See accompanying notes to condensed consolidated financial statements.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
Calypte Biomedical Corporation develops, manufactures, and distributes in vitro diagnostic tests, primarily for the diagnosis of Human Immunodeficiency Virus (“HIV”) infection. We were incorporated in California in 1989 and reincorporated in Delaware in 1996 at the time of our initial public offering. Since September 8, 2006, our common stock has traded on the NASD Over the Counter Bulletin Board under the symbol “CBMC.” During the third quarter of 2007, we combined our research and development operations and our administrative offices in a facility in Portland, Oregon that also includes space for manufacturing operations. Prior to that, our administrative offices were located in Lake Oswego, Oregon, a suburb of Portland, near where our research and development operations were located. Through our 51%-owned joint ventures, we have manufacturing and marketing operations in Beijing, China.
Through late 2005, we manufactured and marketed urine-based HIV-1 diagnostic screening tests and urine and serum-based Western Blot supplemental (sometimes called “confirmatory”) tests for use in high-volume laboratories, which we refer to as our “Legacy Business.” In November 2005, we sold the Legacy Business to Maxim Biomedical, Inc. to concentrate on the development of our rapid test platform products.
Our current emphasis is commercializing our HIV-1/2 Rapid Tests, test products for the rapid detection of antibodies to HIV-1 and HIV Type 2, a second type of HIV (“HIV-2”), in oral fluid and blood samples using a lateral flow dipstick design (the “HIV-1/2 Rapid Tests”). Rapid tests provide diagnostic results in less than 20 minutes and are particularly suitable for point-of-care testing in both the professional sector, such as in developing countries that lack the medical infrastructure to support laboratory based testing, and, for the first time, in the over-the-counter or “OTC” market. We have completed field trials or product evaluations of our AwareTM HIV-1/2 OMT (oral fluid) rapid test covering an aggregate of over 8,000 samples in China, India, South Africa and elsewhere and believe that the results of these studies and evaluations have validated the test. In our studies, this test has averaged 99.7% accuracy. We have obtained regulatory approvals in a number of key countries in Africa, Southeast Asia, the Middle East, Russia, India and China, and we expect to expand our market reach on a steady basis.
In the fourth quarter of 2004, through an arrangement with the U. S. Centers for Disease Control and Prevention (the “CDC”), we introduced an HIV-1 BED Incidence EIA test (the “BED Incidence Test”) that detects HIV-1 infections that have occurred within approximately the prior 6 months and that can be used by public health agencies to identify those regions and the populations within them where HIV transmission is occurring most recently.
In November 2003, we became the 51% owner of a joint venture, Beijing Calypte Biomedical Technology Ltd. (“Beijing Calypte”), created to market our rapid test products in China. The remaining 49% of the joint venture is owned by Marr Technologies Limited, an affiliate of Marr Technologies BV (“Marr”), our largest stockholder, which currently holds approximately 17% of our outstanding stock. Through March 31, 2009, the operations of Beijing Calypte have been primarily organizational and financially insignificant.
Effective in January 2006, we became the 51% owner of Beijing Marr Bio-Pharmaceutical Co., Ltd. (“Beijing Marr”). We purchased our equity interest from Marr Technologies Asia Limited (“Marr Asia”), an affiliate of Marr, which owns the remaining 49% interest in Beijing Marr. In 2008, Beijing Marr obtained the necessary governmental approvals to manufacture, market, distribute and sell our Aware™ HIV-1/2 OMT test and has begun to manufacture and market the test. The Beijing Marr manufacturing facility is qualified under ISO 13485:2003 standards. This facility has the capability to manufacture our products for sale in China and for export to other countries. Obtaining these governmental approvals opened the door to sales in China, and also to sales in countries that only permit import of products that have governmental approval in the country of manufacture.
The accompanying condensed consolidated financial statements reflect our consolidated operations and ownership interests in Beijing Calypte and in Beijing Marr.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
The development of our business took a steep downturn in the fourth quarter of 2008, when our expected sources of financing failed to materialize. Marr, which had previously participated in many of our financing arrangements, advised us that it would no longer provide financing to us. Investors in our March 2007 private placement did not exercise additional warrants and, as the market price of our common stock was below its par value, we could not induce them to exercise their warrants by offering to lower the exercise price to an “in the money” price. We were unable to sell our stock under the arrangement with Fusion Capital as our stock price was well below the floor threshold of the stock purchase arrangement.
During and since the fourth quarter of 2008, we have diverted our focus from commercializing our AwareTM HIV-1/2 rapid tests and the research and development of our other rapid oral test products to focus on scaling down our operations to continue our business while attempting to restructure our business plan. In the fourth quarter of 2008, we substantially reduced our workforce to conserve cash and continue our day-to-day operations at a minimal level. We have been focused on restructuring our operations, seeking opportunities for financing and restructuring our debt, with the hope that we will be able to continue as a going concern and again focus on commercializing our current products and resuming the research and development of our other products. We have maintained a minimum staff in order to continue sales of our products to our existing and new clients so that we do not lose the momentum we have gained over the last few years. While most of our marketing efforts have ceased, we have continued those efforts in certain places where to cease such efforts would almost certainly cause us to lose ground.
During the first quarter of 2009, we incurred a net loss of $1.2 million. At March 31, 2009, we had a working capital deficit of $15.5 million and our stockholders’ deficit was $13.4 million. Our cash balance at March 31, 2009 was $0.2 million, which we do not believe is sufficient to enable us to fund our operations through the remainder of 2009.
As discussed in Note 10, a total of $10.9 million was payable under our 8% Convertible Notes and related Interest Notes and 7% Promissory Notes on April 3, 2009. We are currently discussing termination, reduction or restructuring of these debt obligations with each of the secured creditors. Further, given the current market price of our common stock, we have insufficient authorized shares of common stock available to raise adequate capital to continue our operations. We do not have any definitive agreements with respect to additional financing or a strategic opportunity, and there is no assurance that any such financing or strategic opportunity will be available to us on acceptable terms, or at all. If such additional financing is not available to us when required or is not available to us on acceptable terms, or we are unable to arrange a suitable strategic opportunity, we will be in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all. Our failure to obtain additional financing or to resolve the existing defaults with respect to the 7% Promissory Notes and the 8% Convertible Notes will likely cause us to seek bankruptcy protection under Chapter 7 of Title 11 of the United States Code, which would have a material adverse affect on our business and on our ability to continue our operations. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and they reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of our financial position as of March 31, 2009 and the results of our operations and our cash flows for the three month periods ended March 31, 2009 and 2008. The accompanying condensed consolidated balance sheet at December 31, 2008 has been derived from our audited financial statements at that date. Interim results are not necessarily indicative of the results to be expected for the full year or any future interim period. This information should be read in conjunction with our audited consolidated financial statements for each of the years in the two year period ended December 31, 2008 included in our Form 10-K filed with the SEC on April 27, 2009.
Certain information in footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the SEC. The data disclosed in these condensed consolidated financial statements and in the related notes is unaudited.
| (2) | Significant Accounting Policies |
Principles of Consolidation
The accompanying condensed consolidated financial statements include the results of operations of us, our wholly-owned subsidiary, Calypte, Inc., and our 51% ownership interests in both Beijing Calypte and Beijing Marr. We have eliminated all significant intercompany accounts and transactions in consolidation.
Foreign Currency Translation
The functional currency of our consolidated Chinese joint ventures is the local currency, the Chinese Yuan Renminbi. We translate the assets and liabilities of our foreign joint ventures into U.S. dollars at the rate of exchange in effect at the end of the reporting period. We translate revenues and expenses at the average rates of exchange for the accounting period.
Impairment of Long-Lived Assets
Long-lived assets are comprised of property and equipment and intangible assets. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. We compare an estimate of undiscounted future cash flows produced by the asset, or by the appropriate grouping of assets, to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, we measure the loss based on quoted market prices in active markets, if available. If quoted market prices are not available, we estimate the fair value based on various valuation techniques, including a discounted value of estimated future cash flow and fundamental analysis. We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.
Revenue Recognition
We record revenues only upon the occurrence of all of the following conditions:
| | • | We have received a binding purchase order or similar commitment from the customer or distributor authorized by a representative empowered to commit the purchaser (evidence of a sale). |
| | • | The purchase price has been fixed, based on the terms of the purchase order. |
| | • | We have delivered the product from our manufacturing plant to a common carrier acceptable to the purchaser. Our customary shipping terms are FOB shipping point. Because of the need for controlled conditions during shipment, we suggest, but leave to the purchaser’s discretion, acquiring insurance for the value of the shipment. If the purchaser elects to insure the shipment, the insurance is at the purchaser’s expense. |
| | • | We deem the collection of the amount invoiced probable. To eliminate the credit risk associated with international distributors with whom we have had little or no experience, we require prepayment of all or a substantial portion of the order or a letter of credit before shipment. |
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
Except in the event of verified product defect, we do not permit product returns. Our products must be maintained under rigidly controlled conditions that we cannot control after the product has been shipped to the customer.
We provide no price protection. Subject to the conditions noted above, we recognize revenue upon shipment of product.
Segment and Geographic Information
Our operations are currently focused on the development and sale of HIV diagnostics. The following table summarizes our product sales revenues by product for the three months ended March 31, 2009 and 2008 (in thousands):
| | | 2009 | | | 2008 | |
| | | | | | | |
AwareTM BEDTM HIV-1 Incidence Test | | $ | 121 | | | $ | 152 | |
AwareTM Rapid HIV diagnostic tests | | | 55 | | | | 36 | |
| | | | | | | | | |
| | | | | | | | | |
| Revenue from product sales | | $ | 176 | | | $ | 188 | |
Sales to international customers accounted for approximately 53% and 76% of our revenues in the first quarter of 2009 and 2008, respectively. Four customers accounted for approximately 65% of our first quarter 2009 revenue. A New York Research institution and the U.S. CDC’c contract testing lab purchased BED Incidence tests representing 21% and 10% of our first quarter 2009 revenue, respectively. Our South African distributor purchased both BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 17% of our first quarter 2009 revenue, and our Indian distributor purchased our AwareTM HIV-1/2 oral fluid rapid tests representing 18% of first quarter 2009 revenue. Four customers accounted for approximately 77% of our first quarter 2008 revenue. Purchases of our AwareTM BEDTM HIV-1 Incidence Test (the Incidence Test”) by the Chinese National AIDS laboratory, the CDC’s New York contract testing lab, and a Japanese medical products distributor accounted for approximately 27%, 22% and 10%, respectively, of our first quarter 2008 revenue. Our distributor in South Africa purchased our AwareTM HIV-1/2 oral fluid rapid tests and the Incidence Test in amounts representing approximately 18% of our first quarter 2008 revenue.
Net Loss Per Share
We compute basic net loss per share by dividing net loss by the weighted average number of shares of common stock outstanding during the periods presented. The computation of diluted loss per common share is similar to the computation of basic net loss per share, except that the denominator is increased for the assumed conversion of convertible securities and the exercise of options and warrants, to the extent they are dilutive, using the treasury stock method. The weighted average number of shares used in computing basic and diluted net loss per share are the same for the periods presented in these unaudited condensed consolidated financial statements. Outstanding options and warrants for 204,471,272 shares and 224,479,836 shares were excluded from the computation of loss per share for the three month periods ended March 31, 2009 and 2008, respectively, as their effect is anti-dilutive. The computation of loss per share also excludes 19,504,208 shares and 57,661,991 shares issuable upon the conversion of 8% Convertible Notes, including 8% Convertible Notes issued in payment of interest, and, 7% Notes issued under the Marr Credit Facilty for quarters ended March 31, 2009 and 2008, respectively, as their effect is also anti-dilutive.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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 results could differ from those estimates.
Reclassifications
We made certain reclassifications to prior-period amounts to conform to the first quarter 2009 presentation of noncontrolling interests as a result of adopting SFAS No. 160, Non-controlling Interests in Consolidated Financial Statement.
Stock-Based Compensation Expense
We measure stock-based compensation at the grant date based on the award’s fair value and recognize the expense ratably over the requisite vesting period, net of estimated forfeitures, for all stock-based awards granted after January 1, 2006 and all stock based awards granted prior to, but not vested as of, January 1, 2006.
We have elected to calculate the fair value of option awards based on the Black-Scholes option-pricing model. The Black-Scholes model requires various assumptions, including expected option life and volatility. If we significantly change any of the assumptions used in the Black-Scholes model or the estimated forfeiture rate, stock-based compensation expense may differ materially in the future from that recorded in the current period.
Adoption of New Accounting Pronouncements
In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (EITF) Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (EITF 07-05). EITF 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. EITF 07-05 was effective for financial statements issued for fiscal years beginning after December 15, 2008 (our fiscal year 2009). We adopted EITF 07-05 on the first day of our fiscal year 2009 and determined that no balance sheet reclassifications were necessary at March 31, 2009.
On January 1, 2009, we adopted SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, which introduces changes in the accounting and reporting for business acquisitions and non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. In accordance with the requirements of SFAS 160, we have provided a new presentation on the face of the consolidated financial statements to separately classify non-controlling interests within the equity section of the consolidated balance sheets and to separately report the amounts attributable to controlling and non-controlling interests in the consolidated statements of operations and comprehensive loss for all periods presented. There were no changes in our ownership interests in previously existing subsidiaries or deconsolidation of subsidiaries for the three months ended March 31, 2009.
Inventory as of March 31, 2009 and December 31, 2008 consisted of the following (in thousands):
| | | March 31, | | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Raw materials | | $ | 299 | | | $ | 240 | |
| Work-in-process | | | - | | | | 14 | |
| Finished goods | | | 93 | | | | 152 | |
| | | | | | | | | |
| Total inventory | | $ | 392 | | | $ | 407 | |
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
| (4) | Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses as March 31, 2009 and December 31, 2008 consisted of the following (in thousands):
| | | March 31, | | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Trade accounts payable | | $ | 1,432 | | | $ | 1,499 | |
| Accrued royalties | | | 105 | | | | 92 | |
| Accrued salary and vacation pay | | | 37 | | | | 34 | |
| Customer prepayments on purchases | | | 12 | | | | 10 | |
| Accrued interest | | | 133 | | | | 101 | |
| Accrued audit, legal and consulting expenses | | | 367 | | | | 247 | |
| Accrued liabilities under intellectual property license agreements | | | 40 | | | | 40 | |
| Accounts payable and accrued expenses of consolidated joint ventures | | | 253 | | | | 206 | |
| Accrued liabilities of legacy business | | | 190 | | | | 190 | |
| Accrued liability for acquisition of Chinese manufacturing operation | | | 350 | | | | 349 | |
| Other | | | 168 | | | | 227 | |
| | | | | | | | | |
| Total accounts payable and accrued expenses | | $ | 3,088 | | | $ | 2,995 | |
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
| (5) | Notes and Debentures Payable |
The following table summarizes note and debenture activity for the three months ended March 31, 2009 (in thousands):
| | | | | | | | | | | | | | | | | | | | | Net | |
| | | Balance | | | | | | Conversion | | | | | | Balance | | | Discount at | | | Balance at | |
| | | 12/31/08 | | | Additions | | | to Equity | | | Repayments | | | 3/31/09 | | | 3/31/09 | | | 3/31/09 | |
| Current Notes and Debentures | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| 8% Secured Convertible Notes – | | | | | | | | | | | | | | | | | | | | | |
| April 4, 2005 | | $ | 4,399 | | | $ | - | | | $ | - | | | $ | - | | | $ | 4,399 | | | | | | | |
| July 4, 2005 Interest | | | 66 | | | | - | | | | - | | | | - | | | | 66 | | | | | | | |
| October 4, 2005 Interest | | | 68 | | | | - | | | | - | | | | - | | | | 68 | | | | | | | |
| January 4, 2006 Interest | | | 69 | | | | - | | | | - | | | | - | | | | 69 | | | | | | | |
| April 4, 2006 Interest | | | 68 | | | | - | | | | - | | | | - | | | | 68 | | | | | | | |
| July 4 and 21, 2006 Interest | | | 122 | | | | - | | | | - | | | | - | | | | 122 | | | | | | | |
| October 4, 2006 Interest | | | 91 | | | | - | | | | - | | | | - | | | | 91 | | | | | | | |
| January 4, 2007 Interest | | | 100 | | | | - | | | | - | | | | - | | | | 100 | | | | | | | |
| April 3, 2007 Interest | | | 99 | | | | - | | | | - | | | | - | | | | 99 | | | | | | | |
| July 3, 2007 Interest | | | 102 | | | | - | | | | - | | | | - | | | | 102 | | | | | | | |
| October 3, 2007 Interest | | | 106 | | | | - | | | | - | | | | - | | | | 106 | | | | | | | |
| January 3, 2008 Interest | | | 108 | | | | - | | | | - | | | | - | | | | 108 | | | | | | | |
| April 3, 2008 Interest | | | 110 | | | | - | | | | - | | | | - | | | | 110 | | | | | | | |
| July 3, 2008 Interest | | | 111 | | | | - | | | | - | | | | - | | | | 111 | | | | | | | |
| October 3, 2008 Interest | | | 115 | | | | - | | | | - | | | | - | | | | 115 | | | | | | | |
| January 3, 2009 Interest | | | | | | | 117 | | | | | | | | | | | | 117 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total 8% Secured Convertible Notes | | $ | 5,734 | | | $ | 117 | | | $ | - | | | $ | - | | | $ | 5,851 | | | $ | (152 | ) | | $ | 5,699 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 7% Promissory Notes to related | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| party - | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2005 Credit Facility with Marr | | $ | 4,200 | | | $ | - | | | $ | - | | | $ | - | | | $ | 4,200 | | | $ | (75 | ) | | $ | 4,125 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12% Convertible Debentures – | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mercator assignees | | $ | 60 | | | $ | - | | | $ | - | | | $ | - | | | $ | 60 | | | $ | - | | | $ | 60 | |
8% Secured Convertible Notes
On April 4, 2005, we concluded a private placement (the “April 2005 Placement”) to five institutional investors (the “2005 Investors”) of $8,000,000 of Secured 8% Convertible Notes originally due April 3, 2007 (the “Convertible Notes”) and subsequently extended to April 3, 2009. The Convertible Notes provide for quarterly interest to be paid in cash, or subject to certain conditions, by issuing additional Convertible Notes maturing on April 3, 2007. From July 4, 2005 through October 3, 2008 we issued additional Convertible Notes in an aggregate face amount of $1,817,000 in payment of quarterly interest (the “Interest Notes”). As of March 31, 2009, we had not issued the Interest Notes that were due on January 3, 2009 in payment of quarterly interest in the aggregate amount of $117,000. Consequently, we are in default under the terms of these agreements. Refer to Note 10, Subsequent Events, for information regarding the status of the Convertible Notes and Interest Notes after March 31, 2009.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
Interest Expense
The table below summarizes the components of interest expense for the three month period ended March 31, 2009 and 2008 (in thousands):
| | Three Months ended March 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Interest expense on debt instruments paid or payable in cash | | $ | (74 | ) | | $ | (76 | ) |
| Non-cash income (expense) composed of: | | | | | | | | |
| Accrued interest on 8% Convertible Notes (paid by issuing additional | | | | | | | | |
| Notes) | | | (117 | ) | | | (109 | ) |
| Amortization of discounts associated with March 2007 extension | | | | | | | | |
| and December 2007 restuctructuring of 8% convertible notes and | |
| Marr Credit Facility notes | | | (399 | ) | | | (258 | ) |
| Mark to market adjustment of and intrinsic value of shares issued | | | | | | | | |
| under anti-dilution obligations arising from the February and | | | | | | | | |
| March 2007 financings | | | | | | | 32 | |
| Expense attributable to dividends on mandatorily redeemable Series | | | | | | | | |
| A preferred stock | | | (30 | ) | | | (30 | ) |
| | | | | | | | | |
| Total non-cash items | | | (546 | ) | | | (365 | ) |
| | | | | | | | | |
| Total interest expense | | $ | (620 | ) | | $ | (441 | ) |
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
| (6) | Stockholders’ Deficit |
Warrants, options and stock grants
At March 31, 2009, we had warrants outstanding to purchase an aggregate of 173,863,901 shares of our common stock at a weighted average price of $0.094 per share, as summarized in the following table:
| | | | | | Weighted | | |
| | | | | | Average | | |
| | | Number of | | | Exercise price | | |
| | | Shares | | | per share | | Expiration Date |
| | | | | | | | |
| Warrant issued in connection with August 2008 Private Placement | | | 1,000,000 | | | $ | 0.080 | | August 20, 2010 |
| Warrant issued in connection with September 2008 Private Placement | | | 1,000,000 | | | $ | 0.060 | | September 19, 2010 |
| Series A warrants issued in connection with March 2007 Private Placement | | | 79,274,355 | | | $ | 0.053 | | June 28, 2009, except 7,948,201 on June 28, 2010 |
| Series B warrants issued in connection with March 2007 Private Placement | | | 56,059,012 | | | $ | 0.110 | | September 28, 2009, except 4,135,935 on September 28, 2010 |
| Warrants issued in connection with February 2007 Private Placement | | | 2,500,001 | | | $ | 0.077 | | February 23, 2012 to March 27, 2012 |
Warrants issued to placement agents in connection with the February 2007 Private Placement | | | 125,000 | | | $ | 0.062 | | February 23, 2012 to March 27, 2012 |
| Series A and Series B warrants issued in connection with April 2005 Private | | | | | | | | | |
| Placement, including warrants to placement agents | | | 24,041,610 | | | $ | 0.119 | | April 3, 2010 |
Warrants issued to investors in connection with the 2004 PIPEs, including warrants issued to placement agents | | | 4,270,300 | | | $ | 0.452 | | May 28, 2009 or July 9, 2009 |
| Anti-dilution warrants issued to investors in the 2004 PIPEs | | | 885,677 | | | $ | 0.221 | | May 28, 2009 or July 9, 2009 |
Additional Warrants issued to investors exercising previously issued warrants in connection with July 2006 Warrant Re-pricing | | | 4,057,946 | | | $ | 0.138 | | April 3, 2009 |
| Warrant issued for investment banking services | | | 500,000 | | | $ | 0.085 | | October 31, 2011 |
| All other | | | 150,000 | | | $ | 0.500 | | May 6, 2009 |
| | | | | | | | | | |
| | | | 173,863,901 | | | $ | 0.094 | | |
On April 1, 2008, we granted stock options to purchase an aggregate of 1,500,000 shares of our common stock at $0.065 per share, the market price on the date of the grant, to two consultants. The options have a term of 10 years from the date of grant. Options to purchase 1,000,000 shares are immediately exercisable; options to purchase an additional 250,000 shares become exercisable on the first anniversary of the grant and options to purchase the remaining 250,000 shares become exercisable on the second anniversary of the grant. We utilized the Black Scholes option pricing model with the following assumptions to determine the valuation of the options as of the date of grant:
| Exercise Price per share | | $ | 0.065 | |
| Risk-free interest rate | | | 3.68% | |
| Expected volatility | | | 197.83% | |
| Contractual term (in years) | | | 10.00 | |
| Dividend yield | | | 0% | |
| Valuation per share | | $ | 0.0649 | |
At March 31, 2009, we have recognized approximately $35,000 and $2,000 of non-cash research and development and selling, general and administrative expenses, respectively, attributable to these options.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
We maintain stock compensation plans for our employees and directors which are described in Note 12, Share Based Payments, in the Notes to Consolidated Financial Statements in our 2008 Annual Report on Form 10-K filed with the SEC on April 27, 2009. We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”) effective January 1, 2006. SFAS 123R requires that we recognize the fair value of stock compensation, including stock options, in our statement of operations. We recognize the stock compensation expense over the requisite service period of the individual grantees, which is generally the same as the vesting period of the grant. All of our stock compensation is accounted for as an equity instrument.
We did not grant any options to employees or members of our Board of Directors during the first quarters of 2009 or 2008. Under the provisions of SFAS 123R, we have recorded approximately $120,000 of stock based employee compensation expense in our condensed consolidated statement of operations for the three months ended March 31, 2009 attributable to the employee options granted during the second quarter of 2008 and to options granted to non-employee members of our Board of Directors in the fourth quarter of 2007. Of the total expense, $107,000 has been recorded as selling, general and administrative expense, $7,000 as research and development expense and $6,000 as cost of product sales expense. We have assumed an annual pre-vesting forfeiture rate of 7.75% in determining our stock compensation expense. In determining the inputs to the Black-Scholes option valuation model, we have assumed a dividend yield of zero since we have never paid cash dividends and have no present intention to do so. We estimate volatility based upon the historical volatility of our common stock over a period generally commensurate with the expected life of the options. We determine the risk-free interest rate based on the quoted U.S. Treasury Constant Maturity Rate for a security having a comparable term at the time of the grant. To-date, we have calculated the expected term of option grants using the simplified method prescribed by SEC Staff Accounting Bulletin 107 for “plain vanilla” options. We have historically granted options having a ten year contractual term to our employees and directors.
The following table summarizes option activity for all of our stock option plans from December 31, 2008 through March 31, 2009:
| | | | | | Weighted | | | Weighted | | | Aggregate | |
| | | | | | Average | | | Average | | | Intrinsic | |
| | | | | | Exercise | | | Remaining | | | Value at | |
| | | | | | Price per | | | Contractual | | | Date | |
| | | Options | | | Share | | | Term (years) | | | Indicated | |
| | | | | | | | | | | | | |
| Options outstanding at December 31, 2008 | | | 34,096,583 | | | $ | 0.145 | | | | 4.34 | | | $ | 0 | |
| Options granted | | | - | | | | - | | | | | | | | | |
| Options exercised | | | - | | | | - | | | | | | | | | |
| Options forfeited | | | - | | | | - | | | | | | | | | |
| Options expired | | | (3,489,212 | ) | | $ | 0.335 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Options outstanding at March 31, 2009 | | | 30,607,371 | | | $ | 0.123 | | | | 4.57 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | |
| Options vested and exercisable at December 31, 2008 | | | 30,596,583 | | | $ | 0.145 | | | | 3.81 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | |
| Options vested and exercisable at March 31, 2009 | | | 27,107,371 | | | $ | 0.126 | | | | 4.03 | | | $ | 0 | |
The aggregate intrinsic value is the sum of the amounts by which the quoted market price of our common stock at the date indicated exceeded the exercise price of the options (“in-the-money-options”). At March 31, 2009, the market price of our stock was $0.01 per share, and none of our options were in-the-money. The aggregate intrinsic value of options exercised at the time they were exercised was $0.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
The following table summarizes information about stock options outstanding under all of our option plans at March 31, 2009:
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | Weighted | | | | | | | | | | |
| | | | | | Average | | | Weighted | | | | | | Weighted | |
| Range of | | | | | Remaining | | | Average | | | | | | Average | |
| Exercise | | Number | | | Years to | | | Exercise | | | Number | | | Exercise | |
| Prices | | Outstanding | | | Expiration | | | Price | | | Exercisable | | | Price | |
| | | | | | | | | | | | | | | | | |
| $0.03 to $0.047 | | | 1,000,000 | | | | 4.02 | | | | $ | 0.039 | | | | 1,000,000 | | | $ | 0.039 | |
| $0.065 | | | 12,500,000 | | | | 1.66 | | | | $ | 0.065 | | | | 12,000,000 | | | $ | 0.065 | |
| $0.11 | | | 14,308,402 | | | | 7.65 | | | | $ | 0.110 | | | | 11,308,402 | | | $ | 0.110 | |
| $0.13 to $5.70 | | | 2,791,027 | | | | 1.98 | | | | $ | 0.268 | | | | 2,791,027 | | | $ | 0.268 | |
| $8.40 | | | 1,133 | | | | 2.55 | | | | $ | 8.400 | | | | 1,133 | | | $ | 8.400 | |
| $35.63 | | | 1,233 | | | | 1.76 | | | | $ | 35.630 | | | | 1,233 | | | $ | 35.630 | |
| $61.88 | | | 1,667 | | | | 1.05 | | | | $ | 61.880 | | | | 1,667 | | | $ | 61.880 | |
| $71.25 | | | 167 | | | | 1.13 | | | | $ | 71.250 | | | | 167 | | | $ | 71.250 | |
| $73.13 | | | 408 | | | | 1.2 | | | | $ | 73.130 | | | | 408 | | | $ | 73.130 | |
| $120.00 | | | 3,334 | | | | 1.05 | | | | $ | 120.000 | | | | 3,334 | | | $ | 120.000 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | 30,607,371 | | | | 4.57 | | | | $ | 0.123 | | | | 27,107,371 | | | $ | 0.126 | |
At March 31, 2009, the expected compensation cost of options outstanding but not yet vested was approximately $527,000. We expect to recognize this cost over a weighted average period of approximately 8 months. We did not record any income tax benefits for stock-based compensation arrangements for the three month periods ended March 31, 2009 and 2008, as we have cumulative operating losses and have established full valuation allowances for our income tax benefits.
| (8) | Related Party Transactions |
At March 31, 2009, Marr holds an aggregate of $3,708,000 of our 8% Secured Convertible Notes plus $76,000 in accrued interest and $4,200,000 under the Marr Credit Facility, plus $815,000 of related accrued interest. Additionally, Marr holds approximately 17% of our outstanding common stock.
During the first quarter of 2009, David Khidasheli, an investor in our March 2007 private placement, who beneficially owned approximately 16% of our common stock as of March 31, 2009, advanced an aggregate of $300,025 to us in anticipation of a financing agreement. We used the funds as working capital. This advance was subsequently treated as a partial exercise of a warrant issued to him in our March 2007 private placement. (Refer to Note 10)
On September 28, 2008, David K. Harris, the former Chief Executive Officer of our subsidiary, Beijing Marr, filed a labor dispute claim against Beijing Marr with the Beijing Chaoyang District, China, Labor Dispute Arbitration Commission claiming that he was wrongfully terminated by Beijing Marr and seeking approximately $381,000 for unpaid salary, expense reimbursement, severance payment and penalties. In January 2009, Beijing Marr filed a counterclaim against Mr. Harris for damages it suffered as a result of various instances of misconduct and failure to perform his duties as chief executive officer and seeking approximately $73,000. The matter so far has been heard on November 28, 2008, February 2, 2009 and April 20, 2009.
In late 2008, two former employees of Beijing Marr filed complaints against Beijing Marr with the Labor Arbitration Committee of Chaoyang District, Beijing, claiming that they are owed additional compensation as a result of noncompliance with certain provisions of the Labor Contract Law of China. Each is claiming they are owed one month salary. The total claimed is approximately $31,181.56. The first hearing took place on April 30, 2009.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
The complaint filed by Fangcui Green Garden Project Co., Ltd. (“Fangcui”) against Beijing Marr in the Beijing Arbitration Committee, previously disclosed in our Annual Report on Form 10-K for the fiscal year ending December 31, 2008, was settled. Beijing Marr paid Fangcui approximately $28,000.
Default under Convertible Notes
As of April 3, 2009, we have not repaid the aggregate of $5,968,000 due to three note holders, one of whom is Marr, under the terms of our Secured 8% Convertible Promissory Notes dated April 4, 2005, including Interest Notes in the aggregate amounts of $117,000 that were issuable in payment of quarterly interest on April 3, 2009. Additionally, we have not repaid the aggregate of $5,015,000, including $815,000 of accrued interest through the April 3, 2009 maturity, of the 7% Promissory Notes due under the terms of the 2005 Marr Credit Facility, as amended. Consequently, we are in default under the terms of each of these agreements.
We are currently discussing termination, reduction or restructuring of our debt obligations under the 2005 Marr Credit Facility and the 8% Convertible Notes with each of the secured creditors. There can be no assurance that acceptable terms, or any terms, will be reached between us and any of the creditors. These defaults, coupled with our significant working capital deficit and limited cash resources, place a high degree of doubt on our ability to continue our operations.
In light of our existing operations and financial challenges, we are exploring strategic and financing options in conjunction with our ongoing discussions with these secured creditors to terminate, reduce or restructure our debt obligations. Failure to obtain additional financing and to resolve the existing defaults with respect to the Credit Facility and the Convertible Notes will likely cause us to seek bankruptcy protection under Chapter 7 of Title 11 of the United States Code, 11 U.S.C. § 101 et seq., which would have a material adverse effect on our business, on our ability to continue our operations and on the value of our equity.
Capital Raises
On May 1, 2009, we entered into a subscription agreement (the “Subscription Agreement”) with Carolina Lipascu, an individual pursuant to which Ms. Lipascu agreed to purchase 5,000,000 shares of our common stock, par value $0.03 at a purchase price of $0.03 per share (the “Shares”), for a total purchase price of $150,000, in a private placement transaction pursuant to Regulation S of the Securities Act of 1933, as amended (the “Securities Act”). The Subscription Agreement contains customary representations and warranties by Ms. Lipascu regarding her status as a non-U.S. person, her investment intent and restrictions on transfer. Ms. Lipascu was granted certain piggy-back registration rights which require us to use our best efforts to register all or a portion of the Shares on the next registration statement we file with the Securities and Exchange Commission under the Securities Act. On May 5, 2009, the Company received the $150,000 cash purchase price for the Shares from Ms. Lipascu and subsequently issued the Shares to her. We used the proceeds of the private placement for general working capital purposes.
On June 9, 2009 and July 21, 2009, Ms. Lipascu invested $100,000 and $110,000, respectively, in anticipation of entering into subscription agreements similar to the Subscription Agreement. We plan to enter into subscription agreements with the Investor, on the same terms as the Subscription Agreement and to issue to Ms. Lipascu an aggregate of 7,000,000 shares. We are using the proceeds of these investments for general working capital purposes.
Warrant Exercise
On or around May 15, 2009, we amended the Series A warrant (the “Series A Warrant”) originally issued to David Khidasheli on March 27, 2007, and amended on June 11, 2008. The Series A Warrant was amended to lower the exercise price from $0.05 per share to $0.03, as an inducement to Mr. Khidasheli to treat the $300, 025 advanced to us in the first quarter of 2009 as an exercise of the Series A Warrant.
Khidasheli Letter
The independent members of our Board of Directors, Julius R. Krevans, M.D., Paul E. Freiman and John D, DiPietro (the “Independent Directors”), received a letter dated June 28, 2009, from Mr. Khidasheli, who owns 9.7% of our outstanding shares of common stock (who also holds immediately exercisable warrants to purchase an additional 4% of our outstanding shares), requesting that they resign from the Board of Directors (the “Khidasheli Letter”). The Board of Directors held a meeting on June 29, 2009 to discuss the Khidasheli Letter. The Independent Directors requested Adel Karas, member of our Board of Directors and Chief Executive Officer, Chief Financial Officer and Secretary, to ascertain from Mr. Khidasheli whether the Khidasheli Letter represents the will of our stockholders holding a majority of the outstanding shares of our common stock and to relay to Mr. Khidasheli, that if it does, the Independent Directors would resign, since such majority would have the power to remove the Independent Directors, with or without cause, under Section 3.5 of our Bylaws. Otherwise, as required by Article XII of our Certificate of Incorporation, such stockholders would have to call a special meeting of our stockholders, and go through the time consuming and costly SEC proxy process to exercise their removal right. On August 3, 2009, the Independent Directors received an email correspondence from Mr. Khidasheli’s legal counsel, which included copies of proxies from holders of 45.2% of our outstanding shares of common stock (who also hold immediately exercisable warrants to purchase an additional 8% of our outstanding shares) appointing Mr. Khidasheli as their proxy agent to remove the Independent Directors and to elect two new directors to our Board of Directors. Barring unforeseen circumstances, it is expected that the Independent Directors will resign after consultation and review of this situation by their legal counsel.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview and Outlook
At March 31, 2009, we had $10,983,000 in outstanding secured debt, including accrued interest, which became due and payable on April 3, 2009, in addition to approximately $5.6 million in other liabilities. At March 31, 2009, we had a cash balance of $0.2 million.
During the first quarter of 2009, we continued to focus on restructuring our operations and debt. We continued to maintain minimal administrative staff to operate the company and fulfill sales orders of our AwareTM HIV-1/2 Rapid Test and BED Incidence Test from our existing inventory, while we negotiated with an investor for continued investment and with creditors for the termination, reduction or restructuring of our debt.
As we have been able to obtain a small stream of funding to continue our operations through the partial exercise of a warrant and private placements of common stock, we have recently begun focusing on rebuilding operations. We have hired a scientist to oversee production and a consultant to advise our chief executive officer on operations, in anticipation of rebuilding our production, sales and distribution efforts. However, we do not have any definitive agreements for continued funding from these sources, and there is no assurance that any such continued funding will be available to us on acceptable terms, or at all. If such additional funding is not available to us when required or is not available to us on acceptable terms, our liquidity and financial condition will be adversely affected and we will likely be unable to continue our operations.
Assuming we continue to receive funding, we plan to focus our marketing and sales efforts in Africa, primarily in Kenya, Uganda and South Africa, and in the Middle East, Asia, India and the Carribean. Our marketing efforts and sales to date have been exclusively in the professional market. In the near-term, we plan to expand our marketing and sales efforts to the over-the-counter (“OTC”) market too.
In Kenya and Uganda we are cooperating with local governmental bodies for an Oral Fluid Algorithm release. The Oral Fluid Algorithm is a three step screening procedure that the Ministry of Health in each country adopts to perform HIV testing. If an Oral Fluid Algorithm is adopted by these countries we will be able to sell our AwareTM HIV-1/2 Rapid Test in the private sector, primarily to nongovernmental organizations (“NGOs”), and in the public sector, primarily to government testing programs. We expect this release to occur in both countries by the end of the fourth quarter in 2009. In Kenya, we are also working with the Centers for Disease Control and Prevention (“CDC”) in cooperation with Population Council, a local NGO, to implement a home testing project by the fourth quarter of 2009. If these efforts are successful, we would be selling in both the professional and OTC markets in these countries.
In South Africa, we are working on increasing sales through our local distributor and have continued direct sales of AwareTM HIV-1/2 Rapid Test and BED Incidence Test to current customers. We are also attempting to establish new relationships with international NGOs that will enable us to increase our market share in South Africa.
We are negotiating distribution agreements for our AwareTM HIV-1/2 Rapid Test for the Caribbean, Egypt, and Ethiopia. In Ethiopia, especially, we hope to have a distirbution agreement in place by the end of 2009.
In order to accomplish our business plan and meet our financial obligations, we must:
- Negotiate a termination, reduction or restructuring of our secured debt obligations.
- Raise additional capital to fund working capital requirements.
- Reduce accounts payable and other debt.
- Reduce certain fixed costs.
- Increase marketing and sales of our products through our current and new distribution network.
- Developing a larger international market presence.
We have been actively pursuing potential opportunities to address the above matters, the ultimate resolution of which is beyond our control, and will have a significant impact on our financial condition and ability to continue our operations. As a result, no assurances can be given that these transactions will be completed as contemplated or at all, which could have a detrimental effect on our ability to continue our operations.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
We continue to run the substantial risk that we will not be able to carry out this business plan because of liquidity and capital resource obstacles. Our cash resources are insufficient to continue our operations through the near-term or to pay our debt and, given the current market price of our common stock, we may not have sufficient authorized shares of common stock available to raise sufficient capital to continue operations and pay our debt. Moreover, our stock price is below its par value, which may make it difficult to raise capital through the issuance of equity securities. Additionally, the magnitude of our debt makes it highly unlikely that we will be able to raise additional capital. We do not have any definitive agreements with respect to additional financing or a strategic opportunity, and there is no assurance that any such financing or strategic opportunity will be available to us on acceptable terms, or at all. If such additional financing is not available to us when required or is not available to us on acceptable terms, or we are unable to arrange a suitable strategic opportunity, we will be in significant financial jeopardy and we will be unable to continue our operations.
Financial Considerations
Our consolidated operating cash burn rate for the first three months of 2009 was approximately $295,000 compared to $1,175,000 in the first three months of 2008. Our focus in this quarter was keeping a minimal level of operations so that we could continue shipping existing inventory of products, while we looked for options to fund the company.
During the first three months of 2009, we incurred a net loss of $1.2 million. At March 31, 2009, we had a working capital deficit of $15.5 million, including $10.9 million of 8% convertible notes and 7% notes payable to a related party, including accrued interest, all of which is due on April 3, 2009, and our stockholders’ deficit was $13.4 million. Based upon our financial condition at December 31, 2008, as well as our recurring losses and our negative cash flows from operations, our independent accountants issued an opinion on our December 31, 2008 financial statements citing substantial doubt about our ability to continue our business operations as a going concern. Our cash balance at March 31, 2009 was $0.2 million, which we do not believe is sufficient to enable us to fund our operations through the remainder of 2009. We will need to raise additional capital to fund our operations in the near term.
We currently have 800,000,000 shares of common stock authorized, of which approximately 729,000,000 shares are issued and outstanding or are reserved for issuance under current financing arrangements and our incentive plans. If additional financing is available to us, it will likely be in the form of one or more equity or convertible debt transactions. At the current market price of our common stock, we do not have sufficient authorized common stock to raise more than a few hundred thousand dollars, which is not sufficient to permit us to execute our business plan and achieve self-sustaining cash flow. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii).
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to bad debts, inventories, intangible assets, income taxes, restructuring costs, derivative and anti-dilution liabilities and contingencies and litigation. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
Consistent with our policy on impairment of long-lived assets, given the 3/31/09 operating loss and cash flow loss, the carrying values of Calypte and Beijing-Marr long-lived assets were compared against the undiscounted cash flows of the two entities over the remaining useful life of the primary assets. Cash flow projections were based on a combination of historical run-rates and future projections, depending on the markets where the products were registered and the related distribution channels. We concluded that no impairment was required.
The critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2008 have not changed materially since year-end.
Adoption of New Accounting Pronouncements
In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (EITF) Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (EITF 07-05). EITF 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. EITF 07-05 was effective for financial statements issued for fiscal years beginning after December 15, 2008 (our fiscal year 2009). We adopted EITF 07-05 on the first day of our fiscal year 2009 and determined that no balance sheet reclassifications were necessary at March 31, 2009.
On January 1, 2009, we adopted SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, which introduces changes in the accounting and reporting for business acquisitions and non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. In accordance with the requirements of SFAS 160, we have provided a new presentation on the face of the consolidated financial statements to separately classify non-controlling interests within the equity section of the consolidated balance sheets and to separately report the amounts attributable to controlling and non-controlling interests in the consolidated statements of operations and comprehensive loss for all periods presented. There were no changes in the Company’s ownership interests in previously existing subsidiaries or deconsolidation of subsidiaries for the three months ended March 31, 2009.
Results of Operations
The following represents selected financial data (in thousands):
| | | Three Months Ended | |
| | | March 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Total revenues | | $ | 176 | | | $ | 188 | |
| Cost of product sales | | | 75 | | | | 199 | |
| | | | | | | | | |
| Gross Margin | | | 101 | | | | (11 | ) |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Research and development | | | 43 | | | | 364 | |
| Selling, general and administrative | | | 755 | | | | 1,277 | |
| | | | | | | | | |
| Total operating expenses | | | 798 | | | | 1,641 | |
| | | | | | | | | |
| Loss from operations | | | (697 | ) | | | (1,652 | ) |
| | | | | | | | | |
| Interest expense, net | | | (620 | ) | | | (441 | ) |
| Other income, net | | | 75 | | | | - | |
| | | | | | | | | |
| Net loss before income taxes | | $ | (1,242 | ) | | $ | (2,093 | ) |
| | | | | | | | | |
| Less: Loss attributed to noncontrolling interests in consolidated entities | | | 64 | | | | 117 | |
| | | | | | | | | |
| Net loss attributed to Calypte Biomedical Corporation | | $ | (1,178 | ) | | $ | (1,976 | ) |
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
Quarter ended March 31, 2009 and 2008
Our revenue for the first quarter of 2009 totaled $176,000 compared with $188,000 for the first quarter of 2008, a decrease of $12,000 or 6.4%. Sales of our BED Incidence Test accounted for 69% of our sales in the first quarter of 2009, compared with 81% in the first quarter of 2008. Revenue from the sales of the BED Incidence Test decreased by 21% in 2009 compared with 2008. Such sales tend to be irregular as public health and research institutions begin or conclude various studies to monitor the incidence of HIV infection within their subject populations. Sales of our AwareTM HIV-1/2 rapid tests accounted for 31% and 19% of our sales in the first quarter of 2009 and 2008, respectively. First quarter 2009 revenues from the sale of our rapid tests increased by 52% compared with rapid test revenues in the first quarter of 2008. Sales of our HIV-1/2 rapid tests are also irregular during this commercialization period as we gain approvals for and begin distribution of those tests in various parts of the world. Sales of our new Aware MessengerTM oral fluid sample collection device and our Life Sciences reagents accounted for less than 1% of our sales in the first quarter of 2009.
Four customers accounted for approximately 65% of our first quarter 2009 revenue. A New York Research institution and the CDC’c contract testing lab purchased BED Incidence tests representing 21% and 10% of our first quarter 2009 revenue, respectively. Our South African distributor purchased both BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 17% of our first quarter 2009 revenue, and our Indian distributor purchased our AwareTM HIV-1/2 oral fluid rapid tests representing 18% of first quarter 2009 revenue. Four customers accounted for approximately 77% of our first quarter 2008 revenue. Purchases of our AwareTM BEDTM HIV-1 Incidence Test (the Incidence Test”) by the Chinese National AIDS laboratory, the CDC’s New York contract testing lab, and a Japanese medical products distributor accounted for approximately 27%, 22% and 10%, respectively, of our 2008 first quarter revenue. Our distributor in South Africa purchased our AwareTM HIV-1/2 oral fluid rapid tests and the Incidence Test in amounts representing approximately 18% of our first quarter 2008 revenue.
We reported gross margins of 58% and negative 11% of sales in the first quarter of 2009 and 2008, respectively. The margins we reported in both 2009 and 2008, however, are not typical of our expected future results because of the relatively nominal amounts of revenues and product quantities over which certain fixed expenses, like annual royalty minimum payments, have been allocated. Product costs in both periods are based on resource-constrained purchasing patterns and pilot-plant-sized production lots, and do not reflect the economies of scale that we anticipate when we achieve true commercial scale operations.
During the first three months of 2009, we incurred a net loss of $1.2 million. At March 31, 2009, we had a working capital deficit of $15.5 million.
Research and development costs decreased by $321,000 or 89%, from $364,000 in the first quarter of 2008 to $43,000 in the first quarter of 2009. The primary components of the net decrease include the following:
| | · | a decrease of $239,000 in salary and benefits expenses attributable to the elimination of R&D positions in the fourth quarter of 2008 |
| | · | a decrease of approximately $48,000 in legal expenses related to the pursuit of patents; |
Selling, general and administrative costs decreased by $522,000 or 41%, from $1,277,000 in the first quarter of 2008 to $755,000 in the first quarter of 2009. The primary components of the net decrease include the following:
| | · | a decrease of $258,000 in salary and benefits expenses attributable to the elimination of certain senior administrative and sales management positions in the fourth quarter of 2008 |
| | · | a decrease of approximately $157,000 in marketing and administrative consultant and public company expenses; |
Our loss from operations for the first quarter of 2009, at $697,000, reflects a reduction of 58% compared with the loss of $1,652,000 reported for the first quarter of 2008.
We recorded net interest expense of $620,000 for the first quarter of 2009 compared with $441,000 of net interest expense in the first quarter of 2008. The increased expense in 2009 relates to amortization of discounts and derivative obligations associated with the March 2007 extension of the maturity of the 8% Convertible Notes and the 7% Marr Credit Facility Notes until April 3, 2009, which are being amortized over the period from March 2007 through April 2009.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
The following table summarizes the components of interest expense (in thousands):
| | | | | | | | | (Increase) | |
| | | Three Months ended March 31, | | | Decrease | |
| | | 2009 | | | 2008 | | | Expense | |
| | | | | | | | | | |
| Interest expense on debt instruments paid or payable in cash | | $ | (74 | ) | | $ | (76 | ) | | $ | 2 | |
| Non-cash (expense) income composed of: | | | | | | | | | | | | |
| Accrued interest on 8% Convertible Notes (paid by issuing additional | | | | | | | | | |
| Notes) | | | (117 | ) | | | (109 | ) | | | (8 | ) |
| Amortization of discounts associated with March 2007 extension | | | | | | | | | | | | |
| and December 2007 restructuring of 8% convertible notes and | | | | | | | | | | | | |
| Marr Credit Facility notes | | | (399 | ) | | | (258 | ) | | | (141 | ) |
| Mark to market adjustment of and intrinsic value of shares issued | | | | | | | | | | | | |
| under anti-dilution obligations arising from the February and | | | | | | | | | | | | |
| March 2007 financings | | | - | | | | 32 | | | | (32 | ) |
| Expense attributable to dividends on mandatorily redeemable Series | | | | | | | | | | | | |
| A preferred stock | | | (30 | ) | | | (30 | ) | | | - | |
| | | | | | | | | | | | | |
| Total non-cash items | | | (546 | ) | | | (365 | ) | | | (181 | ) |
| | | | | | | | | | | | | |
| Total interest expense | | $ | (620 | ) | | $ | (441 | ) | | $ | (179 | ) |
Liquidity and Capital Resources
Our cash requirements depend on many factors, including the execution of our business plan. We expect to need to continue to devote substantial capital resources to running our business, negotiating with creditors for the termination, reduction or restructuring of our debt and to implementing our business plan. Based on our current forecasts and assumptions, we believe that our existing cash and cash equivalents are insufficient to meet our anticipated cash needs for working capital and capital expenditures for the next twelve months or to pay our debt. Given the state of the company, we have not made any plans for capital expenditures related to manufacturing and operations.
Operating Activities
During the three months ended March 31, 2009 and 2008 we used cash of $0.3 million and $1.2 million, respectively, in our operating activities. In the period ending March 31, 2009, the cash was used primarily for our selling, general and adminstrative expenses. In the period ending March 31, 2008, the cash was used primarily to develop and commercialize our rapid tests, as well as for our selling, general and administrative expenses, including those of our Chinese joint ventures.
Financing Activities
During the three months ended March 31, 2009, we generated $300,025 from financing activities compared to $842,000 generated from financing activities during the three months ended March 31, 2008. The funds generated from financing activities in the three months ended March 31, 2009 were primarily the result of two partial exercises of a warrant by an investor.
In 2009, to date, we have been able to generate financing from two investors. Although we do not have definitive agreements with either of these investors for continuing financing, these investors have demonstrated their willingness to finance our operations on a regular basis, based on our continuing efforts to execute our business plan, including restructuring our debt.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
If we are unable to obtain additional financing, we will be in significant financial jeopardy and we will be unable to continue as a going concern. If we are able to raise additional capital and restructure our debt by issuing additional equity or debt securities, the ownership percentages of existing stockholders would be reduced, on a fully diluted basis in the case of convertible securities. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Recent Accounting Pronouncements
We have described the recent accounting pronouncements to which we will be subject in future periods in Note 2 to the Condensed Consolidated Financial Statements included in Part I of this Report on Form 10-Q.
Forward-Looking Statements
This Management’s Discussion and Analysis contains forward-looking statements regarding our future plans, regulatory reviews and approvals, timing, strategies, expectations, anticipated expense levels, projected profitability, business prospects and positioning with respect to market, demographic and pricing trends, business outlook and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations) and expresses our current intentions, beliefs, expectations, strategies or predictions. These forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and uncertainties.
Forward-looking statements are generally identifiable by the use of terms such as “anticipate,” “will,” “expect,” “believe,” “should” or similar expressions. Although we believe that the bases of the assumptions on which the forward-looking statements contained herein are reasonable, any of those assumptions could prove to be inaccurate given the inherent uncertainties as to the occurrence or nonoccurrence of future events. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including the potential risks and uncertainties set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 and Item 1A below and relate to our business plan, our business strategy, development of our proprietary technology and our products, timing of such development, timing of FDA and international regulatory reviews, market acceptance of our products by governmental and other public health agencies, health care providers and consumers, characteristics and growth of our market and customers, protection of our intellectual property, implementation of our strategic, operating and human resources initiatives, benefits to be derived from key personnel and directors, our ability to commercialize our products, our ability to obtain an increased market share in the diagnostic test market, our assumptions regarding cash flow from operations and cash on-hand, the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure, implementation of marketing and distribution channels, our distribution agreements and strategic alliances, our liquidity and capital resources, our ability to obtain additional capital as, and when, needed, and on acceptable terms, changes in health care policy in the United States or abroad and general economic conditions specific to our industry, any of which could impact sales, costs and expenses and/or planned strategies and timing. If we are not able to generate sufficient liquidity from operations and current potential resources or are unable to raise sufficient additional capital, this could have a material adverse affect on our business, results of operations, liquidity and financial condition. We assume no obligation to, and do not currently intend to, update these forward-looking statements.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive and financial officer (our “CEO”) of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). This evaluation identified a deficiency in our disclosure controls and procedures with respect to accounting procedures utilized by our Chinese subsidiaries, Beijing Calypte and Beijing Marr, and their reporting to us of financial and other material information. Based on this evaluation, our CEO concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report. Moreover, our CEO has determined that this deficiency constitutes a material weakness in our financial reporting.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
As a result of our evaluation, we determined that we do not have adequate controls and procedures with respect to our Chinese subsidiaries and we are unable to adequately disclose financial and other material information or to do so in a timely manner. Beijing Marr and Beijing Calypte employed a single financial manager for both companies who resigned in the first quarter of 2008. Because of financial constraints, his position has since remained vacant. There are no personnel at our Chinese subsidiaries with sufficient understanding and skills in the application of U.S. generally accepted accounting principles or in U.S. public company reporting obligations to prepare proper financial statements or provide us with other material information to enable us to properly account for and disclose both financial and other material information. The absence of qualified financial personnel at our Chinese subsidiaries has precluded proper monitoring of the financial results of those operations and timely preparation of sufficient and accurate financial statements, rendering our efforts to apply controls over the completeness and accuracy of our Chinese subsidiaries financial statements, closing processes relating to reconciliations, journal entries, spreadsheets, reporting packages and review and preparation of monthly expenditure reports ineffective.
Because of the limited level of activity in which our Chinese subsidiaries were engaged during the first quarter of 2009, there were no material adjustments required to the financial information ultimately prepared by those subsidiaries. Nevertheless, as Beijing Marr commences anticipated manufacturing and sales activities, the absence of an adequately trained financial staff could result in a material misstatement of annual or interim financial statements that would not be prevented or detected.
We are evaluating how to remedy this situation, in consultation with our Chinese subsidiaries’ management and our joint venture partner.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The complaint filed by Fangcui Green Garden Project Co., Ltd. (“Fangcui”) against Beijing Marr in the Beijing Arbitration Committee, previously disclosed in our Annual Report on Form 10-K for the fiscal year ending December 31, 2008, was settled. Beijing Marr paid Fangcui approximately $28,000.
The risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 have not materially changed other than as set forth below.
Risks Related to Our Financial Condition
We have commenced a review of strategic business alternatives, which may or may not result in changes to our business and our profitability.
Since the filing of our Annual Report on Form 10-K for the year ending December 31, 2008, we have engaged in a review of strategic alternatives and to evaluate a full range of possible directions. In connection with this evaluation, we are reviewing and, where appropriate, will adjust our business model with a view toward achieving near-term profitability. Changes in our business model may require us to incur additional restructuring expenses and other write-downs and impairment charges in the near-term. We cannot assure that the evaluation process will result in any specific transaction or outcome or that it will improve our profitability. Consideration of these options may cause us to incur additional expenses, disruption to and distractions in our business, and impact our ability to attract new business and to attract and retain key personnel.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
Item 3. Defaults Upon Senior Securities
As of April 3, 2009, we are in default under our Secured 8% Convertible Promissory Notes, as amended (the “Convertible Notes”), issued to three note holders, one of whom is Marr. The Convertible Notes were issued pursuant to a Purchase Agreement dated April 4, 2005. We are in default under the Convertible Notes because they matured and became due on April 3, 2009, and we are unable to repay them. At maturity, we owe an aggregate of $5,968,000, including $117,000 of accrued interest.
Item 5. Other Information
On May 1, 2009, we entered into a subscription agreement (the “Subscription Agreement”) with Carolina Lipascu, an individual (the “Investor”) pursuant to which the Investor agreed to purchase 5,000,000 shares of our common stock, par value $0.03 at a purchase price of $0.03 per share (the “Shares”), for a total purchase price of $150,000, in a private placement transaction pursuant to Regulation S of the Securities Act of 1933, as amended (the “Securities Act”). The Subscription Agreement contains customary representations and warranties by the Investor regarding her status as a non-U.S. person, her investment intent and restrictions on transfer. The Investor was granted certain piggy-back registration rights which require us to use our best efforts to register all or a portion of the Shares on the next registration statement we file with the Securities and Exchange Commission under the Securities Act. On May 5, 2008, the Company received the $150,000 cash purchase price for the Shares from the Investor and issued the Shares to the Investor. We used the proceeds of the private placement for general working capital purposes.
On June 9, 2009 and July 21, 2009, the Investor invested $100,000 and $110,000, respectively, in anticipation of entering into subscription agreements similar to the Subscription Agreement. We plan to enter into subscription agreements with the Investor, on the same terms as the Subscription Agreement and to issue to the Investor an aggregate of 7,000,000 shares. We are using the proceeds of these investments for general working capital purposes.
On or around May 15, 2009, we amended the Series A warrant (the “Series A Warrant”) originally issued to David Khidasheli on March 27, 2007, as amended on June 11, 2008 as disclosed in our current report on Form 8-K filed with the SEC on June 18, 2008. The Series A Warrant was amended to lower the exercise price from $0.05 per share to $0.03, as an inducement to Mr. Khidasheli to treat the $300, 025 advanced to us in the first quarter of 2009 as an exercise of the Series A Warrant. Mr. Khidasheli exercised the Series A Warrant and was issued 10,000,833 shares of our common stock.
The independent members of our Board of Directors, Julius R. Krevans, M.D., Paul E. Freiman and John D, DiPietro (the “Independent Directors”), received a letter dated June 28, 2009, from Mr. Khidasheli, who owns 9.7% of our outstanding shares of common stock (who also holds immediately exercisable warrants to purchase an additional 4% of our outstanding shares), requesting that they resign from the Board of Directors (the “Khidasheli Letter”). The Board of Directors held a meeting on June 29, 2009 to discuss the Khidasheli Letter. The Independent Directors requested Adel Karas, member of our Board of Directors and Chief Executive Officer, Chief Financial Officer and Secretary, to ascertain from Mr. Khidasheli whether the Khidasheli Letter represents the will of our stockholders holding a majority of the outstanding shares of our common stock and to relay to Mr. Khidasheli, that if it does, the Independent Directors would resign, since such majority would have the power to remove the Independent Directors, with or without cause, under Section 3.5 of our Bylaws. Otherwise, as required by Article XII of our Certificate of Incorporation, such stockholders would have to call a special meeting of our stockholders, and go through the time consuming and costly SEC proxy process to exercise their removal right. On August 3, 2009, the Independent Directors received an email correspondence from Mr. Khidasheli’s legal counsel, which included copies of proxies from holders of 45.2% of our outstanding shares of common stock (who also hold immediately exercisable warrants to purchase an additional 8% of our outstanding shares) appointing Mr. Khidasheli as their proxy agent to remove the Independent Directors and to elect two new directors to our Board of Directors. Barring unforeseen circumstances, it is expected that the Independent Directors will resign after consultation and review of this situation by their legal counsel.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
(a) Exhibits
| 10.192 | | Form of Subscription Agreement between the Company and Carolina Lipascu, dated as of May 1, 2009, between the Company and Carolina Lipascu. |
| 31.1 | | Certification of Chief Executive Officer and Principal Chief Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
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.
| | CALYPTE BIOMEDICAL CORPORATION (Registrant) |
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| Date: August 7, 2009 | By: | /s/ Adel Karas |
| | | Adel Karas President, Chief Executive Officer and Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary |
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