591)
---------- --------- --------- --------- --------- --------- ----------
Balance, December 31, 1999 7,609,581 76 162,914 2 37,497 (28,496) 9,079
Shares issued in connection with private 2,510,570 25 - - 12,604 - 12,629
placement, net
Shares issued in connection with 1,154 0 - - 0 - 0
exercise of stock option
Accrued Series A Preferred dividend - - - - (52) - (52)
Accrued Series B Preferred dividend - - - - (17) - (17)
Shares issued in connection with ESPP 30,454 0 - - 103 - 103
Conversion of the Series A Preferred 179,696 2 (162,914) (2) 107 - 107
Accreted Series B Preferred Stock dividend - - - - (83) - (83)
Issuance of warrants in connection with - - - - 531 - 531
Series B Preferred Stock
Shares issued in connection with the 128,259 1 - - 54 - 55
conversion of the Series B Preferred
Shares issued in connection with 385 1 - - (1) - -
exercise of stock warrant
Shares issued in connection with 130,092 1 - - - - 1
exercise of contingent stock warrants
Net loss - - - - - (16,703) (16,703)
---------- --------- --------- --------- --------- --------- ----------
Balance, December 31, 2000 10,590,191 106 - - 50,743 (45,199) 5,650
Shares issued in connection with private 416,472 4 - - 853 - 857
placement, net
Shares issued in connection with the 654,327 7 - - 1,106 - 1,113
conversion of the Series B Preferred
Shares and warrants issued in connection with - - 517 2,902 6,131 - 9,033
the issuance of the Series C Preferred
Accreted Series C Preferred dividend - - - 897 (897) - -
Shares issued in connection with the 5,173,716 52 (517) (3,799) 3,747 - -
conversion of the Series C Preferred
Shares issued in connection with callable 11,190 - - - 37 - 37
warrant exercise, net
Accrued Series B Preferred dividend - - - - (21) - (21)
Accreted Series B Preferred dividend - - - - (22) - (22)
Shares issued in connection with ESPP 58,297 - - - 95 - 95
Net loss - - - - - (15,669) (15,669)
---------- --------- --------- --------- --------- --------- ----------
Balance, December 31, 2001 16,904,193 $ 169 - $ - $ 61,772 $ (60,868) $ 1,073
========== ========= ========= ========= ========= ========= ==========
The accompanying notes are an integral part of these consolidated statements.
F-4
CARESIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
1999 2000 2001
----------- ----------- -----------
Cash Flows from Operating Activities:
Net loss $ (11,591) $ (16,703) $ (15,669)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,357 2,933 2,493
Impairment of goodwill - - 1,662
Amortization of debt discount 309 - -
Noncash interest expense 290 - -
Changes in operating assets and liabilties:
Accounts receivable (73) (26) (54)
Inventory (472) (2,150) 95
Prepaid expenses and other (20) (71) (307)
Deposits and other 3 (9) -
Accounts payable (73) 612 259
Accrued expenses 671 (425) 203
Accrued interest 195 177 220
----------- ----------- -----------
Net cash used in operating activities (9,404) (15,662) (11,098)
----------- ----------- -----------
Net Cash Used in Investing Activities:
Purchases of property and equipment (3,821) (2,070) (190)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from borrowings under
long-term debt 2,059 795 -
Payments on long-term debt (224) (459) (473)
Payments on capital lease obligation (6) (11) (12)
Deferred offering costs (2) 2 -
Net proceeds from exercise of callable warrants - - 37
Net Proceeds from the issuance of 12,377 14,289 9,986
preferred and common stock
----------- ----------- -----------
Net cash provided by financing activities 14,204 14,616 9,538
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 979 (3,116) (1,750)
Cash and Cash Equivalents, beginning
of period 3,926 4,905 1,789
----------- ----------- -----------
Cash and Cash Equivalents, end
of period $ 4,905 $ 1,789 $ 39
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-5
CARESIDE, INC.
Notes to Consolidated Financial Statements
December 31, 2001
1. Background
----------
Careside, Inc. ("Careside" or "the Company") is focused on designing products
intended to perform routine diagnostic blood tests in doctors' offices, hospital
rooms, patient homes or anywhere a patient is receiving medical attention.
Careside's first product is a compact portable device with related disposables
that performs chemistry, electrochemistry, immunochemistry and coagulation
testing.
In December 1999, Careside completed an acquisition of Texas International
Laboratories, Inc. ("TIL") and merged TIL into a newly formed, wholly-owned
subsidiary, Careside Hematology.
Risks and Liquidity/Going Concern
---------------------------------
Careside was incorporated in July 1996 to acquire an ongoing,
point-of-care ("POC") testing, development-stage product from SmithKline Beecham
Corporation and its affiliates ("SmithKline") and to complete the development of
and to manufacture, market and distribute POC diagnostic products. In the fourth
quarter of 2000, Careside had substantially completed the initial development
efforts of the Company's core product and began generating sales and increasing
its focus on marketing efforts. In 1998, 1999 and for the nine months ended
September 30, 2000, Careside was considered a development stage enterprise.
Since its inception, Careside has generated minimal revenues and incurred
significant losses. Careside anticipates incurring additional losses over at
least the next year, and such losses are expected to increase as Careside
expands its marketing activities. The accompanying consolidated financial
statements have been prepared in conformity with principles of accounting
applicable to a going concern. These principles contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the accompanying consolidated financial statements for the year ended
December 31, 2001, the Company incurred a net loss of $15.7 million, has used
cash in operating activities of $11.1 million at December 31, 2001, the Company
had a working capital deficit of $2.5 million and an accumulated a deficit of
$60.9 million. These factors raise substantial doubt about the ability of the
Company to continue as a going concern. Additional financing will be needed by
Careside to fund its operations. Subsequent to year-end, the Company obtained
$1,040,000 through the issuance of several bridge notes (see Note 16). The
Company is currently working to raise additional funding through bridge loans,
long-term debt financing and permanent equity financing. Further, the Company
plans to reduce portions of its fixed overhead expenses. In addition, the
ability of Careside to commercialize its products will depend on, among other
things, the relative cost to the customer of Careside's products compared to
alternative products, its ability to obtain necessary regulatory approvals and
to manufacture the products in accordance with Good Manufacturing Practices, and
its ability to market and distribute its products. The Company's failure to
raise additional capital on acceptable terms could have a material adverse
effect on its business, financial condition or results of operations. There can
be no assurance that Careside's future product enhancements will receive
regulatory clearance, that the Company will be able to obtain additional
financing, be profitable in the marketplace, or will be able to repay its
current debt obligations. The failure of the Company to successfully achieve one
or all of the above items will have a material impact on the Company's financial
position and results of operations.
2. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Careside and
Careside Hematology. Intercompany accounts and transactions are eliminated in
consolidation.
F-6
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
All highly liquid investments with an original maturity of three months or less
are presented as cash equivalents in the accompanying consolidated financial
statements.
Inventories
-----------
Inventories are stated at the lower of cost or market with cost determined on a
first-in, first-out basis, and are summarized as follows (in thousands):
December 31,
---------------------
2000 2001
-------- --------
Raw materials $ 1,164 $ 932
Work in process 126 123
Finished goods 2,036 1,967
Reserve for excess and obsolescence (628) (524)
-------- --------
$ 2,698 $ 2,498
======== ========
Allowance for Doubtful Accounts
-------------------------------
Allowances for doubtful accounts are estimates and are established based on the
specific circumstances of each customer.
Property and Equipment
----------------------
Property and equipment are stated at cost. Property and equipment capitalized
under capital leases are recorded at the present value of the minimum lease
payments due over the lease term. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives of the related
assets or the lease term, whichever is shorter. The Company uses lives of two to
nine years for laboratory equipment and manufacturing equipment and three to ten
years for computer and office equipment. Leasehold improvements generally are
amortized over the remaining life of the lease.
Goodwill and Impairment Loss
----------------------------
Goodwill represents the excess of the purchase price and related costs over the
value assigned to the tangible net assets of TIL. Goodwill has been amortized on
a straight line basis with an assigned life of five years. Periodically, the
Company reviews the recoverability of goodwill. The measurement of possible
impairment is based primarily on the ability to recover the balance of goodwill
from expected future operating cash flows on an undiscounted basis. As a result
of the loss of the key employee important to the hematology business in October
2001 and the resulting impact on the financial performance of Careside
Hematology, the goodwill was reviewed for future recoverability in the fourth
quarter of 2001.
F-7
An undiscounted cash flow projection of Careside Hematology products was
performed revealing that projected cash flows were not sufficient to recover the
carrying amount of the goodwill. As a result, an evaluation of the fair value of
Careside Hematology was made and the goodwill was written down accordingly. The
amount of the writedown was $1.7 million and was recorded as an expense in the
consolidated statement of operations for the year ended December 31, 2001.
Included in the consolidated statements of operations were net income/(losses)
of Careside Hematology in the amount of $26,126, ($978,703) and ($2,575,781) for
1999, 2000 and 2001 respectively. Included in the consolidated balance sheets
were the net assets of Careside Hematology in the amounts of $2,513,525 and
$261,180 for 2000 and 2001 respectively.
Under the provisions of SFAS No. 142, "Goodwill and other Intangible Assets" the
remaining goodwill will no longer be amortized beginning January 1, 2002. The
remaining goodwill will be reassessed annually under the provisions of SFAS 142.
Long-Lived Assets
-----------------
The Company reviews its long-lived assets (including goodwill) for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset or a group of assets may not be recoverable. If an asset is determined
to be impaired, the loss is measured as the amount by which the carrying amount
of the asset exceeds fair value. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required.
Fair Value of Financial Instruments
-----------------------------------
Cash equivalents are reflected in the accompanying consolidated financial
statements at fair value due to the short-term nature of those instruments. The
carrying amount of long-term debt approximates fair value on the balance sheet
dates based on borrowing rates currently available to the Company for loans with
similar terms and maturities.
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 sales to distributors according to the terms
of the distributor agreements. Revenue from distributors that does not meet all
of the requirements of SAB 101 and SFAS No. 48 "Revenue Recognition When a Right
of Return Exists" 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 date of shipment 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 warranty.
F-8
The Company bills its customers for freight charges related to products sold.
Freight revenues are recorded in sales and the related costs are recorded in
cost of sales in the accompanying consolidated statements of operations.
Warranty
--------
The Company outsources the manufacture of its Analyzer to a third party who
warrants the Analyzers for 18 to 30 months from the date of shipment to the
Company. Careside offers a 12 month warranty to the customer. Procedures have
been put in place to assure that no Analyzer will be shipped with less than a
remaining 12 month warranty. As such, no provision for warranty has been
recorded for the years ended December 31, 1999, 2000 and 2001.
Research and Development
------------------------
Research and development costs are charged to expense as incurred. The company
uses both internal and external resources to produce and develop software to run
its hardware products. Costs to develop this software are accounted for in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed," which requires the Company to
capitalize software development costs when "technological feasibility" of the
product has been established and future revenues assure recovery of the
capitalized amounts. Because of the relatively short time period between
"technological feasibility" and product release, the Company has not capitalized
any software development costs as of December 31, 2000 or December 31, 2001.
Income Taxes
------------
The Company follows SFAS No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, the liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates that are expected to be
in effect when the differences reverse.
Accounting for Stock-Based Compensation
---------------------------------------
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock options.
The Company follows the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits pro forma disclosure of the net loss
using a fair value-based method of accounting for employee stock option plans
(see Note 11).
Net Loss Per Common Share
-------------------------
The Company has presented net loss per common share pursuant to SFAS No. 128,
"Earnings per Share." Basic loss per common share was computed by dividing net
loss applicable to common shareholders by the weighted average number of shares
of common stock outstanding during the period. Dilutive loss per common share
has not been presented since the impact on loss per share using the treasury
stock method is anti-dilutive due to the Company's losses.
Recapitalization
----------------
In February 1999, Careside's stockholders approved a 1-for-5.2 reverse stock
split of Careside's common stock to be effective upon consummation of the
initial public offering which took place in June 1999. All references in the
accompanying consolidated financial statements to the number of shares and per
share amounts have been retroactively restated to reflect the reverse stock
split.
F-9
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Recently Issued 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.
Implementation of SFAS No. 141 and SFAS No. 142 is not expected to have a
material impact in 2002 due to the 2001 writedown of goodwill (see note 2).
SFAS No. 143 "Accounting for Asset Retirement Obligations" 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.
SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets"
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.
F-10
3. Concentration of Risk
---------------------
In 1999 and 2001, the Company had no customers who exceeded 10 percent of net
sales. In 2000, the Company had sales to three customers that were individually
greater than 10 percent of net sales. Combined, these three customers accounted
for 38 percent of net sales and 25 percent of accounts receivable at December
31, 2000. The Company's geographic sales data is as follows (in thousands):
1999 2000 2001
-------- -------- --------
Domestic $ 6 $ 282 $ 847
Asia Pacific 47 428 171
Europe - 19 7
Latin America 8 12 -
-------- -------- --------
$ 61 $ 741 $ 1,025
======== ======== ========
F-11
4. Property and Equipment (in thousands):
-------------------------------------
December 31,
----------------------
2000 2001
-------- --------
Laboratory equipment $ 1,017 $ 1,028
Manufacturing equipment 7,954 8,194
Computer and office equipment 517 560
Leasehold improvements 368 368
-------- --------
9,856 10,150
Less-Accumulated depreciation
and amortization (4,213) (6,186)
-------- --------
$ 5,643 $ 3,964
======== ========
Careside had analyzers with a cost of $1,056,000 and $1,162,000 and a net book
value of $425,000 and $98,000 included in laboratory equipment and computer and
office equipment at December 31, 2000 and 2001, respectively. These analyzers
are used for testing purposes, as design reference units, in research and
development activities and for sales and marketing demonstrations.
Depreciation and amortization expense for the years ended December 31, 1999,
2000 and 2001, was $1,357,000, $2,933,000, and $1,973,000, respectively.
5. Income Taxes
------------
Deferred income tax assets or liabilities are computed based on the temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year in
which the differences are expected to reverse. Realization of the net deferred
tax assets is dependent on generating sufficient taxable income during the
periods in which temporary differences will reverse. The amount of the net
deferred tax assets considered realizable, however, could be adjusted in the
near term if estimates of future taxable income during the reversal periods are
revised. Deferred income tax expenses or credits are based on the changes in the
deferred income tax assets or liabilities from period to period. At December 31,
2001, the Company had net operating loss carryforwards for federal income tax
purposes of approximately $48,560,000. In addition, the Company has federal
research and development credit carryforwards of approximately $1,167,000. The
net operating loss carryforwards expire beginning in 2011 through 2020. The
research and development credit carryforwards expire beginning in 2012 through
2021. The credits and carryforwards are subject to review and possible
adjustment by the Internal Revenue Service. The Tax Reform Act of 1986 contains
provisions that may limit the net operating loss carryforwards available to be
used in any given year in the event of significant changes in ownership
interests. The Company experienced such changes in ownership upon the closing of
its 1997, 2000 and 2001 private placements. The Company does not believe these
changes in ownership will have a material impact on its ability to utilize its
net operating loss and tax credit carryforwards. There can be no assurance that
ownership changes in future periods will not significantly limit the Company's
ability to use existing or future net operating loss or tax credit
carryforwards.
F-12
The components of the deferred income tax assets are as follows (in thousands):
December 31,
---------------------
2000 2001
-------- --------
Net operating loss carryforwards $ 14,409 $ 18,223
Research and development credit carryforwards 1,404 2,212
Capitalized research and development 1,840 1,528
Start-up costs 1,359 809
Allowance for doubtful accounts - 12
Accruals 124 88
Depreciation and amortization 1,219 1,056
Deferred rent 54 63
Inventory reserve 304 224
State tax benefit (344) (1,146)
Valuation allowance (20,369) (23,069)
-------- --------
$ - $ -
======== ========
Due to the uncertainty surrounding the realization of the deferred tax asset,
the Company has provided a valuation allowance against the entire asset.
6. Common Stock Placements
-----------------------
In June 1999, Careside completed an initial public offering of its common stock.
The offering totaled 2,000,000 shares of common stock and 2,000,000 tradable
warrants exercisable into one share of common stock each. The combined shares
and warrants were sold at a price of $7.50 per unit. The warrants are currently
exercisable at a price of $9.00 per share and expire on the earlier of five
years from the date of issuance or if they are called. They are callable at
$0.05 per warrant upon 30 days written notice if the common stock trades for ten
consecutive days at a price equal to or exceeding $14.00 per share.
In March 2000, the Company sold 1,184,091 shares of common stock in a private
placement for $8.77 per share resulting in net proceeds of $9.5 million, net of
$840,000 of cash offering costs. The $8.77 per share was at a discount of 20
percent from the average closing price for the twenty days prior to the initial
closing date of the sales. The placement agent received warrants to purchase
101,305 shares of Careside's common stock at $8.77 per share. In connection with
the sale, the Company issued the investors and the placement agent contingent
warrants for nominal value exercisable into 154,246 shares of the Company's
common stock at an exercise price of $0.01 per share. The contingent warrants
were exercisable upon certain conditions. During the third quarter, the
conditions triggering the exercisabiltiy of these contingent warrants were met.
A total of 130,092 warrants were exercised and converted to 130,092 shares of
common stock and the remainder expired on December 15, 2000. The estimated fair
values of the 101,305 and the 154,246 warrants, computed using the Black-Scholes
option pricing model were $972,000 and $1,997,000 respectively. These amounts
were offset against the proceeds of the offering and credited to additional
paid-in capital.
In November and December 2000, the Company sold 1,326,479 shares of common stock
to an existing investor for an average price of $2.56 per share, at 90 percent
of fair market value, resulting in net proceeds of $3,084,000, net of $314,000
of cash offering costs. In conjunction with the placement, warrants to purchase
an aggregate of 66,324 shares of common stock were issued with an average
exercise price of
F-13
$2.56. The estimated fair value of these warrants, computed using the
Black-Scholes option pricing model was $102,000. This amount was offset against
the proceeds and credited to additional paid-in capital.
In January 2001, the Company sold 416,472 shares of common stock to an existing
investor for $2.25 per share, resulting in net proceeds of $857,000, net of
$80,000 of cash offering costs and the fair value of warrants issued. In
conjunction with the placement, warrants to purchase an aggregate of 20,824
shares of common stock were issued with an average exercise price of $2.25. The
estimated fair-value of the warrant using the Black-Scholes option pricing model
was $31,000 and was offset against the proceeds of the sale.
7. Preferred Stock
---------------
In June 1999, the Company exchanged $1,039,000 of bridge financing and unpaid
interest (see Note 9) for 162,914 shares of Series A Convertible Preferred
Stock. In July 2000, this Preferred Stock in the amount of $163,000 and its
accrued, unpaid dividends in the amount of $17,000 were converted into a unit
consisting of 179,696 shares of common stock and a warrant to purchase 179,696
additional shares of common stock at $9.00 per share.
During 2000, the Company sold 150 shares of Series B Convertible Preferred Stock
to an investor for net proceeds of $615,000, net of expenses of $135,000. In
connection with this sale, the Company issued a warrant to the investor to
purchase 200 additional shares of Series B Preferred Stock at an exercise price
of $5,000 per share. This warrant was exercised in November 2000 resulting in
gross proceeds of $1,000,000.
The sale of Series B Convertible Preferred Stock also included the placement of
callable two year warrants for up to 4,000,000 shares of common stock at an
exercise price of $14.00; however if the warrant is exercised in response to a
Company call, then the exercise price will be the lesser of $14.00 per share or
95% of the average closing price of the stock for the two day period immediately
after the date of the notice of the call from the Company. In 2001, callable
warrants were exercised for 11,190 shares of common stock.
The sale also included a warrant to the placement agent to purchase 25,000
shares of common stock at an exercise price of $5.63 per share, or 120% of the
closing price on the date prior to the sale. The warrant expires on September
13, 2005.
The placement agent for the Series B Convertible Preferred Stock received a
warrant to purchase 50,000 shares of common stock at an exercise price of $5.63
per share. The warrant expires on September 13, 2005.
The Series B Convertible Preferred Stock was converted into common stock over a
ten month period which ended July 2001. A total of 782,586 shares were issued as
the result of this conversion.
At the date of sale, the conversion feature for the 150 shares was beneficial to
the investor because if it was exercised, it could have resulted in proceeds to
the investor in excess of the original purchase price of the 150 shares
allocated to the Series B Preferred Stock after allocations to warrants. The
beneficial conversion feature was recorded as an $84,044 non-cash charge against
the preferred proceeds. This non-cash charge was recorded as a dividend to
preferred stockholders in the computation of earnings per share.
The estimated relative fair values of the warrants to purchase 200 shares of
Series B Preferred Stock, up to 4,000,000 shares of common stock, 25,000 shares
of common stock and 50,000 shares of common stock were $13,000, $496,000, $9,000
and $13,000 respectively. These amounts were offset against the net proceeds of
sale and resulted in an allocation of the remaining net proceeds of $84,000 to
the Series B Preferred. Since the Series B Preferred was mandatorily redeemable
at the option of the holder, the carrying value of shares not converted to
common stock was accrued as a non-cash dividend to preferred stockholders up to
the redemption value of $5,000 per share on a straight line basis through
September 13, 2002. The non-cash accrued dividend recorded at December 31, 2000
was $83,000 and through December 31, 2001 was $22,000.
F-14
In March and May 2001, the Company sold 517.3716 shares of Series C Convertible
Preferred stock in a private placement for $1.94 per share, at 80 percent of
fair market value, resulting in net proceeds of $9.0 million, net of $1.0
million of cash offering costs. In conjunction with the placement, warrants to
purchase an aggregate of 5,173,716 shares of common stock were issued with an
average exercise price of $2.55. The estimated fair value of these warrants,
computed using the Black-Scholes option pricing model was $5.5 million. This
amount was offset against the proceeds and credited to additional paid-in
capital. The placement agent received warrants to purchase 517,371 shares of
Careside's common stock at $1.94 per share. The estimated fair value of these
warrants, computed using the Black-Scholes option pricing model was $630,000.
This amount was offset against the proceeds and credited to additional paid-in
capital.
Prior to the Company's Annual Stockholders' Meeting on May 24, 2001, the Series
C Convertible Preferred Stock was mandatorily redeemable at the option of the
holders, and its conversion feature had not been approved. As such, the
difference between the carrying value and the mandatory redemption amount was
accrued over the redemption period and was recorded as a dividend to preferred
stockholders. The Company received stockholder approval at its Annual
Stockholders' Meeting for the sale and issuance of up to 13,774,130 shares of
Common Stock upon the conversion or exercise of the Series C Convertible
Preferred, the 5,173,716 investor's warrants and the 517,371 placement agent
warrants that had an exercise price below the market price of the Common Stock
on the date of issuance. With this approval, the mandatory redemption feature no
longer existed. As a result, on May 24, the accretion to redemption value was
discontinued. Total accretion recorded in 2001 was $897,000.
With this approval, the Series C Convertible Preferred Stock also became
convertible. At May 24 the conversion feature was beneficial to the investors.
The beneficial conversion feature was recorded as a dividend to preferred
shareholders in the amount of $3,799,000 in the consolidated statement of
operations.
The Series C Convertible Preferred Stock was exchanged for 5,173,716 placement
shares of common stock in October 2001.
8. Purchase of Texas International Laboratories, Inc.
--------------------------------------------------
In December 1999, Careside acquired all of the outstanding common stock of TIL
in exchange for 521,739 shares of Careside's common stock. TIL was then merged
into Careside's newly formed, wholly-owned subsidiary, Careside Hematology. The
transaction was accounted for using the purchase method of accounting. Careside
acquired substantially all assets of TIL for $2.9 million, which represented the
market value of the 521,739 shares of common stock on the date of acquisition.
The excess of the purchase price over the book value of TIL was recorded as
goodwill in the amount of $2,835,000. Goodwill was originally amortized over a
five-year period. Amortization expense was $37,000 in 1999, $567,000 in 2000 and
$520,000 in 2001. The future value of the goodwill was impaired in the fourth
quarter of 2001 and written down in 2001 (see note 2).
The following unaudited proforma results of operations for the year ended
December 31, 1999 has been prepared as if the acquisition of TIL occurred on
January 1, 1999 (in thousands):
Revenue $ 322
Net loss (12,103)
Net loss available to common stockholders (12,158)
Basic and diluted loss per common share (1.81)
F-15
9. Related Party Transactions
--------------------------
In December 1998, Careside entered into an agreement with an affiliate of
SmithKline for up to $3,000,000 of bridge financing. In 1999, $1,000,000 of this
debt, plus $39,000 of accrued and unpaid interest was converted to Series A
Preferred Stock (see Note 7).
In 1999, the Careside entered into an agreement with Advanced Medical
Information Technologies, Inc. (AdMIT) to develop software and hardware. During
1999, Careside paid AdMIT $300,000 which was included in research and
development - software expense. In November 1999, one of the owners of AdMIT was
hired by Careside to be its Senior Vice President and Chief Information Officer.
In May 2000, the Company amended its agreement with AdMIT to commit to an
additional expenditure of $300,000, of which $200,000 was incurred and expensed
in 2000. At December 31, 2001, the remaining $100,000 has been accrued in the
consolidated balance sheet. In connection with the amendment, the Company also
received a 15 percent ownership interest in AdMIT. This investment is carried at
no value due to uncertainty regarding the long-term realizability of the
investment. In addition to commitments under this agreement, Careside made
additional payments to AdMIT of $76,000 in 2000 and $12,000 in 2001 for
additional research and development expenditures. In addition, during 2000 and
2001, payments of $275,000 and $506,000 for software programming were made
respectively to a consulting firm where the CIO's brother is one of the
partners. These payments totaling $781,000 were for contract programming and
were invoiced at rates which management believes are below market cost from
similar competitive service providers.
10. Debt
----
Long-term debt consists of the following (in thousands):
December 31,
---------------------
2000 2001
-------- --------
Note payable to SR One, interest at 10%, due on May 31, 2002 $ 2,000 $ 2,000
Equipment loan due to finance company,
interest at 14%, due in monthly, installments of principal and
interest of $26,837, with a final payment of $133,490
in December 2002 639 414
Equipment loan due to finance company, interest at 15%, due in monthly
installments of principal and interest of $14,347, with a final payment
of $69,854 in September 2003 422 316
Equipment loan due to finance company, interest at 15%, due in monthly
installments of principal and interest of $20,696, with a final payment
of $99,432 in January 2004 651 509
-------- --------
3,712 3,239
Less--Current Portion (2,520) (2,756)
-------- --------
$ 1,192 $ 483
======== ========
In December 1998, Careside entered into a $2,500,000 facility with an equipment
financing company. Borrowings under the facility are evidenced as separate loans
and are secured by specific equipment assets. Each equipment loan has a 48-month
term and bears interest at approximately 14% and 15% per year. As of December
31, 2001, approximately $1.7 million of the facility had been drawn under this
facility to finance equipment purchases. Careside recorded interest expense of
$155,000, $284,000 and $201,000 in 1999, 2000 and 2001, respectively related to
these borrowings.
F-16
In December 1998, Careside entered into an agreement with an affiliate of
SmithKline (S.R. One, Limited) for up to $3,000,000 of bridge financing, of
which $1,500,000 was drawn on December 28, 1998 and the remaining $1,500,000 was
drawn on January 31, 1999. The extended maturity date is May 31, 2002. Careside
issued a warrant (the "Bridge Warrant") in connection with the bridge financing.
The Bridge Warrant was originally exercisable into that number of shares of
common stock which is equal to $750,000 divided by 85% of the initial public
offering price per share. The Bridge Warrant has an exercise price of $6.375 per
share. The Bridge Warrant became exercisable in December 1999 and expires on
June 16, 2004. Using the Black-Scholes pricing model, the estimated fair value
of the Bridge Warrant was calculated at $330,000 and was recorded as a reduction
in the carrying amount of the bridge note, with a corresponding increase in
stockholders' equity. The discount on the bridge note was amortized over the
estimated term of the note as additional interest expense. In June 1999,
$1,000,000 of the bridge financing plus $38,575 of unpaid interest was converted
to Series A Convertible Preferred Stock (see Note 7). In connection with the
conversion, the Bridge Warrant was modified such that it will be exercisable
into that number of shares of common stock which is equal to $1,500,000 divided
by 85% of the Offering price per share. Using the Black-Scholes pricing model,
the estimated fair value of the increase in shares under the Bridge Warrant
modification was calculated at $289,801 and was recorded as interest expense in
1999, with a corresponding increase in stockholders' equity. In November 2000,
the bridge note expiration date was extended to June 30, 2001. In conjunction
with the extension, the bridge warrant expiration date was extended to June 16,
2004. Using the Black-Scholes pricing model the estimated fair value of the
bridge warrant modification was calculated to be $172,000 and is being recorded
as non-cash interest expense over the extended period of the loan. 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 million conversion discussed above.
F-17
Future maturities of debt at December 31, 2001 are as follows (in thousands):
2002 $2,756
2003 385
2004 98
------
$3,239
======
11. Stock Options and Warrants
--------------------------
Stock Options
-------------
Careside has adopted various stock option plans, which provide for the granting
of options to purchase up to 1,391,923 shares of common stock to directors,
officers, consultants and employees of the Company. At December 31, 2001,
333,003 shares were available for future grant under the plans. The number of
options to be granted and the option prices are determined by the Board of
Directors in accordance with the terms of the plans. Generally, options are not
granted at prices below the fair market value at the date of grant. Each option
expires on such date as the Board of Directors may determine. Generally options
vest from 3 to 5 years.
The table below summarizes the option activity for 1999, 2000, and 2001:
Weighted Exercisable
Weighted Average Fair Weighted
Number Average Value of Average
of Exercise Options Granted Number Exercise
Shares Price During the Year Exercisable Price
------ ----- --------------- ----------- -----
Outstanding at
December 31, 1998 410,725 $ 5.78 198,343 $5.08
========= ====== ======= =====
Granted 95,017 6.17 $ 2.82
======
Exercised - -
Cancelled (8,365) 6.07
--------- ------
Outstanding at
December 31, 1999 497,377 $ 5.85 390,278 $5.76
========= ====== ======= =====
Granted 148,500 8.62 $ 5.10
======
Exercised (1,154) 0.05
Cancelled (64,929) 7.42
--------- ------
Outstanding at
December 31, 2000 579,794 $ 6.40 479,857 $6.05
========= ====== ======= =====
Granted 492,500 2.69 $ 1.53
======
Exercised - -
Cancelled (32,243) 5.91
--------- ------
Outstanding at
December 31, 2001 1,040,051 $ 4.66 778,995 $5.02
========= ====== ======= =====
The table below summarizes information about options outstanding at December 31,
2001:
F-18
Range of Number Weighted Avg. Exercise Price Number
Exercise Outstanding at Remaining Of Options Exercisable at
Prices December 31, 2001 Life (years) Outstanding December 31, 2001
------ ----------------- ------------ ----------- -----------------
$ 1.75 - 2.50 27,000 9.7 $ 2.17 10,250
$ 2.65 - 3.75 456,550 8.6 $ 2.72 247,525
$ 5.20 - 7.50 489,499 5.6 $ 5.87 480,699
$ 8.01 -10.00 67,002 7.9 $ 9.96 40,521
------------- ---------- ----- ------ --------
$ 1.75 -10.00 1,040,051 7.2 $ 4.66 778,995
========== ===== ====== ========
As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company continues to apply the accounting rules of APB No. 25 governing the
recognition of compensation expense for employee stock options. Such accounting
rules measure compensation expense on the first date at which both the exercise
price and the number of shares are known. Expense is only recognized in
circumstances where the exercise price is less than the fair market value at the
measurement date. No such expense has been recorded in the accompanying
consolidated statements of operations.
Under the requirements of SFAS No. 123 pro forma disclosure of compensation
expense using the fair value method is required to be disclosed if the Company
applies APB No. 25. Pro forma compensation has been computed by estimating the
fair value of options at the date of grant using the Black-Scholes option
pricing model.
The following assumptions were used in estimating the fair value of options:
1999 2000 2001
------------- ------------- -------------
Weighted average risk-free interest rate 5.92% 6.50% 4.79%
Weighted average expected life 4.17 years 4.00 years 4.00 years
Weighted average volatility 60% 72.5% 78.3%
Dividend yield 0% 0% 0%
Had the compensation cost of these options been recorded for the years ended
December 31, 1999, 2000 and 2001, the Company's net loss would have been as
follows (in thousands, except per share amounts):
1999 2000 2001
---------- ---------- ----------
Net Loss available to
common stockholders:
As reported $ (11,646) $ (16,939) $ (20,408)
Pro forma $ (12,055) $ (17,388) $ (20,914)
Loss per share:
As reported $ (1.88) $ (1.92) $ (1.64)
Pro forma $ (1.94) $ (1.98) $ (1.68)
F-19
Stock Warrants
--------------
The following table summarizes outstanding warrants at December 31, 2001 issued
in connection with private equity financings and the initial public offering
(the Offering):
Type of Outstanding Exercise Issuance Expiration
------- ----------- -------- -------- ----------
Warrants Warrants Price Date Date
-------- -------- ----- ---- ----
Common Stock 384,615 $ 5.20 February 1997 February 2004
Common Stock 339,312 6.76 June 1998 June 2005
Common Stock 235,294 6.38 December 1998 June 2004
Units 200,000 9.00 June 1999 June 2004
Common Stock 101,305 8.77 March 2000 March 2005
Common Stock 179,696 9.00 July 2000 June 2004
Common Stock 25,000 5.63 September 2000 September 2005
Common Stock 50,000 5.63 September 2000 September 2005
Common Stock 3,978,330 14.00 September 2000 September 2002
Common Stock 66,324 2.56 November and November and
December 2000 December 2004
Common Stock 20,824 2.25 January 2001 January 2005
Common Stock 5,173,716 2.55 May 2001 May 2005
Common Stock 517,371 1.94 May 2001 May 2005
-----------
11,271,787
===========
The warrants to purchase 200,000 units were granted to the underwriters of the
initial public offering. Each warrant carries an exercise price of $9.00 and
allows the purchase of one share of common stock and a tradable warrant
identical to those sold in the initial public offering. The warrants are
exercisable for a four year period beginning on the first anniversary of the
initial public offering. (See Notes 6 and 7 for discussion of warrants issued in
2001.)
12. Statements of Cash Flows
------------------------
The Company prepares its statements of cash flows using the indirect method as
defined under SFAS No. 95. The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Supplemental cash flows disclosures are as follows (in thousands):
1999 2000 2001
---------- ---------- ----------
Cash paid for interest $ 158 $ 318 $ 181
Cash paid for income taxes 1 1 1
F-20
Non-cash Investing and Financing Activities:
1999 2000 2001
---- ---- ----
Conversion of bridge financing to $1,039 $ - $ -
Series A Preferred Stock
Acquisition of equipment under 53 - -
capital lease
Accrued dividends on Series A 55 52 -
Preferred stock
Accrued dividends on Series B - 17 21
Preferred stock
Accrued dividends on Series B - 83 22
Preferred stock
Beneficial conversion feature on - 84 -
Series B Preferred stock
Conversion of Series A Preferred - 107 -
stock and unpaid dividends
Conversion of Series B Preferred - 55 -
stock
Accrued dividends on Series C - - 897
Preferred stock
Beneficial conversion feature on - - 3,799
Series C Preferred stock
Cashless exercise of common stock - - -
warrant
Transfer of analyzers from - - 105
inventory To property and
equipment
In connection with the Company's initial public offering, $498,000 of previously
unpaid deferred offering costs were offset against accounts payable in 1999.
In connection with the acquisition of TIL in December 1999, the Company recorded
the following non-cash amounts which have been excluded from the consolidated
statement of cash flows (in thousands):
Additional paid-in capital $2,869
Goodwill 2,834
Net assets acquired 35
13. Commitments
-----------
Leases
------
The Company leases office and laboratory facilities under non-cancelable
operating leases expiring from August 2000 to April 2007. Rent expense for the
years ended 1999, 2000 and 2001 was $174,000, $323,000 and $362,000,
respectively.
Included in property and equipment is approximately $53,000 of equipment, at
acquisition cost, which is leased under a noncancellable lease, accounted for as
a capital lease expiring in June 2003. Accumulated depreciation in 1999, 2000
and 2001 related to equipment under capital leases was $4,000, $21,000 and
$38,000, respectively.
F-21
At December 31, 2001, the future minimum annual rental payments under lease
agreements are as follows (in thousands):
Capital Operating
Leases Leases Total
December 31:
2002 $18 $ 353 $ 371
2003 9 372 381
2004 - 386 386
2005 - 400 400
Thereafter - 327 327
-------- -------- --------
27 $ 1,838 $ 1,865
======== ========
Less - Amount
representing
interest at
approximately 14
percent (3)
--------
Present value of
minimum lease
payments 24
Less - Current portion (15)
--------
$ 9
========
Collaborative Arrangements
--------------------------
Careside has utilized strategic partners with specific design and technology
expertise in order to develop the Careside system rapidly and on a
cost-effective basis. Careside has agreements with (i) Fuji Photo Film Co., Ltd.
for the supply of its dry film based chemistry reagents, (ii) International
Technidyne Corporation for the joint development of coagulation reagents, (iii)
UMM Electronics, Inc. (UMM) to design and manufacture the Careside Analyzer and
(iv) Advanced Medical Information Technologies, Inc. to develop software to link
the Careside system and other medical devices, including the hematology device.
In addition, Careside contracted with Hauser, Inc. for the design of the
Careside system and with Battelle Memorial Institute for the design of the
system's disposable test cartridges and their automated assembly manufacturing
system. Careside Hematology has an agreement with Ysebaert, Inc., the
manufacturer of the H-2000. In 2001, the Company has negotiated the elimination
of previous minimum purchase requirements, as defined in the agreements.
During 2001, the Company paid a deposit of $300,000 to UMM under a purchase
order for 200 analyzers. This deposit was still on hand at UMM at December 31,
2001. The Company and UMM began renegotiating the terms of the purchase order
prior to December 31, 2001. The renegotiations are still ongoing. In connection
therewith, UMM has requested the Company to reimburse UMM for up to $1.4 million
for the purchase of certain component inventories related to the purchase order.
The Company does not believe it bears responsibility for the reimbursement of
such component inventories. The Company believes that as part of its
renegotiations, it will reach agreement with UMM to resolve this difference for
a lesser amount approximating the $300,000 deposit already paid to UMM. Because
the renegotiations have not been finalized, the ultimate liability within the
range above cannot be estimated. As such, no accrual for this contingency has
been provided at December 31, 2001 in excess of the $300,000 deposit on hand.
The Company purchases its dry film based chemistry reagents solely from Fuji
Photo Film Co., Ltd. In addition, UMM is the primary designer and manufacturer
of the Careside Analyzer. The loss of these suppliers could impact the Company's
ability to obtain and produce these items in the short-term. However, the
Company believes that acceptable alternative suppliers are available.
F-22
Legal Matters
-------------
The Company is currently named defendant in legal matters arising in the
ordinary course of business. Management does not believe that the outcome of
these matters will have a material adverse effect on the Company's financial
position or results of operations.
Employment Agreements
---------------------
In 1997 and 1998 the Company entered into three-year renewable employment
agreements with three of its executive officers that provide for aggregate
annual compensation of approximately $660,000. These agreements automatically
renew annually unless they are terminated.
14. Profit Sharing Plan
-------------------
The Company maintains a 401(k) profit sharing plan on behalf of its employees.
Participation in the plan is voluntary and eligible employees, as defined, may
contribute up to 15 percent of their compensation to the plan. The Company
matches 50 percent of the employee's contribution up to 4 percent of an
employee's compensation. Contributions under the Plan were $47,000, $73,000 and
$70,000 for the years ended 1999, 2000 and 2001, respectively.
15. Employee Stock Purchase Plan
----------------------------
In 1999, the Company's shareholders approved the Employee Stock Purchase Plan
("ESPP"), under which 150,000 shares of the Company's common stock could be sold
to employees. Each quarter, an eligible U.S. employee may elect to withhold up
to 15 percent of his or her salary to purchase shares of the Company's stock at
a price equal to 85 percent of the fair value of the stock as of the first day
of the quarter, or the last day of the quarter. The ESPP will terminate at the
earlier of the date that all 150,000 shares have been sold or the date as of
which the Board of Directors chooses to terminate the plan as provided in the
plan provision. In 1999, 3,502 shares of the Company's stock were sold under the
ESPP for $17,000. During 2000, 30,454 shares of the Company's stock were sold
under the ESPP for $103,000 and in 2001 58,297 shares were sold for $95,000. At
December 31, 2001, 57,747 shares remained available for sale.
16. Subsequent Events
------------------
In January 2002, the Company granted 123,900 options to its employees under the
1996 and 1998 stock option plans with a weighted average exercise price of $0.90
per share.
In January 2002, the Company entered into a loan agreement with an investor that
provided a bridge loan of $600,000. The bridge loan is repayable after 90 days.
For each 30 day period this bridge loan is outstanding, the lender will receive
warrants to purchase 50,000 shares of common stock at a price of $0.90 per
share.
In February 2002, the Company entered into a note and warrant purchase agreement
with an investor that provided a bridge loan of $350,000. The bridge loan is
repayable after 75 days or earlier if the Company consummates a financing of at
least $3,000,000. In connection with this bridge loan, for a 90 day period
following repayment of the loan, the lender has the right to purchase up to
500,000 shares of common stock at a price of $.30 per share. For each 30 day
period this bridge loan is outstanding, the lender will receive warrants to
purchase 35,000 shares of common stock at a price of $.30 per share.
Also in February 2002, the Company entered into a note a warrant purchase
agreement with each of three of its directors. One of these agreements provided
a bridge loan of $50,000 and each of the other two agreements provided a bridge
loan of $20,000. Each of these bridge loans is repayable upon 90 days or earlier
if the Company consummates a financing of at least $3,000,000. In connection
with the $50,000 bridge loan, for a 90 day period following repayment of the
Loan, the lender has the right to purchase up to
F-23
20,000 shares of common stock at a price of $.30 per share. For each of the
$20,000 bridge loans, each lender has the same purchase right, except that it is
for up to 8,000 shares of common stock. For each 30 day period that the $50,000
bridge loan is outstanding, the lender will receive warrants to purchase 5,000
shares of common stock at an exercise price of $.30 per share. For each 30 day
period that each of the $20,000 bridge loans is outstanding, each lender will
receive warrants to purchase 2,000 shares of common stock at an exercise price
of $.30 per share.
F-24