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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
Amendment No. 1
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2000
Commission file number: 001-15051
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Careside, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2863507
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6100 Bristol Parkway, Culver City, CA 90230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 338-6767
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
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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/A or any
amendment to this Form 10--K/A. [_]
On March 19, 2001, the aggregate market value of the Registrant's Common
Equity, par value $.01 per share, held by non-affiliates of the Registrant was
approximately $17 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 19, 2001, 11,262,352 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 24, 2001 are incorporated by reference into Part III of this
Form 10--K/A.
EXPLANATORY NOTE
This Form 10--K/A (Amendment No. 1) is being filed to amend the annual
Report on Form 10-K for the fiscal year ended December 31, 2000 (the "Original
Form 10-K") which was filed on March 29, 2001.
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PART I
The Company's forward-looking statements in this Annual Report on Form 10-
K/A 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
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. We plan to offer
immunochemistry tests for the Careside system later in 2001. Tests in these
five 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 five 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. We released the Careside Connect for sale
in 2000.
The FDA has granted pre-market clearance for the Careside Analyzer and the
H-2000, and pre-market clearance or exemption for 41 blood tests performed by
the Analyzer and a 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 2001.
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 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
1
rhealthcare 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 59 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 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. As with any new technology, it
involves an expenditure of cash and some learning time by physicians and other
healthcare providers. 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.
2
Product Development and Regulatory Status
Technology
Product Regulatory/Development Status Partner/Supplier
------- ----------------------------- ----------------
Careside Analyzer Cleared under Section 510(k) of the Food, Drug UMM Electronics, Inc.
and Cosmetic Act for use in licensed
laboratories and for Point-of Care (POC). The
Analyzer is offered for sale to customers.
Disposable Test Cartridges Chemistry, electrochemistry and coagulation Battelle
cartridges have been developed an are offered
for sale to customers. The immunochemistry test
cartridge is in development.
Cleared/Exempt for Planned 2001-2
Test Category 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* APTT Third Party Suppliers.
Fibrinogen
Thrombin Time
Immunochemistry Theophylline Third Party Suppliers.
Phenytoin
Digoxin
Phenobarbital
T4
T3 Uptake
Carbamazepine
-------
* Requires separate clearance or exemption for point-of-care.
3
Product Development and Regulatory Status
Technology
Hematology Status of Development Partner/Supplier
---------- --------------------- ----------------
Careside H-2000 FDA Cleared; offered for sale to customers Third Party Manufacturer
18 parameter, 3 part
differential
Hematology Tests
WBC All hematology tests have been FDA Aqua Solutions
RBC cleared under Section 510(k)
Platelet count
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 Product Status of Development Technology Partner
--------------------- --------------------- ------------------
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 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-
4
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 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
5
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 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.
6
. Ease of Sampling. Sampling is automatic and requires small volumes using
approximately 75 to 150 microliters (l) 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. In December 1999, we
acquired Texas International Laboratories (TIL) in an all-stock acquisition.
TIL had developed a new hematology analyzer, the Hematil-2000 which it
introduced in April 1999 as a high quality, low cost hematology analyzer that
was designed for both human and animal testing. When we acquired TIL, we
renamed the device the H-2000. Its hematology tests are equally applicable in
the 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
Reiger. We will have exclusive rights to use the Careside Connect in the
point-of-care market for laboratory testing services.
7
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 sent to a central location, either a
commercial or hospital laboratory, for processing. Commercial laboratories
provide approximately 27% of all in vitro diagnostic testing services,
hospital laboratories provide approximately 63%, and the balance, about 10%,
is currently provided in physicians' 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
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.
8
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.
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 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
9
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 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 will 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. In 2001, we expect to have distribution partners in
the United States and in more than fifteen international countries for
distribution of the Careside system.
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In the U.S., our focus is 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 at the end of 2000 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.
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.
Discussions are currently underway for distribution agreements in certain
European countries and in the Middle East and South Africa. In addition, the
acquisition of TIL has brought distribution opportunities with companies in
China, Mexico, Turkey, and certain South America 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 2000, 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.
In 1997, we entered into a distribution arrangement with Smith Kline
Beecham Clinical Laboratories, Inc. (SBCL) which gave SBCL an exclusive right
to use and domestically distribute the Careside Analyzer within the commercial
laboratory industry and the non-exclusive rights to sell the Careside Analyzer
to hospitals and healthcare systems, other health care providers, managed care
organizations and insurers. In June 2000, after Quest Diagnostics, Inc.
purchased SBCL, Quest terminated this agreement.
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 because we could use other
distributors in each of the countries where we currently use distributors.
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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.
At the beginning of 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 placed in the field or
becoming demonstration units. As a result of these events, our backlog of
Analyzer orders was immaterial.
H-2000s
We acquired the H-2000 from Texas International Laboratories, Inc. in
December 1999. 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. We do not expect
our H-2000 sales into the veterinary market to continue at the same levels due
to our 2001 focus on the human market. By focusing on the human market, we
expect our sales efforts for Analyzers to benefit our H-2000 sales as well,
because each device will be marketable to the same customers. The backlog of
our H-2000 sales was not material. It was also not material at the end of
1999.
Careside Connect
We had no sales of the Careside Connect in 2000 as it was under development
until early 2001.
Significant Customers
In 2000, the Company had sales to three customers that were individually
greater than 10 percent of net sales. Combined, these three customers amounted
to 38 percent of net sales and 25 percent of accounts receivable at December
31, 2000. 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. markets.
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.
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We continue to pursue development work with other contract partners,
including further development of cartridge design with Battelle, coagulation
reagent technology with International Technidyne Corporation and software
development services of AdMIT for interfaces between the Careside Analyzer and
other medical devices and information systems.
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 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 entered into an agreement with UMM Electronics, Inc. for the
manufacture of the Careside Analyzer at UMM Electronics' facility in
Indianapolis. The contract with UMM covers both development services and
manufacturing after development is completed. The development services
component of our UMM contract is almost 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.
Our inventories of Analyzers was sufficient in 2000 for internal validation
and sales to customers. In 2001, 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.
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.
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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 executed a long-term supply agreement 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 2001, 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. 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.
We keep inventories of H-2000's and reagent solutions to support our sales
in hematology testing. Our inventories are maintained at levels which are
determined by our experience. In 2001, we expect to start using software which
captures data about order and utilization patterns among our hematology
customers. This data will help us to determine the inventory levels which we
will need to keep in the future.
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.
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
14
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. A 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.
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.
15
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 41 tests, along with the 18-parameter
hematology test performed by the Careside H-2000, are already cleared or
exempt by the FDA have been classified in Class II. 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
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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. We expect to receive UL
certification for the H-2000 during 2001.
Clinical Laboratory Improvement Amendments of 1988
All medical testing in the United States is regulated by the Health Care
Financing Administration 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 HCFA or an organization to whom HCFA has delegated such
authority. They also must meet requirements relating to personnel
qualifications, proficiency testing, quality assurance, and quality control.
All of the tests for the Careside Analyzer were categorized as moderate or
less 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.
17
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.
Employees
We had 64 employees as of December 31, 2000. Since our initial public
offering in June 1999, a number of senior managers have been added with
expertise in marketing and sales, information resources, materials management
and product development. In addition, the acquisition of TIL has enabled us to
move into the veterinary market with experienced 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 $17,625, 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 in the final lease year. It has a current
monthly rent of $9,000, gradually increasing to $11,000 per month. 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 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 $839, gradually increasing to $877 per month in the final lease year.
18
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 2000.
19
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 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 2000 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 19, 2001, there were 395 holders of record of our common stock
and an estimated number of beneficial owners of our common stock of
approximately 1,930.
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.
On September 13, 2000, we privately placed Careside securities with RoyCap,
Inc. pursuant to Regulation S of the Securities Act of 1933. The gross
proceeds to the Company from that transaction to date have been $1,750,000.
Brighton Capital, Ltd., the placement agent in that transaction, received a
cash commission of $105,000 and warrants to purchase 50,000 shares at $5.63
per share. Net proceeds from the RoyCap transaction are being used for general
corporate purposes. The securities sold in that transaction included the
following:
1. 150 shares of Series B Convertible Preferred Stock, convertible at any
time before September 13, 2002 into shares of our Common Stock at a conversion
price per share equal to the lesser of (a) the average of the lowest ten
closing prices within the last 30 calendar days prior to the conversion date
or (b) $5.48, being 120% of the closing price on September 13, 2000 ("Closing
Date"). As of March 19, 2001, 170 Preferred Shares (which includes Preferred
Shares received upon exercise of the warrant discussed in #2 below) have been
converted;
2. A warrant to purchase 200 additional shares of Preferred Stock at an
exercise price of $1 million. This warrant was exercised on November 2, 2000;
3. A warrant to purchase 25,000 shares of Common Stock at an exercise price
per share of $5.6256, being 120% of the closing price on the date prior to the
Closing Date;
4. A warrant to purchase 50,000 shares of Common Stock at an exercise price
per share of $5.6256, being 120% of the closing price on the date prior to the
Closing Date, issued to Brighton Capital, Ltd., the placement agent in that
transaction; and
20
5. A warrant to purchase up to 4,000,000 shares of Common Stock at an
exercise price per share of $14.00; however if the warrant is exercised in
response to a Company call of the warrant, then the exercise price per share
will be the lower of (i) $14.00, or (ii) 95% of the average of the closing
prices for the 2 day period immediately after the date of notice of the call
from the Company.
The holders of Series B Preferred Stock may only convert a number of shares
of Series B Preferred Stock such that the aggregate number of shares of Common
Stock issued to the holder upon such or any prior conversion of the Series B
Preferred Stock does not, when aggregated with the number of shares of Common
Stock previously issued or then issuable pursuant to an exercise of the
warrant described in #5 above, exceed 1,797,631 shares of Common Stock (which
number will be adjusted for stock splits and similar events) in violation of
Section 713 of the American Stock Exchange Guide, unless and until the
shareholders of Careside have approved such aggregate issuance of Common
Shares in excess of 1,797,631.
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 are being
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 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.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our summary consolidated financial information.
Careside, Inc.
(in thousands, except share and per share amounts)
Period from
Inception (July
10, 1996) to
December 31, Year End December 31,
------------------ -------------------------------
1996 1997 1998 1999 2000
------- --------- --------- --------- ---------
Operating Results Data:
Net Sales................. $ -- $ -- $ -- $ 61 $ 741
Cost of Sales............. -- -- -- 31 1,001
------- --------- --------- --------- ---------
Gross profit.............. -- -- -- 30 (260)
Operating Expenses
Research and
Development--products.. 1,562 5,896 8,298 8,252 9,074
Research and
Development--software.. -- -- -- 313 898
Selling and Marketing... -- 85 249 1,204 3,657
General and
Administrative......... 55 555 601 1,135 2,124
Amortization of
Goodwill............... -- -- -- 37 567
------- --------- --------- --------- ---------
Operating loss............ (1,617) (6,536) (9,148) (10,911) (16,580)
Interest Income........... (21) 213 234 291 372
Interest Expense.......... -- (8) (22) (971) (495)
------- --------- --------- --------- ---------
Net loss.................. (1,638) (6,331) (8,936) (11,591) (16,703)
Accrued Preferred stock
dividends Series A & B... -- -- -- (55) (69)
Accreted dividend on
Series B................. -- -- -- -- (83)
Beneficial conversion
feature--Series B........ -- -- -- -- (84)
------- --------- --------- --------- ---------
Net Loss available to
common stockholders...... $(1,638) $ (6,331) $ (8,936) $ (11,646) $ (16,939)
Basic and diluted Net Loss
per Common Share......... $ (2.25) $ (2.04) $ (1.93) $ (1.88) $ (1.92)
Shares used in computing
Basic and Diluted Net
Loss per Common Share.... 728,465 3,098,980 4,629,916 6,210,496 8,800,171
Year End December 31,
---------------------------------------------------
1996 1997 1998 1999 2000
------- --------- --------- --------- ---------
Balance Sheet Data:
Cash and cash
equivalents.............. $ 31 $ 1,237 $ 3,927 $ 4,905 $ 1,789
Total assets.............. 1,193 3,140 7,911 14,389 12,663
Long-term debt, net of
current portion.......... -- -- 2,045 1,060 1,192
Mandatorily Redeemable
Series B Convertible
Preferred Stock.......... -- -- -- -- 1,054
Accumulated deficit....... (1,638) (7,969) (16,905) (28,496) (45,199)
Total stockholders' equity
(deficit)................ (1,067) 2,438 4,149 9,079 5,650
The following table presents our summary consolidated quarterly financial
information.
1999 2000
---------------------------------- ----------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------- ------- ------- ------- ------- ------- ------- -------
Net Sales............... $ -- $ -- $ -- $ 61 $ 283 $ 245 $ 108 $ 105
Gross profit............ -- -- -- 31 140 136 49 (585)
Net loss................ (2,998) (2,375) (2,746) (3,472) (4,200) (3,832) (4,102) (4,569)
Net loss available to
common stockholders.... (2,998) (2,378) (2,772) (3,498) (4,226) (3,858) (4,103) (4,752)
Net loss per share...... $ (0.59) $ (0.44) $ (0.39) $ (0.46) $ (0.54) $ (0.44) $ (0.46) $ (0.48)
Shares used in computing
basic and diluted net
loss per share......... 5,084 5,414 7,084 7,226 7,867 8,798 8,988 9,535
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Development of the point-of-care technology used in the Careside system
began in 1994 at SmithKline Beecham Clinical Laboratories, Inc. (SBCL), a
subsidiary of SmithKline Beecham Corporation. In November 1996, we acquired
the intellectual property, equipment and other assets from SBCL to continue
the development of point-of-care diagnostic technology and to create a
commercial product. As part of the consideration paid for the acquisition,
SmithKline Beecham Corporation became an equity owner in Careside.
Since November 1996, 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. As of December 31, 2000, the aggregate loss incurred
was approximately $45.2 million. 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. In
1998, 1999 and for the first nine months of 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.
Results of Operations
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
primarily 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. This
compared to approximately $8.3 million in the same period in 1999. Careside
placed its Careside Analyzer in customer sites for beta testing. 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 that routinely takes place prior to the launch of a
new product.
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 reflects the increase in
staff of approximately $300,000 and 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 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 reflects the preparations for the launch of the Careside system
in 2000, including the full year effect of sales force salaries.
23
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 reflects 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. The increase in expenditures
generally related to being a public company.
Goodwill. Goodwill amortization of $567,000 was recorded in 2000 associated
with goodwill recorded related to the December 1999 acquisition of TIL. This
compares with amortization of $37,000 which was recorded for part of December
in 1999.
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 reflects 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 is 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 reflects the increase in cost of sales due to
the inventory reserve, increases in selling and marketing expense, goodwill
amortization and administrative expenses partially offset by a decrease in
interest expense associated with the S.R. One bridge loan.
Years Ended December 31, 1999 and 1998
Sales and Cost of Sales. Sales increased to $61,000 in 1999 compared to no
prior sales in 1998. The sales were Careside H-2000s, a product of the company
we acquired in December 1999. The cost of sales represents the cost of
instruments and reagents sold.
Research and Development Expenses--Product. Research and development
expenses remained basically unchanged for 1999 as compared to 1998. Total
expense for 1999 was $8.25 million compared to approximately $8.30 million in
the same period in 1998. This reflected the continued efforts to complete the
production design of the Careside Analyzer and to support additional test
submissions to the FDA.
Research and Development Expenses--Software. Research and development
expenses related to software increased to $313,000 for 1999 compared to no
expense in the same period in 1998. This increase reflects the initiation of
efforts related to development of the Careside Connect and its software.
Selling and Marketing Expenses. Selling and marketing expenses increased to
$1.2 million for 1999 compared to $249,000 in the same period in 1998. This
increase reflects the preparations for the launch of the Careside system in
1999, including the partial year effect of hiring sales force staff.
General and Administrative Expenses. General and administrative expenses
increased to $1.1 million for 1999 compared to $601,000 in the same period in
1998. This increase reflects the increase in efforts related to salaries for
additional administrative staff, and increased legal expense and investor
relations efforts after the initial public offering in 1999.
Goodwill. Goodwill amortization of $37,000 associated with goodwill
recorded related to the December 1999 acquisition of Texas International
Laboratories was recorded for part of one month in 1999. No such expense
occurred in prior periods.
Net Interest Income (Expense). Interest income was $291,000 for the year
ended December 31, 1999 as compared to the same period in 1998 at $234,000.
This reflects comparable levels of cash and cash equivalents
24
available for investment. Interest expense was $971,000 for 1999 compared to
$22,000 in 1998. This increase reflects interest paid on the line-of-credit to
purchase equipment initiated in late 1998, accrued interest on the S.R. One
bridge loan, and the non-cash interest charges associated with the cost of
warrants granted to S.R. One in connection with the bridge loan facility and
its partial conversion to preferred stock in 1999.
Net Loss. The net loss increased to approximately $11.6 million for the
twelve months ended December 31, 1999 compared to $8.9 million in the same
period in 1998. This increase reflects the increase in selling and marketing,
administrative expenses and interest expense on the line-of-credit to purchase
equipment and the S.R. One bridge loan.
Years Ended December 31, 1998 and 1997
Research and Development Expenses. Research and development expenses
increased to approximately $8.3 million for the year ended December 31, 1998
compared to approximately $5.9 million in the same period in 1997, an increase
of 41 percent. This increase reflects increased payments to third parties for
the development of the Careside Analyzer and increased staffing for additional
test development and submissions to the FDA.
Selling and Marketing Expenses. Selling and marketing expenses increased to
$249,000 for the year ended December 31, 1998 compared to $85,000 in the same
period in 1997, an increase of 193 percent. This increase reflects the
increase in the preliminary sales and marketing efforts and the full year
effect of marketing staff salaries.
General and Administrative Expenses. General and administrative expenses
increased to $601,000 for the year ended December 31, 1998 compared to
$555,000 in the same period in 1997, an increase of 8 percent.
Net Interest Income (Expense). Interest income was approximately the same
for the year ended December 31, 1998 as compared to the same period in 1997 at
$234,000 and $214,000, respectively. This reflects comparable levels of cash
and cash equivalents available for investment. Interest expense was $22,000 in
1998 compared to $8,000 in 1997. This increase reflects relatively higher
borrowing in 1998.
Net Loss. The net loss was approximately $8.9 million for the year ended
December 31, 1998 compared to approximately $6.3 million in the same period in
1997, an increase of 41%. This increase reflects the increase in research and
development expenses and preliminary sales and marketing efforts.
Liquidity and Capital Resources
We have financed our operations since inception primarily through the net
proceeds generated from the issuance of common stock, long-term debt and
certain short-term borrowings that were subsequently converted into equity
securities. As of December 31, 2000, we have received net proceeds aggregating
approximately $51.8 million from these transactions.
We were a development stage company through 1999 and had minimal sales. We
performed a specific review of receivables as of December 31, 1999 and based
on that review, we determined that no allowance for doubtful accounts was
necessary. We exited the development stage in 2000 and experienced an increase
in sales. Allowances for doubtful accounts are estimates and are established
based on the specific circumstances of each customer.
Net cash used in operating activities for the year ended December 31, 2000
was approximately $15.7 million. For the year ended December 31, 2000, cash
used in operating activities primarily represents the net loss for the period
and increases in inventories offset by an increase in depreciation and
amortization, and accounts payable, and a decrease in accrued expenses.
Increase in inventory of $2,149,728, net of reserves was primarily as a result
of transitioning from a company focused on product development and research to
one
25
focused on positioning itself to begin selling its product. In late 1999-early
2000 the company made significant purchases of chemicals, film and analyzers
to support anticipated sales upon product launch. During fiscal 2000, the
Company's pilot site testing revealed the need for certain device changes. Due
to these changes, early product sales did not materialize. Therefore, certain
of the chemicals and film cartridges were not used as rapidly as expected and
analyzers were not sold as expected. As a result of the time it took to
implement the product changes the percent of finished goods in inventory
increased from 24 percent in 1999 to 61 percent at the end of 2000. Reserves
for excess and obsolete inventory were established in fiscal 2000 to reserve
for potential excess in analyzers, chemicals and film inventory. Net cash used
in operating activities was approximately $9.4 million for the year ended
December 31, 1999. This represents the net loss for the year offset by an
increase in depreciation and amortization and increases in inventories
partially offset by an increase in accrued expenses. Net cash used in
operating activities was approximately $7.7 million for the year ended
December 31, 1998. Cash used for operations in that year was primarily related
to funding expansion of research and development activities as well as the
establishment of an administrative infrastructure.
Cash used in investing activities for the purchase of property and
equipment was approximately $2.0 million and $3.8 million and $2.0 million for
the years ended December 31, 2000, 1999 and 1998, respectively. The cash used
in 2000 was primarily for the acquisition of manufacturing equipment and
laboratory equipment used in research and development.
At December 31, 2000, our principal source of liquidity was approximately
$1.8 million in cash and cash equivalents.
In December 1998, we entered into an agreement with an equipment lease
financing company regarding a $2.5 million facility secured by specific
equipment. Each draw will be a separate loan under the facility. Approximately
$2.4 million of this facility was drawn by December 2000 and was secured by
our existing equipment. Each equipment loan has a 48-month term and bears an
interest rate of approximately 14% per annum adjusted for an index rate based
on four-year U.S. Treasury Notes at the time of borrowing.
In addition, we entered into an agreement for bridge financing with S.R.
One, Limited in December 1998. Under this agreement, $1.5 million was funded
in December 1998 and $1.5 million was funded in January 1999. All of this
funding was used to fund research and development activities and for working
capital. In June 1999, S.R. One, Limited agreed to convert $1 million of the
$3 million loan, together with accrued interest at the rate of 8% on $1
million, into shares of Series A Convertible Preferred Stock. The conversion
price was $6.375, which was 85% of the initial public offering price per unit.
S.R. One received 162,914 shares of Series A Convertible Preferred Stock. Each
share of Series A Convertible Preferred Stock was in turn converted on July 1,
2000, at the option of the holder, into one share of our common stock and one
warrant to purchase an additional share of our common stock. All accrued and
unpaid dividends with respect to shares of Series A Convertible Preferred
Stock were converted by S.R. One were also converted into units at the initial
public offering price per unit. The exercise price and other terms of the
warrant received on the conversion were the same as the warrants included in
units sold in the offering. The remaining $2 million of the loan matures in
June 2001. At that time, we expect either to repay the $2 million balance on
the bridge financing with the proceeds of a new loan or to negotiate to extend
the term or convert the balance of it into preferred or common equity. The
annual interest rate on the remaining $2 million increased to 10% on July 1,
2000. S. R. One has the option to convert all or any portion of the remaining
loan, plus accrued interest thereon, into shares of Series A Convertible
Preferred Stock. This Series A Convertible Preferred Stock would be issued to
S.R. One on the same basis as the Series A Convertible Preferred Stock that
was issued to S. R. One in connection with the $1 million conversion discussed
above.
We issued a bridge warrant to S.R. One, Limited in connection with the
bridge financing. The bridge warrant was exercisable for the number of shares
of common stock equal to $750,000 divided by 85% of the initial public
26
offering price of the common stock. The number of warrants doubled if the loan
was not repaid by June 30, 1999. As part of the conversion of a portion of the
bridge financing into shares of Series A Convertible Preferred Stock, the
bridge warrant was modified such that it will be exercisable in all events for
the number of shares of common stock which is equal to $1,500,000 divided by
$6.375, which is 85% of the initial public offering price per unit. Upon
completion of our initial public offering, the bridge warrant became
exercisable for 235,294 shares of common stock. The bridge warrant has an
exercise price of $6.375. The bridge warrant was exercisable at December 31,
1999 and will expire on June 16, 2004.
In March 2000, we sold 1,184,091 shares of common stock in a private
placement for $8.77 per share. Proceeds, net of approximately $840,000 of
offering costs, amounted to approximately $9.5 million. These shares were
subsequently registered with the Securities and Exchange Commission in April
2000. As part of this transaction, warrants to purchase 101,305 shares of
common stock were issued to the placement agent and contingent warrants to
purchase 154,247 shares of common stock were issued. During the third quarter,
the conditions triggering exercisability of these warrants were met. A total
of 130,092 of these warrants were exercised prior to their expiration on
December 15, 2000. We used the proceeds of this financing to expand our sales
and marketing effort and to fund research and development costs associated
with the Careside Analyzer. In addition, our demand for devices was increasing
at that time. The proceeds were also used to purchase Analyzers and H-2000s
from our manufacturers.
In September 2000, we raised an additional $615,000 of net proceeds in a
private placement of 150 shares of Series B Convertible Preferred Stock and
75,000 warrants to purchase common stock. That financing included the
placement of a warrant to purchase an additional $1,000,000 of Series B
Convertible Preferred Stock which was exercised in November 2000. We used the
proceeds of this financing to expand our sales and marketing effort as well as
remaining research and development costs prior to the relaunch of the Careside
Analyzer. It was also used to build our cartridge inventory. In addition, our
manufacturing costs were increasing at that time and the proceeds were used to
purchase Analyzers and H-2000s from our manufacturers. It also included the
placement of callable two year warrants exercisable for up to 4,000,000 shares
of common stock, subject to conditions, in multiples of twenty shares of
common stock at an exercise price of $14.00 per share. We can call the common
stock warrants at any time. None had been called as of December 31, 2000. The
callable warrants may be exercised within two days of the date of call at a
price equal to 95% of the average trading price over the two days prior to the
date of the call. The Series B Convertible Preferred Stock is convertible into
our common stock at 95% of an average of the ten lowest trading prices during
the thirty days before the date of conversion. Pursuant to Section 713 of the
American Stock Exchange Company Guide, we may at present only issue up to an
aggregate of 1,797,361 shares of common stock upon conversion of our Series B
Convertible Preferred Stock and exercise of the callable two year warrants to
purchase common stock issued in connection with the purchase of our Series B
Convertible Preferred Stock without shareholder approval. At our 2001 annual
meeting, we plan to seek our shareholders' approval of the issuance of the
additional shares of common stock in excess of 1,797,361 shares that may be
issued in connection with the conversion of our Series B Convertible Preferred
Stock and the exercise of the callable two year warrants to purchase common
stock issued in connection with the purchase of our Series B Convertible
Preferred Stock.
In a series of related transactions in November 2000, December 2000 and
January 2001, the company raised $3,942,000 of net proceeds in a private
placement of 1,742,951 shares of common stock and 87,148 warrants to purchase
common stock. We used the proceeds of this financing primarily to expand our
sales and marketing effort and to fund purchases from our manufacturers of
Careside Analyzers and H-2000.
At December 31, 2000, our current liquidity and sales revenue expected
after 2000 were projected to be sufficient to fund our operating expenses and
capital requirements for at least 3 months. This estimate of the period for
which we expect our available sources of cash to be sufficient to meet our
funding needs is a forward looking statement that involves risks and
uncertainties. There can be no assurance that we will be able to meet our
capital requirements for this period as a result of certain factors set forth
under "Risk Factors--Additional Funding May Not Be Available" and elsewhere in
our registration statement on Form S-3 on file with the SEC dated September
27, 2000.
27
We believe that we will need additional funds in connection with generating
our commercial product sales to build sufficient cartridge inventory to meet
the needs that would result from anticipated sales. To continue to fund the
development of additional tests will require research expenditures, however,
but at a level lower than past spending for test development. Sales and
marketing activities will require hiring and training additional staff in
2001. In the event our capital requirements are greater than estimated, we may
need to raise additional capital to fund our research and development
activities, to scale-up manufacturing activities and to expand our sales and
marketing efforts. Prior to the filing of the Annual Report on Form 10-K, in
March 2001 the Company completed the first closing of a private placement
offering approximately $10 million of the Company's securities. The first
closing raised net proceeds of approximately $1.4 million.
Our future liquidity and capital funding requirements will depend on
numerous factors, including the extent to which our products gain market
acceptance, the exercise of outstanding warrants to purchase common stock, the
timing of regulatory actions regarding our products, the costs and timing of
expansions of sales, marketing and manufacturing activities, procurement and
enforcement of patents important to our business, and the impact of
competitors' products. There can be no assurance that such additional capital
will be available on terms acceptable to us, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants. If adequate funds
are not available, we may be forced to curtail our operations significantly or
to obtain funds through entering into collaborative agreements or other
arrangements on unfavorable terms. Our failure to raise capital on acceptable
terms could have a material adverse effect on our business, financial
condition or results of operations and our ability to continue as a going
concern.
Our independent public accountant's report has an explanatory paragraph
raising substantial doubt about our ability to continue as a going concern.
Our financial statements were prepared assuming that we will continue as a
going concern. As discussed in the footnote 1 to our consolidated financial
statements included in this report, we have experienced losses from operations
and accumulated a deficit during our development stage that raises substantial
doubt about our ability to continue as a going concern. Our plans at December
31, 2000 with regard to these matters were described in footnote 1. Our
financial statements did not include any adjustment that might result from the
outcome of this uncertainty.
Income Taxes
As of December 31, 2000, we had approximately $33.7 million and $1,048,000
of net operating loss and research and development credit carryforwards,
respectively, for federal income tax purposes, which begin to expire in 2011.
These amounts reflect different treatment of expenses for tax reporting than
are used for financial reporting. The Tax Reform Act of 1986 contains certain
provisions that may limit our ability to utilize net operating loss and tax
credit carryforwards in any given year. We experienced a change in ownership
interest in excess of 50% as defined under the Tax Reform Act upon the first
closing of our 1997 equity financing and by means of the private placements in
2000. We do not believe that these changes in ownership will have 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
In March 2000, the Financial Accounting Standards Board (FASB) issued
interpretation No. 44 (Fin 44) "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB No. 25." Fin 44 clarifies the
application of APB No. 25 for certain issues including the definition of an
employee, the treatment of the acceleration of stock options ad the accounting
treatment for options assumed in business combinations. FIN 44 became
effective on July 1, 2000, but is applicable for certain transactions dating
back to December 1998. The adoption of FIN 44 did not have a material impact
on the our financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101 "revenue Recognition in Financial
Statements." SAB 101 expresses the view s of the SEC staff in applying
generally accepted accounting principles to certain revenue recognition
issues. We adopted the
28
provisions of SAB No. 101 in the first quarter of 2000. The adoption did not
have material impact on our financial position or the results of our
operations.
ITEM 8. FINANCIAL STATEMENTS
The Company's consolidated financial statements appear at pages F-1 through
F-19, as set forth in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
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............. 54 Chairman of the Board of Directors
and Chief Executive Officer
Thomas H. Grove.................. 51 Chief Technology Officer, Executive
Vice President, Secretary
James R. Koch.................... 46 Chief Financial Officer, Executive
Vice President, Treasurer
Dennis E. Rieger................. 55 Senior Vice President, Information
Technology and Chief Information
Officer
Sandra P. Twyon.................. 62 Vice President Operations
Anthony P. Brenner(1)............ 43 Director
William F. Flatley(2)(3)......... 59 Director
Kenneth N. Kermes(2)............. 65 Director
C. Alan MacDonald(2)(3).......... 67 Director
Diana Mackie(1).................. 53 Director
Key Employees:
Kenneth Asarch................... 43 Vice President--Quality Systems and
Regulatory Affairs
Grant Frazier.................... 39 Vice President--Marketing
George M. Saiz................... 47 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.
30
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 from 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 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 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.
31
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 April 2000, 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.
C. Alan MacDonald, Director. Mr. MacDonald has served as one of our
directors since November 1996. Since July 1999, Mr. MacDonald has served as
President of the Club Management Co., LLC. From October 1997, he served as a
Managing Director of Directorship, Inc., a consulting firm specializing in
corporate governance issues. He served as General Partner of the Marketing
Partnership, Inc., a full service marketing consulting firm, from January 1995
to July 1997 and as an acquisitions consultant with the Noel Group, a venture
capital firm, from July 1994 to December 1994. In addition, he served as
Chairman and Chief Executive Officer of Lincoln Snacks Co., a caramelized
popcorn snack company, from September 1992 to July 1994. Mr. MacDonald holds a
B.S. in Hotel Administration from Cornell University and is a member of the
Cornell Society of Hotelmen and the Dean's Advisory Committee at Cornell Hotel
School. Mr. MacDonald is also a director of Lincoln Snacks Co., Lord Abbett,
J. B. Williams, Fountainhead Water Co. and SAMCO.
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
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.
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
32
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.
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 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 2000, each class
contained three directors. Directors within each class are elected to serve
three-year terms and one-third of the directors sit for election at each
annual meeting of our stockholders. Mr. Smith resigned from the Board at the
end of 2000. In addition, Dr. Grove and Mr. Koch ceased to be voting directors
in early 2001, though they continue to attend all meetings of the Board. The
Board thus contracted to six directors in January 2001. Mr. Flatley and Ms.
Mackie serve in the class whose term expires in 2001. Mr. Stoughton, Mr.
Brenner and Mr. MacDonald serve in the class whose term expires in 2002, and
Mr. Kermes serves in the class whose term expires in 2003. A proposal to be
voted on at our annual shareholders' meeting would extend Mr. Brenner's term
to 2003, making each class contain two directors. 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.
33
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. Our management owns only common
stock of the company. Mark Shoom controls the voting and investment decisions
held by RoyCap, Inc.
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. In addition, we continued in 2000 to utilize the software
development services of Advanced Medical Information Technologies, Inc., also
known as AdMit. AdMit is a company in which our Chief Information Officer,
Dennis Reiger, has an equity interest. We paid AdMit $276,000 in 2000. In
addition, we paid an entity owned in part by Mr. Reiger's brother
approximately $275,000 for programming services during 2000. These services
were at what we believed were below market rates for comparable services.
In June 2000, S.R. One, Limited agreed to extend the maturity date of the
note we owe them to November 2001. The original principal amount of the note
is $2 million. It is the remaining obligation we have from the loan S.R. One
made to us in December 1998, a third of which was converted to Series A
Preferred Stock, which was in turn converted to common equity in July 2000.
S.R. One is the venture capital affiliate of GlaxoSmithKline, which owns more
than 5% of our outstanding common stock.
34
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/A, commencing on page
F-1.
(2) 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
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
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.
35
Exhibit
No. Description
------- -----------
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)
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
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*** Registration Rights Agreement dated as of December 4, 1996 by and
between Careside, Inc. and Spencer Trask Securities Incorporated
10.5*** Registration Rights Agreement dated as of January 31, 1997 by and
among Careside, Inc. and the Investors signatory thereto
10.6*** Stockholders Agreement dated as of December 4, 1996 by and among the
Careside, Inc., SmithKline Beecham Corporation, SmithKline Beecham
Diagnostic Systems Co., Spencer Trask Securities Incorporated,
Exigent Partners, L.P., W. Vickery Stoughton, Thomas H. Grove,
Kenneth B. Asarch, William S. Knight, Donald S. Wong, Ashok K.
Sawhney, Philip B. Smith and each Investor signatory thereto
10.7**** Registration Rights Agreement dated as of December 7, 1999 by and
between Careside, Inc. and Yves LeBihan and Jean-Yves LeBihan.
10.8+ Registration Rights Agreement dated as of September 13, 2000, by and
between RoyCap, Inc., Brighton Capital, Inc. and Careside, Inc.
10.9*** Registration Rights Agreement dated as of March 6, 1998 by and among
Careside, Inc. and the Investors signatory thereto
10.10*** Registration Rights Agreement dated as of March 6, 1998 by and
between Careside, Inc. and Spencer Trask Securities Incorporated
10.11*** Registration Rights Agreement dated as of December 17, 1998 by and
between Careside, Inc. and S.R. One, Limited
10.12*** 1996 Key Executive Stock Option Plan, as amended and restated
10.13*** 1998 Incentive and Non-Qualified Stock Option Plan
10.14*** 1998 Director Stock Option Plan
10.15*** 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.
10.16*** Agreement dated as of August 31, 1996, by and between Fuji Photo Film
Co., Ltd. and Careside, Inc.
10.18*** Product Development and Supply Agreement dated as of July 18, 1997,
by and between Careside, Inc. and UMM Electronics, Inc.
36
Exhibit
No. Description
------- -----------
10.20*** Agreement No. CPO32284 Cost Type executed December 5 and 17, 1996 by
and between Battelle Memorial Institute and Careside, Inc.
10.21*** Joint Research & Development Agreement dated as of October 28, 1996
by and between Careside, Inc. and International Technidyne
Corporation
10.22*** Employment Agreement dated as of March 3, 1997 between Careside, Inc.
and W. Vickery Stoughton
10.23*** Employment Agreement dated as of March 3, 1997 between Careside, Inc.
and Thomas H. Grove
10.24*** Employment Agreement dated as of July 30, 1998 between Careside, Inc.
and James R. Koch
10.37** Securities Conversion Agreement dated as of June 14, 1999 between
S.R. One, Limited and Careside, Inc.
10.38** Form of Amended and Restated Registration Rights Agreement dated as
of June 21, 1999 between S.R. One, Limited and Careside, Inc.
24.1 Power of Attorney (included on signature the signature page hereof)
--------
* 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.
*** 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.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on December 7, 1999 reporting the Company's
acquisition of Texas International Laboratories, Inc. on December 7, 1999. An
amendment to that 8-K was filed on February 22, 2000, reporting Item 7
Financial Information.
A report on Form 8-K was filed on January 28, 2000 reporting that the
Company issued a press release announcing a proposed equity private placement.
A report on Form 8-K was filed on April 20, 2000 reporting that the Company
issued press releases announcing that it had completed the equity private
placement previously discussed on January 28, 2000.
37
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 27th day of July, 2001.
CARESIDE, INC.
/s/ W. Vickery Stoughton
By: _________________________________
W. Vickery Stoughton
Chairman of the Board of
Directors and Chief Executive
Officer
38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Careside, Inc.:
We have audited the accompanying consolidated balance sheets of Careside,
Inc. (a Delaware corporation) as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. 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, 1999 and 2000, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, 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, the Company has suffered
recurring losses from operations and has accumulated a significant deficit
that 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 23, 2001
F-1
CARESIDE, INC.
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1999 AND 2000
1999 2000
------------ ------------
ASSETS
------
Current Assets:
Cash and cash equivalents........................ $ 4,905,440 $ 1,789,259
Accounts receivable, net of allowance of $0 in
1999 and $53,670 in 2000........................ 78,046 104,132
Inventory........................................ 548,623 2,698,351
Prepaid expenses and other....................... 102,615 173,520
------------ ------------
Total current assets........................... 5,634,724 4,765,262
------------ ------------
Property and Equipment, net of accumulated
depreciation of $1,846,275 in 1999 and $4,212,593
in 2000........................................... 5,939,186 5,643,028
Deferred Offering Costs............................ 2,318 --
Deposits and Other................................. 15,000 23,974
Goodwill, net of accumulated amortization of
$36,577 in 1999, and $566,276 in 2000............. 2,798,170 2,231,221
------------ ------------
$ 14,389,398 $ 12,663,485
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilties:
Current portion of long-term debt................ $ 2,316,192 $ 2,519,946
Current portion of obligation under capital
lease........................................... 11,006 12,650
Accounts payable................................. 844,904 1,456,652
Accrued expenses................................. 886,260 420,504
Accrued interest................................. 156,493 333,918
------------ ------------
Total current liabilties....................... 4,214,855 4,743,670
------------ ------------
Long-Term Debt, net of current portion............. 1,059,876 1,192,418
------------ ------------
Obligation Under Capital Lease, net of current
portion........................................... 35,835 23,185
------------ ------------
Manditorily Redeemable Series B Convertible
Preferred Stock 0 and 290 shares issued and
outstanding at December 31, 1999 and 2000,
respectively...................................... -- 1,054,030
Stockholders' Equity:
Preferred stock, $.01 par value: 5,000,000 shares
authorized--Series A Convertible Preferred
162,914 and 0 shares issued and outstanding at
December 31, 1999 and 2000, respectively........ 1,629 --
Common stock, $.01 par value:
50,000,000 shares authorized--7,609,581 and
10,590,191 shares issued and outstanding at
December 31, 1999 and 2000, respectively........ 76,095 105,901
Additional paid-in capital....................... 37,496,984 50,743,642
Accumulated Deficit.............................. (28,495,876) (45,199,361)
------------ ------------
Total stockholders' equity..................... 9,078,832 5,650,182
------------ ------------
$ 14,389,398 $ 12,663,485
============ ============
The accompanying notes are an integral part of these consolidated statements.
F-2
CARESIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
---------------------------------------
1998 1999 2000
----------- ------------ ------------
Net Sales............................ $ -- $ 60,956 $ 741,039
Cost of Sales........................ -- 30,566 1,001,097
----------- ------------ ------------
Gross Profit (Loss).............. -- 30,390 (260,058)
Operating Expenses:
Research and development--
products.......................... 8,297,974 8,252,081 9,073,391
Research and development--
software.......................... -- 313,400 898,256
Selling and marketing.............. 249,000 1,204,548 3,657,072
General and administrative......... 601,129 1,134,900 2,124,264
Goodwill amortization.............. -- 36,577 566,949
----------- ------------ ------------
Operating Loss................... (9,148,103) (10,911,116) (16,579,990)
Other income(expense):
Interest Income.................... 234,089 291,008 371,781
Interest Expense................... (22,275) (970,525) (495,276)
----------- ------------ ------------
Net Loss......................... (8,936,289) (11,590,633) (16,703,485)
Preferred stock dividends on Series A
& B................................. -- (55,201) (68,684)
Accreted dividend on Series B........ -- -- (83,028)
Beneficial conversion feature on
Series B............................ -- -- (84,044)
----------- ------------ ------------
Net loss available to common
stockholders........................ $(8,936,289) $(11,645,834) $(16,939,241)
----------- ------------ ------------
Basic and Diluted Net Loss per Common
Share............................... $ (1.93) $ (1.88) $ (1.92)
Shares used in Computing Basic and
Diluted Net Loss per Common Share... 4,629,916 6,210,496 8,800,171
----------- ------------ ------------
The accompanying notes are an integral part of these consolidated statements.
F-3
CARESIDE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Preferred Stock Additional Total
------------------- ----------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- -------- -------- ------- ----------- ------------ -------------
Balance, December 31,
1997................... 3,365,400 $ 33,654 -- $ -- $10,372,907 $ (7,968,954) $ 2,437,607
Shares issued in
connection with private
placement, net......... 1,701,225 17,012 -- -- 10,180,959 -- 10,197,971
Shares issued in
connection with
exercise of stock
options................ 17,715 177 -- -- 119,565 -- 119,742
Issuance of warrants in
conjunction with bridge
financing.............. -- -- -- -- 330,114 -- 330,114
Net loss................ -- -- -- -- -- (8,936,289) (8,936,289)
---------- -------- -------- ------- ----------- ------------ ------------
Balance, December 31,
1998................... 5,084,340 50,843 -- -- 21,003,545 (16,905,243) 4,149,145
Shares issued in
connection with initial
public offering, net... 2,000,000 20,000 -- -- 12,340,788 -- 12,360,788
Issuance of Series A
Preferred stock in
exchange for bridge
debt................... -- -- 162,914 1,629 1,036,946 -- 1,038,575
Issuance of warrant with
bridge conversion...... -- -- -- -- 289,801 -- 289,801
Accrued Series A
Preferred dividend..... -- -- -- -- (55,201) -- (55,201)
Shares issued in
connection with
acquisition of Texas
International
Laboratories, Inc. .... 521,739 5,217 -- -- 2,864,348 -- 2,869,565
Shares issued in
connection with ESPP... 3,502 35 -- -- 16,757 -- 16,792
Net loss................ -- -- -- -- -- (11,590,633) (11,590,633)
---------- -------- -------- ------- ----------- ------------ ------------
Balance, December 31,
1999................... 7,609,581 76,095 162,914 1,629 37,496,984 (28,495,876) 9,078,832
Shares issued in
connection with private
placements, net........ 2,510,570 25,105 -- -- 12,603,565 -- 12,628,670
Shares issued in
connection with
exercise of stock
options................ 1,154 12 -- -- 48 -- 60
Accrued Series A
Preferred dividend..... -- -- -- -- (51,787) -- (51,787)
Accrued Series B
Preferred dividend..... -- -- -- -- (16,897) -- (16,897)
Accreted Series B
Preferred dividend..... -- -- -- -- (83,028) -- (83,028)
Shares issued in
connection with ESPP... 30,454 305 -- -- 102,963 -- 103,268
Conversion of Series A
Preferred and accrued
and unpaid dividends... 179,696 1,797 (162,914) (1,629) 106,820 -- 106,988
Issuance of warrants in
connection with Series
B Preferred Stock...... -- -- -- -- 530,986 -- 530,986
Shares issued in
connection with the
conversion of the
Series B Preferred..... 128,259 1,283 -- -- 53,992 -- 55,275
Shares issued in
connection with
cashless exercise of
stock warrant.......... 385 4 -- -- (4) -- --
Shares issued in
connection with
exercise of contingent
stock warrants......... 130,092 1,300 -- -- -- -- 1,300
Net loss................ -- -- -- -- -- (16,703,485) (16,703,485)
---------- -------- -------- ------- ----------- ------------ ------------
Balance, December 31,
2000................... 10,590,191 $105,901 -- $ -- $50,743,642 $(45,199,361) $ 5,650,182
========== ======== ======== ======= =========== ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-4
CARESIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
---------------------------------------
1998 1999 2000
----------- ------------ ------------
Operating Activities:
Net loss............................ $(8,936,289) $(11,590,633) $(16,703,485)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization..... 367,231 1,357,488 2,933,268
Amortization of debt discount..... 20,960 309,154 --
Noncash interest expense.......... -- 289,801 --
Changes in operating assets and
liabilties:
Accounts receivable............... -- (73,446) (26,086)
Inventory......................... -- (472,123) (2,149,728)
Prepaid expenses and other........ (25,118) (20,442) (70,905)
Deposits and other................ 80,067 2,700 (8,974)
Accounts payable.................. 876,904 (72,942) 611,748
Accrued expenses.................. (49,192) 670,621 (425,220)
Accrued interest.................. -- 195,068 177,425
----------- ------------ ------------
Net cash used in operating
activities..................... (7,665,437) (9,404,754) (15,661,957)
----------- ------------ ------------
Investing Activities:
Purchases of property and
equipment.......................... (2,005,463) (3,820,634) (2,070,160)
Cash acquired in purchase of Texas
International Laboratories, Inc.... -- 118 --
----------- ------------ ------------
Net cash used in investing
activities..................... (2,005,463) (3,820,516) (2,070,160)
----------- ------------ ------------
Financing Activities:
Proceeds from borrowings under long-
term debt.......................... 2,541,084 2,058,831 795,456
Payments on long-term debt.......... -- (223,847) (459,160)
Payments on capital lease
obligation......................... -- (6,139) (11,006)
Deferred offering costs............. (498,443) (2,318) 2,318
Net Proceeds from the issuance of
preferred and common stock......... 10,317,713 12,377,580 14,288,328
----------- ------------ ------------
Net cash provided by financing
activities..................... 12,360,354 14,204,107 14,615,936
Net Increase (Decrease) in Cash and
Cash Equivalents..................... 2,689,454 978,837 (3,116,181)
Cash and Cash Equivalents, beginning
of period............................ 1,237,149 3,926,603 4,905,440
----------- ------------ ------------
Cash and Cash Equivalents, end of
period............................... $ 3,926,603 $ 4,905,440 $ 1,789,259
=========== ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-5
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Careside
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 Instrument
Laboratories, Inc. ("TIL") and merged TIL into a newly formed, wholly-owned
subsidiary, Careside Hematology. TIL manufactured hematology products used
primarily in veterinary applications.
Risks and Liquidity
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, 2000, the Company incurred a net loss of
$16,703,485, has used cash for operating activities of $15,661,957 and has an
accumulated a deficit of $45,199,361. 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. In addition, the
ability of Careside to commercialize its products will depend on, among other
things, the relative cost to the customer of Careside's products compared to
alternative products, its ability to obtain necessary regulatory approvals and
to manufacture the products in accordance with Good Manufacturing Practices,
and its ability to market and distribute its products. The Company's failure
to raise capital on acceptable terms could have a material adverse effect on
its business, financial condition or results of operations. There can be no
assurance that Careside's future product enhancements will receive regulatory
clearance, that the Company will be able to obtain additional financing, be
profitable in the marketplace, or will be able to repay its current debt
obligations.
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
F-6
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Inventory
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:
December 31,
-------------------
1999 2000
-------- ----------
Raw materials........................................... $369,937 $1,163,593
Work in process......................................... 48,620 126,111
Finished goods.......................................... 130,066 2,036,265
Reserve for excess and obsolescence..................... -- (627,618)
-------- ----------
$548,623 $2,698,351
======== ==========
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 office equipment. Leasehold improvements
generally are amortized over the remaining life of the lease.
Goodwill
Goodwill represents the excess of the purchase price and related costs over
the value assigned to the tangible net assets of TIL. Goodwill is being
amortized on a straight line basis over 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. In management's
opinion, no impairment exists at December 31, 2000.
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. The
Company has not recorded an impairment loss in any period presented.
F-7
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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's distributors do not have rights of return or cancellation and
price protection provisions. Revenue from distributors that does not meet all
of the requirements of SAB 101 are deferred and recognized upon the sale 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.
Warranty
The Company outsources the manufacture of its Analyzer to a third party who
warrantees the Analyzers for 30 months from the date of shipment to the
Company. Careside offers a 24 month warranty to the customer. Procedures have
been put in place to assure no system will be shipped with less than a
remaining 24 month warranty. As such, no provision for warranty has been
recorded for the years ended December 31, 1998, 1999 and 2000.
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 Statement of Financial Accounting Standards
(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, 1999 or December 31, 2000.
F-8
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company follows Statement of Financial Accounting Standards ("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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Recently Issued Pronouncements
In June 1999, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company does not believe that
implementation of SFAS No. 133 and SFAS No. 137 will have a material impact.
3. Concentration of Risk
In 2000, the Company had sales to three customers that were individually
greater than 10 percent of net sales. Combined, these three customers amounted
to 38 percent of net sales and 25 percent of accounts receivable at December
31, 2000. The Company had sales outside of North America of $0, $48,355 and
$459,216 for the years ended December 31, 1998, 1999 and 2000, respectively.
F-9
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
December 31,
------------------------
1999 2000
----------- -----------
Laboratory equipment.............................. $ 3,865,507 $ 4,607,144
Manufacturing equipment........................... 3,233,301 4,357,105
Computer and office equipment..................... 315,414 513,258
Leasehold improvements............................ 371,239 378,114
----------- -----------
7,785,461 9,855,621
Less--Accumulated depreciation and amortization... (1,846,275) (4,212,593)
----------- -----------
$ 5,939,186 $ 5,643,028
=========== ===========
At December 31, 2000, Careside had analyzers with a cost of $1,056,000 and
a net book value of $425,400 included in laboratory equipment and computer and
office equipment. 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,
1998, 1999 and 2000, was $367,231, $1,357,488 and $2,933,268, 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, 2000, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $33,634,347. In
addition, the Company has federal research and development credit
carryforwards of approximately $1,047,937. The net operating loss
carryforwards expire beginning in 2011 through 2020. The research and
development credit carryforward expire 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 and 2000
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-10
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the deferred income tax assets are as follows:
December 31,
--------------------------
1999 2000
------------ ------------
Net operating loss carryforwards................ $ 7,612,306 $ 14,408,954
Research and development credit carryforwards... 1,115,120 1,403,593
Capitalized research and development............ 2,152,254 1,840,084
Start-up costs.................................. 1,570,460 1,358,515
Accruals........................................ 18,569 124,389
Depreciation and amortization................... 783,964 1,219,365
Deferred rent................................... 31,365 53,619
Inventory reserve............................... -- 304,389
State tax benefit............................... (319,686) (343,803)
Valuation allowance............................. (12,964,352) (20,369,105)
------------ ------------
$ -- $ --
============ ============
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 March 1997, Careside completed a private placement (the "1997 Private
Placement") of 1,923,090 shares of its common stock at $5.20 per share. The
1997 Private Placement raised approximately $8.7 million, net of the placement
agent's commission and offering costs. In connection with the 1997 Private
Placement, the placement agent and its affiliates received warrants to
purchase 384,615 shares of Careside's Common stock at $5.20 per share. The
estimated fair value of these warrants, computed using the Black-Scholes
option pricing model, was $763,527. This amount was offset against the
proceeds and credited to additional paid-in capital. These warrants are
currently exercisable and expire seven years from the date of issuance.
In June 1998, Careside completed a private placement (the "1998 Private
Placement") of 1,701,225 shares of its common stock at $6.76 per share, which
generated net proceeds of approximately $10.2 million. In connection with the
1998 Private Placement, the placement agent and its affiliates received
warrants to purchase 340,237 shares of Careside's common stock at $6.76 per
share. The estimated fair value of these warrants, computed using the Black-
Scholes option pricing model, was $827,178. This amount was offset against the
proceeds and credited to additional paid-in capital. These warrants are
currently exercisable and expire seven years from the date of issuance. In
connection with providing financial consulting services for the 1998 Private
Placement, Careside granted an option to purchase 1,154 shares of common stock
at $.05 per share to an entity owned by a director of Careside. The estimated
fair value of these warrants using the Black-Scholes option pricing model, was
$7,762 and was offset against the proceeds and credited to additional paid-in
capital.
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 share and warrant 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 $9,544,488,
net of $840,000 of cash offering costs. The $8.77 per share was at
F-11
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and expired
on December 15, 2000. 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. The estimated fair value of the 101,305 and the 154,246
warrants, computed using the Black-Scholes option pricing model were $971,804
and $1,996,697 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 $3,084,203, net of
$313,624 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 $2.56. The estimated fair value of these warrants,
computed using the Black-Scholes option pricing model was $101,638. This
amount was offset against the proceeds and credited to additional paid-in
capital.
7. Preferred Stock
In June 1999, the Company exchanged $1,038,575 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 162,914
and its accrued, unpaid dividends in the amount of 16,782 shares were
converted into a unit consisting of 179,696 shares of common stock and a
warrant to purchased 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 $615,030, net of expenses of
$134,970. 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.
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 has a stated value equal to $5,000
per share and is entitled to an annual five percent (5%) dividend payable, as
declared by the board of directors, payable in cash, additional shares of
Series B Preferred, or any combination of the two. Accrued and unpaid
dividends were $66,451 at December 31, 2000. The Series B Preferred has a
liquidation preference over the Common Stock, but ranks junior to the Series A
Convertible Preferred Stock with respect to rights on liquidation, dissolution
or winding
F-12
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
up. The liquidation preference is equal to the stated value of the Series B
Preferred Stock, plus all accrued and unpaid dividends. Each share of Series B
Preferred Stock has one vote on all matters to be voted on by the holders of
the Common Stock and will vote with the holders of the Common Stock as one
voting group. The Series B Preferred Stock has the right to vote as a separate
class pursuant to applicable law and on any action limiting the preferences or
rights of the Series B Preferred Stock, reclassifying the Common Stock or any
other capital stock ranking junior to the Series B Preferred Stock into any
class of security ranking senior to or the same as the Series B Preferred
Stock, or increasing the authorized number of shares of Series B Preferred
Stock.
Each share of Series B Preferred Stock is convertible at the option of the
holder at any time before September 13, 2002 into a number of shares of Common
Stock equal to the stated value of $5,000 (plus all accrued and unpaid
dividends thereon) divided by the lower of (a) the average of the lowest ten
closing sales prices within the last thirty days prior to the date the holder
delivers a notice exercising his or her right to convert and (b) $5.48. In
October and November 2000, 60 shares of Series B Preferred Stock, plus accrued
and unpaid dividends totaling $2,233 were converted to 128,259 shares of
common stock. The holder may only convert a number of shares of Series B
Preferred Stock such that the aggregate number of shares of Common Stock
issued to the holder after such conversion of the Series B Preferred Stock and
as a result of all prior conversions of Series B Preferred Stock, do not, when
aggregated with the number of shares of Common Stock previously issued, or
then issuable pursuant to an exercise notice received, upon exercise of the
warrant to purchase up to 4,000,000 shares of common stock discussed above,
exceed 1,797,631 shares of Common Stock (which number will be adjusted for
stock splits and similar events) in violation of Section 713 of the Listing
Standards of the American Stock Exchange, unless and until the shareholders of
Careside have approved such aggregate issuance of Common Shares in excess of
1,797,631.
The Company has the right to redeem the Series B Preferred Stock, pro rata
among all the holders of the Series B Preferred Stock, at any time upon notice
to the shareholders for a per share amount equal to $5,750 plus all accrued
and unpaid dividends per share redeemed. The shareholders must be given a
minimum of thirty days notice before the date of redemption. During that
period, the holders may elect to convert such holder's Series B Preferred
stock into Common Shares equal to the Series B Stated Value of $5,000 plus all
accrued and unpaid dividends, divided by the lower of (a) the average of the
lowest ten closing sales prices within the last thirty days prior to the date
of notice and (b) $5.475.
At September 13, 2002, any shares of Series B Preferred Stock not converted
to common stock must be purchased by the Company at stated value, plus any
accrued and unpaid dividends. Due to this mandatory redemption feature, the
Series B Preferred Stock is classified as mezzanine financing.
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 value 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 was $12,626,
$495,601, $9,327 and $13,362 respectively. These amounts were offset against
the net proceeds of sale and resulted in an allocation of the remaining net
proceeds of $84,044 to the Series B Preferred. Since the Series B Preferred is
mandatorily redeemable at the option of the holder, the carrying value of
shares not converted to common stock must be accreted 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 accreted dividend
recorded through December 31, 2000 was $83,028.
F-13
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Purchase of Texas Instrument 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 $2,869,565,
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 $2,834,747. Goodwill will be
amortized over a five-year period. Amortization expense was $36,577 in 1999
and $566,949 in 2000.
The following unaudited proforma results of operations for the years ended
December 31, 1998 and 1999 have been prepared as if the acquisition of TIL
occurred on January 1, 1998:
Years Ended December 31,
-------------------------
1998 1999
----------- ------------
(unaudited)
Revenue........................................... $ 285,856 $ 321,823
Net loss.......................................... (9,532,870) (12,103,215)
Net loss available to common stockholders......... (9,532,870) (12,158,416)
Basic and diluted loss per common share........... (1.85) (1.81)
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 $38,575 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 has been incurred
and expensed in 2000. 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 of $76,000 to AdMIT in 2000 for additional research and
development expenditures. In addition during 2000, payments of $275,000 for
software programming were made to a consulting firm where the CIO's brother is
one of the partners. These payments totaling $275,000 were for contract
programming and were invoiced at rates which management believes are below
market cost from similar competitive service providers.
F-14
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Debt
Long-term debt consists of the following:
December 31,
------------------------
1999 2000
----------- -----------
Note payable, interest at 10%, due on November 30,
2001................................................ $ 2,000,000 $ 2,000,000
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........................... 854,286 638,945
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................................... 521,782 421,929
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..................................... -- 651,490
----------- -----------
3,376,068 3,712,364
Less--Current Portion................................ (2,316,192) (2,519,946)
----------- -----------
$ 1,059,876 $ 1,192,418
=========== ===========
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, 2000, approximately $2.4 million of the facility had
been drawn under this facility to finance equipment purchases. Careside
recorded interest expense of $0, $155,369 and $283,579 in 1998, 1999 and 2000,
respectively related to these borrowings.
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 June 30, 2001.
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 $330,114 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 $172,138 and will be 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-15
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future maturities of debt at December 31, 2000 are as follows:
2001............................................................ $2,519,946
2002............................................................ 709,306
2003............................................................ 384,973
2004............................................................ 98,139
----------
$3,712,364
==========
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 1,201,923 shares of common stock to
directors, officers, consultants and employees of the Company. At December 31,
2000 603,260 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 1998, 1999, and 2000:
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, 1997............... 317,163 $5.49 23,051 $5.28
======= =====
Granted............... 111,950 6.76 $1.83
=====
Exercised............. (17,715) 6.76
Cancelled............. (673) 5.20
------- -----
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
======= ===== ======= =====
The table below summarizes information about options outstanding at
December 31, 2000:
Weighted Weighted
Number Average Average Number
Outstanding at Remaining Exercise Price Exercisable at
Range of December 31, Contractual of Options December 31,
Exercise Prices 2000 Life Outstanding 2000
--------------- -------------- ----------- -------------- --------------
$5.00-6.00......... 341,252 6.7 years $5.42 335,511
$6.69-10.00........ 238,542 7.2 years $7.79 144,346
------- --------- ----- -------
$5.00-10.00........ 579,794 6.9 years $6.40 479,857
======= ========= ===== =======
F-16
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. In 1998 Careside issued
1,154 options to a consultant. Compensation expense recorded for these options
was immaterial.
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:
1998 1999 2000
--------- ---------- ----------
Weighted average risk-free interest
rate.................................. 5.56% 5.92% 6.50%
Weighted average expected life......... 7.0 years 4.17 years 4.00 years
Weighted average volatility............ 0% 60% 72.5%
Dividend yield......................... 0% 0% 0%
Had the compensation cost of these options been recorded for the years
ended December 31, 1998, 1999 and 2000, the Company's net loss would have been
as follows:
1998 1999 2000
----------- ------------ ------------
Net Loss:
As reported.......................... (8,936,289) (11,645,834) (16,939,241)
Pro forma............................ (9,279,356) (12,055,116) (17,388,486)
Loss per share:
As reported.......................... $ (1.93) $ (1.88) $ (1.92)
Pro forma............................ $ (2.00) $ (1.94) $ (1.98)
Stock Warrants
The following table summarizes outstanding warrants at December 31, 2000
issued in connection with private equity financings and the initial public
offering (the Offering):
Outstanding Exercise Issuance Expiration
Type of 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................. 179,626 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................. 4,000,000 14.00 September 2000 September 2002
Common Stock................. 66,324 2.56 November and November and
December 2000 December 2004
---------
5,581,476
=========
F-17
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The warrants to purchase 200,000 units were granted to the underwriters of
the 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 Offering. The warrants are exercisable for a four year
period beginning on the first anniversary of the Offering. (See Notes 6 and 7
for discussion of warrants issued in 2000.)
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:
1998 1999 2000
----- -------- --------
Cash paid for interest.............................. $ -- $157,653 $317,851
Cash paid for income taxes.......................... -- -- --
Non-cash Investing and Financing Activities:
1998 1999 2000
----- ---------- --------
Conversion of bridge financing to Series A
Preferred Stock................................. $ -- $1,038,575 $ --
Acquisition of equipment under capital lease..... -- 52,980 --
Accrued dividends on Series A Preferred stock.... -- 55,201 51,787
Accrued dividends on Series B Preferred stock.... -- -- 16,897
Accreted dividends on Series B Preferred stock... -- -- 83,028
Beneficial conversion feature on Series B
Preferred stock................................. -- -- 84,044
Conversion of Series A Preferred stock and unpaid
dividends....................................... -- -- 106,988
Conversion of Series B Preferred stock........... -- -- 55,275
Cashless exercise of common stock warrant........ -- -- 4
In connection with the Company's initial public offering, $498,433 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:
Additional paid-in capital..................................... $2,869,565
Goodwill....................................................... 2,834,747
Net assets acquired............................................ 34,818
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 1998, 1999 and 2000 was $156,756, $174,497 and $323,168,
respectively.
Included in property and equipment is approximately $52,980 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
and 2000 related to equipment under capital leases was $4,415 and $21,287,
respectively.
F-18
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, the future minimum annual rental payments under lease
agreements are as follows:
Capital Operating
Leases Leases Total
-------- ---------- ----------
December 31:
2001......................................... 16,875 339,259 356,134
2002......................................... 16,875 363,615 380,490
2003......................................... 9,020 373,229 382,249
2004......................................... -- 386,107 386,107
2005......................................... -- 400,008 400,008
Thereafter................................... -- 326,983 326,983
-------- ---------- ----------
42,770 $2,189,201 $2,231,971
========== ==========
Less--Amount representing interest at
approximately 14 percent.................... (6,935)
--------
Present value of minimum lease payments...... 35,835
--------
Less--Current portion........................ (12,650)
--------
$ 23,185
========
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. 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, Inc. has an agreement with
Ysebaert, Inc., the manufacturer of the H-2000. The Company has minimum
purchase requirements, as defined in the agreements, with two of its
suppliers. Purchase commitment levels were not met for the year ended December
31, 2000. These suppliers have agreed not to enforce the fiscal 2000
requirements.
The Company purchases its dry film based chemistry reagents solely from
Fuji Photo Film Co., Ltd. In addition, UMM Electronics, Inc. is the sole
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.
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.
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, $34,657,
$47,195 and $72,913 for the years ended 1998, 1999 and 2000, respectively.
F-19
CARESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $16,792. During 2000, 30,454 shares of the
Company's stock were sold under the ESPP for $103,268 and at December 31,
2000, 116,044 shares remained available for sale.
16. Subsequent Events
In January 2001, the Company granted 401,500 options to its employees under
the 1996 and 1998 stock option Plans with a weighted average exercise price of
$2.69 per share. There were an additional 37,500 options granted to non-
employee directors under the 1998 Director Stock Option Plan with a weighted
average exercise price of $2.69 per share.
In January 2001, the Company sold 416,472 shares of common stock in a
private placement for $2.25 per share (at 90 percent of the closing price on
that date) resulting in proceeds of $857,411, net of $79,650 of offering
costs. In connection with the sale, the Company issued a warrant exercisable
into 20,824 shares of the Company's common stock at an exercise price of $2.25
per share. The estimated fair value of the warrant using the Black-Scholes
option pricing model was $31,220 and was offset against the proceeds of the
sale.
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