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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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: 000-20985
CALYPTE BIOMEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1226727
(State or other jurisdiction of incorporat (I.R.S. Employer
or organization) Identification Number)
1265 HARBOR BAY PARKWAY, ALAMEDA, CALIFORNIA 94502
(Address of principal executive offices) (Zip Code)
(510) 749-5100
(Registrant's telephone number, including area code)
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 registrant had 24,766,712 shares of common stock outstanding as of
April 30, 2000.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
FORM 10-Q
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)
at March 31, 2000 and December 31, 1999........... 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2000 and
1999 (unaudited).................................. 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended March 31, 2000
and 1999 (unaudited).............................. 5
Notes to Condensed Consolidated Financial
Statements (unaudited)............................ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.. 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......... 19
Item 6. Exhibits and Reports on Form 8-K.................. 19
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
ASSETS
3/31/00 12/31/99
---------------- ---------------
Current assets:
Cash and cash equivalents...................................................... $ 525 $ 2,652
Restricted cash................................................................ 743 -
Securities available for sale.................................................. 509 503
Accounts receivable, net of allowance of $35 at March 31, 2000
and December 31, 1999..................................................... 721 583
Inventory...................................................................... 1,419 1,460
Notes receivable - officers and employees...................................... 598 551
Prepaid expenses............................................................... 204 201
Other current assets........................................................... 122 110
---------------- ---------------
Total current assets.................................................. 4,841 6,060
Property and equipment, net of accumulated depreciation of $4,039
at March 31, 2000 and $3,967 at December 31, 1999.............................. 1,568 1,543
Intangibles, net of accumulated amortization of $17 at March
31, 2000 and $14 at December 31, 1999.......................................... 39 42
Other assets ...................................................................... 174 176
---------------- ---------------
$ 6,622 $ 7,821
================ ===============
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 1,527 $ 1,290
Accrued expenses............................................................... 1,561 1,476
Note payable - current portion................................................. 1,007 844
Capital lease obligations - current portion.................................... 73 90
Deferred revenue............................................................... 500 500
---------------- ---------------
Total current liabilities............................................. 4,668 4,200
Deferred rent obligation............................................................ 27 25
Note payable - long-term portion.................................................... 211 -
Capital lease obligations - long-term portion....................................... 142 50
---------------- ---------------
Total liabilities..................................................... 5,048 4,275
Mandatorily redeemable Series A preferred stock, $0.001 par
value; no shares authorized, 100,000 shares issued and
outstanding; aggregate redemption and liquidation value
of $1,000 plus cumulative dividends............................................ 2,246 2,216
Commitments and contingencies
Stockholders' equity(deficit):
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding............................... - -
Common Stock, $0.001 par value; 30,000,000 shares authorized; 20,670,712
and 20,425,403 shares issued and outstanding as of March 31, 2000 and
December 31, 1999, respectively............................................ 21 20
Additional paid-in capital..................................................... 68,372 68,226
Deferred compensation.......................................................... (107) (135)
Accumulated deficit............................................................ (68,958) (66,781)
---------------- ---------------
Total stockholders' equity (deficit).................................. (672) 1,330
================= ===============
$ 6,622 $ 7,821
================= ===============
- 3 -
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
---------------------------------------
2000 1999
------------- -------------
Revenues:
Product sales....................................................... $ 1,098 $ 834
------------- -------------
Total revenue..................................................... 1,098 834
------------- -------------
Operating expenses:
Product costs....................................................... 1,417 997
Research and development costs...................................... 544 1,660
Selling, general and administrative costs........................... 1,309 1,130
------------- -------------
Total expenses.................................................... 3,270 3,787
------------- -------------
Loss from operations............................................ (2,172) (2,953)
Interest income (expense), (net)....................................... (3) 29
-------------- -------------
Loss before income taxes........................................ (2,175) (2,924)
Income taxes........................................................... (2) (2)
-------------- --------------
Net loss........................................................ (2,177) (2,926)
Less dividends on mandatorily redeemable
Series A preferred stock............................................. (30) (30)
------------- -------------
Net loss attributable to common stockholders........................... $ (2,207) $ (2,956)
============= =============
Net loss per share attributable to common
stockholders (basic and diluted)..................................... $ (0.11) $ (0.18)
============= =============
Weighted average shares used to compute
net loss per share attributable to common
stockholders (basic and diluted)..................................... 20,580 16,336
============= =============
- 4 -
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended March 31,
---------------------------------
2000 1999
------------ -------------
Cash flows from operating activities:
Net loss........................................................................... $ (2,177) $ (2,926)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................................. 104 193
Amortization of deferred compensation.......................................... 28 19
Write-off of note and interest receivable to research and development costs.... - 890
Loss on sale of equipment...................................................... 19 -
Changes in operating assets and liabilities:
Accounts receivable........................................................ (138) (275)
Inventory.................................................................. 41 115
Prepaid expenses and other current assets.................................. (15) (90)
Other assets............................................................... 2 -
Accounts payable, accrued expenses and deferred
revenue............................................................... 322 653
Deferred rent obligation................................................... 2 (2)
------------ -------------
Net cash used in operating activities............................... (1,812) (1,423)
------------ ------------
Cash flows from investing activities:
Purchases of equipment............................................................. (64) (23)
Proceeds from sales of equipment................................................... 15 -
Notes receivable from officers and employees....................................... (47) 16
Loans to related parties........................................................... - (64)
Purchase of securities available for sale.......................................... (6) (200)
Sale of securities available for sale.............................................. - 225
------------ ------------
Net cash used in investing activities .............................. (102) (46)
------------ -------------
Cash flows from financing activities:
Proceeds from sale of stock........................................................ 177 461
Expenses related to sale of stock.................................................. - (263)
Expenses related to purchase of certain assets of Cambridge Biotech................ - (68)
Principal payments on notes payable ............................................... (126) -
Principal payments on capital lease obligations.................................... (21) (64)
Cash pledged to bank pursuant to loan agreement.................................... (743) -
Proceeds from notes payable........................................................ 500 2,000
------------ ------------
Net cash (used in) provided by financing activities................. (213) 2,066
------------- ------------
Net (decrease) increase in cash and cash equivalents.................................. (2,127) 597
Cash and cash equivalents at beginning of period...................................... 2,652 3,121
------------ ------------
Cash and cash equivalents at end of period............................................ $ 525 $ 3,718
============ ============
Supplemental disclosure of cash flow activities:
Cash paid for interest........................................................... $ 34 $ 54
Cash paid for income taxes....................................................... - 2
Supplemental disclosure of noncash activities:
Refinance of capital lease obligation............................................ 96 82
Dividends on mandatorily redeemable Series A preferred stock..................... 30 30
Valuation of acquisition of certain assets of Cambridge Biotech.................. - 293
Conversion of common stock subscribed to common stock............................ - 3
- 5 -
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(UNAUDITED)
(1) THE COMPANY AND BASIS OF PRESENTATION
The Company's primary activities are marketing its FDA-approved urine Human
Immunodeficiency Virus Type I (HIV-1) enzyme immunoassay (EIA) screening
test, its FDA-approved urine and serum HIV-1 Western Blot supplemental tests
and performing research and development on new products. The Company's HIV-1
screening and supplemental tests provide the only complete FDA-approved
urine-based HIV-1 testing method. The Company believes that its urine-based
tests offer significant advantages compared to existing blood-based or other
bodily-fluid-based tests, including ease-of-use, lower costs, and
significantly reduced risk of infection from collecting and handling
specimens.
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC), and reflect all adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the Company's financial
position as of March 31, 2000 and the results of its operations for the three
months ended March 31, 2000 and 1999 and its cash flows for the three months
ended March 31, 2000 and 1999. The Condensed Consolidated Balance Sheet as
at December 31, 1999 is derived from the Company's audited financial
statements. Interim results are not necessarily indicative of the results to
be expected for the full year. This information should be read in conjunction
with the Company's audited consolidated financial statements for each of the
years in the three year period ended December 31, 1999 included in Form 10-K
filed with the SEC on March 30, 2000.
Certain information in footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to the rules and regulations of the SEC.
The data disclosed in these notes to condensed consolidated financial statements
for these periods is unaudited.
(2) SIGNIFICANT ACCOUNTING POLICIES
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic net loss per share attributable to common stockholders is computed by
dividing net loss attributable to common stockholders by the weighted average
number of shares of common stock outstanding during the period presented. The
computation of diluted earnings per common share is similar to the
computation of basic net loss per share attributable to common stockholders,
except that the denominator is increased for the assumed conversion of
convertible securities and the exercise of dilutive options using the
treasury stock method. The weighted average shares used in computing basic
and diluted net loss per share attributable to common stockholders were the
same for the periods presented. Options and warrants for 4,507,947 shares and
3,548,795 shares in 2000 and 1999, respectively, were excluded from the
computation of loss per share as their effect is antidilutive.
(3) RESTRICTED CASH
Pursuant to a loan agreement with a commercial bank, the Company has pledged
$743,000 to the bank to secure the repayment of the related loan. Such funds are
restricted as to the Company's use. The loan agreement requires the Company to
maintain certain financial covenants and comply with certain reporting and other
requirements. As a result of the Company's non-compliance with certain of the
financial covenants and in accordance with the terms of the Agreement, during
the first quarter of 2000, the Company pledged cash to the bank in amounts
equivalent to 105% of the outstanding loan balance. As a result of such pledge,
the Company is considered to have cured any default arising from any non-
- 6 -
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(UNAUDITED)
compliance with the financial covenants. Subsequent to the pledge of cash, in
January 2000, the bank and the Company modified the agreement to extend the
repayment term through August 2001.
(4) INVENTORY
Inventory is stated at the lower of cost or market and the cost is determined
using the first-in, first-out method. Inventory as of March 31, 2000 and
December 31, 1999 consisted of the following:
3/31/00 12/31/99
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 252 $ 233
Work-in-Process 793 862
Finished Goods 374 365
---------- ---------
Total Inventory $ 1,419 $ 1,460
========== =========
(5) STOCK OPTION PLANS
In February 2000, the Company's Board of Directors authorized the modification
of stock options granted to employees from October 1998 through December 1999
under the Company's 1991 Incentive Stock Plan to decrease the vesting period
from five years to three years. Neither the exercise price nor the life of the
option was modified.
(6) FINANCING
On April 7, 2000, the Company completed the sale of 4,096,000 shares of
common stock in a private placement that raised approximately $8.3 million
after deducting the expenses of the transaction. Approximately one-half of
the financing came from a private holding company that was not a prior
investor in the Company and with which one of the Company's Directors is
affiliated. A representative of the holding company was elected as a member
of the Company's Board of Directors in April 2000. The balance of the private
placement financing came primarily from the Company's existing investors. In
March 2000, in conjunction with the private placement, one of the investors
advanced the Company $500,000 with the intent that the loan would be
converted to equity upon the closing of the private placement. The private
placement closed following the effectiveness of a registration statement
filed with the SEC, and the Company received the expected proceeds. The
bridge loan and related accrued interest were converted to equity upon the
closing of the private placement. In conjunction with the private placement
the Company issued 100,000 warrants exercisable at $3.62 per share and 50,000
options exercisable at $2.05 per share. The warrants and options were valued
on the date of grant at $3.03 per share and $2.86 per share, respectively,
using the Black-Scholes option-pricing model with the following assumptions:
expected dividend yield of 0.0%; risk free interest rate of 6.5%, the
contractual life of 5 years for the warrants and 10 years for the options,
and volatility of 80%. The expense associated with the warrants and options
was accounted for as a transaction cost of the private placement.
- 7 -
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE STATEMENTS IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" THAT RELATE TO FUTURE PLANS, EVENTS OR PERFORMANCE
ARE FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. ACTUAL
RESULTS, EVENTS OR PERFORMANCE MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING
THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS, EVENTS OR
PERFORMANCE" BELOW. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
OVERVIEW
Calypte's efforts are currently focused on expanding the sales and marketing of
its HIV-1 urine-based and serum-based diagnostic tests and on improving its
products and processes. In the summer of 1998, upon receipt of a license for
both its screening and supplemental tests, the Company began the marketing and
sale in the U.S. of the only available FDA-approved urine-based HIV test method.
There can be no assurance the Company will have significant revenues from sales
of the HIV-1 urine screening assay or the supplemental test.
The Company expects operating losses to continue in the near future as it
continues to expand its sales and marketing activities for its current
FDA-approved products and conducts additional research and development for
process improvements and new products. The Company's marketing strategy is to
use distributors, focused direct selling and marketing partners to penetrate
certain targeted domestic markets. The Company maintains a small direct sales
force to sell the Company's urine-based HIV-1 test to laboratories serving the
life insurance market. International and other U.S. markets are addressed
utilizing diagnostic product distributors. There can be no assurance that the
Company's products will be successfully commercialized or that the Company will
achieve significant product revenues. In addition, there can be no assurance
that the Company will achieve or sustain profitability in the future.
- 8 -
RESULTS OF OPERATIONS
The following represents selected financial data:
(in thousands)
--------------------------
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ---------
Total revenue $ 1,098 $ 834
--------- ---------
Operating expenses:
Product costs 1,417 997
Research and development 544 1,660
Selling, general and administrative 1,309 1,130
--------- ---------
Total expenses 3,270 3,787
--------- ---------
Loss from operations (2,172) (2,953)
Interest and other income (net) (3) 29
---------- ---------
Loss before income taxes $ (2,175) $ (2,924)
========= =========
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenues from product sales for the first quarter of 2000 totaled $1.1 million,
an increase of $264,000 or 32% compared to the $834,000 reported in the first
quarter of 1999. The increase in revenues is a result of increased sales across
the Company's product line, including its HIV-1 urine screening test and both
its urine-based and serum-based HIV supplemental tests.
Product costs for the first quarter of 2000 totaled $1.4 million, an increase
of $420,000 or 42% versus the $1.0 million for the first quarter of 1999. In
addition to higher costs attributable to the increase in product sales
compared to the first quarter of 1999, the Company continues to incur
duplicative costs to operate and validate processes in its Alameda,
California facility that has not yet been approved by the FDA to manufacture
product for sale. Simultaneously, it is incurring costs to operate its two
licensed facilities in Berkeley, California and Rockville, Maryland.
Redundant manufacturing costs cannot cease until the Alameda facility
receives FDA approval and the Company closes its Berkeley facility.
Additionally, the Company incurred greater costs in the first quarter of 2000
to validate processes and ensure compliance with good manufacturing practices
at its Rockville plant than in the first quarter of 1999.
Research and development expense decreased by $1,116,000 or 67%, to $544,000 for
the first quarter of 2000, compared to $1.7 million for the first quarter of
1999. In the first quarter of 1999, the Company wrote off a note receivable and
accrued interest from a related party in the amount of $890,000 as a research
and development expense. Pure research expenses have been curtailed in the first
quarter of 2000 as the Company dedicates its resources to expanded marketing
efforts for its existing products.
Selling, general and administrative expenses increased by $179,000 or 16%, to
$1.3 million in the first quarter of 2000, compared to $1.1 million in the first
quarter of 1999. The change reflects a combination of increases in salary and
benefits expenses attributable to additional sales and marketing personnel;
increases in the usage of outside consultants, and the costs of underutilization
of the Company's Alameda, California
- 9 -
manufacturing facility primarily for administrative purposes.
Interest income, interest expense and other expense combined to result in a net
expense of $3,000 for the first quarter of 2000, versus income of $29,000 for
the first quarter of 1999. The change was primarily attributable to a decrease
in interest income as a result of lower invested cash balances in 2000 compared
to the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
The Company has financed its operations from its inception primarily through the
private placement of preferred stock and common stock, its Initial Public
Offering (IPO) of common stock and, to a lesser extent, from payments related to
research and development agreements, a bank line of credit, equipment lease
financings and borrowings from notes payable.
During 1996, the Company completed its IPO of 2,536,259 shares of its Common
Stock at $6.00 per share. After deducting underwriters' discounts and
commissions and additional expenses associated with the IPO, the Company
received net proceeds of $13.2 million.
In October 1997, the Company completed a private placement of 2,600,999 shares
of its Common Stock at $4.25 per share. The Company received net proceeds of
approximately $10.2 million after deducting placement agent commissions and
additional expenses associated with the private placement.
In January 1999, the Company completed a private placement of 3,102,500 shares
of its Common Stock at $1.00 per share. The Company received net proceeds of
approximately $2.8 million after deducting placement agent commissions and
additional expenses associated with the private placement.
In April 1999, the Company completed a private placement of 3,398,000 shares of
its Common Stock at $2.25 per share. The Company received net proceeds of
approximately $7.0 million after deducting placement agent commissions and
additional expenses associated with the private placement.
In April 2000, the Company closed a private placement of 4,096,000 shares of
its Common Stock at $2.05 per share following the effectiveness of a
registration statement that the Company filed covering the resale of the
shares by the investors. The Company received proceeds of approximately $8.3
million after deducting expenses of the transaction. In conjunction with the
equity financing, the Company also issued warrants for 100,000 shares of
Common Stock with an exercise price of $3.62 per share to one of the
investors in return for a short-term bridge loan commitment. The Company drew
$500,000 on the bridge loan during March 2000. The bridge loan and accrued
interest were converted to equity upon the closing of the private placement
transaction.
In January 2000, the company renegotiated its bank loan agreement to extend
the repayment term from August 2000 to August 2001. Restrictions on $743,000
cash pledged to the bank at March 31, 2000 will be released upon the
Company's demonstration of compliance with the financial convenants in its
loan agreement. The Company expects this to occur in May 2000 when it files
its compliance documents for the month of April 2000 with the bank.
Although the Company believes current cash, including the proceeds from the
April 2000 private placement, will be sufficient to meet its operating
expenses and capital requirements for the next twelve months, the Company's
future liquidity and capital requirements will depend on numerous factors,
including market acceptance of its products, improvements in the costs and
efficiency of its manufacturing processes, regulatory actions by the FDA and
other international regulatory bodies, intellectual property protection and
the ability, if necessary, to raise additional capital in a timely manner.
- 10 -
There can be no assurance that the Company will be able to achieve improvements
in its manufacturing processes or that the Company will achieve significant
product revenues. In addition, there can be no assurance that the Company will
achieve or sustain profitability in the future. There can be no assurance that
the Company will not be required to raise additional capital or that such
capital will be available on acceptable terms, if at all. Any failure to raise
additional financing, if needed, will likely place us in significant financial
jeopardy. Therefore, the Company cannot predict the adequacy of its capital
resources on a long-term basis.
OPERATING ACTIVITIES
For the three months ended March 31, 2000 and 1999, the Company used cash of
$1.8 million and $1.4 million, respectively, in its operations. The cash used in
operations was primarily for inventory, marketing the Company's urine-based
HIV-1 screening test and its urine-based and serum-based supplemental tests, and
funding manufacturing, research and development, selling, and general and
administrative expenses of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN No. 44"), ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION. This Interpretation clarifies the application of
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and is generally
effective July 1, 2000, with certain conclusions in the Interpretation covering
specific events that occur after either December 15, 1998 or January 12, 2000.
To the extent that this Interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this Interpretation are to be recognized
on a prospective basis from July 1, 2000. Management believes the adoption of
FIN No. 44 will not have a material impact on our financial position, results of
operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), summarizing the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. In March 2000, the
SEC issued Staff Accounting Bulletin No. 101A ("SAB 101A"), delaying the
implementation date of SAB101. As amended, registrants with fiscal years that
begin between December 16, 1999 and March 15, 2000 must adopt SAB 101 during the
second fiscal quarter of their fiscal year. Management is reviewing SAB 101 and
SAB 101A and at the current time does not believe that those interpretations
will have a significant impact on our financial position, results of operations,
or cash flows.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133, as recently amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. Management believes
the adoption of SFAS No. 133 will not have a material effect on our financial
position, results of operations, or cash flows.
FACTORS THAT MAY AFFECT FUTURE RESULTS, EVENTS OR PERFORMANCE
- 11 -
Calypte has identified a number of risk factors and uncertainties that it faces.
These factors, among others, may cause actual results, events or performance to
differ materially from those expressed in any forward-looking statements we make
in this Form 10-Q or in press releases or other public disclosures. Investors
should be aware of the existence of these factors.
UNCERTAIN MARKET ACCEPTANCE OF OUR NEW METHOD OF DETERMINING THE PRESENCE OF
HIV ANTIBODIES. Our products incorporate a new method of determining the
presence of HIV antibodies. There can be no assurance that we will obtain:
- any significant degree of market acceptance among physicians,
patients or health care payors; or
- recommendations and endorsements by the medical community which
are essential for market acceptance of the products.
We have FDA approval to market our urine HIV-1 screening and
supplemental tests in the United States and have been marketing these products
since July 1998. To date, however, this testing method has only generated
limited revenues and not achieved significant market penetration. The failure of
our products to obtain market acceptance would have a material adverse effect on
us.
WE HAVE LIMITED EXPERIENCE SELLING AND MARKETING OUR HIV-1 URINE-BASED
SCREENING TEST. We have little experience marketing and selling our products
either directly or through our distributors. The success of our products depends
upon alliances with third-party distributors including the distribution
agreement announced in September 1999 with Carter-Wallace Inc. There can no
assurance that:
- our direct selling efforts will be effective;
- our distributors will market successfully our products; or
- if our relationships with distributors terminate, we will be
able to establish relationships with other distributors on
satisfactory terms, if at all.
Any disruption in our distribution, sales or marketing network could
have a material adverse effect on us.
WE HAVE SUSTAINED LOSSES IN THE PAST AND WE EXPECT TO SUSTAIN LOSSES IN THE
FUTURE. We have incurred losses in each year since our inception. Our net loss
for the quarter ended March 31, 2000 was $2.2 million and our accumulated
deficit as of March 31, 2000 was $69.0 million. We expect operating losses to
continue as we continue our marketing and sales activities for our FDA-approved
products and conduct additional research and development for product and process
improvements and new products.
- 12 -
OUR QUARTERLY RESULTS MAY FLUCTUATE DUE TO CERTAIN REGULATORY, MARKETING AND
COMPETITIVE FACTORS OVER WHICH WE HAVE LITTLE OR NO CONTROL. The factors listed
below, some of which we cannot control, may cause our revenues and results of
operations to fluctuate significantly:
- actions taken by the FDA or foreign regulatory bodies relating to
our products;
- the extent to which our products and our Sentinel HIV and STD
testing service gain market acceptance;
- the timing and size of distributor purchases; and
- introductions of alternative means for testing for HIV by
competitors.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING THAT WE MAY NEED IN THE
FUTURE. The report of KPMG LLP covering the December 31, 1999 consolidated
financial statements contains an explanatory paragraph that states that our
recurring losses from operations and accumulated deficit raise substantial doubt
about our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
that uncertainty. We may need to raise more money to continue to finance our
operations. We may not be able to obtain additional financing on acceptable
terms, or at all. Any failure to raise additional financing, if needed, will
likely place us in significant financial jeopardy.
WE DEPEND UPON THE VIABILITY OF THREE PRODUCTS--OUR HIV-1 URINE-BASED
SCREENING TEST AND OUR URINE AND BLOOD BASED SUPPLEMENTAL TESTS. Our HIV-1
urine-base screening test and urine and blood-based supplemental tests are our
only products. Accordingly, we may have to cease operations if our tests fail to
achieve market acceptance or generate significant revenues.
OUR PRODUCTS DEPEND UPON RIGHTS TO TECHNOLOGY THAT WE HAVE LICENSED FROM
THIRD PARTY PATENT HOLDERS AND THERE CAN BE NO ASSURANCE THAT THE RIGHTS WE HAVE
UNDER THESE LICENSING AGREEMENTS ARE SUFFICIENT OR THAT WE CAN ADEQUATELY
PROTECT THOSE RIGHTS. We currently have the right to use patent and proprietary
rights which are material to the manufacture and sale of our HIV-1 urine-based
screening test under licensing agreements with New York University, Cambridge
Biotech Corporation, Repligen, and the Texas A&M University System.
WE RELY ON SOLE SOURCE SUPPLIERS THAT WE CANNOT QUICKLY REPLACE FOR CERTAIN
COMPONENTS CRITICAL TO THE MANUFACTURE OF OUR PRODUCTS. Any delay or
interruption in the supply of these components could have a material adverse
effect on us by significantly impairing our ability to manufacture products in
sufficient quantities, particularly as we increase our manufacturing activities
in support of commercial sales.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND LITTLE
EXPERIENCE IN MANUFACTURING OUR PRODUCTS IN COMMERCIAL QUANTITIES. We may
encounter difficulties in scaling-up production of new products, including
problems involving:
- production yields;
- 13 -
- quality control and assurance;
- raw material supply; and
- shortages of qualified personnel.
THE SUCCESS OF OUR PLANS TO ENTER INTERNATIONAL MARKETS MAY BE LIMITED OR
DISRUPTED DUE TO RISKS RELATED TO INTERNATIONAL TRADE AND MARKETING AND THE
CAPABILITIES OF OUR DISTRIBUTORS. We anticipate that international distributor
sales will generate a significant portion of our revenues for the next several
years. We believe that our urine-based test can provide significant benefits in
countries that do not have the facilities or personnel to safely and effectively
collect and test blood samples. The following risks may limit or disrupt our
international sales:
- the imposition of government controls;
- export license requirements
- political instability;
- trade restrictions;
- changes in tariffs;
- difficulties in managing international operations; and
- fluctuations in foreign currency exchanges rates.
Some of our distributors have limited international marketing
experience. There can be no assurance that these distributors will be able to
successfully market our products in foreign markets.
WE FACE INTENSE COMPETITION IN THE MEDICAL DIAGNOSTIC PRODUCTS MARKET AND
RAPID TECHNOLOGICAL ADVANCES BY COMPETITORS. Competition in our diagnostic
market is intense and we expect it to increase. Within the United States, our
competitors include a number of well-established manufacturers of HIV tests
using blood samples, plus at least one system for the detection of HIV
antibodies using oral fluid samples. Many of our competitors have significantly
greater financial, marketing and distribution resources than we do. Our
competitors may succeed in developing or marketing technologies and products
that are more effective than ours. These developments could render our
technologies or products obsolete or noncompetitive or otherwise have a material
adverse effect on us.
OUR ABILITY TO MARKET OUR PRODUCTS DEPENDS UPON OBTAINING AND MAINTAINING
FDA AND FOREIGN REGULATORY APPROVALS. Numerous governmental authorities in
the United States and other countries regulate our products. The FDA
regulates our products under federal statutes and
- 14 -
regulations related to pre-clinical and clinical testing, manufacturing,
labeling, distribution, sale and promotion of medical devices in the United
States.
If we fail to comply with FDA regulations, or the FDA believes that we
are not in compliance with such regulations, the FDA can:
- detain or seize our products;
- issue a recall of our products;
- prohibit marketing and sales of our products; and
- assess civil and criminal penalties against us, our officers or
our employees.
We also plan to sell our products in certain foreign countries where
they may be subject to similar local regulatory requirements. The imposition of
any of the sanctions described above could have a material adverse effect on us.
The regulatory approval process in the United States and other
countries is expensive, lengthy and uncertain. We may not obtain necessary
regulatory approvals or clearances in a timely manner, if at all. We may lose
previously obtained approvals or clearances or fail to comply with regulatory
requirements. The occurrence of any of these events would have a material
adverse effect on Calypte.
Before we begin to manufacture our product at the Alameda facility, we
must obtain FDA approval for that facility. Delays in receiving the FDA's
approval or other difficulties which we encounter in scaling-up our
manufacturing capacity to meet demand could have a material adverse effect on
us.
WE HAVE RECEIVED WARNING LETTERS FROM THE FDA REGARDING THE
SUFFICIENCY OF OUR MANUFACTURING RECORDS AND PRODUCTION PROCEDURES AND WE MUST
SATISFY THE FDA'S CONCERNS IN ORDER TO AVOID REGULATORY ACTION AGAINST US. In
November 1998, the Company received a Warning Letter from the FDA following an
inspection by the FDA of the Company's manufacturing facilities in Berkeley and
Alameda, California. On December 11, 1998, the Company responded in writing to
each of the deficiencies cited in the Warning Letter. The Company subsequently
received another letter from the FDA requesting further responses regarding
certain of the deficiencies. The Company responded to the subsequent letter on
June 1, 1999. The FDA conducted a follow-up inspection of the Berkeley and
Alameda facilities from September 28 through October 7, 1999, which resulted in
observations requiring corrective action or response from the Company. The
Company submitted its written responses to the FDA's inspection observations on
November 4, 1999. On March 21, 2000, the Company received a response from the
FDA requesting additional information. Company representatives met with and
provided information to FDA officials on April 27, 2000 and on May 5, 2000
responded in writing to requests for additional information. Additionally, the
FDA has granted a meeting with Company representatives on May 16, 2000 to review
and provide comments on the Company's application for its Alameda facility.
- 15 -
In May 1999, the Company received a Warning Letter from the FDA that
cited a number of significant observations related to its November 20 through
December 11, 1998 inspection of the Company's manufacturing plant in Rockville,
Maryland. On May 24, 1999, the Company responded in writing to each of the
deficiencies cited in the Warning Letter. On November 19, 1999, the Company
received a letter from the FDA stating that the Company's responses were
considered adequate, and the Warning Letter was formally closed. Between
November 30, and December 9, 1999, the FDA conducted a follow-up inspection of
the Rockville facility that resulted in observations requiring corrective
actions or response from the Company. On January 7, 2000, the Company responded
in writing to each of the FDA observations and is awaiting the FDA's reply. On
March 21, 2000, the Company received a response from the FDA requesting
additional information. Company representatives met with and provided
information to FDA officials on April 27, 2000 and on May 5, 2000 responded in
writing to requests for additional information.
If the FDA is not satisfied with the Company's responses and corrective actions
regarding these matters at either its Alameda or Rockville facilities, the FDA
could take regulatory actions against the Company, including license suspension,
revocation, and/or denial, seizure of products and/or injunction, and/or civil
penalties or criminal sanctions. Any such FDA action is likely to have a
material adverse effect upon the Company's ability to conduct operations. In
addition, failure of the Company to satisfy the FDA on these matters may
adversely affect receiving approval for manufacturing at the Alameda facility
and/or the Company's ability to export its products to certain international
markets.
AS A SMALL MANUFACTURER OF MEDICAL DIAGNOSTIC PRODUCTS, WE ARE EXPOSED TO
PRODUCT LIABILITY AND RECALL RISKS FOR WHICH INSURANCE COVERAGE IS EXPENSIVE,
LIMITED AND POTENTIALLY INADEQUATE. We manufacture medical diagnostic products,
which subjects us to risks of product liability claims or product recalls,
particularly in the event of false positive or false negative reports. A product
recall or a successful product liability claim or claims that exceed our
insurance coverage could have a material adverse effect on us. We maintain a
$10,000,000 claims made policy of product liability insurance. However, product
liability insurance is expensive. In the future we may not be able to obtain
coverage on acceptable terms, if at all. Moreover, our insurance coverage may
not adequately protect us from liability that we incur in connection with
clinical trials or sales of our products.
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER. Certain provisions of our
Certificate of Incorporation and Bylaws could:
- discourage potential acquisition proposals;
- delay or prevent a change in control of Calypte;
- diminish stockholders' opportunities to participate in tender
offers for our common stock, including tender offers at prices
above the then current market price; or
- 16 -
- inhibit increases in the market price of our common stock that
could results from takeover attempts.
WE HAVE ADOPTED A SHAREHOLDER RIGHTS PLAN THAT HAS CERTAIN ANTI-TAKEOVER
EFFECTS. On December 15, 1998, the Board of Directors of Calypte declared a
dividend distribution of one preferred share purchase right ("Right") for each
outstanding share of Common Stock of the Company. The dividend was payable to
the stockholders of record on January 5, 1999 with respect to each share of
Common Stock issued thereafter until a subsequent "distribution date" defined in
a Rights Agreement and, in certain circumstances, with respect to shares of
Common Stock issued after the Distribution Date.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired. However, the Rights should not interfere with
any tender offer, or merger, which is approved by the Company because the Rights
do not become exercisable in the event of an offer or other acquisition exempted
by Calypte's Board of Directors.
AN INVESTOR'S ABILITY TO TRADE OUR COMMON STOCK MAY BE LIMITED BY TRADING
VOLUME. The trading volume in our common shares has been relatively limited. A
consistently active trading market for our common stock may not develop.
WE MAY BE REMOVED FROM THE NASDAQ SMALLCAP MARKET IF WE FAIL TO MEET CERTAIN
MAINTENANCE CRITERIA. The Nasdaq Stock Market inquired on two occasions whether
we continue to meet the net capital surplus maintenance criterion for trading on
the Nasdaq SmallCap Market. We currently meet the maintenance criterion but our
ability to continue to do so will depend on whether we are able to maintain net
tangible assets of $2,000,000 and whether the minimum bid price for our common
stock exceeds $1.00 per share for at least ten consecutive business days during
any period of 120 consecutive business days. The public trading of our common
stock and the ability of our stockholders to sell their shares could be
significantly impaired if we fail to meet the maintenance criteria and are
removed from the Nasdaq SmallCap Market. In that case, our common stock would
trade on either the OTC bulletin board, a regional exchange or in the pink
sheets, which would likely result in an even more limited trading volume.
THE PRICE OF CALYPTE'S COMMON STOCK HAS BEEN HIGHLY VOLATILE DUE TO SEVERAL
FACTORS WHICH WILL CONTINUE TO EFFECT THE PRICE OF OUR STOCK. Our common stock
has traded as low as $1.28 per share and as high as $7.25 per share during the
first quarter of 2000. Some of the factors leading to the volatility include:
- price and volume fluctuations in the stock market at large which
do not relate to our operating performance;
- fluctuations in our operating results;
- 17 -
- announcements of technological innovations or new products which
we or our competitors make;
- FDA and international regulatory actions;
- availability of reimbursement for use of our products from
private health insurers, governmental health administration
authorities and other third- party payors;
- developments with respect to patents or proprietary rights;
- public concern as to the safety of products that we or others
develop;
- changes in health care policy in the United States or abroad; and
- changes in stock market analysts' recommendations regarding
Calypte, other medical products companies or the medical
product industry generally.
CALYPTE AND THE PRICE OF CALYPTE SHARES MAY BE ADVERSELY EFFECTED BY THE
PUBLIC SALE OF A SIGNIFICANT NUMBER OF THE SHARES ELIGIBLE FOR FUTURE SALE. All
outstanding shares of our common stock are freely tradable. Sales of common
stock in the public market could materially adversely affect the market price of
our common stock. Such sales also may inhibit our ability to obtain future
equity or equity-related financing on acceptable terms.
OUR RESEARCH AND DEVELOPMENT OF HIV URINE TEST INVOLVES THE CONTROLLED USE
OF HAZARDOUS MATERIALS. There can be no assurance that our safety procedures for
handling and disposing of hazardous materials such as azide will comply with
applicable regulations. In addition, we cannot eliminate the risk of accidental
contamination or injury from these materials. We may be held liable for damages
from such an accident and that liability could have a material adverse effect on
us.
WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND RESEARCH AND DEVELOPMENT
PERSONNEL. As a small company with only 62 employees, our success depends on the
services of key employees in executive and research and development positions.
The loss of the services of one or more of such employees could have a material
adverse effect on us.
- 18 -
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three years ended March 31, 2000, the Company completed
three private placements of shares of its Common Stock. See "Financing
Activities" in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section. In each instance, the proceeds were used to
fund the Company's continuing operations. The shares sold in each of the private
placements were exempt from registration with the Securities and Exchange
Commission pursuant to Rule 506 of Regulation D of the Securities Act of 1933 as
amended ("Securities Act"). Shares were sold only to accredited investors as
defined in Rule 501 of the Securities Act and were registered for resale by such
investors on Forms S-3 filed on October 21, 1997, November 14, 1998, and March
30, 1999. The proceeds from each private placement have been used to finance
operations.
SUBSEQUENT EVENT. On April 7, 2000, the Company completed the sale of
4,096,000 shares of its Common Stock to institutional investors in a private
placement at $2.05 per share with an aggregate offering price of $8,396,000. The
Company received net proceeds of approximately $8.3 million after deducting
expenses associated with the private placement. The Company also issued warrants
for 100,000 shares of its Common Stock to one of the investors in return for a
bridge loan issued prior to the closing of the private placement. The warrants
are exercisable at $3.62 per share. The shares sold in the private placement
were exempt from registration with the Securities and Exchange Commission
pursuant to Rule 506 of the Securities Act. Shares were sold only to accredited
investors as defined in Rule 501 of the Securities Act and were registered for
resale by such investors on a Form S-3 Registration Statement filed on March 13,
2000. The private placement closed following the effectiveness of the
Registration Statement on April 5, 2000. The Company will use the proceeds from
the private placement to finance its continuing operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 10.64 Loan Modification Agreement between Registrant and Silicon Valley Bank
dated as of November 15, 1999
Exhibit 10.65 Loan Modification Agreement between Registrant and Silicon Valley Bank
dated as of January 30, 2000
Exhibit 10.66 Restated Technology Rights Agreement between Registrant and Howard B.
Urnovitz, Ph.D. dated as of March 1, 2000
Exhibit 10.67 Technology Rights Agreement between Registrant and Chronix Biomedical
dated as of March 1, 2000
Exhibit 10.68* Exclusive Independent Contractor Agreement for Project Sentinel between
Clinical Reference Laboratory, Inc. and Registrant dated as of January 21, 2000
Exhibit 27 Financial Data Schedule
*Confidential treatment has been granted as to certain portions of this exhibit.
b. Reports on Form 8-K
None
- --------------------------------------------------------------------------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALYPTE BIOMEDICAL CORPORATION
------------------------------
(Registrant)
Date: May 12, 2000 By: /s/ Nancy E. Katz
--------------------------
Nancy E. Katz
PRESIDENT, CHIEF OPERATING OFFICER,
AND CHIEF FINANCIAL OFFICER
(Principal Accounting Officer)