FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from ____________ to _______________
COMMISSION FILE NUMBER: 0-30859
CARESCIENCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2703715
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3600 MARKET STREET
PHILADELPHIA, PA 19104
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(215) 387-9401
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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 [ ]
The number of shares of the registrant's Common Stock outstanding, as of
May 6, 2002 was 13,300,391.
CARESCIENCE, INC.
FORM 10-Q
March 31, 2002
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--December 31, 2001 and March 31, 2002
(unaudited).....................................................................................2
Consolidated Statements of Operations--Three Months Ended March 31, 2001
and March 31, 2002 (unaudited)..................................................................3
Consolidated Statements of Cash Flows--Three Months Ended March 31, 2001 and
March 31, 2002 (unaudited).....................................................................4
Notes to Consolidated Financial Statements......................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................13
Item 2. Changes in Securities and Use of Proceeds..............................................13
Item 6. Exhibits and Reports on Form 8-K.......................................................13
Signatures.....................................................................................14
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CARESCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
2001 2002
------------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 8,860,436 $ 10,528,083
Short-term investments ................................... 12,000,950 9,975,278
Interest receivable ...................................... 83,821 30,224
Accounts receivable, net of allowance for doubtful
accounts of $68,354 and $71,354, respectively ........ 1,207,094 1,187,158
Prepaid expenses and other ............................... 479,696 309,006
------------ ------------
Total current assets ........................................ 22,631,997 22,029,749
------------ ------------
Property and equipment:
Computer equipment ....................................... 4,707,706 4,780,955
Office equipment ......................................... 471,754 471,754
Leasehold improvements ................................... 169,956 167,672
Furniture and fixtures ................................... 508,598 513,961
------------ ------------
5,858,014 5,934,342
Less--Accumulated depreciation and amortization .......... (3,345,267) (3,663,500)
------------ ------------
Net property and equipment ............................. 2,512,747 2,270,842
------------ ------------
Other assets ............................................... 155,639 151,493
------------ ------------
Goodwill, net .............................................. 1,245,687 1,245,687
------------ ------------
Total assets ......................................... $ 26,546,070 $ 25,697,771
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations and
note payable ........................................... $ 207,747 $ 248,697
Accounts payable ......................................... 529,809 239,576
Accrued expenses ......................................... 1,196,176 1,370,094
Deferred revenues ........................................ 3,535,484 3,754,121
------------ ------------
Total current liabilities ................................... 5,469,216 5,612,488
------------ ------------
Capital lease obligations ................................... 200,069 166,057
------------ ------------
Note payable ................................................ -- 263,205
------------ ------------
Shareholders' equity:
Preferred stock, no par value, 20,000,000 shares
authorized, no shares issued or outstanding .............. -- --
Common stock, no par value, 100,000,000 shares
authorized, 14,720,016 shares issued and
13,280,016 shares outstanding, and;
14,740,391 shares issued and 13,300,391
shares outstanding, respectively ....................... 60,256,012 60,282,656
Additional paid-in capital ............................... 5,008,718 4,859,859
Deferred compensation .................................... (2,202,250) (1,787,964)
Accumulated other comprehensive income ................... 57,852 42,611
Accumulated deficit ...................................... (40,923,547) (42,421,141)
Subscriptions receivable ................................. (420,000) (420,000)
Treasury stock, at cost, 1,440,000 shares ................ (900,000) (900,000)
------------ ------------
Total shareholders' equity ............................. 20,876,785 19,656,021
------------ ------------
Total liabilities and shareholders' equity .......... $ 26,546,070 $ 25,697,771
============ ============
The accompanying notes are an integral part of these statements
Page 3
CARESCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
2001 2002
----------- ------------
(UNAUDITED)
Revenues ............................ $ 2,515,611 $ 3,262,928
Cost of revenues .................... 1,535,777 1,706,597
------------ ------------
Gross profit ...................... 979,834 1,556,331
------------ ------------
Operating expenses:
Research and development .......... 1,308,014 725,746
Selling, general and administrative 3,453,857 2,426,074
------------ ------------
Total operating expenses ........ 4,761,871 3,151,820
------------ ------------
Operating loss .................. (3,782,037) (1,595,489)
Interest income ..................... (383,608) (108,736)
Interest expense .................... 21,547 10,841
------------ ------------
Net loss ............................ $ (3,419,976) $ (1,497,594)
============ ============
Net loss per common share:
Basic and diluted ................. $ (0.26) $ (0.11)
============ ============
Weighted average shares outstanding:
Basic and diluted ................. 12,985,952 13,287,034
============ ============
The accompanying notes are an integral part of these statements.
Page 4
CARESCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
2001 2002
------------ -------------
(UNAUDITED)
Cash flows from operating activities:
Net loss ......................................... $ (3,419,976) $ (1,497,594)
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation and amortization ................ 325,468 318,233
Loss on disposal ............................. 158,000 --
Provision for bad debts ...................... 5,475 3,000
Stock-based compensation ..................... 316,020 265,427
Changes in assets and liabilities--
(Increase) decrease in--
Interest receivable ...................... 118,605 53,597
Accounts receivable ...................... (107,121) 16,936
Prepaid expenses and other ............... (35,748) 170,690
Other assets ............................. -- 4,146
Increase (decrease) in--
Accounts payable and accrued expenses .... (870,453) (116,315)
Deferred revenues ........................ 890,957 218,637
------------ ------------
Net cash used in operating activities .... (2,618,773) (563,243)
------------ ------------
Cash flows from investing activities:
Purchases of short-term investments ............ -- (4,955,154)
Proceeds from the redemption of short-term
investments .................................. 3,000,115 6,965,585
Cash paid for acquisition ....................... (882,367) --
Purchases of property and equipment ............. (75,247) (76,327)
------------ ------------
Net cash provided investing activities ... 2,042,501 1,934,104
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise common stock options . -- 26,644
Payments on capital lease obligations ........... (67,244) (54,858)
Proceeds from notes payable ..................... -- 325,000
------------ ------------
Net cash (used in) provided by
financing activities ................... (67,244) 296,786
------------ ------------
Net (decrease) increase in cash and cash
equivalents ..................................... (643,516) 1,667,647
Cash and cash equivalents, beginning of period ..... 26,702,096 8,860,436
------------ ------------
Cash and cash equivalents, end of period ........... $ 26,058,580 $ 10,528,083
============ ============
The accompanying notes are an integral part of these statements.
Page 5
CARESCIENCE, INC. AND SUDSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
CareScience, Inc. (formerly Care Management Science Corporation) (the
"Company") provides Internet-based tools designed to improve the quality and
efficiency of health care. The Company uses its proprietary clinical algorithms
and data collection and storage technologies to perform complex clinical
analyses. The Company's customers use its services to identify clinical
inefficiencies and medical errors and monitor the results of implemented
solutions. Additionally, the Company facilitates the real-time exchange of
clinical information over the Internet among local health care constituents.
The consolidated balance sheet as of March 31, 2002, the consolidated
statements of operations for the three months ended March 31, 2001 and 2002 and
the consolidated statements of cash flows for the three months ended March 31,
2001 and 2002 have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting of normal and recurring adjustments,
necessary to present fairly the financial position, results of operations and
cash flows at March 31, 2002 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in the Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. The results of operations for the three
months ended March 31, 2002 are not necessarily indicative of the operating
results for the full year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
CareScience, Inc. and its subsidiary. All significant intercompany transactions
and balances have been eliminated.
Recent Accounting Pronouncements
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement modifies existing generally accepted
accounting principles related to the amortization and impairment of goodwill and
other intangible assets. Upon adoption of the new standard, goodwill, including
goodwill associated with equity method investments, will no longer be amortized.
In addition, goodwill, other than goodwill associated with equity method
investments, must be assessed at least annually for impairment using a
fair-value based approach. The provisions of this statement are required to be
adopted as of the beginning of the first fiscal year after December 15, 2001.
Impairment losses that arise due to the initial application of this statement
are to be reported as a cumulative effect of change in accounting principle. The
Company has completed an analysis of the impact of implementing the provisions
of this statement as of January 1, 2002 and has determined that there is no
impairment loss. With the adoption of this new standard, as of January 1, 2002
the Company discontinued the amortization of the goodwill balance. The following
proforma disclosure is included pursuant to the disclosure requirements of SFAS
142:
Page 6
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
2001 2002
----------- --------------
(UNAUDITED)
Reported net loss .......................... $(3,419,976) $ (1,497,594)
Add back--Goodwill amortization ............ 28,600 --
----------- -------------
Adjusted net loss .......................... $(3,391,376) $ (1,497,594)
=========== =============
Basic and diluted net loss per
Common share:
Reported net loss ........................ $ (0.26) $ (0.11)
Goodwill amortization .................... -- --
----------- -------------
Adjusted net income ........................ $ (0.26) $ (0.11)
=========== =============
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations for a disposal of a segment of a business". SFAS No. 144
is effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The impact of adopting this accounting standard is not
expected to have a material effect on the Company's financial position or
results of operations.
Cash and Cash Equivalents and Short-term Investments
The Company invests excess cash in highly liquid investment-grade
marketable securities including corporate commercial paper and U.S. government
agency bonds. For financial reporting purposes, the Company considers all highly
liquid investment instruments purchased with an original maturity of three
months or less to be cash equivalents. All investment instruments with
maturities greater than three months are available for use in current operations
and accordingly are classified as current assets. All investments are considered
available-for-sale and accordingly, unrealized gains and losses are included in
a separate component of shareholders' equity.
As of March 31, 2002 cash and cash equivalents and short-term investments
at cost and fair market value consisted of the following:
MARCH 31, 2002
--------------------------------------------------
(UNAUDITED)
FAIR
ORIGINAL UNREALIZED MARKET
COST GAINS VALUE
----------- ----------- -----------
Cash and cash equivalents... $10,528,083 $ -- $10,528,083
Short-term investments ..... 9,932,667 42,611 9,975,278
----------- ----------- -----------
$20,460,750 $ 42,611 $20,503,361
=========== =========== ===========
At March 31, 2002 short-term investments consisted of eight debt
instruments maturing between April 4, 2002 and August 28, 2003.
Supplemental Cash Flow Information
The Company paid interest of $21,547 and $10,841 for the three months ended
March 31, 2001 and 2002, respectively.
Page 7
Revenue Recognition
The Company generates revenue from subscriptions to its internet based
proprietary technology applications and hosting of customer data, as well as
development agreements and consulting services.
The Company's agreements for its internet based tools, which typically
cover an initial period of one-to-five years and are fixed priced, provide to
customers, among other things, a software license, project management services,
data management services, data storage and computer server maintenance and
software support and maintenance. Revenues under these contracts are recognized
ratably over the contract period. Any additional consulting fees, outside of the
initial contract, are recognized as the service is delivered.
The Company's development agreements, with periods ranging from
three-to-five years, provide for customer funding for the development of new
solutions and services. In accordance with Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements", the Company is treating
revenue on these agreements as a single element contract and is recognizing
total revenue on a cost-to-cost basis over the entire agreement period.
The Company's various consulting services are delivered either as a single
program or as a project whose completion normally occurs over a several month
period. Consulting revenues from program services are recorded as the program is
completed. Consulting revenues from projects are recorded on a percentage of
completion basis over the term of the project.
Major Customers
The Company's operations are conducted in one business segment and sales
are primarily made to health care payors and providers. The company had one
customer and two customers for the three month periods ended March 31, 2001 and
2002 respectively, which accounted for 15% and 24 % of total revenues,
respectively.
The Company had two customers at March 31, 2002, which accounted for 29% of
total accounts receivable.
Comprehensive Income (Loss)
The components of accumulated comprehensive income (loss) are as follows:
Balance, December 31, 2001...... $ 57,852
Change in unrealized gain on
available for sales
securities................... (15,241)
---------
Balance, March 31, 2002......... $ 42,611
=========
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from those estimates.
Reclassifications
Certain amounts have been reclassified in the prior years consolidated
financial statements to conform to the 2002 presentation.
(2) NET LOSS PER SHARE
Net loss per share is calculated utilizing the principles of SFAS No. 128,
"Earnings per Share" ("EPS"). Basic EPS excludes potentially dilutive securities
and is computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding for the
Page 8
period. Diluted EPS is computed assuming the conversion or exercise of all
dilutive securities such as options and warrants.
Under SFAS No. 128, the Company's granting of certain stock options and
warrants resulted in potential dilution of basic EPS. The number of incremental
shares from the assumed exercise of stock options and warrants is calculated
applying the treasury stock method. Stock options and warrants and convertible
into common shares were excluded from the calculations as they were
anti-dilutive due to the net loss. Stock options to purchase 2,187,821 shares of
common stock at exercise prices ranging from $0.25 to $12.00 were outstanding as
of March 31, 2002, but were excluded from the computation of diluted net loss
per share since the inclusion would be anti-dilutive.
(3) COMMITMENTS AND CONTINGENCIES
Litigation
The Company and certain of its officers are defendants in a purported class
action litigation pending in the United States District Court for the Eastern
District of Pennsylvania. The complaints purport to bring claims on behalf of
all persons who allegedly purchased Company common stock between June 29, 2000
and November 1, 2000, for alleged violations of the federal securities laws,
including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by issuing
a materially false and misleading Prospectus and Registration Statement with
respect to the initial public offering of Company common stock. Specifically,
the complaints allege, among other things, that the Company's Prospectus and
Registration Statement misrepresented and omitted to disclose material facts
concerning two of the Company's prospective products. The actions seek
compensatory and other damages, and costs and expenses associated with
litigation. Although the Company cannot predict the ultimate outcome of the case
or estimate the range of any potential loss that may be incurred in the
litigation, management believes the lawsuits are frivolous and without merit,
strenuously denies all allegations of wrongdoing asserted by plaintiffs, and
believes it has meritorious defenses to plaintiffs' claims. The Company intends
to vigorously defend the lawsuits. Management believes that the resolution of
this litigation will not have a material effect on our consolidated financial
position or results of operations.
Note Payable
In December 2001, the Company entered into a loan agreement with PIDC Local
Development Corporation, whereby it would borrow up to $325,000 with an interest
rate of 2.5%, a term of five years, and secured by an interest in certain
property and equipment and investments. The balance due on this note payable was
$0 and $325,000 at December 31, 2001 and March 31, 2002, respectively.
(4) INCOME TAXES
The Company has incurred operating losses and generated a significant
accumulated deficit through March 31, 2002, therefore, no tax provisions have
been recorded. As of March 31, 2002 the Company had federal net operating loss
carryforwards of approximately $32 million which expire from 2010 through 2021.
As of March 31, 2002 and March 31, 2001 a valuation allowance was recorded for
100% of the Company's deferred tax asset as realization of the tax benefit was
not considered more likely than not under the provisions of SFAS No. 109.
The Tax Reform Act of 1986 contains certain provisions that limit the
utilization of net operating losses and tax credit carryforwards if there has
been a cumulative ownership change greater than 50% within a three-year period.
Such limitation could result in the expiration of the net operating losses
before such losses are fully utilized.
Page 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report includes a number of forward-looking statements that reflect
our current views with respect to future events and financial performance. We
use words such as anticipates, believes, expects, future, intends, and similar
expressions to identify forward-looking statements. For these statements we
claim the protection of the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995. There are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements, including:
- the difficulty in evaluating our business because we operate in a new
industry and our operating history is limited;
- we have a history of losses and expect our losses to continue;
- the proprietary technology we own or license may be subjected to
infringement claims or disagreements with the licensor which could be
costly to resolve;
- we depend on an exclusive license with the University of Pennsylvania
and an exclusive license with the California HealthCare Foundation for
some of our technology, and the loss of these licenses would impair
our ability to develop our business;
- we could be liable for information retrieved from our Web sites and
incur significant costs from resulting claims;
- we may experience system failures which could interrupt our service
and damage our customer relationships;
- the health care industry may not accept our solutions or buy our
services which would adversely affect our financial results;
- because our revenues are dependent on a limited number of services,
the failure of any one of these services would significantly decrease
our revenues;
- termination of one or more of our significant contracts would cause a
significant decline in our revenue;
- failure to manage our growth would adversely affect our operations;
- we face intense competition and may be unable to compete successfully
which would adversely effect our financial results;
- the loss of any of our key personnel could adversely affect our
operations;
- our failure to develop strategic relationships could adversely affect
our ability to develop new services;
- our failure to use new technologies effectively or to adapt emerging
industry standards would adversely affect our ability to compete;
- our failure to adapt our technology to our customers' needs or to
handle high levels of customer activity would adversely affect our
ability to increase revenue;
- failure by our service providers could interrupt our business and
damage our customer relationships;
- we may need to obtain additional capital and failure to do so may
limit our growth;
- health information is subject to potential government regulation and
legal uncertainties and changes may require us to alter our business;
- changes in the health care industry could adversely affect our
operations;
- our business will suffer if commercial users do not accept Internet
solutions;
- our industry is evolving and we may not adapt successfully.
Overview
CareScience, Inc. is a provider of online care management services. Our
mission is to transform the quality and efficiency of care delivery by providing
innovative clinical information technology to the health care industry. We
market our services to hospitals, health systems and pharmaceutical and
biotechnology manufacturers, and support more than 150 customers in 40 states.
Page 10
We work with health care providers to manage clinical processes surrounding
the point of care so that fundamental reductions in errors and operating cost
can be achieved. Our products collect, share, store and analyze clinical data
generated by widely used health information systems. Our services allow
customers to apply this data to the management of care, including quality
monitoring, practice improvement, credentialing, profiling, error tracking, case
management and clinical guidelines. We also provide consulting services to
healthcare providers that support strategic planning and clinical operations.
For the pharmaceutical and biotechnology industry, we provide tools and
services that shorten the drug development cycle and improve development yield.
Our offerings include a suite of Internet-based data analysis tools, consulting
services, customized research and strategic development support. These tools and
services are aimed at the specialized drug development needs of pharmaceutical
industry clinicians, product managers, market strategists, health economists and
outcomes researchers.
We have pioneered and commercialized numerous clinical information
technologies. We have developed one of the nation's first online quality
measurement and management tools, one of the first clinically based outcome risk
assessment algorithms, one of the first health care application service
providers, and, most recently, the first peer-to-peer clinical data sharing
technology. We have developed these tools in collaboration with leading public
organizations, including the Wharton School of Business at the University of
Pennsylvania, the National Library of Medicine, Los Alamos National Laboratory
and The California HealthCare Foundation.
CareScience was incorporated in 1992 with the purpose of commercializing
intellectual property that was developed at the University of Pennsylvania
School of Medicine and The Wharton School of Business. In 1993, we exclusively
licensed the intellectual property underlying our core technology in a 30-year
agreement with the University of Pennsylvania. In 1996, we launched our first
Internet-based commercial product based on this proprietary technology under our
Care Management System(TM) product line. In 1999, we initiated our Care Data
Exchange(TM), as well as our Lifecycle Decision System(TM), which is aimed at
the pharmaceutical and biotechnology industries. On March 7, 2000, we changed
our name from Care Management Science Corporation to CareScience, Inc.
We generate revenues from subscriptions to our Internet-based proprietary
technology applications and hosting of customer data, as well as from consulting
services and development agreements. We sell our services individually or as an
integrated suite of solutions and services. We price our subscription services
on a per-encounter basis, such as the number of a hospital's patient admissions
or outpatient visits.
The Company's agreements for its internet based tools, which typically
cover an initial period of one-to-five years and are fixed priced, provide to
customers, among other things, a software license, project management services,
data management services, data storage and computer server maintenance and
software support and maintenance. Revenues under these contracts are recognized
ratably over the contract period regardless of the timing of the required
delivery of services to the customer or the related cost to the Company of
delivering such services.
The Company's development agreements, with periods ranging from one-to-five
years, provide for customer funding for the development of new solutions and
services. In accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements", the Company is treating revenue on these
agreements as a single element contract and is recognizing total revenue on a
cost-to-cost basis over the entire agreement period.
The Company's various consulting services are delivered either as a single
program or as a project whose completion normally occurs over a several month
period. Consulting revenues from program services are recorded as the program is
completed. Consulting revenues from projects are recorded on a percentage of
completion basis over the term of the project.
Our contracts generally provide for payment in advance of services
rendered. Therefore, we record these payments as deferred revenues and recognize
these payments when earned in accordance with our revenue recognition policy.
Our deferred revenue balances were $3.5 million and $3.8 million at December 31,
2001 and March 31, 2002, respectively.
We have incurred substantial research and development costs since inception
and have also invested in our corporate infrastructure to support our long-term
growth strategy. We expect that our operating expenses will continue to at
historic or greater levels as we further our product development and
Page 11
sales and marketing efforts. Accordingly, we expect to continue to incur
quarterly net losses for the foreseeable future.
Since inception, we have incurred cumulative net losses for federal and
state tax purposes and have not recognized any material tax provision or
benefit. As of December 31, 2001, we had net operating loss carryforwards of
approximately $30.8 million for federal income tax purposes. The net operating
loss carryforwards, if not utilized, expire from 2010 through 2021. Federal tax
laws impose significant restrictions on the utilization of net operating loss
carryforwards in the event of an ownership change as defined in Section 382 of
the Internal Revenue Code.
Results of Operations
THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001
REVENUES
Total revenues increased 30% to $3.3 million for the three months ended
March 31, 2002 from $2.5 million for the three months ended March 31, 2001. The
increase was primarily related to revenues generated from additional customer
and development contracts.
Unrecognized revenues related to customer and development contracts
(backlog) as of March 31, 2002 totaled $18.3 million.
COST OF REVENUES
Cost of revenues include customer and service-related costs including
personnel and facility costs, depreciation and maintenance. Cost of revenues for
the three months ended March 31, 2002 was $1.7 million an increase of $171,000
or 11%, compared to $1.5 million for the three months ended March 31, 2001. The
increase was primarily a result of additional costs necessary to service new
contracts.
GROSS PROFIT
Our gross profit margin increased from 39% for the three months ended March
31, 2001, to 48% for the three months ended March 31, 2002. The increase in
gross profit margin is primarily due to increased revenues spread over a
partially fixed cost base.
RESEARCH AND DEVELOPMENT
Research and development costs include technology and product development
costs. Research and development costs for the three months ended March 31, 2002
were $726,000, a decrease of $582,000 or approximately 45%, compared to $1.3
million for the three months ended March 31, 2001. This decrease is primarily
due to lowering costs as certain development projects near completion.
As a percentage of revenue, research and development costs were 22% for the
three months ended March 31, 2002 as compared to 52% for the three months ended
March 31, 2001. We expect the growth in revenue to exceed the growth in research
and development costs. Therefore, we expect these costs will decrease as a
percentage of revenue in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include costs associated with
our sales, marketing, finance, human resource and administrative functions.
Selling, general and administrative expenses for the three months ended March
31, 2002 were $2.4 million, an decrease of $1.0 million, or 30% compared to $3.5
million for the three months ended March 31, 2001. The decrease was primarily
related to a planned reduction in marketing and other administrative
expenditures in 2002 as part of the company's efforts of reducing costs.
As a percentage of revenues, selling, general, and administrative expenses
were 74% for the three months ended March 31, 2002 as compared to 137% for the
three months ended March 31, 2001. We expect the percentage of selling, general
and administrative costs to continue to decrease as a percentage of revenues in
the future as our fixed costs are spread over an increasing revenue base.
Page 12
STOCK-BASED COMPENSATION
We granted certain stock options to our officers and employees with
exercise prices deemed to be below the fair market value of the underlying
stock. The remaining cumulative difference between the fair value of the
underlying stock at the date the options were granted and the exercise price of
the granted options was $1.8 million at March 31, 2002. We expect to amortize
this amount over the four to seven year vesting periods of the granted options.
Accordingly, our results from operations will include stock-based compensation
expense at least through 2006. We recognized $265,000 and $316,000 of this
expense during the three months ended March 31, 2002 and 2001, respectively.
INTEREST INCOME AND EXPENSE
Net interest income for the three months ended March 31, 2002 was $98,000,
a decrease of $264,000, compared to $362,000 for the three months ended March
31, 2001. The decrease is primarily due to lower investable cash balances and a
decrease in investment interest rates.
LIQUIDITY AND CAPITAL RESOURCES--MARCH 31, 2002
Since inception, we have financed our operations and funded our capital
expenditures through the public offering and private sale of equity securities,
supplemented by private debt and equipment leases. We believe that current
capital resources will be sufficient to fund anticipated capital expenditures
and working capital requirement for at least the next 12 months. As of March 31,
2002, we had $20.5 million in cash and cash equivalents and short-term
investments and working capital of $16.4 million.
Net cash used in operating activities was $563,000 for the three months
ended March 31, 2002 and $2.6 million for the three months ended March 31, 2001.
For those periods, net cash used in operating activities was primarily to fund
losses from operations offset by changes in current assets and liabilities.
Net cash provided by investing activities was $1.9 million for the three
months ended March 31, 2002 and consisted primarily of proceeds from the
redemption of short-term investments, net of purchases of short-term investments
and property and equipment. Net cash provided by investing activities was $2.0
million for the three months ended March 31, 2001 and consisted primarily of
proceeds from the redemption of short-term investments, net of funding of an
acquisition and purchases of property and equipment.
Net cash provided by financing activities was $297,000 for the three months
ended March 31, 2002 and consisted of proceeds from a note payable and the
exercise of common stock options net of payments on capital lease obligations.
Net cash used in financing activities consisted of $67,000 for three months
ended March 31, 2001, and consisted of payments on capital lease obligations.
As we execute our strategy, we expect significant increases in our
operating expenses to fund development of current and new divisions and product
lines. Presently, we anticipate that our existing capital resources will meet
our operating and investing needs for at least the next 12 months. After that
time, additional funding may not be available on acceptable terms or at all. If
we require additional capital resources to grow our business, execute our
operating plans or acquire complementary businesses at any time in the future,
we may seek to sell additional equity or debt securities or secure additional
lines of credit, which may result in ownership dilution to our shareholders.
ITEM 3. QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash equivalents, short-term investments and capital lease obligations
are at fixed interest rates and therefore the fair market value of these
instruments is affected by changes in market interest rates. As of March 31,
2002 all of our cash equivalents mature within 17 months and we had the ability
to immediately liquidate our investments. Therefore, we believe that we are
exposed to immaterial levels of market risk.
Page 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We and certain of our officers are defendants in a purported shareholder
class action lawsuit litigation pending in the United States District Court for
the Eastern District of Pennsylvania described below for alleged violations of
federal securities laws. Although we cannot predict the ultimate outcome of the
case or estimate the range of any potential loss that may be incurred in the
litigation, we believe the lawsuits are frivolous and without merit, strenuously
deny all allegations of wrongdoing asserted by plaintiffs, and believe we have
meritorious defenses to plaintiffs' claims. We intend to vigorously defend the
lawsuits.
The class action litigation is the result of several complaints filed with
the court beginning on October 17, 2001. These actions were consolidated on
November 16, 2001. The court approved the selection of the lead plaintiff in the
litigation on March 12, 2002. These complaints purport to bring claims on behalf
of all persons who allegedly purchased our common stock between June 29, 2000
and November 1, 2000, for alleged violations of the federal securities laws,
including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by issuing
a materially false and misleading Prospectus and Registration Statement with
respect to the initial public offering of our common stock. Specifically, the
complaints allege, among other things, that our Prospectus and Registration
Statement misrepresented and omitted to disclose material facts concerning two
of our prospective products and our planned disposition of the offering
proceeds. The actions seek compensatory and other damages, and costs and
expenses associated with litigation.
We are not involved in any other legal proceedings that either individually
or taken as a whole would have a material adverse effect on our business,
financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS
On June 28, 2000 the Securities and Exchange Commission declared effective
our Registration Statement on Form S-1 (File number 333-32376), relating to the
initial public offering of our Common Stock, no par value per share. The net
offering proceeds to us after total expenses were $43.4 million. As of March 31,
2002, we have used approximately $23.7 million of the net proceeds from our
initial public offering of which approximately $13.4 million was used for
working capital and other general corporate purposes, including expansion of our
sales and marketing efforts as well as development of our solutions and
services, approximately $6.5 million was used for dividends on and the
redemption of preferred stock, approximately $2.7 million was used for the
purchase of property plant and equipment, including technology and equipment
expenditures required to support our product development infrastructure and $1.1
million was used for the acquisition of Strategic Outcomes Services, Inc.
None of the net proceeds from the offering were used to pay, directly or
indirectly, directors, officers, persons owning ten percent or more of the
Company's equity securities, or affiliates of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
None
Page 14
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARESCIENCE, INC.
Date: May 6, 2002 By: /s/ RONALD A. PAULUS
---------------------------
Ronald A. Paulus, President
Date: May 6, 2002 By: /s/ STEVEN BELL
----------------------------
Steven Bell, Chief Financial
Officer and Treasurer
Page 15
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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