SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 incorporation (I.R.S. Employer
or organization) Identification Number)
1440 FOURTH STREET, BERKELEY, CALIFORNIA 94710
(Address of principal executive offices) (Zip Code)
(510) 526-2541
(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 13,193,347 shares of common stock outstanding as of
November 10, 1997.
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets at
September 30, 1997 and December 31, 1996............ 3
Consolidated Condensed Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1997 and 1996........................ 4
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended September 30, 1997
and 1996............................................ 5
Notes to Consolidated Condensed Financial Statements. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............ 19
Item 5. Other Information.................................... 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
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
9/30/97 12/31/96
(Unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 2,076 $ 7,924
Accounts receivable.................................................................. 36 24
Inventory............................................................................ 159 205
Notes receivable from officers and employees......................................... 240 -
Other current assets................................................................. 190 170
-------- -------
Total current assets......................................................... 2,701 8,323
Property and equipment, net of accumulated depreciation of
$ 2,735 at September 30, 1997 and $2,187 at December 31, 1996........................ 1,300 1,761
Other assets.......................................................................... 228 263
-------- --------
$ 4,229 $ 10,347
======== ========
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 349 $ 418
Accrued expenses..................................................................... 1,091 768
Capital lease obligations - current portion.......................................... 438 443
Deferred revenue..................................................................... 573 627
------- -------
Total current liabilities.................................................... 2,451 2,256
Deferred rent obligation.............................................................. 33 55
Capital lease obligations - long-term portion......................................... 421 764
------- -------
Total liabilities............................................................ 2,905 3,075
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............................... 1,946 1,856
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares authorized; no shares
issued and outstanding........................................................... - -
Common Stock, $0.001 par value; 20,000,000 shares authorized;
10,556,180 and 10,459,501 shares issued and outstanding as of
September 30, 1997 and December 31, 1996, respectively.......................... 11 10
Additional paid-in capital.......................................................... 46,275 46,270
Deferred compensation............................................................... (258) (363)
Deficit accumulated during development stage........................................ (46,650) (40,501)
-------- --------
Total stockholders' equity................................................... (622) 5,416
-------- --------
$ 4,229 $ 10,347
======== ========
See accompanying notes to consolidated condensed financial statements.
-3-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Period from
February 18,
1988
Three Months Ended Nine Months Ended (inception)
September 30, September 30, through
------------------ ------------------ September 30,
1997 1996 1997 1996 1997
---- ---- ---- ---- ----
Revenue:
Product sales.......................................... $ 93 $ 129 $ 225 $ 129 $ 355
Earned under research and development
contracts, substantially from related parties........ - - - - 2,390
------- ------- ------- ------- --------
Total revenue........................................ 93 129 225 129 2,745
------- ------- ------- ------- --------
Operating expenses:
Product costs.......................................... 592 710 1,810 710 2,895
Research and development costs......................... 755 987 2,897 4,558 28,995
Purchased in-process research and
development costs.................................... - - - - 2,500
Selling, general and administrative costs.............. 523 1,040 1,709 2,756 15,969
------- ------- ------- ------- --------
Total expenses....................................... 1,870 2,737 6,416 8,024 50,359
------- ------- ------- ------- --------
Loss from operations............................... (1,777) (2,608) (6,191) (7,895) (47,614)
Interest income, interest expense and other income........ (8) 32 44 (123) 23
------- ------- ------- ------- --------
Loss before income taxes and
extraordinary item............................... (1,785) (2,576) (6,147) (8,018) (47,591)
Income taxes.............................................. - - (2) (2) (65)
------- ------- ------- ------- --------
Loss before extraordinary item..................... (1,785) (2,576) (6,149) (8,020) (47,656)
Extraordinary gain on debt extinguishment................. - - - - 485
------- ------- ------- ------- --------
Net loss......................................... (1,785) (2,576) (6,149) (8,020) (47,171)
Less dividends on mandatorily redeemable
Series A preferred stock................................ (30) (30) (90) (90) (946)
------- ------- ------- ------- --------
Net loss attributable to common stockholders.............. $(1,815) $(2,606) $(6,239) $(8,110) $(48,117)
======= ======= ======= ======= ========
Net loss per share attributable to common
stockholders............................................ $ (0.17) $ (0.27) $ (0.60) $ (1.00)
======= ======= ======= =======
Weighted average shares used to compute
net loss per share attributable to common
stockholders............................................ 10,521 9,723 10,488 8,113
======= ======= ======= =======
See accompanying notes to consolidated condensed financial statements.
-4-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Period from
February 18,
1988
(inception)
Nine Months Ended September 30, through
------------------------------- September 30,
1997 1996 1997
---- ---- ----
Cash flows from operating activities:
Net loss........................................................ $ (6,149) $ (8,020) $(47,171)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 550 574 3,164
Loss on sale or disposal of equipment....................... - - 115
Extraordinary gain on debt extinguishment................... - - (485)
Amortization of deferred compensation....................... 142 178 645
Compensation paid by stock issuance......................... - - 47
Forgiveness of note receivable from officer................. - 43 85
Purchased in-process research and development costs......... - - 2,500
Changes in operating assets and liabilities:
Accounts receivable..................................... (12) (99) (36)
Inventory............................................... 46 (138) (159)
Other current assets.................................... (20) 360 49
Organizational costs.................................... - - (123)
Other assets............................................ 35 (147) (551)
Accounts payable, accrued expenses and deferred
revenue............................................ 200 315 1,915
Deferred rent obligation.................................. (22) (26) 32
Note payable in exchange for expenses paid on
behalf of the Company.............................. - - 192
--------- ---------- --------
Net cash used in operating activities............ (5,230) (6,960) (39,781)
--------- ---------- --------
Cash flows from investing activities:
Proceeds from disposition of equipment.......................... - - 25
Purchase of equipment, net...................................... (87) (257) (2,334)
Notes receivable from officers and employees.................... (240) - (240)
Investment in Pepgen Corporation................................ - - (1,000)
--------- ---------- --------
Net cash used in investing activities ........... (327) (257) (3,549)
---------- ---------- --------
Cash flows from financing activities:
Proceeds from sale of stock..................................... 57 20,187 48,540
Expenses paid related to sale of stock.......................... - (2,124) (2,994)
Prepaid license fee............................................. - - 500
Principal payments on notes payable............................. (1,000) (2,259) (5,174)
Principal payments on capital lease obligations................. (348) (239) (844)
Proceeds from notes payable..................................... 1,000 - 3,692
Capital contributions........................................... - - 75
Joint ventures' capital contributions........................... - - 1,611
--------- ---------- --------
Net cash provided by financing activities........ (291) 15,565 45,406
--------- ---------- --------
Net (decrease) increase in cash and cash equivalents............... (5,848) 8,348 2,076
Cash and cash equivalents at beginning of period................... 7,924 2,558 -
--------- ---------- --------
Cash and cash equivalents at end of period......................... $ 2,076 $ 10,906 $ 2,076
========= ========== ========
See accompanying notes to consolidated condensed financial statements.
-5-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Period from
February 18,
1988
(inception)
Nine Months Ended September 30, through
------------------------------- September 30,
1997 1996 1997
---- ---- ----
Supplemental disclosure of cash flow activities:
Cash paid for interest..................................................... $ 149 $ 275 $ 986
Cash paid for income taxes................................................. 2 2 64
Supplemental disclosure of noncash activities:
Acquisition of equipment through obligations under capital leases.......... - 370 1,703
Accrued liabilities converted to notes payable............................. - - 363
Accrued liabilities converted to common stock.............................. - - 39
Notes payable converted to common stock.................................... - - 459
Notes payable converted to Series B convertible preferred stock............ - - 50
Notes payable issued upon investment in Pepgen Corporation................. - - 1,000
Options issued upon investment in Pepgen Corporation....................... - - 500
Dividend on mandatorily redeemable Series A preferred stock................ 90 90 946
Deferred compensation attributable to stock grants......................... 37 168 903
See accompanying notes to consolidated condensed financial statements.
-6-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(1) THE COMPANY AND BASIS OF PRESENTATION
Calypte Biomedical Corporation (the Company) was incorporated on November 11,
1989 and is a development stage enterprise. The Company's primary activities
have been to obtain funding, perform research and development and obtain
approval for its urine-based diagnostic tests.
The accompanying unaudited consolidated condensed 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 of normal
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation of the Company's financial position as of September 30, 1997
and the results of its operations for the three and nine months ended September
30, 1997 and 1996 and its cash flows for the nine months ended September 30,
1997 and 1996. 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, 1996 included in Form 10-K
filed with the SEC on March 28, 1997.
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 consolidated financial statements for these
periods is unaudited.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated condensed financial statements include the results
of operations of the Company and its wholly owned subsidiary, Calypte, Inc. and
Calypte Biomedical Company (the Joint Venture). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company accounts for its interest in Pepgen Corporation (Pepgen) under the
equity method.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Except as noted below, net loss per share attributable to common stockholders is
computed using the weighted average number of shares of common stock
outstanding. Common equivalent shares from stock options and warrants are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the SEC Staff Accounting Bulletin No. 83, common stock issued for
consideration below the Company's $6.00 per share Initial Public Offering (IPO)
price and warrants exercised, warrants granted and stock options granted with
exercise prices below the IPO price during the 12-month period preceding May 20,
1996, the date of the initial filing of the Registration Statement, even when
antidilutive, have been included in the calculation of common equivalent shares
for periods prior to April 1, 1996, using the treasury stock method based on the
$6.00 per share IPO price, as if they were outstanding for all periods
presented.
Furthermore, common equivalent shares from convertible preferred stock that were
converted upon the completion of the Company's IPO are included using the "as if
converted" method.
-7-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
The Financial Accounting Standards Board recently issued Statements of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128) and No. 129,
"Disclosure of Information about Capital Structure" (SFAS No. 129). SFAS No. 128
requires the presentation of basic earnings per share (EPS) and, for companies
with complex capital structures, diluted EPS. SFAS No. 128 is effective for
annual and interim periods ending after December 15, 1997 and requires
restatement of all prior-period EPS data presented. The Company expects basic
EPS will be equivalent to primary EPS as presented in the accompanying condensed
consolidated financial statements. SFAS No. 129 is required to be adopted on
December 31, 1997. At that time, the Company will be required to disclose the
liquidation preference of preferred stock and the amount of redemption
requirements of redeemable stock. The impact of SFAS No. 129 is not expected to
be material for the quarter and nine month period ended September 30, 1997.
(3) INVENTORIES
Inventories are stated at the lower of cost or market and the cost is determined
using the first-in, first-out method. Inventory as of September 30, 1997 and
December 31, 1996 consisted of the following:
9/30/97 12/31/96
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 40 $ 80
Work-in-Process 119 108
Finished Goods - 17
---------- ---------
Total Inventory $ 159 $ 205
========== =========
(4) LINE OF CREDIT
In April 1997, the Company entered into a bank line of credit agreement expiring
March 1998 to borrow up to $2,000,000 at an interest rate of prime plus 2%. The
agreement requires the Company to maintain certain financial covenants and
comply with certain reporting and other requirements. In addition, borrowings
under the line of credit agreement are secured by the Company's assets.
The Company drew down $500,000 in June 1997 and $500,000 in July 1997 on the
bank line of credit.
In September 1997, the Company paid back $1 million on the bank line of credit
and the line of credit was terminated.
(5) NOTES RECEIVABLE FROM OFFICERS
In May 1997, a loan for $70,000 was made to an officer of the Company. The loan
is evidenced by a promissory note and is secured by 30,000 stock options. The
interest on the outstanding principal balance of the loan is a variable rate of
the prime rate plus 1%. The loan is due the earlier of (1) October 31, 1997 or
(2) such time that the Company's cash and cash equivalents is less than $2.5
million excluding any amounts drawn down on the bank line of credit.
-8-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
During 1997, in recognition of a Technology Rights Agreement entered into
between the Company and an officer of the Company, the Company funded the
expenses of a research foundation started by that officer. The Company has
entered into a loan agreement with the officer to repay such funding to the
Company and to limit the funding to a maximum of $90,000. The loan is evidenced
by a promissory note and is secured by the officer's stock options to purchase
common stock with a market value of 200% of the outstanding loan balance. The
interest on the outstanding principal balance of the loan is a variable rate of
the prime rate plus 1%. The principal amount and all accrued interest are due on
December 1, 1997. As of September 30, 1997, the balance outstanding under the
loan agreement was $90,000.
See Note (7).
(6) OPERATING LEASES
In July 1997, the Company signed a second addendum to the noncancelable
operating lease for the Alameda, California facility. Under the terms of the
lease, the lease period was extended for a period of five years, commencing on
November 15, 1998 and terminating on November 14, 2003. Future minimum rental
payments under all noncancelable operating leases as of July 21, 1997 were:
Years ended December 31, (in thousands)
1997 $ 282
1998 472
1999 352
2000 353
2001 366
2002 and thereafter 685
---------
$ 2,510
=========
(7) SUBSEQUENT EVENTS
On October 13, 1997, the Board of Directors approved to extend the due dates for
the two officer's loans mentioned at Note (5) to March 1, 1998 with all other
terms of the loan agreements remaining unchanged.
On October 21, 1997, the Company completed a private placement of 2,600,999
shares of Common Stock at $4.25 per share. After deducting placement agent
commissions and additional expenses associated with the private placement, the
Company received net proceeds of approximately $10.2 million.
-9-
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. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be needed to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
- --------
Since commencement of operations in 1988, Calypte Biomedical Corporation (the
Company or Calypte) has reported its results as a development stage company,
engaged in research, development and commercialization of its products. The
Company's efforts have been primarily focused on developing and obtaining
approval for its urine-based diagnostic tests for sexually transmitted diseases.
In August 1996, the Company received a product license and an establishment
license from the U.S. Food and Drug Administration (FDA) to manufacture and sell
in interstate and foreign commerce the Company's urine-based HIV-1 screening
test for use in professional laboratory settings. In October 1996, Calypte
received notification that the FDA would require additional data before it would
approve an amendment to Cambridge Biotech Corporation's product license
application for its HIV-1 western blot kit to allow use of the western blot kit
as a confirmatory test with Calypte's HIV-1 urine screening assay. On March 17,
1997, the Company submitted to the FDA the additional data requested by the FDA
in connection with such requested amendment to Cambridge Biotech Corporation's
product license application. In September 1997, Cambridge Biotech Corporation
received official notice from the FDA that the agency had completed its review
of the application for the HIV-1 western blot kit and that the application is
approvable pending the completion of product labeling.
The Company has a limited history of operations and has experienced significant
operating losses since inception. As of September 30, 1997, the Company had an
accumulated deficit of $46.7 million. The Company expects operating losses to
continue as it initiates marketing and sales activities and additional research
and development. The Company's marketing strategy is to use distributors,
focused direct selling and marketing partners to penetrate certain targeted
domestic markets. The Company plans to maintain a small direct sales force to
market the Company's urine-based HIV-1 test to major laboratories serving the
life insurance, military, immigration and criminal justice markets. Other U.S.
and international markets will be targeted utilizing diagnostic product
distributors.
-10-
RESULTS OF OPERATIONS
- ---------------------
The following represents selected financial data:
(in thousands)
--------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
Total revenue.................................. $ 93 $ 129 $ 225 $ 129
--------- -------- -------- ---------
Operating expenses:
Product costs............................... 592 710 1,810 710
Research and development.................... 755 987 2,897 4,558
Selling, general and administrative......... 523 1,040 1,709 2,756
--------- -------- -------- ---------
Total expenses............................ 1,870 2,737 6,416 8,024
--------- -------- -------- ---------
Loss from operations........................ (1,777) (2,608) (6,191) (7,895)
Interest income, interest expense
and other income.............................. (8) 32 44 (123)
--------- -------- -------- ---------
Loss before income taxes.................... $ (1,785) $ (2,576) $ (6,147) $ (8,018)
========= ======== ======== =========
Three Months Ended September 30, 1997 and 1996
- ----------------------------------------------
In the third quarter of 1997, revenue from Calypte's HIV-1 screening test
decreased 28% to $93,000 as compared to $129,000 in the prior year's comparable
period. The decrease is due to lower unit sales and product mix in 1997 compared
to 1996. The HIV-1 screening test margin was negative during the quarter due to
the overhead expense incurred in relation to the number of units produced.
Product costs decreased 17% to $592,000 for the three months ended September 30,
1997 from $710,000 for the three months ended September 30, 1996. The decrease
was primarily due to lower unit sales and overhead expense in relation to the
number of units produced.
Research and development expenses decreased 24% to $755,000 for the three months
ended September 30, 1997 from $987,000 in the corresponding period of the prior
year. The decrease was principally due to the October 1996 reduction in
workforce. This was partially offset by expenses related to validation studies
in the current quarter.
Selling, general and administrative expenses decreased $517,000 or 50% to
$523,000 for the three months ended September 30, 1997. The decrease was
primarily related to the October 1996 reduction in workforce.
Interest income, interest expense and other income decreased $40,000 to ($8,000)
for the three months ended September 30, 1997 from $32,000 for the three months
ended September 30, 1996. The decrease was mainly due to interest on the
proceeds received from the Initial Public Offering (IPO) in the third quarter of
1996 compared to lower a cash balance in 1997.
Nine Months Ended September 30, 1997 and 1996
- ---------------------------------------------
Revenue from Calypte's HIV-1 screening test increased 74% to $225,000 for the
nine month period ended September 30, 1997 as compared to $129,000 in the
corresponding period of the prior year. The increase is primarily due to the
timing of FDA approval of the Company's urine-based HIV-1 screening test which
was approved in August 1996. The HIV-1 screening test margin was negative during
the nine months due to the overhead expense incurred in relation to the number
of units produced.
-11-
Product costs increased $1.1 million to $1.8 million for the nine month period
ended September 30,1997 from $710,000 for the nine months ended September
30,1996. The increase was primarily due to the recognition of certain product
costs as inventory and cost of sales rather than research and development
following FDA approval of the Company's HIV-1 screening test.
Research and development expense decreased 37% to $2.9 million for the nine
months ended September 30, 1997 from $4.6 million for the nine months ended
September 30, 1996. The decrease was principally due to the recognition of
certain product costs as inventory and cost of sales rather than research and
development following FDA approval of the Company's HIV-1 screening test.
Selling, general and administrative expenses decreased $1.0 million or 38% to
$1.7 million for the nine months ended September 30, 1997. The decrease was
primarily related to the October 1996 reduction in workforce.
Interest income, interest expense and other income increased $167,000 to $44,000
for the nine months ended September 30, 1997 from ($123,000) in the prior year's
comparable period. The increase was primarily attributable to higher interest
income in 1997 resulting from a higher cash balance due to the proceeds received
from the IPO in the third quarter of 1996. In addition, interest payments on the
Company's bank line of credit were higher in 1996 as compared to 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Financing Activities
- --------------------
The Company has financed operations from inception primarily through an IPO, the
private placement of preferred stock, the private placement 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. Since inception through September 30, 1997, the Company has
received approximately $34.0 million in net proceeds from private placements of
the Company's equity securities and $13.2 million in its IPO. In addition,
approximately $1.7 million was borrowed by the Company through equipment lease
financings, of which approximately $858,000 was outstanding as of September 30,
1997, $2.4 million was received from research and development agreements and
$3.0 million has been borrowed through bank lines of credit.
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 April 1997, the Company entered into a line of credit agreement with a bank
to borrow up to $2.0 million at an interest rate of prime plus 2%. The agreement
requires the Company to maintain certain financial covenants and comply with
certain reporting and other requirements. In addition, borrowings under the line
of credit agreement are secured by the Company's assets. In June 1997, the
Company drew down $500,000 on the line of credit. Subsequently, in July 1997,
the Company drew down an additional $500,000 on the line of credit, thereby
increasing the note payable to $1.0 million. The $1,000,000 was repaid in
September 1997 and the line of credit was terminated.
The Company's cash balance at September 30, 1997 was approximately $2.1 million
and the cash requirements over the last nine months have averaged $650,000 per
month. On October 21, 1997, the
-12-
Company completed a private placement of 2,600,999 shares of Common Stock at
$4.25 per share. After deducting placement agent commissions and additional
expenses associated with the private placement, the Company received net
proceeds of approximately $10.2 million. Although the Company believes net
proceeds from the private placement together with current cash will be
sufficient to meet the Company's operating expenses and capital requirements
through December 31, 1998, the Company's future liquidity and capital
requirements will depend on numerous factors, including regulatory actions by
the FDA and other international regulatory bodies, market acceptance of its
products and intellectual property protection.
There can be no assurance that the Company's products will be successfully
commercialized or that the Company will achieve significant product revenue. In
addition, there can be no assurance that the Company will achieve or sustain
profitability in the future.
Operating Activities
- --------------------
For the nine months ended September 30, 1997 and September 30, 1996, the
Company's cash used in operations was $5.2 million and $7.0 million,
respectively. The cash used in operations was primarily to fund research and
development expenses related to the urine-based HIV-1 test along with selling,
general and administrative expenses of the Company.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
- ------------------------------------------
The Financial Accounting Standards Board recently issued Statements of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128) and No. 129,
"Disclosure of Information about Capital Structure" (SFAS No. 129). SFAS No. 128
requires the presentation of basic earnings per share (EPS) and, for companies
with complex capital structures, diluted EPS. SFAS No. 128 is effective for
annual and interim periods ending after December 15, 1997 and requires
restatement of all prior-period EPS data presented. The Company expects basic
EPS will be equivalent to primary EPS as presented in the accompanying condensed
consolidated financial statements. SFAS No. 129 is required to be adopted on
December 31, 1997. At that time, the Company will be required to disclose the
liquidation preference of preferred stock and the amount of redemption
requirements of redeemable stock. The impact of SFAS No. 129 is not expected to
be material for the quarter and nine month period ended September 30, 1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS, EVENTS OR PERFORMANCE
- -------------------------------------------------------------
The Company wishes to caution readers that the following important factors,
among others, may affect the Company's future results, events or performance and
could cause actual results, events or performance to differ materially from
those expressed in any forward-looking statements made by the Company in this
report or presented elsewhere by the Company from time to time.
Dependence on Sole Source of Supply and Regulatory Approval of Confirmatory Test
- --------------------------------------------------------------------------------
In order to minimize the possibility of false positive reports, positive HIV
screening results must be confirmed with an additional test format before being
reported to the physician or patient in the United States and in most developed
countries. The Company has entered into an agreement with Cambridge Biotech
Corporation (Cambridge Biotech) under which both the Company and Cambridge
Biotech will market and distribute a urine-capable western blot confirmatory
test which uses technology licensed from the Company. The western blot kit
manufactured by Cambridge Biotech has already received FDA approval for blood
testing, and is the only confirmatory test for which application has been made
for FDA
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approval for use with urine. On September 18, 1997, Cambridge Biotech received
official notice from the FDA that the FDA had completed its review of the HIV-1
western blot kit. Such notice indicated that Cambridge Biotech's application was
approvable pending the completion of product labeling. There can be no assurance
that the FDA will grant approval of the Cambridge Biotech urine confirmatory
test. Any significant delay in obtaining approval for the Cambridge Biotech
urine confirmatory test or the failure to obtain such approval at all could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Reliance on Proprietary Technology and Know-How; License Obligations
- --------------------------------------------------------------------
The Company believes that its future success will depend in large part on its
ability to protect its patents and proprietary rights. Accordingly, the
Company's ability to compete effectively will depend in part on its ability to
develop and maintain proprietary aspects of its technology. In addition, the
Company has the right to utilize certain patents and proprietary rights under
licensing agreements with New York University, Cambridge Biotech, Repligen,
Texas A&M University System and Stanford University. These license arrangements
secure intellectual property rights for the manufacture and sale of the
Company's products. There can be no assurance that such intellectual property
rights will be sufficient or that such patents and proprietary rights can be
adequately protected.
Uncertainty of Market Acceptance; Lack of Sales and Marketing Experience
- ------------------------------------------------------------------------
The Company's products represent a new method of determining the presence of HIV
antibodies and there can be no assurance that these products will gain any
significant degree of market acceptance among physicians, patients or health
care payors, even if necessary international and U.S. regulatory and
reimbursement approvals are obtained. The Company believes that recommendations
and endorsements by the medical community will be essential for market
acceptance of the products and there can be no assurance that any such
recommendations or endorsements will be obtained. The Company has no experience
marketing and selling its products either directly or through its distributors.
The Company's marketing strategy relies upon its alliance with third-party
distributors for the success of its products. There can be no assurance that the
Company's direct sales force will be effective, that its distributors will
market successfully the Company's products or that, if such relationships are
terminated, the Company will be able to establish relationships with other
distributors on satisfactory terms, if at all. Any disruption in the Company's
distribution, sales or marketing network, or failure of the Company's products
to achieve market acceptance, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on a Single Product
- ------------------------------
The Company's HIV-1 urine-based screening test is the Company's only
FDA-approved product. Because the screening test is the Company's sole product,
the Company could be required to cease operations if Cambridge Biotech's
confirmatory test does not receive FDA approval or if the Company's test,
together with the Cambridge Biotech urine confirmatory test, fail to achieve
market acceptance or generate significant revenue.
Dependence Upon Key Suppliers
- -----------------------------
The Company purchases raw materials and components used in the manufacture of
its product from various suppliers and relies on single sources for several of
these components. Establishment of additional or replacement suppliers for these
components cannot be accomplished quickly. The Company has a number
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of single-source components and any delay or interruption in supply of these
components could significantly impair the Company's ability to manufacture its
products in sufficient quantities, and therefore would have a material adverse
effect on the Company's business, financial condition and results of operations,
particularly as the Company scales up its manufacturing activities in support of
commercial sales.
Limited Manufacturing Experience; Scale-Up Risk
- -----------------------------------------------
The Company has limited experience in manufacturing its products. The Company
currently manufactures its products in limited quantities for submission to the
FDA for ongoing compliance, international clinical trials and building its
inventory in anticipation of commercialization. The Company does not have
experience in manufacturing its products in commercial quantities. Manufacturers
often encounter difficulties in scaling-up production of new products, including
problems involving production yields, quality control and assurance, raw
material supply and shortages of qualified personnel. The larger Alameda
facility will be needed if initial demand exceeds the more limited capacity of
the Berkeley facility. Difficulties encountered by the Company in manufacturing
scale-up to meet demand, including delays in receiving FDA approval for the
Alameda facility, could have a material adverse effect on its business,
financial condition and results of operations.
Dependence Upon International Distributors and Sales
- ----------------------------------------------------
The Company anticipates that a significant portion of its revenues for the next
several years will be derived from international distributor sales.
International sales and operations involve a number of inherent risks and may be
limited or disrupted by 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 exchange rates. Certain of the Company's distributors have limited
international marketing experience, and there can be no assurance that the
Company's distributors will be able to market successfully the Company's
products in any international market.
Intense Competition in Company's Markets and Rapid Technological Advances by
- ----------------------------------------------------------------------------
Competitors
-----------
Competition in the in vitro diagnostic market is intense and is expected to
increase. Within the United States, the Company will face competition from a
number of well-established manufacturers of blood-based enzyme immunoassays,
plus at least one system for the detection of HIV antibodies using oral fluid
samples. In addition, the Company may face intense competition from competitors
with significantly greater financial, marketing and distribution resources than
the Company, several of whom may have already submitted applications to the FDA
for approval of their over-the-counter (OTC) products. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that are more effective than those developed by the
Company or that would render the Company's technologies or products obsolete or
otherwise commercially unattractive. In addition, there can be no assurance that
competitors will not succeed in obtaining regulatory approval for such products,
or introducing or commercializing them prior to the Company. Such developments
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Potential Fluctuations in Quarterly Results
- -------------------------------------------
The Company expects that its revenues and results of operations may fluctuate
significantly from quarter to quarter and will depend on a number of factors,
many of which are outside the Company's control. These factors include actions
relating to regulatory matters, the extent to which the Company's products gain
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market acceptance, the timing and size of distributor purchases, introduction of
alternative means for testing for HIV, competition, the timing and cost of new
product introductions and general economic conditions.
Extensive Government Regulation
- -------------------------------
The Company's products are subject to extensive regulation by the FDA and, to
varying degrees, by state and foreign regulatory agencies. The Company's
products are regulated by the FDA under the Federal Food, Drug and Cosmetic Act
(the Act), as amended by the Medical Device Amendments of 1976 and the Safe
Medical Devices Act of 1990, among other laws. Under the Act, the FDA regulates
the preclinical and clinical testing, manufacturing, labeling, distribution,
sale and promotion of medical devices in the United States. The FDA prohibits a
device, whether or not cleared under a 510(k) premarket notification or approved
under a pre-market application, from being marketed for unapproved clinical
uses. If the FDA believes that a company is not in compliance with the
regulations, it can institute proceedings to detain or seize a product, issue a
recall, prohibit marketing and sales of the such company's products and assess
civil and criminal penalties against such company, its officers and/or its
employees. Furthermore, the Company plans to sell products in certain foreign
countries which impose local regulatory requirements. The preparation of
required applications and subsequent FDA and foreign regulatory approval process
is expensive, lengthy and uncertain. Failure to comply with the FDA and similar
foreign requirements could result in civil monetary penalties or criminal
sanctions, restrictions on or injunctions against marketing of the Company's
products. Additional enforcement actions potentially may include seizure or
recall of the Company's products and other regulatory action. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
or clearances in a timely manner or at all, and delays in receipt of or failure
to receive such approvals or clearances, loss of previously received approvals
or clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
Establishment and Regulation of Reference Laboratory
- ----------------------------------------------------
The Company intends to establish a clinical reference laboratory in connection
with seeking approval for an OTC home urine collection kit for HIV-1. There are
a number of risks in establishing a reference laboratory especially for testing
for HIV. The Company must, among other actions, seek to hire and retain key
laboratory personnel, purchase necessary equipment, secure required permits,
incur marketing expenses, obtain customers and comply with government
regulations. The Company's planned laboratory would test for HIV using the
Company's urine-based HIV-1 test and, if approvals are obtained, receive home
collected urine for HIV testing. The Company may be required to offer counseling
in connection with the reporting of results to laboratory customers. There can
be no assurance that the Company can establish or receive the necessary approval
for the laboratory.
Product Liability and Recall Risk; Limited Insurance Coverage
- -------------------------------------------------------------
The manufacture and sale of medical diagnostic products entail the risk of
product liability claims or product recalls. While the Company maintains product
liability insurance, the Company faces the risk of litigation in the event of
false positive or false negative reports. There can be no assurance that the
Company's existing insurance coverage limits will be adequate to protect the
Company from any liabilities it might incur in connection with the clinical
trials or sales of its products. In addition, the Company may require increased
product liability coverage as its products are commercialized. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the
-16-
Company's products, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence Upon Key Personnel
- -----------------------------
The Company is dependent upon a number of key management and technical
personnel. The Company has employment agreements with some members of its core
management team. The Company's ability to manage its transition to
commercial-scale operations, and hence its success, will depend on the efforts
of these individuals, among others. The loss of the services of one or more key
employees could have a material adverse effect on the Company. The Company's
success will also depend on its ability to attract and retain additional highly
qualified management and technical personnel. The Company faces intense
competition for qualified personnel, many of whom are often subject to competing
employment offers, and there can be no assurance that the Company will be able
to attract and retain such personnel.
Control by Directors, Executive Officers and Affiliated Entities
- ----------------------------------------------------------------
The Company's directors, executive officers and entities affiliated with them,
in the aggregate, beneficially own approximately 35% of the Company's
outstanding Common Stock. Accordingly, these stockholders, individually and as a
group, may be able to substantially influence the outcome of matters requiring
approval by the stockholders of the Company, including the election of directors
and the approval of mergers or other business combination transactions.
Possible Volatility of Stock Price
- ----------------------------------
There can be no assurance than an active trading market will be maintained in
the Company's Common Stock. The Company's Common Stock is listed on the NASDAQ
SmallCap Market System. The stock market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In addition,
the market price of the shares of Common Stock is likely to be highly volatile.
Factors such as fluctuations in the Company's operating results, announcements
of technological innovations or new products by the Company or its competitors,
FDA and international regulatory actions, actions with respect to reimbursement
matters, developments with respect to patents or proprietary rights, public
concern as to the safety of products developed by the Company or others, changes
in health care policy in the United States and internationally, changes in stock
market analysts' recommendations regarding the Company, other medical products
companies or the medical product industry generally and general market
conditions may have a significant effect on the market price of the Common
Stock.
Potential Adverse Effect on Market Price of Shares Eligible for Future Sale
- ---------------------------------------------------------------------------
Substantially all of the shares of the Company's outstanding Common Stock are
freely tradeable. Sales of Common Stock (including shares issued upon the
exercise of outstanding options) in the public market could materially adversely
affect the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company deems appropriate.
-17-
Anti-Takeover Effect of Certain Charter Provisions
- --------------------------------------------------
Certain provisions of the Company's Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common
Stock. Such provisions may also inhibit increases in the market price of the
Common Stock that could result from takeover attempts. In addition, the Board of
Directors of the Company, without further stockholder approval, may issue
Preferred Stock with such terms as the Board of Directors may determine, that
could have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock could also adversely affect the voting
power of the holders of Common Stock, including the loss of voting control to
others.
-18-
PART II. OTHER INFORMATION
--------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Calypte Biomedical Corporation previously filed a Form SR with the
Securities and Exchange Commission for the period ending April 30,
1997. As of September 30, 1997, the amount of net offering proceeds
from the Company's IPO used for working capital increased to
approximately $6.4 million; expansion of product development and
clinical trials support increased to approximately $4.8 million; and
expansion of manufacturing capacity increased to approximately
$800,000.
ITEM 5. OTHER INFORMATION
On September 18, 1997, Calypte Biomedical Corporation announced that
Cambridge Biotech Corporation received official notice from the FDA
that the agency had completed its review of the Cambridge Biotech /
bioMerieux Vitek application supplement for its Human Immunodeficiency
Virus Type 1 (HIV-1) Western Blot kit for use with urine samples. The
FDA "Review Complete" letter indicated that the application is
approvable pending the completion of product labeling.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 10.41 Second Addendum to Lease
Exhibit 11 Computation of Loss Per Share
Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K - None
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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: November 13, 1997 By: /s/ John J. DiPietro
-----------------------------------
John J. DiPietro
Vice President - Finance, Chief Financial Officer
and Secretary (Principal Accounting Officer)