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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------------
FORM 10-Q
--------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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)
1265 HARBOR BAY PARKWAY, ALAMEDA, CALIFORNIA 94502
(Address of principal executive offices) (Zip Code)
(510) 749-5100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.)
Yes No X
The registrant had 304,692,581 shares of common stock outstanding as of
May 12, 2003.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
FORM 10-Q
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited) :
Condensed Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002........................ 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2003 and 2002........................ 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2003 and 2002........................ 5
Notes to Condensed Consolidated Financial
Statements.................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................... 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................. 48
Item 4. Controls and Procedures..................................... 49
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 50
Item 2. Changes in Securities and Use of Proceeds................... 50
Item 4. Submission of Matters to a Vote of Security Holders......... 52
Item 5. Other Information - Subsequent Events....................... 52
Item 6. Exhibits and Reports on Form 8-K............................ 53
SIGNATURES AND CERTIFICATIONS....................................................... 54
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 294 $ 147
Accounts receivable, net of allowance of $32 at March 31, 2003 and December 31, 2002 319 327
Inventory 1,271 963
Prepaid expenses 294 163
Deferred offering costs, net of accumulated amortization of
$396 and $213 at March 31, 2003 and December 31, 2002, respectively 732 662
Other current assets 14 15
---------- ----------
Total current assets 2,924 2,277
Property and equipment, net 799 917
Other assets 83 103
---------- ----------
$ 3,806 $ 3,297
========== ==========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 5,284 $ 5,145
Notes and debentures payable, net of discount of $2,625 and $2,638 at March 31, 2003
and December 31, 2002, respectively 3,404 2,181
Deferred revenue 500 500
---------- ----------
Total current liabilities 9,188 7,826
Warrant liability 393 356
Deferred rent obligation 21 20
Capital lease obligations-long-term portion 16 13
---------- ----------
Total liabilities 9,618 8,215
---------- ----------
Mandatorily redeemable Series A preferred stock, $0.001 par value; no shares authorized at March 31, 2003
and December 31, 2002; 100,000 shares issued and outstanding at March 31, 2003 and December 31, 2002;
aggregate redemption and liquidation value of $1,000 plus cumulative dividends 2,606 2,576
---------- ----------
Commitments and contingencies - -
Stockholders' deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or outstanding - -
Common stock, $0.001 par value; 800,000,000 and 200,000,000 shares authorized at March 31,
2003 and December 31, 2002, respectively; 235,638,840 and 151,754,521 shares issued and
outstanding as of March 31, 2003 and December 31, 2002, respectively 236 152
Additional paid-in capital 99,140 93,804
Accumulated deficit (107,794) (101,450)
---------- ----------
Total stockholders' deficit (8,418) (7,494)
---------- ----------
$ 3,806 $ 3,297
========== ==========
See accompanying notes to financial statements.
-3-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2003 2002
-------------- -------------
Revenues:
Product Sales $ 784 $ 1,159
Operating expenses:
Product Costs 1,415 1,630
Research and development costs 314 241
Selling, general and administrative costs (non-cash of $ 2,219
for the three months ended March 31, 2003) 4,009 1,215
--------- ---------
Total expenses 5,738 3,086
--------- ---------
Loss from operations (4,954) (1,927)
Interest income - 1
Interest expense (non-cash of $1,373 and $33 for the three
months ended March 31, 2003 and 2002, respectively) (1,516) (47)
Gain on early extinguishments of debt - 1,319
Other income, net (non-cash of $128 for the three months
ended March 31, 2003 128 8
--------- ---------
Loss before income taxes (6,342) (646)
Income taxes (2) (2)
--------- ---------
Net loss (6,344) (648)
Less dividends on mandatorily redeemable Series A preferred stock (30) (30)
-------- ---------
Net loss attributable to common stockholders $ (6,374) $ (678)
======== ========
Net loss per share attributable to common stockholders (basic and diluted) $ (0.04) $ (0.02)
======== ========
Weighted average shares used to compute net loss per share attributable to common
stockholders (basic and diluted) 172,657 40,597
======== ========
See accompanying notes to financial statements.
-4-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2003 2002
------------- --------------
Cash flows from operating activities:
Net loss $ (6,344) $ (648)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 134 122
Amortization of deferred compensation - 8
Amortization of debenture discounts and charge for beneficial conversion feature 840 27
Amortization of deferred offering costs 184 -
Liquidated damages due to non-registration 312 -
Non-cash loss (gain) on settlement of debt 55 (1,319)
Fair market value of common stock warrants, options and bonuses granted 2,214 18
Gain on repurchase of beneficial conversion feature (128) -
Warrant liability adjustment 37 -
Changes in operating assets and liabilities:
Accounts receivable 8 143
Inventory (308) 91
Prepaid expenses and other current assets (130) 249
Other assets 20 -
Accounts payable and accrued expenses 314 125
Deferred rent obligation 1 2
----------- -----------
Net cash used in operating activities (2,791) (1,182)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (16) (69)
----------- -----------
Net cash used in investing activities (16) (69)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of stock 1,661 823
Expenses paid related to sale of stock (50) (66)
Proceeds from issuance of notes and debentures 1,658 368
Repayment of notes and debentures (318) (18)
Principal payments on capital lease obligations 3 (24)
----------- -----------
Net cash provided by financing activities 2,954 1,083
----------- -----------
Net increase (decrease) in cash and cash equivalents 147 (168)
Cash and cash equivalents at beginning of period 147 287
----------- -----------
Cash and cash equivalents at end of period $ 294 $ 119
=========== ===========
Supplemental disclosure of cash flow activities:
Cash paid for interest $ 3 $ 3
Cash paid for income taxes 2 -
Supplemental disclosure of non-cash activities:
Dividend on mandatorily redeemable Series A preferred stock 30 30
Common stock grants 292 238
Original issue discount and expense withheld from debenture proceeds - 57
Conversion of notes, debenture payable and accrued interest to common stock 635 -
Fair market value of warrants issued in conjunction with debenture - 425
Beneficial conversion feature, net of write off upon conversion 827 -
Accrued interest converted to note payable 42 -
See accompanying notes to financial statements
-5-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
(1) THE COMPANY AND BASIS OF PRESENTATION
Calypte Biomedical Corporation (the Company) is a health care company dedicated
to the development and commercialization of urine-based diagnostic products and
services for Human Immunodeficiency Virus Type 1 (HIV-1), sexually transmitted
diseases and other chronic illnesses. The Company's tests include the screening
enzyme immunoassay (EIA) and supplemental Western Blot tests, the only two
FDA-licensed HIV-1 antibody tests that can be used on urine samples. The Company
believes that accurate, non-invasive urine-based testing methods for HIV and
other chronic diseases make important contributions to public health by helping
to foster an environment in which testing may be done safely, economically, and
painlessly.
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC), and reflect all adjustments (consisting only of
normal recurring adjustments) which, in the opinion of management, are necessary
for a fair presentation of the Company's financial position as of March 31, 2003
and the results of its operations for the three months ended March 31, 2003 and
2002 and its cash flows for the three months ended March 31, 2003 and 2002.
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, 2002 included in its Form 10-K filed with the SEC
on March 26, 2003.
Certain information in footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America has been condensed or omitted pursuant to the
rules and regulations of the SEC. The data disclosed in these condensed
consolidated financial statements and in the related notes is unaudited.
During the first quarter of 2003, Calypte incurred a net loss of $6.3 million
and its accumulated deficit at March 31, 2003 was $107.8 million. For the
Company to successfully implement its business plan, it must overcome certain
impediments. Specifically, in April of 2002, the Company announced the winding
down of its business operations because it lacked sufficient capital to continue
to successfully implement its business model. Subsequently, in May of 2002, the
Company announced an arrangement for new funding, including a commitment for
funding of at least $5 million over the next twelve months, which allowed for
Calypte to resume and recommence regular business operations. Based upon the
Company's tenuous financial condition, its independent auditors have issued an
opinion indicating that its recurring losses from operations, its working
capital deficit and its accumulated deficit raise substantial doubt about the
Company's ability to continue its business operations as a going concern, and
the Company continues to reassess its business plan and capital requirements as
a result of the wind-down and subsequent restart of its operations. The Company
does not believe that its currently available financing will be adequate to
sustain operations at current levels and achieve its current business expansion
milestones through the second quarter of 2003 unless new financing is arranged.
Although, for the period May 10, 2002 through March 31, 2003, the Company has
completed new financings in which it has received an aggregate of approximately
$8.7 million, exceeding the initial $5 million new funding commitment described
above, the Company does not know if it will succeed in raising additional funds
through further offerings of debt or equity. The Company must achieve
profitability for its business model to succeed. Prior to accomplishing this
goal, the Company believes that it will need to arrange additional financing of
at least $10 million in the next twelve months. There can be no assurance that
subsequent additional financings will be made available to the Company on a
timely basis or that the additional capital that the Company requires will be
available on acceptable terms, if at all. The terms of a subsequent financing
may involve a change of control and/or require stockholder approval, or require
the Company to obtain waivers of certain covenants that are contained in
existing agreements.
The Company is actively engaged in seeking additional financing in a variety of
venues and formats and it continues to impose actions designed to minimize its
operating losses. The Company would consider strategic opportunities, including
investment in the Company, a merger or other comparable transaction, to sustain
its operations. The Company does not currently have any agreements in place
with respect to any such strategic opportunity, and there can be no assurance
that such opportunity will be available to it on acceptable terms, or at all.
If additional financing is not available when required or is not available on
acceptable terms, or the Company is unable to arrange a suitable strategic
opportunity, it will place the Company in significant financial jeopardy and it
may be unable to continue its operations at current levels, or at all.
-6-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, establishes a fair-value method of
accounting for stock options and similar equity instruments. The fair-value
method requires that compensation cost be measured on the value of the award at
the grant date, and recognized over the service period. SFAS No. 123, as
amended, allows companies to either account for stock-based compensation to
employees under the provisions of SFAS No. 123, as amended, or under the
provisions of Accounting Principles Board (APB) Opinion No. 25 and its related
interpretations. The Company accounts for its stock-based compensation to
employees in accordance with the provisions of APB Opinion No. 25. The Company
records deferred compensation for the difference, if any, between the exercise
price and the deemed fair market value of the common stock for financial
reporting purposes of stock options granted to employees. The compensation
expense related to such grants is amortized over the vesting period of the
related stock options on a straight-line basis. The Company has adopted the
disclosure requirements of SFAS No. 148.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123, as amended, and Emerging Issues
Task Force (EITF) Issue No. 96-18 Accounting for Equity Instruments that Are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
employee awards in each period (in thousands):
Three months ended
March 31,
2003 2002
---- ----
Net loss attributable to common stockholders, as reported $ (6,374) $ (678)
Add: Stock-based employee compensation expense included in reported
net loss, net of related tax effects 84 9
Less: Stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects (104) (229)
--------- ----------
Pro forma net loss attributable to common stockholders $ (6,394) $ (898)
--------- ----------
Basin and diluted net loss per share attributable to common stockholders:
As reported $ (0.04) $ (0.02)
Pro forma $ (0.04) $ (0.02)
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic net loss per share attributable to common stockholders is computed by
dividing net loss attributable to common stockholders by the weighted average
number of shares of common stock outstanding attributable to common stockholders
during the period presented. The computation of diluted loss per share is
similar to the computation of basic loss per share attributable to common
stockholders, except that the denominator is increased for the assumed
conversion of convertible securities and the exercise of dilutive options using
the treasury stock method. The weighted average shares used in computing basic
and diluted net loss per share attributable to common stockholders are
equivalent for the periods presented. Options and warrants for 34,341,879 and
30,424,479 shares at March 31, 2003 and 2002, respectively, were excluded from
the computation of loss per share attributable to common stockholders as their
effect was anti-dilutive.
-7-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
USE OF ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the Company's
financial statements and accompanying notes. Actual results could differ
materially from those estimates.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
The Company adopted Statement of Financial Accounting Standards No. 145,
"Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections," during the first quarter of 2003. Accordingly,
certain reclassifications have been made in the Condensed Consolidated Statement
of Operations for 2002 to conform to Statement No. 145.
(3) INVENTORIES
Inventory is stated at the lower of cost or market and the cost is determined
using the first-in, first-out method. Inventory as of March 31, 2003 and
December 31, 2002 consisted of the following (in thousands):
2003 2002
---- ----
Raw materials $ 239 $ 197
Work-in-process 659 443
Finished goods (including consigned inventory of $66 and $101 for the periods
ended March 31, 2003 and December 31, 2002, respectively 373 323
--------- -------
Total Inventory $ 1,271 $ 963
========= =======
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of March 31, 2003 and December 31, 2002
consisted of the following (in thousands):
2003 2002
---- ----
Trade accounts payable $ 3,356 $ 3,462
Accrued royalty payments 464 338
Accrued salary and vacation pay 323 240
Accrued interest (including non-cash liquidated damages of $ 708 and $546
at March 2003 and December 31 2002, respectively) 981 789
Other 160 316
---------- ----------
Total accounts payable and accrued expenses $ 5,284 $ 5,145
======== ========
(5) NOTES AND DEBENTURES PAYABLE
The table below summarizes notes and debentures payable activity for the three
months ended March 31, 2003 (in thousands).
Discount Net
Balance Balance At Balance At
12/31/02 Additions Payments Conversions 3/31/03 3/31/03 3/31/03
-------- --------- -------- ----------- ------- ------- -------
8% Convertible Notes $ 2,985 $ - $ - $ (100) $ 2,885 $ (1,637) $ 1,248
8.5% Note - LHC Corporation 393 42 (18) - 417 - 417
10% Convertible Note - BNC Bach 126 - - - 126 - 126
10% Convertible Debentures -
Mercator - 1,950 - - 1,950 (896) 1,054
12% Convertible Debenture -
Bristol Investment Fund, 465 - - (364) 101 (56) 45
Ltd.
12% Convertible Debenture -
Mercator 850 - (300) - 550 (36) 514
-------- ---------- ------ ----------- -------- --------- --------
Total $ 4,819 $ 1,992 $ (318) $ (464) $ 6,029 $ (2,625) $ 3,404
======== ======== ======== ======= ========== ======== ========
-8-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
8% Convertible Notes - Various Holders
During the second and third quarters of 2002, the Company issued a series of 8%
convertible notes in the aggregate principal amount of $3.125 million. The notes
each have a 24 month term and are convertible into shares of the Company's
common stock at the lesser of $.10 or 70% of the average of the three lowest
trades during the 30 day period preceding conversion and are convertible at any
time prior to maturity. On February 3, 2003, Excalibur Limited Partnership
converted $100,000 face value plus accrued interest and $28,000 of liquidated
damages into 4,113,640 shares of the Company's common stock at a conversion
price of $0.0338 per share.
At March 31, 2003, the Company has not yet filed a registration statement for
the shares underlying the notes and, consequently, the holders of the notes have
the right to demand immediate repayment of the notes. Although none of the
holders has demanded repayment, these notes are classified as current
liabilities as of March 31, 2003 and December 31, 2002. As a result of the
non-registration, the Company is required to pay, in cash or stock, at the
subscribers' option, liquidated damages in an amount equal to 2% of the note
principal per month. As of March 31, 2003, the Company has accrued approximately
$556,000 as liquidated damages attributable to these notes, of which
approximately $188,000 was recorded as non-cash interest expense during the
first quarter of 2003.
8.5% Note - LHC Corporation
On February 28, 2003, the Company and LHC Corporation executed a new note in the
amount of $435,000, representing the unpaid principal and accrued but unpaid
interest on the December 2001 note. The terms of the February 2003 note require
monthly principal payments of $17,500 plus interest from March 2003 through May
2003, increasing to $35,000 monthly, plus interest, thereafter, unless and until
the Company secures at least $5,000,000 in additional financing, at which time
the remaining outstanding balance is due and payable. The Company renegotiated
the terms of the December 2001 note due to a lack of available funds and to
avoid a default.
10% Convertible Note - BNC Bach
On January 15, 2003, the Company and BNC Bach agreed to extend the maturity date
of the 10% Convertible Note to March 17, 2003. On March 17, 2003, the Company
and BNC Bach agreed to further extend the maturity date to April 4, 2003. No
accounting adjustments were required as a result of the extension of the note's
maturity. See Note 7, Subsequent Events, regarding a further extension of the
maturity of this note.
10% Convertible Debentures-Mercator Focus Fund, Mercator Momentum Fund and
Mercator Momentum Fund III On January 13, 2003, when the market price of the
Company's stock was $0.065, the Company issued a $1,000,000 10% convertible
debenture to Mercator Focus Fund, L.P. ("Focus Fund") pursuant to Regulation S
and received net proceeds of $818,000 net of fees and expenses. $308,000 of the
proceeds was used to repay the $300,000 October 2002 12% convertible debenture
and accrued interest issued to Mercator Momentum Fund L.P. ("Mercator"). The
debenture is convertible into the Company's common stock at 80% of the average
of the three lowest trades for the 20 days preceding conversion, but not more
than $0.10. Under the terms of the debenture agreement, the Company agreed to
file a registration statement for the shares of common stock underlying the
debenture within 30 days of the closing date and use its reasonable best
commercial efforts to cause the registration statement to be declared effective
within 120 days of the closing date. On February 14, 2003, when the price of the
Company's common stock was $0.067, the Company and Focus Fund agreed to waive
all penalties relating to non-registration of the underlying common stock as
required in the Registration Rights Agreement until April 4, 2003. On March 31,
2003, when the market price of Calypte's common stock was $0.0295, Focus Fund
granted the Company an additional 30-day extension, until May 5, 2003, in which
to register the shares of common stock underlying this financing. In the event
the Company does not complete the registration within the specified time period,
Focus Fund may elect to accelerate the debenture, together with accrued interest
and any other amounts owing in respect thereof, and require immediate repayment
in cash or shares of the Company's common stock. See Note 7, Subsequent Events,
regarding a further waiver of the registration requirements for this debenture.
On January 29, 2003, when the market price of the Company's stock was $0.056,
the Company issued a $450,000 10% convertible debenture to Mercator pursuant to
Regulation S and received net proceeds of $440,000, net of fees and expenses.
The debenture is convertible into the Company's common stock at 80% of the
average of the three lowest trades for the 20 days preceding conversion, but not
more than $0.10. Under the terms of the debenture agreement, the Company agreed
to file a registration statement for the shares of common stock underlying the
-9-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
debenture within 30 days of the closing date and use its reasonable best
commercial efforts to cause the registration statement to be declared effective
within 120 days of the closing date. On February 14, 2003, when the price of the
Company's common stock was $0.067, the Company and Mercator agreed to waive all
penalties relating to non-registration of the underlying common stock as
required in the Registration Rights Agreement until April 4, 2003. On March 31,
2003, when the market price of Calypte's common stock was $0.0295, Mercator
granted the Company an additional extension, until May 5, 2003, in which to
register the shares of common stock underlying this financing. In the event the
Company does not complete the registration within the specified time period,
Mercator may elect to accelerate the debenture, together with accrued interest
and any other amounts owing in respect thereof, and require immediate repayment
in cash or shares of our common stock. See Note 7, Subsequent Events, regarding
a further waiver of the registration requirements for this debenture.
On March 14, 2003, when the market price of the Company's stock was $0.050, the
Company issued a $400,000 10% convertible debenture to Focus Fund and a $100,000
10% convertible debenture to Mercator Momentum Fund III, L.P. ("Momentum Fund
III"), each pursuant to Regulation S, and received aggregate net proceeds of
$400,000, net of fees and expenses. Each debenture is convertible into the
Company's common stock at 65% of the average of the three lowest trades for the
20 days preceding conversion, but not more than $0.07. Under the terms of the
debenture agreements, Calypte agreed to file a registration statement for the
shares of common stock underlying the debentures within 30 days of the closing
date and use its reasonable best commercial efforts to cause the registration
statement to be declared effective within 120 days of the closing date. In the
event the Company does not complete the registration within the specified time
period, Focus Fund and Momentum Fund III may elect to accelerate the debentures,
together with accrued interest and any other amounts owing in respect thereof,
and require immediate repayment in cash or shares of our common stock.
The Company determined that each of the above 10% convertible debentures was
issued with a beneficial conversion feature. The intrinsic value was calculated
at the date of issue as the difference between the conversion price of the
debenture and the fair value of the Company's common stock into which the
debenture was convertible, multiplied by the number of common shares into which
the debenture was convertible, limited by the face amount of the debenture. The
Company has treated the beneficial conversion features as a discount to the face
amount of the debentures and is amortizing them over the term of the respective
debentures. In aggregate, the Company has recorded approximately $165,000 of
such amortization as non-cash interest expense for the quarter ended March 31,
2003. Upon conversion of all or a portion of the debenture, the proportionate
share of unamortized discount is charged to interest expense.
12% Convertible Debentures - Bristol Investment Fund Ltd.
On February 18, 2003, and subsequent to the February 14, 2003 effective date of
the registration statement on Form S-2/A (No. 6) which registered shares of
common stock underlying the 12% Convertible Debentures in the amount of $525,000
that we issued to Bristol Investment Fund, Ltd. ("Bristol"), Bristol provided
notice to the Company that Bristol intended to convert a portion of its
debentures and that the number of shares underlying its debenture was subject to
adjustment for anti-dilution pursuant to the terms of the Security Purchase
Agreement with the Company. As a consequence of that notice, the Company and
Bristol signed a letter agreement on February 28, 2003 (the "February 28, 2003
Letter Agreement") providing that the Company could be required to issue
additional shares to Bristol based upon an adjusted conversion rate. On the
basis of the February 28, 2003 Letter Agreement, Bristol converted an aggregate
of $365,000 face value, plus accrued interest and $122,000 of liquidated
damages, into 19,792,211 shares of the Company's common stock during the first
quarter of 2003. See Note 7, Subsequent Events, regarding an additional
conversion of these debentures.
The number of additional shares that the Company could be required to issue
pursuant to the February 28, 2003 Letter Agreement is based on the difference
between (i) the number of shares that would have been issued based on a
conversion price of the lesser of (a) $0.05 per share and (b) 60% of the average
of the 3 lowest closing bid prices for the 22 trading days preceding conversion
(the "60% Conversion Price"), and (ii) the number of shares previously issued
pursuant to the conversion notice (based on a conversion price of 70% of the 3
lowest trades for the 20 days preceding conversion (the "70% Conversion
Price")). In accordance with the Registration Rights Agreement, the Company is
-10-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
required to file a post-effective amendment to the Company's Registration
Statement on Form S-2/A (No.6) to reflect the adjusted conversion rate. The
Company had included additional shares in the Form S-2 registration statement to
cover such a contingency. In accordance with the February 28, 2003 Letter
Agreement, the Company is required to issue the following additional shares to
Bristol: (1) an additional 0.796 million shares pursuant to Bristol's conversion
on February 18, 2003 of $150,000 principal amount of the debentures; (2) an
additional 0.212 million shares pursuant to Bristol's conversion on March 10,
2003 of $63,464 principal amount of debentures, and (3) an additional 0.290
million shares pursuant to Bristol's conversion on March 26, 2003 of $55,000
principal amount of debentures, for a total of an additional 1.298 million
shares. The 70% Conversion Price used to determine the number of shares issued
pursuant to Bristol's conversion notice on March 31, 2003 resulted in the
issuance of a greater number of shares than would have resulted from the use of
the 60% Conversion Price. Specifically, the Company issued shares in excess of
the 60% Conversion Price amount of 1.880 million shares pursuant to Bristol's
conversion on March 31, 2003 of $96,566 principal amount of debentures. The
excess shares issued pursuant to the March 31, 2003 conversion exceeds by 0.582
million shares the additional shares required to be issued pursuant to the
February 18, March 10, and March 26, 2003 conversions. Accordingly, the Company
does not currently plan to file a post-effective amendment to its Registration
Statement or register any additional shares for these debentures.
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In, a Company's Own Stock," and the terms of
the Class A and Class B warrants issued to Bristol in conjunction with the 12%
debentures in February 2002, the fair value of the warrants was accounted for as
a liability, with an offsetting discount to the carrying value of the first
debenture, which was being amortized as interest expense over the 24 month term
of the debenture. The warrant liability will be reclassified to equity at the
time the Company has registered sufficient shares to allow for the exercise of
the warrants. Until that time, it is marked to market through earnings. The
Company recorded approximately $37,000 of non-cash interest expense attributable
to the re-measurement of the warrant liability for the quarter ended March 31,
2003. The Company also recognized approximately $35,000 in non-cash interest
expense related to the amortization of the debenture discount for the quarter
ended March 31, 2003. The Company recorded an additional $23,000 of non-cash
interest expense during the quarter ended March 31, 2003 attributable to
liquidated damages for the failure to timely register the shares underlying
these debentures prior to the effective date of the registration statement.
12% Convertible Debentures - Mercator Momentum Fund
On September 12, 2002, the Company issued a $550,000 12% convertible debenture
to Mercator. The debenture is convertible into the Company's common stock at 85%
of the average of the three lowest trades for the 20 days preceding conversion,
but not less than $0.05. This debenture is the first tranche of a $2.0 million
commitment that will become available upon the filing and effectiveness of a
registration statement. Under the terms of the debenture agreement, the Company
agreed to file a registration statement for the shares of common stock
underlying the debenture within 45 days of the closing date and use its
reasonable best commercial efforts to cause the registration statement to be
declared effective within 135 days of the closing date. At December 31, 2002,
the Company had obtained a waiver of the non-registration provisions of the
agreement through February 18, 2003. On February 14, 2003, when the price of the
Company's common stock was $0.067, the Company and Mercator agreed to waive all
penalties relating to non-registration of the underlying common stock as
required in the various Registration Rights Agreements until April 4, 2003. On
March 31, 2003, when the market price of Calypte common stock was $0.0295, the
Company amended the conversion price to eliminate a conversion price floor of
$0.05 per share in return for an extension until May 5, 2003 in which to
register the shares of common stock underlying this and certain other
Mercator-group financings. In the event the Company does not complete the
registration within the specified time period, Mercator may elect to accelerate
the debenture, together with accrued interest and any other amounts owing in
respect thereof, and require immediate repayment in cash or shares of its common
stock. See Note 7, Subsequent Events, regarding a further waiver of the
registration requirements for this debenture.
On October 22, 2002, the Company issued a $300,000 12% convertible debenture to
Mercator. The debenture and related accrued interest was repaid on January 13,
2003 in conjunction with the issuance of a $1,000,000 10% convertible debenture
to Focus Fund. Upon the repayment, the Company charged the remaining unamortized
amount of the beneficial conversion feature of approximately $271,000 to
non-cash interest expense. Additionally, the repayment of this note resulted in
the Company effectively repurchasing a portion of the beneficial conversion
feature. In situations in which a debt instrument containing an embedded
beneficial conversion feature is extinguished prior to conversion, a portion of
the debt payment is allocated to the beneficial conversion feature using the
-11-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
intrinsic value of that conversion feature at the extinguishment date. Any
residual amount is then allocated to the convertible security with the Company
recognizing a gain or loss to remove the remaining liability. The repayment of
the debenture and the repurchase of the beneficial conversion feature resulted
in a non-cash gain of $128,000, recorded as other income, during the first
quarter of 2003.
The Company determined that the Bristol and Mercator 12% convertible debentures
were each issued with a beneficial conversion feature. The intrinsic value was
calculated at the date of issue as the difference between the conversion price
of the debenture and the fair value of the Company's common stock into which the
debenture was convertible, multiplied by the number of common shares into which
the debenture was convertible, limited by the face amount of the debenture. The
Company has treated the beneficial conversion feature as a discount to the face
amount of the debenture and amortized it over the respective term. The Company
recorded approximately $54,000 of such amortization as non-cash interest expense
for the quarter ended March 31, 2003. Upon conversion of all or a portion of the
debenture, the proportionate share of unamortized discount will be charged to
interest expense.
(6) STOCKHOLDERS' DEFICIT
Increase in Authorized Shares
On February 14, 2003, the Company filed an Amendment to its Amended and Restated
Certificate of Incorporation with the Secretary of State of Delaware that
increased the number of shares of authorized common stock from 200 million to
800 million. The Company's stockholders approved the Amendment to the
Certificate of Incorporation at a Special Meeting of Stockholders held on
February 14, 2003. A principal purpose for authorizing the additional shares was
for issuance pursuant to arrangements to finance the Company's continuing
operations.
Private Placement
Under the terms of the August 2002 private placement agreement in which the
Company issued 8,000,000 shares of its common stock and received proceeds of
$400,000, it agreed to file a registration statement for the shares of common
stock and use its reasonable best commercial efforts to cause the registration
statement to be declared effective within ninety days of the closing date. Under
the terms of the agreement, the Company is require to issue, as liquidated
damages, 250,000 shares of its common stock for each ten days of delay past
November 27, 2002. At March 31, 2003, the Company had not filed a registration
statement for this private placement. Accordingly, at March 31, 2003, the
Company has recorded an aggregate of $152,000 in non-cash interest expense
representing the value of 3,000,000 shares issuable as liquidated damages
through March 31, 2003. See Note 7, Subsequent Events, regarding shares issued
as liquidated damages pursuant to this agreement.
Warrants, options and stock grants
During 2002, the Company issued warrants and options to purchase an aggregate of
47,500,000 shares of its common stock under agreements with consultants to
perform legal, financial, business advisory and other services associated with
the restart of its operations, including introductions and arrangements with
respect to potential domestic and international product distribution agreements,
assistance with international product trials and regulatory qualifications. At
December 31, 2002, the consultants had exercised options and warrants to
purchase all but 1,000,000 of the warrants granted. In February 2003, the
Company received $50,000 from the exercise of the remaining warrants and issued
1,000,000 shares of its common stock.
-12-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
During the first quarter of 2003, the Company entered into new contracts and
extended certain other contracts with existing consultants to perform various
legal, business advisory, marketing and distribution functions similar to those
entered into during 2002. The Company issued warrants to purchase an aggregate
of 60,240,000 shares of its common stock as compensation for these services. At
March 31, 2003, the consultants had exercised warrants to purchase 43,240,000
shares of the Company's common stock and the Company had received proceeds of
$1,481,000. The warrants summarized below were non-forfeitable and fully-vested
at the date of issuance and were valued using the Black-Scholes option pricing
model using the assumptions noted below.
Date of Issue 2/14/03 2/14/03 3/14/03 3/24/03 3/25/03 3/27/03
Number of shares 19,000,000 3,000,000 240,000 20,000,000 10,000,000 8,000,000
Exercise price per share $0.05 $0.05 $ .025 $ .025 $ .025 $ .025
Market price of Calypte's stock on $0.067 $0.067 $0.050 $0.047 $0.045 $0.044
date of issuance
Black Scholes valuation: $0.026 $0.0400 $0.0486 $0.0243 $0.0252 $0.0213
Assumptions:
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Risk free rate of return 1.19% 1.30% 1.30% 1.19% 1.20% 1.19%
Contractual life 3 months 9 months 12 months 3 months 6 months 3 months
Volatility 142.3% 163.6% 411.5% 138.4% 136.8% 131.35%
Consulting Expense $496,000 $119,000 $11,670 $485,963 $251,588 $170,611
Number of shares exercised through 16,000,000 - 240,000 20,000,000 3,000,000 4,000,000
March 31, 2003
Proceeds received upon exercise $800,000 - $6,000 $500,000 $75,000 $100,000
Pursuant to the requirements of FASB Statement No. 123 and EITFs 96-18 and 00-18
related to accounting for stock-based compensation, the Company recognized
consulting expense attributable to these warrants at the date of grant and in
the amounts indicated.
In addition to the warrants described above, during the first quarter of 2003,
the Company also issued stock grants for approximately 13.3 million shares of
its common stock to certain consultants and other vendors under various
agreements and recorded non-cash selling, general and administrative expense of
$635,000 based on the market price of the stock on the date of grant.
(7) SUBSEQUENT EVENTS
Conversion of remaining Bristol 12% Convertible Debenture
On April 2, 2003, Bristol Investment Fund, Ltd. converted the remaining $100,000
principal, plus accrued interest, 12 % Convertible Debenture into 6,328,611
shares of the Company's common stock. Pursuant to the February 28, 2003 Letter
Agreement, the 70% Conversion Price used to determine the number of shares
issued pursuant to Bristol's April 2, 2003 conversion notice resulted in the
issuance of approximately 590,000 shares more than would have resulted from the
use of the 60% Conversion Price.
Extension of Maturity of 10% Convertible Note
On April 2, 2003, the Company and BNC Bach agreed to extend the maturity date of
the 10% Convertible Note to May 5, 2003. On April 30, 2003, the Company and BNC
Bach amended the conversion price to eliminate a conversion price ceiling of
$0.05 per share and to increase the discount applicable to the conversion price
from 40% to 50%. In return for this modification of the conversion price, BNC
Bach agreed to extend the maturity of the note until May 10, 2004.
Extension of Waiver of Non-Registration Penalties
On April 11, 2003, when the market price of Calypte's common stock was $0.0245,
the Company received an extension until May 5, 2003 in which to register the
shares of common stock underlying the aggregate of $500,000 face value of 10%
Convertible Debentures issued to Focus Fund and Momentum Fund III. On May 1,
2003, when the market price of Calypte's common stock was $0.0237, the Company
received a further extension until June 16, 2003 to file and until September 2,
2003 to achieve effectiveness of a registration statement including the shares
underlying all of the Mercator, Focus Fund and Momentum Fund III convertible
debentures and warrant.
Issuance of shares for liquidated damages
On April 1, 2003, when the price of the Company's common stock was $0.0283, the
Company issued 3,000,000 shares of its common stock in settlement of accumulated
liquidated damages through March 27, 2003 pursuant to the terms of the August
2002 private placement agreement. The Company has still not filed a registration
statement for these shares and liquidated damages continue to accrue.
-13-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
Additional Financing
On April 29, 2003, when the market price for the Company's common stock was
$0.0275, the Company issued a $300,000 12% convertible debenture to Mercator and
received net proceeds of $245,000, net of fees and expenses. The debenture is
convertible into the Company's common stock at 70% of the average of the three
lowest trades for the 20 days preceding conversion, but not more than $0.04.
Under the terms of the debenture agreement, the Company agreed to file a
registration statement for the shares of common stock underlying the debenture
within 30 days of the closing date and use its reasonable best commercial
efforts to cause the registration statement to be declared effective within 120
days of the closing date. On May 1, 2003, when the market price of Calypte's
common stock was $0.0237, the Company received a further extension until June
16, 2003 to file and until September 2, 2003 to achieve effectiveness of a
registration statement including the shares underlying this debenture. The
Company has not yet filed a registration statement for the shares underlying
this financing.
Issuance of Additional Shares for Consulting Services
During April 2003, the Company entered into new contracts and extended certain
other contracts with existing consultants to perform various services. The
Company issued warrants to purchase an aggregate of 9,000,000 shares of its
common stock as compensation for these services. As of April 30, 2003, the
consultants had exercised warrants to purchase 4,000,000 shares of the Company's
common stock and the Company had received proceeds of $100,000. The warrants
were non-forfeitable and fully-vested.
In addition to the warrants described above, during April 2003, the Company
issued stock grants for approximately 31 million shares of its common stock to
certain consultants under various agreements and recorded non-cash selling,
general and administrative expense of approximately $750,000 based on the market
value of the stock on the date granted. Also during April 2003, the Company
issued approximately 5 million shares of its common stock to certain service
providers agreeing to settle outstanding balances in stock.
Legal Proceedings
On April 30, 2003, the Company and its former counsel, Heller Ehrman White &
McAuliffe,LLP ("Heller") reached a settlement agreement whereby the Company has
agreed to pay a total of $463,000 to settle Heller's claim for unpaid legal fees
and expenses in the amount of $546,132 plus $93,312 in interest, after which the
suit will be dismissed.
Under the terms of the settlement, the Company must pay Heller $50,000 by June
15, 2003. Beginning with the month of May 2003 and thereafter, the Company must
also make monthly payments of $20,000 plus a percentage of the Company's net
financings (the "Subsequent Payments"). The Subsequent Payments are due on the
16th of the following month, with the first payment due on June 16, 2003. There
are certain exceptions that may delay the Subsequent Payments for up to 3
months, but should the Company default on the terms of the settlement agreement,
Heller may file a stipulated judgment for the unpaid remainder of the $463,000
settlement balance. A stipulated judgment may permit Heller to obtain custody
of some of the Company's California property, which would, in turn, materially
impair the Company's business. As a part of the settlement, the Company waived
all of its defenses to Heller's claims, as well as its counterclaims, should it
default on this payment plan.
-14-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information we provide in this Form 10-Q or statements made by our directors,
officers or employees may constitute "forward-looking" statements and may be
subject to numerous risks and uncertainties. Any statements made in this Form
10-Q, including any statements incorporated herein by reference, that are not
statements of historical fact are forward-looking statements (including, but not
limited to, statements concerning the characteristics and growth of our market
and customers, our objectives and plans for future operations and products and
our liquidity and capital resources). Such forward-looking statements are based
on current expectations and are subject to uncertainties and other factors which
may involve known and unknown risks that could cause actual results of
operations to differ materially from those projected or implied. Further,
certain forward-looking statements are based upon assumptions about future
events which may not prove to be accurate. Risks and uncertainties inherent in
forward looking statements include, but are not limited to:
o our ability to obtain additional financing that will be necessary to
fund our continuing operations;
o fluctuations in our operating results;
o announcements of technological innovations or new products which we or
our competitors make;
o FDA and international regulatory actions;
o availability of reimbursement for use of our products from private
health insurers, governmental health administration authorities and
other third-party payors;
o developments with respect to patents or proprietary rights;
o public concern as to the safety of products that we or others develop
and public concern regarding HIV and AIDS;
o changes in health care policy in the United States or abroad;
o changes in stock market analysts' recommendations regarding Calypte,
other medical products companies or the medical product industry
generally;
o changes in domestic or international conditions beyond our control
that may disrupt our or our customers' or distributors' ability to
meet contractual obligations;
o fluctuations in market demand for and supply of our products; and
o price and volume fluctuations in the stock market at large which do
not relate to our operating performance.
The forward-looking information set forth in this Quarterly Report on Form 10-Q
is as of May 9, 2003, and Calypte undertakes no duty to update this information.
Should events occur subsequent to May 5, 2003 that make it necessary to update
the forward-looking information contained in this Form 10-Q, the updated
forward-looking information will be filed with the SEC in a Quarterly Report on
Form 10-Q or as an earnings release included as an exhibit to a Form 8-K, each
of which will be available at the SEC's website at www.sec.gov or our website at
www.calypte.com. More information about potential factors that could affect
Calypte's business and financial results is included in the section entitled
"Risk Factors" beginning on page 33 of this Form 10-Q.
OVERVIEW
Calypte's efforts are currently focused on expanding the sales and marketing of
its HIV-1 urine-based and serum-based diagnostic tests and on improving those
products and their related manufacturing processes. Additionally, we continue to
develop a urine-based HIV screening test in a rapid-test format and are
investigating potential urine-based diagnostic tests for other diseases. Since
1998, following FDA approval for both the screening and supplemental tests, we
have been marketing and selling in the U.S. the only available FDA-approved
urine-based HIV test method. We have also received regulatory approval to sell
our urine-based screening test in the Peoples' Republic of China, Malaysia,
Indonesia and the Republic of South Africa. In conjunction with our
distributors, we are actively working to obtain requisite regulatory approvals
to expand the distribution of our products in selected additional international
markets. There can be no assurance that we will achieve or sustain significant
revenues from sales of the HIV-1 urine screening assay or the supplemental test,
or from other new products we develop or introduce.
-15-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
During the first quarter of 2002, our financial condition and cash availability
deteriorated significantly, to the point that by early April 2002 we determined
that we would need to curtail our operations and possibly consider filing for
bankruptcy protection. We announced that the situation had reached a critical
point in mid-April 2002, at which time management began the process of
furloughing employees and winding down our operations, with complete cessation
of operations a likely possibility. In early May 2002, however, before the
wind-down process was completed, we received commitments for what management
deemed to be sufficient additional financing to resume our operations and we
stopped the wind-down. In conjunction with the new financing commitment, our
Board of Directors appointed a new chairman. At present, we have returned to
pre-wind-down staffing levels and have resumed operations at both of our
manufacturing facilities. We continue to reassess our current and longer-term
business plans and objectives. During the last three quarters of 2002 and in the
first quarter of 2003, we incurred certain costs and inefficiencies associated
with the restart of our operations and inadequate working capital and we believe
that similar situations may continue into mid-2003 as we re-establish our
manufacturing efficiencies and continue to seek additional financing.
We continue to evaluate the impact of the announcement and commencement of the
wind-down of our business on our revenues and customer base. Our revenues for
2002 were approximately 46% below those of the previous year, and revenues for
the first quarter of 2003 were 32% below those of the first quarter of 2002,
primarily as a result of the wind-down and restart. We can provide no assurance
that the announcement of the wind-down and the subsequent restart of our
operations have not negatively impacted either our revenues or our customer base
for the long term. Although we continue to reassess our business plan and
capital requirements as a result of the wind-down and subsequent restart of our
operations, we do not believe that our currently available financing will be
able to sustain operations at current levels through the second quarter of 2003
unless new financing is arranged. There can be no assurance that the additional
capital that we require will be available on acceptable terms, on a timely
basis, or at all. In the absence of such additional capital, we do not have
sufficient capital to sustain our operations through the second quarter of 2003
and our business will be placed in significant financial jeopardy. Additionally,
there can be no assurance that our products will be successfully commercialized
or that we will achieve significant product revenues. Further, there can be no
assurance that we will achieve or sustain profitability in the future.
Due to the wind-down and restart of our operations in 2002, we were not able to
sustain or improve upon the revenue base that was in place in the final half of
2001 and that had resulted in a positive gross margin for that period. We are
currently attempting to rebuild the revenue base following the 2002 decline. Our
marketing strategy is to use focused direct selling, distributors, and marketing
partners to penetrate targeted domestic markets. For some time, we have
maintained a small direct sales force to market our urine-based HIV-1 tests to
reference laboratories serving the life insurance market. In 2001, we expanded
our direct sales force to target other domestic sectors, including public health
clinics and laboratories and community based advocacy and service groups. Our
sales effort, like other initiatives, was curtailed as a result of our financial
situation during 2002, but has now been re-established. We address international
markets utilizing resident diagnostic product distributors.
Although we are adding new customers, it generally takes about six months before
we recognize additional revenue from those additions. Consequently, we expected
that our revenues for the first quarter of 2003 would approximate our revenues
for the last quarter of 2002, and provided guidance to that effect. Our first
quarter 2003 results, revenues of $784,000, were at the high end of the target
range. As we projected previously, we continue to expect revenues for the second
quarter of 2003 to be in that same $700,000 to $800,000 range. Subject to our
obtaining adequate financing and to only a short-term impact of Severe Acute
Respiratory Syndrome ("SARS") on our Chinese distributor's ability to timely
accept contractually-stipulated quantities of our product, and based on growth
from new domestic users of our products, including both insurance companies and
community based organizations, and expected increases in Africa and other
international markets, we expect revenues for the third and fourth quarters of
2003 to return to the $1.1 to $1.2 million range we experienced prior to the
wind down of activities in 2002. We expect operating losses to continue during
2003 and into 2004, however, as we continue to expand our sales and marketing
activities domestically and internationally for our current products and as we
concentrate on finalizing the development of and conducting clinical trials on
our rapid test and as we conduct additional research and development for process
improvements and other potential new products. There can be no assurance that
our current or potential new 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.
To successfully implement our business plan, we must ultimately overcome certain
impediments that have recently delayed our progress. As described earlier, in
April of 2002, we announced the winding down of our business operations because
-16-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
we lacked sufficient capital to continue to successfully implement our business
model. Subsequently, in May of 2002, we announced an arrangement for new
funding, which allowed us to resume and recommence our business operations.
Based upon our continued tenuous financial condition as demonstrated by our
working capital deficit and recurring losses, our independent auditors have
issued an opinion that cites substantial doubt about our ability to continue our
business operations as a going concern. We continue to reassess our business
plan and capital requirements as a result of the impact of the wind-down and
subsequent restart of our operations. We do not believe that our currently
available financing will be adequate to sustain operations at current levels and
achieve our current business expansion milestones through the second quarter of
2003 unless new financing is arranged. From May 10, 2002 through April 30, 2003,
we have completed new financings in which we have received an aggregate of
approximately $9.0 million against an initial $5 million new funding commitment
more fully discussed in Liquidity and Capital Resources later in this section.
We do not know, however, if we will succeed in raising enough additional funds
through further offerings of debt or equity. We must ultimately achieve
profitability for our business model to succeed. Prior to accomplishing this
goal, we believe that, in addition to the financing that we have already
received, we will need to arrange additional financing of at least $10 million
in the next twelve months to sustain our operations. There can be no assurance
that subsequent additional financings will be made available to us on a timely
basis or that the additional capital that we require will be available on
acceptable terms, if at all. The terms of a subsequent financing may involve a
change of control and/or require stockholder approval, or require us to obtain
waivers of certain covenants that are contained in existing agreements.
We are actively engaged in seeking additional financing in a variety of venues
and formats and we continue to impose actions designed to minimize our operating
losses. We would consider strategic opportunities, including investment in the
Company, a merger or other comparable transaction, to sustain our operations. We
do not currently have any agreements in place with respect to any such strategic
opportunity, and there can be no assurance that such opportunity will be
available to us on acceptable terms, or at all. If additional financing is not
available when required or is not available on acceptable terms, or if we are
unable to arrange a suitable strategic opportunity, we will be placed in
significant financial jeopardy and we may be unable to continue our operations
at current levels, or at all.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates and judgments,
including those related to bad debts, inventories, intangible assets, income
taxes, restructuring costs, and contingencies and litigation. We base our
estimates on historical experience and on various other factors that we believe
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements.
o REVENUE RECOGNITION We recognize revenue from product sales upon shipment
to customers and when all requirements related to the shipments have
occurred. Should changes in terms cause us to determine these criteria are
not met for certain future transactions, revenue recognized for any
reporting period could be adversely affected.
o ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain an allowance for doubtful
accounts on a specific account identification basis for estimated losses
resulting from the inability of our customers to make required payments. If
the financial condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may
be required.
o INVENTORY VALUATION We adjust the value of our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the
cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. Further, since we have continued
to incur negative gross profit on an
-17-
annual basis, and have high fixed manufacturing costs, we also review
our inventories for lower of cost or market valuation. If actual market
conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
o DEFERRED TAX ASSET REALIZATION We record a full valuation allowance to
reduce our deferred tax assets to the amount that is more likely than
not to be realized. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event we were to determine
that we would be able to realize our deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax
asset would increase income in the period such determination was made.
RESULTS OF OPERATIONS
The following represents selected financial data (in thousands):
Three months Ended
March 31,
------------------------------
2003 2002
---- ----
Total revenue $ 784 $ 1,159
Product costs 1,415 1,630
-------- -------
Gross Margin (631) (471)
Operating expenses:
Research and development 314 241
Selling, general and administrative 4,009 1,215
-------- -------
Total operating expenses 4,323 1,456
-------- -------
Loss from operations (4,954) (1,927)
Interest income - 1
Interest expense (1,516) (47)
Gain on settlement of debt - 1,319
Other income (expense) 128 8
--------- --------
Loss before income taxes $ 6,342 $ 646
========= ========
WIND-DOWN AND RESTART
In mid-April 2002, as a result of insufficient cash to continue our operations,
we announced that we were winding down our operations and might have to cease
our operations entirely and file for bankruptcy. We immediately furloughed all
but a few manufacturing and administrative employees, making no separation
payments or payments of accrued vacation to any employees. The manufacturing
employees who were retained completed certain lots of in-process inventory and
readied them for sale and were then also furloughed. Immediately prior to the
restart, we had terminated all but 5 employees, retaining only the minimum
necessary to ensure regulatory compliance for our facilities should additional
financing enabling a restart become available. Upon receipt of the initial
financing commitment that permitted the restart, we recalled key management and
manufacturing employees and began the process of resuming our manufacturing
operations. Other employees, such as administrative and sales personnel, were
recalled in stages as required and as funding permitted. Not all of the
pre-wind-down employees were rehired, but we believe our current complement is
generally sufficient to meet our operational needs.
The costs of the wind-down and restart are difficult to quantify precisely, but
we believe that the lower margins experienced since those of the fourth quarter
of 2001, when gross margin reached 25%, are primarily the result of the
wind-down and restart. The margin reduction reflects both the inherent
inefficiencies in the restart of our manufacturing processes, including the
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
excess overhead and capacity costs incurred, as well as the lower sales demand
resulting from abnormally-large purchases by certain customers prior to the
wind-down, and the time required to rebuild demand among customers concerned
with our longer-term stability. Additionally, we have incurred incremental
general and administrative costs (some of them non-cash) attributable to
consultants engaged in the restart process and thereafter in investor relations
and strategic positioning initiatives within the financial community, and in
other areas of expertise.
CUSTOMER TRENDS
HIV-1 URINE TEST SALES Sales of our urine HIV-1 screening test accounted for 45%
and 55% of our total sales for the year ended December 31, 2002 and the three
months ended March 31, 2003, respectively. Sales of our urine Western Blot
supplemental test accounted for approximately 4% of calendar year 2002 revenue
and approximately 6% of the first quarter 2003 revenue. The impact of the
announcement of our possible cessation of operations caused many customers to
modify their traditional product purchase patterns during 2002. The increase in
the sales of our urine screening and supplemental tests as a proportion of total
sales is primarily the result of (1) these altered order patterns in 2002, and
(2) a decrease in sales of serum Western Blot sales primarily as a result of a
change in distributors. We expect, however, that our urine screening and
supplemental tests will comprise an increasing proportion of our sales in the
future as we expand our distribution of these products internationally.
Domestic Sales Sales of our HIV-1 screening test to domestic life insurance
reference labs accounted for 85% of screening test revenue for calendar
year 2002 and 97% of screening test revenue in the first quarter of 2003.
These reference lab sales were distributed between four labs in both
periods. Individual lab sales as a percentage of total reference lab sales
ranged from 2% to 59% in calendar year 2002 and from 2% to 55% in the first
quarter of 2003, with LabOne being the largest of the four in both periods.
Although we sell our product to the reference labs, we market our HIV-1
urine screening test to both the reference labs and to over 100 life
insurance companies who have committed to urine testing for HIV screening
of at least some of their policy applicants and who employ the labs to
conduct their applicant testing. Individual life insurance companies can
and do move their business from one lab to another based on a number of
considerations, including the availability of urine testing. As the only
supplier of an FDA-approved urine based testing algorithm for HIV-1,
reference labs must use our testing products to satisfy the demand of
insurance companies desiring urine testing. Although we do not expect to
lose LabOne or any other reference lab as a customer, should such a loss
occur, the insurance companies using urine-based testing in their policy
underwriting determinations could realign themselves with another lab
offering our urine-based testing algorithm. We could, however, potentially
lose a significant amount of business because insurance companies that rely
on this large lab could switch to another form of testing, either blood or
oral fluid, and remain with LabOne. Direct or distributor sales of our
screening test to domestic diagnostic clinics, public health agencies and
community-based organizations were not material in either period. Sales of
our urine Western Blot test are generally made to the same customers who
purchase the urine-based screening test.
International Sales International sales of our urine-based screening test
are not currently a material component of our revenue, accounting for only
4% of total revenues in 2002 and 1% in the first quarter of 2003, but we
see significant potential for international distribution of our urine-based
testing algorithm. Our primary focus is currently on developing or
expanding distribution relationships in China and Africa and qualifying our
products through the World Health Organization ("WHO"). Our new
distribution agreement with our Chinese distributor requires the purchase
of at least $3 million worth of tests during the two year term of the
agreement. Our Chinese distributor requested that we delay our expected
first quarter shipment until the second quarter of 2003 as a result of the
disruption in the Chinese infrastructure resulting from SARS. We
believe that the delay in distribution is only a temporary situation that
will not impact longer-term expectations. We plan to qualify all of our
urine-based testing products for WHO, which serves as both a
quasi-regulatory body and a potential funding source for many countries
that might not otherwise possess the regulatory infrastructure or financial
resources to avail themselves of our products. Should we reach a definitive
agreement with Safe Blood for Africa Foundation following their evaluation
of our tests, we expect that it would result in significant revenue over
its term.
Serum Western Blot Sales Sales of our serum based Cambridge Biotech HIV-1 serum
Western Blot supplemental test kit accounted for 43% of our revenues for the
year ended December 31, 2002 and 37% of our revenues for the quarter ended March
31, 2003. Sales of this test to bioMerieux Inc. accounted for approximately 18%
of total revenue for the year ended December 31, 2002, but we have sold none of
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
these tests to bioMerieux since the restart of our operations in May 2002.
Although there is limited competition in the supplemental testing market, we
have not yet been able to rebuild market share and revenues to previous levels.
Although we signed a new distributor for this product whose sales during the
second half of 2002 represented approximately 5% of our full year 2002 revenues
and whose first quarter 2003 sales represented over 6% of our total first
quarter revenues, and while certain customers who had previously purchased our
serum Western Blot from bioMerieux now purchase directly from us, the loss of
serum Western Blot sales to bioMerieux has had an impact on revenues.
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
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Revenues for the first quarter of 2003 decreased by 32% or $375,000, from
$1,159,000 for the first quarter of 2002 to $784,000 for the first quarter of
2003. Certain of our customers were concerned about our continued viability
during the first quarter of 2002 and significantly increased their orders as a
contingency plan in case we were forced to discontinue our operations. The
decrease in revenue for 2003 results primarily from the impact of stockpiling in
early 2002 and from the discontinuation of sales to our former primary serum
Western Blot distributor following our wind down and restart. Sales of Calypte's
urine-based HIV screening test in the first quarter of 2003 decreased by
$104,000 or 19%, from $536,000 to $432,000, compared with sales in the first
quarter of 2002. Sales of Calypte's urine-based HIV screening test to domestic
life insurance reference laboratories declined 10% compared with the comparable
period in 2002, when sales to one reference laboratory were higher by $52,000 or
32% as a result of contingency stockpiling. Sales of Calypte's urine
supplemental test increased $13,000 or 36%, from $37,000 to $50,000,
demonstrating increased product availability in 2003. Sales of serum HIV
supplemental tests decreased $279,000 or 49%, from $565,000 to $286,000,
compared with first quarter of 2002, primarily due to the change in primary
distributors during 2002 as a result of our wind down and restart.
Gross margin on sales was -81% for the first quarter of 2003 versus -41% for the
first quarter of 2002. The decline is attributable to the impact of reduced
sales measured against a relatively fixed manufacturing overhead cost structure
and a nominal increase in manufacturing and quality headcount-related expenses
incurred in preparation for the production demand increase required to meet an
expanded sales expectations.
Research and development expense increased $73,000 or 30% from $241,000 in the
first quarter of 2002 to $314,000 in the first quarter of 2003. The increase is
primarily attributable to costs associated with the acquisition of specimens
required for clinical trials for our proposed urine-based rapid test and an
increase in R&D staffing by one position.
Selling, general and administrative expenses increased by $2,794,000, from
$1,215,000 in the first quarter of 2002 to $4,009,000 in the first quarter of
2003. The increase is primarily attributable to a $2.6 million increase, of
which approximately $2.2 million was non-cash, in consulting expense for
consultants engaged by the Company to help with various investor relations,
business development and operating initiatives. Selling, general and
administrative expenses were significantly curtailed during the first quarter of
2002 to reduce the Company's cash burn rate.
The loss from operations increased by $3,027,000, from $1,927,000 in the first
quarter of 2002 to $4,954,000 in the first quarter of 2003, primarily as a
result of the decrease in sales and the increase in selling general and
administrative expenses.
Interest expense increased by $1,469,000, from $47,000 for the first quarter of
2002 to $1,516,000 for the first quarter of 2003. Non-cash interest expense of
$1,373,000 for the first quarter of 2003 related to the amortization of deferred
offering costs, note and debenture discounts and penalties for non-registration
of the shares underlying the convertible debentures and other instruments used
to finance our restart since mid-2002. Non-cash expense of $33,000 in the first
quarter of 2002 related primarily to amortization of equity line offering costs
and debenture discounts.
In the first quarter of 2002, Calypte recognized a gain of $1,319,000 as a
result of restructuring certain of its trade indebtedness. In accordance with
the provisions of Statement of Financial Accounting Standards No. 145,
"Recission of FASB Statements No 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections", Calypte is reporting this gain as other income,
rather than as an extraordinary item as it was reported in 2002. Other income
for the first quarter 2003 represents the non-cash gain on the repurchase of the
beneficial conversion feature recorded in connection with the repayment of the
$300,000 12% Mercator debenture.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
FINANCING ACTIVITIES
- ---------------------
We have financed our operations from our inception primarily through the private
placement of preferred stock and common stock, our Initial Public Offering (IPO)
of common stock, two equity line facilities and the issuance of convertible
notes and debentures. Our financing activities for the most recent three years
include the following.
In April 2000, the Company completed a private placement of 4,096,000 shares of
its common stock at $2.05 per share under Regulation D. The Company received
proceeds of approximately $8.3 million, after deducting expenses associated with
the transaction. In connection with a bridge loan commitment of $1 million from
one of the investors, Calypte also issued warrants for 100,000 shares of common
stock with an exercise price of $3.62 per share. The actual bridge loan of
$500,000 was converted to equity upon closing of the private placement.
On January 22, 2001, the Company signed an agreement to place up to $1.1 million
in convertible short-term debentures. Under this arrangement, the Company issued
two convertible debentures to the debenture holder in the principal amount of
$550,000 each, pursuant to Regulation S. Each debenture had an interest rate of
6% and was issued at an original issue discount of 9.1%. The Company issued the
first debenture on January 26, 2001 and the second on March 13, 2001. Each
debenture matured 90 days from the date of issuance, or on April 26, 2001 and
June 11, 2001, respectively. Under the terms of the debentures, the debenture
holder could elect at any time prior to maturity to convert the balance
outstanding on the debentures into shares of the Company's common stock at a
fixed price that represented a 5% discount to the average trading price of the
shares for the 10 trading days preceding the issuance of each debenture. If the
Company chose not to redeem the debentures upon maturity, as in the case of the
second debenture, the conversion discount to the debenture holder increased to
15% of the average low bid price for the Company's common stock for any three of
the 22 trading days prior to the date of conversion. Concurrent with the
issuance of the first debenture, the Company also issued a warrant to the
debenture holder for 200,000 shares of common stock at an exercise price of
$1.50. The shares underlying the debentures and warrant were registered using a
form S-3 Registration Statement. The Company received aggregate net proceeds
from the issuance of the two debentures of $925,000 during the first quarter of
2001. The Company redeemed the first debenture, plus accrued interest, prior to
its contractual maturity using the proceeds from the sales of its common stock.
The Company also redeemed a portion of the second debenture prior to its
contractual maturity. On June 12, 2001, the debenture holder converted the
remaining $168,000 balance on the second debenture plus accrued interest into
1,008,525 shares of the Company's common stock, in accordance with the
conversion provisions of the debenture. On August 17, 2001, the Company modified
the warrant that it had issued to the debenture holder pursuant to the terms of
the warrant, reducing its exercise price to $0.15 per share, and the debenture
holder exercised it for the entire 200,000 shares. The Company received $28,500
in net proceeds from the exercise of the warrants.
On January 24, 2001 the Company amended a common stock purchase agreement with a
private investment fund for the issuance and purchase of its common stock. The
initial closing of the transaction took place on November 2, 2000. The stock
purchase agreement established what is sometimes termed an equity line of credit
or an equity draw down facility. The facility generally operated with the
investor committed to purchase up to $25 million or up to 20% of the Company's
outstanding shares of common stock over a twelve-month period. Once during each
draw down pricing period, the Company could request a draw, subject to a formula
based on the Company's average stock price and average trading volume setting
the maximum amount of the request for any given draw. The amount of money that
the investor provided to the Company and the number of shares the Company issued
to the investor in return for that money was settled during a 22 day trading
period following the draw down request based on the formula in the stock
purchase agreement. The investor received a 5% discount to the market price for
the 22-day period and the Company received the settled amount of the draw down.
By June 30, 2001, the Company had issued 5,085,018 shares of its common stock,
the total number registered for the equity line with the Securities and Exchange
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
Commission, at an average price of $0.42 per share and had received net proceeds
of approximately $2,014,000 after deducting expenses of the transactions. There
are no further funds available to the Company under this equity line. The terms
of the 6% convertible debentures discussed earlier required that 50% of the net
proceeds of any equity sales, including sales under the equity draw down
facility, be used to repay the debentures and related accrued interest.
Accordingly, approximately $938,000 of the net proceeds from sales under the
equity draw down facility was used to pay down the debentures. In conjunction
with the agreement, the Company issued a 3-year warrant to the investor to
purchase up to 1,000,000 shares of its stock at an exercise price of $1.55 per
share. On August 2 and August 8, 2001, the Company modified the exercise price
for 300,000 shares each of the warrants pursuant to the terms of the warrant, to
$0.20 per share, and the investor exercised it for an aggregate of 600,000
shares. The Company received $114,000 in net proceeds from the exercise of these
warrants. On August 21, 2001, the Company modified the exercise price for the
remaining 400,000 shares of the warrant to $0.15 per share. The investor
exercised the remaining balance of the warrant and the Company received net
proceeds of $57,000 after deducting expenses of the transaction.
`
In April 2001, the Company announced that it had concluded negotiations to sell
its 29% minority interest in the stock of Pepgen Corporation, a privately held
therapeutic company, for $500,000. The Company received the proceeds from the
sale in two installments in April and May 2001.
In August 2001, the Company executed a promissory note in the amount of $400,000
to LHC Corporation, the parent company of its then-largest stockholder. The note
required interest at 8.5% per annum and principal plus accrued interest was due
no later than September 14, 2001. The note was subsequently extended after
September 14, 2001 and in December 2001, the parties agreed to execute a new
note in the amount of $411,000, representing the unpaid principal and accrued
but unpaid interest on the previous note. This note required interest payable at
8.5% and was due in installments of $200,000 on February 28, 2002 and $35,000
per month thereafter until paid in full, plus accrued interest. The repayment
terms of the note were renegotiated in February 2002. The amended note required
payments of $17,500 at the end of February and March 2002, increasing to $35,000
monthly thereafter unless and until the Company raised at least $2 million in
external financing, not including the Bristol 12% convertible debentures and
warrants discussed below. If there was a remaining balance under the note upon
the Company's obtaining proceeds of at least $2 million of external financing,
the Company was obligated to repay $200,000 on the note and should any balance
on the note remain thereafter, the Company was obligated to continue monthly
payments of $35,000 until the note was repaid in full. The Company made the
required $17,500 payment on February 28, 2002. On March 28, 2002, the Company
again renegotiated the payment terms of this note, suspending any required
principal or interest payments until 30 days after the effective date of the
Company's registration statement for the 12% convertible debentures, at which
time the Company was required to make a $200,000 payment and to resume making
monthly payments of $35,000. The registration statement became effective on
February 14, 2003. No payments were made on this note from February 2002 through
February 2003. On February 28, 2003, the Company and LHC Corporation executed a
new note in the amount of $435,000, representing the unpaid principal and
accrued but unpaid interest on the Decdember 2001 note. The payment terms
require monthly principal payments of $17,500 plus interest from March through
May 2003, increasing to $35,000 monthly, plus interest, thereafter, unless and
until the Company secures at least $5,000,000 in additional financing, at which
time the remaining outstanding balance is due and payable. The Company
renegotiated the terms of the December 2001 note due to a lack of available
funds and to avoid a default.
On August 23, 2001, the Company and a private investment fund signed a common
stock purchase agreement for the future issuance and purchase of up to $10
million of the Company's common stock over a twenty-four month period. The
initial closing of the transaction occurred on October 19, 2001. Under this
arrangement, the Company, at its sole discretion, may draw down on this
facility, sometimes termed an equity line, from time to time, and the investment
fund is obligated to purchase shares of the Company's common stock. This
facility operates similarly to the previous equity line facility employed
earlier in the year. The purchase price of the common stock purchased pursuant
to any draw down under this facility is equal to 88% of the daily volume
weighted average price of the Company's common stock on the applicable date. In
conjunction with the signing of the stock purchase agreement, on October 19,
2001, the Company issued a 7-year warrant pursuant to Regulation S to the
investment fund to purchase up to 4,192,286 shares of common stock at an
exercise price of $0.2743 per share. On October 26, 2001, the Company filed a
Registration Statement on Form S-2 with the Securities and Exchange Commission
to register for resale 30,000,000 shares of common stock that it may issue in
conjunction with the equity line facility and the warrant. From the time the
Registration Statement became effective in November 2001 through the present,
the Company has issued a total of 25,673,289 shares of its common stock at an
average price of $0.131 per share and received net proceeds of approximately
$3.2 million after deducting expenses of the transactions. There are currently
approximately 19,000 registered shares available for sale under this facility.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
In November 2001, the Company sold 1,575,855 shares of common stock under
Regulation D of the Securities Act to various investors in a private placement
at $0.19 per share, receiving net proceeds of $295,000. The private placement
did not include registration rights. Therefore, pursuant to Rule 144 of the
Securities Act, the transfer of the securities purchased by the investors was
restricted for twelve months from the date of purchase. Two current and one
former member of the Company's Board of Directors, Nancy Katz, Mark Novitch, and
David Collins, purchased an aggregate of 721,154 shares of this offering. The
proceeds of this offering were used to fund the Company's current operations.
The purchase transactions by the Company's Board members were on a fair and
reasonable basis and on terms more favorable to the Company than could have been
obtained with non-affiliated parties as a result of the tenuous financial
condition of the Company at that time.
On November 28, 2001, Calypte announced that it intended to offer up to $10
million of shares of its common stock to international investors pursuant to
Regulation S of the Securities Act. There was no investor interest in the
proposed offering, and consequently, the Company elected not to proceed with it.
On February 11, 2002, the Company signed a securities purchase agreement with
Bristol Investment Fund, Ltd. ("Bristol") pursuant to which Bristol committed to
purchase an aggregate of $850,000 of 12% secured convertible debentures maturing
two years after issuance. As of April 30, 2003, the Company has issued $525,000
of debentures and has received net proceeds of $470,000. The Company may issue a
debenture for the balance of the $325,000 commitment and file a registration
statement for the common shares underlying the debenture only after Bristol, the
selling stockholder, is at market risk. The debentures bear interest at the
annual rate of 12% payable quarterly in common stock or cash at Bristol's
option. Under the terms of the debenture, Bristol can elect at any time prior to
maturity to convert the balance outstanding on the debenture into shares of the
Company's common stock. The conversion price for the debentures, as originally
defined, is equal to the lesser of (i) the average of the lowest three trading
prices during the 20 trading days immediately prior to the conversion date
discounted by 30%, subject to anti-dilution adjustment, and (ii) $0.115. On May
31, 2002, Bristol converted approximately $60,000 of principal plus accrued
interest and the Company issued approximately 4,462,000 shares of its common
stock at $0.014 per share. Upon effectiveness of a registration statement for
the entire amount of the debentures and for the Class A and B warrants described
below, Bristol would be required to convert the debentures at a monthly rate
equal to 5% of the aggregate trading volume of the Company's common stock for
the 60 trading days immediately preceding such conversions.
On February 18, 2003, and subsequent to the February 14, 2003 effective date of
the registration statement on Form S-2/A (No. 6) which registered shares of
common stock underlying the 12% Convertible Debentures in the amount of
$525,000, Bristol provided notice to the Company that it intended to convert a
portion of its debentures and that the number of shares underlying its debenture
was subject to adjustment for anti-dilution pursuant to the terms of the
Security Purchase Agreement with the Company. As a consequence of that notice,
the Company and Bristol signed a letter agreement on February 28, 2003 (the
February 28, 2003 Letter Agreement") providing that the Company could be
required to issue additional shares to Bristol based upon an adjusted conversion
rate. On the basis of the February 28, 2003 Letter Agreement, Bristol has
converted the remainder of the outstanding debentures, an aggregate of $465,000
face value, plus accrued interest and $122,000 of liquidated damages, into
26,120,822 shares of the Company's common stock between February 18 and April 2,
2003.
The number of additional shares that the Company could be required to issue to
Bristol pursuant to the February 28, 2003 Letter Agreement is based on the
difference between (i) the number of shares that would have been issued based on
a conversion price of the lesser of (a) $0.05 per share and (b) 60% of the
average of the 3 lowest closing bid prices for the 22 trading days preceding
conversion (the "60% Conversion Price"), and (ii) the number of shares
previously issued pursuant to the conversion notice (based on a conversion price
of 70% of the 3 lowest trades for the 20 days preceding conversion (the "70%
Conversion Price")). In accordance with the February 28, 2003 Letter Agreement,
the Company is required to issue the following additional shares to Bristol: (1)
an additional 0.796 million shares pursuant to Bristol's conversion on February
18, 2003 of $150,000 principal amount of the debentures; (2) an additional 0.212
million shares pursuant to Bristol's conversion on March 10, 2003 of $63,464
principal amount of debentures, and (3) an additional 0.290 million shares
pursuant to Bristol's conversion on March 26, 2003 of $55,000 principal amount
of debentures, for a total of an additional 1.298 million shares. The 70%
Conversion Price used to determine the number of shares issued pursuant to
Bristol's conversion notices on March 31 and April 2, 2003 resulted
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
in the issuance of a greater number of shares than would have resulted from the
use of the 60% Conversion Price. Specifically, the Company issued shares in
excess of the 60% Conversion Price amount of (1) 1.880 million shares pursuant
to Bristol's conversion on March 31, 2003 of $96,566 principal amount of
debentures and (2) 0.590 million shares pursuant to Bristol's conversion on
April 2, 2003 of $100,000 principal amount of debentures. The excess shares
issued pursuant to the March 31, 2003 and April 2, 2003 conversions exceed by
1.172 million shares the additional shares required to be issued pursuant to the
February 18, March 10, and March 26, 2003 conversions.
In conjunction with the initial transaction, the Company issued Bristol a Class
A warrant to purchase up to 1,700,000 shares of its common stock. The Class A
warrant is exercisable for a period of seven years after issuance at a price per
share equal to the conversion price, subject to certain anti-dilution
adjustments. Bristol has sole discretion with respect to when and if it chooses
to exercise any or all of the Class A warrant prior to its expiration.
The Company also issued Bristol a Class B warrant to purchase an additional
12,000,000 shares of its common stock. Upon the effectiveness of the related
registration statement for all of the shares underlying the debentures and
warrants, Bristol is required to exercise the Class B warrant in conjunction
with the mandatory monthly conversion of its debentures so that each month the
Company will issue to the investment fund, pursuant to the Class B warrant, a
number of shares equal to 150% of the shares issued to the fund pursuant to the
monthly conversion of the debentures. Because the fund is required to convert
the debentures for a minimum number of shares equal to 5% of the Company's
aggregate trading volume for the preceding 60 trading days, this means that the
fund must exercise the Class B warrant during each monthly conversion period for
a number of shares equal to 7.5% of such trading volume, provided that more than
2 million shares will not be issued per month pursuant to such conversion and
exercise without the Company's consent. The term of the Class B warrant is 12
months from the effective date of the registration statement for the shares
underlying the warrant. The exercise price for the Class B warrant is the lesser
of (i) the average of the lowest three trading prices during the 20 trading days
immediately prior to exercise discounted by 25%; and (ii) $0.215 per share,
subject to certain anti-dilution adjustments.
Wind-down and Restart
Calypte publicly announced on April 17, 2002 that the Company was winding down
its operations as it did not have sufficient working capital or the necessary
funds to continue with its business plan or operations. On May 9, 2002, the
Company entered into a letter agreement with Cataldo Investment Group, an
independent investment group assigned the acronym "CIG", whereby the investors
agreed to provide approximately $1.4 million within 90 days and an aggregate of
at least $5 million over the next 12 months to fund Calypte's operations.
Accordingly, the Company restarted its operations.
The Company has determined to aggregate all investments received from parties
with whom it did not have financing agreements prior to its restart (e.g., other
than Bristol Investment Fund and Townsbury Investments Limited) and through May
10, 2003 under the heading "Other Recent Financings", formerly referred to as
"CIG financing", to attribute them to the $5 million that was to be invested in
the Company as set forth in the investment commitment letter by CIG. The Equity
Line of Credit with Townsbury and the convertible debentures and warrants
agreement with Bristol, together with Other Recent Financings post-restart are
our "Recent Financings". In excess of $5 million in investments have been
attributed to our Recent Financings to date.
CIG is essentially a de facto entity comprised of a number of unaffiliated
accredited investors assembled by Mr. Anthony Cataldo, the Company's current
executive chairman, to facilitate investments in the Company. Mr. Cataldo does
not have an affiliation or any agreements with any of the individual investors
that are categorized as CIG. As a condition precedent to the initial investment,
Mr. Cataldo requested that he be appointed Executive Chairman in connection with
the restart of the Company's operation. Additionally, Mr. Cataldo was granted a
temporary limited right on behalf of CIG to appoint new directors constituting a
majority of the Board of Directors. During the time period of the right, Mr.
Cataldo recommended the appointment of one director, as a result of the
resignation of a director during the limited time period.
Mr. Paul Kessler, a Director of Bristol Investment Fund, Ltd., which was an
investor in a company with which Mr. Cataldo had been previously affiliated,
initially made the introduction of Mr. Cataldo to the Company as an existing
security holder of the Company who was concerned about the Company winding down
its business affairs and its investment (holdings) in the Company. Thereafter,
Mr. Cataldo arranged for new financings, which were categorized under the
heading Recent Financings, primarily the Other Recent Financings. Mr. Cataldo
has disclaimed any affiliation or beneficial ownership with the individual
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
investors that comprise CIG. To the best of the Company's knowledge, the
individual investors of CIG are not affiliated with each other. Mr. Cataldo was
a designee of the investors chosen in light of the tenuous financial condition
of the Company at the time of the new financing. He continues to actively pursue
raising the necessary capital to fund the Company's on-going operations.
There are no defined terms with respect to investments that have been or may be
attributed to the Other Recent Financings and, as such, all financing
arrangements must be negotiated on an individual basis. Since Other Recent
Financings is used only as a heading to track the Company's financings since the
restart of its operations in May 2002, new investors who provide funds for the
Company have been aggregated under this heading along with investors who
provided the initial restart financing in May 2002. As noted above, we refer to
this as Recent Financings. Each financing that has been aggregated as a part of
Other Recent Financings has been the subject of a separate agreement between the
Company and the investor. The Company's Board of Directors has approved the
terms of each transaction included in Other Recent Financings since the
Company's restart and has taken into account the merits of the specific
transaction, the Company's immediate and long-term requirements for cash, and
alternatives, if any, available at the given time.
Mr. Cataldo was not a stockholder and had no previous contact with the Company
prior to the announced wind-down of the business in April 2002. The independent
members of the Company's Board of Directors validated his references, determined
that he had the skills required to perform as Chairman of the Company in its
present condition, and offered him an agreement on May 10, 2002.
Mr. Cataldo has known certain investors or principals of certain investment
funds that have provided financing that has been aggregated under Other Recent
Financings prior to their investment in the Company and Mr. Cataldo's
association with the Company as a result of his business experience and his role
in managing other companies. Specifically, Mr. Cataldo has known Mr. Paul
Kessler, as described previously, through a previous company managed by Mr.
Cataldo. Additionally, Mr. Cataldo has no beneficial ownership rights or
affiliations with any of the individual investors that have provided financing
included in Other Recent Financings. Mr. Cataldo has used his business
relationships to locate potential accredited investors.
Mr. Cataldo receives no consideration or payment from either the Company or
investors as a result of any financing included in Other Recent Financings. Mr.
Cataldo's compensation is recited in his employment agreement
To date, to the best of the Company's knowledge, all investors that have
provided financing included in Other Recent Financings are offshore investors.
Additional new investors not providing a portion of the initial May 2002 or
subsequent Other Recent Financings may provide financing in the future and be
aggregated under the heading Other Recent Financings.
There can be no assurance that the terms of the additional capital that the
Company requires will be made available to the Company on a timely basis and
there can be no assurance that such capital will be available on acceptable
terms, if at all. Any failure to secure additional financing on a timely basis
will place the Company in significant financial jeopardy.
The following table summarizes Calypte's Recent Financings through April 30,
2003: (Table in thousands, except share price and per share data.)
-25-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
SHARES SHARES
GROSS NET CALYPTE ISSUED (000)/ ISSUABLE AT
CONVERSION AMOUNT AMOUNT TRANSACTION CLOSING $000 APRIL 30, 2003
INVESTOR (1) FEATURE $000 $000 DATE PRICE REDEEMED (2)
- ------------ ------- ---- ---- ---- ----- -------- ---
BRISTOL: Lesser of (i) $425 2/11/02 $0.25 4,462/ $60
- --------
12% CONVERTIBLE DEBENTURE 60% of the 9,227/ $150
- -------------------------
($850,000 TOTAL COMMITMENT) average of 2,225/$63
- ---------------------------
lowest 3 2,072/$55
trading 6,267/$97
prices for 22 6,329/$100
days preceding (1,173)/0
(7)
conversion or $100 5/10/02 $0.03 25.6 million
----
(ii) $0.05 (7) $525 $468
==== ====
Class A Warrant Lesser of (i) $0 $0 2/11/02 $0.25 0 1.7 million
70% of the
average of
lowest 3
trading
prices for 20
days
preceding
conversion or
(ii) $0.115 per share
Class B Warrant Lesser of (i) $0 $0 2/11/02 $ 0.25 0 12.0 million
70% of the
average of
lowest 3
trading
pricing for
20 days
preceding
conversion or
(ii) $0.215.
OTHER RECENT FINANCINGS: (3)
8% CONVERTIBLE NOTES Lesser of
Alpha Capital Aktiengesellshaft (i) $0.10 or $500 5/24/02 $ 0.12
Stonestreet Limited Partnership (ii) 70% of $500 5/24/02 $ 0.12
Filter International Ltd. the average $150 5/24/02 $ 0.12
Camden International Ltd. of the 3 $250 5/24/02 $ 0.12 4,324/ $70
Camden International Ltd. Lowest $100 5/24/02 $ 0.12
Domino International Ltd. trades for 30 $150 5/24/02 $ 0.12 4,324/ $70
Thunderbird Global Corporation Days $ 75 5/24/02 $ 0.12
BNC Bach International Ltd. Preceding $200 5/24/02 $ 0.12
Excalibur Limited Partnership Conversion $200 5/24/02 $ 0.12 4,114/ $100
Standard Resources Ltd. $100 5/24/02 $ 0.12
SDS Capital International Ltd. $300 7/10/02 $ 0.34
Camden International Ltd. $100 7/10/02 $ 0.34
Excalibur Limited Partnership $250 7/24/02 $ 0.22
Stonestreet Limited Partnership $250 8/21/02 $ 0.13
----
$3,125 $2,594 257.6 million
====== ======
-26-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
SHARES SHARES
GROSS NET CALYPTE ISSUED (000)/ ISSUABLE AT
CONVERSION AMOUNT AMOUNT TRANSACTION CLOSING $000 APRIL 30, 2003
INVESTOR (1) FEATURE $000 $000 DATE PRICE REDEEMED (2)
- ------------ ------- ---- ---- ---- ----- -------- ---
8% CONVERTIBLE DEBENTURES
- -------------------------
Su So 80% of the $100 $85 6/17/02 $0.14 1,100 (4)/ 0
lower of the $100
average
closing bid
or trade
price for the
5 days
preceding
conversion,
but not less
than $0.10
Jason Arasheben 70% of the $100 $85 7/03/02 $0.27 475 (4)/ 0
lower of the $100
average
closing bid
or trade
price for the
5 days
preceding
conversion,
but not less
than $0.10
10% CONVERTIBLE NOTE
- --------------------
BNC Bach International Ltd. 50% of the $150 $150 5/14/02 $0.14 0/$24 9.9 million
(Note: on 7/14/02 the maturity average of $0.36 on
date was extended until the 3 lowest 7/14/02;
12/31/02; on December 27, closing bid $0.064 on
2002, the maturity date was prices for 22 12/27/02;
extended until January 15, days $0.060 on
2003; on January 15, 2003 the preceding 1/15/03;
maturity date was subsequently conversion $0.050 on
extended until March 17, 2003, (8) 3/17/03;
on March 17, 2003 the maturity $0.033 on
date was extended until April 4/2/03;
4, 2003; on April 2, 2003, the $0.0249
maturity date was subsequently on 4/30/03
extended until May 5, 2003; on
April 30, 2003, the maturity
date was subsequently extended
to May 10, 2004 (8)
12% CONVERTIBLE DEBENTURES
- --------------------------
Mercator Momentum Fund, L.P. ($2.0 85% of the $550 $345 (5) 9/12/02 $0.10 500 (4)/ 147.1 million
million total commitment) average of $0
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion
(9)
Mercator Momentum Fund, L.P. 80% of the $300 $260 10/22/02 $0.13 0/ $300 (6) 0
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not less
than $0.05
-27-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
SHARES SHARES
GROSS NET CALYPTE ISSUED (000)/ ISSUABLE AT
CONVERSION AMOUNT AMOUNT TRANSACTION CLOSING $000 APRIL 30, 2003
INVESTOR (1) FEATURE $000 $000 DATE PRICE REDEEMED (2)
- ------------ ------- ---- ---- ---- ----- -------- ---
Mercator Momentum Fund L.P. 70% of the $300 $245 4/29/03 $0.0275 0 26.8 million
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $0.04
Mercator warrant $0.10 per $0 $0 10/22/02 $0.13 0 3.0 million
share
10% CONVERTIBLE DEBENTURES
- --------------------------
Mercator Focus Fund, L.P. 80% of the $1,000 $510 1/13/03 $0.065 0 78.1 million
average of (6)
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $0.10
Mercator Momentum Fund, L.P. 80% of the $450 $440 1/29/03 $0.056 0 35.2 million
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $0.10
Mercator Focus Fund, L.P. $400 3/13/03 $0.049 0 48.1 million
Mercator Momentum Fund III, L.P. 65% of the 100
average of $500 $400
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $0.07
PIPE AT $0.05 PER SHARE
- -----------------------
Careen Ltd. $0.05 per $200 $200 8/28/02 $0.16 4,000 0
Caledonia Corporate Group Share
Limited $200 $200 8/28/02 $0.16 4,000 0
-28-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
SHARES SHARES
GROSS NET CALYPTE ISSUED (000)/ ISSUABLE AT
CONVERSION AMOUNT AMOUNT TRANSACTION CLOSING $000 APRIL 30, 2003
INVESTOR (1) FEATURE $000 $000 DATE PRICE REDEEMED (2)
- ------------ ------- ---- ---- ---- ----- -------- ---
TOWNSBURY EQUITY LINE
- ---------------------
November 2001 to December 31, 88% of $3,359 $3,176 Sixteen 25,673 0.02 million
2002 volume draws
weighted
average
price during
draw down
pricing
period
Townsbury Warrant - repriced $0.015 per $63 $63 5/10/02 $0.03 4,193 0
from $0.27 per share on 5/10/02 share
Total Shares Issuable 645.12 million
(1) The Bristol debentures and warrants and all of the Other Recent
Financings were issued under exemptions provided by Regulation S. The Company
could issue no shares under the equity line with Townsbury until it had
completed an effective registration for the underlying shares. The warrants
issued to Townsbury were issued under an exemption provided by Regulation S.
(2) Based on total commitment and market prices as of April 30, 2003,
where applicable. The market price of Calypte stock on April 30, 2003 was
$0.0249 per share and the low market price as defined in the agreements was
approximately $0.011 per share at 70%, $0.013 at 80%, and $0.010 at 65%, based
on lowest trading prices in the previous 20 to 30 business days prior to April
30, 2003 and $0.013 per share at 60% based on the average of the three lowest
closing bid prices for the 22 trading days prior to April 30, 2003.
(3) On February 14, 2003 the registration statement for $525,000 of the
Bristol Debentures became effective. We have not yet filed a registration
statement for any of the Other Recent Financings. Many of these financings have
requirements for registration and impose liquidated damages for delays beyond 30
days from the transaction date allowed for registration. The convertible note
transactions generally require liquidated damages at the rate of 2% of the
original principal balance for each month's delay. The PIPE financing at $0.05
per share requires liquidated damages at the rate of 250,000 shares of Calypte
common stock for each 10 days of delay beginning November 27, 2002. As of
February 14, 2003, the Company had incurred approximately $122,000 in liquidated
damages resulting from the delay in registration of the Bristol Debentures and,
as of April 30, 2003, approximately $637,000 in liquidated damages attributable
to the delay in the registration of the remaining financings. In most instances,
the investor has the option of receiving liquidated damages in either cash or
the Company's common stock, although the PIPE financing agreement specifies
damages to be paid in stock. As of April 30, 2003, all of the registration
penalty provisions have been triggered, except for those in the Mercator
agreements. The Company has issued approximately 8.0 million shares of its
common stock in payment of liquidated damages. Based on current prices, the
payment of liquidated damages in stock as of April 30, 2003 would require the
Company to issue approximately 48 million shares of its common stock. Liquidated
damages attributable to registration delays on the convertible notes and
debentures continue to accrue at a rate of approximately $63,000 per month (or
approximately 5.7 million shares at current prices) plus 750,000 shares
attributable to the PIPE transaction. Additionally, the holders of the $3.125
million original face value of our 8% convertible notes now have the option, at
any time, to require the redemption of the outstanding principal and any accrued
interest as a result of the delay in registration of the notes.
(4) Includes fee shares.
(5) Reflects a 10% cash commitment fee on the entire $2 million
commitment paid to The Mercator Group less additional fees and expenses. An
additional $250,000 is available upon the filing of a registration statement and
an additional $500,000 within 5 days following the effectiveness of the
registration of shares underlying $1.3 million of the $2.0 million commitment.
The remaining $0.7 million available under the commitment will be available upon
the filing of a registration for the associated underlying shares after the
debenture is at market risk.
(6) In conjunction with the issuance of the $1 million 10% convertible
-29-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
debenture to Mercator Focus Fund, L.P., the Company used the proceeds to repay
the $0.3 million outstanding principal balance of the 12% convertible debenture
previously issued to Mercator Momentum Fund, L.P. plus accrued interest. The
balance of costs incurred represents transactional and legal fees.
(7) Subsequent to the effective date of the registration statement on
Form S-2/A (No. 6) File No. 333-84660 which registered shares of common stock
underlying Bristol's $525,000 debenture, Bristol provided notice to the Company
that it intended to convert a portion of its debenture and that the number of
shares underlying its debenture was subject to adjustment as a result of its
Security Purchase Agreement with the Company. Based upon the foregoing, the
Company determined that it would permit Bristol to convert at the adjusted
conversion rate, which will, through March 31, 2003, result in the issuance of
approximately 0.6 million additional shares of common stock, subject to
anti-dilution provisions. In accordance with the February 28, 2003 Letter
Agreement, the Company is required to issue the following additional shares to
Bristol: (1) an additional 0.796 million shares pursuant to Bristol's conversion
on February 18, 2003 of $150,000 principal amount of the debentures; (2) an
additional 0.212 million shares pursuant to Bristol's conversion on March 10,
2003 of $63,464 principal amount of debentures, and (3) an additional 0.290
million shares pursuant to Bristol's conversion on March 26, 2003 of $55,000
principal amount of debentures, for a total of an additional 1.298 million
shares. The 70% Conversion Price used to determine the number of shares issued
pursuant to Bristol's conversion notices on March 31, 2003 and April 2, 2003
resulted in the issuance of a greater number of shares than would have resulted
from the use of the 60% Conversion Price. Specifically, the Company issued
shares in excess of the 60% Conversion Price amount of (1) 1.880 million shares
pursuant to Bristol's conversion on March 31, 2003 of $96,566 principal amount
of debentures and (2) 0.590 million shares pursuant to Bristol's conversion of
$100,000 principal amount of debentures, for a total of 2.470 million excess
shares. The excess shares issued pursuant to the March 31 and April 2, 2003
conversions exceeds by 1.172 million shares the additional shares required to be
issued pursuant to the February 18, March 10, and March 26, 2003 conversions.
This table uses the 60% Conversion Price in estimating shares issuable at April
30, 2003, excluding any potential anti-dilution adjustments.
(8) On April 30, 2003, when the market price of Calypte common stock was
$0.0249, the Company and BNC Bach amended the conversion price to eliminate a
conversion price ceiling of $0.05 per share and to increase the discount
applicable to the conversion price from 40% to 50%. In return for this
modification of the conversion price, BNC Bach agreed to extend the maturity of
the note until May 10, 2004.
(9) On March 31, 2003, when the market price of Calypte common stock was
$0.0295, the Company, amended the conversion price to eliminate a conversion
price floor of $0.05 per share in return for a 30-day extension, until May 5,
2003, in which to register the shares of common stock underlying the various
Mercator financings.
In May 2002, Calypte issued warrants and options to purchase 19 million shares
of its common stock under agreements with consultants to perform legal,
financial, business advisory and other services associated with the restart of
its operations. The warrants were issued at $0.015 per share on May 9, 2002 when
the market price of our common stock was $0.03 per share. The option was granted
at $0.03 per share on May 10, 2002, when the market price of our common stock
was $0.03 per share. All of the warrant and option grants were non-forfeitable
and fully-vested at the date of issuance and were registered for resale by the
consultants under Form S-8. The consultants exercised all the warrants and
options and Calypte issued 19 million shares and received proceeds of $292,500.
All but one of the consulting agreements discussed above expired in August and
we have entered into new agreements for legal, financial, business advisory, and
other services including introductions and arrangements with respect to
potential domestic and international product development of synergistic
relationships with appropriate public service organizations. In November 2002,
Calypte issued warrants to purchase 28.5 million shares of our common stock and
stock grants for 2.1 million shares of our stock to consultants under the terms
of these new agreements. The Company issued 10.5 million warrants at an exercise
price of $0.05 per share on November 1, 2002, when the market price of our stock
-30-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
was $0.14 per share. The Company issued an additional 18.0 million warrants at
an exercise price of $0.05 on November 20, 2002, when the market price of our
common stock was $0.09. All of the warrant grants were non-forfeitable and
fully-vested at the date of issuance and were registered for resale by the
consultants under Form S-8. By February 2003, the consultants had exercised all
the warrants and the Company had received aggregate proceeds of $1.425 million.
The Company issued 29.6 million shares of its common stock pursuant to the
exercises of the November 2002 warrant and stock grants.
During the first four months of 2003, the Company entered into new contracts and
extended certain other contracts with existing consultants to perform various
legal, business advisory, business development and introductory services, and
marketing and distribution functions similar to those entered into during 2002.
On February 14, 2003, when the market price of the Company's stock was $0.067,
the Company issued warrants to purchase an aggregate of 22,000,000 shares of its
common stock at $0.05 per share and stock grants of an aggregate of 7,650,000
shares of its common stock as compensation for these services. During March
2003, when the market price of the Company's stock ranged from $0.044 to $0.050
per share, the Company issued warrants to purchase an aggregate of 38,240,000
shares of its common stock at $0.025 per share and stock grants of an aggregate
of 401,923 shares of its common stock as compensation for these services. The
warrants were non-forfeitable and fully-vested at the date of issuance. In April
2003, when the market price of the Company's stock ranged from $0.0270 to
$0.0295 per share, the Company entered into additional contracts for services
and issued warrants to purchase an aggregate of 9,000,000 shares of its common
stock at $0.025 per share and issued stock grants for an aggregate of 30,700,000
shares of its common stock as compensation for these services. The Company also
issued 6,072,000 and 5,017,987 shares of its common stock in satisfaction of
approximately $241,000 and $132,000 in trade payables in March and April 2003,
respectively, to service providers who agreed to accept stock in payment. At
April 30, 2003, the consultants had exercised warrants to purchase 60,240,000
shares of the Company's common stock and the Company had received proceeds of
$1,956,000.
In order to conserve cash and to obtain services, the Company may continue to
issue options and warrants at significant discounts to market or issue direct
stock grants in return for necessary consulting services. The Company would
subsequently register the underlying shares on a Form S-8 for resale by the
consultants.
Restructure of Trade Debt
On February 12, 2002, the Company completed a restructuring of approximately
$1.7 million of its past due accounts payable and certain 2002 obligations with
27 of its trade creditors. Under the restructuring, the Company issued
approximately 1.4 million shares of its common stock at various negotiated
prices per share with the trade creditors in satisfaction of the specified debt.
The issuance of shares was exempt from registration pursuant to Regulation D of
the Securities Act. The shares issued are now eligible for resale under the
provisions of Rule 144.
The Company does not believe that its currently available financing will be
adequate to sustain operations at current levels through the second quarter of
2003, or to permit it to achieve the revenue and profitability guidance provided
previously. The Company must achieve profitability for its business model to
succeed. Prior to accomplishing this goal, it will need to raise additional
funds, from equity or debt sources. The Company believes that it will need to
arrange additional financing of at least $10 million in the next twelve months.
If additional financing is not available when required or is not available on
acceptable terms, the Company may be unable to continue its operations at
current levels, or at all. As of March 31, 2003, the Company reported cash
on-hand of $294,000. During the first quarter of 2003, cash receipts exceeded
cash expenditures by $147,000, but trade payables and accrued expenses increased
by $139,000. The Company is actively engaged in seeking additional financing in
a variety of venues and formats and continues to impose actions designed to
minimize its operating losses. The Company would consider strategic
opportunities, including investment in the Company, a merger or other comparable
transaction, to sustain its operations. The Company does not currently have any
agreements in place with respect to any such strategic opportunity, and there
can be no assurance that additional capital will be available to the Company on
acceptable terms, or at all. The Company's inability to obtain additional
financing or to arrange a suitable strategic opportunity will place it in
significant financial jeopardy.
The Company's future liquidity and capital requirements will depend on numerous
factors, including the ability to raise additional capital in a timely manner
through additional investment, a potential merger, or similar transaction, as
well as expanded market acceptance of its current products, improvements in the
costs and efficiency of its manufacturing processes, its ability to develop and
commercialize new products, regulatory actions by the FDA and other
international regulatory bodies, and intellectual property protection.
Our independent auditors continue to issue an opinion indicating that our
-31-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
recurring losses from operations, our working capital deficit and our
accumulated deficit raise substantial doubt about our ability to continue our
business operations as a going concern. There can be no assurance that the
additional capital that the Company requires will be available on acceptable
terms, if at all. Any failure to secure additional financing will place the
Company in significant financial jeopardy. Therefore, the Company cannot predict
the adequacy of its capital resources on a long-term basis. There can be no
assurance that the Company will be able to achieve improvements in its
manufacturing processes or that it will achieve significant product revenues
from its current or potential new products. In addition, there can be no
assurance that the Company will achieve or sustain profitability in the future.
OPERATING ACTIVITIES
- --------------------
During the quarters ended March 31, 2003 and 2002, the Company used cash of $2.8
million and $1.2 million, respectively, in its operations. In both periods, the
cash used in operations was primarily for manufacturing, promoting and marketing
the Company's complete urine-based HIV-1 testing method, and for research,
selling, and general and administrative expenses of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
- ------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements no.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 requires gains and losses from extinguishment of debt to be
classified as an extraordinary item only if the criteria in APB No. 30 have been
met. Further, lease modifications with economic effects similar to
sale-leaseback transactions must be accounted for in the same manner as
sale-leaseback transactions. While the technical corrections to existing
pronouncements are not substantive in nature, in some instances they may change
accounting practice. SFAS No. 145 became effective for the Company on January 1,
2003. While this standard does not have a material impact on the Company's
consolidated financial position or results of operations, it requires the
reclassification in 2003 as ordinary items certain previously-recognized gains,
such as the gain on the restructure of trade debt and on the repurchase of
beneficial conversion feature upon early extinguishment of convertible debt,
previously classified as extraordinary.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit and disposal activities and supercedes
Emerging Issues Task Force Issue No. 94-3 (EITF 94-3), "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, as defined by the Statement. Under
EITF 94-3, an exit cost was recognized at the date an entity committed to an
exit plan. Additionally, SFAS No. 146 provides that exit and disposal costs
should be measured at fair value and that the associated liability will be
adjusted for changes in estimated cash flows. The provisions of SFAS No. 146 are
effective for exit and disposal activities that are initiated after December 31,
2002. Management does not expect this standard to have a material impact on the
Company's consolidated financial position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Under the fair value based
method, compensation cost for stock options is measured when options are issued.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements of
the effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS No. 148 were effective for the Company's fiscal
year ended December 31, 2002. The interim disclosure provisions are effective
for the financial statements issued for the quarters ended March 31, 2003 and
thereafter and are included herein. The Company's adoption of SFAS No. 148 did
not have a significant impact on its consolidated financial statements.
-32-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
FACTORS THAT MAY AFFECT FUTURE RESULTS, EVENTS OR PERFORMANCE
- -------------------------------------------------------------
RISK FACTORS
Calypte has identified a number of risk factors faced by the Company. These
factors, among others, may cause actual results, events or performance to differ
materially from those expressed in any forward-looking statements made in this
Form 10-Q or in press releases or other public disclosures. Investors should be
aware of the existence of these factors.
RISKS RELATED TO OUR FINANCIAL CONDITION
If We are Unable to Obtain Additional Funds We May Have to Significantly Curtail
the Scope of Our Operations and Alter Our Business Model.
We do not believe that our currently available financing will be adequate to
sustain operations at current levels through the second quarter of 2003 unless
new financing is arranged. Although, from May 10, 2002 through March 31, 2003,
we have completed new financings in which we have received an aggregate of
approximately $8.7 million, exceeding the initial $5 million letter agreement
commitment, we do not know if we will succeed in raising additional funds
through further offerings of debt or equity. We must ultimately achieve
profitability for our business model to succeed. Prior to accomplishing this
goal, we believe that we will need to arrange additional financing of at least
$10 million to sustain our operations for the next twelve months. There can be
no assurance that subsequent additional financings will be made available to the
Company on a timely basis or that the additional capital that the Company
requires will be available on acceptable terms, if at all. The terms of a
subsequent financing may involve a change of control, require stockholder
approval, and/or require the Company to obtain waivers of certain covenants that
are contained in existing agreements.
As of March 31, 2003 our cash on hand was $294,000. We are actively engaged in
seeking additional financing in a variety of venues and formats and we continue
to impose actions designed to minimize our operating losses. We would consider
strategic opportunities, including investment in the Company, a merger or other
comparable transaction, to sustain our operations. We do not currently have any
agreements in place with respect to any such strategic opportunity, and there
can be no assurance that such opportunity will be available to us on acceptable
terms, or at all. If additional financing is not available when required or is
not available on acceptable terms, or we are unable to arrange a suitable
strategic opportunity, it will place the Company in significant financial
jeopardy and we may be unable to continue our operations at current levels, or
at all.
Our Independent Auditors have Stated that Our Recurring Losses from Operations
and Our Accumulated Deficit Raise Substantial Doubt about Our Ability to
Continue as a Going Concern.
The report of KPMG LLP dated February 7, 2003, except Note 20, which is as of
March 24, 2003, covering the December 31, 2002 consolidated financial statements
contains an explanatory paragraph that states that our recurring losses from
operations and accumulated deficit raise substantial doubt about our ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
We will need to raise more money to continue to finance our operations. We may
not be able to obtain additional financing on acceptable terms, or at all. Any
failure to raise additional financing will likely place us in significant
financial jeopardy.
Our Prior Announcement that We Would be Winding Down Our Business Operations May
Have A Detrimental Effect on Our Business.
During the first quarter of fiscal year 2002, our financial condition and
availability of operating funds deteriorated significantly, to the point that in
early April 2002, it was determined that we would need to curtail our business
operations and possibly consider filing for bankruptcy protection. We announced
that our financial condition had reached a critical point in mid April 2002 at
which time we publicly announced and began the process of furloughing employees
as a part of the winding down of our business operations. We had announced that
the complete cessation of our business operations was a likely possibility at
that time. Subsequently, in May of 2002, before we finalized the winding down
process, we received a commitment for sufficient additional financing to allow
us to resume our operations. The winding down of operations and the subsequent
recommencement of our business did not have a materially adverse effect on the
majority of our relationships with suppliers and customers, however, we did
incur certain non-recurring costs associated with the restart of operations in
our second quarter and expect that these costs will continue through the
mid-2003. Additionally, we experienced certain instances of delay in obtaining
materials required for our manufacturing processes as a result of the need to
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
develop payment arrangements with vendors concerned about our financial
stability. Most of our supply arrangements with our materials vendors are
currently on a cash-only basis, and some require the repayment of past due
amounts in addition to payment for current orders. Although to date we have not
seen a significant adverse effect from our prior announcement of winding down
and our subsequent recommencement of our business, there can be no assurance
that it will not have an adverse effect on our future revenues and customer
base. If we are unable to re-establish our manufacturing efficiency, including
the ability to procure an orderly flow of manufacturing materials and supplies,
we may subsequently have difficulty fulfilling orders and maintaining customers.
Our Financial Condition has Adversely Affected Our Ability to Pay Suppliers,
Service Providers and Licensors on a Timely Basis Which May Jeopardize Our
Ability to Continue Our Operations and to Maintain License Rights Necessary to
Continue Shipments and Sales of Our Products.
We have engaged in negotiations with our creditors to restructure and reschedule
our payment of certain obligations. On February 12, 2002, we closed a
restructuring of approximately of $1.7 million of our trade debt, including
approximately $1.0 million of royalty obligations, pursuant to which 27
creditors agreed to discharge such debt and minimum royalty obligations in
exchange for a total of 1.4 million shares of our common stock. As of March 31,
2003 our accounts payable totaled $3.4 million, of which $3.1 million was over
sixty days old. We currently have primarily cash-only arrangements with
suppliers and certain arrangements require that we pay down certain outstanding
amounts due when we make a current payment. These past due payments vary monthly
depending on the items purchased and range from approximately $50,000 to
$200,000 per month. As of March 31, 2003 we have accrued an aggregate of
approximately $464,000 in royalty obligations to our key patent licensors, of
which approximately $242,000 were past due. Although we anticipated that past
due royalties could be brought current by the end of 2002 under agreed payment
plans, we have been unable to remain current on our royalty payment obligations
through March 31, 2003. The licenses attributable to past due royalty payments
relate to technology utilized in both our urine EIA screening test and our
supplemental urine and serum tests. Because of the interdependence of the
screening and supplemental tests in our testing algorithm, the inability to use
any one of the patents could result in the disruption of the revenue stream from
all of our products. If we are unable to obtain additional financing on timely
and acceptable terms, our ability to make payment on past due negotiated royalty
obligations, make timely payments to our critical suppliers, service providers
and to licensors of intellectual property used in our products will be
jeopardized and we may be unable to obtain critical supplies and services and to
maintain licenses necessary for us to continue to manufacture, ship and sell our
products. We have not made any royalty payments since the end of 2002.
Additionally, certain vendors and service providers with whom we have not
currently arranged payment plans have or may choose to bring suit against the
Company to recover amounts they deem owing, as described in Part II, Item 1
Legal Proceedings. While we may dispute these claims, should the creditor
prevail and if additional financing is not available when required or is not
available on acceptable terms, the Company will be placed in significant
financial jeopardy and we may be unable to continue our operations at current
levels, or at all. Further, as described in Legal Proceedings, we have reached a
settlement agreement that requires a total payout of $463,000 for prior legal
services beginning with a $50,000 payment due on June 15, 2003. The terms of the
settlement require a payment of $20,000 per month plus a percentage of our net
financings. There are certain exceptions that may delay the payments subsequent
to June 15, 2003 for up to 3 months, but should we default on the payment plan,
the creditor may exercise a stipulated judgement against us, and if so, the
Company may be placed in significant financial jeopardy and we may be unable to
continue our operations at current levels, or at all.
The Company and the Price of Our Shares May Be Adversely Affected By the Public
Sale of a Significant Number of the Shares Eligible for Future Sale.
At March 31, 2003, approximately 212 million or 90% of the outstanding shares of
our common stock were freely tradable. Sales of common stock in the public
market could materially adversely affect the market price of our common stock.
Such sales also may inhibit our ability to obtain future equity or
equity-related financing on acceptable terms.
From inception through March 31, 2003, the Company has issued approximately 236
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
million shares and raised $99 million. At a Special Meeting of Stockholders on
February 14, 2003, our stockholders approved an increase in the number of
authorized shares of the Company's common stock from 200 million to 800 million.
The continuing need to raise additional funds through the sale of equity in the
Company will likely result in the issuance of a significant number of shares of
common stock in relation to the number of shares currently outstanding. In the
past, we have raised money through the sale of shares of our common stock or
through debt instruments that may convert into shares of our common stock at a
discount to the current market price. Such arrangements have included the
private sale of shares to investors on the condition that we register such
shares for resale by the investors to the public. These arrangements have taken
various forms including private investments in public equities or "PIPE"
transactions, equity lines of credit, and other transactions summarized in the
table included in the "Financing Activities" section of Liquidity and Capital
Resources in this document.
We will continue to seek financing on an as-needed basis on terms that are
negotiated in arms-length transactions. Moreover, the perceived risk of dilution
may cause our existing stockholders and other holders to sell their shares of
stock, which would contribute to a decrease in our stock price. In this regard,
significant downward pressure on the trading price of our stock may also cause
investors to engage in short sales, which would further contribute to
significant downward pressure on the trading price of our stock.
We Have Incurred Losses in the Past and We Expect to Incur Losses in the Future.
We have incurred losses in each year since our inception. Our net loss for the
three month period ended March 31, 2003 and the year ended December 31, 2002 was
$6.4 million and $13.3 million, respectively and our accumulated deficit at
March 31, 2003 was $107.7 million. We expect operating losses to continue for at
least the next several quarters as we continue our marketing and sales
activities for our FDA-approved products and conduct additional research and
development for product and process improvements and clinical trials on
potential new products.
RISKS RELATED TO OUR RECENT FINANCINGS -- OUR EQUITY LINE OF CREDIT
WITH TOWNSBURY AND THE CONVERTIBLE
DEBENTURES AND WARRANTS AGREEMENT WITH BRISTOL AND THE OTHER RECENT FINANCINGS
We May be in Default In Payment of Principal and Interest Under the Terms of Our
Previously Issued 8% Convertible Notes.
On February 14, 2003 we completed the registration process for $525,000 of the
Bristol Debentures but we have not filed a registration statement for any Other
Recent Financings. As described more completely in footnote 3 to the Recent
Financings table in Liquidity and Capital Resources above, many of these
financings have requirements for registration and impose liquidated damages for
delays beyond 30 days from the transaction date allowed for filing a
registration statement or 90 days for the registration to be declared effective.
Additionally, the holders of the original face value of $3,125,000 of the 8%
Convertible Notes have the right to demand immediate repayment of the
outstanding principal balance plus accrued interest due to the non-registration
of the underlying shares. Although none of the holders has demanded repayment,
we may be required to repay the outstanding balance of $2,885,000 prior to
maturity. Accordingly, we have classified these notes as a current liability in
the accompanying consolidated financial statements. The notes may be subject to
Rule 144 and $2.225 million of Other Recent financings will have been held for
one year on May 24, 2003. The convertible note transactions generally require
liquidated damages at the rate of 2% of the original principal balance for each
month's delay. The PIPE financing at $0.05 per share requires liquidated damages
at the rate of 250,000 shares of Calypte common stock for each 10 days of delay.
In most instances, the investor has the option of receiving liquidated damages
in either cash or the Company's common stock, although the PIPE financing
agreement specifies damages to be paid in stock. Liquidated damages attributable
to registration delays on the convertible notes and debentures continue to
accrue at a rate of approximately $63,000 per month plus 750,000 shares
attributable to the PIPE transaction.
Our "Recent Financings" and the Issuance of Shares Pursuant to the "Recent
Financings" May Cause Significant Dilution to Our Stockholders and May Have a
Negative Impact on the Market Price of Our Common Stock.
The resale by Townsbury, Bristol and the investors providing Other Recent
Financings of the common stock that they purchase from us has increased and will
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
continue to increase the number of our publicly traded shares, which could put
downward pressure on the market price of our common stock. As of March 31, 2003,
of the 236 million shares outstanding, approximately one-third have been issued
pursuant to these recent financings.
As of March 31, 2003, while there are essentially no registered shares remaining
under the equity line, there is approximately $6.6 million remaining under the
commitment and we could decide to file a new registration statement for
additional shares and continue selling shares of our common stock under the
equity line. Since all the shares we sell to Townsbury would be available for
immediate resale, the mere prospect of our sales to Townsbury could depress the
market price for our common stock. The shares of our common stock issuable to
Townsbury under the equity line facility would be sold at 88% of the daily
volume weighted average price of our common stock on the date of purchase
subject to adjustment if our market capitalization increases significantly.
Similarly, the shares of our common stock issuable to Bristol upon conversion of
the $850,000 debenture commitment will be issued at a price equal to the lesser
of 70% of the average of the 3 lowest trading prices of our common stock during
the 20 trading days immediately preceding the conversion or exercise or at
$0.115 per share, subject to adjustment per the Securities Purchase Agreement.
As described in Note 5 to the financial statements and in footnote 7 to the
Recent Financings table in Liquidity and Capital Resources, we have reduced the
conversion price for $790,000 of the debenture commitment that may be converted
into the underlying shares of common stock after the effectiveness of the
registration statement to 60% of the average of the 3 lowest closing bid prices
for the 22 trading days preceding conversion, but not more than $0.05 per share.
Bristol has funded $525,000 of the $850,000 commitment and we have registered
30.3 million shares for resale upon debenture conversions. At this time, we have
not registered the shares underlying the remaining $325,000 debenture commitment
nor the 13.7 million shares underlying the Class A and B warrants. However, we
could be required to register the underlying shares if these securities are
funded. By April 2, 2003, Bristol had converted the entire $525,000 principal
amount of debentures funded and we had issued 30.6 million shares upon the
conversions plus interest and liquidated damages. Based on current market
prices, the exercise of the remaining debenture commitment and the Class A and B
warrants would result in the issuance of an additional 39 million shares.
Further, the investors that have provided Other Recent Financings, with
agreements in place, have the ability to convert their Notes and Debentures, and
their related warrant shares, into an additional 645 million shares based upon
the market price of our common stock as of March 31, 2003. Additionally, the
Company has issued 22.8 million restricted shares of common stock to these
investors. The common stock and the common stock underlying the notes and
debentures issued to the investors providing Other Recent Financings are
unregistered, however they may be subject to Rule 144 and $2.225 million of
Other Recent financings will have been held for one year on May 24, 2003. All of
the agreements include ownership limitations by the investors that would
prohibit a change of control. None of the Other Recent Financings permit
ownership by the respective investors of more than 9.9% of the Company's
outstanding stock without the Company's agreement. These notes and debentures
are convertible at discounts to the market price of our common stock.
If we were to require Townsbury to purchase our common stock at a time when our
stock price is low, our existing stockholders would experience substantial
dilution. If Bristol or the investors in the Other Recent Financings convert the
shares underlying their securities when our stock price is low, our existing
stockholders would experience substantial dilution.
Refer to the table in Liquidity and Capital Resources for a summary of potential
dilution as of April 30, 2003 by type of security related to the Recent
Financings.
Consequently, the issuance of shares to Townsbury subsequent to the potential
filing of a new registration statement for the equity line facility and to
Bristol upon conversion and exercise of the debentures and warrants and to the
investors providing Other Recent Financings on the conversion of their Notes and
Debentures will dilute the equity interest of existing stockholders and, coupled
with the registration of restricted shares, could have an adverse effect on the
market price of our common stock. In addition, depending on the price per share
of our common stock during the life of these financings, we may need to register
additional shares for resale to access the full amount of financing available,
which could have a further dilutive effect on the value of our common stock.
The perceived risk of dilution may cause our stockholders to sell their shares,
which would contribute to a downward movement in the stock price of our common
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
stock. Moreover, the perceived risk of dilution and the resulting downward
pressure on our stock price could encourage investors to engage in short sales
of our common stock. By increasing the number of shares offered for sale,
material amounts of short selling could further contribute to progressive price
declines in our common stock.
We Cannot Determine the Precise Amount by Which the Interests of Our
Stockholders Will Be Diluted by Draw Downs and Conversions Under the Recent
Financings Because the Number, Size and the Timing of Draw Downs, Debenture and
Warrant Conversions, and the Minimum Threshold Price for Each Depends Upon a
Number of Factors.
Although at the current time there are essentially no registered shares
remaining under the equity line, there is approximately $6.6 million remaining
under the commitment. We could decide to file a new registration statement for
additional shares and continue selling shares of our common stock under the
equity line. We have substantial discretion and are also subject to mandatory
requirements regarding the number, size and timing of the draw downs under the
equity line and debt and warrant conversions that will occur pursuant to the
Bristol debentures and warrants. In addition, when we are not subject to
mandatory draw downs under the equity line, at the time we make a draw down
request, we have the right to limit the amount of dilution that will occur by
setting a minimum threshold price below which shares may not be sold in that
draw down. However, if we set the minimum threshold price at a level high enough
to limit the sale of our shares, the amount of funds we can raise in that draw
down will also be reduced. Some of the factors that we will consider in
determining the size and amount of each draw down and the minimum threshold
price are:
o our short-term and long-term operating capital requirements;
o our actual and projected revenues and expenses;
o our assessment of general market and economic conditions;
o our assessment of risks and opportunities in our targeted markets;
o the availability and cost of alternative sources of financing; and
o the trading price of our common stock and our expectations with
respect to its future trading price.
Our discretion with respect to the number, size and timing of each draw down
request is also subject to a number of contractual limitations. Conversely, we
have little discretion regarding the timing of conversion of the various
convertible debenture and note instruments we have issued and the ultimate
number of shares that we may have to issue upon their conversion. While the
investors who hold these notes and debentures may consider some of the factors
above, they will make conversion decisions based on their own investment
strategies and requirements, which may not include consideration of the dilutive
impact of their conversions. Accordingly, it may be difficult to predict the
number of shares of our common stock that will be sold on the public market,
which may adversely affect the market price of our common stock.
We Cannot Determine the Precise Amount by Which the Interests of Other
Stockholders Will be Diluted by Sales of Our Common Stock Under the Recent
Financings Because the Number of Shares We Will Issue Depends Upon the Trading
Price of the Shares During each Equity Line Draw Down and Debenture Conversion
Period.
The number of shares that we will issue is directly related to the trading price
and volume of our common stock preceding and during each draw down and debt
conversion period. If the price of our common stock decreases, and if we decide
to or are required to draw down on the equity line of credit, we will be
required to issue more shares of our common stock for any given dollar amount
invested by Townsbury. Similarly, the number of shares issuable pursuant to
conversions of the debenture and the exercise of the Class B warrants increases
as the trading price of our common stock decreases, although such number of
shares is subject to a minimum equal to 12.5% of the trading volume for the 60
trading days immediately preceding the date of conversion up to a maximum of 2
million shares per month, which maximum may be waived by the Company.
Accordingly, investors may find it difficult to predict the number of shares of
our common stock that will be sold on the public market and which may adversely
affect the market price of our common stock.
The Sale of Material Amounts of Our Common Stock Could Reduce the Price of Our
Common Stock and Encourage Short Sales.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
As we issue shares of our common stock pursuant to the Recent Financings and the
investors then resell the common stock, our common stock price may decrease due
to the additional shares in the market. If the price of our common stock
decreases, and if investors convert the notes or debentures and resell the stock
they receive upon conversion as we either register the underlying shares or the
underlying shares qualify for sale under Rule 144, or if we decide to register
additional shares so that we may continue to draw down on the equity line of
credit, or as we are required to issue shares upon conversions of the Bristol
debentures and Class B warrants, we will be required to issue more shares of our
common stock for any given dollar amount invested. This may encourage short
sales, which could place further downward pressure on the price of our common
stock.
Because the Investors in the Recent Financings are Residents of Foreign
Countries, It May be Difficult or Impossible to Obtain or Enforce Judgments
Against Them and the Investors are also Subject to United States and Foreign
Laws that Could Affect Our Ability to Access the Funds.
Townsbury, Bristol, and the unaffiliated investors who have provided the Other
Recent Financings are off-shore investors and a substantial portion of their
assets are located outside of the United States. As a result, it may be
difficult or impossible to effect service of process on the investors within the
United States. It may also be difficult or impossible to enforce judgments
entered against the investors in courts in the United States based on civil
liability provisions of the securities laws of the United States. In addition,
judgments obtained in the United States, especially those awarding punitive
damages, may not be enforceable in foreign countries.
As overseas investment funds, the investors are also subject to United States
and foreign laws regulating the international flow of currency over which we
have no control and which could affect the availability of the funds. Any delay
in our ability to receive funds under the Recent Financings when expected could
prevent us from receiving necessary capital and place us in significant
financial jeopardy.
Under the Terms of Our Recent Financings We Have or May Have to Grant Partial or
Complete Liens On Substantially All of Our Assets.
In the event of a default under the terms of securities purchase agreements
obtained as part our Recent Financings to date and in the future, the security
holders can typically foreclose on the security interest in our assets. If this
were to happen, we may be required to file a petition under Chapter 11 of the
Bankruptcy Code seeking protection, or file under Chapter 7 and liquidate.
If the Price or the Trading Volume of Our Common Stock Does Not Sustain Certain
Levels, We Will be Unable to Raise All or Substantially All of the Expected
Proceeds Under Our Recent Financings, Which May Force Us to Significantly
Curtail the Scope of Our Operations and Alter Our Business Plan.
The maximum amount of a draw down under the Townsbury equity line facility is
equal to a formula based upon the weighted average price for our common stock
and its trading volume during the 60 calendar day period immediately prior to
the date that we deliver notice to Townsbury of our intention to exercise a draw
down, multiplied by the number of days in the draw down period. We are allowed
to exceed the maximum draw down amount only if we agree to set the minimum
threshold price of the draw down, which is the stock price below which we will
not draw down on the equity line, at 80% of the average of the five daily volume
weighted average prices immediately prior to the issuance of the draw down
notice. Days on which the price of our common stock is less than the minimum
threshold price will be excluded from the calculation of the draw down amount
and will therefore reduce the amount of funds that we may draw down.
As a result, if our stock price and trading volume fall below certain levels,
then either the maximum draw down amount formula or the mandatory threshold
price will probably prevent us from being able to draw down all $10 million
pursuant to the Townsbury equity line facility. At current trading volume and
pricing levels, and if we register additional shares, we could draw the
remaining $6.6 million commitment under the line. However, should volume or
price decrease, we might not be able to access the full line. The commitment
expires on October 23, 2003.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
Similarly, the amount of funds that we may receive upon exercise of the warrants
issued to Bristol in conjunction with the convertible debentures is likewise
limited by our trading volume. We issued two types of warrants to Bristol --
Class A and Class B warrants. Bristol has sole discretion over the exercise of
the Class A warrants. However, provided there is an effective registration for
the shares underlying the debentures and Class A and B warrants, Bristol may be
obligated to exercise the Class B warrants whenever it converts the debentures
and it is obligated to convert the debentures each month at a rate that will
result in the exercise of a number of warrants equal to at least 7.5% of the
trading volume of our shares for the 60 days immediately preceding the
conversion. The exercise price of the Class B warrants is in turn set at the
lesser of 75% of the average of the three lowest trading prices for our common
stock for the twenty trading days immediately preceding the conversion and
exercise and $0.215 per share, subject to anti-dilution adjustments for
below-market sales of our common stock. Accordingly, if the trading volume of
our shares does not reach certain levels and our stock price declines
significantly, the number of warrant shares that Bristol may exercise upon
conversion of the debentures and the price that Bristol pays for such shares may
decrease and reduce the amount of funds that we may receive upon exercise of the
Class B warrants.
Therefore, if our trading volume and stock price decline, or if we fail to
register all shares underlying the debentures and warrants, Bristol may not
completely convert the debentures and the warrants, and we, at current market
prices, may not receive the approximately $0.8 million in expected proceeds at
March 31, 2003 from the issuance and conversions. Additionally, if we are unable
to draw down the full $10 million under the equity line and/or realize the
expected proceeds from the debentures and warrants and we are unable to secure
alternative financing, we may have to curtail the scope of our operations as
contemplated by our business plan.
RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK
RISK FACTORS ASSOCIATED WITH THE PROPOSED 1:30 REVERSE
STOCK SPLIT SUBMITTED TO OUR STOCKHOLDERS FOR APPROVAL
AT OUR ANNUAL MEETING SCHEDULED FOR MAY 20, 2003
There can be no assurance that the total market capitalization of Calypte common
stock (the aggregate value of all Calypte common stock at the then market price)
after the proposed Reverse Stock Split will be equal to or greater than the
total market capitalization before the proposed Reverse Stock Split or that the
per share market price of Calypte common stock following the Reverse Stock Split
will either equal or exceed the current per share market price.
There can be no assurance that the market price per new share of Calypte common
stock after the Reverse Stock Split will remain unchanged or increase in
proportion to the reduction in the number of old shares of Calypte common stock
outstanding before the Reverse Stock Split. For example, based on the market
price of Calypte common stock on March 31, 2003 of $0.0295 per share, following
a Reverse Stock Split in the ratio of one-for-thirty, there can be no assurance
that the post-split market price of Calypte common stock would be $0.885 per
share or greater.
Accordingly, the total market capitalization of Calypte common stock after the
proposed Reverse Stock Split may be lower than the total market capitalization
before the proposed Reverse Stock Split and, in the future, the market price of
Calypte common stock following the Reverse Stock Split may not exceed or remain
higher than the market price prior to the proposed Reverse Stock Split.
If the Reverse Stock Split is implemented, the resulting per-share stock price
may not attract institutional investors or investment funds and may not satisfy
the investing guidelines of such investors and, consequently, the trading
liquidity of Calypte common stock may not improve.
While the Board of Directors believes that a higher stock price may help
generate investor interest, there can be no assurance that the Reverse Stock
Split will result in a per-share price that will attract institutional investors
or investment funds or that such share price will satisfy the investing
guidelines of institutional investors or investment funds. As a result, the
trading liquidity of Calypte common stock may not necessarily improve.
A decline in the market price of Calypte common stock after the Reverse Stock
Split may result in a greater percentage decline than would occur in the absence
of a Reverse Stock Split, and the liquidity of Calypte common stock could be
adversely affected following such a Reverse Stock Split.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
If the Reverse Stock Split is effected and the market price of Calypte common
stock declines, the percentage decline may be greater than would occur in the
absence of a Reverse Stock Split. The market price of Calypte common stock will,
however, also be based on Calypte's performance and other factors, which are
unrelated to the number of shares outstanding. Furthermore, the reduced number
of shares that would be outstanding after the Reverse Stock Split could
adversely affect the liquidity of Calypte common stock.
OTHER RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK
We Have Been Removed From the Nasdaq SmallCap Market and We Are Uncertain How
Trading on the Over the Counter Bulletin Board Will Affect the Liquidity and
Share Value of Our Stock.
On July 13, 2001 our stock was removed from trading on the Nasdaq SmallCap
Market as a result of the failure to comply with the Nasdaq Stock Market rules
that required the minimum bid price for our common stock to exceed $1.00 per
share and that we meet at least one of the following criteria:
o have net tangible assets equal at least $2.0 million;
o have market capitalization equal to $35.0 million in public float;
or
o recognize net income of at least $500,000 in our most recent fiscal
year or in two of our three previous fiscal years.
Beginning on July 13, 2001, our stock has traded on the Over-the-Counter
Bulletin Board. Although the per share price of our common stock has declined
since it was delisted from the Nasdaq SmallCap Market, trading volume in our
stock has increased. We are uncertain, however, about the long-term impact, if
any, on share value as a result of trading on the Over-the-Counter Bulletin
Board.
The Price of Our Common Stock Has Been Highly Volatile Due to Several Factors
Which Will Continue to Affect the Price of Our Stock.
Our common stock has traded as low as $0.012 per share and as high as $0.43 per
share in the twelve months ended March 31, 2003. We believe that some of the
factors leading to the volatility include:
o price and volume fluctuations in the stock market at large which do
not relate to our operating performance;
o fluctuations in our operating results;
o concerns about our ability to finance our continuing operations;
o financing arrangements, including the Recent Financings, which may
require the issuance of a significant number of shares in relation to
the number of shares currently outstanding;
o announcements of technological innovations or new products which we or
our competitors make;
o FDA and international regulatory actions;
o availability of reimbursement for use of our products from private
health insurers, governmental health administration authorities and
other third-party payors;
o developments with respect to patents or proprietary rights;
o public concern as to the safety of products that we or others develop;
o changes in health care policy in the United States or abroad;
o changes in stock market analysts' recommendations regarding Calypte,
other medical products companies or the medical product industry
generally;
o fluctuations in market demand for and supply of our products; and
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
o certain world conditions, such as SARS or conflict in the Middle East
Our Issuance of Warrants, Options and Stock Grants to Consultants for Services
May Have a Negative Effect on the Trading Price of Our Common Stock.
During 2002, we issued approximately 50 million shares of our common stock
pursuant to warrants, options, and stock bonus grants to consultants, and we
have, through March 31, 2003, issued warrants and stock bonuses for an
additional 60 million shares, as more fully described in "Liquidity and Capital
Resources". As we continue to look for ways to minimize our use of cash while
obtaining required services, we plan to issue additional warrants and options at
or below the current market price and make additional stock bonus grants. In
addition to the potential dilutive effect of a large number of shares and a low
exercise price for the warrants and options, there is the potential that a large
number of the underlying shares may be sold on the open market at any given
time, which could place downward pressure on the trading price of our common
stock.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market In Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
Shares of our common stock are "penny stocks" as defined in the Exchange Act,
which are traded in the Over-The-Counter Market on the OTC Bulletin Board. As a
result, investors may find it more difficult to dispose of or obtain accurate
quotations as to the price of the shares of the common stock being registered
hereby. In addition, the "penny stock" rules adopted by the Commission under the
Exchange Act subject the sale of the shares of our common stock to certain
regulations which impose sales practice requirements on broker/dealers. For
example, brokers/dealers selling such securities must, prior to effecting the
transaction, provide their customers with a document that discloses the risks of
investing in such securities. Included in this documents are the following:
o the bid and offer price quotes in and for the "penny stock", and the
number of shares to which the quoted prices apply.
o the brokerage firm's compensation for the trade.
o the compensation received by the brokerage firm's sales person for the
trade.
In addition, the brokerage firm must send the investor:
o a monthly account statement that gives an estimate of the value of
each "penny stock" in the investor's account.
o a written statement of the investor's financial situation and
investment goals.
Legal remedies, which may be available to you as an investor in "penny stocks",
are as follows:
o if "penny stock" is sold to you in violation of your rights listed
above, or other federal or states securities laws, you may be able to
cancel your purchase and get your money back.
o if the stocks are sold in a fraudulent manner, you may be able to sue
the persons and firms that caused the fraud for damages.
o if you have signed an arbitration agreement, however, you may have to
pursue your claim through arbitration.
If the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker/dealer, the broker/dealer must
also approve the potential customer's account by obtaining information
concerning the customer's financial situation, investment experience and
investment objectives. The broker/dealer must also make a determination whether
the transaction is suitable for the customer and whether the customer has
sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the Commission's rules may limit the number of
potential purchasers of the shares of our common stock.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
Resale restrictions on transferring "penny stocks" are sometimes imposed by some
states, which may make transaction in our stock more difficult and may reduce
the value of the investment. Various state securities laws pose restrictions on
transferring "penny stocks" and as a result, investors in our common stock may
have the ability to sell their shares of our common stock impaired.
RISKS RELATED TO OUR BUSINESS
Our Customers May Not Be Able to Satisfy Their Contractual Obligations and We
May Not Be Able to Deliver Our Products as a Result of the Impact of Conditions
Such as Severe Acute Respiratory Syndrome ("SARS") or Operation Iraqi Freedom.
Our expected first quarter 2003 shipment of urine HIV screening tests to our
distributor in the People's Republic Of China was delayed, in part, as a result
of the impact of SARS in that country. Our distributor has reported that both
potential patients and medical personnel are reluctant to visit or report for
work at hospitals, clinics and other sites for fear of contracting or spreading
SARS and, consequently, both diagnostic and therapeutic procedures are being
postponed. Additionally, governmentally-imposed facility closures and quarantine
restrictions are disrupting the ability of the distributor to receive and
distribute our HIV tests. This situation may continue for some time in both
China and elsewhere as emphasis is temporarily directed at containing and/or
preventing the spread of SARS.
Also during the first quarter of 2003, we encountered an unusual degree of
difficulty in obtaining transportation for evaluation kits of our product to a
potential distributor in Africa. Our products require controlled refrigeration
during transport and the availability of such carriers was limited due to the
utilization of many private transportation resources in moving materials and
supplies to the Persian Gulf region in support of Operation Iraqi Freedom.
Our business model and current revenue forecasts call for a significant
expansion of sales to our distributor in the Peoples' Republic of China, in
accordance with the requirements of the distribution contract. Additionally, we
project a significant level of sales of our product in Africa upon successful
completion of the product evaluation. Should conditions beyond our control, such
as SARS or Operation Iraqi Freedom, redirect attention more than temporarily
from the worldwide HIV/AIDS epidemic, our customers' ability to meet their
contractual purchase obligations or our ability to supply product
internationally for either evaluation or commercial use may prevent us from
achieving the revenues we have projected. As a result, we may have to seek
additional financing beyond that which we have projected, which may not be
available on the timetable required or on acceptable terms, or we may have to
curtail our operations, or both.
Our Quarterly Results May Fluctuate Due to Certain Regulatory, Marketing and
Competitive Factors Over Which We Have Little or No Control.
The factors listed below, some of which we cannot control, may cause our
revenues and results of operations to fluctuate significantly:
o actions taken by the FDA or foreign regulatory bodies relating to our
products;
o the extent to which our products and our HIV and STD testing service
gain market acceptance;
o the timing and size of distributor purchases;
o introductions of alternative means for testing for HIV by competitors;
and
o customer concerns about the stability of our business which could
cause them to seek alternatives to our product.
We Have Limited Experience Selling and Marketing Our HIV-1 Urine-Based Screening
Test.
Our urine-based products incorporate a unique method of determining the presence
of HIV antibodies and we have limited experience marketing and selling them
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
either directly or through our distributors. Calypte's success depends upon the
ability of domestic marketing efforts to penetrate expanded markets and upon
alliances with third-party international distributors. There can be no assurance
that:
o our direct selling efforts will be effective;
o we will obtain any expanded degree of market acceptance among
physicians, patients or health care payors; or others in the medical
or public health community which are essential for expanded market
acceptance of the products;
o our international distributors will successfully market our products;
or
o if our relationships with distributors terminate, we will be able to
establish relationships with other distributors on satisfactory terms,
if at all.
We have had FDA approval to market our urine HIV-1 screening and supplemental
tests in the United States and have been marketing these products since 1998. We
have achieved market penetration within the domestic life insurance industry.
Based upon our internal estimates, we believe that as of the end of 2002, out of
approximately 7.1 million HIV-1 tests given by the domestic life insurance
industry in 2002, approximately 0.6 million were administered with our urine
based tests. However, we have not achieved significant market penetration in
domestic public health agency or international markets. A disruption in our
distribution, sales or marketing network could reduce our sales revenues and
cause us to either cease operations or expend more resources on market
penetration.
Our Distribution and Sales Network for U.S. Hospitals, and Public and Private
Health Markets Has Thus Far Failed to Yield Significant Sales and Revenues.
Domestic health agencies are a fragmented marketplace with many small outlets
which makes achieving market acceptance difficult. Because we lack sufficient
working capital, we have experienced difficulty in penetrating independent
public and private health markets as they require direct selling efforts.
Initially, we entered into a distribution agreement with a distributor of
medical products to domestic healthcare markets, who encountered significant
obstacles due to the fragmented nature of the domestic health care market place.
We terminated the distribution agreement and have expanded our own direct sales
force in an effort to better penetrate the domestic healthcare markets and, in
conjunction with other business partners, have re-launched Sentinel. If our
efforts to market our products to domestic hospitals and public and private
health organizations fail to yield significant amounts of revenue, we may have
to cease operations.
We Depend Upon the Viability of Three Primary Products -- Our HIV-1 Urine-Based
Screening Test and Our Urine and Blood Based Supplemental Tests.
Our HIV-1 urine-based screening test and urine and blood-based supplemental
tests are our current products. Accordingly, we may have to cease operations if
our screening and supplemental tests fail to achieve market acceptance or
generate significant revenues.
We Have Experienced a Decrease in the Sale of Our Cambridge Biotech Serum
Western Blot Test
Our Cambridge Biotech HIV-1 Serum Western Blot kit is the first of four
supplemental blot tests for blood HIV-1 antibodies licensed by the FDA. The
Western Blot test has been in commercial distribution for more than nine years.
We sell the serum-based Western Blot test for HIV-1 as a supplemental test to
HIV-1 screening test products made by other manufacturers. In the fiscal year
ended December 31, 2002 and the three month period ended March 31, 2003, Western
Blot sales accounted for 43% and 37% of our revenues, respectively. Western blot
test sales to bioMerieux Inc. accounted for a total 17.5% of our sales revenues
for 2002. Subsequent to our restart of operations in May 2002, we have not sold
any of our Western Blot test to bioMerieux although we have signed several new
customers, including Adaltis, Inc., which is a new distributor, and other
smaller customers who previously purchased from bioMerieux and who now purchase
directly from us. Although there is limited competition in the supplemental
testing market and the cost and time attributed to the only known production
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
process makes it unlikely that additional companies will seek to qualify and
engage in the production of these supplemental tests, we have yet to regain our
market share. Until this occurs, the loss in sales to bioMerieux will have a
detrimental impact on our cash flow and may (1) delay or disrupt our plans to
expand the Company's business and (2) require us to raise additional equity
capital, thereby further increasing dilution, which could place further downward
pressure on the price of our common stock. A more complete discussion of our
revenues and customers can be found in the "Customer Trends" section of
Management's Discussion and Analysis.
We May Experience a Decrease In The Sales of Our HIV Viral Lysate Which
Previously Accounted For a Material Amount of Our Revenue.
Our HIV viral lysate is a component of the production of our Western Blot
Supplemental tests. There is a limited demand for our HIV viral lysate, which we
have in the past been able to sell to certain customers. The sale of viral
lysate accounted for approximately 6 % of our revenue in the fiscal year ended
December 31, 2002, primarily all in the first quarter. We sold no lysaste in the
first quarter of 2003. The revenue attributed to the sale of our HIV viral
lysate in ealry 2002 may have resulted from our principal lysate customer
stockpiling larger than normal quantities in light of our tenuous financial
condition in an effort to avoid a potential interruption of supply. As a result
of such stockpiling, we may continue to experience little or no sales of HIV
viral lysate. However, as we view our HIV viral lysate as a manufacturing
component, its sale is not considered to be a major contributor to our
anticipated future revenue, but rather a supplemental revenue source.
We May Not be Able to Successfully Develop and Market New Products That We Plan
to Introduce.
We plan to develop other urine-based diagnostic products including a rapid HIV
screening test and tests for other infectious diseases or health conditions.
There are numerous developmental and regulatory issues that may preclude the
introduction of these products into commercial sale. If we are unable to
demonstrate the feasibility of these products or meet regulatory requirements
with respect to their marketing, we may have to abandon them and alter our
business plan. Such modifications to our business plan will likely delay
achievement of milestones related to revenue increases and achievement of
profitability.
Our Products Depend Upon Rights to Technology That We Have Licensed From Third
Party Patent Holders and There Can be No Assurance That the Rights We Have Under
These Licensing Agreements are Sufficient or That We Can Adequately Protect
Those Rights.
We currently have the right to use patent and proprietary rights which are
material to the manufacture and sale of our HIV-1 urine-based screening test
under licensing agreements with New York University, Cambridge Biotech
Corporation, Repligen Corporation, and the Texas A&M University System. We also
have the right to use patent and proprietary rights material to the manufacture
and sale of our HIV-1 serum-based supplemental test under a licensing agreement
with National Institutes of Health. Although we have arranged payment plans with
certain of the licensors in an effort to resolve past due balances owed under
the license agreements, we have not been able to remain current on all of them.
As of March 31, 2003 we had accrued an aggregate of approximately $242,000 in
past due royalty obligations to our patent licensors. In the event our financial
condition inhibits our ability to pay royalty payments due under our license
agreements, our rights to use those licenses could be jeopardized. Specifically,
during the 2002 calendar year and in the first quarter of 2003, revenues subject
to the New York University, Cambridge Biotech, Repligen and Texas A&M license
agreements were $1.5 million and $0.4 million, respectively, and revenues
subject to the National Institutes of Health agreement were $2.0 million in
calendar 2002 and $0.4 million in the first quarter of 2003. The loss of any of
the foregoing licenses could have a materially adverse effect on our ability to
continue to produce our products since the license agreements provide necessary
proprietary processes or components for the manufacture of our products.
We Rely on Sole Source Suppliers that We Cannot Quickly Replace for Certain
Components Critical to the Manufacture of Our Products.
Among the critical items we purchase from qualified sole source suppliers are
various conjugates, fetal bovine serum, and HIV-positive and HIV-negative urine
samples. Any delay or interruption in the supply of these or other sole source
components could have a material adverse effect on us by significantly impairing
our ability to manufacture products in sufficient quantities, particularly as we
increase our manufacturing activities in support of commercial sales. In
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
addition, if our financial condition reduces our ability to pay for critical
components on a timely basis, our suppliers may delay or cease selling critical
components to us, which could also impair our ability to manufacture. We
typically do not have long-term supply agreements with these suppliers, instead
using purchase orders to arrange for our purchases of materials.
We Have Limited Experience in Manufacturing Our Products and Little Experience
in Manufacturing Our Products In Commercial Quantities.
Our lack of working capital and turnover among our manufacturing personnel as a
result of our wind-down and restart has resulted in material production
difficulties in the past including problems involving:
o scaling up production of new products;
o developing market acceptance for new product;
o production yields;
o quality control and assurance;
o raw material supply; and
o shortages of qualified personnel.
These difficulties that we have experienced, and may experience in the future
could affect our ability to meet increases in demand should our products gain
market acceptance and could impede the growth of our sales revenues.
The Success of Our Plans to Enter International Markets May Be Limited or
Disrupted Due to Risks Related to International Trade and Marketing and the
Capabilities of Our Distributors.
We anticipate that international distributor sales will generate a significant
portion of our revenues for the next several years. More specifically, in
October 2002, we completed a new agreement for the distribution of our products
in the Peoples' Republic of China that calls for minimum purchases of $3 million
over the two-year term of the agreement, and which also provides for a two-year
extension contingent upon the distributor's performance. This agreement can be
terminated by either party upon ninety days notice. Additionally, the Company
has entered into a Memorandum of Understanding with Safe Blood for Africa
Foundation. The memorandum serves as a non-binding understanding between the
parties to enter into a formal distribution agreement whereby Calypte would
appoint Safe Blood for Africa as its exclusive distributor (excluding the HIV-1
Serum Western Blot) for its in vitro diagnostic test kits for a period of ten
years to all public and private entities whose primary activity is related to
the collection and processing of human blood donations in sub-Saharan Africa. We
believe that our urine-based test can provide significant benefits in countries
that do not have the facilities or personnel to safely and effectively collect
and test blood or other bodily fluid samples. However, sales to international
customers in our fiscal year ended December 31, 2002 accounted for only 4% of
our revenue. A majority of the companies with which we compete in the sale of
HIV screening tests actively market their diagnostic products outside of the
U.S. In addition, as regulatory requirements for HIV screening tests outside the
United States are less demanding than those of the FDA, we compete with our EIA
products against a much wider range of competitors that may not be FDA approved.
Manufacturers from Japan, Canada, Europe, and Australia offer a number of HIV
screening tests in those markets including HIV-1/HIV-2 tests, rapid tests and
other non-EIA format tests, which are not approved for sale in the U.S. market.
There can be no assurance that our products will compete effectively against
these products in foreign markets, or that these competing products will not
achieve FDA approval. The following risks may limit or disrupt our international
sales:
o the imposition of government controls (regulatory approval);
o export license requirements;
o political instability;
o trade restrictions;
o changes in tariffs;
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
o difficulties in managing international operations (difficulty in
establishing a relationship with a foreign distributor with the
financial and logistical ability to maintain quality control of
product);
o fluctuations in foreign currency exchanges rates;
o the financial stability of our distributors;
o the financial capabilities of potential customers in lesser-developed
countries or, alternatively, our inability to obtain approvals which
would enable such countries access to outside financing, such as the
World Bank;
o the ability of our distributors to successfully sell into their
contractual market territory or to successfully cover their entire
territory;
o the possibility that a distributor may be unable to meet minimum
contractual commitments;
o establishing market awareness; and
o external conditions such as regional conflicts or health crises
resulting from SARS.
Some of our distributors have limited international marketing experience. There
can be no assurance that these distributors will be able to successfully market
our products in foreign markets. Any such failure will delay or disrupt our
plans to expand the Company's business.
We Face Intense Competition in the Medical Diagnostic Products Market and Rapid
Technological Advances by Competitors.
Competition in our diagnostic market is intense and we expect it to increase.
The marketplace where we sell our products is divided into two categories: (i)
screening, and (ii) supplemental testing. Within the United States, our
competitors for screening tests include a number of well-established
manufacturers of HIV tests using blood samples, plus at least one system for the
detection of HIV antibodies using oral fluid samples sold by Orasure
Technologies, Inc. In the supplemental testing category of the market, we offer
the only FDA approved urine-based test as well as a blood-based test. Bio-Rad
Laboratories, Inc. is the only other company that offers a supplemental blood
test. In addition to our urine and blood-based confirmation test, Orasure also
offers an oral mucosal transidate (saliva) based supplemental test that competes
with our test. Many of our competitors have significantly greater financial,
marketing and distribution resources than we do. Our competitors may succeed in
developing or marketing technologies and products that are more effective than
ours, including Orasure's and Med-Mira's recently-FDA approved rapid blood
tests. These developments could render our technologies or products obsolete or
noncompetitive or otherwise affect our ability to increase or maintain our
products' market share.
Our Ability to Market Our Product Depends Upon Obtaining and Maintaining FDA and
Foreign Regulatory Approvals.
Numerous governmental authorities in the United States and other countries
regulate our products. The FDA regulates our products under federal statutes and
regulations related to pre-clinical and clinical testing, manufacturing,
labeling, distribution, sale and promotion of medical devices in the United
States. In addition, our facilities are inspected periodically by the FDA with
regard to the sufficiency of our manufacturing records and production procedures
and we must continue to satisfy the FDA's concerns in order to avoid regulatory
action against us.
If we fail to comply with FDA regulations, or if the FDA believes that we are
not in compliance with such regulations, the FDA can:
o detain or seize our products;
o issue a recall of our products;
o prohibit marketing and sales of our products; and
o assess civil and criminal penalties against us, our officers or our
employees.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
We also plan to sell our products in certain foreign countries where they may be
subject to similar local regulatory requirements. The imposition of any of the
sanctions described above could have a material adverse effect on us by delaying
or reducing the growth in our sales revenue or causing us to expend more
resources to penetrate our target markets. 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
be likely to have a material adverse effect on Calypte by disrupting our
marketing and sales efforts.
Our Research and Development of HIV Urine Tests Involves the Controlled Use of
Hazardous Materials.
There can be no assurance that the Company's safety procedures for handling and
disposing of hazardous materials such as azide will comply with applicable
regulations. For example, azide, when present in high concentrations and not
diluted with water, can have an explosive reaction. Azide is a chemical used as
a preservative in our kits. In addition, we cannot eliminate the risk of
accidental contamination or injury from these materials. We may be held liable
for damages from such an accident and that liability could have a material
adverse effect on the Company.
We May Not Be Able to Retain Our Key Executives and Research and Development
Personnel.
As a small company, our success depends on the services of key employees in
executive and research and development positions. The loss of the services of
one or more of such employees could have a material adverse effect on us.
As a Small Manufacturer of Medical Diagnostic Products, We Are Exposed to
Product Liability and Recall Risks For Which Insurance Coverage is Expensive,
Limited and Potentially Inadequate.
We manufacture medical diagnostic products, which subjects us to risks of
product liability claims or product recalls, particularly in the event of false
positive or false negative reports. A product recall or a successful product
liability claim or claims that exceed our insurance coverage could have a
material adverse effect on us. We maintain a $10,000,000 claims made policy of
product liability insurance. However, product liability insurance is expensive.
In the future we may not be able to obtain coverage on acceptable terms, if at
all. Moreover, our insurance coverage may not adequately protect us from
liability that we incur in connection with clinical trials or sales of our
products.
Our Charter Documents May Inhibit a Takeover.
Certain provisions of our Certificate of Incorporation and Bylaws could:
o discourage potential acquisition proposals (i.e. shareholder rights
plan also known as a "poison pill");
o delay or prevent a change in control of Calypte;
o diminish stockholders' opportunities to participate in tender offers
for our common stock, including tender offers at prices above the
then-current market price;
o inhibit increases in the market price of our common stock that could
result from takeover attempts; or
o grant to the Board of Directors the discretionary right to designate
specific rights and preferences of preferred stock greater than those
of our common stock.
We Have Adopted a Stockholder Rights Plan That Has Certain Anti-takeover
Effects.
On December 15, 1998, the Board of Directors of Calypte declared a dividend
distribution of one preferred share purchase right ("Right") for each
outstanding share of common stock of the Company. The dividend was payable to
the stockholders of record on January 5, 1999 with respect to each share of
common stock issued thereafter until a subsequent "distribution date" defined in
a Rights Agreement and, in certain circumstances, with respect to shares of
common stock issued after the Distribution Date.
The Rights have certain anti-takeover effects. The Rights will cause substantial
dilution to a person or group that attempts to acquire the Company without
conditioning the offer on the Rights being redeemed or a substantial number of
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
Rights being acquired. However, the Rights should not interfere with any tender
offer, or merger, which is approved by the Company because the Rights do not
become exercisable in the event of an offer or other acquisition exempted by
Calypte's Board of Directors.
Our Board of Directors has Certain Discretionary Rights With Respect to Our
Preferred Shares That May Adversely Effect the Rights of our Common
Stockholders.
Our Board may, without shareholder approval, designate and issue our preferred
stock in one or more series. Additionally, our Board may designate the rights
and preferences of each series of preferred stock it designates which may be
greater than the rights of our common stock. Potential effects on our common
stock may include among other things:
o restricting dividends;
o dilution of voting power;
o impairment of liquidation rights; and
o delay or preventing a change in control of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to changes in the price of our common stock, as it relates to
the conversion price of the 12% convertible debentures and the exercise price of
the related exercisable Class A and mandatorily exercisable Class B warrants
issued to Bristol Investment Fund in February 2002 as disclosed in Note 5 to the
accompanying financial statements and in the "Financing Activities" subheading
of Liquidity and Capital Resources. We also face exposure to changes in the
price of our common stock as it relates to the conversion price of the aggregate
of $3,125,000 original face value of 8% convertible notes issued during the
second and third quarters of 2002; the $150,000 original face value 10%
convertible note issued during the second quarter of 2002; the aggregate of
$1,950,000 10% convertible debentures issued during the first quarter 2003; and
the $550,000 face value of 12% convertible debenture issued during the third
quarter of 2002, all disclosed in Note 5 to the accompanying financial
statements and in "Financing Activities". Additionally, we face exposure to
changes in the price of our common stock as it relates to the conversion price
of the $300,000 12% convertible debenture issued in April 2003. Further, our
stockholders face additional dilution by our issuance of additional shares of
common stock as a result of penalties incurred in our failure to file and obtain
an effective registration for certain shares of our common stock issued or to be
issued pursuant to our Recent Financings. The liability for these penalties is
being accrued as incurred.
The 12% debentures issued to Bristol are convertible at a price (the Conversion
Price) equal to the lesser of (i) 60% of the average of the lowest closing bid
prices during the 22 trading days immediately prior to the conversion date,
subject to anti-dilution adjustment, and (ii) $0.05. The Class A warrant for up
to 1,700,000 shares of common stock is exercisable at 70% of the average of the
three lowest trading prices for the 20 days immediately preceding conversion,
subject to anti-dilution adjustment. The Class B warrant for up to 12,000,000
shares of common stock is exercisable at a price equal to the lesser of (i) the
average of the lowest three trading prices during the 20 days immediately prior
to the exercise price discounted by 25%; subject to anti-dilution adjustment,
and $0.215 per share.
In addition, until such time that a registration statement covering the shares
related to the Class A and B warrants described above is declared effective, the
fair value of these warrants will be marked to market through earnings. We have
not yet filed a registration statement covering the common stock underlying the
warrant shares as they are not at market risk. We have been made aware that the
shares underlying the Class A and B warrants, which are registerable securities
per our agreement with Bristol Investment Fund, Ltd., may not be able to be
registered until such time as the underlying common shares are subject to market
risk.
The 8% notes issued between May 2002 and August 2002 are convertible into shares
of the Company's common stock at the lower of $0.10 or 70% of the average of the
three lowest trades during the 30-day period preceding conversion.
The 10% convertible note issued in May 2002 and subsequently extended through
May 2004 is convertible at 50% of the average of the 3 lowest closing bid prices
for the 22 trading days preceding conversion.
The two 10% convertible debentures with aggregate face value of 1,450,000 issued
during January 2003 are convertible into shares of the Company's common stock at
80% of the average of the 3 lowest trading prices for the 20 trading days
preceding conversion, but not more than $0.10. The two 10% convertible
debentures with aggregate face value of $500,000 issued during March 2003 are
convertible into shares of the Company's common stock at 65% of the average of
the 3 lowest trading prices for the 20 trading days preceding conversion, but
not more than $0.07.
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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
The $550,000 12% convertible debenture issued in September 2002 is convertible
into shares of the Company's common stock at 85% of the average of the three
lowest trades for the 20 days preceding conversion. The $300,000 12% convertible
debenture issued in April 2003 is convertible into shares of the Company's
common stock at 70% of the average of the three lowest trades for the 20 days
preceding conversion, but not more than $0.04.
These financings have requirements for registration and many impose liquidated
damages for delays beyond 30 days from the transaction date allowed for
registration. On February 14, 2003 the registration statement for $525,000 of
the Bristol Debentures became effective, but we have not yet filed a
registration statement for any of the other financings. The 8% convertible note
transactions generally require liquidated damages at the rate of 2% of the
original principal balance for each month's delay. Through February 14, 2003,
the Company had incurred approximately $122,000 in liquidated damages resulting
from the delay in registration of the Bristol Debentures and as of April 30,
2003, approximately $637,000 in liquidated damages attributable to the delay in
the registration of the remaining financings, all of which have been accrued
during the periods in which they were incurred. In most instances, the investor
has the option of receiving liquidated damages in either cash or the Company's
common stock at same discount-to-market conversion price attributable to the
debenture or note. As of April 30, 2003, all of the registration penalty
provisions have been triggered, except for those in the various Mercator
agreements. The Company has issued approximately 8.0 million shares of its
common stock in payment of liquidated damages. Based on current prices, the
payment of liquidated damages in stock as of April 30, 2003 would require the
Company to issue approximately 48 million shares of its common stock. Liquidated
damages attributable to registration delays on the convertible notes and
debentures continue to accrue at a rate of approximately $63,000 per month (or
approximately 5.6 million shares at current prices).
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedure.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures within 90 days of the filing date of this quarterly report, and based
on their evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that these disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in the Company's periodic SEC filings. There were no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
Disclosure controls and procedures are the controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized, and reported, within the time periods specified in the Securities
and Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
(b) Changes in internal controls.
Not applicable.
-49-
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
On January 27, 2003, an action was filed in San Francisco County Superior Court
against the Company by Heller Ehrman White & McAuliffe, LLP ("Heller"), the
Company's former attorneys. The claim is for unpaid legal fees and expenses in
the sum of $546,132 incurred for services rendered primarily between January
2001 and April 2002, plus $93,312 in interest, calculated through March 19, 2003
at 10% per annum on the claimed outstanding balance. The Company disputes the
claim. The Company has accrued for the disputed fees and expenses, in the
respective periods incurred, excluding interest.
On April 30, 2003, the Company and Heller reached a settlement agreement whereby
the Company has agreed to pay a total of $463,000 to settle this claim, after
which the suit will be dismissed.
Under the terms of the settlement, the Company must pay Heller $50,000 by June
15, 2003. Beginning with the month of May 2003 and thereafter, the Company must
also make monthly payments of $20,000 plus a percentage of the Company's net
financings (the "Subsequent Payments"). The Subsequent Payments are due on the
16th of the following month, with the first payment due on June 16, 2003. There
are certain exceptions that may delay the Subsequent Payments for up to 3
months, but should the Company default on the terms of the settlement agreement,
Heller may file a stipulated judgment for the unpaid remainder of the $463,000
settlement balance. A stipulated judgment may permit Heller to obtain custody of
some of the Company's California property, which would, in turn, materially
impair the Company's business. As a part of the settlement, the Company waived
all of its defenses to Heller's claims, as well as its counterclaims, should it
default on this payment plan.
On January 24, 2003, the Company was informed that a former vendor of the
Company, Validation Systems, Inc. ("Validation"), had commenced an action in
Santa Clara County Superior Court on an open book account in the amount of
$79,614, incurred between April 1999 and July 2002 and which the Company
accrued, concurrently, plus $20,156 in interest, at the rate of 10% per annum
until payment, wherein it has claimed that it rendered services related to the
validation of biomedical equipment and processes at the Company's facilities.
The Company has contested the claim as the alleged services claimed by
Validation were not performed in a timely fashion and were unable to be used by
the Company. The Company believes that it has meritorious defenses to the
action.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three years ended March 31, 2003, the Company completed private
placements of shares of its Common Stock in April 2000, November 2001 and August
2002; issued $1.1 million face value of convertible debentures in January 2001;
issued $425,000 face value of 12% convertible debentures in February 2002 and an
additional $100,000 face value to the same party and under the same terms in May
2002; and in May 2002 also issued $2.225 million face value of 8% convertible
notes and a $0.150 million 10% convertible promissory note. In June 2002, the
Company issued a $0.1 million face value 8% convertible debenture. In July, the
Company issued an additional $0.1 million face value 8% convertible debenture
and $0.650 million of additional 8% convertible notes. In August 2002, the
Company issued an additional $0.250 million face value 8% convertible note. In
September 2002, the Company issued a $550,000 face value 12% convertible
debenture. In January 2003, the Company issued $1.450 million face value 10%
convertible debenture. In March 2003, the Company issued an aggregate of $0.5
million face value in two 10% convertible debentures, and, finally, in April
2003, it issued a $0.300 million face value 12% convertible debenture. Earlier,
in January 2001, the Company entered into a stock sale and purchase agreement in
a form generally referred to as an equity line of credit or equity draw down
facility. Upon the termination of that facility, the Company entered into a
second equity line facility in August 2001. These transactions are discussed in
greater detail in "Financing Activities" in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
-50-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
The shares sold in each of the private placements and pursuant to the equity
line of credit facility were exempt from registration with the Securities and
Exchange Commission pursuant to Section 4(2) or Rule 506 of Regulation D of the
Securities Act of 1933 as amended ("Securities Act"). Shares were sold only to
accredited investors as defined in Rule 501 of the Securities Act and, with the
exception of shares in the private placements in November 2001 and August 2002,
were registered for resale by such investors on Forms S-3 filed on March 30,
1999, and March 13, 2000 for the private placements and on Form S-2 filed on
January 25, 2001 and subsequently amended on February 9, 2001 and March 5, 2001
for the first equity line of credit. Shares sold pursuant to the second equity
line were registered for resale by the investor on a Form S-2 filed on October
26, 2001. Shares issued in the November 2001 private placement were also sold to
accredited investors but the transfer of the securities did not include
registration rights; pursuant to Rule 144 of the Securities Act the transfer of
these securities will be restricted for twelve months from the date of purchase.
Shares sold in the August 2002 private placement were sold to accredited
investors pursuant to Regulation S. The debenture holder in the $1.1 million
transaction was also an accredited investor as defined by Rule 501 of the
Securities Act and the Company registered for resale shares that were converted
pursuant to the debenture agreements on Form S-3 filed on April 13, 2001. The
proceeds from each private placement, from each of the debentures, and from the
equity lines of credit have been used to finance operations.
In February 2002, the Company entered into an agreement to issue up to $850,000
face value of 12% secured convertible debentures. The Company issued one
debenture in the face amount of $425,000 concurrent with signing the agreement
and a second debenture in the face amount of $100,000 in May 2002. The Company
also issued warrants to purchase up to 13,785,000 shares of its common stock in
conjunction with the convertible debenture agreement. During the second quarter
of 2002, the investor converted principal of approximately $60,000 plus accrued
interest attributable to the February debenture into 4,462,425 shares of
restricted common stock. During the first quarter of 2003, the investor
converted the remaining $465,000 of outstanding principal plus accrued interest
and liquidated damages resulting from delay in registration into 26,120,822
shares of registered common stock. No warrants have been exercised as of April
30, 2003. The Company's registration statement on Form S-2/A (No. 6) registering
30,300,000 shares of common stock for resale by the investor pursuant to
conversion of the $525,000 face value of debentures issued became effective on
February 14, 2003. The proceeds from the debentures were used to finance
operations.
Between May and August 2002, in conjunction with the financing that enabled the
restart of its operations, the Company issued an aggregate of $3.125 million
face value of 8% convertible notes, a $0.150 million face value 10% convertible
promissory note and two $0.1 million face value 8% convertible debentures to
several accredited offshore investors pursuant to subscription agreements under
Regulation S. In September 2002, the Company issued an additional $0.550 million
12% debenture pursuant to Regulation S, that is intended to be the first tranche
of a $2.0 million commitment between the investor and the Company. The
agreements all provide cost-free registration rights to the holders of the notes
and debentures for the registration of the underlying conversion shares of the
Company's common stock. The Company has not yet filed a registration statement
applicable to these transactions. The proceeds from the notes and debentures
were used to finance operations.
During the first quarter 2003, the Company issued an aggregate of $1,950,000
face value 10% convertible debentures to accredited investors under Regulation
S. The agreements all provide cost-free registration rights to the holders of
the debentures for the registration of the underlying conversion shares of the
Company's common stock. The Company has not yet filed a registration statement
applicable to these transactions. The proceeds from the debentures were used to
finance operations.
In April 2003, the Company issued a $300,000 face value 12% convertible
debenture to an accredited investor under Regulation S. The agreement provides
cost-free registration rights to the holder of the debentures for the
registration of the underlying conversion shares of the Company's common stock.
The Company has not yet filed a registration statement applicable to this
transaction. The proceeds from the debentures were used to finance operations.
-51-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Calypte's stockholders voted on a single proposal, to amend the Company's
Amended and Restated Certificate of Incorporation to increase the number of
authorized shares of the Company's common stock from 200 million shares to 800
million shares, at a Special Meeting of Stockholders held on February 14, 2003.
The following votes were tabulated:
For: 89,376,270
Against: 4,256,984
Abstain: 6,691,204
ITEM 5. OTHER INFORMATION - SUBSEQUENT EVENTS
Conversion of remaining Bristol 12% Convertible Debenture
On April 2, 2003, Bristol Investment Fund, Ltd. converted the remaining $100,000
principal, plus accrued interest, 12 % Convertible Debenture into 6,328,611
shares of the Company's common stock. Pursuant to the February 28, 2003 Letter
Agreement, the 70% Conversion Price used to determine the number of shares
issued pursuant to Bristol's April 2, 2003 conversion notice resulted in the
issuance of approximately 590,000 shares more than would have resulted from the
use of the 60% Conversion Price.
Extension of Maturity of 10% Convertible Note
On April 2, 2003, when the market price of Calypte's common stock was $0.033,
the Company and BNC Bach agreed to extend the maturity date of the 10%
Convertible Note to May 5, 2003. On April 30, 2003, when the market price of
Calypte's stock was $0.0249, the Company and BNC Bach amended the conversion
price to eliminate a conversion price ceiling of $0.05 per share and to increase
the discount applicable to the conversion price from 40% to 50%. In return for
this modification of the conversion price, BNC Bach agreed to extend the
maturity of the note until May 10, 2004.
Extension of Waiver of Non-Registration Penalties
On April 11, 2003, when the market price of Calypte's common stock was $0.0295,
the Company received an extension until May 5, 2003 in which to register the
shares of common stock underlying the aggregate of $500,000 face value of 10%
Convertible Debentures issued to Focus Fund and Momentum Fund III. On May 5,
2003, the Company received a further extension until June 16, 2003 to file and
until September 2, 2003 to achieve effectiveness of a registration statement
including the shares underlying all of the Mercator, Focus Fund and Momentum
Fund III convertible debentures and warrant.
Issuance of shares for liquidated damages
On April 1, 2003, when the price of the Company's common stock was $0.0283, the
Company issued 3,000,000 shares of its common stock in settlement of accumulated
liquidated damages through March 27, 2003 pursuant to the terms of the August
2002 private placement agreement.
Additional Financing
On April 29, 2003, when the market price for the Company's common stock was
$0.0275, the Company issued a $300,000 12% convertible debenture to Mercator
Momentum Fund and received net proceeds of $245,000, net of fees and expenses.
The debenture is convertible into the Company's common stock at 70% of the
average of the three lowest trades for the 20 days preceding conversion, but not
more than $0.04. Under the terms of the debenture agreement, the Company agreed
to file a registration statement for the shares of common stock underlying the
debenture within 30 days of the closing date and use its reasonable best
commercial efforts to cause the registration statement to be declared effective
within 120 days of the closing date.
Issuance of Additional Shares for Consulting Services
During April 2003, the Company entered into new contracts and extended certain
other contracts with existing consultants to perform various services. The
Company issued warrants to purchase an aggregate of 9,000,000 shares of its
common stock as compensation for these services. As of April 30, 2003, the
consultants had exercised warrants to purchase 4,000,000 shares of the Company's
common stock and the Company had received proceeds of $100,000. The warrants
were non-forfeitable and fully-vested at the date of issuance. Pursuant to the
-52-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
requirements of FASB Statement No. 123 and EITFs 96-18 and 00-18 related to
accounting for stock-based compensation, the Company recorded $79,000 of
consulting expense attributable to these warrants
In addition to the warrants described above, during April 2003, the Company also
issued stock grants for approximately 27 million shares of its common stock to
certain consultants under various agreements and recorded non-cash selling,
general and administrative expense of approximately $750,000 based on the
intrinsic value of the stock on the date granted. Also during April 2003, the
Company issued approximately 5 million shares of its common stock to certain
service providers agreeing to settle outstanding balances in stock.
Legal Proceedings
On April 30, 2003, the Company and its former counsel, Heller Ehrman White &
McAuliffe,LLP ("Heller") reached a settlement agreement whereby the Company has
agreed to pay a total of $463,000 to settle Heller's claim for unpaid legal fees
and expenses in the amount of $546,132 plus $93,312 in interest, after which the
suit will be dismissed.
Under the terms of the settlement, the Company must pay Heller $50,000 by June
15, 2003. Beginning with the month of May 2003 and thereafter, the Company must
also make monthly payments of $20,000 plus a percentage of the Company's net
financings (the "Subsequent Payments"). The Subsequent Payments are due on the
16th of the following month, with the first payment due on June 16, 2003. There
are certain exceptions that may delay the Subsequent Payments for up to 3
months, but should the Company default on the terms of the settlement agreement,
Heller may file a stipulated judgment for the unpaid remainder of the $463,000
settlement balance. A stipulated judgment may permit Heller to obtain custody
of some of the Company's California property, which would, in turn, materially
impair the Company's business. As a part of the settlement, the Company waived
all of its defenses to Heller's claims, as well as its counterclaims, should it
default on this payment plan.
Other Recent Developments - Non-Financing Related
On April 29, 2003, the Company and the Magic Johnson Foundation, Inc. announced
that Earvin "Magic" Johnson has agreed to join Calypte's Board of Directors, and
that he will also play an active role in promoting global awareness of Calypte's
FDA-approved HIV-1 antibody tests for use with urine samples. At a Board Meeting
on May 9, 2003, the Company's Board of Directors appointed Mr. Johnson as a
member of the Board effective at its next regular Board meeting scheduled for
July 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
Form 8-K/A regarding Other Material Events, filed January 21, 2003.
Announcement of amendment and waiver of registration default provisions
applicable to certain 12% convertible debentures and rescission of
partial conversion of one of the subject debentures, including the
amendment agreement filed as an exhibit.
-53-
SIGNATURES
-----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALYPTE BIOMEDICAL CORPORATION
--------------------------------
(Registrant)
Date: May 16, 2003 By: /S/ RICHARD D. BROUNSTEIN
------------------------------
Richard D. Brounstein
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
-54-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CERTIFICATION PURSUANT TO
THE SARBANES-OXLEY ACT OF 2002
I, Anthony J. Cataldo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calypte Biomedical
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 16, 2003
/S/ ANTHONY J. CATALDO
- -----------------------
Anthony J. Cataldo
Executive Chairman
-55-
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CERTIFICATION PURSUANT TO
THE SARBANES-OXLEY ACT OF 2002
I, Nancy E. Katz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calypte Biomedical
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 16, 2003
/S/ NANCY E. KATZ
- ------------------
Nancy E. Katz
Chief Executive Officer
-56-
CERTIFICATION PURSUANT TO
THE SARBANES-OXLEY ACT OF 2002
I, Richard D. Brounstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calypte Biomedical
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 16, 2003
/S/ RICHARD D. BROUNSTEIN
- -------------------------
Richard D. Brounstein
Executive Vice President and Chief Financial Officer
-57-