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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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) 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
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The registrant had 13,428,194 shares of common stock outstanding as of
October 26, 1998.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
FORM 10-Q
INDEX
Page No.
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PART I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 1998 (unaudited) and December 31,
1997........................................................ 3
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997 (unaudited)... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 (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 6. Exhibits and Reports on Form 8-K............................ 17
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)
ASSETS
9/30/98 12/31/97
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(Unaudited)
Current assets:
Cash and cash equivalents..................................................... $ 1,456 $ 10,820
Securities available for sale................................................. 1,873 --
Accounts receivable........................................................... 198 133
Inventories................................................................... 847 161
Notes receivable - officers and employees..................................... 528 239
Note receivable - related party............................................... 768 --
Other current assets.......................................................... 190 150
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Total current assets................................................. 5,860 11,503
Property and equipment, net of accumulated depreciation of $3,214
at September 30, 1998 and $2,824 at December 31, 1997......................... 1,060 1,219
Other assets....................................................................... 210 228
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$ 7,130 $ 12,950
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LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 1,028 $ 610
Accrued expenses............................................................. 1,032 912
Capital lease obligations - current portion.................................. 341 479
Deferred revenue............................................................. 500 585
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Total current liabilities........................................... 2,901 2,586
Deferred rent obligation.......................................................... 32 37
Capital lease obligations - long-term portion..................................... 112 282
-------- --------
Total liabilities................................................... 3,045 2,905
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........................ 2,066 1,976
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares authorized; no shares
issued and outstanding................................................... -- --
Common Stock, $0.001 par value; 20,000,000 shares authorized; 13,424,073 and
13,198,781 shares issued and outstanding as of September 30, 1998 and
December 31, 1997, respectively........................................... 13 13
Additional paid-in capital.................................................... 56,933 56,847
Deferred compensation......................................................... (241) (496)
Accumulated deficit........................................................... (54,686) (48,295)
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Total stockholders' equity........................................... 2,019 8,069
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$ 7,130 $ 12,950
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3
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
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Revenues:
Product sales.......................................... $ 147 $ 93 $ 684 $ 225
------------ ------------ ------------ ------------
Total revenue........................................ 147 93 684 225
------------ ------------ ------------ ------------
Operating expenses:
Product costs.......................................... 454 592 1,503 1,810
Research and development costs......................... 1,155 755 2,883 2,897
Selling, general and administrative costs.............. 1,190 523 2,953 1,709
------------ ------------ ------------ ------------
Total expenses....................................... 2,799 1,870 7,339 6,416
------------ ------------ ------------ ------------
Loss from operations............................... (2,652) (1,777) (6,655) (6,191)
Interest income, interest expense and other income........ 63 (8) 266 44
------------ ------------- ------------ ------------
Loss before income taxes........................... (2,589) (1,785) (6,389) (6,147)
Income taxes.............................................. - - (2) (2)
------------ ------------ ------------ ------------
Net loss......................................... (2,589) (1,785) (6,391) (6,149)
Less dividends on mandatorily redeemable
Series A preferred stock................................ (30) (30) (90) (90)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders.............. $ (2,619) $ (1,815) $ (6,481) $ (6,239)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share attributable to common
stockholders (basic and diluted)........................ $ (0.20) $ (0.17) $ (0.48) $ (0.60)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares used to compute
net loss per share attributable to common
stockholders (basic and diluted)........................ 13,422 10,521 13,404 10,488
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4
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
---------------------------------
1998 1997
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Cash flows from operating activities:
Net loss..................................................................... $ (6,391) $ (6,149)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................................ 390 550
Amortization of deferred compensation.................................... 305 142
Forgiveness of note receivable from officer.............................. 57 -
Changes in operating assets and liabilities:
Accounts receivable.................................................. (65) (12)
Inventory............................................................ (686) 46
Other current assets................................................. (40) (20)
Other assets......................................................... 18 35
Accounts payable, accrued expenses and deferred
revenue......................................................... 453 200
Deferred rent obligation............................................. (5) (22)
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Net cash used in operating activities......................... (5,964) (5,230)
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Cash flows from investing activities:
Purchase of equipment, net................................................... (197) (87)
Notes receivable from officers and employees................................. (346) (240)
Loan to Pepgen............................................................... (768) -
Purchase of securities available for sale.................................... (1,873) -
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Net cash used in investing activities ........................ (3,184) (327)
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Cash flows from financing activities:
Proceeds from sale of stock.................................................. 126 57
Principal payments on notes payable.......................................... - (1,000)
Principal payments on capital lease obligations.............................. (342) (348)
Proceeds from notes payable.................................................. - 1,000
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Net cash used in financing activities......................... (216) (291)
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Net decrease in cash and cash equivalents....................................... (9,364) (5,848)
Cash and cash equivalents at beginning of period................................ 10,820 7,924
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Cash and cash equivalents at end of period...................................... $ 1,456 $ 2,076
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Supplemental disclosure of cash flow activities:
Cash paid for interest..................................................... $ 93 $ 149
Cash paid for income taxes................................................. 2 2
Supplemental disclosure of noncash activities:
Acquisition of equipment through obligations under capital leases.......... 34 0
Dividends on mandatorily redeemable Series A preferred stock............... 90 90
Deferred compensation attributable to stock grants......................... 50 37
5
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(unaudited)
(1) The Company and Basis of Presentation
Calypte Biomedical Corporation (the Company) was incorporated on November 11,
1989. The Company's primary activities are to sell its FDA-approved urine
Human Immunodeficiency Virus Type I (HIV-1) enzyme immunoassay (EIA)
screening test, perform research and development on new products and obtain
FDA approval for its urine-based diagnostic tests. Prior to March 31, 1998,
the Company was considered a development stage enterprise. On June 1, 1998,
the Company announced that the U.S. Food and Drug Administration licensed the
urine HIV-1 Western Blot test that confirms the presence of antibodies to
HIV-1 in urine samples. The new test is used on samples that are repeatedly
reactive in the Company's HIV-1 urine antibody screening test. The new test
completes the only available urine-based HIV test system. Accordingly, the
Company ceased being a development stage enterprise.
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 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, 1998 and the results of its operations for the
three and nine months ended September 30, 1998 and 1997 and its cash flows
for the nine months ended September 30, 1998 and 1997. 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, 1997 included in Form 10-K filed with the SEC on
March 25, 1998.
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
Comprehensive Income (Loss)
The Company adopted Statement of Financial Accounting Standard No. 130 (SFAS
130), "Reporting Comprehensive Income," effective January 1, 1998. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components in financial statements. For the periods ended September 30,
1998 and 1997, comprehensive income was equal to the net income as presented
in the accompanying statement of operations.
Net Loss Per Share Attributable to Common Stockholders
Basic net loss per share attributable to common stockholders has been
computed using the weighted average number of common shares outstanding
during each period presented. Diluted net loss per share attributable to
common stockholders has been computed using the weighted average number of
common shares and all dilutive potential common shares outstanding during
each period presented. For the three and nine months ended September 30, 1998
and 1997, the number of shares used in the calculation of all net loss per
share amounts did not include common stock equivalents relating to
outstanding stock options as they were antidilutive.
6
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(unaudited)
(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, 1998 and
December 31, 1997 consisted of the following:
9/30/98 12/31/97
(in thousands) (in thousands)
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Raw Materials $ 180 $ 53
Work-in-Process 571 103
Finished Goods 96 5
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Total Inventory $ 847 $ 161
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(4) Notes receivable - officers and employees
During the third quarter of 1998, the loan to Dr. Urnovitz related to a
Technology Rights Agreement was increased from $265,000 to $440,000 subject
to the same terms of the initial note. The Technology Rights Agreement gives
the Company the first right of refusal for an exclusive, worldwide license to
practice, make or have made, use, sell, distribute and license to other any
invention or discovery made by Dr. Urnovitz in exchange for a one-time cash
payment and the payment of royalties.
As of September 30, 1998, Dr. Urnovitz was not in compliance with the
collateral requirements of the notes. The company is in the process of
securing additional collateral for the notes.
(5) Note receivable - related party
During the third quarter of 1998, the Company loaned Pepgen Corporation an
additional $468,000 under the same terms of the initial note and extension,
increasing the total amount due from Pepgen to $768,000. Pepgen Corporation
is a company in which Calypte has a minority interest.
(6) Subsequent Event
In November 1998, the Company signed an agreement to sell 3,102,500 shares of
Common Stock to institutional investors in a private placement. The net
proceeds are estimated to be approximately $2.8 million. The closing of the
transaction is conditioned upon the effectiveness of a registration statement
which has been filed by the Company covering resales by the investors.
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
Our efforts are primarily focused on selling, developing and obtaining
approval for our urine-based diagnostic tests for sexually transmitted
diseases. In August 1996, we received a product license and an establishment
license from the U.S. Food and Drug Administration (FDA) to manufacture and
sell our urine-based HIV-1 screening test for use in professional laboratory
settings. In June 1998, we announced that the FDA had licensed the urine
HIV-1 Western Blot test that confirms the presence of antibodies to HIV-1 in
urine samples. The new test is used on samples that are repeatedly reactive
in our HIV-1 urine antibody screening test. The new test completes the only
available urine-based HIV test system. There can be no assurance we will have
significant revenues from sales of the HIV-1 urine screening assay or the
confirmatory test.
We expect operating losses to continue as we continue our marketing and sales
activities for our first FDA-approved product and conduct additional research
and development for subsequent products. Our marketing strategy is to use
distributors and focused direct selling and marketing partners to penetrate
certain targeted domestic markets. We plan to maintain a small direct sales
force to market our 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. We are currently exploring the possibility of attracting new
distributors for our product in order to expand our marketing capability.
We have limited experience in manufacturing, marketing or selling our
products in commercial quantities. There can be no assurance that our
products will be successfully commercialized or that we will achieve
significant product revenues. In addition, there can be no assurance
that we will achieve or sustain profitability in the future.
8
Results of Operations
The following represents selected financial data:
(in thousands)
------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Total revenue $ 147 $ 93 $ 684 $ 225
--------- --------- --------- ---------
Operating expenses:
Product costs 454 592 1,503 1,810
Research and development 1,155 755 2,883 2,897
Selling, general and administrative 1,190 523 2,953 1,709
--------- --------- --------- ---------
Total expenses 2,799 1,870 7,339 6,416
--------- --------- --------- ---------
Loss from operations (2,652) (1,777) (6,655) (6,191)
Interest income, interest expense and other income 63 (8) 266 44
--------- ---------- --------- ---------
Loss before income taxes $ (2,589) $ (1,785) $ (6,389) $ (6,147)
--------- --------- --------- ---------
--------- --------- --------- ---------
Three Months Ended September 30, 1998 and 1997
In the third quarter of 1998, revenue increased $54,000 to $147,000 from
$93,000 in the prior year's comparable period due to an increase in sales
after FDA approval of the urine HIV-1 Western Blot test.
Product costs decreased 23% to $454,000 for the three months ended September
30, 1998 from $592,000 for the three months ended September 30, 1997. Product
costs during the three months ended September 30, 1997 were higher because a
greater quantity of product produced was expensed since it was not retained
as saleable inventory. During the three months ended September 30, 1998, a
greater quantity of product was valued as inventory (raw materials and
finished goods) after FDA approval of the confirmatory test for Calypte's
HIV-1 urine screening test.
Research and development expenses increased 53% to $1.2 million for the three
months ended September 30, 1998 from $755,000 in the corresponding period of
the prior year. The increase was principally due to clinical investigations
performed for the discordant study (a study of HIV-1 antibodies found in
urine when the same person tests negative for HIV-1 antibodies in blood),
research funding made to outside organizations and more personnel hired to
complete research and development studies.
Selling, general and administrative expenses increased $667,000 or 128% to
$1.2 million for the three months ended September 30, 1998 from $523,000 for
the three months ended September 30, 1997. The increase was primarily related
to the increase in the use of consultants related to various projects and
increased expenses related to the marketing of our HIV-1 urine screening test.
Interest income, interest expense and other income increased $71,000 to
$63,000 for the three months ended September 30, 1998 from ($8,000) for the
three months ended September 30, 1997. The increase was primarily due to the
interest earned from proceeds of a private placement of Common Stock in
October 1997 (1997 Private Placement) and the decrease in interest paid for
capital leases.
9
Nine Months Ended September 30, 1998 and 1997
Revenue increased $459,000 to $684,000 for the nine month period ended
September 30, 1998 as compared to $225,000 in the corresponding period of the
prior year due to an increase in sales made primarily to laboratories for
research and evaluation purposes and sales after the approval of the urine
HIV-1 Western Blot test.
Product costs decreased $307,000 to $1.5 million for the nine month period
ended September 30, 1998 from $1.8 million for the nine months ended
September 30, 1997. Product costs during the nine months ended September 30,
1997 were higher because a greater quantity of product produced was expensed
since it was not retained as saleable inventory. During the nine months ended
September 30, 1998, a greater quantity of product was valued as inventory
(raw materials and finished goods) in anticipation of and after FDA approval
of the confirmatory test for Calypte's HIV-1 urine screening test.
Research and development expenses stayed approximately the same at $2.9 million
for the nine months ended September 30, 1998 and 1997. The differences in the
type of expenses between 1997 and 1998 include the clinical investigations
performed in 1997 for the additional data requested by the FDA in October, 1996
and the reduction in the use of regulatory consultants offset by research
funding made to outside organizations in 1998.
Selling, general and administrative expenses increased $1.2 million or 73% to
$2.9 million for the nine months ended September 30, 1998 from $1.7 million for
the nine months ended September 30, 1997. The increase was primarily related to
the increase in the use of consultants related to various projects and increased
expenses related to the marketing of our HIV-1 urine screening test.
Interest income, interest expense and other income increased $222,000 to
$266,000 for the nine months ended September 30, 1998 from $44,000 for the
nine months ended September 30, 1997. The increase was primarily due to the
interest earned from the 1997 Private Placement and the decrease in interest
paid for capital leases.
Liquidity and Capital Resources
Financing Activities
The Company has financed operations primarily through the private placement of
preferred stock and common stock, the Company's 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.
10
In November 1998, the Company signed a purchase agreement to sell 3,102,500
shares of Common Stock to institutional investors in a private placement. The
net proceeds are estimated to be approximately $2.8 million. The closing of
the transaction is conditioned upon the effectiveness of a registration
statement which has been filed by the Company covering resales by the
investors.
Although the Company believes current cash will be sufficient to meet the
Company's operating expenses and capital requirements through December 31,
1998, we will need to raise more money in the next six months in addition to
the money we expect to raise in the pending private placement. The Company's
future liquidity and capital requirements will depend on a number of factors,
including market acceptance of its products, regulatory actions by the FDA
and other international regulatory bodies, intellectual property protection
and the ability to raise additional capital in a timely manner.
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. 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 will likely place us in significant financial jeopardy.
Operating Activities
For the nine months ended September 30, 1998 and September 30, 1997, the
Company's cash used in operations was $6.0 million and $5.2 million,
respectively. The cash used in operations was primarily for inventory,
marketing the complete urine-based HIV-1 testing system, funding research
and development, manufacturing, selling, and general and administrative
expenses of the Company.
Factors That May Affect Future Results, Events or Performance
You should consider carefully the following risk factors, along with the
other information contained or incorporated by reference in this Form 10-Q,
in evaluating the Company. 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.
UNCERTAINTY OF MARKET ACCEPTANCE; LACK OF SALES AND MARKETING
EXPERIENCE. 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.
The failure of our products to obtain market acceptance would have a material
adverse effect on the Company.
In addition, we have limited experience marketing and selling our
products either directly or through our distributors. The success of our
products depends upon alliances with third-party distributors. There can be
no assurance that:
11
- 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 the Company.
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING. We have
incurred losses in each year since our inception. Our net loss for the nine
months ended September 30, 1998 was $6.4 million. In addition to the money we
expect to raise in the pending private placement, we will need to raise more
money in the next six months 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 will likely place us in
significant financial jeopardy.
DEPENDENCE ON A SINGLE PRODUCT. Our HIV-1 urine-based screening test
product is our only product. Accordingly, we may have to cease operations if
our screening test fails to achieve market acceptance or generate significant
revenues.
RELIANCE ON PROPRIETARY TECHNOLOGY AND KNOW-HOW. Our success and ability
to compete effectively depends in large part on our ability to:
- protect our patents and proprietary rights; and
- develop and maintain proprietary aspects of our technology.
We currently have the right to use certain patents and proprietary
rights related to the manufacture and sale of our products under licensing
agreements with New York University, Cambridge Biotech Corporation, Repligen
Corporation, and the Texas A&M University System. There can be no assurance
that the rights we have under these licensing agreements are sufficient or
that we can adequately protect those rights.
DEPENDENCE UPON SOLE SOURCE SUPPLIERS. We rely on single sources for
several of the components used in the manufacture of our products. We can not
quickly replace the suppliers of single-source components. Any delay or
interruption in the supply of these components could have a material adverse
effect on the Company by significantly impairing our ability to manufacture
products in sufficient quantities, particularly as we increase our
manufacturing activities in support of commercial sales.
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK. We have limited
experience in manufacturing our products in commercial quantities. We may
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.
12
In addition, we will need to implement manufacturing at our facility in
Alameda, California if the initial demand for our product exceeds the
capacity of our Berkeley, California facility. 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 the Company.
DEPENDENCE UPON INTERNATIONAL DISTRIBUTORS AND SALES. We anticipate that
international distributor sales will generate a significant portion of our
revenues for the next several years. The following risks common to
international sales and operations 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 exchange rates.
Some of our distributors have limited international marketing experience.
There can be no assurance that these distributors will be able to market
successfully our products in foreign markets.
INTENSE COMPETITION IN COMPANY'S MARKETS AND RAPID TECHNOLOGICAL
ADVANCES BY COMPETITORS. Competition in the in vitro diagnostic market is
intense. We expect competition to increase. Within the United States, our
competitors include 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. Many of our competitors have
significantly greater financial, marketing and distribution resources than we
do. Several of these competitors may have already submitted applications to
the FDA for approval of their over-the-counter (OTC) products. 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 the Company.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The factors listed below,
some of which we can not control, may cause our revenues and results of
operations to fluctuate significantly:
- actions relating to regulatory matters;
- the extent to which our products gain market acceptance;
- the timing and size of distributor purchases;
- introductions of alternative means for testing for HIV; and
- general economic conditions.
EXTENSIVE GOVERNMENT REGULATION. Numerous governmental authorities in
the United States and other countries regulate our products. The FDA
regulates our products under federal statutes and regulations related to
preclinical and clinical testing, manufacturing, labeling, distribution, sale
and promotion of medical devices in the United States.
13
If the Company fails to comply with FDA regulations, or the FDA believes
that the Company is 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 the Company,
its officers or its 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 the Company.
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 the Company.
ESTABLISHMENT AND REGULATION OF REFERENCE LABORATORY. In connection with
seeking approval for an OTC home urine collection kit for HIV-1 testing, we
may establish a clinical reference laboratory. If the necessary regulatory
approvals are obtained, the reference laboratory would test for HIV using our
urine-based HIV-1 test and receive home-collected urine for HIV testing. In
addition, we may have to offer counseling to laboratory customers in
connection with the reporting of results. A reference laboratory, especially
for HIV testing, involves a numbers of risks. To establish a reference
laboratory, we must:
- seek to hire and retain key laboratory personnel;
- purchase necessary equipment;
- secure required permits;
- incur marketing expenses;
- obtain customers; and
- comply with government regulations.
We may not be able to establish the laboratory or receive the regulatory
approvals required for its operation.
PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE. The
Company manufactures medical diagnostic products which subject it to risks or
product liability claims or product recalls, particularly in the event of
false positive or false negative reports. We maintain $10,000,000 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
liabilities which we incur in connection with clinical trials or sales of our
products. A product recall or a successful product liability claim or claims
which exceed our insurance coverage could have a material adverse effect on
the Company.
HAZARDOUS MATERIALS. Our research and development involves the
controlled use of hazardous materials. There can be no assurance that our
safety procedures for handling and disposing of such materials will comply
with applicable regulations. In addition we can not eliminate the risk of
accidental contamination or injury from these materials. The Company may be
held liable for any damages from such an accident and that liability could
have a material adverse effect on the Company.
14
DEPENDENCE UPON KEY PERSONNEL. Our success depends upon:
- the ability of key management and technical personnel to manage our
transition to commercial-scale operations; and
- our ability to attract and retain additional highly-qualified
management and technical personnel to oversee that transition.
We face intense competition for qualified personnel. Many of our
employees and potential employees often receive competing employment offers.
There can be no assurance that we will be able to attract and retain such
personnel. The loss of the services of one or more of our key employees could
have a material adverse effect on the Company.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of our common
stock, which is quoted on the NASDAQ SmallCap Market System, is likely to be
highly volatile due to, among others, the following factors:
- price and volume fluctuations in the stock market at large, or on the
NASDAQ SmallCap Market System, which do not relate to the Company's
operating performance;
- fluctuations in the our operating results;
- announcements of technological innovations or new products which we
or our competitors make;
- 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 that we or others develop;
- changes in health care policy in the United States or abroad; and
- changes in stock market analysts' recommendations regarding the
Company, other medical products companies or the medical product
industry generally.
POTENTIAL ADVERSE EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE
SALE. Nearly all outstanding shares of our common stock are freely tradeable.
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.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. Certain provisions
of our Certificate of Incorporation and Bylaws could:
- discourage potential acquisition proposals;
- delay or prevent a change in control of the Company;
- diminish stockholders' opportunities to participate in tender offers
for our common stock, including tender offers at prices above the then
current market price; or
- inhibit increases in the market price of our common stock that could
result from takeover attempts.
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LIMITED PUBLIC MARKET; POSSIBLE REMOVAL FROM NASDAQ SMALLCAP. The
public trading volume of our common stock has been relatively limited. A
consistently active trading market for our common stock may not develop.
In addition, the Nasdaq Stock Market has inquired whether the Company
continues to meet the maintenance criteria for trading on the Nasdaq SmallCap
market. We currently meet the maintenance criteria but our ability to
continue to do so will depend on whether we become profitable or are able to
raise additional financing. The public trading volume of our common stock and
the ability of stockholders to sell their shares could be significantly
impaired if we fail to meet the maintenance criteria and are consequently
removed from the Nasdaq SmallCap Market.
YEAR 2000. The Company has a formal Year 2000 Program focusing on five key
readiness areas: 1) hardware, addressing information technology; 2) software,
addressing business, research, financial, inventory planning, production
control, product distribution and customer support areas; 3) firmware,
addressing built-in microprocessors that control production and non-production
equipment; 4) third party suppliers of critical inventory; and 5) third party
service providers.
The Company established a Year 2000 Task Force earlier this year. The
task force is systematically examining each of the five key readiness areas
by 1) identifying items with Year 2000 compliance concerns; 2) assessing the
risk and impact of noncompliance for each item identified; and 3) correcting
non-compliant items and testing the corrections to ensure readiness at both
component and system levels. The task force shall develop contingency plans
if it discovers areas where there is a substantial possibility that Year 2000
compliance will not be achieved. The Company plans to complete the
identification of Year 2000 compliance concerns by the end of 1998. We expect
to complete risk assessment in each area by May, 1999 and the correction,
testing and the development of contingency plans will follow. We have
presently completed correction and testing in the Hardware readiness area and
it is now Year 2000 compliant. To date the Company has spent approximately
$2,300 on its Year 2000 program.
We estimate the total Year 2000 costs to upgrade systems within the
Company will range from $4,000 to $15,000 with the majority of costs to be
incurred in the next eighteen months. At this time we do not anticipate that
the Company will incur significant operating expenses or be required to
invest heavily in computer system improvements because our manufacturing
process does not rely heavily on automation and our existing computer
hardware has proven to be Year 2000 compliant. However the Company is
continuing to assess and develop alternatives that will require refinement of
its cost estimate over time. There can be no assurance that there will not be
a delay in, or increased costs associated with, our Year 2000 compliance
program. Since our program is ongoing, all potential Year 2000 complications
have not yet been identified. Therefore, the potential impact of possible
complications on the Company's financial condition and results of operations
cannot be determined at this time. If computer systems used by the Company or
its suppliers or the product integrity of products provided to the Company by
suppliers fail or experience significant difficulties related to the Year
2000, the Company's operations and financial condition could be adversely
effected.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. 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 16, 1998 By: /s/ John J. DiPietro
-----------------------
John J. DiPietro
Chief Operating Officer, Vice President -
Finance, Chief Financial Officer and
Secretary
(Principal Accounting Officer)