AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON _____________
REGISTRATION NO. 333-_________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CALYPTE BIOMEDICAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 3826 06-1226727
(STATE OR OTHER JURISDICTION OF PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
1265 HARBOR BAY PARKWAY
ALAMEDA, CALIFORNIA 94502
(510) 749-5100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
J. RICHARD GEORGE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CALYPTE BIOMEDICAL CORPORATION
1265 HARBOR BAY PARKWAY
ALAMEDA, CALIFORNIA 94502
(510) 749-5100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JOSEPH A. BARATTA, ESQ.
BARATTA & GOLDSTEIN
597 FIFTH AVENUE
NEW YORK, NEW YORK 10017
(212) 750-9700 (PHONE)
(212) 750-8297 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. |X|.
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. |X|.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, as amended, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of this Prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT TO BE FFERING PRICE AGGREGATE AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED(1) OPER SHARE(2) OFFERING PRICE REGISTRATION FEE
===============================================================================================================
Common Stock, $0.03 par value per
share 83,056,050 $ 0.54 $ 44,850,267 $ 5,683
(1) Shares of common stock which may be offered pursuant to this registration
statement, which shares have been issued or may be issuable upon
conversion of convertible notes and debentures or have been issued upon
private placement transactions. The number of shares of common stock
registered hereunder includes a good faith estimate by the Company of the
number of shares of common stock issuable upon conversion of the
debentures. In addition to the shares set forth in the table, the amount
to be registered includes an indeterminate number of shares, as such
number may be adjusted as a result of stock splits, stock dividends and
similar transactions in accordance with Rule 416 under the Securities Act
of 1933, as amended.
(2) Estimated in accordance with Rule 457(c) for the purpose of computing the
amount of the registration fee based on the average of the closing bid and
ask prices of the Company's common stock on the Over-the-Counter Bulletin
Board on June 10, 2004.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE __, 2004
PROSPECTUS
CALYPTE BIOMEDICAL CORPORATION
83,056,050 Shares of Common Stock
o This Prospectus relates to the resale of our common stock by the selling
security holders, all of whom were issued securities pursuant to an
exemption under Regulation S, except for the selling security holders in
the May 2004 PIPE who were issued securities pursuant to an exemption
under Regulation D, of up to:
o 3,088,554 shares of our common stock that have previously been
issued to certain selling security holders as a result of their
conversions of $3,232,000 aggregate original principal amount of our
8% secured convertible notes, plus interest and liquidated damages;
o 4,725,414 shares of our common stock, including 563,538 shares that
may be issued upon the conversion of the remaining $91,597 aggregate
principal amount of our 10% convertible debentures, including
accrued interest, extension fees and other amounts, and 4,161,876
shares that have been previously issued to a selling security holder
upon the conversion of $1,100,072 principal amount of our 10%
convertible debentures, plus accrued interest and liquidated
damages;
o 10,351,061 shares of our common stock, including 682,646 shares that
may be issued upon the conversion of the remaining $66,113 aggregate
principal amount of our 12% convertible debentures including accrued
interest and other amounts, 100,000 shares of common stock
underlying warrants issued as part of the consideration for a 12%
convertible debenture transaction, and 9,568,415 shares previously
issued to certain selling security holders upon their conversions of
$1,933,887 aggregate principal amount of our 12% convertible
debentures, plus accrued interest and liquidated damages;
o 28,333,333 shares of our common stock that have previously been
issued to a selling security holder in connection with a $2,500,000
PIPE transaction at $0.30 per share and a $10,000,000 PIPE
transaction at $0.50 per share;
o 3,265,188 shares of our common stock, including 2,569,727 shares
that have previously been issued to certain selling security holders
in connection with agreements in which we have obtained goods and
services in return for the issuance of shares of our common stock,
and 695,461 shares underlying warrants or other agreements between
us and certain selling security holders in connection with which we
have obtained goods and services;
o 1,275,000 shares of our common stock underlying warrants issued in
connection with a $10,000,000 5% Promissory Note Commitment
Agreement and subsequent amendments thereof; and
o 32,017,500 shares of our common stock, including 23,250,000 shares
that have been previously issued to selling security holders in
connection with a $9,300,000 May 2004 PIPE transaction at $0.40 per
share and an additional 8,767,500 shares underlying warrants to
purchase our common stock at $0.50 per share issued in conjunction
therewith.
o We will not receive any proceeds from the sale of these shares. We will
receive proceeds from the exercise of warrants issued to certain of the
selling stockholders. Any proceeds received will be used for general
corporate purposes.
o The subscribers (as detailed below) may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933, as amended, in
connection with their sales.
o Our common stock is traded on the Over-the-Counter Bulletin Board under
the symbol "CYPT." The last reported sales price for our common stock on
June 10, 2004 was $0.545 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
SEE " RISK FACTORS" BEGINNING ON PAGE 5.
We may amend or supplement this Prospectus from time to time by filing
amendments or supplements as required. You should read the entire Prospectus and
any amendments or supplements carefully before you make your investment
decision.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is June __, 2004.
TABLE OF CONTENTS
PAGE
PART I. INFORMATION REQUIRED IN PROSPECTUS
Where You Can Find More Information 1
The Company 2
The Offering, including Use of Proceeds and Determination of Offering Price 4
Risk Factors 5
Summary of Financings May 2002 to June 10, 2004 18
Dilution 26
Selling Security Holders 27
Plan of Distribution 32
Legal Proceedings 33
Directors, Executive Officers, Promoters and Control Persons 34
Security Ownership of Certain Beneficial Owners and Management 39
Description of the Securities 40
Disclosure of Commission Position on Indemnification for Securities Act Liabilities 52
Description of Business 53
Management's Discussion and Analysis 71
Description of Property 89
Certain Relationships and Related Transactions 89
Market for Common Stock and Related Stockholder Matters 90
Executive Compensation 93
Financial Statements 101
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 101
Interest of Named Experts and Counsel 103
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnificationof Directors and Officers II-1
Item 25. Other Expenses of Issuance and Distribution II-1
Item 26. Recent Sales of Unregistered Securities II-1
Item 27. Exhibits II-12
Item 28. Undertakings II-18
SIGNATURES II-20
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. Our SEC filings are also
available to the public at the SEC's web site at HTTP://WWW.SEC.GOV and at our
website at http://www.calypte.com.
A copy of our Annual Report on Form 10-KSB for the year ended December 31, 2003
is included with this Prospectus. You may request another copy of the 10-KSB, at
no cost, by writing or telephoning us at the following address:
Calypte Biomedical Corporation
1265 Harbor Bay Parkway
Alameda, California 94502
Attention: President
Telephone: (510) 749-5100.
You should rely only on information provided in this Prospectus. We have not
authorized anyone else to provide you with different information.
From time to time, information we provide or statements made by our directors,
officers or employees may constitute "forward-looking" statements and are
subject to numerous risks and uncertainties. Any statements made in this
Prospectus, 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 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 developments with respect to patents or proprietary rights;
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 changes in health care policy in the United States or abroad;
o our ability to obtain additional financing as necessary to fund both our
long-and short-term business plans;
o fluctuations in market demand for and supply of our products;
o public concern as to the safety of products that we or others develop and
public concern regarding HIV and AIDS;
o availability of reimbursement for use of our products from private health
insurers, governmental health administration authorities and other
third-party payors; and
o price and volume fluctuations in the stock market at large which do not
relate to our operating performance.
For a further discussion of these and other significant factors to consider in
connection with forward-looking statements, see the discussion in this
Prospectus under the heading "RISK FACTORS".
1
THE COMPANY
Calypte Biomedical Corporation ("Calypte" or the "Company") develops,
manufactures and markets in vitro diagnostic tests primarily for the detection
of antibodies to the Human Immunodeficiency Virus ("HIV") and other sexually
transmitted and infectious diseases. We have historically focused our business
on urine-based screening and supplemental tests for use in laboratories. By
integrating several proprietary technologies, we developed novel urine HIV
antibody tests, the Calypte urine-based enzyme immunoassay ("EIA") HIV Type 1
("HIV-1") screening test and the Cambridge Biotech urine-based HIV-1 western
blot ("Urine Western Blot") supplemental test. We also manufacture and market
the Cambridge Biotech serum-based western blot ("Serum Western Blot")
supplemental test for detecting HIV-1 antibodies in serum. Our revenues are
currently generated from sales of these three products, which we refer to
collectively as our "ELISA tests." The ELISA tests are manufactured in formats
that make them most suitable for high-volume laboratory settings.
We are the only company with Food and Drug Administration ("FDA") approval for
the marketing and sale of urine-based HIV-1 antibody tests. Our EIA HIV-1
screening test received FDA approval for use in laboratories in August 1996. Our
Urine Western Blot supplemental test received FDA approval in May 1998. Our
urine-based ELISA tests together, with their screening and confirmatory testing
components, are the only complete FDA approved urine-based HIV testing method.
Our business is also involved in developing new test products for the rapid
detection of HIV-1 and HIV Type 2, a second type of HIV ("HIV-2"), and other
infectious diseases. In November 2003, we filed an Investigational Device
Exemption ("IDE") with the FDA announcing our intent to develop a rapid
serum-based HIV screening test. Rapid tests provide test results in less than 20
minutes and are particularly suitable for point-of-care testing, especially in
lesser developed countries which lack the medical infrastructure to support
laboratory based testing. We are currently developing serum- urine- and oral
fluid-based HIV-1 and HIV-2 rapid tests and anticipate that our primary focus
for the current and longer-term future will be the development, manufacture and
sale of our rapid test products, both internationally and domestically.
We were incorporated in California in 1989 and reincorporated in Delaware in
1996 at the time of our initial public offering. In December 1998, we acquired
certain assets from Cambridge Biotech Corporation, an entity now owned by
bioMerieux, Inc. The acquisition included the Urine Western Blot and Serum
Western Blot supplemental tests and leasehold rights to the Rockville, Maryland
manufacturing facility.
We are headquartered at 1265 Harbor Bay Parkway, Alameda, California 94502,
telephone number (510) 749-5100 and have manufacturing facilities there and in
Rockville, Maryland. Historically, the Alameda facility has manufactured our EIA
screening test and the Rockville facility has manufactured our Urine and Serum
Western Blot tests. However, we are currently in the process of consolidating
our domestic manufacturing operations by moving all manufacturing to our
Rockville facility. We expect the closure of the Alameda facility to be
completed by June 30, 2004, when the current lease expires. Effective July 1,
2004, our corporate headquarters will relocate to 5000 Hopyard Road, Suite 480,
Pleasanton, California 94588. As of June 4, 2004, we had approximately 70
full-time and temporary employees. We expect to have fewer than 60 employees
following the closure of our Alameda facility.
To successfully implement our business plans, we must obtain sustainable cash
flow and profitability. Our future liquidity and capital requirements will
depend on numerous factors, including successful completion of the development
of our new rapid tests, acquisition and protection of intellectual property
rights, costs of developing our new products, ability to transfer technology,
set up manufacturing and obtain regulatory approvals of our new rapid tests,
market acceptance of all our products, competing products in our current and
anticipated markets, actions by the FDA and other international regulatory
bodies, and the ability to raise additional capital in a timely manner.
Since December 31, 2003, we have entered into new financing arrangements that
management believes will be adequate to sustain our operations at expected
levels through 2004. In May 2004, we completed a private placement of our common
stock with 7 accredited investors and received net proceeds of approximately
$8.8 million. Additionally, in May 2004 Marr Technologies BV, our largest
stockholder and a participant in the private placement, agreed to extend
$5,000,000 of our borrowing availability under the terms of the Marr Credit
Facility through December 31, 2004. If, however, sufficient funds are not
available to fund our operations in 2005 or beyond, we may need to arrange
additional financing or make other arrangements. There can be no assurance that
additional financing, if and as necessary, would be available or, if it is
available, that it would be on acceptable terms. The terms of an additional
financing could involve a change of control and/or require stockholder approval
or could potentially trigger anti-dilution protection clauses that are contained
in existing financing agreements. We would or might be required to consider
strategic opportunities, such as a merger, consolidation, sale or other
comparable transactions, to sustain our operations. We do not currently have any
agreements in place with respect to any such new strategic opportunity, and
there can be no assurance that any such opportunities will be available to us on
acceptable terms, or at all. If additional financing is not available when and
if required or is not available on acceptable terms, or if we are unable to
arrange a suitable strategic opportunity, we will be in significant financial
jeopardy and may be unable to continue our operations at current levels, or at
all.
2
USE OF FORM SB-2 REGISTRATION STATEMENT
We were contacted by the San Francisco District Office of the SEC on October 28,
2003 and advised of an informal inquiry being conducted by the enforcement staff
of the SEC regarding the Company. The staff has requested, among other things,
documents related to certain press releases we issued. We have voluntarily
provided the information sought by the SEC and are cooperating with the SEC in
connection with its informal inquiry. Independently, the Audit Committee of our
Board of Directors has investigated the matter and retained outside counsel to
assist in its investigation by reviewing the press releases and related
information that were the subject matter of the SEC's informal inquiry letter.
The Audit Committee has completed its investigation and reported the results of
its investigation and associated recommendations to the Board of Directors.
Counsel for the Audit Committee advised the Audit Committee and the Board of
Directors that the results of their investigation, interviews and review of
documents provided in response to the SEC's informal inquiry letter indicated no
evidence of management malfeasance with respect to its inquiry. While the SEC
has advised us that the inquiry should not be construed as an indication by the
SEC or its staff that any violation of law has occurred, we informed our former
independent auditors, KPMG LLP ("KPMG") of the inquiry, and they informed us
that they could not complete their quarterly review of our interim financial
statements contained in our Quarterly Report on Form 10-QSB for the quarterly
period ended September 30, 2003 or audit our financial statements for our fiscal
year ended December 31, 2003 until such time as our Audit Committee had
completed its investigation related to the Commission's informal inquiry letter,
the same was reviewed by KPMG, and KPMG was satisfied that, in its opinion, an
adequate investigation was conducted and appropriate conclusions were reached
and actions taken.
The interim financial statements contained in a Form 10-QSB are required to be
reviewed under Statement of Auditing Standards No. 100 ("SAS 100") by an
independent public accountant pursuant to Item 310(b) of the Commission's
Regulation S-B. We filed our Form 10-QSB for the quarterly period ended
September 30, 2003 within the time permitted, on November 14, 2003, without KPMG
having completed its SAS 100 review. On December 23, 2003, the Company dismissed
KPMG as independent auditors for the Company, effective immediately. The
decision to dismiss KPMG was recommended by the Audit Committee of the Board of
Directors. As of the date of KPMG's dismissal, KPMG had advised us that, in
KPMG's opinion, the conditions necessary for KPMG to complete its review had not
yet been satisfied. At the time of KPMG's dismissal, the Audit Committee had
completed its investigation, had reported the results of its investigation and
associated recommendations to the Board of Directors, and the Board of Directors
had approved such recommendations. In addition, at such time, counsel for the
Audit Committee had advised us that it had commenced to provide information to
KPMG concerning the investigation conducted, the conclusions reached and the
actions taken by the Company.
On December 24, 2003, upon approval of the Audit Committee of the Board of
Directors, we engaged Odenberg Ullakko Muranishi & Co. LLP ("OUM") to audit the
consolidated financial statements of the Company for the two years ended
December 31, 2003 and 2002 and to review the interim financial statements of the
Company contained in its amended Quarterly Report on Form 10-QSB for the
quarterly period ended September 30, 2003. OUM completed its SAS 100 review
associated with the Form 10-QSB/A (No.1) for the quarterly period ended
September 30, 2003 that we filed on January 29, 2004.
Although we have filed an amended 10-QSB on which OUM has completed an SAS 100
review, the staff of the SEC has taken the position that our initial Form 10-QSB
was deficient because the required review was not completed on a timely basis.
That means that we are viewed as not being current in our filings under the
Securities Exchange Act of 1934. Accordingly, having been determined to be
deficient in our periodic filings, we are, therefore, ineligible to use Forms
S-2 or S-3 to register securities until all required reports under the
Securities Exchange Act of 1934 have been timely filed for the 12 months
following January 29, 2004. We are currently eligible to use either Form S-1 or
SB-2 to satisfy our obligations under the registration rights agreements we have
entered into with respect to various financing arrangements and we have elected
to use Form SB-2 to register the subject shares of our common stock for resale.
3
THE OFFERING
COMMON STOCK, $0.03 par value per share ("Common 163,721,512 shares
Stock"), outstanding as of June 10, 2004:
SHARES OFFERED BY SELLING SECURITY HOLDERS 83,056,050 shares, of which 70,971,905
shares have been issued to selling
security holders and are included in our
outstanding shares.
RISK FACTORS The shares involve a high degree of
risk. Investors should carefully
consider the information set forth under
"RISK FACTORS" beginning on page 5.
USE OF PROCEEDS We will not receive any proceeds from
the sale of common stock offered through
this prospectus by the selling
shareholders. To date, we have received
gross amounts of $3,125,000 from the 8%
convertible notes; $400,000 from the
2002 PIPE at $1.50 per share; $200,000
from the 8% convertible debentures;
$150,000 from the 10% convertible notes;
$1,950,000 from the 10% convertible
debentures; $2,600,000 from the 12%
convertible debentures; $2,500,000 from
the 2003 Marr PIPE at $0.30 per share,
$10,000,000 from the 2003 Marr PIPE at
$0.50 per share and $9,300,000 from the
May 2004 PIPE at $0.40 per share. All
proceeds from the aforementioned
financings have been or will be used for
general corporate purposes, including
the commercialization of our rapid tests
for HIV-1/2 diagnosis that are currently
under development. We are registering
the shares for sale to provide the
selling shareholders with freely
tradable securities. The registration of
these shares does not necessarily mean
that any of these shares will be offered
or sold by the selling shareholders. All
proceeds from the sale of shares sold
under this prospectus will go to the
selling shareholders.
We may receive proceeds from the selling
shareholders' exercise of warrants or
options, but the issuance of common
stock from Calypte to the selling
shareholders is not covered by this
prospectus. Such proceeds, if any, will
be used for working capital and other
corporate purposes as noted above.
However, warrants held by certain
selling shareholders may be exercised
through a cashless exercise in certain
circumstances while the underlying
shares are unregistered, in which event
we would not receive any proceeds from
the exercise.
DETERMINATION OF OFFERING PRICE This prospectus may be used from time to
time by the selling shareholders who
offer the common stock in transactions
(which may include block transactions)
at prevailing market prices at the time
of sale, at prices related to the
prevailing market prices, or at other
negotiated prices. The selling
shareholders will act independently in
determining the offering price of each
sale.
OVER-THE-COUNTER BULLETIN BOARD TRADING SYMBOL CYPT
4
FORWARD-LOOKING INFORMATION
When used in this prospectus, the words "believes," "plans,""anticipates," "will
likely result," "will continue," "projects," "expects," and similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including those risks defined above, which
could cause actual results to differ materially from those projected.
We caution readers not to place undue reliance on any forward-looking
statements, which are based on certain assumptions and expectations which may or
may not be valid or actually occur, and which involve certain risks, including
these risks defined below. Sales and other revenues may not commence and/or
continue as anticipated due to delays or otherwise. As a result, our actual
results for future periods could differ materially from those anticipated or
projected.
RISK FACTORS
In addition to the other information in this Prospectus, Calypte has identified
a number of risk factors that the Company faces. 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 Prospectus or in other
filings with the Securities and Exchange Commission or in press releases or
other public disclosures. Investors should be aware of the existence of these
factors and should consider them carefully in evaluating our business before
purchasing the shares offered in this Prospectus.
RISK RELATED TO AN INFORMAL SECURITIES AND EXCHANGE COMMISSION INQUIRY
The SEC May Not Have Completed Its Informal Inquiry and We May Be Subject to a
Further Investigation.
We were contacted by the San Francisco District Office of the SEC on October 28,
2003 and advised that there was an informal inquiry being conducted by the
enforcement staff of the SEC regarding the Company. The staff has requested,
among other things, documents related to certain press releases issued by the
Company. The SEC has advised us that the inquiry should not be construed as an
indication by the SEC or its staff that any violation of law has occurred and we
have voluntarily cooperated with the SEC and have taken part in interviews as
well as provided the SEC with all documents requested. Separately, our Audit
Committee retained independent counsel to investigate the matter addressed in
the SEC's informal inquiry, and the Committee's counsel determined that there
was no evidence of management malfeasance, however, there is no assurance that
the SEC will not continue to pursue the inquiry, or that the SEC will not
commence a formal investigation, or that there will not be sanctions against the
Company or its officers or directors.
RISKS RELATED TO OUR FINANCIAL CONDITION
If We are Unable to Obtain Additional Financing When and If Required We May Have
to Significantly Curtail the Scope of Our Operations and Alter Our Business
Model.
We believe that the aggregate $8.8 million net proceeds of our May 2004 private
placement and the extension through December 31, 2004 of $5,000,000 of borrowing
capability under the terms of the amended Marr Credit Facility will be adequate
to sustain our operations at expected levels through 2004. There can, however,
be no assurance that such resources will be adequate. Further, there can be no
assurance that we will be able to achieve expanded acceptance of or realize
significant revenues from our current or potential new products, including our
rapid tests, or that we will achieve significant improvements in the efficiency
of our manufacturing processes. In addition, there is no assurance that we will
achieve or sustain profitability or positive cash flows in the future. In the
absence of adequate resources from current working capital and existing
financing, we would need to raise additional capital to sustain our operations.
In that case, we would or might be required to consider strategic opportunities,
including merger, consolidation, sale 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
any such opportunity will be available to us on acceptable terms, or at all. If
additional financing is not available to us when required or is not available to
us on acceptable terms, or we are unable to arrange a suitable strategic
opportunity, we will be in significant financial jeopardy and we may be unable
to continue our operations at current levels, or at all. The terms of a
subsequent financing may involve a change of control, require stockholder
approval, and/or trigger anti-dilution protection clauses contained in existing
financing agreements that would result in substantial dilution to our existing
stockholders or might require us to pledge the rights to our products for
collateral security for the issuance of a convertible debt security.
5
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.
As of March 31, 2004 our accounts payable totaled $2.0 million, of which $1.5
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, 2004 we have
accrued an aggregate of approximately $551,000 in royalty obligations to our
patent licensors, of which approximately $387,000 were past due. 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. While at this time we
are current with our payment plans for past-due amounts, if we are unable to
maintain sufficient working capital, our ability to make payments 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. Additionally, certain vendors and service providers
with whom we have not currently arranged payment plans have or may choose to
bring legal action against us to recover amounts they deem due and owing. While
we may dispute these claims, should a creditor prevail, we may be required to
pay all amounts due to the creditor. If the working capital that will enable us
to make the required payment is not available when required, we will be placed
in significant financial jeopardy and we may be unable to continue our
operations at current levels, or at all.
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
quarter ended March 31, 2004 was $4.0 million and for the year ended December
31, 2003 was $26.5 million and our accumulated deficit at March 31, 2004 was
$131.9 million. We expect operating losses to continue during 2004 and perhaps
beyond, as we complete the development and begin commercializing our rapid
tests, complete our manufacturing restructuring and consolidation, and conduct
additional research and development for product improvements and clinical trials
on potential new products.
An Economic Downturn or Terrorist Attacks May Adversely Affect Our Business.
Changes in economic conditions could adversely affect our business. For example,
in a difficult economic environment, customers may be unwilling or unable to
invest in new diagnostic products, may elect to reduce the amount of their
purchases or may perform less HIV testing. A weakening business climate could
also cause longer sales cycles and slower growth, and could expose us to
increased business or credit risk in dealing with customers adversely affected
by economic conditions.
Terrorist attacks and subsequent governmental responses to these attacks could
cause further economic instability or lead to further acts of terrorism in the
United States and elsewhere. These actions could adversely affect economic
conditions outside the United States and reduce demand for our products
internationally. Terrorist attacks could also cause regulatory agencies, such as
the FDA or agencies that perform similar functions outside the United States, to
focus their resources on vaccines or other products intended to address the
threat of biological or chemical warfare. This diversion of resources could
delay our ability to obtain regulatory approvals required to manufacture, market
or sell our products in the United States and other countries.
6
RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK
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 $0.11 per share and as high as $1.799 per
share in the twelve months ended March 31, 2004. 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 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, SEC 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
o certain world conditions, such as SARS, an economic downturn or terrorist
attacks.
o anti-American sentiment in certain international markets.
Our Registration of a Significant Amount of Our Outstanding Restricted Stock and
the Availability of a Significant Number of Shares Eligible for Future Sale May
Have a Negative Effect on the Trading Price of Our Stock.
At June 10, 2004, investors in our common stock hold approximately 71.0 million
shares of restricted stock, of which approximately 41.0 million shares relate to
acquisitions of our common stock by Marr Technologies BV ("Marr" or "MTBV"), the
provider of our current $5,000,000 credit facility and our largest stockholder,
through their participation in private placements in 2003 and 2004 and
conversion of debentures. Approximately 15.75 million additional shares are
related to issuances of restricted shares of our common stock to other
participants in our May 2004 private placement; another 11.6 million shares are
related to issuances pursuant to our convertible notes and debentures and an
additional 2.6 million shares are related to issuances under contracts and
agreements under which we have received goods and services. Further, in the May
2004 private placement we issued warrants that are immediately exercisable or
exercisable on 61 days' notice that could result in the issuance of an
additional 8.8 million shares. Additionally, we could be required to issue
approximately 2.9 million additional shares of our common stock if the holders
of currently outstanding convertible debentures or various warrant holders
elected to convert the remaining principal and accrued interest of their
debentures or exercise their outstanding warrants. This registration statement
includes essentially all of the outstanding restricted shares and the shares
underlying the outstanding convertible debentures and warrants. Although certain
of the Marr agreements require that Marr hold approximately 28.2 million of its
its shares for one year following their purchase, essentially all of the other
shares would be freely tradable upon the effectiveness of this registration
statement and upon conversion of the debentures or exercise of the warrants. If
investors holding a significant number of freely tradable shares decided to sell
them in a short period of time following the effectiveness of the registration
statement, such sales could contribute significant downward pressure on the
trading price of our stock. Such sales might also inhibit our ability to obtain
future equity or equity-related financing on acceptable terms.
7
From inception through June 10, 2004, we have issued approximately 163.7 million
shares of our common stock and raised approximately $139 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. Although we have no plans to do so, at June 10,
2004, we have the ability, without further stockholder approval, to issue in
excess of 500 million shares of our common stock for financing or for other
purposes. The perceived risk of dilution from this amount of authorized but
unissued stock 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.
Our Issuance of Warrants, Options and Stock Grants to Consultants for Services
and the Granting of Registration Rights for the Underlying Shares of Common
Stock May Have a Negative Effect on the Trading Price of Our Common Stock.
As we continue to look for ways to minimize our use of cash while obtaining
required services, we have issued and may continue to issue warrants and options
at or below the current market price or make additional stock bonus grants.
During 2003, we issued warrants, options and stock bonuses for nearly 19.8
million shares, including approximately 10.0 million shares from employee
benefit plans and the 2003 Non-Qualified Stock Option Plan, in payment for
consulting services. In the first quarter of 2004, we issued approximately
596,000 additional shares in payment for consulting services. 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 Stockholders May Experience Substantial Dilution as a Result of Our Recent
PIPE Financing and the Anti-Dilution Provisions Contained Therein or as a Result
of Future Financings.
The current market price of our common stock and the price at which investors in
our May 2004 PIPE purchased shares of our common stock is significantly higher
than the book value of our common stock. Had the May 2004 PIPE transaction
occurred as of March 31, 2004, the investors would have invested, net of fees,
an amount equal to approximately $11.0 million in excess of our total
stockholders' equity as of that date, but would own only approximately 15% of
our outstanding common stock.
Although we believe that we have sufficient funds to continue our operations
through 2004, we may need to arrange additional financing to fund our operations
in 2005 or thereafter. There can be no assurance that additional financing would
be available, or it if is available, that it would be on acceptable terms.
Additionally, the shares issued pursuant to the May 2004 PIPE and the related
warrants have an anti-dilution feature that will require us to issue additional
shares to the PIPE investors and modify their outstanding warrants if we
subsequently issue additional equity at a per share price of less than $0.40 for
a period of one year from the closing date, except under the provisions of
previously outstanding convertible debt, option plans, or option or warrant
agreements. If we find it necessary to issue additional common stock to fund our
operations in the year following the May 2004 PIPE, all of our stockholders will
experience dilution; if the terms of the potential future financing require that
we issue shares of our common stock at a price of less than $0.40 per share,
holders of our common stock prior to the 2004 PIPE will experience even greater
proportional dilution.
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:
8
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.
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
We May Be Unsuccessful in Implementing Our Consolidation, Development and
Marketing Plans as Anticipated.
We are in the process of consolidating our manufacturing operations in a single
facility at our Rockville, Maryland location. In addition to internal validation
and comparability studies that we conduct in conjunction with our manufacturing
consolidation, the FDA must approve our facility changes and urine EIA
manufacturing operations in Rockville before we will be permitted to sell urine
EIA tests manufactured at that facility in the U.S. If the consolidation does
not proceed as planned, or if the FDA does not approve the facility changes on
the timeline anticipated, the anticipated cost reductions as well as increased
efficiencies may not occur. There can be no assurance that we will successfully
complete the development and commercialization of our rapid tests currently
under development, or that our international marketing efforts with respect to
these tests will result in significant additional sales. Additionally, there can
be no assurance that we will be able to successfully negotiate government or
private-sector contracts for mass-testing applications. Consequently, our
current financial resources and available financing may be inadequate, and we
may have to seek additional financing, which may not be available on the
timetable required or on acceptable terms, or we may have to curtail our
operations, or both.
In conjunction with our manufacturing consolidation, we expect that we will be
unable to produce our HIV-1 Urine EIA product for sale in the US until we
complete the required validation and comparability studies at our Rockville
facility that will be necessary for FDA review and approval. We expect FDA
review and approval to be completed during the first quarter of 2005. We believe
we have manufactured sufficient inventories of our HIV 1 Urine EIA test to
continue to satisfy expected customer orders during the transition period. We
have considered historical sales levels and the length of time required to
complete the consolidation and obtain FDA approval in determining the amount of
inventory required to bridge the transition period. Demand could significantly
exceed historical levels, and consolidation of operations or FDA approval could
take longer than expected. If one or more of these events occur, then our
transition inventory may not be sufficient to supply customer orders and we may
lose business that we may find difficult, or impossible, to replace.
Alternatively, demand could fall significantly below historical levels, in which
case we will have built excess inventory that we may have to dispose of at
additional cost, or at a loss.
9
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 Other World Events.
Our expected first quarter 2003 shipment of urine HIV screening tests to our
distributor in the People's Republic Of China was delayed until the third
quarter of 2003 in part as a result of the impact of the SARS outbreak in that
country. Our distributor has reported that both potential patients and medical
personnel were 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 were postponed. Additionally,
governmentally-imposed facility closures and quarantine restrictions disrupted
the ability of the distributor to receive and distribute our HIV tests. This
situation may recur.
Our business model and future revenue forecasts call for a significant expansion
of sales in the People's Republic of China as well as in Russia and Africa upon
successful completion of the rapid product evaluation and regulatory approval.
Should conditions beyond our control, such as SARS, redirect attention 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 that are not substantially dilutive to our stockholders, 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
existing products or products we are currently developing or seeking to
develop;
o the extent to which our current or proposed new products gain market
acceptance;
o the timing and size of purchases by our laboratory customers, distributors
or joint venture partners;
o introductions of alternative means for testing for HIV by competitors;
o changes in the way requlatory authorities evaluate HIV testing, including
supplemental testing of the domestic blood supply; and
o customer concerns about the stability of our business which could cause
them to seek alternatives to our product.
Our Research, Development and Commercialization Efforts May Not Succeed or Our
Competitors May Develop and Commercialize More Effective or Successful
Diagnostic Products.
In order to remain competitive, we must regularly commit substantial resources
to research and development and the commercialization of new products.
The research and development process generally takes a significant amount of
time and money from inception to commercial product launch. This process is
conducted in various stages. During each stage there is a substantial risk that
we will not achieve our goals on a timely basis, or at all, and we may have to
abandon a product in which we have invested substantial amounts of money.
During the year ended December 31, 2003 and in the first quarter of 2004, we
incurred $1.5 million and $0.5 million, respectively, in research and
development expenses. We expect to incur even more significant costs from our
research and development activities in the future.
10
A primary focus of our efforts has been, and is expected to continue to be,
rapid HIV tests, which are currently under development. However, there can be no
assurance that we will succeed in our research and development efforts with
respect to rapid tests or other technologies or products.
Successful products require significant development and investment, including
testing, to demonstrate their cost-effectiveness or other benefits prior to
commercialization. In addition, regulatory approval must be obtained before most
products may be sold. Additional development efforts on these products will be
required before any regulatory authority will review them. Regulatory
authorities may not approve these products for commercial sale. In addition,
even if a product is developed and all applicable regulatory approvals are
obtained, there may be little or no market for the product, or we may be unable
to obtain the requisite licenses to sell the product or to qualify for a
government tender, which are often requirements in third world countries where
the greatest need and largest market for HIV diagnostic testing exists.
Accordingly, if we fail to develop commercially successful products, or if
competitors develop more effective products or a greater number of successful
new products, or there are governmental limitations affecting our ability to
sell our products, customers may decide to use products developed by our
competitors. This would result in a loss of revenues and adversely affect our
results of operations, cash flows and business.
We Have Limited Experience Selling and Marketing Our HIV-1 Urine ELISA Tests and
No Experience Marketing a Rapid Test.
Our urine-based ELISA products incorporate a unique method of determining the
presence of HIV antibodies and we have limited experience marketing and selling
them either domestically or internationally. Further, we have no experience
marketing and selling blood or oral fluid products. Our company's success
depends upon alliances with third-party international distributors and joint
venture partners and upon our ability to penetrate expanded markets. There can
be no assurance that:
o our international distributors and joint ventures will successfully market
our products;
o our domestic 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, including governments and humanitarian funding sources critical
in may international markets, which are essential for acceptance of 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 current urine HIV-1 screening and
supplemental tests in the United States and have been marketing these products
since 1998. We have not yet introduced either an HIV-1/2 product or a rapid
point of care test, both of which are necessary in many areas of the world.
Further, we have not achieved significant market penetration with our current
ELISA tests within domestic 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 efforts than are available to us without affecting other parts of
our business.
We Currently 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. Our sales of these products for the quarter
ended March, 2004 increased by 24% compared to the comparable period in 2003.
There can be no assurance, however, that such a trend will continue and, even
with the increase, we still incurred a loss from operations for the quarter. If
we cannot profitably introduce new products on a timely basis and if these
products and our screening and supplemental tests fail to achieve market
acceptance or generate significant revenues, we may have to cease operations.
11
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 rapid HIV-1/2
screening tests, tests for other infectious diseases or health conditions and
serum-based and oral-fluid based rapid HIV-1/2 screening tests. We are also
transfering technology from the Centers for Disease Control and Prevention
("CDC") for an HIV ELISA incidence test and plan to develop, along with the CDC,
a blood-based rapid HIV test for diagnostic and surveillance purposes. 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, successfully transfer the technology for
commercial-scale manufacturing to either internal, joint venture or outsourced
manufacturers or meet regulatory requirements or resolve potential patent
licensing or government distribution licensing 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 sustainable
cash flow from product sales and profitability. As a result, we may have to seek
additional financing, which may not be available on the timetable required or on
acceptable terms, or we may have to curtail our operations, or both.
A Market for Our Products May Not Develop.
Our future success will depend, in part, on the market acceptance, and the
timing of such acceptance, of new products such as our developmental stage rapid
HIV tests and other new products or technologies that may be developed or
acquired. To achieve market acceptance, we must make substantial marketing
efforts and spend significant funds to inform potential customers and the public
of the perceived benefits of these products. We currently have limited evidence
on which to evaluate the market reaction to products that may be developed, and
there can be no assurance that any products will obtain market acceptance and
fill the market need that is perceived to exist.
Our Success Depends on Our Ability to Protect Our Proprietary Technology.
The diagnostics test industry places considerable importance on obtaining
patent, trademark, and trade secret protection, as well as other intellectual
property rights, for new technologies, products and processes. Our success
depends, in part, on our ability to develop and maintain a strong intellectual
property portfolio or obtain licenses to patents for products and technologies
both in the United States and in other countries.
As appropriate, we intend to file patent applications and obtain patent
protection for our proprietary technology. These patent applications and patents
will cover, as applicable, compositions of matter for our products, methods of
making those products, methods of using those products, and apparatus relating
to the use or manufacture of those products. We will also rely on trade secrets,
know-how, and continuing technological advancements to protect our proprietary
technology. There is, however, no assurance that we will be successful in
obtaining any patent protection.
We have entered, and will continue to enter, into confidentiality agreements
with our employees, consultants, advisors and collaborators. However, these
parties may not honor these agreements and we may not be able to successfully
protect our rights to unpatented trade secrets and know-how. Others may
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets and know-how.
Many of our employees, including scientific and management personnel, were
previously employed by competing companies. Although we encourage and expect all
of our employees to abide by any confidentiality agreement with a prior
employer, competing companies may allege trade secret violations and similar
claims against us.
We may collaborate with universities and governmental research organizations
which, as a result, may acquire part of the rights to any inventions or
technical information derived from collaboration with them.
We may incur substantial costs and be required to expend substantial resources
in asserting or protecting our intellectual property rights, or in defending
suits against us related to intellectual property rights. Disputes regarding
intellectual property rights could substantially delay product development or
commercialization activities. Disputes regarding intellectual property rights
might include state, federal or foreign court litigation as well as patent
interference, patent reexamination, patent reissue, or trademark opposition
proceedings in the United States Patent and Trademark Office. Opposition or
revocation proceedings could be instituted in a foreign patent office. An
adverse decision in any proceeding regarding intellectual property rights could
result in the loss or limitation of our rights to a patent, an invention or
trademark.
12
We are Dependent Upon Patents, Licenses and Other Proprietary Rights From Third
Parties.
To facilitate development and commercialization of a proprietary technology
base, we may need to obtain licenses to patents or other proprietary rights from
other parties. Obtaining and maintaining such licenses may require the payment
of substantial amounts. In addition, 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 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- and urine-based supplemental tests
under a licensing agreement with National Institutes of Health. We will require
license agreements from certain of these parties or other patent holders for
technologies used in our rapid tests and other potential new products. As of
March 31, 2004 we had accrued an aggregate of approximately $387,000 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 in the event
of a default in payment of royalties. Specifically, during the 2003 calendar
year and the first quarter of 2004, revenues subject to the New York University,
Cambridge Biotech and Texas A&M license agreements were $2.0 million and $0.6
million, respectively, and revenues subject to the National Institutes of Health
agreement were $1.3 million and $0.4 million in calendar 2003 and in the first
quarter of 2004, respectively. 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.
The Sales Potential for the Rapid Test Products We Are Developing Will be
Affected by Our Ability to Obtain Certain Licenses.
There are two primary factors that will affect the specific countries in which
we will be able to sell our rapid HIV tests that are under development and
therefore the overall sales potential of the tests. One factor is whether we can
arrange a sublicense or distribution agreement related to patents for detection
of the HIV-2 virus. HIV-2 is a type of the HIV virus estimated to represent a
small fraction of the known HIV cases worldwide. Nevertheless, HIV-2 is
considered to be an important component in the testing regimen for HIV in many
markets. Access to a license for one or more HIV-2 patents may be necessary to
sell HIV-2 tests in countries where such patents are in force, or to manufacture
in countries where such patents are in force and then sell into non-patent
markets.
Another factor that may affect the specific countries in which we will be able
to sell our rapid HIV-1 or HIV-2 tests, and therefore the overall sales
potential, concerns whether we can arrange a sublicense or distribution
agreement related to any patents which claim lateral flow assay methods and
devices covering the our rapid HIV tests or their use. Our developmental stage
tests are lateral flow assay devices that test for specific antibodies or other
substances. There are numerous patents in the United States and other countries
which claim lateral flow assay methods and devices. Some of these patents may
broadly cover the technology used in our rapid test products and are in force in
the United States and other countries. We may not be able to make or sell our
rapid test products in countries where these patents are in force.
In the event that it is determined that a license is required and it is not
possible to negotiate a license agreement under a necessary patent, our ability
to manufacture and sell our rapid products may be delayed or limited. In such
case, we may be able to modify our rapid tests such that a license would not be
necessary. However, this alternative may not be possible, or, if feasible, it
could delay or limit our ability to sell our rapid test products, which would
adversely affect our results of operations, cash flows and business.
13
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
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, so that
suppliers could delay or decline to ship components until payment is made in
advance or on a COD basis.
We Have Limited Experience in Manufacturing Our Products and Little Experience
in Manufacturing Our Products In Commercial Quantities.
Turnover among our manufacturing personnel as a result of our consolidation of
the operations into our Rockville facility has necessitated the hiring of new
manufacturing personnel. Such turnover has, in the past, resulted in material
production difficulties 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.
The current consolidation of manufacturing operations to our Rockville facility,
technology transfer and manufacturing transitions and scale-ups in which we may
engage 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.
In an Effort to Scale Up Our Manufacturing Capacity Quickly, We May Engage
Contract Manufacturers to Produce Some of Our Products, Including Our Rapid
Tests Currently Under Development.
Outsourcing some of our manufacturing processes to contract manufacturers may
permit us to expand our manufacturing capacity more quickly, but it may also
subject us to problems in such areas as:
o lack of technical knowledge regarding regulated procedures;
o uncertain or unreliable production yields;
o maintaining quality control and assurance;
o regulatory compliance, since most rapid test manufacturers do not produce
products that are as stringently controlled as HIV diagnostics; and
o misappropriation of intellectual property, particularly in foreign
countries where patent protection is less stringent, and depending on the
extent of manufacturing processes that are outsourced.
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, Manufacturers and Joint Venture Partners.
Following the anticipated completion of the development of our rapid tests, we
believe that sales to international distributors and/or joint ventures will
generate a significant portion of our revenues for the next several years. We
believe that our urine and oral fluid-based tests can provide significant
benefits in countries that do not have the facilities or personnel to safely and
effectively collect and test blood samples. However, sales to international
customers accounted for only 5% of our revenue in our fiscal year ended December
31, 2003 and less than 1% of our revenue in the first quarter of 2004. 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-1/2 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:
14
o the imposition of government controls (regulatory approval);
o export license requirements;
o domestic license requirements;
o political instability;
o trade restrictions;
o changes in tariffs;
o difficulties in managing international operations (difficulty in
establishing a relationship with a foreign distributor, joint venture
partner, or contract manufacturer with the financial and logistical
ability to maintain quality control of product);
o the ability to secure licenses for intellectual property or technology
that are necessary to manufacture or sell our products in the selected
countries;
o fluctuations in foreign currency exchanges rates;
o the financial stability of our distributors and/or their expertise in
obtaining local country regulatory approvals;
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.
The Chinese Government Could Change Its Policies Toward Private Enterprises or
Even Nationalize or Expropriate Them, Which Could Result in the Total Loss of
Business in That Country.
We have established a joint venture in China and are currently planning to sell
both our existing products and our rapid products currently under development
through it. Our business in China is subject to political or economic
uncertainties and may be adversely affected by political, economic and social
developments in China. Over the past decade, the Chinese government has pursuend
economic reform policies, including the encouragement of private economic
activity and greater economic decentralization. The Chinese government may
choose to end these policies or alter them significantly to our detriment with
little, if any, prior notice.
Changes in policies, laws and regulations or in their interpretation or the
imposition of taxation, restrictions on currency conversion, restrictions or
devaluations of currency, nationalization or other expropriation of private
enterprises could have a material adverse effect on our business in China.
Nationalization or expropriation could result in the total loss of business in
China.
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. In the supplemental
testing category of the market, we offer the only FDA approved urine-based test
as well as a blood-based test. One other company offers an FDA approved
supplemental blood test. In addition to our urine and blood-based confirmation
test, there is also an oral mucosal transidate (saliva) based supplemental test
to complement the oral-fluid screening 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 several recently-FDA
approved rapid blood tests. In addition, as the anticipated acceptance for urine
testing grows, we may experience competition from companies in areas where
intellectual property rights may not be as stringent as in the US. These
developments could render our technologies or products obsolete or
noncompetitive or otherwise affect our ability to increase or maintain our
products' market share.
15
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
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.
16
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.
Additionally, following the 1:30 reverse split of our common stock that became
effective in May 2003, we currently have over 500 million shares of common stock
that could be issued without further stockholder approval. Although there are no
current plans to issue such a large number of shares, the dilution resulting
from such issuance could also adversely affect the rights of our current common
stockholders.
RISKS RELATED TO REGULATORY APPROVALS AND CLEARANCES
The Time Needed to Obtain Regulatory Approvals and Respond to Changes in
Regulatory Requirements Could Adversely Affect Our Business.
Our proposed and existing products are subject to regulation by the FDA and
other governmental or public health agencies. In particular, we are subject to
strict governmental controls on the development, manufacture, labeling,
distribution and marketing of our products. In addition, we are often required
to obtain approval or registration with foreign governments or regulatory bodies
before we can import and sell our products in foreign countries.
The process of obtaining required approvals or clearances from governmental or
public health agencies can involve lengthy and detailed laboratory testing,
human clinical trials, sampling activities and other costly, time-consuming
procedures. The submission of an application to the FDA or other regulatory
authority does not guarantee that an approval or clearance to market a product
will be received. Each authority may impose its own requirements and delay or
refuse to grant approval or clearance, even though a product has been approved
in another country or by another agency.
Moreover, the approval or clearance process for a new product can be complex and
lengthy. This time span increases our costs to develop new products as well as
the risk that we will not succeed in introducing or selling them in the United
States or other countries.
Newly promulgated or changed regulations could also require us to undergo
additional trials or procedures, or could make it impractical or impossible for
us to market our products for certain uses, in certain markets, or at all.
Failure to Comply With FDA or Similar International Regulatory Bodies or Other
Requirements May Require Us to Suspend Production of Our Products Which Could
Result in a Loss of Revenues.
We can manufacture and sell products, both in the United States and abroad, only
if we comply with regulations of government agencies such as the FDA. We have
implemented quality assurance and other systems that are intended to comply with
applicable regulations in the United States.
Although we believe that we have adequate processes in place to ensure
compliance with these requirements, the FDA could force us to stop manufacturing
our products if it concludes that we are out of compliance with applicable
regulations. The FDA could also require us to recall products if we fail to
comply with applicable regulations, which could force us to stop manufacturing
such products. We will face similar risks when we establish our international
manufacturing operations.
17
SUMMARY OF FINANCINGS - MAY 2002 TO JUNE 10, 2004
In April 2002, we announced that we planned to wind down our operations as a
result of insufficient working capital and the lack of funds with which to
continue our operations and business plan. In May 2002, however, prior to the
complete cessation of our operations, we received a financing commitment and
restarted our operations. We subsequently negotiated several additional
financings which have enabled us to sustain operations. In July 2003, we filed a
registration statement for the Common Stock underlying approximately $7.4
million of these financings. Since May 2002 through June 10, 2004, we have
raised approximately $30.3 million in gross proceeds from the intial restart
financings and those completed subsequently. The following table summarizes
these financings by major category and the subsequent table provides the details
of these financings. (Both tables are in thousands, except share price and per
share data in the second table. All share amounts and per share prices reflect
the post-split basis of the 1:30 reverse stock split approved by our
stockholders on May 20, 2003 and which became effective on May 28, 2003.)
TOTAL RESTRICTED
GROSS NET SHARES SHARES SHARES SHARES BEING
FINANCING SOURCE PROCEEDS PROCEEDS ISSUED ISSUED ISSUABLE REGISTERED (3)
SECURITIES IN JULY 2003
REGISTRATION STATEMENT: (1) (4)
8% Convertible Notes $ 3,232 $ 2,594 46,084.3 16,092.1 -- 3,088.6
Other Restart Financings 750 730 2,720.3 1,731.0 -- --
Mercator 12% and 10% Debentures
3,850 2,950 31,944.0 10,361.7(2) 388.8 9,134.5
------- --------- --------- --------- --------- ---------
7,832 6,274 80,748.6 28,184.8 388.8 12,223.1
------- --------- --------- --------- --------- ---------
NEW SECURITIES IN THIS
REGISTRATION STATEMENT:
Mercator 12% Debentures:
Purchased by Marr 570 570 5,181.8 5,181.8 -- 5,181.8
Purchased by others 130 130 118.4 118.4(2) 165.4 760.1
Marr Private Placements 12,500 11,900 28,333.3 28,333.3 -- 28,333.3
Warrants issued in connection with
Marr 5% Promissory Note Commitment
-- -- -- -- 1,275.0 1,275.0
May 2004 Private Placement:
PIPE at $0.40 per share 9,300 8,769 23,250.0 23,250.0 -- 23,250.0
Warrant at $0.50 per share
-- -- -- -- 8,767.5 8,767.5
------- --------- --------- --------- --------- ---------
22,500 21,369 56,883.5 56,883.5 10,207.9 67,567.7
------- --------- --------- --------- --------- ---------
OTHER SECURITIES BEING REGISTERED:
Shares issued for goods and services -- -- 2,569.8 2,569.8 133.3 2,703.1
Warrants issued and shares issuable
under contracts for goods and
services -- -- -- -- 562.1 562.1
------- --------- --------- --------- --------- ---------
Total $30,332 $ 27,643 140,201.9 87,638.1 11,292.1 83,056.0
======= ========= ========= ========= ========= =========
- ------------------
(1) Certain of the restricted shares issued pursuant to these financings are
eligible for resale under Rule 144 now or may become so at various times
in the future. Certain of the investors who were issued restricted shares
subsequently sold the shares under exemptions provided by Rule 144. As of
June 10, 2004, approximately 43% of the Company's outstanding shares, or
approximately 71.0 million shares, were restricted. In addition to the
restricted shares issued pursuant to financing transactions subsequent to
our July 2003 registration statement that are summarized here and being
included in this registration statement, certain vendors, consultants and
other parties who have agreed to accept our common stock in lieu of cash
hold an additional 2.6 million restricted shares, some of which is also
included in this registration statement.
18
(2) The market price of Calypte common stock on June 10, 2004 was $0.545 per
share. The average of the three lowest trades for the 20 trading days
preceding that date is $0.427 per share, which, adjusted for the
applicable discount, is the basis for the determination of the number of
shares issuable pursuant to convertible debentures which have not yet been
converted.
(3) This figure includes both the restricted shares issued and outstanding
pursuant to the indicated financing as of June 10, 2004, based on
information supplied by our transfer agent, plus the registration
requirement applicable to convertible debentures not yet converted.
Although the various registration rights agreements for the unconverted
debentures require different registration coverage levels, with the
exception of the warrants related to the Marr 5% Promissory Note
Commitment and subsequent amendments and the shares and warrants issued
pursuant to the May 2004 PIPE, the Company has elected to register the
common stock underlying all of such securities using the highest
requirement, or twice the number of currently issuable shares, to allow
for conversion of accrued interest and other amounts as well as for a
potential decrease in the market price of its Common Stock below the
assumed conversion price indicated in Note 2, above. See also Note 11 in
Detail of Financings, following.
(4) The registration statement for these financings (File No. 333-106862)
became effective on July 18, 2003. In that registration statement, we
registered 52.5 million shares of our common stock on the basis of a
then-current market price applicable to the convertible securities of
approximately $0.28 per share, before contractual discounts. Shortly
following the effectiveness of the registration statement, many of the
investors holding the convertible notes and debentures elected to convert
their holdings into shares of our stock and to immediately sell the
shares. The market price of our stock declined significantly and the
holders were unable to convert all of the notes and debentures into
registered shares of common stock. Many of the investors chose to convert
at the lower, then-current market price and we issued restricted shares of
our common stock to the holders of such convertible notes and debentures.
As indicated in Note 1, many of these holders have subsequently sold their
restricted shares under the provisions of Rule 144. This registration
statement includes approximately 9.1 million currently outstanding
restricted shares of our common stock issued to these holders of the
convertible notes and debentures.
19
DETAIL OF FINANCINGS - MAY 2002 TO JUNE 10, 2004
CALYPTE SHARES
CONVERSION GROSS NET TRANSACTION CLOSING SHARES ISSUED/ CURRENTLY
FINANCING TYPE AND INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE $ REDEEMED (2) ISSUABLE
- ------------------------------- ------- -------- -------- ---- ----- -------------- --------
8% CONVERTIBLE NOTES Lesser of
Alpha Capital Aktiengesellshaft (i) $3.00 or $500 5/24/02 $ 3.60 7,260.7/ $500 -
Stonestreet Limited Partnership (ii) 70% of $500 5/24/02 $ 3.60 7,075.7/ $500 -
Filter International Ltd. the average of $150 5/24/02 $ 3.60 2,452.4/ $150 -
Camden International Ltd. the 3 lowest $350 5/24/02 $ 3.60 5,279.1/ $350 -
Domino International Ltd. trades for 30 $150 5/24/02 $ 3.60 1,767.4/ $150 -
Thunderbird Global Corporation days $ 75 5/24/02 $ 3.60 1,083.1/ $75 -
BNC Bach International Ltd. preceding $200 5/24/02 $ 3.60 2,463.8/ $200 -
Excalibur Limited Partnership conversion $200 5/24/02 $ 3.60 1,678.9/ $200 -
Standard Resources Ltd. $100 5/24/02 $ 3.60 1,542.5/ $100 -
SDS Capital International Ltd. $300 7/10/02 $ 10.20 4,189.8/ $300 -
Camden International Ltd. $100 7/10/02 $ 10.20 1,707.9/ $100 -
Excalibur Limited Partnership $250 7/24/02 $ 6.60 4,238.3/ $250 -
Stonestreet Limited Partnership $250 8/21/02 $ 3.90 4,042.2/ $250 -
Alpha Capital Aktiengesellshaft $107 5/9/03 $ 0.63 1,302.5/ $107 -
------ ------ ---------------- ---------
Total 8% Convertible Notes $3,232 $2,594 46,084.3/ $3,232 -
====== ====== ================ =========
OTHER RESTART FINANCINGS:
10% CONVERTIBLE NOTE
BNC Bach International Ltd. 50% of the $ 150 $ 150 5/14/02 $4.20 2,217.8/ $150 -
(Note: on 7/14/02 the average of 3 $10.80 on
maturity date was extended lowest 7/14/02;
until 12/31/02; on December closing bid $1.92 on
27, 2002, the maturity date prices for 22 12/27/02;
was extended until January days $1.80 on
15, 2003; on January 15, preceding 1/15/03;
2003 the maturity date was conversion $1.50 on
extended until March 17, (4) 3/17/03;
2003, on March 17, 2003 the $0.99 on
maturity date was extended 4/2/03
until April 4, 2003; on $0.75 on
April 2, 2003, the maturity 4/30/03
date was extended until May
5, 2003; on April 30, 2003,
the maturity date was
subsequently extended until
May 10, 2004)(3)
8% CONVERTIBLE DEBENTURES
Su So 80% of the $ 100 $ 90 6/17/02 $4.20 36.7 (3)/ $100 -
lower of the
average
closing bid
or trade
price for the
5 days
preceding
conversion,
but not less
than $3.00
20
CALYPTE SHARES
CONVERSION GROSS NET TRANSACTION CLOSING SHARES ISSUED/ CURRENTLY
FINANCING TYPE AND INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE $ REDEEMED (2) ISSUABLE
- ------------------------------- ------- -------- -------- ---- ----- -------------- --------
Jason Arasheben 70% of the $ 100 $ 90 7/03/02 $8.10 15.8 (3)/ $100 -
lower of the
average
closing bid
or trade
price for the
5 days
preceding
conversion,
but not less
than $3.00
PIPE AT $1.50 PER SHARE
Careen Ltd. $1.50 per $ 200 $ 200 8/28/02 $ 4.80 225.0/ N/A -
Caledonia Corporate Group Share $ 200 $ 200 8/28/02 $ 4.80 225.0/ N/A -
Limited ------ ------ ---------------- ---------
Total Other Restart $ 750 $ 730 2,720.3/ $350 -
Financings ====== ====== ================ =========
MERCATOR 12% AND 10% DEBENTURES
PREVIOUSLY REGISTERED
12% CONVERTIBLE DEBENTURES
Mercator Momentum Fund, L.P. 85% of the $ 550 $345 9/12/02 $3.00 4,866.4(3)/ -
($2,000 total commitment; $1,300 average of (5) $550
previously registered) the 3 lowest
trading
Mercator assigned its rights to: prices for
Alpha Capital AG the 20 250 250 7/24/03 $0.115 2,673.8/ $250 -
Gamma Opportunity Capital trading days 250 250 7/24/03 $0.115 2,685.6/ $250 -
Partners, LP preceding
Goldplate Investment Partners conversion
Goldplate Investment Partners (7) 250 250 7/24/03 $0.115 2,673.8/ $ 250 -
------ ------ ---------------- ---------
$1,300 $1,095 12,899.6/$1,300 -
------ ------ ---------------- ---------
Mercator Momentum Fund, L.P. 80% of the $300 $260 10/22/02 $3.90 0/ $300 (6) -
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not less
than $1.50
Mercator Momentum Fund L.P. (9) 70% of the $300 $245 4/29/03 $0.825 3,455.5/ $294 20.5
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $1.20
21
CALYPTE SHARES
CONVERSION GROSS NET TRANSACTION CLOSING SHARES ISSUED/ CURRENTLY
FINANCING TYPE AND INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE $ REDEEMED (2) ISSUABLE
- ------------------------------- ------- -------- -------- ---- ----- -------------- --------
Mercator warrant $3.00 per $0 $0 10/22/02 $3.90 0 100.0
share
10% CONVERTIBLE DEBENTURES
Mercator Focus Fund, L.P. (9) 80% of the $1,000 $510 1/14/03 $1.92 7,941.1/ $1,000 -
average of (6)
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $3.00
Mercator Momentum Fund, L.P. (9) 80% of the $450 $440 1/30/03 $1.86 2,592.6/ $358 268.3
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $3.00
Mercator Focus Fund, L.P. (9) $400 3/13/03 $1.47 3,428.9/ $400 -
Mercator Momentum Fund III, L.P. 65% of the 100 1,626.3/ $100 -
------ ---------------- ---------
average of $500 $400 5,055.2/ $500 -
------ ------ ---------------- ---------
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $2.10
Total Mercator Debentures
previously registered $3,850 $2,950 31,944.0/ $3,752 388.8
====== ====== ================ =========
NEW FINANCINGS INCLUDED IN THIS
REGISTRATION STATEMENT
MERCATOR 12% CONVERTIBLE
DEBENTURES
Mercator Momentum Fund, L.P. 85% of the
($2,000 total commitment; $1,300 average of
previously registered) the 3 lowest
trading
Mercator assigned its rights to: prices for
Marr Technologies, B.V. (10) the 20 570 570 9/1/03 $0.498 5,181.8/ $570 -
Dr. Khalid Ahmed trading days 50 50 10/2/03 $1.310 84.6/ $ 50 -
Roger Suyama preceding 20 20 10/2/03 $1.310 33.8/ $ 20 -
Logisticorp, Inc. conversion (7) 20 20 10/2/03(11) $1.310 - 55.1
Southwest Resource
Preservation Inc. 40 40 10/2/03(11) $1.310 - 110.3
------ ------ ---------------- ---------
700 700 5,300.2/ $640 165.4
====== ====== ================ =========
22
CALYPTE SHARES
CONVERSION GROSS NET TRANSACTION CLOSING SHARES ISSUED/ CURRENTLY
FINANCING TYPE AND INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE $ REDEEMED (2) ISSUABLE
- ------------------------------- ------- -------- -------- ---- ----- -------------- --------
MARR PRIVATE PLACEMENTS
PIPE AT $0.30 PER SHARE
Marr Technologies B.V. (8)(10) $0.30 per $2,500 $2,300 8/1/03 $0.152 8,333.3 -
share
PIPE AT $0.50 PER SHARE
Marr Technologies B.V. (8)(10) $0.50 per $10,000 $9,600 9/1/03 $0.498 20,000.0 -
share
5% PROMISSORY NOTE
COMMITMENT AGREEMENT (12)
Boodle Hatfield warrant $0.80 per $ 0 $ 0 11/13/03 $0.880 - 375.0
share
Boodle Hatfield warrant $0.46 per 0 0 3/19/04 $0.575 - 400.0
share
Marr Technologies BV warrant $0.40 per 0 0 5/26/04 $0.460 - 500.0
share ------- ------- -------- -------
Total Marr Private Placements $12,500 $11,900 28,333.3 1,275.0
======= ======= ======== =======
MAY 2004 PRIVATE PLACEMENT
PIPE at $0.40 per share (13) Shares
SF Capital Partners Ltd. Isssued $4,000 $3,720 5/28/04 $0.50 10,000.0 3,500.0
Marr Technologies BV $0.40 per 3,000 2,910 5/28/04 $0.50 7,500.0 2,625.0
Proximity Fund LP share; 500 465 5/28/04 $0.50 1,250.0 437.5
Proximity Partners LP 5 year 500 465 5/28/04 $0.50 1,250.0 437.5
MTB Small Cap Growth Fund warrant at 500 465 5/28/04 $0.50 1,250.0 437.5
$0.50
MTB Multi Cap Growth Fund per share 500 465 5/28/04 $0.50 1,250.0 437.5
Bridges & PIPES LLC 300 279 5/28/04 $0.50 750.0 262.5
Duncan Capital LLC (14) 0 0 5/28/04 $0.50 - 30.0
Capstone Investments (14) 0 0 5/28/04 $0.50 - 600.0
------- ------- -------- -------
9,300 8,769 23,250.0 8,767.5
======= ======= ======== =======
23
CALYPTE SHARES
CONVERSION GROSS NET TRANSACTION CLOSING SHARES ISSUED/ CURRENTLY
FINANCING TYPE AND INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE $ REDEEMED (2) ISSUABLE
- ------------------------------- ------- -------- -------- ---- ----- -------------- --------
OTHER SHARES BEING REGISTERED:
Shares issued for goods and services (15):
BioEquity Partners (4 persons) N/A N/A N/A 10/1/03 $1.15 25.0 -
Ernesto Cardenas 9/30/03 $1.22 100.0 -
CEOCast, Inc. 7/29/03 $0.12 300.0 -
CEOCast,.Inc. 10/27/03 $1.51 100.0 -
European Equity Group 9/30/03 $1.22 100.0 -
New York University 2/12/02 $7.33 25.0 -
New York University 9/30/03 $1.22 500.0 -
Platinum Partners Value
Arbitrage Fund 9/30/03 $1.22 675.6 -
Alfonso Saavedra 9/30/03 $1.22 100.0 -
Vintage Filings 8/1/03 $0.15 46.9 -
URSA group (5 persons) 10/9/03 $1.40 30.6 -
Magic Johnson Foundation 1/13/04 $0.67 66.7 133.3
Pointe Investments 2/13/04 $0.67 500.0 -
2,569.8 133.3
------- -----
Warrants and contracts for goods and services:
Craig Enenstein $0.18 per share $0 $0 8/20/03 $0.178 - 100.0
Michael Rovens $0.18 per share $0 $0 8/20/03 $0.178 - 100.0
Adaltis, Inc. $0.03 per share $0 $0 4/6/04 $0.485 - 212.1
Merchant Intercapital $0.50 per share $0 $0 5/6/04 $0.465 - 150.0
------- ------- -------- -------
- - - 562.1
------- ------- -------- -------
Non-financing-related shares
being registered $ - $ - 2,569.8 695.4
======= ======= ======== =======
- ------------------
(1) The 8% Convertible Notes, the Other Restart Financings, the Mercator
12% and 10% Debentures and warrants, the Common Stock underlying MTBV's 2003
PIPEs and the Common Stock underlying the May 2004 PIPE were issued under
exemptions provided by Regulation S or Regulation D. With the exception of MTBV,
which has identified itself as an affiliate of the Company in public filings
with the Securities and Exchange Commission based on its August and September
2003 PIPE investments and other market purchases of Common Stock, none of the
entities listed above is or has been an affiliate of the Company. Other than
MTBV and SF Capital Partners Ltd., all of the listed investors were subject to
ownership limitations restricting their ownership of our stock to a maximum of
4.9% or 9.9%, depending on the specific agreement.
(2) On July 18, 2003, the registration statement for 52,500,000 shares
underlying the 8% Convertible Notes, the Other Restart Financings and certain of
the Mercator 12% and 10% Convertible Debentures became effective (File No.
333-106862). As a result of a decline in the market price of our stock
subsequent to the effective date of the July 2003 registration statement, the
number of shares registered was insufficient to permit the complete conversion
of the notes and debentures into registered shares. The shares underlying
certain of the convertible securities have become eligible for resale under Rule
144, and certain investors have availed themselves of that eligibility to
convert restricted shares issued pursuant to conversions into free-trading
shares. As of June 10, 2004, approximately 43% of our outstanding Common Stock,
or approximately 71.0 million shares, are unregistered. Of this amount, MTBV
holds 41.0 million restricted shares issued pursuant to their two 2003 PIPE
transactions, the conversion of their investment in $570,000 principal value of
12% convertible debentures and their participation in the May 2004 PIPE. Other
investors in our convertible notes and debentures hold approximately 11.6
million restricted shares issued pursuant to their conversions. Investors in our
May 2004 PIPE other than Marr hold an additional 15.75 million restricted
shares. We are registering the shares of Common Stock on a cost-free basis to
the holders of said shares of Common Stock in this registration statement.
(3) Includes fee shares.
24
(4) On April 30, 2003, when the market price the Common Stock was $0.75,
we and BNC Bach amended the conversion price to eliminate a conversion price
ceiling of $1.50 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. BNC Bach subsequently converted the outstanding principal and accrued
interest into shares of Common Stock.
(5) Reflects a 10% cash commitment fee on the entire $2 million commitment
paid to The Mercator Group less additional fees and expenses. We initially
registered shares underlying $1,300,000 of the commitment in July 2003 and are
registering the shares underlying the final $700,000 of this commitment in this
registration statement.
(6) In conjunction with the issuance of the $1,000,000 10% convertible
debenture to Mercator Focus Fund, L.P., we used the proceeds to repay the
$300,000 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) On March 31, 2003, when the market price of the Common Stock was
$0.885, we amended the conversion price to eliminate a conversion price floor of
$1.50 per share in return for an extension of time in which to register the
shares of common stock underlying the various Mercator financings.
(8) The Securities Purchase Agreements for both transactions between the
Company and MTBV require that we provide cost-free registration rights to MTBV;
however, MTBV is subject to a one-year lock-up provision following the
transaction date with respect to the shares purchased.
(9) On January 14, 2004, when the market price of the Common Stock was
$0.60, we extended the maturity date of the following debentures until July 14,
2004:
o 10% Convertible Debenture dated January 14, 2003 issued to Mercator Focus
Fund, LP
o 10% Convertible Debenture dated January 30, 2003 issued to Mercator
Momentum Fund, LP
o 10% Convertible Debentures dated March 13, 2003 issued to Mercator Focus
Fund, LP
o 12% Convertible Debenture dated April 29, 2003 issued to Mercator Momentum
Fund, LP
In return for the extension of the maturity dates, we have agreed to pay an
additional extension fee equal to 2% of the outstanding principal balance per
month until the earlier of the extended maturity date or conversion. The
extension fee is payable 1% in cash and 1% in shares of Common Stock.
Additionally, we agreed to file a registration statement including the shares
potentially applicable to the conversion of the outstanding debenture balances
and the extension fees by no later than April 29, 2004. On April 23, 2004, when
the market price of the Common Stock was $0.625, we and the various Mercator
Funds agreed to extend until May 14, 2004 the period for filing the registration
statement including the extension fee shares and shares issued or potentially
issuable upon conversion. On May 7, 2004, when the market price of our common
stock was $0.48 per share, we and the various Mercator Funds agreed to further
extend from May 14, 2004 until 21 days following the closing of a private
placement of equity financing of at least $5,000,000, but in any case to no
later than June 30, 2004, the period in which we are required to file a
registration statement including shares of our common stock issued or
potentially issuable upon conversion.
(10) On January 23, 2004, when the market price of the Common Stock was
$0.695, we and MTBV agreed to extend the registration rights period attributable
to 5,181,818 shares of Common Stock issued in conjunction with MTBV's conversion
of $570,000 principal amount of our 12% Convertible Debentures from February 27,
2004 to April 29, 2004. In return for the extension, we agreed to include in our
next registration statement an aggregate of 28,333,333 shares of our Common
Stock purchased by MTBV in PIPE transactions in the third quarter of 2003. On
April 23 2004, when the market price of the Common Stock was $0.625, we and MTBV
agreed to extend until May 14, 2004 the period for filing the registration
statement including the shares issued to MTBV upon conversion of the 12%
convertible debenture and in the 2003 PIPE transactions. On May 7 2004, when the
market price of our common stock was $0.48 per share, MTBV agreed to further
extend from May 14, 2004 until 21 days following the closing of a private
placement of equity financing of at least $5,000,000, but in any case to no
later than June 30, 2004, the period in which we are required to file a
registration statement including shares of our common stock issued to MTBV upon
conversion of the 12% convertible debenture and in the 2003 PIPE transactions.
Such shares are included in this registration statement.
(11) The holder claims an earlier transaction date, which we dispute. This
debenture has not yet been converted. The number of shares currently issuable
reported here assumes conversion based on current market prices as of June 10,
2004. Assuming immediate conversion at the earlier, disputed transaction date,
the number of shares of common stock issuable to Logisticorp and Southwest
Resource Preservation would be 213,903 and 427,807, respectively. While not
necessarily agreeing to issue the number of shares calculated as issuable based
on the disputed transaction date, we are registering that number of shares of
Common Stock pending resolution of the dispute. See Legal Proceedings.
25
(12) On November 13, 2003, when the market price of the Common Stock was
$0.88 per share, we and MTBV entered into an agreement in which MTBV agreed to
provide us up to an aggregate of $10,000,000 (the "Marr Credit Facility")
pursuant to promissory notes issuable to MTBV on an as-needed basis by us (the
"Notes"). Each Note will bear interest at the rate of 5% per annum and will have
a 12-month term. The Marr Credit Facility was available during the period
beginning on February 28, 2004 and ending on May 31, 2004. The aggregate amount
available under the Marr Credit Facility is proportionally reduced by the amount
of any equity financing we obtain during the term of the Marr Credit Facility.
MTBV has the right of first refusal to participate in any such equity financing
on the same terms as the other investors. The Marr Credit Facility initially
provided for earlier termination as of March 31, 2004, if we failed to have our
Common Stock listed on an established stock exchange by that date. Moreover,
upon the failure to obtain such stock exchange listing, any outstanding Notes
would be due and payable on April 30, 2004. As consideration for the Marr Credit
Facility, we issued to a party designated by MTBV a warrant to purchase 375,000
shares of Common Stock at an exercise price of $0.80 per share. The warrant is
immediately exercisable and expires two years after issuance on November 12,
2005.
On March 19, 2004, when the market price of the Common Stock was $0.575 per
share, we and MTBV amended the Marr Credit Facility to increase the aggregate
amount available under the Marr Credit Facility to $15,000,000 and to eliminate
the termination provision upon failure to have the Common Stock listed on an
established stock exchange by March 31, 2004. As additional consideration for
the amendment of the Marr Credit Facility, we issued to a party designated by
MTBV an additional warrant to purchase 400,000 shares of our Common Stock at an
exercise price of $0.46 per share. This warrant is immediately exercisable and
expires two years from its date of issuance on March 18, 2006.
On May 26, 2004, when the market price of the Common Stock was $0.46 per share,
we and MTBV again amended the Marr Credit Facility whereby MTBV has committed to
purchase up to $5,000,000 of Promissory Notes that we may issue through December
31, 2004. Any Notes issued pursuant to this second amendment will bear interest
at 9% per annum and will have a maturity date of May 31, 2005. The $5,000,000
amount available under the amended Marr Credit Facility will be reduced by the
amount of any equity financing we obtain after the May 26, 2004 effective date
of the second amendment and through the December 31, 2004 commitment period. At
June 10, 2004, we have issued no Notes under the Marr Credit Facility. As
consideration for the extension of the commitment period reflected in the second
amendment of the Marr Credit Facility, we issued to MTBV a warrant to purchase
500,000 shares of our Common Stock at an exercise price of $0.40 per share. This
warrant is immediately exercisable and expires two years from its date of
issuance on May 26, 2006. The Common Stock underlying these three warrants is
included in this registration statement.
(13) The shares issued pursuant to the May 2004 PIPE and the related
warrants have an anti-dilution feature that will require us to issue additional
shares to the PIPE investors and modify their outstanding warrants if we
subsequently issue additional equity at a per share price of less than $0.40 for
a period of one year from the closing date, except under the provisions of
previously outstanding convertible debt, option plans, or option or warrant
agreements.
(14) Reflects warrants issued pursuant to placement agent agreements.
(15) Transaction Dates and Calypte Closing Prices reported here reflect
the dates on which we issued shares of our Common Stock pursuant to the
agreement, which may not be the effective date of the agreement.
DILUTION
The issuance of additional shares and the eligibility of issued shares for
resale will dilute our Common Stock and may lower the price of our Common Stock.
If you invest in our Common Stock, your interest will be diluted to the extent
of the difference between the price per share you pay for the Common Stock and
the pro forma as adjusted net tangible book value per share of our Common Stock
at the time of sale. We calculate net tangible book value per share by
calculating the total assets less intangible assets and total liabilities, and
dividing it by the number of outstanding shares of Common Stock.
The net tangible book value of our Common Stock as of March 31, 2004, was
($2,181,000) or approximately ($0.0159) per share. Assuming that on March 31,
2004,
o if we had issued a total of 2,163,900 shares to Mercator Focus Fund LP and
Mercator Momentum Fund LP upon their conversions of the $669,351 remaining
outstanding aggregate face value of 10% convertible debentures (calculated
based on the lesser of 80% of the average of the three lowest trading
prices of our common stock for the 20 trading days preceding March 31,
2004, or $0.309, and $3.00); and
o if we had issued a total of 884,500 shares to Mercator Focus Fund LP upon
its conversion of the $222,318 remaining outstanding face value of 10%
convertible debentures (calculated based on the lesser of 65% of the
average of the three lowest trading prices of our common stock for the 20
trading days preceding March 31, 2004, or $0.251, and $2.10); and
26
o if we had issued a total of 182,600 shares to Logisticorp Inc, and
Southwest Resource Preservation, Inc. upon their conversions of the
$60,000 outstanding aggregate face value of 12% convertible debentures
(calculated based on 85% of the average of the three lowest trading prices
of our common stock for the 20 trading days preceding March 31, 2004, or
$0.329); and
o if we had issued a total of 22,600 shares to Mercator Momentum Fund LP
upon its conversion of the $6,113 remaining outstanding face value 12%
convertible debenture, (calculated based on 70% of the average of the
three lowest trading prices of our common stock for the 20 trading days
preceding March 31, 2004, or $0.271, and $1.20); and
o if we had issued a total of 100,000 shares to Mercator Momentum Fund upon
its exercise of the warrant for 100,000 shares of our Common Stock at
$3.00 per share; and
o if we had issued a total of 200,000 shares to Craig Enenstein and Michael
Rovens upon their exercise of their warrants for 100,000 shares each of
our Common Stock at $0.18 per share; and
o if we had issued a total of 375,000 shares to Boodle Hatfield upon its
exercise of the warrant for 375,000 shares of our Common Stock at $0.80
per share; and
o if we had issued a total of 400,000 shares to Boodle Hatfield upon its
exercise of the warrant for 400,000 shares of our Common Stock at $0.46
per share; and
o if we had issued a total of 212,127 shares to Adaltis, Inc. upon its
exercise of the warrant for 212,127 shares of our Common Stock at $0.03
per share; and
o If we had issued a total of 150,000 shares to Merchant Intercapital upon
its exercise of the warrant for 150,000 shares of our Common Stock at
$0.50 per share; and
o if we had issued a total of 23,250,000 shares to the investors in the May
2004 PIPE upon their purchase of 23,250,000 shares at a price of $0.40 per
share and if we had received $8,769,000 in net proceeds; and
o if we had issued a total of 8,767,500 shares to the investors in the May
2004 PIPE upon their exercise of warrants to purchase 8,767,500 shares at
a price of $0.50 per share and if we had received $4,383,750 in net
proceeds; and
o if you had purchased shares under this prospectus for $0.3685 per share,
which was the closing price for our common stock on March 31, 2004,
o then our pro forma net tangible book value as of March 31, 2004 would have
been $12,880,000, or approximately $0.074 per share.
This represents an immediate increase in the net tangible book value of
approximately $0.090 per share to existing stockholders on March 31, 2004. This
also represents an immediate dilution in net tangible book value of
approximately $0.294 per share to all acquirers of common stock in this
offering.
The actual dilution to you may be greater or less than in this example,
depending on the actual price you pay for shares, the actual prices at which we
issue shares to the various parties under the convertible debenture agreements
and how many of the exercisable options and warrants outstanding have been
exercised at the time of your investment. The convertible note and debenture
agreements each contain ownership limitations that would preclude certain
parties from converting the entire face amount of their notes and debentures in
a single transaction as contemplated in the calculations above.
SELLING SECURITY HOLDERS
The number of shares set forth in the table for the various subscribers
represents an estimate of the number of shares of Common Stock to be offered by
them. The actual number of shares of Common Stock issuable upon conversion of
the remaining debentures and exercise of warrants is indeterminate, is subject
to adjustment and could be materially less or more than such estimated number
depending on factors which cannot be predicted by us at this time including,
among other factors, the future market price of the common stock. The actual
number of shares of Common Stock offered in this Prospectus, and included in the
registration statement of which this Prospectus is a part, includes such
additional number of shares of Common Stock as may be issued or issuable upon
conversion of the debentures and exercise of related warrants by reason of any
stock split, stock dividend or similar transaction involving the Common Stock,
in accordance with Rule 416 under the Securities Act of 1933, as amended.
Except with respect to Marr Technologies BV, which has identified itself as an
affiliate of the Company in public filings with the Commission, and with respect
to the investors in the May 2004 PIPE, under the terms of the debentures, notes
and the related warrants, the debentures and notes are convertible and the
warrants are exercisable by any holder only to the extent that the number of
shares of Common Stock issuable pursuant to such securities, together with the
number of shares of Common Stock owned by such holder and its affiliates (but
not including shares of Common Stock underlying unconverted shares of debentures
or unexercised portions of the warrants) would not exceed 9.99% of the
then-outstanding Common Stock as determined in accordance with Section 13(d) of
the Exchange Act; this restriction may be waived for certain selling security
holders. With respect to the investors in the May 2004 PIPE, under the terms of
the related warrants, the warrants are exercisable by any holder only to the
extent that the number of shares of Common Stock issuable pursuant to the
warrants, together with the number of shares of Common Stock owned by such
holder and its affiliates (but not including shares of Common Stock underlying
unexercised portions of the warrants) would not exceed 4.99% of the
then-outstanding Common Stock as determined in accordance with Section 13(d) of
the Exchange Act, except that this restriction may be waived upon 61 days'
notice by the holder. Accordingly, the number of shares of Common Stock set
forth in the table for the selling security holder may exceed the number of
shares of Common Stock that the selling security holder could own beneficially
at any given time through its ownership of the debentures and the warrants. In
that regard, the beneficial ownership of the Common Stock by the selling
security holder set forth in the table is not determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934, as amended.
27
The applicable percentage of ownership listed below is based on 163,721,512
shares of Common Stock outstanding as of June 10, 2004.
Common Stock
Beneficially Common Stock
Owned Prior to Common Stock to Beneficially Owned
Offering be Sold After Offering
--------------------------------------------------------------------
Holder Number Number Number Percent
Stonestreet Limited Partnership (1) 321,954 321,954 -0- *
SDS Capital International Ltd. (2) 1,266,600 1,266,600 -0- *
Compass Strategic Corporation (3) 1,500,000 1,500,000 -0- *
Mercator Momentum Fund, L.P. (4) 704,474 (44) 704,474 -0- *
Mercator Focus Fund, L.P. (4) 3,100,801 3,100,801 -0- *
Gamma Opportunity Capital Partners, LP (5) 349,358 349,358 -0- *
Goldplate Investment Partners (6) 418,796 418,796 -0- *
Khalid B. Ahmed, M.D. Pension Plan (7) 84,602 84,602 -0- *
Roger Suyama (8) 33,841 33,841 -0- *
Logisticorp, Inc. (9) 213,903 (45) 213,903 -0- *
Southwest Resource Preservation Inc. (10) 427,807 (46) 427,807 -0- *
Ace Global Ltd. (11) 153,846 (47) 153,846 -0- *
Piter Korompis (12) 461,538 (48) 461,538 -0- *
Net Capital Partners, Inc. (13) 1,637,998 (49) 1,637,998 -0- *
Langdale Profits Limited (14) 769,231 (50) 769,231 -0- *
Synergyworks, Ltd. (15) 1,538,462 (51) 1,538,462 -0- *
Marr Technologies BV (16) 49,540,151 (52) 44,140,151 5,400,000 3.30%
Top Calibre Enterprise Limited (17) 775,000 (53) 775,000 -0- *
David Miller (18) 6,250 6,250 -0- *
Antonella Popoff (19) 6,250 6,250 -0- *
Jack W. Reich (20) 6,250 6,250 -0- *
Rona Taylor (21) 6,250 6,250 -0- *
Ernesto Cardenas (22) 100,000 100,000 -0- *
CEOCast, Inc. (23) 400,000 400,000 -0- *
European Equity Group (24) 100,000 100,000 -0- *
New York University (25) 525,000 525,000 -0- *
Platinum Partners Value Arbitrage Fund (26) 675,625 675,625 -0- *
Alfonso Saavedra (27) 100,000 100,000 -0- *
Vintage Filings (28) 46,875 46,875 -0- *
John M. Ennis (29) 26,131 26,131 -0- *
Paul R. Smith (29) 3,056 3,056 -0- *
Kyle Ryan (29) 458 458 -0- *
Michael Schmidt (29) 458 458 -0- *
Joseph M. Staebler (29) 458 458 -0- *
Magic Johnson Foundation (30) 200,000 (54) 200,000 -0- *
Pointe Investments, Ltd. (31) 500,000 500,000 -0- *
Craig Enenstein (32) 100,000 (55) 100,000 -0- *
Michael Rovens (33) 100,000 (56) 100,000 -0- *
Adaltis, Inc. (34) 212,127 (57) 212,127 -0- *
Merchant Intercapital (35) 150,000 (58) 150,000 -0- *
SF Capital Partners Ltd. (36) 13,832,000 (59) 13,500,000 332,000 *
Proximity Fund LP (37) 1,687,500 (60) 1,687,500 -0- *
Proximity Partners LP (38) 1,687,500 (61) 1,687,500 -0- *
MTB Small Cap Growth Fund (39) 1,687,500 (62) 1,687,500 -0- *
MTB Multi Cap Growth Fund (40) 1,687,500 (63) 1,687,500 -0- *
Bridges & PIPES LLC (41) 1,012,500 (64) 1,012,500 -0- *
Duncan Capital LLC (42) 30,000 (65) 30,000 -0- *
Capstone Investments (43) 600,000 (66) 600,000 -0- *
---------- ---------- ---------
88,788,050 83,056,050 5,732,000
========== ========== =========
28
- ------------
* Represents beneficial ownership of less than 1%
(a) Assumes all shares included in this offering are sold by the selling
security holder
(1) Stonestreet Limited Partnership is engaged in the business of investing in
publicly traded equity securities for its own account. Stonestreet's
principal offices are located at 260 Towne Centre Blvd., Suite 201,
Markham, Ontario, Canada L3R 8H8. Elizabeth Leonard has voting and
investment control over investments held by Stonestreet.
(2) SDS Capital International, Ltd. Is engaged in the business of investing in
publicly traded equity securities for its own account. SDS Capital's
principal offices are located at HWR Services Ltd., Craigmuir Chambers,
Road Town, Tortola, British Virgin Islands. Steve Derby has voting and
investment control over investments held by SDS Capital.
(3) Compass Strategic Corportion is engaged in the business of investing
publicly traded equity securities for its own account. Compass' principal
ofices are located at c/o Patton, Moreno & Asvat BVI Ltd. , P.O. Box 3174,
Road Town, Tortola British Virgin Islands. Marco Natalucci has voting and
investment control over investments held by Compass Strategic Corporation.
The shares listed have been sold to the selling stockholder by Camden
International Ltd. In a transaction not involving the Company.
(4) Mercator Momentum Fund, L.P. and Mercator Focus Fund, L.P. are each
engaged in the business of investing in publicly traded equity securities
for their own accounts. The principal office for each of the Mercator
entities is 555 S. Flower Street, Suite 4500, Los Angeles, CA 90071. David
Firestone has voting and investment control over investments held by
Mercator Momentum Fund and Mercator Focus Fund.
(5) Gamma Opportunity Capital Partners, LP is engaged in the business of
investing in publicly traded equity securities for its own account. Gamma
Opportunity Capital's principal offices are located at 605 Crescent
Executive Court, Building Three, Suite 416, Lake Mary, Florida 32746.
Jonathan P. Knight has voting and investment control over investments held
by Gamma Opportunity Capital Partners.
(6) Goldplate Investment Partners is engaged in the business of investing in
publicly traded equity securities for its own account. Goldplate's
principal offices are located at 53rd Street Urbanizacion Obarrio, Swiss
Tower, 16th Floor, Panama, Republic of Panama. Ron Shapiro has voting and
investment control over investments held by Goldplate Investment Partners.
(7) Khalid B. Ahmed M.D. Pension Plan is engaged in the business of investing
in publicly traded equity securities for its own account. The Pension
Plan's principal office is located at 4511 Rosemead Blvd., Pico Rivera, CA
90660. Khalid B. Ahmed, M.D. has voting and investment control over
investments held by the Khalid B. Ahmed, M.D. Pension Plan.
(8) Roger Suyama is an individual investor who invests in publicly traded
equity securities for his own account. Mr. Suyama's address is 601 Van
Ness Avenue, #E3-839, San Francisco, CA.
(9) Logisticorp, Inc. is engaged in the business of investing in publicly
traded equity securities for its own account. Logisticorp's primary
offices are located at 4601 W. Sahara, Suite I, Las Vegas, NV 89102.
Stanley Pore has voting and investment control over investments held by
Logisticorp.
(10) Southwest Resource Preservation Inc. is engaged in the business of
investing in publicly traded equity securities for its own account.
Southwest's primary offices are located at 4601 W. Sahara, Suite I, Las
Vegas, NV 89102. Stanley Pore has voting and investment control over
investments held by Southwest Resource Preservation.
(11) Ace Global Ltd. Is engaged in the business of investing in publicly traded
equity securities for its own account. Ace's primary offices are located
at 4406 Cather Avenue, San Diego, CA 92122. Mark Zhuang has voting and
investment control over investments held by Ace Global. The shares listed
have been sold to the selling stockholder by Mercator Momentum Fund LP and
Mercator Advisory Group, LLC in a transaction not involving the Company.
See Note (47).
(12) Piter Korompis is an individual offshore investor who invests in publicly
traded equity securities for his own account. Mr. Korompis' address is
Jalan Durimala I/4, Kepaduri, Tomang Barat, Jakarta, Indondesia. The
shares listed have been sold to the selling stockholder by Mercator
Momentum Fund LP in a transaction not involving the Company. See Note
(48).
(13) Net Capital Partners is engaged in the business of investing in publicly
traded equity securities for its own account. Net Capital Partners'
primary office is located at 49 Main Street, P.O. Box 186, Road Town,
Tortola, British Virgin Islands. Mr. Irawan Onggara has voting and
investment control over investments held by Net Capital Partners. Certain
of the shares listed have been sold to the selling stockholder by Mercator
Momentum Fund LP in a trancaction not involving the Company. See Note
(49).
(14) Langdale Profits Limited is engaged in the business of investing in
publicly traded equity securities for its own account. Langdale's primary
offices are located at 45 Cantonment Road, Singapore 089748, China. Mr.
Agus Irawan has voting and investment control over investments held by
Langdale Profits. The shares listed have been sold to the selling
stockholder by Mercator Momentum Fund LP and Mercator Advisory Group LLC
in a transaction not involving the Company. See Note (50).
(15) Synergyworks, Ltd. Is engaged in the business of investing in publicly
traded equity securities for its own account. Synergyworks' primary
offices are located at Jipfa Building, Third Floor, Main Street, P.O. Box
181, Road Town, British Virgin Islands. Andry Pribadi has voting and
investment control over investments held by Synergyworks. The shares
listed have been sold to the selling stockholder by Mercator Momentum Fund
LP in a transaction not involving the Company. See Note (51).
(16) Marr Technologies, BV is engaged in the business of investing in publicly
traded equity securities for its own account. Marr Technologies' primary
offices are located at Strawinskylaan 1431, 1077XX Amsterdam, The
Netherlands. Mr. Marat Safin has voting and investment control over
investments held by Marr Technologies.
(17) Top Calibre Enterprise Limited is engaged in the business of investing in
publicly traded equity securities for its own account. Top Calibre's
primary offices are located at 2nd Floor, Barkly Wharf, Le Caudan
Waterfront, Port Louis, Mauritius. Mihail Zeligman has voting and
investment control over investments held by Top Calibre Enterprise
Limited. The listed shares are underlying warrants issued originally to
Boodle Hatfield,at the direction of Marr Technologies BV as a fee in
conjunction with a 5% Promissory Note Purchase Commitment and subsequent
amendment thereof. Boodle Hatfield subsequently assigned its rights with
respect to the warrants to the selling stockholder.
(18) David Miller is an individual investor who invests in publicly traded
equity securities for his own account. Mr. Miller's address is 1748 Monroe
Avenue, Bronx, NY 10457. The listed shares were issued to the selling
stockholder in conjunction with a consulting contract between the Company
and BioEquity Partners, Inc.
(19) Antonella Popoff is an individual investor who invests in publicly traded
equity securities for her own account. Ms. Popoff's address is 585 Albin
Street, Teaneck, NJ 07666. The listed shares were issued to the selling
stockholder in conjunction with a consulting contract between the Company
and BioEquity Partners, Inc.
(20) Jack W. Reich is an individual investor who invests in publicly traded
equity securities for his own account. Mr. Reich's address is P.O. Box
8025,Rancho Santa Fe, CA 92067. The listed shares were issued to the
selling stockholder in conjunction with a consulting contract between the
Company and BioEquity Partners, Inc.
29
(21) Rona Taylor is an individual investor who invests in publicly traded
equity securities for her own account. Ms. Taylor's address is 35 Eastern
Parkway, Apt. 3C, Brooklyn, NY 11238. The listed shares were issued to the
selling stockholder in conjunction with a consulting contract between the
Company and BioEquity Partners, Inc.
(22) Ernesto Cardenas is an individual investor who invests in publicly traded
equity securities for his own account. Mr. Cardenas' address is c/o Astor
Capital, 9300 Wilshire Blvd., Suite 308, Beverly Hills, CA 90212. The
listed shares were issued to the selling stockholder in conjunction with a
consulting contract with the Company.
(23) CEOCast, Inc. is engaged in the business of investing in publicly traded
equity securities for its own account. CEOCast's primary offices are
located at55 John Street, 11th Floor, New York, NY 10038. Michael Wachs
has voting and investment control over investments held by CEOCast. The
listed shares were issued to the selling stockholder in conjunction with a
contract to provide investor relations services to the Company.
(24) European Equity Group is engaged in the business of investing in publicly
traded equity securities for its own account. European Equity Group's
primary offices are located at c/o Astor Capital, 9300 Wilshire Blvd.,
Suite 308, Beverly Hills, CA 90212. Sophie Leacacos has voting and
investment control over investments held by European Equity Group. The
listed shares were issued to the selling stockholder in conjunction with a
consulting contract with the Company.
(25) New York University is engaged in the business of investing in publicly
traded equity securities for its own account. New York University School
of Medicine's primary offices are located at Office of Industrial
Liaison/Technology Transfer, 650 First Avenue, 6th Floor, New York, NY
10016. Abram Goldfinger has voting and investment control over investments
held by New York University. The listed shares were issued to the selling
stockholder in conjunction with a license agreement with the Company.
(26) Platinum Partners Value Arbitrage Fund is engaged in the business of
investing in publicly traded equity securities for its own account.
Platinum Partners' primary offices are located at 152 West 57th Street,
54th Floor, New York, NY 10019. Harry Adler has voting and investment
control over investments held by Platinum Partners Value Arbitrage Fund.
The listed shares were issued to the selling stockholder in conjunction
with the exercise of a warrant issued under a consulting contract with the
Company that was assigned by the consultant.
(27) Alfonso Saavedra is an individual investor who invests in publicly traded
equity securities for his own account. Mr. Saavedra's address is c/o Astor
Capital, 9300 Wilshire Blvd., Suite 308, Beverly Hills, CA 90212. The
listed shares were issued to the selling stockholder in conjunction with a
consulting contract with the Company.
(28) Vintage Filings is an EDGAR filing agent that provides filing conversion
services for public companies. Vintage Filings' primary offices are
located at 150 West 46th Street, New York, NY 10036. Shai Stern has voting
and investment control over investments held by Vintage Filings. The
listed shares were issued to the selling stockholder in conjunction with a
consulting contract with the Company.
(29) John M. Ennis, Paul R. Smith, Kyle Ryan, Michael Schmidt and Joseph M.
Staebler are each individual investors who invest in publicly traded
equity securities for his own account. The address for each of these
individuals is c/o URSA, Inc., 5601 East 18th Street, Suite 305,
Vancouver, WA 98661. The listed shares were issued to the selling
stockholder in conjunction with an asset purchase agreement with the
Company.
(30) Magic Johnson Foundation is engaged in the business of investing in
publicly traded equity securities for its own account. The Foundation's
primary offices are located at 9100 Wilshire Blvd., 700 East Tower,
Beverly Hills, CA 90012. Kawanna Brown has voting and investment control
over investments held by the Magic Johnson Foundation. The listed shares
were or will be issued to the selling stockholder in conjunction with a
consulting agreement with the Company.
(31) Pointe Investments Ltd. Is engaged in the business of investing in
publicly traded equity securities for its own account. Pointe Investment's
primary offices are located at 900 Sunset Boulevard, Los Angeles, CA.
Assad Ali Assad has voting and investment control over investments held by
Pointe Investments. The listed shares were issued to the selling
stockholder in conjunction with a consulting contract with the Company.
(32) Craig Enenstein is an individual investor who invests in publicly traded
equity securities for his own account. Mr. Enenstein's address is 12051
Rose Marie Lane, Los Angeles, CA 90049. The listed shares are issuable
upon the exercise of a warrant granted to the selling stockholder in
conjunction with a consulting contract with the Company.
(33) Michael Rovens is an individual investor who invests in publicly traded
equity securities for his own account. Mr. Rovens' address is 1400
Ambassador Street, # 203, Los Angeles, CA 90035. The listed shares are
issuable upon the exercise of a warrant granted to the selling stockholder
in conjunction with a consulting contract with the Company.
(34) Adaltis, Inc. is engaged in the business of investing in publicly traded
equity securities for its own account. Adaltis' primary offices are
located at 10900 Hamon Street, Montreal, Quebec, Canada H3M 3A4. Paulo
Bouca has voting and investment control over investments held by Adaltis.
(35) Merchant Intercapital is engaged in the business of investing in publicly
traded equity securities for its own account. Merchant Intercapital's
primary offices are located at 340 Broad Avenue, Englewood, NJ 07631.
Ronny Kraft has voting and investment control over investments held by
Merchant intercapital.
(36) SF Capital Partners Ltd.'s primary offices are located at 3600 South Lake
Drive, St. Francis, WI 53235. Michael A. Roth and Brian J. Stark are the
founding members and direct the management of Staro Asset Management, LLC,
a Wisconsin limited liability company ("Staro"), which acts as investment
manager and has sole power to direct the management of SF Capital Partners
Ltd. Through Staro, Messrs. Roth and Stark possess sole voting and
dispositive power over all of the shares owned by SF Capital Partners Ltd.
(37) Proximity Fund LP is engaged in the business of investing in publicly
traded equity securities for its own account. Proximity Fund's primary
offices are located at 1 Montgomery Street, Suite 3300 San Francisco, CA
94104. Geoff Crosby has voting and investment control over investments
held by Proximity Fund LP.
(38) Proximity Partners LP is engaged in the business of investing in publicly
traded equity securities for its own account. Proximity Partners' primary
offices are located at 1 Montgomery Street, Suite 3300 San Francisco, CA
94104. Geoff Crosby has voting and investment control over investments
held by Proximity Partners LP.
(39) MTB Small Cap Growth Fund is engaged in the business of investing in
publicly traded equity securities for its own account. MTB Small Cap
Growth Fund's primary offices are located in care of MTB Investment
Advisors at 1000 East Pratt Street, 17th Floor, Baltimore, MD 21202. James
Thorne has voting and investment control over investments held by MTB
Small Cap Growth Fund.
(40) MTB Multi Cap Growth Fund is engaged in the business of investing in
publicly traded equity securities for its own account. MTB Multi Cap
Growth Fund's primary offices are located in care of MTB Investment
Advisors at 1000 East Pratt Street, 17th Floor, Baltimore, MD 21202.
Thomas DeHudy has voting and investment control over investments held by
MTB Small Cap Growth Fund.
(41) Bridges & PIPES LLC is engaged in the business of investing in publicly
traded equity securities for its own account. Duncan Capital's primary
offices are located at 830 Third Avenue, 14th Floor, New York, NY 10022.
David Fuchs has voting and investment control over investments held by
Duncan Capital.
30
(42) Duncan Capital LLC is engaged in the business of investing in publicly
traded equity securities for its own account. Duncan Capital's primary
offices are located at 830 Third Avenue, 14th Floor, New York, NY 10022.
David Fuchs has voting and investment control over investments held by
Duncan Capital.
(43) Capstone Investments is engaged in the business of investing in publicly
traded equity securities for its own account. Capstone's primary offices
are located at 4660 La Jolla Village Drive, Suite 1040, San Diego, CA
92122. Steven Capozza has voting and investment control over investments
held by Capstone Investments.
(44) Includes 604,474 shares which may be issuable upon conversion pursuant to
the aggregate of $97,710 remaining face value of the 12% and 10%
convertible debentures and 100,000 shares that are issuable upon the
exercise of a warrant granted to the selling stockholder as additional
consideration for its investment in the Company's 12% convertible
debentures.
(45) Includes 213,903 shares of common stock which may be issuable upon
conversion pursuant to the $20,000 face value of a 12% convertible
debenture, which includes an allowance for shares which may be issued in
resolution of the transaction date dispute. See Legal Proceedings.
(46) Includes 427,807 shares of common stock which may be issuable upon
conversion pursuant to the $40,000 face value of a 12% convertible
debenture, which includes an allowance for shares which may be issued in
resolution of the transaction date dispute. See Legal Proceedings.
(47) Represents 153,846 shares of common stock purchased from Mercator Advisory
Group, LLC, an affiliate of Mercator Momentum Fund LP, in a transaction
not involving the Company. Mercator Advisory Group, LLC acquired the
shares from Mercator Momentum Fund LP, which acquired the shares in
transactions resulting from the July 2003 issuance and conversion of
$750,000 face value of 12% convertible debentures.
(48) Represents 461,538 shares of common stock purchased from Mercator Momentum
Fund LP in a transaction not involving the Company. Mercator Momentum Fund
LP acquired the shares in transactions resulting from the July 2003
issuance and conversion of $750,000 face value of 12% convertible
debentures.
(49) Includes 1,061,075 shares of common stock that have been issued to the
selling stockholder as a result of the conversion of $300,000 of 10%
convertible debentures assigned by Mercator Momentum Fund LP and 576,923
shares of common stock purchased from Mercator Momentum Fund LP in a
transaction not involving the Company. Mercator Momentum Fund LP acquired
the shares in transactions resulting from the July 2003 issuance and
conversion of $750,000 face value of 12% convertible debentures.
(50) Represents 423,077 shares of common stock purchased from Mercator Momentum
Fund LP and 346,154 shares of common stock purchased from Mercator
Advisory Group, LLC, an affiliate of Mercator Momentum Fund LP, in a
transaction not involving the Company. Mercator Advisory Group, LLC
acquired its shares from Mercator Momentum Fund LP, which acquired all the
shares in transactions resulting from the July 2003 issuance and
conversion of $750,000 face value of 12% convertible debentures.
(51) Represents 1,538,462 shares of common stock purchased from Mercator
Momentum Fund LP in a transaction not involving the Company. Mercator
Momentum Fund LP acquired the shares in transactions resulting from the
July 2003 issuance and conversion of $750,000 face value of 12%
convertible debentures.
(52) Includes 3,125,000 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder
(53) Includes 775,000 shares of common stock that are issuable upon the
exercise of a warrant assigned to the selling stockholder.
(54) Includes 66,666 shares of common stock that have been issued in
conjunction with a consulting agreement with the Company and 133,334
shares that are issuable to the selling stockholder in future periods in
conjunction with the consulting agreement.
(55) Includes 100,000 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder.
(56) Includes 100,000 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder.
(57) Includes 212,127 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder.
(58) Includes 150,000 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder.
(59) Includes 3,500,000 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder.
(60) Includes 437,500 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder.
(61) Includes 437,500 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder.
(62) Includes 437,500 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder
(63) Includes 437,500 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder.
(64) Includes 1,012,500 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder.
(65) Includes 30,000 shares of common stock that are issuable upon the exercise
of a warrant issued to the selling stockholder.
(66) Includes 600,000 shares of common stock that are issuable upon the
exercise of a warrant issued to the selling stockholder.
31
PLAN OF DISTRIBUTION
The selling security holders and any of their pledgees, donees, transferees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of Common Stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling security holders may use any one or more
of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits Investors;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o to cover short sales made after the date that this Registration Statement
is declared effective by the Commission;
o broker-dealers may agree with the selling security holders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling security holders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling security holders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling security holders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling security holders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling security holders may from time to time pledge or grant a security
interest in some or all of the Shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of Common Stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
security holders to include the pledgee, transferee or other successors in
interest as selling security holders under this prospectus.
Upon the Company being notified in writing by a selling security holder that any
material arrangement has been entered into with a broker-dealer for the sale of
Common Stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such selling security holder and
of the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such the shares of Common Stock were sold, (iv)the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus, and (vi) other facts material to the transaction. In addition,
upon the Company being notified in writing by a selling security holder that a
donee or pledge intends to sell more than 500 shares of Common Stock, a
supplement to this prospectus will be filed if then required in accordance with
applicable securities law.
The selling security holders also may transfer the shares of Common Stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus.
The selling security holders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
Securities will be paid by the selling security holder and/or the purchasers.
Each selling security holder has represented and warranted to the Company that
it acquired the securities subject to this registration statement in the
ordinary course of such selling security holder's business and, at the time of
its purchase of such securities such selling security holder had no agreements
or understandings, directly or indirectly, with any person to distribute any
such securities.
32
The Company has advised each selling security holder that it may not use shares
registered on this Registration Statement to cover short sales of Common Stock
made prior to the date on which this Registration Statement shall have been
declared effective by the Commission. If a selling security holder uses this
prospectus for any sale of the Common Stock, it will be subject to the
prospectus delivery requirements of the Securities Act. The selling security
holders will be responsible to comply with the applicable provisions of the
Securities Act and Exchange Act, and the rules and regulations thereunder
promulgated, including, without limitation, Regulation M, as applicable to such
selling security holders in connection with resales of their respective shares
under this Registration Statement.
The Company is required to pay all fees and expenses incident to the
registration of the shares, but the Company will not receive any proceeds from
the sale of the Common Stock. The Company has agreed to indemnify the Selling
security holders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act. If the selling security holders
use this prospectus for any sale of the Common Stock, they will be subject to
the prospectus delivery requirements of the Securities Act.
LEGAL PROCEEDINGS
On January 24, 2003, we were informed that one of our former vendors, 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 we 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 our facilities. We have contested the claim as the
alleged services claimed by Validation were not performed in a timely fashion
and were, thus, unusable. On September 9, 2003 the Court dismissed Validation's
lawsuit against us due to the failure of Validation's counsel to appear at a
mediation status review and to respond to an order to show cause regarding the
failure to appear. Validation has filed a motion to vacate this dismissal on
grounds of inadvertence, mistake, surprise and excusable neglect. The Court
vacated the dismissal and reinstated the case at a hearing on December 2, 2003
in return for Validation's payment of fees incurred by us in connection with
Validation's failure to appear. Additonally, the Court ordered the parties to
mediation. The parties are in the process of scheduling the mediation. We
believe that we have meritorious defenses to the action.
A claim has been made by Logisticorp, Inc. ("Logisticorp") and Southwest
Resource Preservation, Inc. ("Southwest") with respect to an aggregate of
$60,000 of 12% Convertible Debentures assigned to Logisticorp and Southwest by a
debenture holder. Logisticorp's and Southwest's claim is that each tendered
their respective conversion notice requests in August, 2003 and that as a result
of their separate notice of election to convert their debentures, that Southwest
is entitled to receive 427,807 registered shares of common stock, and
Logisticorp 213,903 registered shares of common stock for an aggregate of
641,710 shares of common stock. Additionally, Logisticorp claims damages in the
sum of at least $235,000, and Southwest claims damages in the sum of at least
$471,000, or an aggregate of at least $706,000. The Company has advised
Logisticorp and Southwest that it disputes their claims with respect to the
conversion notice date, the conversion price and the number of shares based upon
the formula in the debenture and the registration rights for the underlying
shares. The Company, Logisticorp and Southwest are discussing a possible
resolution of the claims.
33
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our directors, executive officers and significant employees are listed below.
POSITION WITH THE COMPANY DIRECTOR
NAME AGE PRINCIPAL / OCCUPATION SINCE
- ---- --- ---------------------- -----
Anthony J. Cataldo 53 Chairman 5/02
John J. DiPietro 46 Director / Chief Financial Officer, Chronix 10/99
Biomedical, Inc.
Paul E. Freiman 69 Director / President and Chief Executive 12/97
Officer, Neurobiological Technologies, Inc.
Julius R. Krevans, M.D. 80 Director / Retired Chancellor Emeritus, 3/95
Director of International Medical Services
University of California, San Francisco
Maxim A. Soulimov 32 Director / Director of Legal Affairs, Global 4/04
Corporate Ventures Limited
Zafar I. Randawa, Ph.D. 55 Director / Director of the New Technology 12/96
Evaluation Division, Otsuka America
Pharmaceutical
J. Richard George, Ph.D. 62 President and Chief Executive Officer n/a
Richard D. Brounstein 54 Executive Vice President and Chief Financial n/a
Officer
ANTHONY J. CATALDO was appointed Executive Chairman in May 2002. Mr.
Cataldo has held management positions with a number of emerging growth and
publicly traded companies. He served as the Chief Executive Officer and Chairman
of the Board of Directors of Miracle Entertainment, Inc., a Canadian film
production Company, from May 1999 through May 2002 where he was the executive
producer or producer of several motion pictures. From August 1995 to December
1998, Mr. Cataldo served as President and Chairman of the Board of Senetek, PLC,
a publicly traded biotechnology company involved in age-related therapies. From
1990 to 1995, Mr. Cataldo held various positions including Chairman and Chief
Executive Officer with Management Technologies, Inc., a manufacturer and seller
of trading system and banking software systems. He has also held the position of
Executive Vice President of Hogan Systems, a banking software manufacturer and
retailer. Mr. Cataldo has also served as President of Internet Systems, a
pioneer in the Internet banking arena. Mr. Cataldo served in the United States
Air Force from 1969 to 1973. Since October 2003, Mr. Cataldo has served as the
Chairman of the Board of Directors of BrandPartners Group, Inc. a publicly-held
brand building communication services company.
JOHN J. DIPIETRO was elected to the Company's Board of Directors in
October 1999. Since September 2002, he has served as the Chief Financial Officer
of Chronix Biomedical Inc, a private biotechnology company. Since February 2003,
Mr. DiPietro has also been a member of the Board of Chronix Biomedical. From
September 1999 to September 2002 he had been the Chief Financial Officer and
Vice President-Finance and Administration of Tripath Technology, Inc., a
semi-conductor manufacturing company. He served as Calypte's Chief Operating
Officer, Vice President of Finance, Chief Financial Officer and Secretary from
December 1997 through September 1999. From October 1995 until December 1997, he
served as Calypte's Vice President of Finance, Chief Financial Officer and
Secretary. Prior to joining the Company, he was Vice President of Finance, Chief
Financial Officer and Secretary of Meris Laboratories, Inc., a full service
clinical laboratory, from 1991 until 1995. He is a Certified Public Accountant
and received his M.B.A. from the University of Chicago, Graduate School of
Business and a B.S. in Accounting from Lehigh University.
PAUL E. FREIMAN has served as a member of the Company's Board of Directors
since December 1997. He has served as the President and Chief Executive Officer
of Neurobiological Technologies, Inc. since May 1997. In 1995, Mr. Freiman
retired from his position as Chairman and Chief Executive Officer of Syntex
Corporation, a pharmaceutical company. From 1962 until 1994, he held several
other positions at Syntex Corporation, including President and Chief Operating
Officer. Mr. Freiman is currently serving on the board of Penwest
Pharmaceuticals Inc. and Neurobiological Technologies, Inc and several private
biotechnology companies. He has been chairman of the Pharmaceutical
Manufacturers Association of America (PhARMA) and has also chaired a number of
key PhARMA committees. Mr. Freiman is also an advisor to Burrill & Co., a San
Francisco merchant bank.
34
JULIUS R. KREVANS, M.D. has served on the Company's Board of Directors
since March 1995. Dr. Krevans served as Chancellor Emeritus and Director of
International Medical Care at University of California at San Francisco from
1993 until his retirement in June 2002. From 1982 until 1993, Dr. Krevans served
as Chancellor at UCSF, and was Dean of the School of Medicine at UCSF from 1971
until 1982. Prior to this, Dr. Krevans served as Dean for Academic Affairs at
Johns Hopkins University School of Medicine where he also served on the faculty
for 18 years and was Professor of Medicine from 1968 until 1971. He is also
Chairman of the Board of Directors of Neoprobe Corporation and a member of the
Board of Directors of AccuImage Corporation. Dr. Krevans received his M.D. from
New York University, College of Medicine and completed a residency in Medicine
at Johns Hopkins University School of Medicine.
MAXIM A. SOULIMOV was appointed to the Company's Board of Directors in
April 2004 pursuant to an August 2003 agreement between the Company and Marr
Technologies BV ("MTBV") in which MTBV purchased $2.5 million of Common Stock
and the Company agreed to grant MTBV the right to appoint two mutually-agreeable
representatives to the Board. MTBV is currently the Company's largest
stockholder, holding approximately 28% of the Company's outstanding Common
Stock. Since November 2002, Mr. Soulimov has served as Director of Legal Affairs
of Global Corporate Ventures Limited ("GCVL") of London, a company providing
consultancy services to a variety of private investors including Marr and its
affiliates. From April 2000 through October 2002, Mr. Soulimov served as
in-house legal counsel for Lukoil Europe Limited and Lukoil Europe Holdings
Limited, private companies involved in the management of all Lukoil downstream
companies outside the Russian Federation. From September 1997 to April 2000, Mr.
Soulimov served as Trainee and then as Assistant Solicitor in the London firm of
Norton Rose Solicitors. Mr. Soulimov holds a Degree in Modern Languages from
Tver State University in Russia and an LLB Law degree from University of
Hertfordshire in the United Kingdom.
ZAFAR I. RANDAWA, PH.D. has served on the Company's Board of Directors
since December 1996. Dr. Randawa is currently the Senior Director of Research &
Development of the Otsuka Maryland Research Institute and has served in this
capacity since September 1995. From 1989 until September 1995, Dr. Randawa
served as a Chief Scientist at Otsuka America Pharmaceutical, Inc. Dr. Randawa
received his Ph.D. in Biochemistry at Oregon Health Sciences University, his
Master of Science degree in Biochemistry at Karachi University in Karachi,
Pakistan, his B.Sc. in Biochemistry from Karachi University and his B.S. in
Chemistry from Panjab University in Lahore, Pakistan.
J. RICHARD GEORGE, PH.D. has served as Calypte's President and Chief
Executive Oficer since January 2004. Dr. George joined the Company in January
2003 as Vice President - Government Affairs. From September 2000 to March 2002,
Dr. George served as Senior Vice President - Research & Development, Infectious
Diseases at Orasure Technologies, Inc. (Nasdaq: OSUR), a company involved in
developing and marketing oral fluid specimen collection devices, including
devices involved in testing for HIV/AIDS. Dr. George served from April 1995
through August 2000 as Chief Science Officer of Epitope, Inc. (a predecessor
company to Orasure Technologies, Inc.). Dr. George was employed in various roles
at the Centers for Disease Control and Prevention (CDC) from 1960 to 1995. He
left the CDC in 1995 as Chief of the Developmental Technology Section,
Laboratory Investigations Branch of the Division of HIV/AIDS. Dr. George
received his Ph.D. in Microbiology from the University of Georgia; he received
his Master of Science and B.S. degrees in Biology from Georgia State University.
RICHARD D. BROUNSTEIN has served as Executive Vice President and Chief
Financial Officer since joining Calypte in December 2001, following a short
period in which he served as a financial consultant and interim CFO. He also
served as member of the Board of Directors from December 2001 until May 2003,
when he did not stand for re-election. Prior to joining Calypte, Mr. Brounstein
served as Chief Financial Officer for Certicom Corporation, a mobile and
wireless software security company from 2000 to 2001. From 1997 to 2000, Rick
served as Chief Financial Officer for VidaMed, Inc., a growth-stage medical
device company. From 1989 to 1997, Mr. Brounstein served as Chief Financial
Officer and Chief Quality Officer of MedaSonics, Inc., a manufacturer of
non-invasive medical ultrasound devices. Mr. Brounstein is a CPA; he received
both his MBA in Finance and his BA in Accounting from Michigan State University.
THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors has standing Audit, Compensation and Nominating
Committees.
35
AUDIT COMMITTEE
The Audit Committee currently consists of Mr. Freiman as Chairman, Mr.
DiPietro, and Dr. Randawa. The Audit Committee assists the Board in fulfilling
its oversight responsibilities relating to the integrity of the financial
statements, compliance with legal and regulatory requirements, the independent
auditor's qualifications and independence, and the performance of the
independent auditor. It is not the duty of the Audit Committee to plan or
conduct audits, to prepare the Company's financial statements or to determine
that the Company's financial statements and disclosures are complete and
accurate and are in accordance with generally accepted accounting principles and
applicable rules and regulations. These are the responsibilities of management
and the independent auditor. In discharging its responsibilities, the Audit
Committee engages the Company's independent auditors, approves the services
performed by such auditors, reviews and evaluates the Company's accounting
principles and its system of accounting controls, and reviews with the auditors
the Company's quarterly unaudited and annual audited financial statements and
the results of the reviews and audit thereof.
The Board has determined that all current members of the Audit Committee
are independent Directors and that each member of the Audit Committee has the
ability to read and understand fundamental financial statements. The Board has
also determined that Mr. Freiman and Mr. DiPietro qualify as "Audit Committee
financial experts" as defined under Item 410(h) of Regulation S-B of the
Securities Exchange Act of 1934 (the "Exchange Act"). Mr. DiPietro served as a
member of the Audit Committee from January 2003 until May 2003, but because of
his prior consulting agreement with the Company, he did not meet the
independence requirements for a member of the Audit Committee at that time.
Consequently, Dr. Randawa replaced Mr. DiPietro on the Audit Committee in May
2003. In January 2004, subsequent to his being considered independent in
September 2003, Mr. DiPietro was re-appointed to the Audit Committee and
replaced Dr. Krevans, who resigned from the Committee.
Compensation Committee
The Compensation Committee consists of Dr. Krevans as Chairman and Mr.
Freiman, both of whom are independent directors who have served on the
Compensation Committee since at least 2000. The Compensation Committee assists
the Board in fulfilling its oversight responsibilities relating to officer and
director compensation, succession planning for senior management, development
and retention of senior management, and administration of the Company's stock
option, incentive and other benefit plans, including, without limitation the
1995 Director Option Plan (the "Director Plan") and the 2000 Equity Inventive
Plan (the "2000 Plan").
Nominating Committee
The Nominating Committee consists of Mr. Freiman as Chairman and Dr. Krevans,
both of whom have served on the Nominating Committee since 2002. The Nominating
Committee assists the Board in fulfilling its oversight responsibilities
relating to the Company's corporate governance matters, including the
determination of the independence status of current and prospective Board
members, periodic evaluation of the Board of Directors, its committees and
individual directors, and the identification and selection of director nominees.
The Nominating Committee will also consider stockholder suggestions for nominees
for director other than self-nominating suggestions.
REPORT OF AUDIT COMMITTEE
Annual Report on Form 10-KSB
The role of the Audit Committee (the "Committee") is to assist the Board in its
oversight of the Company's financial reporting process. The Audit Committee
operates pursuant to a Charter that was last amended and restated by the Board
on January 19, 2004. Management of the Company is responsible for the
preparation, presentation and integrity of the Company's financial statements,
the Company's accounting and financial reporting principles and internal
controls and procedures designed to assure compliance with accounting standards
and applicable laws and regulations. The independent auditors are responsible
for auditing the Company's financial statements and expressing an opinion as to
their conformity with generally accepted accounting principles.
36
In the performance of its oversight function, the Committee met and held
discussions with management and Odenberg Ullakko Muranishi & Co. LLP ("OUM"),
the Company's independent auditors. Management represented to the Committee that
the Company's consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States, and the Committee
reviewed and discussed the consolidated financial statements with management and
with OUM. The Committee also discussed with OUM the matters required to be
discussed by Statement on Auditing Standards No. 61 (Codification of Statements
on Auditing Standards, AU 380), as amended.
In addition, the Committee discussed with OUM their independence from the
Company and its management, and OUM provided to the Committee the written
disclosures and letter required from the independent auditors by the
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees).
The Committee discussed with OUM the overall scope and plans for their
audit. The Committee met with OUM, with and without management present, to
discuss the results of their examination, their evaluations of the Company's
internal controls, and the overall quality of the Company's financial reporting.
The members of the Committee are not professionally engaged in the
practice of auditing and therefore rely without independent verification on the
information provided to them and on the representations made by management and
the independent auditors. Accordingly, the Audit Committee's oversight does not
provide an independent basis to determine that management has maintained
appropriate accounting and financial reporting principles or appropriate
internal control and procedures designed to assure compliance with accounting
standards and applicable laws and regulations. Furthermore, the Audit
Committee's reviews and discussions referred to above do not assure that the
audit of the Company's financial statements has been carried out in accordance
with generally accepted auditing standards, that the financial statements are
presented in accordance with generally accepted accounting principles or that
the Company's auditors are in fact "independent."
Based upon the reports and discussions described in this report, and
subject to the limitations on the role and responsibilities of the Audit
Committee referred to above and in the Audit Committee's Charter, the Audit
Committee approved the inclusion of the audited financial statements in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 for
filing with the SEC.
SEC Informal Inquiry
The Company was contacted by the San Francisco District Office of the
Securities and Exchange Commission (the "Commission") on October 28, 2003 and
advised that the enforcement staff of the Commission was conducting an informal
inquiry regarding the Company. The Commission has requested, among other things,
documents and information related to certain press releases issued by the
Company. The Commission has advised the Company that the inquiry should not be
construed as an indication by the Commission or its staff that any violation of
law has occurred. The Company has voluntarily provided the information sought by
the Commission and is cooperating with the Commission in connection with its
informal inquiry.
Independently, the Committee investigated the matter and retained outside
counsel to assist in its investigation by reviewing the press releases and
related information that were the subject matter of the Commission's informal
inquiry letter. The Committee completed its investigation and reported the
results of its investigation and associated recommendations to the Board of
Directors. Counsel for the Committee advised both the Committee and the Board of
Directors that the results of their investigation, interviews and review of
documents provided in response to the Commission's informal inquiry letter
indicated no evidence of management malfeasance with respect to its inquiry. The
Committee, based upon its counsel's recommendations, proposed that the Company
implement certain practices and procedures, some of which represent a
continuation or formalization of present practices. The recommendations and
proposals of the Committee were approved by the Board of Directors and include
certain improvements in the Company's press release issuance process and
investor relations and regulatory recordkeeping procedures. Additionally, the
Board of Directors has directed management to implement the American Stock
Exchange corporate governance standards (SR-AMEX-2003-65) approved by the
Commission on December 1, 2003. While corporate governance is an on-going
process, the Company has substantially implemented our recommendations and
proposals and we and the Board have approved the updated policies and charters,
including those attached as exhibits to this Proxy Statement.
37
Change of Auditors
The Company's interim financial statements are required to be reviewed
under Statement of Auditing Standards 100 ("SAS 100") by an independent public
accountant pursuant to Item 310(b) of Regulation S B and our annual financial
statements must be audited by an independent public accountant pursuant to Item
310(a) of Regulation S B. Calypte's former independent auditors, KPMG LLP
("KPMG"), informed the Company that they could not complete their quarterly
review of the Company's interim financial statements contained in the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended September 30,
2003 or audit the Company's financial statements for its fiscal year ended
December 31, 2003 until such time as the Audit Committee had completed its
investigation related to the Commission's informal inquiry letter, the same was
reviewed by KPMG, and KPMG was satisfied that, in its opinion, an adequate
investigation was conducted and appropriate conclusions were reached and actions
taken.
On December 23, 2003, the Board dismissed KPMG as independent auditors for
the Company, effective immediately, at the recommendation of the Committee. As
of the date of KPMG's dismissal, KPMG had advised the Company that, in KPMG's
opinion, the conditions necessary for KPMG to complete its review had not yet
been satisfied. At the time of KPMG's dismissal, the Committee had completed its
investigation, had reported the results of its investigation and associated
recommendations to the Board of Directors, and the Board of Directors had
approved the recommendations. Additionally, at that time, counsel for the
Committee had advised the Company and the Committee that it had commenced to
provide to KPMG information concerning the investigation conducted, the
conclusions reached and the actions taken by the Company.
On December 24, 2003, upon the approval of and at the direction of the
Committee, the Company engaged OUM to audit the consolidated financial
statements of the Company for the two years ended December 31, 2003 and 2002 for
inclusion in the Company's Annual Report on Form 10-KSB and to review the
interim financial statements of the Company contained in its Quarterly Report on
Form 10-QSB for the quarterly period ended September 30, 2003. OUM has completed
the SAS 100 review associated with the Company's Form 10-QSB/A (No.1) and its
audit of the Company's financial statements for the years ended December 31,
2003 and 2002.
The Committee and the Board have appointed, subject to stockholder
ratification, OUM as the Company's independent auditors for the fiscal year
ending December 31, 2004.
SUBMITTED BY THE AUDIT COMMITTEE OF THE BOARD
Paul E. Freiman, Chairman
John J. DiPietro
Zafar I. Randawa, Ph.D.
April 16, 2004
38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except as set forth in the footnotes to this table, the following table
sets forth information known to the Company with respect to the beneficial
ownership of its Common Stock as of June 10, 2004 for (i) all persons known by
the Company to own beneficially more than 5% of its outstanding Common Stock,
(ii) each of the Company's directors, (iii) each Named Executive Officer and
(iv) all directors and executive officers of the Company as a group.
SHARES % OF
5% STOCKHOLDERS, DIRECTORS AND OFFICERS(1) BENEFICIALLY TOTAL(2)
------------------------------------------ ------------ --------
Marr Technologies BV (3) 49,540,151 29.69
Strawinskylaan 1431
1077XX, Amsterdam
The Netherlands
SF Capital Partners Ltd. (4) 10,322,000 6.31
3600 South Lake Drive
St. Francis, WI 53235
Anthony J. Cataldo (5) 5,022,341 2.98
Richard D. Brounstein (6) 1,507,371 *
J. Richard George (7) 2,549,051 1.53
John DiPietro (8) 307,977 *
Paul Freiman (9) 309,901 *
Julius Krevans, M.D.(10) 308,468 *
Zafar Randawa, Ph.D.(11) 351,372 *
Maxim A. Soulimov (12) 200,000 *
All current directors and executive officers as a group (8 persons) 10,556,481 6.07
- ------------------
* Represents beneficial ownership of less than 1%.
(1) To the Company's knowledge, except as set forth in the footnotes to this
table and subject to applicable community property laws, each person named
in this table has sole voting and investment power with respect to the
shares set forth opposite such person's name. Except as otherwise
indicated, the address of each of the persons in this table is as follows:
c/o Calypte Biomedical Corporation, 1265 Harbor Bay Parkway, Alameda,
California 94502.
(2) Based on 163,721,512 shares outstanding as of June 10, 2004.
(3) As reported in Amendment No. 3 to Schedule 13D dated December 2, 2003
filed with the Securities and Exchange Commission adjusted for shares and
warrants purchased in the 2004 PIPE transaction. Includes 3,125,000 shares
subject to warrants exercisable within 60 days. Marat Safin has voting and
investment control over shares held by Marr Technologies BV.
(4) As reported in Schedule 13G dated June 3, 2004 filed with the Securities
and Exchange Commission. Excludes 3,500,000 shares subject to warrants
held by SF Capital Partners Ltd. Such warrants are subject to conversion
caps that preclude SF Capital Partners Ltd. from utilizing its exercise
rights within 60 days to the extent that it would beneficially own
(determined in accordance with Section 13(d) of the Securities Act of
1934) in excess of 4.999% of the Company's common stock, giving effect to
such exercise. Michael A. Roth and Brian J. Stark are the founding members
and direct the management of Staro Asset Management, LLC, a Wisconsin
limited liability company ("Staro"), which acts as investment manager and
has sole power to direct the management of SF Capital Partners Ltd.
Through Staro, Messrs. Roth and Stark possess sole voting and dispositive
power over all of the shares owned by SF Casptial Partners Ltd.
(5) Includes 4,765,556 shares subject to options exercisable within 60 days.
The grant of 2,500,000 options is subject to stockholder approval of the
Company's 2004 Incentive Plan at the Company's Annual Meeting of
Stockholders scheduled for June 22, 2004.
39
(6) Includes 1,507,371 shares subject to options exercisable within 60 days.
The grant of 750,000 options is subject to stockholder approval of the
Company's 2004 Incentive Plan at the Company's Annual Meeting of
Stockholders scheduled for June 22, 2004.
(7) Includes 2,549,051 shares subject to options exercisable within 60 days.
The grant of 2,500,000 options is subject to stockholder approval of the
Company's 2004 Incentive Plan at the Company's Annual Meeting of
Stockholders scheduled for June 22, 2004.
(8) Includes 307,734 shares subject to options exercisable within 60 days.
(9) Includes 309,901 shares subject to options exercisable within 60 days.
(10) Includes 308,001 shares subject to options exercisable within 60 days.
(11) Includes 308,267 shares subject to options exercisable within 60 days. Dr.
Randawa is a director of the Company and an affiliate of Otsuka
Pharmaceutical Co., Ltd. All shares listed are held by Otsuka. Dr. Randawa
disclaims beneficial ownership of the shares except to the extent of his
affiliation with Otsuka.
(12) Includes 200,000 shares subject to options exercisable within 60 days.
Marr Technologies BV ("Marr"), the beneficial owner of 49,540,151 shares
of Calypte Common stock (the "Marr Holdings") has the right to nominate
two (2) candidates to serve on the Calypte Board of Directors. Mr.
Soulimov was nominated by Marr and subsequently appointed as a director
upon approval of the Calypte Board of Directors. Mr. Soulimov disclaims
any direct or indirect beneficial ownership of Marr Holdings and does not
exercise any control nor does he take part in any investment decisions
undertaken by Marr and does not have a direct or indirect pecuniary
interest in Marr Holdings.
DESCRIPTION OF THE SECURITIES
The determination of shares currently issuable under the convertible debenture
agreements described below is based on the low trading prices assuming such
shares had been issued upon a conversion at a date during the period between May
17, 2004 and June 10, 2004, and which includes the 20 trading day look-back
period preceding the assumed conversion date, as specified in the respective
agreements. Our stock traded between $0.41 and $0.56 during this period,
including the look-back period, and the calculation of currently-issuable shares
is based on the low trade prices during this period. The Company believes that
this approach to determining the number of shares currently issuable, which, in
turn, is used to determine the number of shares to be registered, provides a
reasonable estimate based on the trading characteristics of its stock. (Tables
are in thousands, except share price and per share data. All share amounts and
per share prices reflect the post-split basis of a 1:30 reverse stock split
approved by our stockholders on May 20, 2003 and which became effective on May
28, 2003.)
SECURITIES PREVIOUSLY REGISTERED IN OUR JULY 2003 REGISTRATION STATEMENT
The registration statement for the financings described in this section (File
No. 333-106862) became effective on July 18, 2003. In that registration
statement, we registered 52.5 million shares of our common stock on the basis of
a then-current market price applicable to the convertible securities of
approximately $0.28 per share, before contractual discounts. Shortly following
the effectiveness of the registration statement, many of the investors holding
the convertible notes and debentures elected to convert their holdings into
shares of our stock and to immediately sell the shares. The market price of our
stock declined significantly and the holders were unable to convert all of the
notes and debentures into registered shares of stock. Many of the investors
chose to convert at the lower, then-current market price and we issued
restricted shares of stock to the holders of such convertible notes and
debentures.
40
A significant number of the restricted shares that the Company issued have been
and are now eligible for resale under exemptions provided by Rule 144. Many of
the investors have sold their restricted stock under the provisions of Rule 144.
This registration statement includes approximately 12.2 million restricted
shares of our Common Stock issued or potentially issuable upon conversion to the
holders of the convertible notes and debentures as described below. In certain
cases, we are registering the shares for resale by the initial investor in our
convertible securities who holds an unconverted portion of the convertible
security or the restricted shares we issued upon conversion. In other cases, we
are registering the shares for resale by the accredited investor to whom an
investor transferred shares and who may not currently be eligible to resell them
under the provisions of Rule 144. The tables below indicate the number of shares
being registered pursuant to the security we issued. The Selling Security Holder
table indicates the party for whom the shares are being registered. Based on our
transfer agent's records and communications with our initial investors, we are
not including in this registration statement any restricted shares that we
issued pursuant to conversion of our convertible securities that were
subsequently resold by our initial investors under an exemption permitted by
Rule 144.
8% CONVERTIBLE NOTES
Pursuant to Regulation S, between May 24, 2002 and August 21, 2002, we issued a
series of 8% convertible notes in the aggregate principal amount of $3.125
million. On May 9, 2003, we issued an additional 8% note in the face amount of
$106,667 representing liquidated damages due to one of the holders of the May
24, 2002 notes. These notes each had a 24 month term and were convertible into
shares of our common stock at the lesser of $3.00 or 70% of the average of the
three lowest trades during the 30 day period preceding conversion and were
convertible at any time prior to maturity. We received approximately $2.6
million in proceeds after deducting costs and fees associated with the issuance
of these notes. Accrued interest was payable in cash or in stock, at the
subscribers' option, at maturity. Under the terms of the subscription agreement,
we had agreed to file a registration statement for the shares of common stock
underlying the notes and use our reasonable commercial efforts to cause the
registration statement to be declared effective within 90 days of the closing
date. In the event of non-registration under the terms of the agreement, we were
required to pay, in cash or stock, at the subscribers' option, as liquidated
damages an amount equal to 2% of the note principal per month. Between July 2002
and December 2003, we recognized as interest expense approximately $768,000 in
liquidated damages resulting from the delay in obtaining an effective
registration for the shares underlying the convertible notes.
All of the holders of the 8% convertible notes have converted their notes into
shares of Common Stock. We issued an aggregate of approximately 46,048,300
shares upon the conversion of principal, accrued interest and liquidated
damages, of which approximately 16,092,100 shares were restricted. We believe
that these notes are subject to Rule 144 provisions and, as such, all of the
securities represented by the $3.232 million original face value are eligible
for resale without registration following the one-year holding period.
Nevertheless, we are including the restricted shares issued upon conversion of
these notes and still held by the initial investors or the accredited investors
to whom they were sold, aggregating approximately 3,088,600 shares of Common
Stock, in this registration statement.
The following table sets forth the individual investors who subscribed to the 8%
convertible notes and summarizes the aggregate number of shares issued upon
conversion of all of the notes and the number of restricted shares being
registered in this registration statement:
41
CALYPTE SHARES SHARES SHARES
GROSS NET TRANSACTION CLOSING ISSUED/ CURRENTLY BEING
INVESTOR AMOUNT AMOUNT DATE PRICE $ REDEEMED ISSUABLE REGISTERED
- -------- ------ ------ ---- ----- ---------- -------- ----------
Alpha Capital $500 5/24/02 $ 3.60 7,260.7/ $500 - -
Aktiengesellshaft
Stonestreet Limited $500 5/24/02 $ 3.60 7,075.7/ $500 - -
Partnership
Filter International Ltd. $150 5/24/02 $ 3.60 2,452.4/ $150 - -
Camden International Ltd. $350 5/24/02 $ 3.60 5,279.1/ $350 - -
Domino International Ltd. $150 5/24/02 $ 3.60 1,767.4/ $150 - -
Thunderbird Global $ 75 5/24/02 $ 3.60 1,083.1/ $75 - -
Corporation
BNC Bach International Ltd. $200 5/24/02 $ 3.60 2,463.8/ $200 - -
Excalibur Limited Partnership $200 5/24/02 $ 3.60 1,678.9/ $200 - -
Standard Resources Ltd. $100 5/24/02 $ 3.60 1,542.5/ $100 - -
SDS Capital International Ltd. $300 7/10/02 $ 10.20 4,189.8/ $300 - 1,266.6
Camden International Ltd. $100 7/10/02 $ 10.20 1,707.9/ $100 - 1,500.0
Excalibur Limited Partnership $250 7/24/02 $ 6.60 4,238.3/ $250 - -
Stonestreet Limited $250 8/21/02 $ 3.90 4,042.2/ $250 - 322.0
Partnership
Alpha Capital $107 5/9/03 $ 0.63 1,302.5/ $107 - -
------ ---------------- ------- -------
Aktiengesellshaft
$3,232 $2,594 46,084.3/ $3,232 - 3,088.6
====== ====== ================ ======= =======
MERCATOR 12% CONVERTIBLE DEBENTURES AND WARRANTS
MERCATOR MOMENTUM FUND - SEPTEMBER 2002 AND JULY 2003
On September 12, 2002, when the market price of our Common Stock was $3.00 per
share and pursuant to Regulation S, we issued a $550,000 12% convertible
debenture to Mercator Momentum Fund, L.P. ("Mercator"). Under the terms of the
amended debenture agreement, the debenture was convertible into shares of our
Common Stock at 85% of the average of the three lowest trades for the 20 days
preceding conversion, and had a term of 24 months. The debenture originally had
a conversion price floor of $1.50 per share, but we and Mercator agreed to
eliminate the floor in March 2003. Interest was payable at maturity or upon
conversion, and was paid in shares of Common Stock at Mercator's option. This
debenture was the first tranche of a $2.0 million commitment. The shares
underlying this $550,000 debenture and an aggregate of $750,000 of additional
12% debentures were included in our July 2003 registration statement.
On July 24, 2003, when the market price of our Common Stock was $0.115 per share
and which was within 5 business days of the filing and effectiveness of the July
2003 registration statement, Calypte issued, pursuant to Regulation S, and three
parties to whom Mercator had assigned their rights under the $2 million
commitment, Alpha Capital AG ("Alpha"), Gamma Opportunity Capital Partners
("Gamma") and Goldplate Investment Partners ("Goldplate") each funded an
additional $250,000 debenture for an aggregate of $750,000. The terms of the
July 2003 debentures were the same as those of the September 2002 debenture.
Fees on the total $2 million commitment were deducted from the proceeds of the
September 2002 transaction so that we received $345,000 at the September 2002
closing and an aggregate of $750,000 at the July 2003 closing.
Under the terms of the September 2002 $550,000 debenture and registration rights
agreements, we agreed to file a registration statement for the shares of common
stock underlying the debenture within 45 days of the closing date and use our
reasonable best commercial efforts to cause the registration statement to be
declared effective within 135 days of the closing date. The agreement required
that the Company pay 333 shares of its common stock per day as liquidated
damages for each day of registration delay. We obtained waivers from Mercator
with respect to the non-registration provisions of the September 2002 debenture
and registration rights agreements. On March 31, 2003, when the market price of
our common stock was $0.885 per share, Mercator agreed to extend the waiver of
the non-registration provisions of the agreements through May 5, 2003. In return
for this waiver, we amended the conversion price for this debenture to eliminate
the $1.50 per share conversion price floor, as noted previously. The debenture
agreement prohibits conversion of the debenture or receipt of shares of our
Common Stock in payment of accrued interest if Mercator, individually or in
combination with any of its affiliates, would, following the conversion or
interest payment, beneficially own in excess of 9.99% of our outstanding stock,
except as permitted by our prior written consent.
On December 23, 2002, when the price of our stock was $1.59 per share, we agreed
with Mercator to amend certain other provisions of the September 2002 debenture
and registration rights agreements. The amendment agreement specified that
Mercator would fund an aggregate of $750,000 of debentures within 5 days
following the effectiveness of a registration statement for 125% of the shares
underlying $1.3 million of the $2.0 million total commitment. As noted, Mercator
assigned its rights under the agreement and Alpha, Gamma and Goldplate fulfilled
Mercator's obligations to fund the $750,000 as required by the agreement.
Mercator was not required to fund the remaining $700,000 commitment for at least
30 days following the effectiveness of the July 2003 registration statement. The
remaining $700,000 commitment was funded in September and October 2003 and the
shares underlying those debentures are included in this registration statement.
See "New Securities Included in this Registration Statement."
42
On May 1, 2003, when the market price for our stock was $0.71 per share,
Mercator agreed to extend the waiver of the non-registration provisions of the
agreement through July 1, 2003. On June 26, 2003, when the trading price for our
stock was $0.36 per share, Mercator agreed to extend the waiver of
non-registration provisions of the agreement through July 15, 2003. We filed the
registration statement on July 8, 2003 and it became effective on July 18, 2003.
In conjunction with the September 2002 debenture, we issued 8,333 shares of our
Common Stock as fee shares to both Mercator and to an affiliated entity,
Mercator Advisory Group, LLC. The aggregate of 16,666 shares was included in the
July 2003 registration statement.
Between July and September 2003, Mercator converted the entire $550,000
debenture plus accrued interest and liquidated damages arising from delayed
registration into 4,849,792 shares of Common Stock, of which 567,976 shares were
restricted. In July 2003, Alpha, Gamma and Goldplate converted the aggregate of
$750,000 of debentures into 8,033,154 shares of Common Stock, of which 4,268,154
shares were restricted. We are including in this registration statement the
restricted shares previously issued upon the conversion of both the September
2002 and July 2003 12% convertible debentures to the extent that the investors
have not sold them under exemptions provided by Rule 144.
In a series of transactions not involving Calypte, Alpha, Gamma and Goldplate
transferred ownership of an aggregate of 3,500,000 restricted shares issued upon
their conversions of the July 2003 debentures to Mercator. Mercator subsequently
sold these restricted shares to five accredited investors. The Company is
registering these shares for the benefit of the five investors, who are included
in the Selling security holderstable.
MERCATOR MOMENTUM FUND - OCTOBER 2002
On October 22, 2002, we issued a $300,000 12% convertible debenture to Mercator,
also pursuant to Regulation S, but not a part of the $2.0 million commitment
agreed to in September 2002. We received $260,000 in cash proceeds after
deducting fees and expenses related to the financing. The maturity and
conversion terms were substantially equivalent to those of the September 12,
2002 debenture. We repaid this debenture and its accrued interest in January
2003 in conjunction with the funding of another of our debentures by an
affiliate of Mercator. In conjunction with the October debenture, we issued
Mercator a warrant to purchase 100,000 shares of our common stock. The warrant
is exercisable for a period of five years after issuance at $3.00 per share.
Mercator has sole discretion with respect to when and if it chooses to exercise
the warrant prior to its expiration. We did not receive any additional
consideration over and above the negotiated price for the debenture in
connection with the issuance of this warrant. We are including the 100,000
shares underlying the warrant in this registration statement.
MERCATOR MOMENTUM FUND - APRIL 2003
On April 29, 2003, when the market price of our Common Stock was $0.825 per
share and pursuant to Regulation S, we issued a $300,000 12% convertible
debenture to Mercator and received proceeds of $245,000 net of fees and
expenses. This Mercator debenture was convertible into shares of our Common
Stock at 70% of the average of the three lowest trades for the 20 trading days
preceding conversion, but not more than $1.20 per share. The term of the
debenture was 12 months. Interest is payable at maturity or upon conversion, and
has been paid in shares of our Common Stock at Mercator's option. Under the
terms of the debenture agreement, we agreed to file a registration statement for
the shares of Common Stock underlying the debenture within 30 days of the
closing date and use our reasonable best commercial efforts to cause the
registration statement to be declared effective within 120 days of the closing
date. The agreement required that the Company pay the greater of $300 or 333
shares of its Common Stock per day as liquidated damages for each day of
registration delay. The debenture agreement prohibits conversion of the
debenture or receipt of shares of our common stock in payment of accrued
interest if Mercator, individually or in combination with any of its affiliates
would, following the conversion or interest payment, beneficially own in excess
of 9.99% of our outstanding stock, except as permitted by our prior written
consent.
On May 1, 2003, when the market price for our Common Stock was $0.71 per share,
Mercator agreed to extend the waiver of the non-registration provisions of the
agreement through July 1, 2003. On June 26, 2003, when the trading price for our
Common Stock was $0.36 per share, Mercator agreed to extend the waiver of
non-registration provisions of the agreement through July 15, 2003. We filed the
registration statement on July 8, 2003 and it became effective on July 18, 2003.
Between August and September 2003, Mercator or its assignees converted $293,867
of the debenture plus accrued interest and liquidated damages into 3,455,471
shares of Common Stock, of which 2,499,998 shares are restricted. The current
outstanding principal balance of the debenture is $6,113 and there are no
registered shares remaining for additional conversions.
43
On January 14, 2004, when the market price of our Common Stock was $0.60,
Mercator agreed to extend the maturity date of this debenture until July 14,
2004. In return for the extension of the maturity date, we have agreed to pay,
following the original maturity date, an additional extension fee equal to 2% of
the outstanding principal balance per month until the earlier of the extended
maturity date or conversion. The extension fee is payable 1% in cash and 1% in
Common Stock. Additionally, we agreed to file a registration statement including
the shares potentially applicable to the conversion of the outstanding debenture
balance and the extension fee shares by no later than April 29, 2004. On April
23, 2004, when the market price of the Common Stock was $0.625, the Company and
Mercator agreed to extend until May 14, 2004 the period for filing the
registration statement including the extension fee shares and shares issued or
potentially issuable upon conversion. On May 7, 2004, when the market price of
the Company's common stock was $0.48 per share, the Company and Mercator agreed
to further extend from May 14, 2004 until 21 days following the closing of a
private placement of equity financing of at least $5,000,000, but in any case to
no later than June 30, 2004, the period in which the Company is required to file
a registration statement including shares of its common stock issued or
potentially issuable upon conversion.
Although the contractual registration coverage provisions of the registration
rights agreement require that we include only 100% of the shares potentially
issuable upon conversion of this debenture based on the current market price per
share, as defined, we are including in this registration statement 200% of the
number of shares which may be currently issuable upon conversion of the
remaining $6,113 principal amount to cover payment of interest to the extended
maturity date, shares issuable in payment of the extension fee or as a result of
market price fluctuations. We are not including in this registration statement
the restricted shares previously issued upon the conversion of April 2003 12%
convertible debenture as Mercator has previously sold them under exemptions
provided by Rule 144.
The following table lists the investors in the 12% convertible debentures and
summarizes the shares issued and amounts converted through June 10, 2004 and the
number of shares being registered in this registration statement:
CALYPTE SHARES SHARES SHARES
GROSS NET TRANSACTION CLOSING ISSUED/ CURRENTLY BEING
INVESTOR AMOUNT AMOUNT DATE PRICE $ REDEEMED ISSUABLE REGISTERED
- -------- ------ ------ ---- ----- ---------- -------- ----------
Mercator Momentum Fund L.P.(1) $550 $345 9/12/02 $3.00 4,866.4(1)/$550 - -
(1)
Mercator Momentum Fund L.P. 300 260 10/22/02 $3.90 0/ $300 - -
Mercator Momentum Fund L.P. - 0 0 10/22/02 $3.90 - 100.0 100.0
warrant
Mercator Momentum Fund L.P. 300 245 4/29/03 $0.8255 3,455.5/ $294 20.5 40.9
Mercator Momentum Fund
assigned its rights to:
Alpha Capital 250 250 7/24/03 $0.115 2,673.8/ $250 - 1,418.8
Aktiengesellshaft
Gamma Opportunity Capital 250 250 7/24/03 $0.115 2,685.6/ $250 - 1,430.6
Partners, LP
Goldplate Investment 250 250 7/24/03 $0.115 2,673.8/ $250 - 1,418.8
------ ------ -------- ------ ----- -------
Partners
$1,900 $1,600 16,355.1/$1,894 120.5 4,409.1
====== ====== ======== ====== ===== =======
(1) includes aggregate of 16.7 fee shares issued to Mercator Momentum Fund
LP and a related entity
MERCATOR 10% CONVERTIBLE DEBENTURES
MERCATOR FOCUS FUND - JANUARY 2003
On January 14, 2003, when the market price of our Common Stock was $1.92 and
pursuant to Regulation S, we issued a $1,000,000 10% convertible debenture to
Mercator Focus Fund, L.P. ("Focus Fund") and received net proceeds of $818,000
net of fees and expenses. We immediately used $308,000 of the proceeds to repay
the $300,000 12% debenture we had issued to Mercator in October 2002 plus
accrued interest. The Focus Fund debenture is convertible into shares of our
Common Stock at 80% of the average of the three lowest trades for the 20 trading
days preceding conversion, but not more than $3.00 per share. The term of the
debenture is 12 months. Interest is payable at maturity or upon conversion, and
has been paid in shares of our Common Stock at Focus Fund's option. Under the
terms of the debenture agreement, we agreed to file a registration statement for
the shares of common stock underlying the debenture within 60 days of the
closing date and use our reasonable best commercial efforts to cause the
registration statement to be declared effective within 120 days of the closing
date. The agreement requires that the Company pay 167 shares of its common stock
per day as liquidated damages for each day of registration delay. We have
obtained waivers from Focus Fund with respect to the non-registration provisions
of the debenture and registration rights agreements. On March 31, 2003, when the
market price of our Common Stock was $0.885 per share, Focus Fund agreed to
extend the waiver of the non-registration provisions of the agreements through
May 5, 2003. On May 1, 2003, when the market price for our Common Stock was
$0.71 per share, Focus Fund agreed to extend the waiver of the non-registration
provisions of the agreement through July 1, 2003. On June 26, 2003, when the
market price for our Common Stock was $0.36 per share, Focus Fund agreed to
extend the waiver of non-registration provisions of the agreement through July
15, 2003. We filed the registration statement on July 8, 2003 and it became
effective on July 18, 2003. The debenture agreement prohibits conversion of the
debenture or receipt of shares of our Common Stock in payment of accrued
interest if Focus Fund, individually or in combination with any of its
affiliates (including Mercator), would, following the conversion or interest
payment, beneficially own in excess of 9.99% of our outstanding stock, except as
permitted by our prior written consent.
44
Between July and October 2003, Focus Fund converted $422,246 principal amount of
the debenture plus accrued interest and liquidated damages into 5,831,806 shares
of Common Stock, all of which were registered. The outstanding principal balance
of the debenture following those conversions was $577,754 and there were no
registered shares remaining for additional conversions.
On January 14, 2004, when the market price of our Common Stock was $0.60, Focus
Fund agreed to extend the maturity date of this debenture until July 14, 2004.
In return for the extension of the maturity date, we have agreed to pay,
following the original maturity date, an additional extension fee equal to 2% of
the outstanding principal balance per month until the earlier of the extended
maturity date or conversion. The extension fee is payable 1% in cash and 1% in
Common Stock. Additionally, we agreed to file a registration statement including
the shares potentially applicable to the conversion of the outstanding debenture
balance and the extension fee shares by no later than April 29, 2004. On April
23, 2004, when the market price of our Common Stock was $0.625 per share, Focus
Fund agreed to extend until May 14, 2004 the period in which the Company is
required to file a registration statement including the shares. On May 7, 2004,
when the market price of our common stock was $0.48 per share, we and Focus Fund
agreed to further extend from May 14, 2004 until 21 days following the closing
of a private placement of equity financing of at least $5,000,000, but in any
case to no later than June 30, 2004, the period in which the Company is required
to file a registration statement including shares of its common stock issued
upon conversion.
On April 22, 2004, when the market price of our Common Stock was $0.625 per
share, Focus Fund converted the remaining $577,754 debenture balance plus
accrued interest and extension fees into 2,109,366 shares of Common Stock, all
of which were restricted. This registration statement includes those shares.
MERCATOR MOMENTUM FUND - JANUARY 2003
On January 30, 2003, when the market price of our Common Stock was $1.86 and
pursuant to Regulation S, we issued a $450,000 10% convertible debenture to
Mercator and received net proceeds of $440,000 net of fees and expenses. The
debenture is convertible into our Common Stock at 80% of the average of the
three lowest trades for the 20 days preceding conversion, but not more than
$3.00. The term of the debenture is 12 months. Under the terms of the debenture
agreement, we agreed to file a registration statement for the shares of common
stock underlying the debenture within 30 days of the closing date and use our
reasonable best commercial efforts to cause the registration statement to be
declared effective within 120 days of the closing date. The agreement requires
that the Company pay the greater of $300 or 333 shares of its common stock per
day as liquidated damages for each day of registration delay. We have obtained
waivers from Mercator with respect to the non-registration provisions of the
debenture and registration rights agreements. On March 31, 2003, when the market
price of our Common Stock was $0.885 per share, Mercator agreed to extend the
waiver of the non-registration provisions of the agreements through May 5, 2003.
On May 1, 2003, when the market price for our Common Stock was $0.71 per share,
Mercator agreed to extend the waiver of the non-registration provisions of the
agreement through July 1, 2003. On June 26, 2003, when the market price for our
Common Stock was $0.36 per share, Mercator agreed to extend the waiver of
non-registration provisions of the agreement through July 15, 2003. We filed the
registration statement on July 8, 2003 and it became effective on July 18, 2003.
The debenture agreement prohibits conversion of the debenture or receipt of
shares of our common stock in payment of accrued interest if Mercator,
individually or in combination with any of its affiliates (including Focus
Fund), would, following the conversion or interest payment, beneficially own in
excess of 9.99% of our outstanding stock, except as permitted by our prior
written consent.
In September 2003, Mercator assigned its rights with respect to $300,000
principal amount of the debenture and the related accrued interest and
liquidated damages to Net Capital Partners which converted its holdings into
2,424,764 restricted shares of Common Stock. Between September and October 2003,
Mercator converted $58,403 principal amount of the debenture plus accrued
interest and liquidated damages into 167,879 shares of Common Stock, all of
which were registered. The current outstanding principal balance of the
debenture is $91,597 and there are no registered shares remaining for additional
conversions.
On January 14, 2004, when the market price of our Common Stock was $0.60,
Mercator agreed to extend the maturity date of this debenture until July 14,
2004. In return for the extension of the maturity date, we have agreed to pay,
following the original maturity date, an additional extension fee equal to 2% of
the outstanding principal balance per month until the earlier of the extended
maturity date or conversion. The extension fee is payable 1% in cash and 1% in
Common Stock. Additionally, we agreed to file a registration statement including
the shares potentially applicable to the conversion of the outstanding debenture
balance and the extension fee shares by no later than April 29, 2004. On April
23, 2004, when the market price of our Common Stock was $0.625 per share,
Mercator agreed to extend until May 14, 2004 the period in which the Company is
required to file a registration statement including the shares. On May 7, 2004,
when the market price of our common stock was $0.48 per share, we and Mercator
agreed to further extend from May 14, 2004 until 21 days following the closing
of a private placement of equity financing of at least $5,000,000, but in any
case to no later than June 30, 2004, the period in which the Company is required
to file a registration statement including shares of its common stock issued or
potentially issuable upon conversion.
45
Although the contractual registration coverage provisions of the registration
rights agreement require that we include only 100% of the shares potentially
issuable upon conversion of this debenture based on the current market price per
share, as defined, we are including in this registration statement 200% of the
number of shares which may be currently issuable upon conversion of the
remaining $91,957 principal amount to cover payment of interest to the extended
maturity date, shares issuable in payment of the extension fee or as a result of
market price fluctuations. We are also including in this registration statement
the restricted shares previously issued upon the conversion of the January 2003
10% convertible debenture to the extent that they have not been sold under
exemptrions permitted by Rule 144 by either Mercator or Net Capital Partners.
MERCATOR FOCUS FUND AND MERCATOR MOMENTUM FUND III - MARCH 2003
On March 13, 2003, when the market price of our Common Stock was $1.47 and
pursuant to Regulation S, we issued a $400,000 10% convertible debenture to
Focus Fund and a $100,000 10% debenture to Mercator Momentum Fund III, L.P.
("Momentum Fund III") and received aggregate proceeds of $400,000 net of fees
and expenses. With the exception of the principal amounts, the debentures and
registration rights agreements have the same terms, provisions and conditions.
The debentures are convertible into our Common Stock at 65% of the average of
the three lowest trades for the 20 trading days preceding conversion, but not
more than $2.10. The term of each debenture is 12 months. Under the terms of the
debenture agreements, we agreed to file a registration statement for the shares
of common stock underlying the debentures within 30 days of the closing date and
use our reasonable best commercial efforts to cause the registration statement
to be declared effective within 120 days of the closing date. The agreements
require that the Company pay the greater of $300 or 333 shares of its common
stock per day as liquidated damages for each day of registration delay. We have
obtained waivers from Focus Fund and Momentum Fund III with respect to the
non-registration provisions of the debentures and registration rights
agreements. On April 11, 2003, when the market price of our Common Stock was
$0.735 per share, Focus Fund and Momentum Fund III agreed to extend the waiver
of the non-registration provisions of the agreements through May 5, 2003. On May
1, 2003, when the market price for our Common Stock was $0.71 per share, Focus
Fund and Momentum Fund III agreed to extend the waiver of the non-registration
provisions of the agreement through July 1, 2003. On June 26, 2003, when the
market price for our Common Stock was $0.36 per share, Focus Fund and Momentum
Fund III agreed to extend the waiver of non-registration provisions of the
agreement through July 15, 2003. We filed the registration statement on July 8,
2003 and it became effective on July 18, 2003. The debenture agreements prohibit
conversion of the debentures or receipt of shares of our Common Stock in payment
of accrued interest if Focus Fund or Momentum Fund III, individually or in
combination with any of their affiliates (including Mercator), would, following
the conversion or interest payment, beneficially own in excess of 9.99% of our
outstanding stock, except as permitted by our prior written consent.
In August 2003, Focus Fund converted $177,682 principal amount of the debenture
plus accrued interest and liquidated damages into 2,437,368 shares of Common
Stock, all of which were registered, leaving an outstanding principal balance of
the Focus Fund debenture of $222,318 and no registered shares remaining for
additional conversions. In August 2003, Mercator converted the entire $100,000
principal amount of the debenture plus accrued interest and liquidated damages
into 1,626,319 shares of Common Stock, all of which were registered.
On January 14, 2004, when the market price of our Common Stock was $0.60, Focus
Fund agreed to extend the maturity date of its debenture until July 14, 2004. In
return for the extension of the maturity date, we have agreed to pay, following
the original maturity date, an additional extension fee equal to 2% of the
outstanding principal balance per month until the earlier of the extended
maturity date or conversion. The extension fee is payable 1% in cash and 1% in
Common Stock. Additionally, we agreed to file a registration statement including
the shares potentially applicable to the conversion of the outstanding debenture
balance and the extension fee shares by no later than April 29, 2004. On April
23, 2004, when the market price of our Common Stock was $0.625 per share, Focus
Fund agreed to extend until May 14, 2004 the period in which the Company is
required to file a registration statement including the shares. On May 7, 2004,
when the market price of our common stock was $0.48 per share, we and Focus Fund
agreed to further extend from May 14, 2004 until 21 days following the closing
of a private placement of equity financing of at least $5,000,000, but in any
case to no later than June 30, 2004, the period in which the Company is required
to file a registration statement including shares of its common stock issued
upon conversion.
On April 22, 2004, when the market price of our Common Stock was $0.625 per
share, Focus Fund converted the remaining $222,318 debenture balance plus
accrued interest and extension fees into 991,465 shares of Common Stock, all of
which were restricted. This registration statement includes those shares. We are
not registering any additional shares with respect to the Momentum Fund III
debenture.
The following table lists the investors in the 10% convertible debentures and
summarizes the shares issued and amounts converted through June 10, 2004 and the
number of shares being registered in this registration statement:
46
CALYPTE SHARES SHARES SHARES
GROSS NET TRANSACTION CLOSING ISSUED/ CURRENTLY BEING
INVESTOR AMOUNT AMOUNT DATE PRICE $ REDEEMED ISSUABLE REGISTERED
- -------- ------ ------ ---- ----- ---------- -------- ----------
Mercator Focus Fund L.P. $1,000 $510 1/14/03 $1.92 7,941.1/ $1,000 - 2,109.3
Mercator Momentum Fund $450 $440 1/30/03 $1.86 2,592.6/ $ 358 268.3 1,624.6
L.P., including amounts
assigned to Net Capital
Partners
Mercator Focus Fund L.P $400 $320 3/13/03 $1.47 3,428.9/ $ 400 - 991.5
Mercator Momentum $100 $80 3/13/03 $1.47 1,626.3/ $ 100 - -
------ ------ -------- ------ ----- -------
Fund III, L.P.
$1,950 $1,350 15,588.9/ $1,858 268.3 4,725.4
====== ====== ======== ====== ===== =======
NEW SECURITIES INCLUDED IN THIS REGISTRATION STATEMENT
12% CONVERTIBLE DEBENTURES
Under the terms of the September 2002 agreement with Mercator, as amended in
December 2002, Mercator committed to fund a final $700,000 tranche of its
commitment to purchase our 12% convertible debentures following the filing and
effectiveness of a registration statement that included the shares underlying
the previous funding of $1,300,000 of our 12% convertible debentures. We filed
that registration statement on July 8, 2003 and it became effective on July 18,
2003. Mercator assigned its rights with respect to the final $700,000 tranche of
12% debentures to five other parties and we issued debentures directly to those
parties. As noted previously, fees on Mercator's total $2 million commitment
were deducted from the proceeds of the September 2002 transaction registered
previously so that we received an aggregate of $700,000 cash upon the closing of
the transactions comprising the final tranche of the Mercator commitment.
On September 1, 2003, when the market price of our Common Stock was $0.498 per
share and pursuant to Regulation S, we issued a $570,000 12% convertible
debenture to Marr Technologies BV ("MTBV"). Under the terms of the debenture
agreement, the debenture was convertible into shares of our Common Stock at 85%
of the average of the three lowest trades for the 20 days preceding conversion,
but not less than $0.11 per share, and had a term of 24 months. Interest was
payable at maturity or upon conversion, and was payable in cash or in shares of
Common Stock at MTBV's option. MTBV immediately converted the entire principal
amount of the debenture into 5,181,818 shares of restricted Common Stock.
Under the terms of the debenture and registration rights provided to MTBV, we
agreed to provide cost-free piggyback registration rights for the shares of
common stock underlying the debentures in a registration statement to be filed
within 180 days. On January 23, 2004, when the market price of our Common Stock
was $0.695, we and MTBV agreed to extend the registration rights period
attributable to the 5,181,818 shares of Common Stock issued in conjunction with
MTBV's conversion from February 27, 2004 to April 29, 2004. In return for the
extension, we agreed to include in our next registration statement an aggregate
of 28,333,333 shares of its Common Stock purchased by MTBV in PIPE transactions
during the third quarter of 2003. On April 23 2004, when the market price of the
Common Stock was $0.625, the Company and MTBV agreed to extend until May 14,
2004 the period for filing the registration statement including the shares
issued to MTBV upon conversion of the 12% convertible debenture and in the 2003
PIPE transactions. On May 7 2004, when the market price of the Company's common
stock was $0.48 per share, MTBV agreed to further extend from May 14, 2004 until
21 days following the closing of a private placement of equity financing of at
least $5,000,000, but in any case to no later than June 30, 2004, the period in
which the Company is required to file a registration statement including shares
of its common stock issued to MTBV upon conversion of the 12% convertible
debenture and in the 2003 PIPE transactions. Such shares are included in this
registration statement. See "Marr Private Placements" below.
On October 2, 2003, when the market price of our Common Stock was $1.31 per
share and pursuant to Regulation S, we issued an aggregate of $130,000 of 12%
convertible debentures as follows:
o to Khalid B. Ahmed, M.D. Pension Plan ("Dr. Ahmed") for $50,000;
o to Roger Suyama ("Suyama") for $20,000;
o to Logisticorp, Inc. ("Logisticorp") for $20,000; and
o to Southwest Resource Preservation Inc. ("Southwest") for $40,000.
Under the terms of these debenture agreements, each debenture is convertible
into shares of our Common Stock at 85% of the average of the three lowest trades
for the 20 days preceding conversion and has a term of 24 months. Interest is
payable at maturity or upon conversion, and is payable in cash or in shares of
Common Stock at the holder's option. Dr. Ahmed and Suyama immediately converted
the entire principal amount of their debentures into an aggregate of 118,443
shares of restricted Common Stock. Logisticorp and Southwest have not yet
converted their debentures as a result of a dispute with the Company regarding
the transaction date. The number of shares currently issuable reported in the
table below assumes conversion based on current market prices as of June 10,
2004. Assuming immediate conversion at the earlier, disputed transaction date,
the number of shares of common stock issuable to Logisticorp and Southwest
Resource Preservation would be 213,903 and 427,807, respectively. While not
necessarily agreeing to issue the number of shares calculated as issuable based
on the disputed transaction date, the Company is registering that number of
shares of Common Stock pending resolution of the dispute. See Legal Proceedings.
47
Under the terms of the debenture and registration rights provided to Dr. Ahmed,
Suyama, Logisticorp and Southwest, we agreed to provide cost-free piggyback
registration rights for the shares of common stock underlying the debentures in
a registration statement to be filed no later than 180 days following September
30, 2003, or March 28, 2004. While we did not file a registration statement
including these shares within the specified period, there are no penalties to
the Company as a result of its failure to include the shares in a registration
statement filed by that date and the debentures are not considered to be in
default.
Although the contractual registration coverage provisions for all of the
debentures in this $700,000 tranche require that we register 125% of the shares
potentially issuable upon conversion of the debentures based on the current
market price per share, as defined, we are including in this registration
statement an aggregate of 641,710 shares with respect to Logisticorp and
Southwest as described above, which exceeds the contractual amount. See Legal
Proceedings. We are also including in this registration statement the restricted
shares previously issued to MTBV, Dr. Ahmed and Suyama.
The following table lists the investors in the final tranche of the 12%
convertible debentures as assigned by Mercator and summarizes the shares issued
and amounts converted through June 10, 2004 and the number of shares being
registered in this registration statement:
CALYPTE SHARES SHARES
GROSS NET TRANSACTION CLOSING ISSUED/ CURRENTLY SHARES BEING
INVESTOR AMOUNT AMOUNT DATE PRICE $ REDEEMED ISSUABLE REGISTERED
- -------- ------ ------ ---- ----- ---------- -------- ----------
Marr Technologies BV $570 $570 9/1/03 $0.498 5,181.8/ $570 - 5,181.8
Khalid B. Ahmed M.D. 50 50 10/2/03 $1.310 84.6/ $50 - 84.6
Pension Plan
Roger Suyama 20 20 10/2/03 $1.310 33.8/ $20 - 33.8
Logisticorp, Inc. 20 20 10/2/03 $1.310 - 53.8 213.9
Southwest Resource
Preservation Inc. 40 40 10/2/03 $1.310 - 107.7 427.8
---- ---- ------- ---- ----- -------
$700 $700 5,300.2/ $640 161.5 5,941.9
==== ==== ======= ==== ===== =======
MARR 2003 PRIVATE PLACEMENTS
PIPES AT $0.30 PER SHARE AND $0.50 PER SHARE
On August 1, 2003, when the market price of the Common Stock was $0.152 per
share, and pursuant to Regulation S, we issued 8,333,333 restricted shares of
Common Stock at $0.30 per share to Marr Technologies BV under the terms of a
Subscription Agreement and received gross proceeds of $2.5 million. On September
1, 2003, when the market price of the Common Stock was $0.498 per share, and
pursuant to Regulation S, we issued 20,000,000 restricted shares of Common Stock
at a price of $0.50 per share to MTBV under the terms of a Subscription
Agreement and received gross proceeds of $10.0 million. Both Subscription
Agreements require MTBV to hold the shares for 12 months following their
respective dates of issuance. The Subscription Agreements initially required
that we use our best commercial efforts to register the restricted shares. In
conjunction with the January 2004 agreement with MTBV in which the registration
requirement for the shares underlying the $570,000 12% convertible debenture it
purchased was extended until April 29, 2004, we agreed to file a registration
statement including the shares issued in the private placements by no later than
April 29, 2004. Accordingly, those shares are included in this registration
statement.
5% PROMISSORY NOTE PURCHASE COMMITMENT AGREEMENT AND WARRANTS
On November 13, 2003, when the market price of the Common Stock was $0.88 per
share, we entered into an agreement with MTBV in which MTBV agreed to provide
the Company up to an aggregate of $10,000,000 (the "Marr Credit Facility") in
connection with promissory notes we may issue to MTBV on an as-needed basis (the
"Notes"). Each Note will bear interest at the rate of 5% per annum and will have
a 12-month term. The Marr Credit Facility is available during the period
beginning on February 28, 2004 and ending on May 31, 2004. The aggregate amount
available under the Marr Credit Facility will be proportionally reduced by the
amount of any equity financing we obtain during the term of the Marr Credit
Facility. MTBV has the right of first refusal to participate in any such equity
financing on the same terms as the other investors. The Marr Credit Facility
initially provided for earlier termination as of March 31, 2004, if we failed to
have our Common Stock listed on an established stock exchange by that date.
Moreover, upon the failure to obtain such stock exchange listing, any
outstanding Notes would be due and payable on April 30, 2004. Under the terms of
the Marr Credit Facility, we are not required to register any shares of our
Common Stock. As consideration for the Marr Credit Facility, however, we issued
to Boodle Hatfield, a party designated by MTBV, a warrant to purchase 375,000
shares of Common Stock at an exercise price of $0.80 per share. The warrant is
immediately exercisable and expires two years after issuance on November 12,
2005. In April 2004, Boodle Hatfield assigned its rights under ther warrant to
Top Calibre Enterprise Limited. We are including the shares underlying this
warrant in this registration statement on behalf of Top Calibre Enterprise
Limited.
48
On March 19, 2004, when the market price of the Common Stock was $0.575 per
share, we and MTBV amended the Marr Credit Facility to increase the aggregate
amount available under the Marr Credit Facility to $15,000,000 and to eliminate
the termination provision upon our failure to have the Common Stock listed on an
established stock exchange by March 31, 2004. As additional consideration for
the amendment of the Marr Credit Facility, we issued to Boodle Hatfield, a party
designated by MTBV, an additional warrant to purchase 400,000 shares of our
Common Stock at an exercise price of $0.46 per share. This warrant is
immediately exercisable and expires two years from its date of issuance on March
18, 2006. In April 2004, Boodle Hatfield assigned its rights under ther warrant
to Top Calibre Enterprise Limited. We are including the shares underlying this
warrant in this registration statement on behalf of Top Calibre Enterprise
Limited.
On May 26, 2004, when the market price of the Common Stock was $0.46 per share,
we and MTBV again amended the Marr Credit Facility whereby MTBV has committed to
purchase up to $5,000,000 of Promissory Notes that we may issue through December
31, 2004. Any Notes we issue pursuant to this second amendment will bear
interest at 9% per annum and will have a maturity date of May 31, 2005. The
$5,000,000 amount available under the amended Marr Credit Facility will be
reduced by the amount of any equity financing we obtain after the May 26, 2004
effective date of the second amendment and through the December 31, 2004
commitment period. At June 10, 2004, we have issued no Notes under the Marr
Credit Facility. As consideration for the extension of the commitment period
reflected in the second amendment of the Marr Credit Facility, we issued to MTBV
a warrant to purchase 500,000 shares of our Common Stock at an exercise price of
$0.40 per share. This warrant is immediately exercisable and expires two years
from its date of issuance on May 26, 2006. We are including the shares
underlying this warrant in this registration statement on behald of MTBV.
The following table summarizes the investments and transaction dates related to
the stock and warrant issuances under the Marr private placements and the Marr
Credit Facility:
CALYPTE SHARES
GROSS NET TRANSACTION CLOSING SHARES CURRENTLY SHARES BEING
INVESTOR AMOUNT AMOUNT DATE PRICE ISSUED ISSUABLE REGISTERED
- -------- ------ ------ ---- ----- ------ -------- ----------
Marr Technologies BV $ 2,500 $2,300 8/1/03 $0.152 8,333.3 - 8,333.3
Marr Technologies BV 10,000 9,600 9/1/03 $0.498 20,000.0 - 20,000.0
Boodle Hatfield warrant - - 11/13/03 $0.880 - 375.0 375.0
Boodle Hatfield warrant - - 3/19/04 $0.575 - 400.0 400.0
Marr Technologies BV
warrant - - 5/26/04 $0.460 - 500.0 500.0
------- ------- -------- ------- --------
$12,500 $11,900 28,333.3 1,275.0 29,608.3
======= ======= ======== ======= ========
MAY 2004 PRIVATE PLACEMENT - PIPE AT $0.40 PER SHARE AND RELATED WARRANTS
EXERCISABLE AT $0.50 PER SHARE
On May 28, 2004, when the market price of our Common Stock was $0.50 per share
and pursuant to Regulations S and D, we issued 15,750,000 restricted shares of
our Common Stock at a price of $0.40 per share to 6 unaffiliated investors and
received gross proceeds of $6,300,000. Under the terms of the Marr Credit
Facility, which provides MTBV a right of first refusal to participate in
subsequent financings on the same terms as other investors, MTBV invested
$3,000,000 in this private placement and we issued 7,500,000 restricted shares
of our Common Stock to MTBV. Under the terms of the subscription agreement, each
investor received warrants to purchase our Common Stock in an amount equal to
35% of the number of shares purchased in the private placement. Accordingly, we
issued warrants to purchase an aggregate of 8,137,500 shares of our Common Stock
to the investors and warrants to purchase an additional 630,000 shares of our
Common Stock pursuant to placement agent agreements. The warrants are
exercisable at a price of $0.50 per share for a period of two years from the May
28, 2004 date of issuance.
The securities purchase agreements for this private placement provide the
investors with participation rights on the same terms and conditions as other
investors in any subsequent financing transactions we may complete within one
year of the closing of this placement. The securities purchase agreements also
contain anti-dilution provisions that could require us to issue additional
shares of common stock to the investors if we raise additional equity financing
at a price below $0.40 per share in the year following the closing of the PIPE
transaction. We are including the shares issued in the private placement and the
shares underlying the warrants in this registration statement. We are not
including in this registration statement any shares which may be potentially
issuable as a result of anti-dilution provisions.
The following table summarizes the investments and transaction dates related to
the issuances under the May 2004 Private Placement.
49
CALYPTE SHARES
GROSS NET TRANSACTION CLOSING SHARES CURRENTLY SHARES BEING
INVESTOR AMOUNT AMOUNT DATE PRICE ISSUED ISSUABLE REGISTERED
- -------- ------ ------ ---- ----- ------ -------- ----------
SF Capital Partners $4,000 $3,720 5/28/04 $0.40 10,000.0 3,500.0 13,500.0
Marr Technologies BV 3,000 2,910 5/28/04 $0.40 7,500.0 2,625.0 10,125.0
Proximity Fund LP 500 465 5/28/04 $0.40 1,250.0 437.5 1,687.5
Proximity Partners LP 500 465 5/28/04 $0.40 1,250.0 437.5 1,687.5
MTB Small Cap Growth Fund 500 465 5/28/04 $0.40 1,250.0 437.5 1,687.5
MTB Multi Cap Growth Fund 500 465 5/28/04 $0.40 1,250.0 437.5 1,687.5
Bridges & PIPES LLC 300 279 5/28/04 $0.40 750 262.5 1,012.5
Duncan Capital LLC (1) - - 5/28/04 $0.40 - 30.0 30.0
Capstone Investments (1) - - 5/28/04 $0.40 - 600.0 600.0
------ ------ -------- ------- --------
May 2004 PIPE $9,300 $8,769 23,250.0 8,767.5 32,017.5
====== ====== ======== ======= ========
- ----------------
(1) reflects shares underlying warrants issued pursuant to placement agent
agreements.
50
OTHER SECURITIES BEING REGISTERED IN THIS REGISTRATION STATEMENT
In the normal course of our business, we have entered into various contracts and
agreements under which we have issued restricted shares of our Common Stock or
issued warrants and options or entered into contracts which provide for the
issuance of shares of our Common Stock to various consultants or other material
or service providers willing to accept such shares in lieu of cash payments for
all or a portion of their compensation. The following table summarizes the
parties to whom restricted shares have previously been issued and to whom
warrants, options or other agreements which provide for the potential issuance
of shares of our Common Stock have been issued. All of such restricted shares
and the shares underlying the warrants, options, or other agreements are being
included in this registration statement.
CALYPTE SHARES SHARES
CONVERSION TRANSACTION CLOSING SHARES CURRENTLY BEING
FEATURE DATE PRICE ISSUED ISSUABLE REGISTERED
------- ---- ----- ------ -------- ----------
Shares issued for goods and
services: (1)
BioEquity Partners (4 persons) N/A 10/1/03 $1.15 25.0 - 25.0
Ernesto Cardenas 9/30/03 $1.22 100.0 - 100.0
CEOCast, Inc. 7/29/03 $0.12 300.0 - 300.0
CEOCast, Inc. 10/27/03 $1.51 100.0 - 100.0
European Equity Group 9/30/03 $1.22 100.0 - 100.0
New York University 2/12/02 $7.33 25.0 - 25.0
New York University 9/30/03 $1.22 500.0 - 500.0
Platinum Partners Value
Arbitrage Fund 9/30/03 $1.22 675.6 - 675.6
Alfonso Saavedra 9/30/03 $1.22 100.0 - 100.0
Vintage Filings 8/1/03 $0.15 46.9 - 46.9
URSA, Inc. (5 persons) 10/9/03 $1.40 30.6 - 30.6
Magic Johnson Foundation 1/13/04 $0.67 66.7 133.3 200.0
Pointe Investments 2/13/04 $0.67 500.0 - 500.0
------- ----- -------
2,569.8 133.3 2,703.1
======= ===== =======
Warrants and contracts for goods and services:
Craig Enenstein $0.18 per share 8/20/03 $0.178 - 100.0 100.0
Michael Rovens $0.18 per share 8/20/03 $0.178 - 100.0 100.0
Adaltis, Inc. $0.03 per share 4/6/04 $0.485 - 212.1 212.1
Merchant Intercapital $0.50 per share 5/6/04 $0.465 - 150.0 150.0
------- ----- -------
- 562.1 562.1
------- ----- -------
Non-financing-related shares
being registered 2,569.8 695.4 3,265.2
======= ===== =======
- ----------------
(1) Transaction Dates and Calypte Closing Prices reported here reflect the
dates on which the Company issued shares of its Common Stock pursuant to the
agreement, which may not be the effective date of the agreement.
51
SUMMARY OF SECURITIES BEING REGISTERED
The following table summarizes the securities underlying the common stock being
registered in this registration statement:
SHARES SHARES SHARES
GROSS NET ISSUED/ CURRENTLY BEING
SECURITY AMOUNT AMOUNT $ REDEEMED ISSUABLE REGISTERED
- -------- ------ ------ ---------- -------- ----------
SECURITIES PREVIOUSLY
REGISTERED:
8% Convertible Notes $3,232 $2,594 46,084.3/ $3,232 - 3,088.6
12% Convertible Debentures
and warrants 1,900 1,600 16,355.1/ $1,894 120.5 4,409.1
10% Convertible Debentures 1,950 1,350 15,588.9/ $1,858 268.3 4,725.4
-------- -------- --------- ------ -------- --------
7,082 5,544 78,028.3/ $6,984 388.8 12,223.1
-------- -------- --------- ------ -------- --------
NEW SECURITIES BEING
REGISTERED
12% Convertible Debentures 700 700 5,300.2/ $ 640 165.4 5,941.9
Marr Private Placements 12,500 11,900 28,333.3/ - 1,275.0 29,608.3
May 2004 Private Placement 9,300 8,769 23,250.0/ - 8,767.5 32,017.5
Other non-financing related
securities - - 2,569.8/ - 695.4 3,265.2
-------- -------- --------- ------ -------- --------
22,500 21,369 59,453.3/ $ 640 10,903.3 70,832.9
-------- -------- --------- ------ -------- --------
Total securities included in $ 29,582 $ 26,913 137,481.6/ $7,624 11,292.1 83,056.0
this registration statement
Other restart financings not 750 730 2,720.3/ $ 350 - -
included in this -------- -------- --------- ------ -------- --------
registration statement
Total Financing May 2002 $ 30,332 $ 27,643 140,201.9/ $7,974 11,292.1 83,056.0
======== ======== ========= ====== ======== ========
through June 10, 2004
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article VIII of the Registrant's Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the corporation if
such person acted in good faith and in a manner reasonably believed to be in and
not opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his conduct was unlawful.
Calypte has entered into indemnification agreements with its directors and
executive officers, in addition to indemnification provided for in Calypte's
Bylaws, and intends to enter into indemnification agreements with any new
directors and executive officers in the future.
52
DESCRIPTION OF BUSINESS
Our business involves the development, manufacture and marketing of in vitro
diagnostic tests primarily for the detection of antibodies to the Human
Immunodeficiency Virus ("HIV") and other sexually transmitted and infectious
diseases. We have historically focused our business on urine-based screening and
supplemental tests for use in laboratories. By integrating several proprietary
technologies, we developed novel urine HIV antibody tests, the Calypte
urine-based enzyme immunoassay ("EIA") HIV Type 1 ("HIV-1") screening test and
the Cambridge Biotech urine-based HIV-1 western blot ("Urine Western Blot")
supplemental test. We also manufacture and market the Cambridge Biotech
serum-based western blot ("Serum Western Blot") supplemental test for detecting
HIV-1 antibodies in serum. Our revenues are currently generated from sales of
these three products, which we refer to collectively as our "ELISA tests." The
ELISA tests are manufactured in formats that make them most suitable for
high-volume laboratory settings. We shall sometimes refer to ourselves herein as
"Calypte" or the "Company."
We are the only company with Food and Drug Administration ("FDA") approval for
the marketing and sale of urine-based HIV-1 antibody tests. Our EIA HIV-1
screening test received FDA approval for use in laboratories in August 1996. Our
Urine Western Blot supplemental test received FDA approval in May 1998. Our
urine-based ELISA tests together, with their screening and confirmatory testing
components, are the only complete FDA approved urine-based HIV testing method.
Our business is also involved in developing new test products for the rapid
detection of HIV-1 and HIV Type 2, a second type of HIV ("HIV-2"), and other
infectious diseases. In November 2003, we filed an Investigational Device
Exemption ("IDE") with the FDA announcing our intent to develop a rapid
serum-based HIV screening test. Rapid tests provide test results in less than 20
minutes and are particularly suitable for point-of-care testing, especially in
lesser developed countries which lack the medical infrastructure to support
laboratory based testing. We are currently developing both serum- and
urine-based HIV-1 and HIV-2 rapid tests and anticipate that our primary focus
will be the development, manufacture and sale of our rapid test products, both
internationally and domestically.
BACKGROUND
HIV
HIV, the cause of AIDS, is a leading cause of death for persons ages 25 to 44 in
the U.S. and for persons of all ages in many international locales. Those
infected with HIV generally do not show symptoms of AIDS until several years
after HIV infection, if at all. Because most persons infected with HIV are
unaware of their HIV status and are asymptomatic for AIDS, they do not avail
themselves of medical treatment and may unknowingly expose others to the risk of
HIV infection.
Prior exposure to HIV can be detected in laboratory and point-of-care tests even
though the infected individual is asymptomatic. Although the human immune system
typically requires a number of weeks or months to begin producing antibodies
following exposure to HIV, there is no consensus in the scientific community as
to whether antibodies can first be detected in blood, urine or oral fluid.
According to the December 2003 AIDS EPIDEMIC UPDATE published jointly by the
Joint United Nations Programme on HIV/AIDS and the World Health Organization
(the "WHO"), at the end of 2003 an estimated 40 million people globally were
living with HIV; over 30.9 million people had already died from the disease, and
an estimated 5 million people were newly infected with HIV during 2003. The
UPDATE reported that about 3 million people died of AIDS during 2003. HIV is
spread by a transfer of bodily fluids, primarily through sexual contact, blood
transfusions, sharing intravenous needles, accidental needle sticks or
transmission from infected mothers to newborns.
In its February 2004 presentation, GLOBAL HEALTH, The Bill & Melinda Gates
Foundation (the "Gates Foundation") cites a mid-2002 UNAIDS report indicating
that in the absence of dramatically expanded prevention and treatment efforts,
68 million people will die of AIDS in the 45 most affected countries between
2000 and 2020, a mortality outlook that is five times the number of AIDS-related
deaths in the previous two decades in these countries. Further, the Gates
Foundation report projects approximately 45 million new HIV/AIDS infections by
the year 2010, with 28 million of these infections considered to be preventable.
Whereas the epidemic is currently centered primarily in sub-Saharan Africa,
where expectations of current and future infection range from 30 to 35 million
adults by 2010, the Gates Foundation study identifies countries in northern
Africa as well as Russia, India and China as the "next wave" countries which
will experience the HIV/AIDS pandemic, as demonstrated in the following chart:
53
- --------------------------------------------------------------------------------
High and Low Estimates of Current and Future HIV/AIDS-Infected Adults in
Next-Wave Countries, 2002 and 2010
(in millions)
High Low
---- ---
Nigeria 2002 4 2
2010 10 5
Ethiopia 2002 3 2
2010 7 3
Russia 2002 1 1
2010 5 3
India 2002 5 3
2010 20 5
China 2002 1 1
2010 10.5 4.5
SOURCE: Bill and Melinda Gates Foundation Global Health report 2/2004
- --------------------------------------------------------------------------------
CURRENT STATUS OF HIV/AIDS TESTING
A May 2004 report by the Global Business Coalition on HIV/AIDS (GBC), based on
their own estimates and those of the World Health Organization (WHO), disclosed
that less than 10% of infected individuals in the developing world know their
HIV status. According to this report, new infections are on the rise -- and only
400,000 of the 6 million people in need of antiretroviral therapy have access to
these life saving medicines. Testing for HIV serves as an entry point for both
prevention and treatment. The objective of treating 3,000,000 people by the end
of 2005, the stated goal of the WHO "3 by 5" Initiative, would require that
500,000 people will need to be tested each day. This is based on the report's
estimate that 50,000 people will test positive in hard hit countries where the
prevalence rates average 10%, and that 10% or 5,000 per day of those will
require immediate initiation of treatment. GBC states that the challenge is
enormous but attainable with increases in funding from donor governments,
reductions in drug and diagnostic pricing, integration of public-private
delivery of healthcare and overarching shifts in policy.
HIV TESTING
The discovery in 1984 of HIV antibodies circulating in the blood led to the
development and widespread use of blood screening tests for the detection of HIV
antibodies. Blood banks began testing their supplies of blood in an effort to
maintain and protect the integrity of the blood. Most current HIV antibody
screening tests are EIA tests which operate on the principle that antibodies
react with antigens. Antibodies are produced by the human body in response to
the presence of an infectious disease, such as HIV. Antigens are substances that
stimulate production of antibodies. EIA tests provide an antigen base that will
react with HIV antibodies, if such antibodies are present. Enzymes are used to
detect the reaction between the antigens and antibodies.
Since then, the blood screening test has been considered the gold standard of
HIV testing. In the United States, in addition to blood banks, physicians, life
insurance companies, the military, the criminal justice system, the Immigration
and Naturalization Service and community-based organizations all use blood-based
testing. Unfortunately, HIV blood testing can be expensive and poses risk of
infection to health care personnel. Blood is typically drawn at physician
offices, clinics, hospitals or blood draw stations, where trained personnel are
available. The blood is then sent to a laboratory where a trained health care
worker or phlebotomist must first centrifuge the blood sample and then test it
for the presence of HIV antibodies. Blood samples and related blood-sampling
equipment require careful handling to avoid accidental exposure to blood-borne
pathogens, such as HIV. Additionally, blood-based testing has become
increasingly more costly as the costs of disposing of potentially infected
specimens, syringes, needles and transfer tubes has increased. The cost of
blood-based testing is prohibitive to many large public health screening
programs, particularly in lesser-developed countries, many of which have
significantly higher rates of HIV infection. Even in the United States, certain
populations are not routinely screened due to the high cost of blood-based
testing.
54
We have consistently maintained that urine-based testing offers unique
advantages to blood-based testing. The following table illustrates these
advantages:
- --------------------------------------------------------------------------------
ADVANTAGE OF URINE OVER BLOOD
- --------------------------------------------------------------------------------
SAFETY
o Urine is non-invasive
o Urine collection uses no needles or lancets
o Urine does not spread HIV
- --------------------------------------------------------------------------------
COST EFFECTIVE,
SIMPLE
TO COLLECT o No special handling. Urine is stable for 4
weeks without refrigeration
o A urine sample is easier to obtain
o Urine is not a bio-hazard and does not
require expensive disposal
- --------------------------------------------------------------------------------
CONVENIENCE o Urine collection does not require sterile
collection devices or trained health care
providers
- --------------------------------------------------------------------------------
PATIENT APPEAL o Urine has been shown to increase voluntary
testing by up to 73% (Source: University of
Pennsylvania study results)
- --------------------------------------------------------------------------------
PATIENT SUITABILITY o Urine is easy to collect from patients and
is the most commonly collected bodily fluid
- --------------------------------------------------------------------------------
COMPLEMENTARY MENU
OF TESTS o Similar commercialized urine tests exist for
drugs of abuse, pregnancy, other sexually
transmitted diseases
- --------------------------------------------------------------------------------
ACCURACY o Clinical data of urine testing shows a high
correlation to blood, approaching 100%
- --------------------------------------------------------------------------------
All methods of HIV testing follow the same testing protocol. The protocol is to
first test a sample for the presence of HIV antibodies. Any sample found to be
reactive is then retested in duplicate. If either of the retests is reactive,
the same sample is tested again using a more precise and expensive supplemental
test. The presence of HIV antibodies, based on the results of the supplemental
test, is considered a positive diagnosis of HIV infection. This protocol
minimizes the risk of incorrectly reporting a false positive result that an
individual is infected with HIV.
ORGANIZATION
We were incorporated in California in 1989 and reincorporated in Delaware in
1996 at the time of our initial public offering. In December 1998, we acquired
certain assets from Cambridge Biotech Corporation, an entity now owned by
bioMerieux, Inc. The acquisition included the Urine Western Blot and Serum
Western Blot supplemental tests and leasehold rights to the Rockville, Maryland
facility.
We are headquartered in Alameda, California and have manufacturing facilities
there and in Rockville, Maryland. Historically, the Alameda facility has
manufactured our EIA screening test and the Rockville facility has manufactured
our Urine and Serum Western Blot tests. However, we are currently in the process
of consolidating our manufacturing operations by moving all manufacturing to our
Rockville facility. We expect the closure of the Alameda facility to be
completed by June 30, 2004, when the current lease expires. Our corporate
headquarters will remain in the San Francisco bay area in Pleasanton,
California.
In November, 2003, we became the 51% owner of a joint venture, Beijing Calypte
Biomedical Technology Ltd. (the "Beijing Calypte Joint Venture"), created to
market existing and potential new products in the People's Republic of China
("China"). The remaining 49% of the joint venture is owned by Marr Technologies
Limited, an affiliate of Marr Technologies BV ("Marr"), our largest stockholder,
with a security ownership of approximately 28% of our outstanding stock as of
June 10, 2004.
Currently, we and our distributors market our ELISA tests in approximately half
a dozen countries worldwide, primarily, however, in China and Brazil. Our
current marketing strategy is to use distributors, both third party and joint
venture partners, to penetrate targeted domestic and international markets. In
the future, we may use the Beijing Calypte Joint Venture or other joint ventures
to manufacture and market our products in international markets or as vehicles
to manage our international manufacturing arrangements.
55
FINANCIAL CONSIDERATIONS
To successfully implement our business plans, we must obtain sustainable cash
flow and profitability. Our future liquidity and capital requirements will
depend on numerous factors, including successful completion of the development
of our new rapid tests, acquisition and protection of intellectual property
rights, costs of developing our new products, ability to transfer technology,
set up manufacturing and obtain regulatory approvals of our new rapid tests,
market acceptance of all our products, competing products in our current and
anticipated markets, actions by the FDA and other international regulatory
bodies, and the ability to raise additional capital in a timely manner.
Since December 31, 2003, we have entered into new financing arrangements that
management believes will be adequate to sustain operations at expected levels
through 2004. In May 2004, we completed a private placement of our common stock
with 7 accredited investors and received net proceeds of approximately $8.8
million. Additionally, in May 2004 we and Marr Technologies BV, our largest
stockholder and a participant in the private placement, agreed to extend
$5,000,000 of the borrowing availability under the terms of the Marr Credit
Facility through December 31, 2004. If, however, sufficient funds are not
available to fund our operations in 2005 or beyond, we may need to arrange
additional financing or make other arrangements. There can be no assurance that
additional financing, if and as necessary, would be available or, if it is
available, that it would be on acceptable terms. The terms of an additional
financing could involve a change of control and/or require stockholder approval
or could require us to obtain waivers of certain covenants that are contained in
existing agreements. We would or might be required to consider strategic
opportunities, such as a merger, consolidation, sale or other comparable
transaction, to sustain our operations. We do not currently have any agreements
in place with respect to any such new strategic opportunity, and there can be no
assurance that any such opportunities will be available to us on acceptable
terms, or at all. If additional financing is not available when and if required
or is not available on acceptable terms, or we are unable to arrange a suitable
strategic opportunity, we will be in significant financial jeopardy and may be
unable to continue our operations at current levels, or at all.
PRODUCTS
THE CALYPTE URINE-BASED HIV-1 SCREENING AND SUPPLEMENTAL TESTS (THE URINE ELISA
TESTS)
Our proprietary urine-based HIV-1 EIA (the "EIA Screening Test") is
non-invasive, easy to use, reliable and avoids many of the costs and risks
associated with blood-based testing. Our EIA Screening Test, when used with our
Urine Western Blot supplemental test provides the only complete urine-based HIV
testing method. Laboratories using our urine-based testing method can complete
the entire testing profile for HIV-1 antibody using a single urine specimen. Key
benefits of our test include:
Convenience and Safety. Urine is the most commonly collected bodily fluid for
laboratory testing. Collection of urine can take place any time of day. Urine
testing does not require a 24-hour voided specimen or a midstream, clean-catch
sample. Because it requires no special preservatives or containers, urine is
also easy to collect, handle and discard. Our EIA Screening Test is in standard
EIA format and is designed to be used with standard laboratory equipment.
Independent studies have concluded that the likelihood of contracting infectious
HIV virus in urine is extremely low. There have been no reported cases of
transmission of HIV virus through contact with urine of HIV-infected patients.
Accordingly, the risk of HIV infection to health care and laboratory workers
accidentally exposed to urine samples appears to be negligible. Since no needles
are used in the urine sampling process, our test avoids this route of accidental
infection. In lesser-developed countries, where the supply of sterile needles
and syringes cannot be guaranteed and the medical infrastructure to support
laboratory testing is scarce or nonexistent, the safety benefits of using urine
sampling extend to patients as well as to health care workers.
Patient Appeal The ability to screen non-invasively for HIV in all types of
patients, including injection drug users and newborns, may both enhance patient
comfort and significantly increase the voluntary testing rates in patients who
might otherwise decline testing. A recent study conducted by Johns Hopkins
University entitled "Screening for HIV Infection in High-Risk Communities by
Urine Antibody Testing," published in the December 2002 volume of JOURNAL OF
ACQUIRED IMMUNE DEFICIENCY SYNDROMES utilized Calypte's EIA Screening and Urine
Western Blot Tests. The study concluded that "[u]rine-based screening for HIV
infection in high-prevalence inner city communities can be an effective tool for
identifying and treating infected persons who are unaware of their infection."
56
Cost Effective. Our EIA Screening Test may significantly lower the overall cost
of testing for HIV infection because the cost of collecting, transporting,
testing and disposing of urine specimens is relatively inexpensive. Our urine
ELISA tests do not require the use of trained healthcare professionals to obtain
samples and we believe that a urine collection cup costs between $0.05 and
$0.50. Moreover, since urine is often already being collected for other testing
purposes, the incremental cost of collecting urine samples is likely to be
insignificant.
Domestically, our current testing products qualify for insurance reimbursement
coverage. We sell our current ELISA tests primarily to reference laboratories
which in turn receive compensation from the insurance companies who order the
tests. Even with reimbursement approvals, there can be no assurance that our
ELISA tests will gain any significant degree of market acceptance among
physicians, patients, or healthcare payers. As we seek to develop new products
and obtain FDA approval for them in the future, insurance reimbursements may be
necessary to facilitate their market acceptance.
Accuracy We have performed clinical studies demonstrating the effectiveness of
using urine as a reliable and clinically valid sample for HIV testing. In the
clinical trials for FDA approval of our urine ELISA tests, which followed FDA
protocol of using the screening and supplemental tests together, our tests
detected the presence of HIV-1 antibodies in urine with 99.7% sensitivity in
subjects previously identified as HIV-1 infected through blood-based screening
tests. Approximately 13,000 paired blood and urine specimens were tested. In
subjects at low risk for HIV, the specificity of tests was 100%. "Specificity"
is the ability to identify all non-HIV infected individuals correctly.
"Sensitivity" is the ability to detect HIV infected individuals. Specificity and
sensitivity of our urine ELISA tests in certain populations, including those at
high risk and those with other medical conditions, was lower when compared to
blood-based testing.
Calypte's HIV-1 antibody test is a much-needed alternative for people who fail
to get tested for HIV because they are afraid of needles. According to the
Centers for Disease Control and Prevention ("CDC"), approximately 665,000
Americans are living with HIV and AIDS. An estimated one in four does not know
they are infected. It is critical for all people at potential risk for HIV
infection to learn their status because early detection and treatment have been
shown to prevent debilitating opportunistic infections and to extend life.
Studies have shown that between 21% and 50% of people would prefer a urine test
to a blood test, and up to 80% of these individuals cited fear of needles as the
reason for preferring a urine test.
In spite of the benefits of our urine ELISA tests, these tests represent an
alternative method of determining the presence of HIV antibodies. Blood-based
and oral fluid-based tests have the advantage of already being commercially
marketed and of having gained acceptance from the medical community. Both
blood-based and oral fluid-based tests have been shown to be reliable media for
HIV detection. There can be no assurance that our urine ELISA tests will gain
any significant degree of market acceptance among physicians, other health care
providers or patients.
Moreover, some blood-based HIV tests have also been proven effective in testing
for both HIV-1 and HIV-2. Our urine ELISA tests are currently limited to testing
for HIV-1 only. Although HIV-1 is the predominant strain of the virus, there are
certain regions of the world, such as western Africa, where HIV-2 also exists.
To date, although our urine ELISA tests are limited to HIV-1, we believe that
factor has not had a materially adverse effect on our operations and revenues.
However, there can be no assurance that this HIV-1 screening limitation will not
have an adverse effect on our ability to market our urine ELISA tests in the
future if another strain of HIV not detectable by our urine ELISA tests develops
or if HIV-2 becomes more prevalent. Additionally, although we are working on
development of rapid HIV diagnostic tests, there can be no assurance that our
current lack of a rapid test will not adversely affect our operations and
revenues.
Test Methodology. Our EIA Screening Test uses an industry-standard 96 well
microtiter plate to detect antibodies to HIV-1 in urine. The HIV-1 antibodies,
when present in urine, bind to our proprietary antigen coated on prepared
microtiter plates. A subsequent enzymatic reaction produces a color change
revealing the presence of HIV-1 antibodies.
The screening test requires only 200 microliters of urine (approximately four
drops) and can be performed using standard laboratory equipment. Samples can be
shipped and stored at 15 to 30 degrees centigrade for up to 55 days, or for up
to 1 year at 2 to 8 degrees centigrade, before testing. The laboratory protocol
for testing urine is nearly identical to that of blood, and therefore requires
few, if any, modifications to existing laboratory protocols.
Our Urine Western Blot test is an in vitro qualitative assay for the detection
and identification of antibodies to HIV-1. This more specific assay is used as a
supplemental test with urine specimens that tested repeatedly reactive using our
EIA Screening Test.
57
Our Urine Western Blot test is manufactured from HIV-1 propagated in an
H9/HTLV-IIIB T-Lymphocyte cell line. The virus is inactivated and specific HIV-1
proteins are bound to a nitrocellulose strip. Each strip contains all of the
proteins and glycoproteins of HIV arranged in bands across the strip in order of
molecular weight. If HIV-1 antibodies are present in the specimen, they will
bind to the viral antigens present on the nitrocellulose strip. The position of
bands on the nitrocellulose strips allows this antibody reactivity to be
associated with specific viral antigens.
Our Urine Western Blot supplemental test uses the same commercially available
western blot kit components as used in our Serum Western Blot supplemental test.
The test procedure is virtually identical as well, except that the Urine Western
Blot supplemental test requires 1.0 milliliter of urine added directly to the
standard kit diluent and requires additional times of incubation for the two
detection steps. The same laboratory equipment is used for both the Urine and
Serum Western Blot supplemental tests.
Additionally, our Urine Western Blot test is differentiated by the blot controls
it employs and the use of a positive criterion for blot interpretation. In
urine, blots showing the presence of a single band, gp160, equal to or greater
in intensity than the low positive urine western blot control are interpreted as
a positive HIV-1 result. Urine blots have a lower indeterminate rate than blood,
allowing more definitive negative or positive results.
THE CAMBRIDGE BIOTECH SERUM-BASED HIV-1 SUPPLEMENTAL TEST
Our Serum Western Blot test was the first supplemental western blot test to be
FDA-approved and licensed for the detection of HIV-1 antibodies in blood. Our
Serum Western Blot test has been distributed commercially for more than 15
years. Today, there are only two such products on the market. Since the FDA's
November 1999 approval of a "Day Assay" format, the supplemental test is
available in both a five-hour and an overnight format. We sell our Serum Western
Blot test as a supplemental test to HIV-1 EIA screening tests produced by other
manufacturers. Additionally, our Serum Western Blot test has been approved by
the FDA for use as a supplemental test to HIV-1 rapid blood tests products by
other manufacturers.
PRODUCTS UNDER DEVELOPMENT
Our research and development efforts are currently directed toward the
development of select high-priority new diagnostic tests, primarily for the
detection of HIV-1 and HIV-2. Priority is determined on the basis of
feasibility, probable cost to develop, ability to acquire necessary intellectual
property rights, regulatory complexity, market size and competition. Our product
development strategy includes both internal product development and partnering
with other companies to optimize existing tests and test formats and to obtain
freedom to operate in conformity with other companies' intellectual property
rights.
Rapid Tests. In response to reports by the CDC on the value of rapid HIV
antibody test results, we have been pursuing the development of HIV-1 and HIV-2
rapid tests as our primary new products effort. We believe that such rapid tests
are feasible and that a significant market exists for such tests. The high
number of individuals who do not return for test results and counseling
constitutes a threat to public health. In addition, in emergency rooms, delivery
rooms and other settings, there is an urgent need to immediately know the HIV
status of patients. For example, since azidothymidine ("AZT") treatment of
pregnant mothers, even at delivery, has been shown to result in a substantial
decrease in mother-to-child HIV transmission, there appears to be a ready market
for reliable rapid HIV tests. Internationally, lesser-developed countries have
the highest incidence of HIV infection and the least effective medical
infrastructure with which to diagnose and treat it. This situation largely
exists in the "next wave" countries in northern Africa, Russia, India and China.
We believe that a rapid test is much more appropriate in these countries than a
laboratory test.
We are designing our rapid tests to comply with the rapid testing protocol
promulgated by WHO. Under that protocol, if a sample is non-reactive on the
basis of a single rapid test, testing is complete and the diagnosis is
considered negative for HIV infection. If the sample is reactive using the first
rapid test, it is tested with a second, different rapid test. A reactive sample
using the second test, having already been indicated as a presumptive positive
by the first test, is considered to be a positive diagnosis for HIV. A sample
that is non-reactive to the second test, after having been reactive to the first
test, is re-tested using a third, different rapid test. A reactive sample on the
third test is considered a positive diagnosis for HIV; a non-reactive sample is
considered a negative diagnosis.
58
We have already conducted in-house trials of our development stage blood, oral
fluid and urine rapid tests and are conducting field evaluations in Thailand to
validate the performance of these products. Through the validation process, any
enhancements necessary and/or desired in the performance of the rapid tests in
the field are worked on in the laboratory. The reworked rapid tests are then
returned to the field for further evaluation. This process is iterative and
precedes the larger clinical trials that will be required for regulatory
approval in many countries prior to bringing the products to market. In our
first phase of field trials, we tested our development-stage blood and urine
rapid tests. These studies identified certain refinements that we have
implemented. We have subsequently conducted a second phase of field trials that
included our developmental stage blood, oral fluid and urine rapid tests.
Based on our field study results to-date, we believe that we have finalized our
blood rapid test and are initiating plans to manufacture it in Thailand
beginning in June 2004. We are concurrently making plans to conduct a formal
clinical trial in China using the blood test. We expect that clinical trial to
be completed in the third quarter of 2004. We believe that we have successfully
field tested and are now finalizing our oral fluid test. We plan to initiate
manufacturing of the oral fluid test in Thailand shortly following the start-up
of blood test manufacturing. We also expect to include it in the clinical trial
we are about to commence in China. We are continuing the development process for
our urine rapid test. Urine contains a lesser amount of antibody than either
blood or oral fluid, making the the identification of those individuals with low
levels of antibodies even more difficult. We believe that the results to date
are encouraging, however we have not yet tested enough samples to achieve
statistical significance. As we continue the current field trial, we are
continuing the iterative development process and are evaluating other
alternatives, some of which we may choose to test in a new field trial. While it
is our objective to include a urine test in the clinical trial in China, at this
time it is uncertain whether the test currently in field study will (1) be
successful, (2) have tested a sufficient quantitiy of specimens to have obtained
a level of statistical significance in time to be included, or (3) perform at
higher levels of sensitivity and specificity than a subsequent iteration of the
test which is currently under development. If we have not finalized a urine
version of the test in time for the clinical trial in China, we will conduct a
separate trial for the urine test when we believe the results of a field study
have demonstrated statistical significance at a level of commercial viability.
We define commcercial viability as meeting the highest of regulatory standards,
including those set by the U.S. FDA. While we expect that our efforts will
result in a finalized version of the test that will achieve commercial
viabililty no later than the third quarter of 2004, there can be no assurance
that we will successfully develop or commercialize a urine rapid test within
that timeframe, or at all.
Further, our urine test development efforts have identified certain unique
product properties and processes that we plan to protect. We believe that this
intellectual property is significant as it may result in a blocking patent to
those who may consider urine testing by protecting a key step necessary in
achieving the highest levels of specificity.
As mentioned above, we plan to initially manufacture our rapid tests in
Thailand. In preparation for our first foreign manufacturing technology
transfer, we announced on May 11, 2004 that we have finalized a non-exclusive
contract manufacturing agreement with Thailand-based Pacific Biotech Co., Ltd.
to act as our initial international manufacturer for our HIV-1/2 blood, serum
and plasma rapid tests. Manufacturing will be located at the Pacific Biotech
facility in Phetchaboon, Thailand. We are commencing the technology transfer in
June 2004 with the objective of completing our first pilot production lots in
the third quarter of 2004. Further, on May 13, 2004, we announced that we have
selected Beijing Tiantan Biological Products Co, Ltd. ("BTBP") as our
manufacturing partner for the production of our rapid tests in China. On the
basis of a memorandum of understanding between the parties, BTBP has commenced
the construction of a manufacturing site in China where the HIV rapid tests will
be produced.
One of the most critical components affecting the design and composition of our
rapid test products is the acquisition of patent rights. A number of patents
from a number of third parties are required for the unrestricted manufacture of
the rapid test platforms and contents. These patent rights may restrict us as to
use, territories in which we may sell products and modes of operation. These
restrictions may impact whether we can transfer any of our rights to manufacture
and/or distribute products incorporating particular patents and how we may
conduct such manufacturing and/or distribution arrangements. We may need to
enter into partnering arrangements with other entities in order to manufacture
and/or distribute our products, but we may be restricted from doing so because
of restrictions on certain patent rights. We may be required to devote
substantial funds and other resources to acquire the necessary patent rights in
a manner that will not hinder our ability to commercialize our products. There
can be no assurance that we will be successful in our endeavors to commercialize
these products. On April 1, 2004, we announced that we had entered into an
agreement with Adaltis, Inc. to license and supply certain peptides for use in
our immunodiagnostic assays. The first application for the peptides will be in
our HIV rapid diagnostic tests currently under development. The agreement will
provide us with our supply of key, patented HIV-Type 1 and HIV-Type 2
("HIV-1/2") peptides from Adaltis. Our non-exclusive license to Adaltis' peptide
sequences provides us freedom to operate throughout the world, with the
exception of Canada, where we would work with Adaltis in its home territory.
59
Incidence Tests. On April 12, 2004, we announced that the Centers for Disease
Control and Prevention ("CDC") had granted us a worldwide, non-exclusive license
enabling us to use technologies developed by the CDC to manufacture and
commercialize a serum enzyme immunoassay (HIV 1-EIA) that can be used to
estimate the proportion of HIV infections that are recently acquired in a
population (infections occurring in the last 6-8 months). This laboratory assay
can be used to identify those regions and the populations within those regions
where HIV transmission is occurring most recently. Once our production
capabilities are in place, the CDC will no longer supply this product. We expect
to have this product available for international distribution in the second half
of 2004. On April 14, 2004, we announced that we had executed a CRADA - a
Cooperative Research and Development Agreement - with the CDC for the
development of a new HIV rapid blood assay. Like current rapid test assays, the
proposed device will be for diagnostic use to detect HIV antibodies, but it will
also be used to determine the proportion of HIV-1 infections that have occurred
in the last six months. The purpose of the test is to provide a simplified and
rapid format that can be performed in resource poor settings and remote outreach
locations for diagnostic and surveillance purposes.
Over-the-Counter. There are currently no FDA approved over-the-counter HIV test
products providing an immediate diagnosis. Nonethless, we believe there may be
interest in an over-the-counter in-home rapid test in a number of countries
worldwide. We will continue to explore the potential for an over-the-counter
in-home urine collection kit for use in HIV diagnosis. However, due to
regulatory approval uncertainties and cost concerns in the more developed
countries, and especially in the United States, this is not a near-term priority
development for us on our own.
Other Diagnostics. We intend to develop and/or market additional or improved
tests, focusing on our expertise in urine and oral fluid, for other infectious
and viral diseases, including other sexually transmitted diseases. We intend to
focus on developing and marketing products that are complementary to our
existing product lines, technical expertise and market opportunities. These
efforts are in the early research and evaluation stages and are not expected to
result in revenues in 2004, if at all.
Research and Development Spending. We continue to invest funds in research and
development that we believe are necessary and appropriate to bring our rapid
HIV-1 and HIV-2 tests to market, to ensure that our ELISA tests meet customer
requirements and to explore the potential for other new diagnostic test
products. We spent $1.5 million and $0.9 million on product research and
development in 2003 and 2002, respectively. We expect future spending will
continue to be devoted to development and commercialization of HIV-1 and HIV-2
rapid tests and improvements for our existing products, as well as to
investigation of other potential new test products. There can be no assurance
that we will achieve or sustain any revenues from sales of rapid HIV diagnostic
tests, internationally or domestically, or from other new products we may
develop or introduce.
SALES, MARKETING AND DISTRIBUTION
Our marketing strategy is to continue to expand our global distribution network
through the use of third party distributors and joint venture partners. In
addition to FDA approvals, to date, we have received approval to market our
ELISA urine tests in Indonesia, South Africa, Uganda, Kenya, China and Malaysia.
Other international approvals for the ELISA urine tests are pending. We are
working collaboratively with our third party distributors and through our
Beijing Calypte Joint Venture to obtain regulatory approval to market and
promote our products in certain international markets.
We anticipate that a greater portion of our revenues for the next several years
will be derived from sales to international distributors and by manufacturing
collaborations in key markets. International sales and operations involve a
number of inherent risks and may be limited or disrupted by the imposition of
government controls, export license requirements, political instability, trade
restrictions, changes in tariffs, difficulties in managing international
operations and fluctuations in foreign currency exchange rates. Distributors of
medical products in developing countries where the need for cost-effective HIV
diagnostic tests may be the most acute often find it difficult to establish and
maintain the necessary transportation, storage and credit facilities. Certain of
our distributors have limited international marketing experience, and there can
be no assurance that our distributors will be able to successfully market our
products in any international market.
60
The following table summarizes the markets and geographic regions that we and
our current marketing partners for our ELISA tests cover. The table includes
marketing and distribution arrangements that were in effect at December 31, 2003
and those expected to become effective in the first half of 2004. Material terms
of the respective distribution arrangements are described in more detail below.
MARKETING PARTNER/ COMPANY EFFECTIVE DATE TERM OF GEOGRAPHIC MARKETS/PRODUCTS TYPE OF
OF ARRANGEMENT ARRANGEMENT REGION ARRANGEMENT (1)
- ----------------------------------------------------------------------------------------------------------------------
United
Calypte States and
Canada All
Otsuka Pharmaceutical 12/98 Evergreen Japan Urine only Exclusive
Teva Medical Ltd. 12/94 Evergreen Israel Urine only Exclusive
Uni-Health Services Sdn. Bhd. 4/01 3 years, with Malaysia All Exclusive -
2 year renewal urine
option Non-exclusive
- serum
BioBras S. A. 3/00 3 years; 2 Brazil All Exclusive -
year renewal urine
option Non-exclusive
- serum
Medicure, Inc. 5/01 3 years with 2 Philippines All Exclusive-
year renewal urine
option Non-exclusive
- serum
PCN Healthcare 3/01 3 years with 2 Thailand All Exclusive-
year renewal urine
option Non-exclusive
- serum
Centrum Promotora 6/01 2/04 Mexico All Exclusive -
Internacional urine
Non-exclusive
- serum
REM Industria E. Comerica LTDA 4/01 3 years with 2 Brazil Serum only Non-Exclusive
year renewal
option
Zhong Yang Pute Biomedical Co. 0/02 2 years, with 20 Provinces All except drug Exclusive -
2 year renewal in China rehabilitation urine
option (2) and criminal Non-exclusive
justice - serum
Beijing Calypte Biomedical 1/03 Not applicable China All 51%-owned
Technology Ltd. joint venture
Sumit Exports and Trades Pvt. 1/02 3 years, with India All Exclusive -
Ltd.. 2 year renewal urine
option Non-exclusive
- serum
bioMerieux Mexico S.A. de C.V. 6/01 3 years with 2 Mexico Serum only Non-exclusive
year renewal
option
61
MARKETING PARTNER/ COMPANY EFFECTIVE DATE TERM OF GEOGRAPHIC MARKETS/PRODUCTS TYPE OF
OF ARRANGEMENT ARRANGEMENT REGION ARRANGEMENT (1)
- ----------------------------------------------------------------------------------------------------------------------
bioCiencia Tecnologia e 1/02 3 years with 2 Brazil Serum only Non-exclusive
Comercio Ltda. year renewal
option
Adaltis Inc. 4/02 3 years with 2 Worldwide Serum only Non-exclusive
year renewal
option
Mistaire LLC 3/03 3 years with 2 gulf All Exclusive -
Year renewal cooperative serum in
Option council, GCC;
Botswana non-exclusive
- urine and
serum in
Botswana
- ---------------
(1) All serum products are sold on a non-exclusive basis. Urine EIA
screening and supplemental tests are distributed on the basis of
country or territory exclusivity.
(2) The agreement calls for minimum purchases of $3 million over the
two-year term of the agreement, and provides for a two-year
extension contingent upon the distributor's purchase of a specified
minimum number of tests (EIA - 1,500,000 tests the first twelve
months and 2,500,000 tests the second twelve months; Urine Western
Blot - 15,000 tests the first twelve months and 30,000 tests the
second twelve months) during the original term of the agreement.
Based on purchases to date, it is not likely that the distributor
will achieve the required minimum purchases and, consequently, the
agreement will likely not be renewed. This distribution agreement
has been assigned to Beijing Calypte Joint Venture. The agreement
can be terminated by either party upon ninety days notice.
In 2003, our revenue from product sales totaled $3.5 million. Approximately 95%
of our 2003 revenues were derived from sales to customers in the United States.
MANUFACTURING
The manufacture of our urine ELISA tests involves antigen production, plate
processing and preparation of certain washes and other reagents. All processes
are carried out under FDA Quality System/ Good Manufacturing Practices ("GMP")
regulations. Antigen production involves cell culture, antigen expression and
purification. Following purification, the antigen is tested extensively and
optimized for plate coating. The coating of standard 96 well microtiter plates
with antigen is completed using industry standard plate coating equipment.
Following binding of the antigen to the plates, the plates are blocked and
stabilized to prevent nonspecific binding of the antigen. The plates are then
dried and packaged in foil pouches. The washes and reagents are produced using
standard solution preparation techniques.
The physical relocation of our our manufacturing operations to Rockville will be
completed by June 30, 2004. This process has required significant investment of
both capital and human resources to transfer the manufacturing processes and
procedures for our urine ELISA tests, to reconfigure space and purchase new
equipment at the Rockville facility and to hire and train current and additional
staff. The transition will continue to require significant resources as we
conduct validation studies and complete comparability studies which will be
necessary for FDA review and approval, which we expect to be completed during
the first quarter of 2005.
We have pre-market approval ("PMA") from the FDA for the manufacture and sale of
our EIA screening test for our Alameda, California facility. We have a Biologics
License ("BL") from the FDA for the manufacture and sale of our serum Western
Blot tests for our Rockville, Maryland facility. We also have a PMA from the FDA
for the manufacture and sale of our urine Western Blot tests for our Rockville
facility. We have applied for a PMA to manufacture and sell our EIA test kits at
our Rockville facility and expect to receive it in the spring of 2005. Until we
receive the PMA, we will not be able to manufacture our EIA screening test for
sale in the United States at our Rockville facility. As a result, we have
recently increased our production of EIA screening tests at our Alameda facility
in an attempt to establish a sufficient supply of inventory to meet our expected
demand during the consolidation period. We considered historical sales levels
and the expected length of time required to complete the consolidation and
obtain the PMA in determining the amount of inventory we would need to cover
demand during the transition period. Demand could significantly exceed
historical levels and consolidation of operations or FDA approval could take
longer than expected. If one or more of these events occur, our transition
inventory may not be sufficient to supply customer orders. Alternatively, demand
could fall significantly below historical levels, in which case we will have
manufactured excess inventory that we may have to dispose of at additional cost.
62
The lease for our Alameda facility expires on June 30, 2004 and, as part of our
Rockville consolidation, we are winding up manufacturing operations in our
Alameda facility. We plan to keep our corporate headquarters in the San
Francisco bay area and are relocating it to Pleasanton, California.
The FDA did not inspect either of our facilities during 2002. It inspected our
Alameda facility in June 2003 and our Rockville facility in October 2003. Both
inspections resulted in a few minor observations requiring response or
corrective action, which we have made. Although we believe the FDA is currently
satisfied with our responses and corrective actions resulting from its latest
inspections, if it subsequently determines that it is not satisfied with them
or, if it observes new conditions requiring corrective actions which remain
unresolved following a future inspection, the FDA could take regulatory actions
against us, including license suspension, revocation, and/or denial, seizure of
products and/or injunction, and/or civil penalties or criminal sanctions. Any
such FDA action would likely have a material adverse effect upon our ability to
conduct our ELISA test business.
Except as may be limited by licensed patent right restrictions and other
regulatory or government imposed considerations, we expect to outsource the
manufacture of our rapid test products and are in the process of identifying
manufacturers and potential joint venture partners that we believe could
manufacture the rapid tests in the quantity and quality that we desire. There
can be no assurance that we can successfully develop and transfer our rapid test
technologies to another manufacturer or that the manufacturer will be able to
successfully obtain local regulatory approval or meet expected commercial
demand. Additionally, more than one manufacturer may produce various components
of the tests, and there can be no assurance that the production from various
sources will be successfully coordinated. Governmental regulations will likely
affect the cost of production and time to production in amounts and manners that
we cannot quantify.
We purchase and expect to purchase or have our manufacturing partners purchase
raw materials and other components obtained from various suppliers in the
manufacture of our test products. We also use some single-source components. Any
delay or interruption in supply of these raw materials or components, especially
in regard to single-source components, could significantly impair our ability to
manufacture products in sufficient quantities to meet established and increasing
commercial demand because additional or replacement suppliers cannot be quickly
established.
As a result of limited financial resources in the past and related personnel
turnover, we have had limited experience in the commercial-scale manufacture of
our products. We currently manufacture our products for sale, for submission to
FDA for ongoing compliance, for clinical trials, and for building our inventory.
We may encounter difficulties in transferring the technology to our
manufacturing partners or scaling-up production of our products, including
problems involving production yields, quality control and assurance, raw
material supply and shortages of qualified personnel. Due to our limited
manufacturing experience, our estimates with regard to these and other
operational requirements may be incomplete or inaccurate and unanticipated
events and circumstances are likely to occur. Difficulties we may encounter in
the scale-up of manufacturing inventory following the consolidation of our
domestic manufacturing operations could have a material adverse effect on our
business, financial condition and results of operations.
Due to the nature of our manufacturing processes, we are subject to stringent
federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, air emission, discharge, handling and
disposal of certain materials and wastes. There can be no assurance that we will
not be required to incur significant costs to comply with land use and
environmental regulations as manufacturing is scaled-up to commercial levels,
nor that our operations, business or financial condition will not be materially
and adversely affected by current or future environmental laws, rules,
regulations and policies. There can be no assurance that we will be able to
obtain and maintain all required permits in connection with the operation of our
manufacturing facilities. If we attempt to manufacture our products on a larger
commercial scale, we may become a significant user and disposer of water. The
disposal of water used in our manufacturing processes must comply with
applicable federal, state and local environmental protection laws, and
compliance with these laws may be costly and difficult.
Our Rockville facility is a specialized facility incorporating Biosafety Level 3
controls for the manipulation of potentially infectious biological agents (HIV
viruses). It also uses hazardous chemical materials. As such, this facility and
the products manufactured there are subject to rigorous federal, state and local
regulatory controls including registration, licensing and specific material use
permits.
63
TECHNOLOGY
Our urine ELISA tests are based on the discovery by scientists at the New York
University Medical Center ("NYU") in 1988 that antibodies to HIV could be found
in urine. Prior to this discovery, it was commonly held that antibodies to
systemic infections could not pass through the kidneys, and thus, could not be
found in the urine of infected individuals. The NYU scientists showed that
antibodies to HIV-1 envelope antigens were present in all urine samples from
HIV-1 seropositive subjects. Building on this discovery, we developed our enzyme
immunoassay ("EIA") to detect antibodies to HIV-1 in urine. There are two
proprietary features of our EIA test that result in a format sensitive enough to
detect the low levels of HIV antibodies in urine, the antigen target and the
sample buffer in the assay.
Recognizing the prominence of envelope antibodies in urine, the antigen target
in the assay is a full length, recombinant glycosylated HIV-1 envelope protein,
rgp160. Although this antigen is a recombinant glycoprotein, it is identical to
the viral envelope protein gp160 in amino acid sequence and in the presence of
carbohydrate at glycosylation sites. This kind of antigen target can efficiently
capture the full range of HIV-1 envelope specific antibodies produced in the
human polyclonal response to the virus. The microwell assay format permits the
high availability of epitopes of the recombinant envelope glycoprotein for
antibody binding. This availability of epitopes results in the sensitivity
verified in clinical trials.
We have non-exclusive rights to the proprietary process used to express the
recombinant HIV-1 envelope glycoprotein from Texas A&M University System
("TAMUS"). This proprietary process for the manufacture of rgp160 begins with
the baculovirus expression vector system established in an insect cell culture.
The consistent and high levels of rgp160 expression in baculovirus infected
insect cell culture are a critical step in the overall manufacturing of rgp160.
We improved and upgraded the Repligen Corporation process with a proprietary
process which uses a system in which the HIV-1 envelope protein is produced in
the insect cell membrane rather than typical tissue culture systems where the
protein is secreted into insect cell culture media. Rgp160 is an insoluble
protein and requires detergent based extraction and purification procedures
which are proprietary. We developed and have obtained a United States patent
claiming a sample buffer formulation, which is used in the HIV-1 urine test.
This sample buffer acts as a diluent for urine in the assay procedure and
significantly increases test specificity by reducing non-specific binding of
immunoglobulins (non-specific antibodies) and other substances in urine that
would decrease specificity and sensitivity of HIV-1 antibody binding. Sample
buffer is currently manufactured in our Alameda facility and is being
transferred as part of our consolidation in our Rockville facility.
Our products incorporate established immunoassay technology based on
antibody-antigen reactions. Antibodies are immune system proteins produced as a
result of an organism's immune response to substances (antigens) foreign to the
body and specifically bind to antigens and signal the immune system to assist in
eliminating them. Immunoassays are used for diagnostic applications where the
presence or absence of a specific analyte is being evaluated and allow the
detection of some analytes at levels as low as one part per billion. Antigens
include viruses, bacteria, parasites, chemical toxins and other foreign
substances and hormones.
The HIV-1 urine assay format includes a standard 96 well microtiter plate which
is compatible with standard laboratory instrumentation. The microwell plates are
coated with proprietary recombinant HIV-1 envelope protein antigen. Patient
urine and the unique specimen diluent are introduced to the microwell
simultaneously. If HIV-1 antibodies are present, they bind to the antigen coated
well and remain during the subsequent wash steps. An enzyme labeled conjugate is
added to the well. This conjugate binds specifically to human antibodies which
remain from the previous step. Following another wash, substrate reagent is
added and color development occurs due to the presence of the enzyme conjugate
in the well. This color is measured spectrophotometrically on a standard
laboratory microwell plate reader. The presence of HIV antibodies in the
specimen is indicated by the development of color in the microwell, and the
intensity of the color is proportional to the amount of antibody.
Our Urine Western Blot supplemental test combines the Cambridge Biotech HIV-1
Western Blot test with a procedure we developed for testing urine specimens. Our
Urine Western Blot test is based on the combination of electrophoretic
separation of complex mixtures of proteins with the highly sensitive
immunoblotting technique. This method has been highly useful in characterizing
the antigenic profile of HIV-1 and describing the immune response to HIV-1 in
the serum/plasma of exposed or infected persons.
64
The manufacture of our Urine Western Blot and Serum Western Blot tests involves
the production of an inactivated, partially purified HIV-1 lysate from HIV-1
propagated in an H9/HTLV-IIIb T-lymphcyte cell line. HIV-1 proteins are
separated by molecular size using gel electrophoresis of the lysate in the
presence of detergent (sodium dodecylsulfate). The separated HIV-1 proteins are
electrotransferred from gel to a nitrocellulose membrane that is washed, blocked
to minimize non-specific immunoglobulin binding and packaged. These tests
provide controls and components which enable the detection and visualization of
HIV-1 antibodies present in the specimen incubated with individual
nitrocellulose membrane strips. Bands corresponding to specific location of
HIV-1 proteins are used to interpret a positive, negative or indeterminate
result.
The format of both of our urine and blood rapid tests under development is based
on a lateral flow device where the specimen enters by capillary action into a
sample pad, where conditioning of the specimen takes place. The specimen then
moves into a conjugate pad where the presence of antibodies in the urine or
blood results in binding to a detection molecule carrying a color indicator.
This antibody complex moves to a nitrocellulose test strip containing the HIV-1
and HIV-2 antigen targets and in a separate area as a control zone. If HIV-1 or
HIV-2 specific antibodies are present in the complex, binding occurs between the
antibody complex and the antigen band forming a red line. Absence of a red line
at this location indicates the absence of HIV-1 and/or HIV-2 antibodies and a
non-reactive result for the specimen. The validity of that result depends on the
binding of the antibody complex to the control zone to form a red line. Results
are seen in about 20 minutes in contrast with the laboratory based EIA tests
that take 2 to 3 hours to perform.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
We seek patent and other intellectual property rights to protect and preserve
our proprietary technology and our right to capitalize on the results of our
research and development activities. We also rely on trade secrets, know-how,
continuing technological innovations and licensing opportunities to provide
competitive advantages for our products in our markets and to develop new
products.
We have two United States patents, one pending United States patent application,
six foreign patents, and eight pending foreign patent applications. In addition,
we currently license the right to use certain patents and other intellectual
proprietary rights from NYU, Cambridge Biotech and TAMUS. These licenses secure
intellectual property rights necessary for the manufacture and sale of our ELISA
test products as summarized below:
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
EXPIRATION -
UPON EXPIRATION
ISSUER OF LICENSE OWNER DESCRIPTION ADDITIONAL PROVISIONS OF PATENT IN:
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
EIA:
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
NYU NYU Exclusive license for Right to make, use, 2009
using urine in place of sell and sublicense
blood as a specimen sample products utilizing the
for detecting HIV technology described
in the patent
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
Texas A&M University TAMUS Non-exclusive license for Right to make, have 2009
System (TAMUS) using insect cells to made, use and sell
obtain gp160 products based on its
proprietary
recombinant expression
systems
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
bioMerieux (Cambridge Harvard University Non-exclusive license for Sublicense to make, 2005
Biotech Corporation) using gp160 to detect HIV have made, use and
infection sell products that
relate to the licensed
technology
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
URINE WESTERN BLOT
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
NYU NYU Exclusive license for Right to make, use, 2009
using urine in place of sell and sublicense
blood as a specimen sample products utilizing the
for detecting HIV technology described
in the patent
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
NIH Pasteur Institute HIV 1 virus 2112
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
65
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
EXPIRATION -
UPON EXPIRATION
ISSUER OF LICENSE OWNER DESCRIPTION ADDITIONAL PROVISIONS OF PATENT IN:
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
SERUM WESTERN BLOT
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
NIH Pasteur Institute HIV 1 virus 2112
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
As we pursue the development of our rapid HIV tests, we will need to obtain
licenses or other rights under, or enter into distribution or other business
arrangements in connection with, certain patents for HIV-2, peptides, analytes
and lateral flow technology, in order to manufacture and sell our rapid HIV
tests. See the Section entitled, "Risk Factors" for a further discussion of
these issues. To obtain these licenses, we will have to pay upfront fees and
ongoing royalties.
In April 2004, we announced that we entered into a license and supply agreement
with Adaltis, Inc. under which Adaltis will supply us with key HIV-1/2 peptides
for use in our rapid tests. The table below identifies the primary patent suites
we will need to acquire for the manufacture of our rapid tests.
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
EXPIRATION -
UPON EXPIRATION
ISSUER OF LICENSE OWNER DESCRIPTION ADDITIONAL PROVISIONS OF PATENT IN:
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
RAPID URINE:
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
Adaltis, Inc. Adaltis, Inc. Non-exclusive license for Right to make, have 2010 - 2012
use of HIV-1 and HIV-2 made, use and sell
peptide sequences Calypte products
throughout the world,
except in Canada,
utilizing the
technology described
in the patent
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
Bio-Rad Laboratories Non-exclusive license for Right to make, have 2006 - 2015
and Bio-Rad Pasteur use of HIV-2 virus made, use and sell
(In negotiations) products utilizing the
technology described
in the patent
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
Abbott Laboratories Non-exclusive sublicense Right to make, have 2008 - 2017
(In negotiations) of the Swanson, et al and made, use and sell
Guire et al lateral flow products utilizing the
patent suite technology described
in the patent
- -------------------------- ------------------- ---------------------------- ------------------------ -----------------
We have filed patent applications in the United States, China and Russia for a
"Rapid Test For Antibodies Against HIV In Urine." These applications are in the
early stages of prosecution but establish a priority date for our invention.
Although important, the issuance of a patent or existence of trademark or trade
secret protection does not in itself ensure the success of our business.
Competitors may be able to produce products competing with our patented products
without infringing our patent rights. Issuance of a patent in one country
generally does not prevent manufacture or sale of the patented product in other
countries. The issuance of a patent is not conclusive as to validity or as to
the enforceable scope of the patent. The validity or enforceability of a patent
can be challenged by litigation after its issuance. If the outcome of such
litigation is adverse to the owner of the patent, the owner's rights could be
diminished or withdrawn. Trade secret protection does not prevent independent
discovery and exploitation of the secret product or technique.
We are not aware of any pending claims of infringement or other challenges to
our patents or our rights to use our trademarks or trade secrets in the United
States or in other countries.
66
We require our employees, consultants, outside collaborators, and other advisors
to execute confidentiality agreements upon the commencement of employment or
consulting relationships with us. These agreements provide that all confidential
information developed by or made known to the individual during the course of
the individual's relationship with us is to be kept confidential and not
disclosed to third parties except in specific circumstances. In the case of
employees, the agreements provide that all inventions conceived by the
individual during his or her tenure with us will be our exclusive property.
GOVERNMENT REGULATION
Overview
Our products are subject to extensive regulation by the FDA and, to varying
degrees, by state and foreign regulatory agencies. Our products are regulated by
the FDA under the Federal Food, Drug, and Cosmetic Act (the "Act"), as amended
by the Medical Device Amendments of 1976, the Safe Medical Devices Act of 1990,
the FDA Modernization Act of 1997, and the Medical Devices User Fee and
Modernization Act ("MDUFMA") among other laws. Under the Act, the FDA regulates
the pre-clinical and clinical testing, manufacturing, labeling, distribution,
sale and promotion of medical devices in the United States. Beginning in October
2002, MDUFMA requires companies to pay substantial user fees for many FDA
applications for new product approvals and for some product modifications. The
FDA prohibits a device, whether or not cleared under a 510(k) pre-market
notification, or approved under a pre-market approval ("PMA") or a biologics
license application, from being marketed for unapproved uses. If the FDA
believes that a company is not in compliance with the regulations, it can
institute proceedings to detain or seize a product, issue a recall, prohibit
marketing and sales of the company's products and assess civil and criminal
penalties against the company, its officers or its employees.
We plan to sell our products in certain foreign countries which impose local
regulatory requirements. The preparation of required applications and subsequent
FDA and foreign regulatory approval processes are expensive, lengthy and
uncertain. Failure to comply with FDA and foreign regulatory requirements could
result in civil monetary penalties or criminal sanctions, restrictions on or
injunctions against marketing of our products. Additional enforcement actions
may potentially include seizure or recall of our products, and other regulatory
actions. There can be no assurance that we will be able to obtain necessary
regulatory approvals or clearances in a timely manner or at all, and delays in
receipt of or failure to receive such approvals or clearances, the loss of
previously received approvals or clearances, or failure to comply with existing
or future regulatory requirements would have a material adverse effect on our
business, financial condition and results of operations.
HIV-1 Screening and Supplemental Tests
Our ELISA tests are regulated by the FDA Center for Biologics Evaluation and
Research. When our EIA screening test was submitted to the FDA in September
1992, the FDA required a product license application ("PLA") and an
establishment licensing application ("ELA") for our Berkeley, California
manufacturing facility. In August 1996, we received a product license and an
establishment license from the FDA to manufacture and sell, in interstate and
foreign commerce, our EIA screening test for use in laboratory settings.
In December 1998, when we acquired the assets relating to the Cambridge Biotech
Western Blot tests for HIV-1, Cambridge Biotech had a product license and an
establishment license from the FDA for both the urine and serum-based Western
Blot tests. In March 1999, the licenses were transferred from Cambridge Biotech
to us and replaced with a Biologics License ("BL"). In January 2001, our EIA
screening test was transferred from the biologics license to an approved PMA
license as a Class III medical device concurrent with the approval of our
Alameda, California manufacturing facility. In June 2001, our urine Western Blot
test, manufactured in our Rockville, Maryland facility, was transferred from the
biologics license to an approved PMA license as a Class III medical device.
In December 2002, we received FDA approval to eliminate the lot release testing
requirement for our EIA test. In February 2003, we received FDA approval for
elimination of lot release testing for our urine Western Blot test.
Clinical Laboratory
We have not established nor do we plan to establish a clinical reference
laboratory. Our customers depend upon the services and facilities of independent
clinical reference laboratories to process our ELISA tests.
67
Manufacturing Facilities
The FDA requires our products to be manufactured in compliance with its Quality
System/Good Manufacturing Practices ("GMP") regulations. In addition, we are
subject to certain additional manufacturing regulations imposed by the State of
California for our Alameda facility and the State of Maryland for our Rockville
facility. These regulations require that we manufacture our products and
maintain related documentation for testing and control activities. Our
facilities and manufacturing processes have been periodically inspected by the
FDA and other agencies and remain subject to audit from time to time. We believe
that we are in substantial compliance with all applicable federal and state
regulations. Nevertheless, there can be no assurance that our manufacturing
facilities will satisfy FDA, GMP or California and Maryland manufacturing
requirements. Enforcement of the GMP regulations has increased significantly in
the last several years, and the FDA has publicly stated that compliance will be
more strictly enforced. In the event the FDA determines that we are not in
compliance with its regulations and, to the extent that we are unable to
convince the FDA of the adequacy of our compliance, the FDA has the power to
assert penalties, including injunctions or temporary suspension of shipment
until compliance is achieved. In addition, the FDA will not approve a biologics
license or PMA if the facility is found in noncompliance with GMPs. Such
penalties could have a material adverse effect on our business, financial
condition and results of operations.
We are also subject to regulation by other federal entities, such as the
Occupational Safety and Health Agency, the Environmental Protection Agency, and
by various state agencies, including the California Environmental Protection
Agency. Federal and state regulations regarding the manufacture, sale or use of
our products are subject to future change, and these changes could have a
material adverse effect on our business, financial condition and results of
operations.
Product Liability and Recall Risk; Limited Insurance Coverage. The manufacture
and sale of medical diagnostic products 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 against which no claims have been made. 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.
International
Our Alameda, California manufacturing site was awarded International
Organization for Standardization ("ISO") 9001/EN 46001/ ISO 13485 certification
on March 14, 2001 and we expect this approval to remain in effect until the
facility is closed as part of our consolidation of manufacturing operations in
Rockville. Our Rockville, Maryland manufacturing site underwent an assessment in
December 2003 for ISO certification. The Rockville site was awarded ISO 13485
certification effective May 14, 2004. The certification is effective until March
15, 2006.
Distribution of our products outside the United States is subject to regulatory
requirements that vary from country to country. Our export from the United
States of certain of products that have not yet been approved for domestic
commercial distribution is subject to FDA export restrictions. The European
Union ("EU") requires a CE mark as well as ISO 9001 certification to qualify for
sale in the EU. We have no immediate plans to seek such qualification. In a
number of foreign countries, FDA approval is required prior to approval in that
country to avoid additional in-country regulatory processes. Other countries
require approval in the country of manufacture to avoid the in-country
regulatory processes. Still other countries look to the results of WHO
evaluations for guidance.
WHO serves as both a quasi-regulatory body and a potential funding source for
many developing countries that might not otherwise possess the regulatory
infrastructure or financial resources to avail themselves of products for the
diagnosis and treatment of HIV and AIDS. We believe that a strong performance of
our proposed rapid urine tests in a WHO evaluation would be an equally, if not
more, effective demonstration of the viability of urine testing for HIV
antibodies than the evaluation we earlier contemplated for our ELISA tests. We
have been advised by WHO that its bulk procurement program for HIV tests focuses
on diagnostic and blood donation screening tests capable of detecting the
presence of both HIV-1 and HIV-2 antibodies. Although WHO has previously
reported the results of its Phase 1 trials of our current EIA and Western Blot
tests on its website, WHO has advised us that, in principle, it views those
tests as suitable only for surveillance purposes and therefore not eligible for
WHO's bulk procurement program. We anticipate that certain countries will look
to the results of WHO evaluations for guidance on the potential uses of urine
tests and for this reason we intend to continue to work with WHO. In our view,
the attributes of our planned rapid tests for HIV-1 and HIV-2 in both urine and
whole blood samples more closely match the needs of the developing world and,
once evaluated by WHO, are more likely to meet its bulk procurement eligibility
criteria. For these reasons, we may request WHO either to put further
evaluations of our ELISA tests on hold or to drop them entirely in order to help
WHO focus its limited resources on evaluation of the technology to be employed
by the rapid tests.
68
We have obtained regulatory approval for our ELISA tests in certain
international markets including Malaysia, China, Indonesia, the Republic of
South Africa, Kenya and Uganda. These approvals validate the use of urine
testing in the diagnosis of HIV. We believe that the two largest international
markets for our urine ELISA tests are (1) China, where our ELISA tests have
already been granted approval as a medical device and where we are attempting to
achieve expanded access to governmental testing applications by obtaining an
additional Biologics Branch approval, and (2) Russia, where we are considering
expansion. Although we have obtained approval for our urine ELISA tests in
certain African countries and are engaged in the approval process in others, we
have determined that most hospitals and voluntary testing centers in these
countries, due to their limited infrastructure, can best utilize our proposed
HIV urine rapid test. Even though many hospitals, clinics or testing centers may
recognize the advantages of and prefer urine testing, there is negligible demand
for our current urine ELISA tests as they would prefer to wait for the
availability of our announced rapid test products than implement procedures
applicable to the current lab-based urine testing alternative.
Since we are still in the development stage for our rapid test products, we have
not begun the regulatory process for those tests in any target market, although
we have begun preparations for clinical trials in China. We believe that the
regulatory processes in certain foreign countries having a greater prevalence of
HIV will be faster, which should result in a quicker timeframe for approval and
right to bring our rapid tests to market. Consequently, we plan to focus our
efforts on obtaining approvals for our rapid tests in those countries. We expect
that our initial focus for obtaining approval of our rapid tests will be in
Africa and the key "next wave" countries of China, Russia and, subsequently,
India. We anticipate that there will be distinct approval processes for the
professional market (hospitals, clinics, testing centers and government testing
applications) and the over-the-counter market. The over-the-counter approval
process may include additional requirements relating to self-testing with the
rapid test. In China, regulatory approval for a product is granted only for
products manufactured in China and only to the Chinese manufacturer of such
product. As a result, for us to maintain control of our products in China, we
plan to manufacture our products in China through our Beijing Calypte Joint
Venture. Failure to obtain necessary regulatory approvals for our rapid tests
would have a material adverse effect on our business, financial condition and
results of operations.
COMPETITION
Competition in the market for HIV testing is intense and is expected to
increase. We believe that the principal competition will come from existing
laboratory-based blood tests, point-of-care rapid blood tests, oral fluid-based
tests, or other laboratory-based urine assays that may be developed. Our
competitors include specialized biotechnology firms as well as pharmaceutical
companies with biotechnology divisions and medical diagnostic companies, many of
which are substantially larger and have greater financial, research,
manufacturing, and marketing resources.
Important competitive factors for our products include product quality, price,
ease of use, customer service, and reputation. Industry competition is based on
the following:
o Scientific and technological capability;
o Proprietary know-how;
o The ability to develop and market products and processes;
o The ability to obtain FDA or other regulatory approvals;
o The ability to manufacture products that meet applicable FDA
requirements (i.e., good manufacturing practices);
o Access to adequate capital;
o The ability to attract and retain qualified personnel; and
o The availability of patent protection.
We expect competition to intensify as technological advances are made and become
more widely known, and as new products reach the market. Furthermore, new
testing methodologies could be developed in the future that render our products
impractical, uneconomical or obsolete. There can be no assurance that our
competitors will not succeed in developing or marketing technologies and
products that are more effective than those we develop or that would render our
technologies and products obsolete or otherwise commercially unattractive. In
addition, there can be no assurance that our competitors will not succeed in
obtaining regulatory approval for these products, or introduce or commercialize
them before we can do so. These developments could have a material adverse
effect on our business, financial condition and results of operations.
69
Significant competitors for our current and developmental stage HIV antibody
tests are Abbott Laboratories, bioMerieux, the Ortho Diagnostics division of
Johnson & Johnson and Bio-Rad Laboratories, which sell blood-based HIV-1 EIAs
and Orasure Technologies, Inc., which sells FDA-approved HIV tests including an
oral fluid-based laboratory test, a blood-based rapid HIV-1 and HIV-2 test and
an oral fluid-based rapid HIV-1 test. MedMira and Trinity Biotech each recently
received FDA approval to sell rapid HIV-1 blood tests in the United States. We
believe other companies may seek FDA approval to sell competing rapid HIV tests
in the future.
Several companies market or have announced plans to market blood-based or oral
fluid-based HIV rapid tests in the United States and abroad. We expect the
number of blood-based and oral fluid-based HIV rapid tests to increase as these
tests become more widely accepted. We are not aware of any companies marketing
or planning to market competing urine-based HIV rapid tests, although, Murex
Corporation, owned by Abbott Laboratories, has previously announced urine
capability for an HIV test.
Outside of the United States, where regulatory requirements for HIV screening
tests are sometimes less demanding, a much wider range of competitors may be
found. Manufacturers from Japan, Canada, Europe, and Australia offer a number of
HIV screening tests in those markets including HIV-1 and HIV-2 tests, rapid
tests and other non-EIA format tests. There can be no assurances that our
products will compete effectively against these products in foreign markets, or
that these competing products will not achieve FDA approval.
EMPLOYEES
As of June 4, 2004, we had an aggregate of 74 full time, part time and temporary
employees, 13 of whom were engaged in or directly supported our research and
development activities, 50 of whom were in manufacturing, manufacturing support
and quality assurance, one of whom was in marketing and 11 of whom were in
administration. We expect to have fewer than 60 employees following the closure
of our Alameda facility. Our employees are not represented by a union or
collective bargaining entity. We believe our relations with our employees are
good.
70
RISK FACTORS
See Risk Factors beginning on page 5 of this Prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the consolidated
financial statements and related notes that are provided as a part of this
Prospectus.
Information we provide in this Prospectus 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
Prospectus, 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 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 developments with respect to patents or proprietary rights;
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 changes in health care policy in the United States or abroad;
o our ability to obtain additional financing as necessary to fund both
our long- and short-term business plans;
o fluctuations in market demand for and supply of our products;
o public concern as to the safety of products that we or others
develop and public concern regarding HIV and AIDS;
o availability of reimbursement for use of our products from private
health insurers, governmental health administration authorities and
other third-party payors; 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 Prospectus is as of June 10,
2004, and Calypte undertakes no duty to update this information. Should events
occur subsequent to June 10, 2004 that make it necessary to update the
forward-looking information contained in this Prospectus, the updated
forward-looking information will be filed with the SEC in a Quarterly Report on
Form 10-QSB, as an earnings or other release included as an exhibit to a Form
8-K or as an amendment to this registration statement, 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 5 of this Prospectus.
OVERVIEW AND OUTLOOK
Since 1998, following FDA approval for both the current ELISA screening and
supplemental tests, Calypte has been marketing and selling in the United States
the only available FDA-approved urine-based HIV testing method. We have since
received regulatory approval to sell our ELISA tests in China, Malaysia,
Indonesia, and in parts of Africa. Unfortunately, the tests have not received
significant acceptance in those markets. We believe that there is a small
established market for our current ELISA tests in the United States and a
potential market in certain foreign countries with established medical
diagnostic and treatment infrastructures as well. We believe that rapid tests
are more suitable in many of the countries in which HIV/AIDS is epidemic, and
particularly so in the "next wave" countries of Russia, China, Africa and India.
Consequently, we are now actively working to commercialize our HIV rapid test
products -and to obtain requisite regulatory approvals to introduce these
products in these countries, as well as in other international markets. There
can be no assurance that we will achieve or sustain significant revenues from
sales of HIV diagnostic tests, internationally or domestically, or from other
new products we may develop or introduce.
71
During the first quarter of 2002, our financial condition and cash availability
deteriorated so significantly that by early April 2002 we had determined that we
would need to curtail our operations and 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 winding down
operations, with the likely expectation of a complete cessation of business. 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 operations and stopped the wind-down process. In conjunction with the new
financing commitment, the Board of Directors appointed a new chairman and we
resumed operations.
We must achieve profitability and sustainable cash flows for our business model
to succeed. To the extent that we have not yet achieved these objectives, we
must continually evaluate both our current and long-term business plan and
capital requirements. While the validation of our business plan is ongoing, we
have identified and begun to implement certain critical components:
o We have strengthened our financial position with the receipt of an
aggregate of $12.5 million in new investment financing in two
third-quarter 2003 transactions from Marr Technologies BV ("Marr")
and the approximately $8.8 million in net proceeds from our
recently-completed PIPE financing, in which Marr also participated.
Marr now owns approximately 28% of our outstanding common stock and
is our largest stockholder. Marr has previously identified itself in
a public filing with the SEC as a "related party." Additionally, in
May 2004 we and Marr agreed to extend $5,000,000 of the borrowing
availability under the terms of the Marr Credit Facility through
December 31, 2004. We believe that our currently available cash,
plus the funds that would be available, if necessary, through the
Marr Credit Facility are adequate to sustain our operations at
expected levels through 2004. If, however, sufficient funds are not
available from our operations to fund our business in 2005 and
beyond or to repay any promissory notes we may issue under the Marr
Credit Facility when they mature in May 2005, we may need to arrange
additional financing, attempt to extend or otherwise modify the
promissory note or make other arrangements. There can be no
assurance that additional financing would be available or, if it is
available, that it would be on acceptable terms.
o The consolidation of our domestic manufacturing operations is
progressing according to our schedule and, when completed, is
expected to eliminate approximately $1 million of annual expense,
including approximately $500,000 in annual occupancy costs, and
create a more efficient and cost effective manufacturing structure.
o We are committed to and focused on the introduction of one or more
rapid HIV-1 and HIV-2 diagnostic tests in international markets. We
will continue to distribute our ELISA test products internationally
through our current distribution networks and will also seek new
distribution relationships for our current and future test products.
We may set up international manufacturing and distribution
facilities utilizing joint venture or similar entities. We believe
our initial international focus will be on China and Russia, two of
the "next wave" HIV epidemic countries. We intend to pursue
additional international distribution opportunities from government
AIDS initiatives and humanitarian organizations as they provide
funds for HIV testing in lesser-developed countries where the HIV
infection is epidemic.
Guidance We have previously projected 2004 annual sales of our legacy business
products, our current, primarily domestic, ELISA tests, to generate
approximately $3.2 million to $4.0 million in aggregate revenues, spread
generally evenly over the four quarters of the year. We continue to believe that
projection is realistic. Revenue from sales of those products during the first
quarter of 2004 was $971,000. Revenue for the second quarter of 2004 is expected
to be comparable, or slightly higher as certain of our screening test customers
may elect to purchase additional safety stock in recognition of the closure of
our Alameda manufacturing facility, where we currently manufacture our screening
test, as a part of our manufacturing consolidation. Sales of our urine ELISA
test products will continue to be primarily to reference laboratories supporting
the domestic life insurance industry and sales of our Serum Western Blot
supplemental test will continue to be primarily to distributors, blood banks and
similar testing institutions. Although we have received certain international
approvals for our ELISA tests, we are not offering guidance on any international
sales of these products as we have no firm purchase orders. Additionally, we are
not offering any guidance at this time with respect to potential sales of the
ELISA incidence tests we expect to manufacture using the technology recently
licensed from the CDC. Although we have received inquiries regarding the
availability of the product for sale and expect that it might be available for
international distribution in the second half of 2004, we must complete the
technology transfer and determine and complete the regulatory requirements
before we can sell the product.
72
We have previously indicated that our primary focus for 2004 is completing the
development and commercialization of certain rapid HIV tests. We are currently
involved in international field trials of our developmental stage urine, blood
and oral fluid rapid HIV tests in Thailand. The test development process is
iterative and subject to unanticipated delays. Intellectual property
considerations are critical, as our choices will affect our future ability to
commercialize the test products. Based on our current estimates, these trials
will continue during the second quarter of 2004. While there can be no assurance
that we will complete the development process during this timeframe, we have, in
parallel, initiated certain manufacturing agreeemnts in Thailand and China.
Should additional improvements or modifications be required for only one of the
developmental stage rapid HIV tests, we may elect to proceed with the
commercialization of one or both of the other rapid HIV tests. Additionally, we
have just begun the research on a blood-based rapid HIV test for diagnostic and
surveillance purposes under the terms of a Cooperative Research and Development
Agreement with the CDC.
Commercialization of our proposed rapid HIV tests entails many steps and
variables not under our control. We expect that different regulations and
customs in each foreign country will further complicate the commercialization
process. As a result, we are unable to predict with any certainty a timetable
for the various steps and milestones required for the successful
commercialization of our developmental stage products. Nevertheless, we believe
that the primary milestones necessary to achieve commercialization of our rapid
HIV tests include the following:
o Achievement of desired performance in one or more field evaluations.
o Acquisition of necessary intellectual property rights.
o Entrance into manufacturing arrangements in targeted countries.
o Acquisition of regulatory approval in targeted countries.
o Performance of clinical trials.
o Initiation of manufacturing and distribution efforts for commercial
sale.
o Prediction with certainty of the amount of investment required.
Based on our current understanding of the intellectual property landscape and
the various regulatory processses, we do not expect to generate significant
revenues, if any, from the sale of any rapid HIV test products during 2004. It
will take at least six months from the time we commence the process to complete
the regulatory approval process in China. Depending on the manufacturing site
chosen to manufacture products for importation into Russia, we may be able to
commence a regulatory process of six to 12 months there in the third quarter of
2004. We have recently entered into an agreement with a manufacturer in Thailand
which we expect will enable us to supply rapid tests in Russia, Southeast Asia
and certain parts of Africa, subject to regulatory approval. Products might be
ready for market in Africa late in 2004 or early in 2005. While we cannot
estimate the regulatory approval process in various other international markets,
we are encouraged by the interest we have received in our proposed rapid HIV
tests.
We believe that the key to our penetration of the Chinese market will hinge on
the success of the Beijing Calypte Joint Venture with our rapid HIV test
products in China. Early indications, based on meetings with high-level Chinese
authorities in which both we and representatives of our joint venture partner
participated, lead us to expect that there is great potential for significant
revenues from the sale of rapid HIV tests in China. As a result, based on a
memorandum of understanding with Beijing Tiantan Biological Products, Co., Inc.
("BTBP"), construction is underway on a Chinese manufacturing facility. BTBP
manufactures multiple vaccines for both viral and bacterial infections and has
experience in operating life-science quality manufacturing facilities and
obtaining regulatory approvals for its products. Its parent company is the
National Vaccine & Serum Institute of the Peoples Republic of China, which
currently owns over 66% of BTBP. We have also had similar indications of
interest in our proposed rapid HIV tests in meetings with various Russian
officials. After receiving regulatory approval, we visited local hospitals and
voluntary testing centers in Africa during the third quarter of 2003 to
determine how best to proceed with sales of our current urine ELISA tests there.
As a result of these visits, we have determined that most of these
installations, due to their limited infrastructure, can best utilize our rapid
HIV tests. Even though many centers indicated a preference for urine testing,
there is negligible demand for our current ELISA tests. The clinics and testing
centers indicated that they preferred to wait for the rapid HIV tests.
73
Our operating cash burn rate for the quarter ended March 31, 2004 and for the
year ended December 31, 2003 averaged approximately $1.1 million per month. Our
current cash balances reflecting the approximately $8.8 million in net proceeds
from our May 2004 private placement and the remaining $5 million commitment
available through December 31, 2004 under the amended Marr Credit Facility
should, if our Board of Directors unanimously approves the issuance of a
promissory note before the availability expires, and in the absence of any
unanticipated material costs and expenses that are not factored into our cash
flow projections, be adequate to sustain our operations at expected levels
through 2004, which is expected to enable us to pursue the commercialization of
our rapid HIV test products currently in development. Alternatively, we may seek
to raise additional capital; however, we may not be able to obtain additional
financing on acceptable terms, or at all.
Our cash flow requirements may vary materially from those now planned due to
many factors, including, but not limited to, the progress of our research and
development of our rapid HIV test products, the scope and timing of strategic
alliances, the costs and timing of the expansion of our manufacturing capacity,
the results of clinical testing, the magnitude of capital expenditures, changes
in existing and potential relationships with business partners, the time and
costs of obtaining regulatory approvals, the costs involved in obtaining and
enforcing patents, proprietary rights and other necessary licenses, the cost and
timing of expansion of sales and marketing activities, the timing of the
commercial launch of our new rapid HIV test products, market acceptance of our
new rapid HIV tests, competing technological and market developments, the
ability to raise additional capital in a timely manner, costs and charges that
may potentially occur as a result of the informal inquiry by the SEC and other
factors. Additionally, if, and as, we issue a Promissory Note under the Marr
Credit Facility, the Note would become due on May 31, 2005, further increasing
our capital requirements.
There can be no assurance that subsequent additional financing, if and as
necessary, would be available, or if it is available, that it would be on
acceptable terms. The terms of an additional financing could involve a change of
control and/or require stockholder approval, or could potentially trigger
anti-dilution clauses that are contained in existing financing agreements. We
would or might be required to consider strategic opportunities, including
merger, consolidation, sale or other comparable transaction, to sustain our
operations. We do not currently have any agreements in place with respect to any
such new strategic opportunity, and there can be no assurance that any such
opportunities will be available to us on acceptable terms, or at all. If
additional financing is not available when and if required or is not available
on acceptable terms, or we are unable to arrange a suitable strategic
opportunity, we will be in significant financial jeopardy and we may be unable
to continue our operations at current levels, or at all.
Off-Balance Sheet Arrangements We do not have any off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon Calypte's 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, or regulatory issues with our products were raised,
additional allowances may be required.
74
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 and development of new products by our competitors.
Further, since we have continued to incur negative gross profit on
an 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. In
connection with the build-up of inventory of our screening test
prior to the transfer of its manufacturing to our Rockville, MD
facility, demand for this product could fall significantly below the
historical levels on which the production was based or international
demand for this product may not occur, in which case we may have
built excess inventory that we may have to dispose of at additional
cost, or at a loss.
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.
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. We had 73 full- and
part-time employees prior to our wind-down and we have returned to our
approximate pre-wind-down headcount levels. Not all of the pre-wind-down
employees were rehired, and 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. 2002
operations reflect both the inherent inefficiencies in the restart of our
manufacturing processes, including the excess overhead and capacity costs
incurred, as well as the lower sales demand resulting from abnormally-large
purchases 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, as well as financial
costs in obtaining new capital investments and financing in the Company, (some
of them non-cash) attributable to consultants engaged in the restart process and
thereafter in investor relations initiatives within the financial community, and
in other areas of expertise.
CUSTOMER TRENDS
The trends discussed below reflect our more recent sales results and
expectations. The sales mix for 2002 was abnormally skewed due to the impact of
the wind-down and restart, as discussed above.
ELISA TEST SALES Sales of our EIA Screening Test accounted for 66%, 63% and 45%
of our total sales for the three months ended March 31, 2004 and the years ended
December 31, 2003 and 2002, respectively. Sales of our Urine Western Blot
supplemental test accounted for approximately 3% of first quarter 2004 revenue
and approximately 4% of revenue in both calendar year 2003 and 2002. With the
possible exception of a short time during our planned transition of EIA
manufacturing to our Rockville facility, we do not expect significant changes in
the level of sales or the purchasers of our current urine EIA screening test in
the near future. We are, however, exploring opportunities for our EIA test in
"next wave" countries such as China and Russia. Additionally, we have just begun
the technology transfer from the CDC for a serum-based ELISA HIV incidence test
that we plan to market. It is too early to project any trends from potential
sales of this product, although we have received inquiries regarding its
expected availability. We expect that our rapid urine HIV tests, once completely
developed and commercialized, will comprise an increasing proportion of our
future sales, as we expand our distribution of these products internationally.
75
Domestic Sales Sales of our EIA Screening Test to domestic life insurance
reference laboratories accounted for 96%, 89% and 85% of screening test
revenue for the first quarter 2004 and the years 2003 and 2002,
respectively. These reference laboratory sales were distributed among
three laboratories during the first quarter 2004 and four laboratories
during calendar 2003 and 2002. Individual laboratory sales as a percentage
of total reference laboratory sales ranged from 13% to 66% during the
first three months of 2004; from 2% to 63% during 2003, and from 2% to 59%
during 2002, with LabOne being the largest customer in all periods. In
October 2003, LabOne acquired the smallest of the above mentioned
reference laboratories, bringing the number of laboratories to which we
sell to three. We do not expect this acquisition to have a material effect
on our aggregate sales to reference laboratories. We sell our product to
the reference laboratories who service 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 laboratory 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 laboratories must use our testing products to satisfy the demand
of insurance companies desiring urine testing. Based on our recent
multi-year agreement with LabOne, we do not expect to lose LabOne, or any
of the other current reference laboratories, as a customer. However,
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 laboratory could switch to
another form of testing, either blood or oral fluid, and remain with
LabOne. Further, any disruption in the supply of this sole-source product
would force our customers to find alternative testing solutions - either
blood or oral fluid. In such a situation, it is unlikely that we could
subsequently regain a material amount of this business. 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. During the third quarter of 2003 we eliminated the sales
force that had focused on this diverse and disaggregated market. Sales of
our Urine Western Blot test are generally made to the same customers who
purchase the EIA Screening Test.
International Sales International sales of our EIA Screening Test are not
currently a material component of our revenue. Although we have obtained
approval of our EIA Screening Test in several international markets and we
believe that such approvals validate the use of urine as a testing medium,
we see little interest in our current format screening test in most
international markets and project minimal revenues from their sale
internationally in 2004. The distribution agreement with our Chinese
distributor has been assumed by the Beijing Calypte Joint Venture, but as
the distributor is unlikely to achieve the minimum purchase requirements,
the agreement is not expected to be renewed. We are in the process of
expanding our Chinese ELISA test approval, which may open new markets
within the government sector in China. We have no firm commitments at this
time, however. We are also seeking approval for our ELISA tests in Russia.
As noted earlier, we have just begun the development of an ELISA
serum-based HIV incidence test based on technology recently licensed from
the CDC and contemplate the development of a rapid test version. We expect
that these products, when and if available and approved by international
regulatory authorities, may have international research and public health
applications, based on inquiries received to date.
While we believe there is interest in our rapid HIV tests currently under
development, the timing of revenues from our rapid HIV tests will be
contingent upon completing our field evaluations and clinical trials,
acquiring intellectual property rights, establishing manufacturing
operations and obtaining the necessary regulatory approvals, as more fully
discussed in the comments on Guidance earlier in this section, as we
complete the development activities for our rapid HIV tests, our primary
focus will be on developing manufacturing relationships and developing or
expanding distribution relationships.
76
While many counties have their own regulatory approval processes, others
look to the results of WHO evaluations for guidance. The World Health
Organization ("WHO") serves as both a quasi-regulatory body and a
potential funding source for many developing countries that might not
otherwise possess the regulatory infrastructure or financial resources to
avail themselves of products for the diagnosis and treatment of HIV and
AIDS. Calypte believes that a strong performance of the rapid urine tests
in a WHO evaluation would be an equally, if not more, effective
demonstration of the viability of urine testing for HIV antibodies as the
evaluation we earlier contemplated for the EIA and Western Blot algorithm.
We have been advised by WHO that its bulk procurement program for HIV
tests focuses on diagnostic and blood donation screening tests capable of
detecting the presence of both HIV-1 and HIV-2 antibodies. Although WHO
has previously reported the results of its Phase 1 trials of Calypte's
current HIV-1 EIA and Western Blot tests on its website, WHO has advised
us that, in principle, it views those tests as suitable only for
surveillance purposes and therefore not eligible for WHO's bulk
procurement program. We anticipate, however, that certain countries will
look to the results of WHO evaluations for guidance on the potential uses
of urine tests and for this reason the Company wants to continue to work
with WHO. In our view, the attributes of Calypte's planned rapid tests for
HIV-1 and HIV-2 in both urine and whole blood samples will more closely
match the needs of the developing world and, once evaluated by WHO, are
more likely to meet its bulk procurement eligibility criteria. For these
reasons, Calypte may request WHO either to put further evaluations of our
EIA and Western Blot on hold or to drop them entirely in order to help WHO
focus its limited resources on evaluation of the technology employed by
the rapid tests.
Serum Western Blot Sales Sales of our Serum Western Blot supplemental test
accounted for 33%, 32% and 43% of our revenues for the three months ended March
31, 2004 and for the years ended December 31, 2003 and 2002, respectively. While
at this time our manufacturing consolidation with respect to the urine EIA
product does not impact the Serum Western Blot product, there can be no
assurance that the final results will not impact the financial viability of this
product and our ability to maintain it on a long-term basis. Additionally, in
mid-April 2004, our primary domestic distributor for the serum Western Blot was
acquired by another entity and informed us that it would no longer serve as a
distributor of our product. We have not appointed a successor distributor and
while several of the former distributor's customers are now purchasing the serum
Western Blot directly from us, we do not know how many of these customers will
continue using our test. Furthermore, while the Western Blot is key in the
FDA-regulated testing algorithm today, it is unclear if, or when, rapid testing
may substantially replace ELISA-based testing. If that trend occurs, the need
for Western Blot supplemental tests may also be significantly reduced or
eliminated.
Viral Lysate Sales In 2002, we sold approximately $0.2 million of HIV viral
lysate, a component used in manufacturing our Western Blot products and which we
have sold sporadically to another manufacturer of serum-based HIV diagnostic
tests and other parties. Such sales represented approximately 6% of our total
revenues in 2002 and were negligible in 2003 and in the first quarter of 2004.
We do not consider such sales to be a core component of our on-going business.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
Calypte's 2003 revenues totaled $3.5 million compared with $3.7 million for
2002, a decrease of $0.2 million or 6%. Screening test revenues increased by
$508,000 or 30%. Sales of the screening tests to insurance company reference
labs increased by $528,000 or 37%. During the fourth quarter of 2003, our
largest customer purchased remaining consignment inventory on hand and switched
to a standard contractual relationship. This increased our fourth quarter
revenue by approximately $167,000. Additionally, screening tests revenues were
lower than historical levels in 2002 due primarily to a reduction in product
availability as a result of our wind-down and restart.
International sales of our screening tests accounted for approximately $173,000
and $143,000 in 2003 and 2002, respectively. International sales amounted to
approximately 5% of total revenue in 2003 and 4% in 2002. Our primary
international sales in both 2003 and 2002 were to our Chinese distributor.
Domestic diagnostic and direct screening test sales were insignificant in both
2003 and 2002.
Revenue from the sale of our supplemental tests and viral lysate decreased $0.7
million or 35% in 2003 compared with 2002. Urine Western Blot sales decreased
$7,000 or 5%, from $162,000 in 2002 to $154,000 in 2003. Serum Western Blot
sales decreased by 30% or approximately $0.5 million compared with 2002 levels.
The decrease is due to product availability issues related to the wind-down and
restart, as well as to the loss of bioMerieux as a distributor after our
restart. We engaged Adaltis Inc. as our new distributor in the second half of
2002, but have yet to regain our pre-wind-down market share, as there have not
been significant sales by Adaltis.
77
Sales of HIV viral lysate, a component we use in the production of our Western
Blot products and which we previously sporadically sold to another manufacturer
of serum-based HIV diagnostic tests and other parties, decreased by $0.2 million
or nearly 100% compared to 2002 levels. The sale of viral lysate accounted for
approximately 6% of 2002 revenues. We have not sold viral lysate since we
restarted our operations in mid-2002 and we do not consider its sale to be a
core component of our on-going business.
Of customers accounting individually for more than 10% of our revenues, two
customers accounted for an aggregate of 50% of our total revenues in 2003 and 3
customers accounted for an aggregate of 52% of our total revenues in 2002. As
noted, previously, bioMerieux accounted for approximately 18% of our total
revenues in 2002 and has not purchased from us since our mid-2002 restart.
Gross margin decreased from a loss of $2,492,000 (-68% of sales in 2002) to a
loss of $2,654,000 (-77% of sales in 2003). As an FDA-regulated manufacturing
entity with two geographically diverse locations, we incur a significant level
of relatively fixed costs, including personnel-related costs, to operate and
maintain our manufacturing facilities in compliance with Good Manufacturing
Practices. Once those relatively fixed manufacturing costs are covered, we enjoy
a significant contribution margin on additional sales. When we incur those costs
without sufficient revenues from the sale of our products to offset them, we
report negative margins. To restart our manufacturing operations in 2002, we had
a workforce in place at both facilities and incurred both personnel and
manufacturing process expenses throughout the second and third quarters of 2002,
however only late in the third quarter was a complete cycle of post-restart
production and sales achieved at both manufacturing facilities. Partially
mitigating the impact of the wind-down and restart on manufacturing operations
and expenses during 2002 was the completion of a facility consolidation project
at our Rockville, Maryland location during the first quarter 2002, which reduced
occupancy costs by approximately $200,000 on an annualized basis without
impacting quality or efficiency. 2003 results include a full year's facility
costs in product cost expense whereas only a portion of these costs were
included in product costs during 2002. Additionally, the higher margins we
achieved from viral lysate sales compared with those achieved from sales of
either our screening or supplemental tests improved the overall margin on sales
in 2002. As noted previously, we did not sell viral lysate during 2003 and do
not expect viral lysate sales to recur in the near term.
Included in cost of sales, a component of gross margin, is royalty expense,
which we pay on the sale of all of our products. Royalty expense was
approximately $670,000 in 2003 and $412,000 in 2002. Our effective royalty rate
varies based on our product mix, with the rate being higher on our EIA screening
tests than on our urine or serum supplemental tests. Additionally, certain of
our license agreements contain minimum royalty provisions which, in both 2003
and 2002, exceed amounts due based on the contractual percentage rates. In both
2002 and 2003, one licensor accepted shares of our common stock in satisfaction
of discounted amounts due for one or more years in excess of the percentage
royalty rate. The value of the common stock issued in both 2003 and 2002 was
recorded as royalty expense.
R&D costs increased $615,000 or 66% from $929,000 in 2002 to $1,544,000 in 2003.
Approximately 47% of the increase is due to expenses associated with the
increased headcount involved in our rapid test development. The remaining
increase is due to expense associated with the acquisition of specimens and
product prototypes in preparation for clinical trials to pursue our rapid test
initiative.
Selling, general and administrative costs increased from $9,006,000 in 2002 to
$15,517,000 in 2003, an increase of $6,511,000 or 72%. Sales and marketing
expenses increased by approximately $1,096,000 or 70% composed primarily of:
o Increases of $1,455,000 in marketing consulting contracts, and
o Increases of $247,000 for marketing materials.
o Partially offsetting these increases was a decrease in salaries and
benefits expenses due to the elimination of our direct sales and
marketing force which occurred between June and August of 2003.
General and administrative expenses increased by approximately $5,415,000 or
80%. The primary components of the increase include the following:
o An increase of $3,325,000 in primarily non-cash expense recorded in
connection with the issuance of warrants and options to consultants
and third party firms for various investor relations and other
projects;
o An increase of $1,200,000 in compensation expense comprised of
o Severance costs paid to senior management
o Restoration of certain management employees' salaries in June
2002 and certain increases in 2003;
o Senior management salaries incurred for the full year in 2003
versus a portion of the year in 2002 and
78
o Non-cash expense attributable to the intrinsic value of
below-market grants of stock options to certain management
employees in return for a salary deferral in 2003.
o An increase of $259,000 in international and domestic travel related
expense incurred primarily by senior executives.
o Increased legal and auditor fees incurred in connection with the
informal SEC inquiry.
o Fees associated with our new auditor's re-audit of our financial
statements for the year ended December 31, 2002.
o Accrued severance-related costs attributable to the announced
shutdown of our Alameda, California facility in mid-2004.
The loss from operations for 2003, at $19,715,000, reflects a 59% increase over
the $12,427,000 loss reported for 2002.
Net interest expense for 2003 increased by $4,766,000, from $2,203,000 in 2002
to $6,969,000 in 2003. The change is primarily attributable to (in thousands):
2003 2002 CHANGE
---- ---- ------
Interest on debt instruments $ 425 $ 332 $ 93
Non-cash expense composed of:
Amortization and proportional write-off upon
conversion of note and debenture discounts 4,835 1,188 3,647
Liquidated damages due to delayed registration of
shares underlying convertible securities 620 546 74
Amortization and proportional write-off upon
conversion of deferred offering costs 997 210 787
Expense attributable to warrants issued in
conjunction with the Marr $10 million Promissory
Note Agreement 322 - 322
Warrant liability mark-to-market adjustment (these
warrants were exercised by Bristol during the third
quarter of 2003 and the remaining warrant liability
was written off to APIC at the time of exercise.) (275) (70) (205)
Expense attributable to dividends on mandatorily
redeemable Series A preferred stock 60 - 60
------- -------- -------
Total interest expense 6,984 2,206 4,778
Interest income (15) (3) (12)
------- -------- -------
Net interest expense $ 6,969 $ 2,203 $ 4,766
======= ======== =======
QUARTERS ENDED MARCH 31, 2004 AND 2003
Revenues for the first quarter of 2004 increased 24% or $187,000, to $971,000,
compared with $784,000 for the first quarter of 2003. Sales of the screening
tests to insurance company reference labs increased by $203,000 or nearly 50%.
Much of this increase is attributable to purchases made by our largest customer.
Domestic test sales through the direct diagnostic channel, as well as
international test sales, were insignificant during the first quarter in both
2004 and 2003. Revenue from the sale of our supplemental tests decreased $22,000
or 45% during the first quarter of 2004 compared with the first quarter of 2003.
Of customers accounting individually for more than 10% of our revenues, two
customers accounted for an aggregate of 57% and 49% of our first quarter revenue
in 2004 and 2003, respectively.
79
Gross margin decreased to a loss of $1,009,000 (-104% of first quarter sales in
2004) from a loss of $631,000 (-81% of first quarter sales in 2003). As an
FDA-regulated manufacturing entity with two geographically diverse locations, we
incur a significant level of relatively fixed costs, including personnel-related
costs, to operate and maintain both manufacturing facilities in compliance with
Good Manufacturing Practices. When we incur those costs without sufficient
revenues from the sale of our products to offset them, we report negative
margins. Our Maryland facility ceased its primary production activities during
the first quarter 2004 while it was being modified to produce the EIA screening
test kits currently manufactured in California. We have continued to incur the
relatively fixed costs described above during this modification, which has
negatively affected our gross margin. The modifications to the Maryland facility
are expected to be substantially completed during the second quarter of 2004.
Included in cost of sales, a component of gross margin, is royalty expense,
which we pay on the sale of all of our products. Royalty expense was
approximately $172,000 and $101,000 in the first quarter of 2004 and 2003,
respectively. Our effective royalty rate varies based on our product mix, with
the rate being higher on our EIA screening tests than on our urine or serum
supplemental tests. Additionally, certain of our license agreements contain
minimum royalty provisions which, in 2004 and 2003, exceed amounts due based on
the contractual percentage rates. In both 2004 and 2003, one licensor accepted
shares of our common stock in satisfaction of discounted amounts due for one or
more years in excess of the percentage royalty rate. The value of the common
stock issued in both periods was recorded as royalty expense.
R&D costs increased $227,000 or 72% to $541,000 for the first quarter of 2004
from $314,000 for the first quarter of 2003. Approximately half of the increase
is the result of additional compensation and benefits expense for new personnel
involved in our rapid test development. The remaining increase is due to expense
associated with the acquisition of specimens and product prototypes in
preparation for clinical trials to pursue our rapid test initiative.
Selling, general and administrative costs decreased to $2,196,000 during the
first quarter of 2004 from $4,009,000 during the first quarter of 2003, a
decrease of $1,813,000 or 45%. Sales and marketing expenses were essentially
unchanged with a decrease in compensation and benefits expenses due to the
elimination of our direct sales and marketing force in the second and third
quarters of 2003 offsetting an increase in marketing consulting expenses.
General and administrative expenses decreased by approximately $1,784,000 or
49%. The primary components of the decrease include the following:
o a decrease of approximately $2,485,000 in primarily non-cash expense
recorded in connection with the issuance of warrants and options to
consultants and third party firms for various investor relations and
other projects, offset by
o expense of approximately $575,000, of which $225,000 is non-cash, in
costs incurred as a result of a Separation Agreement between the
Company and a former executive;
o an increase in legal and audit fees incurred in connection with an
informal SEC inquiry;
o an accrual for severance-related costs attributable to the announced
shutdown of our Alameda, California facility in mid-2004.
The loss from operations for the first three months of 2004, at $3,746,000,
reflects a 24% decrease compared with the $4,954,000 loss reported for the first
three months of 2003.
Net interest expense for the first quarter of 2004 decreased to $297,000
compared with $1,516,000 in the first quarter of 2003, a decrease of $1,219,000.
The decrease is primarily the result of the conversion of a significant portion
of the Company's convertible debt during the third quarter of 2003 and the
accounting treatment applicable to the related discounts and deferred offering
costs.
LIQUIDITY AND CAPITAL RESOURCES
Financing Activities
In February 2002, we entered into an agreement to issue up to $850,000 face
value of 12% secured convertible debentures. We 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. We also issued warrants to purchase
up to 459,500 shares of our 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 148,747 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 870,695 shares of registered common stock. In
September 2003, the investor exercised warrants to purchase 456,667 shares of
our common stock and we received proceeds of approximately $37,000. Our
registration statement on Form S-2/A (No. 6) registering 1,010,000 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 issuance of the debentures and from the exercise of the
warrants were used to finance operations.
80
Subsequently, beginning in May 2002, we negotiated several new financings from
which, through June 10, 2004, we have raised approximately $30.3 million in
gross proceeds. The following table summarizes these financings by major
category and the subsequent table provides the details of these financings.
SUMMARY OF FINANCINGS - MAY 1, 2002 TO JUNE 10, 2004
TOTAL RESTRICTED
GROSS NET SHARES SHARES
FINANCING SOURCE PROCEEDS PROCEEDS ISSUED OUTSTANDING (2)
---------------- -------- -------- ------ ---------------
8% Convertible Notes $ 3,232 $ 2,594 46,084.3 3,088.6
Other Restart Financings 750 730 2,720.3 -
Mercator 12% and 10% Debentures(1) 4,550 3,650 37,244.2 13,730.3
Marr 2003 Private Placements 12,500 11,900 28,333.3 28,333.3
May 2004 PIPE 9,300 8,769 23,250.0 23,250.0
$ 30,332 $ 27,643 137,632.1 68,402.2
-------- -------- --------- --------
Shares issued to consultants
and others in non-financing
-related transactions - - 2,569.8 2,569.8
-------- -------- --------- --------
Total $ 30,332 $ 27,643 140,201.9 70,972.0
======== ======== ========= ========
- -----------
(1) At June 10 2004, the holders have converted all but approximately
$158,000 of principal of the convertible debentures issued since
September 2002. Based on current market prices, we estimate that we
would be required to issue approximately 0.3 million additional
shares of our common stock if the holders elected to convert the
remaining principal and accrued interest of their debentures at this
time. The holders of an aggregate of $60,000 principal of our
outstanding 12% convertible debentures claim a transaction date
which we dispute. These debentures have not yet been converted
pending resolution of the transaction date dispute, which may impact
the number of shares of our stock to which the holder is entitled
upon conversion. See Legal Proceedings and Note 12 to Detail of
Financings.
(2) Based upon ownership information supplied by our transfer agent as
of June 10 2004. Certain of the restricted shares issued pursuant to
these financings are eligible for resale under Rule 144 now or may
become so at various times in the future. Certain of the investors
who were issued restricted shares subsequently sold the shares under
exemptions provided by Rule 144. As of June 10, 2004, approximately
43% of our outstanding shares, or approximately 71.0 million shares,
were restricted. In addition to the restricted shares issued
pursuant to financing transactions that are summarized here, certain
vendors, consultants and other parties who have agreed to accept our
common stock in lieu of cash hold an additional 2.6 million
restricted shares, also summarized here.
81
DETAIL OF FINANCINGS - MAY 1, 2002 TO JUNE 10, 2004
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
8% CONVERTIBLE NOTES Lesser of
Alpha Capital Aktiengesellshaft (i) $3.00 or $500 5/24/02 $ 3.60 7,260.7/ $500
Stonestreet Limited Partnership (ii) 70% of $500 5/24/02 $ 3.60 7,075.7/ $500
Filter International Ltd. the average of $150 5/24/02 $ 3.60 2,452.4/ $150
Camden International Ltd. the 3 lowest $350 5/24/02 $ 3.60 5,279.1/ $350
Domino International Ltd. trades for 30 $150 5/24/02 $ 3.60 1,767.4/ $150
Thunderbird Global Corporation days $ 75 5/24/02 $ 3.60 1,083.1/ $75
BNC Bach International Ltd. preceding $200 5/24/02 $ 3.60 2,463.8/ $200
Excalibur Limited Partnership conversion $200 5/24/02 $ 3.60 1,678.9/ $200
Standard Resources Ltd. $100 5/24/02 $ 3.60 1,542.5/ $100
SDS Capital International Ltd. $300 7/10/02 $ 10.20 4,189.8/ $300
Camden International Ltd. $100 7/10/02 $ 10.20 1,707.9/ $100
Excalibur Limited Partnership $250 7/24/02 $ 6.60 4,238.3/ $250
Stonestreet Limited Partnership $250 8/21/02 $ 3.90 4,042.2/ $250
Alpha Capital Aktiengesellshaft $107 5/9/03 $ 0.63 1,302.5/ $107
------ ------ -------- ------
Total 8% Convertible Notes $3,232 $2,594 46,084.3/ $3,232
====== ====== ======== ======
OTHER RESTART FINANCINGS:
10% CONVERTIBLE NOTE
BNC Bach International Ltd. 50% of the $ 150 $ 150 5/14/02 $4.20 2,217.8/ $150
(Note: on 7/14/02 the average of 3 $10.80 on
maturity date was extended lowest 7/14/02;
until 12/31/02; on December closing bid $1.92 on
27, 2002, the maturity date prices for 12/27/02;
was extended until January 22 days $1.80 on
15, 2003; on January 15, preceding 1/15/03;
2003 the maturity date was conversion $1.50 on
extended until March 17, 3/17/03;
2003, on March 17, 2003 the $0.99 on
maturity date was extended 4/2/03
until April 4, 2003; on $0.75 on
April 2, 2003, the maturity 4/30/03
date was extended until May
5, 2003; on April 30, 2003,
the maturity date was
subsequently extended until
May 10, 2004)(5)
8% CONVERTIBLE DEBENTURES
Su So 80% of the $ 100 $ 90 6/17/02 $4.20 36.7 (4)/ $100
lower of the
average
closing bid
or trade
price for
the 5 days
preceding
conversion,
but not less
than $3.00
82
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
Jason Arasheben 70% of the $ 100 $ 90 7/03/02 $8.10 15.8 (4)/ $100
lower of the
average
closing bid
or trade
price for
the 5 days
preceding
conversion,
but not less
than $3.00
PIPE AT $1.50 PER SHARE
Careen Ltd. $1.50 per $ 200 $ 200 8/28/02 $ 4.80 225.0/ N/A
Caledonia Corporate Group Share $ 200 $ 200 8/28/02 $ 4.80 225.0/ N/A
------ ------ -------- ------
Limited
Total Other Restart
Financings $ 750 $ 730 2,720.3/ $350
====== ====== ========== ====
MERCATOR 12% AND 10% DEBENTURES(2)
12% CONVERTIBLE DEBENTURES
Mercator Momentum Fund, L.P. 85% of the $ 550 $345 (6) 9/12/02 $3.00 4,866.4(4)/$550
($2,000 total commitment) average of
the 3 lowest
Mercator assigned its rights to: trading
Alpha Capital AG prices for 250 250 7/24/03 $0.115 2,673.8/ $250
Gamma Opportunity Capital the 20 250 250 7/24/03 $0.115 2,685.6/ $250
Partners, LP trading days
Goldplate Investment Partners preceding 250 250 7/24/03 $0.115 2,673.8/ $250
Marr Technologies, B.V. (11) conversion 570 570 9/1/03 $0.498 5,181.8/ $570
------ ------ -------- ------
(8) 1,870 1,665
Dr. Khalid Ahmed 50 50 10/2/03 $1.310 84.6/ $ 50
Roger Suyama 20 20 10/2/03 $1.310 33.8/ $ 20
Logisticorp, Inc. 20 20 10/2/03(12) $1.310 -
Southwest Resource 40 40 10/2/03(12) $1.310 -
------ ------ -------- ------
Preservation Inc. $2,000 $1,795 18,199.8/ $1,940
------ ------ -------- ------
Mercator Momentum Fund, L.P. 80% of the $300 $260 10/22/02 $3.90 0/ $300 (7)
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not less
than $1.50
Mercator Momentum Fund L.P. (10) 70% of the $300 $245 4/29/03 $0.825 3,455.5/ $294
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $1.20
83
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
Mercator warrant $3.00 per $0 $0 10/22/02 $3.90 0
share
10% CONVERTIBLE DEBENTURES
Mercator Focus Fund, L.P. (10) 80% of the $1,000 $510 1/14/03 $1.92 7,941.1/ $1,000
average of (6)
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $3.00
Mercator Momentum Fund, L.P. 80% of the $450 $440 1/30/03 $1.86 2,592.6/ $358
(10) average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $3.00
Mercator Focus Fund, L.P. (10) $400 3/13/03 $1.47 3,428.9/ $400
Mercator Momentum Fund III, L.P. 65% of the 100 1,626.3/ $100
------ ------ -------- ------
average of $500 $400 5,055.2/ $500
------ ------ -------- ------
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $2.10
Total Mercator Debentures $4,550 $3,650 37,244.2/ $4,392
====== ====== ======== ======
MARR PRIVATE PLACEMENTS
PIPE AT $0.30 PER SHARE
Marr Technologies B.V. (9)(11) $0.30 per $2,500 $2,300 8/1/03 $0.152 8,333.3
share
PIPE AT $0.50 PER SHARE
Marr Technologies B.V. (9)(11) $0.50 per $10,000 $9,600 9/1/03 $0.498 20,000.0
------ ------ -------- ------
share
Total Marr Private Placements $12,500 $11,900 28,333.3
======= ======= ========
84
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
MAY 2004 PRIVATE PLACEMENT
PIPE AT $0.40 PER SHARE (13) Shares
SF Capital Partners LP Issued at $4,000 $3,720 5/28/04 $0.50 10,000.0
Marr Technologies BV $0.40 per 3,000 2,910 5/28/04 $0.50 7,500.0
Proximity Fund LP share; 500 465 5/28/04 $0.50 1,250.0
Proximity Partners LP 5 year 500 465 5/28/04 $0.50 1,250.0
MTB Small Cap Growth Fund warrant at 500 465 5/28/04 $0.50 1,250.0
$0.50
MTB Multi Cap Growth Fund per share 500 465 5/28/04 $0.50 1,250.0
Bridges & PIPES LLC 300 279 5/28/04 $0.50 750.0
------ ------- --------
Total May 2004 PIPE $9,300 $ 8,769 23,250.0
====== ======= ========
- --------------------
(1) The 8% Convertible Notes, the Other Restart Financings, the Mercator
12% and 10% Debentures and warrants, and the Common Stock underlying MTBV's 2003
PIPEs and the May 2004 PIPE were issued under exemptions provided by Regulation
S or Regulation D. With the exception of Marr Technologies B.V., which is an
affiliate of the Company based on its August and September 2003 PIPE investments
and participation in the May 2004 PIPE, none of the entities listed above is or
has been an affiliate of the Company. Other than Marr Technologies B.V. and SF
Capital Partners Ltd., all of the listed investors were subject to ownership
limitations restricting their ownership of our stock to a maximum of 4.9% or
9.9%, depending on the specific agreement.
(2) At June 10, 2004, the holders have converted all but approximately
$158,000 of principal of the convertible debentures issued since September 2002.
Based on current market prices, we estimate that we would be required to issue
approximately 0.3 million additional shares of our common stock if the holders
elected to convert the remaining principal and accrued interest of their
debentures at this time. See also Note 12.
(3) On July 18, 2003, the registration statement for 52,500,000 shares
underlying the 8% Convertible Notes, the Other Restart Financings and $1,300,000
of the Mercator 12% and 10% Convertible Debentures became effective. As a result
of a decline in the market price of our stock subsequent to the effective date
of the July 2003 registration statement, the number of shares registered was
insufficient to permit the complete conversion of the notes and debentures into
registered shares. The shares underlying certain of the convertible securities
have become eligible for resale under Rule 144, and certain investors have
availed themselves of that eligibility to convert restricted shares issued
pursuant to conversions into free-trading shares. As of June 10, 2004,
approximately 43% of our outstanding common stock, or approximately 71.0 million
shares, are unregistered. Of this amount, Marr Technologies BV holds 41.0
million restricted shares issued pursuant to their two 2003 PIPE transactions,
the conversion of their investment in $570,000 principal value of 12%
convertible debentures and their participation in the May 2004 PIPE. Other
investors in our convertible notes and debentures hold approximately 11.6
million restricted shares issued pursuant to their conversions. Investors in our
May 2004 PIPE other than Marr hold an additional 15.75 million restricted
shares. We are registering the shares of common stock on a cost-free basis to
the holders of said shares of common stock in this registration statement.
(4) Includes fee shares.
(5) On April 30, 2003, when the market price of the common stock was
$0.75, we and BNC Bach amended the conversion price to eliminate a conversion
price ceiling of $1.50 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. BNC Bach subsequently converted the outstanding principal and accrued
interest into shares of our common stock.
(6) Reflects a 10% cash commitment fee on the entire $2 million commitment
paid to The Mercator Group less additional fees and expenses. We registered
shares underlying $1,300,000 of the total $2,000,000 commitment in July 2003 and
the shares underlying the final $700,000 of this commitment are included in this
registration statement.
(7) In conjunction with the issuance of the $1 million 10% convertible
debenture to Mercator Focus Fund, L.P., we 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.
85
(8) On March 31, 2003, when the market price of our Common Stock was
$0.885, we amended the conversion price to eliminate a conversion price floor of
$1.50 per share in return for an extension of time in which to register the
shares of common stock underlying the various Mercator financings.
(9) The Securities Purchase Agreements for both transactions between the
Company and Marr Technologies B.V. require that we provide cost-free
registration rights to Marr; however, Marr is subject to a one-year lock-up
provision following the transaction date with respect to the shares purchased.
(10) On January 14, 2004, when the market price of our common stock was
$0.60, we extended the maturity date of the following debentures until July 14,
2004:
o 10% Convertible Debenture dated January 14, 2003 issued to Mercator
Focus Fund, LP
o 10% Convertible Debenture dated January 30, 2003 issued to Mercator
Momentum Fund, LP
o 10% Convertible Debentures dated March 13, 2003 issued to Mercator
Focus Fund, and
o 12% Convertible Debenture dated April 29, 2003 issued to Mercator
Momentum Fund, LP.
In return for the extension of the maturity dates, we have agreed to pay an
additional extension fee equal to 2% of the outstanding principal balance per
month until the earlier of the extended maturity date or conversion. The
extension fee is payable 1% in cash and 1% in shares of our common stock.
Additionally, we agreed to file a registration statement including the shares
potentially applicable to the conversion of the outstanding debenture balances
by no later than April 29, 2004. On April 23, 2004, when the market price of our
Common Stock was $0.625, we and the various Mercator Funds agreed to extend
until May 14, 2004 the period for filing the registration statement including
the shares issued or potentially issuable upon conversion. On May 7, 2004, when
the market price of our common stock was $0.48 per share, we and the various
Mercator Funds agreed to further extend from May 14, 2004 until 21 days
following the closing of a private placement of equity financing of at least
$5,000,000, but in any case to no later than June 30, 2004, the period in which
we are required to file a registration statement including shares of our common
stock issued or potentially issuable upon conversion.
(11) On January 23, 2004, when the market price of our common stock was
$0.695, we and Marr agreed to extend the registration rights period attributable
to 5,181,818 shares of our common stock issued in conjunction with Marr's
conversion of $570,000 principal amount of our 12% Convertible Debentures from
February 27, 2004 to April 29, 2004. In return for the extension, we agreed to
include in our next registration statement an aggregate of 28,333,333 shares of
our common stock purchased by Marr in PIPE transactions in the third quarter of
2003. On April 23 2004, when the market price of our Common Stock was $0.625, we
and MTBV agreed to extend until May 14, 2004 the period for filing the
registration statement including the shares issued to MTBV upon conversion of
the 12% convertible debenture and in the 2003 PIPE transactions. On May 7 2004,
when the market price of our common stock was $0.48 per share, MTBV agreed to
further extend from May 14, 2004 until 21 days following the closing of a
private placement of equity financing of at least $5,000,000, but in any case to
no later than June 30, 2004, the period in which we are required to file a
registration statement including shares of our common stock issued to MTBV upon
conversion of the 12% convertible debenture and in the 2003 PIPE transactions.
Such shares are included in this registration statement.
(12) The holder claims an earlier transaction date, which we dispute.
This debenture has not yet been converted. The ultimate resolution of the
transaction date dispute may determine the number of shares of our stock to
which the holder is entitled upon conversion. See Legal Proceedings.
(13) The shares issued pursuant to the May 2004 PIPE and the related
warrants have an anti-dilution feature that will require us to issue additional
shares to the PIPE investors and modify their warrants if we subsequently issue
additional equity at a per share price of less than $0.40 for a period of one
year from the closing date, except under the provisions of previously
outstanding convertible debt, option plans, or option or warrant agreements.
On November 13, 2003, when the market price of our common stock was $0.88 per
share, the Company and Marr, its largest stockholder, entered into an agreement
in which Marr agreed to provide us up to an aggregate of $10,000,000 (the "Marr
Credit Facility") pursuant to promissory notes issuable to Marr on an as-needed
basis by us (the "Notes"). Each Note will bear interest at the rate of 5% per
annum and will have a 12-month term. The Marr Credit Facility was available
during the period beginning on February 28, 2004 and ending on May 31, 2004. The
aggregate amount available under the Marr Credit Facility is proportionally
reduced by the amount of any equity financing we obtain during the term of the
Marr Credit Facility. Marr has participation rights in any such equity financing
on the same terms as the other investors. The Marr Credit Facility initially
provided for earlier termination as of March 31, 2004, if we failed to have our
common stock listed on an established stock exchange by that date. Moreover,
upon the failure to obtain such stock exchange listing, any outstanding Notes
would be due and payable on April 30, 2004. As consideration for the Marr Credit
Facility, we issued to Marr a warrant to purchase 375,000 shares of our common
stock at an exercise price of $0.80 per share. The warrant is immediately
exercisable and expires two years after issuance on November 12, 2005.
86
On March 19, 2004, when the market price of our common stock was $0.575 per
share, we and Marr amended the Marr Credit Facility to increase the aggregate
amount available under the Marr Credit Facility to $15,000,000 and to eliminate
the termination provision upon failure to have our common stock listed on an
established stock exchange by March 31, 2004. As additional consideration for
the amendment of the Marr Credit Facility, we issued to Marr an additional
warrant to purchase 400,000 shares of our common stock at an exercise price of
$0.46 per share. This warrant is immediately exercisable and expires two years
from its date of issuance on March 18, 2006.
On May 26, 2004, when the market price of our Common Stock was $0.46 per share,
we and MTBV again amended the Marr Credit Facility whereby MTBV has committed to
purchase up to $5,000,000 of Promissory Notes that we may issue through December
31, 2004. Any Notes issued pursuant to this second amendment will bear interest
at 9% per annum and will have a maturity date of May 31, 2005. The $5,000,000
amount available under the amended Marr Credit Facility will be reduced by the
amount of any equity financing we obtain after the May 26, 2004 effective date
of the second amendment and through the December 31, 2004 commitment period. At
June 10, 2004, we have issued no Notes under the Marr Credit Facility. As
consideration for the extension of the commitment period reflected in the second
amendment of the Marr Credit Facility, we issued to MTBV a warrant to purchase
500,000 shares of our Common Stock at an exercise price of $0.40 per share. This
warrant is immediately exercisable and expires two years from its date of
issuance on May 26, 2006. We have provided piggyback registration rights and are
registering the shares underlying these three warrants in this registration
statement.
Warrants, Options and Stock Grants
Since January 2002, we have entered into various contracts and agreements with
consultants who have agreed to accept payment for their services in the form of
warrants, options and/or stock grants. We have obtained various services under
these arrangements, including legal, financial, business advisory, and other
services including business introductions and arrangements with respect to
potential domestic and international product placement and the development of
potentially synergistic relationships with appropriate public service or other
governmental and non-governmental organizations. We have generally issued the
warrants at a discount to the then-current market price and has registered the
shares underlying the warrants, options and stock grants on Form S-8
Registration Statements for resale by the consultants. We have, since January
2002, issued approximately 9.6 million shares of our common stock as a result of
warrant or option exercises and stock grants related to these consulting
agreements, of which approximately 7.9 million shares were issued during 2003.
In May 2002, Calypte issued warrants and options to purchase 633,333 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 $0.45 per share on May 9, 2002 when the
market price of our common stock was $0.90 per share. The option was granted at
$0.90 per share on May 10, 2002, when the market price of our common stock was
$0.90 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 633,333 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 950,000 shares of our common stock and stock
grants for 70,000 shares of our stock to consultants under the terms of these
new agreements. The Company issued 350,000 warrants at an exercise price of
$1.50 per share on November 1, 2002, when the market price of our stock was
$4.20 per share. The Company issued an additional 600,000 warrants at an
exercise price of $1.50 on November 20, 2002, when the market price of our
common stock was $2.70. 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 986,667 shares of its common stock pursuant to the exercises
of the November 2002 warrant and stock grants. In January and February 2003, the
Company entered into new contracts and extended certain other contracts with
existing consultants to perform services as described above. On February 14,
2003, when the market price of the Company's stock was $2.01, the Company issued
warrants exercisable at $1.50 per share and stock grants for an aggregate of
975,216 shares of its common stock as compensation for these services. The
warrants were non-cancelable and fully-vested at the date of issuance. By May
31, 2003, the consultants had exercised warrants to purchase all of the shares
granted to them and the Company had received proceeds of $0.8 million.
87
During March 2003, when the market price of the Company's stock ranged from
$1.32 to $1.50 per share, the Company issued warrants exercisable at $0.75 per
share and stock grants for an aggregate of 1,350,400 as compensation for
services under new or extended contracts. The warrants were non-cancelable and
fully-vested at the date of issuance. By May 31, 2003, the consultants had
exercised warrants to purchase all of the shares granted to them and the Company
had received proceeds of approximately $0.9 million.
In April 2003, when the price of the Company's stock ranged from $0.81 to $0.885
per share, the Company entered into additional contracts, extended certain
contracts, and modified certain other contracts with existing consultants who
agreed to settle a portion of the outstanding balance due for services under
their contracts in stock. The Company issued warrants at $0.75 per share and
stock grants for an aggregate of 1,490,600 shares of its common stock as
compensation or settlement for these services. The warrants were non-cancelable
and fully-vested at the date of issuance. By May 31, 2003, the consultants had
exercised warrants to purchase all of the shares granted to them and the Company
had received proceeds of approximately $0.1 million.
In May 2003, when the price of the Company's stock ranged from $0.552 to $0.576
per share, the Company again entered into new contracts, extended certain
contracts, and modified certain other contracts with existing consultants who
agreed to settle a portion of the outstanding balance due for services under
their contracts in shares of stock. The Company issued warrants at $0.30 per
share and stock grants for an aggregate of 2,080,305 shares of its common stock
as compensation or settlement for these services. The warrants were
non-cancelable and fully-vested at the date of issuance. By September 30, 2003,
the consultants had exercised warrants to purchase all of the shares granted to
them and the Company had received proceeds of approximately $0.5 million.
In July 2003, when the price of the Company's stock ranged from $0.11 to $0.30
per share, the Company extended a contract for consulting and other services and
granted the consultant a warrant to purchase 722,500 shares of its common stock
at 50% of the closing market price on the date of any exercise as compensation
under the contract. The warrant was granted as fully-vested and expired on
September 30, 2003. By September 30, 2003, the consultant had exercised the
entire warrant at prices ranging from $0.08 to $0.61 per share and the Company
had received proceeds of approximately $0.4 million. Also during July 2003, the
Company issued stock grants to consultants for an aggregate of 356,344 shares of
its common stock as compensation under their contracts.
On August 20, 2003, when the price of the Company's stock was $0.18 per share,
the Company issued consulting contracts to two new consultants pursuant to which
it issued warrants for 100,000 shares each, exercisable at $0.18 per share. The
warrants were non-cancelable and fully-vested at the date of issuance. At
December 31, 2003, the consultants had exercised none of the warrants.
In September 2003, when the price of the Company's stock ranged from $0.50 to
$1.80 per share, the Company issued an aggregate of 800,000 shares of its common
stock to consultants and other service providers who agreed to take shares of
stock in lieu of cash as compensation under their contracts.
In October and November 2003, when the price of the Company's stock ranged from
$0.53 to $1.65 per share, the Company issued an aggregate of 125,000 shares of
its common stock to consultants and other service providers who agreed to take
shares of stock in lieu of cash as compensation under their contracts.
In February 2004, when the price of the Company's stock was $0.67 per share, the
Company issued 500,000 shares of its common stock to a consultant who had agreed
to accept shares of stock as a portion of its compensation under a consulting
agreement. The Company issued approximately 67,000 additional shares of its
common stock during the first quarter of 2004 to another consultant under the
terms of a long-term consulting agreement.
In May 2004, when the price of the Company's stock was $0.465 per share, the
Company issued warrants to purchase 150,000 shares of its common stock at an
exercise price of $0.50 as a portion of the compensation under a consulting
contract. The warrants were exercisable immediately and remain so for a period
of five years.
To conserve cash and to obtain goods and services, the Company may continue to
issue options and warrants at discounts to market or issue direct stock grants.
In the event that the Company issues additional options and warrants, it is
anticipated that the securities will contain cost-free registration rights which
will be granted to holders of the options and warrants, and that there may be
dilution to the Company's existing stockholders.
88
Summary of Financing Activities
To successfully implement our business plan, we must obtain sustainable cash
flow and profitability. Since December 31, 2003, we have entered into new
financing arrangements that management believes will be adequate to sustain
operations at expected levels through 2004. In May 2004, we completed a private
placement of our common stock with 7 accredited investors and received net
proceeds of $8.8 million. Additionally, in May 2004 we and Marr Technologies BV,
our largest stockholder and a participant in the private placement, agreed to
extend $5,000,000 of the borrowing availability under the terms of the Marr
Credit Facility through December 31, 2004. If, however, sufficient funds are not
available to fund our operations in 2005 or beyond, we may need to arrange
additional financing or make other arrangements. There can be no assurance that
additional financing would be available, or it if is available, that it would be
on acceptable terms. Our future liquidity and capital requirements will depend
on numerous factors, including successful completion of the development of our
new rapid tests, acquisition and protection of intellectual property rights,
costs of developing our new products, ability to transfer technology, set up
manufacturing and obtain regulatory approvals of our new rapid tests, market
acceptance of all our products, existence of competing products in our current
and anticipated markets, actions by the FDA and other international regulatory
bodies, and the ability to raise additional capital in a timely manner.
Our longer-term liquidity and capital requirements are dependent on factors
similar to those which impact our current liquidity and capital resource
considerations and which will be critical in validating our business model
during 2004. Consequently, we cannot predict the adequacy of our capital
resources on a long-term basis. There can be no assurance that we will achieve
or sustain profitability or positive cash flows in the future. In addition,
there can be no assurance that subsequent additional financings, if and as
necessary, would be available to us on a timely basis, or that if it is
available, that it would be on acceptable terms, if at all. The terms of
additional financing could involve a change of control and/or require
stockholder approval, or could require us to obtain waivers of certain covenants
that are contained in existing agreements. We would or might be required to
consider strategic opportunities, such as merger, consolidation, sale or other
comparable transaction, to sustain our operations. We do not currently have any
agreements in place with respect to any such new strategic opportunity, and
there can be no assurance that any such opportunities will be available to us on
acceptable terms, or at all. If additional financing is not available when and
if required or is not available on acceptable terms, or we are unable to arrange
a suitable strategic opportunity, we will be in significant financial jeopardy
and we may be unable to continue our operations at current levels, or at all.
DESCRIPTION OF PROPERTY
We currently lease approximately 20,000 square feet of office, research and
manufacturing space in Alameda, California under a lease that expires in June
2004. We are not renewing this lease. In conjunction with the consolidation of
all of our domestic manufacturing operations at our Rockville, Maryland
location, we plan to vacate this space by June 30, 2004. On May 7, 2004, we
signed a three year lease that commences on June 15, 2004 for approximately
4,400 square feet of office space in Pleasanton, California that will house our
corporate headquarters.
We also lease two manufacturing sites in Rockville, Maryland, a 26,000 square
foot manufacturing, research and office site and a 3,000 square foot site which
houses our BSL-3 virus laboratory. Our lease on the virus lab site expires in
October 2006 and our lease on the larger site expires in February 2009.
We believe that the facilities described above are adequate for our current
requirements. We are currently evaluating our requirements for our developmental
stage rapid test products.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 2001, the Company issued a $400,000 8.5% Promissory Note to the
parent company of its then-largest stockholder. The Company renegotiated the
note during 2001, 2002 and subsequently in 2003. This note was repaid in 2003.
89
In connection with Marr Technologies BV's aggregate $12.5 million investment in
the Common Stock during 2003, the Company signed a Memorandum of Understanding
with Marr Technologies Limited, an affiliate of MTBV, to create a joint venture
in China to market the Company's current and future products. Additionally, the
Nominating Committee of the Company's Board agreed to grant MTBV the right to
appoint two mutually-agreeable representatives to the Company's Board at a
mutually-agreeable future date.
In November 2003, the joint venture, Beijing Calypte Biomedical Technology Ltd.,
was formed, with the Company owning a 51% interest in the entity and Marr
Technologies Limited holding a 49% interest. In April 2004, upon the nomination
by MTBV and the recommendation of the Nominating Committee of the Board, the
Company's Board appointed Maxim A. Soulimov as a member of the Board.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
STOCK SPLIT
Our Common Stock commenced trading on the Nasdaq SmallCap Market on July 26,
1996, the time of our Initial Public Offering, under the symbol "CALY". Our
Company's stock was removed from listing on the Nasdaq Small Cap Market on July
13, 2001 as a result of our failure to meet the market's listing maintenance
requirements. Beginning on July 13, 2001 and until May 28, 2003, our stock
traded on the Over the Counter Bulletin Board under the symbol "CALY". On May
20, 2003, our shareholders approved a 1:30 reverse stock split, which became
effective on May 28, 2003. Since May 28, 2003, our stock has traded on the Over
the Counter Bulletin Board under the symbol "CYPT". At the time of the reverse
split, the stated par value of our common stock was changed to $0.03 from $0.001
per share. The number of our authorized shares of common stock remained at 800
million. High and low quotations reported by the Over the Counter Bulletin Board
during the periods indicated are shown below. These quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions and may
not represent actual transactions. All share prices reported in this document
have been restated to reflect the reverse stock split.
FISCAL YEAR (REFLECTS STOCK SPLIT) QUARTER HIGH - LOW
- --------------------------------------------------------------------------------
2004, through June 10, 2004 2nd $ 0.67 $ 0.38
2004 1st 0.90 0.35
2003 4th 1.74 0.44
2003 3rd 1.80 0.11
2003 2nd 1.05 0.25
2003 1st 3.45 0.75
2002 4th 4.80 1.50
2002 3rd 12.90 2.40
2002 2nd 8.70 0.30
2002 1st 8.10 5.10
On May 3, 2004, the record date for our 2004 Annual Meeting of Stockholders,
there were approximately 450 holders of record of our common stock. The closing
price of our common stock on June 10, 2004 was $0.545 We have never paid any
cash dividends, and our Board of Directors does not anticipate paying cash
dividends in the foreseeable future. We intend to retain any future earnings to
provide funds for the operation and expansion of our business.
90
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 800 million shares of Common Stock and
five million shares of preferred stock. The following summaries of certain
provisions of the Common Stock and preferred stock do not purport to be complete
and are subject to, and qualified in their entirety by the provisions of our
Certificate of Incorporation, as amended.
Common Stock. As June 10, 2004, there were 163,721,512 shares of Common Stock
outstanding, which were held of record by approximately 450 registered
stockholders and approximately 19,000 additional holders who hold their shares
in street name in brokerage accounts. The holders of Common Stock are entitled
to one vote per share on all matters to be voted upon by the stockholders.
Subject to preferences that may be applicable to any outstanding preferred
stock, the holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock.
Preferred Stock. The Board of Directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of the common stock until the Board of Directors
determines the specific rights of the holders of such preferred stock. However,
the effects might include, among other things, restricting dividends on the
Common Stock, diluting the voting power of the Common Stock, impairing the
liquidation rights of the Common Stock and delaying or preventing a change in
control of the Company without further action by the stockholders.
Warrants. As of June 10, 2004, we had outstanding warrants to purchase
10,737,410 shares of Common Stock, at a weighted average exercise price of $0.82
per share. Such warrants expire on various dates, the latest of which is May 28,
2009. Included in the above number are the following warrants for which an
aggregate of 10,704,627 underlying shares are being included in this
registration statement:
o On October 22, 2002, in conjunction with their purchase of our 12%
convertible debenture, we granted Mercator Momentum Fund, L.P.
immediately exercisable warrants to purchase 100,000 shares of our
Common Stock at $3.00 per share at any time up to and including the
fifth anniversary of their issuance.
o On November 13, 2003, in connection with the Marr Credit Facility,
we granted Boodle Hatfield immediately exercisable warrants to
purchase 375,000 shares of Common Stock, exercisable at $0.80 per
share at any time up to and including the second anniversary of
their issuance;
o On March 19, 2004, in connection with the amendment of the Marr
Credit Facility, we granted Boodle Hatfield immediately exercisable
warrants to purchase 400,000 shares of Common Stock at $0.46 per
share at any time up to and including the second anniversary of
their issuance;
o On August 20, 2003, in conjunction with a consulting agreement, we
granted Craig Enenstein immediately exercisable warrants to purchase
100,000 shares of Common Stock, exercisable at $0.18 per share at
any time up to and including the second anniversary of their
issuance;
o On August 20, 2003, in conjunction with a consulting agreement, we
granted Michael Rovens immediately exercisable warrants to purchase
100,000 shares of Common Stock, exercisable at $0.18 per share at
any time up to and including the second anniversary of their
issuance; and
o On April 6, 2004, in conjunction with a Licence and Supply
Agreement, we granted Adaltis, Inc. immediately exercisable warrants
to purchase 212,127 shares of Common Stock, exercisable at $0.03 per
share at any time up to and including March 31, 2006.
o On May 6, 2004, we granted Merchant Intercapital immediately
exercisable warrants to purchase 150,000 shares of Common Stock
exercisable at $0.50 per share at any time up to and including the
fifth anniversary of their issuance.
o On May 26, 2004, in connection with the Marr Credit Facility, we
granted Marr Technologies BV immediately exercisable warrants to
purchase 500,000 shares of Common Stock, exercisable at $0.40 per
share at any time up to and including the second anniversary of
their issuance;
o On May 28, 2004, we granted the investors in our May 2004 PIPE
immediately exercisable warrants to purchase 8,137,500 shares of
Common Stock, exercisable at $0.50 per share at any time up to and
including May 28, 2009. These warrants also have an anti-dilution
feature should the Company issue additional equity in a financing
transaction at a per share price of less than $0.40 per share for a
period of one year following the PIPE transaction. Additionally, we
granted certain other parties warrants to purchase 630,000 shares as
fees for services rendered in connection with the PIPE financing.
These warrants have the same terms as those issued to the investors,
with the exception of the anti-dilution feature.
91
Stockholders Rights Plan. On December 15, 1998, our Board of Directors 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 us without conditioning the offer on the Rights
being redeemed or a substantial number of Rights being acquired. However, the
Rights should not interfere with any tender offer, or merger, which is approved
by us because the Rights do not become exercisable in the event of an offer or
other acquisition exempted by our Board of Directors.
92
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded or paid by the
Company during the years ended December 31, 2003, 2002 and 2001 to persons who
served as its Chief Executive Officer and as its other executive officers during
2003 (collectively, the "Named Executive Officers"). The compensation table
excludes other compensation in the form of perquisites and other personal
benefits that constitute the lesser of $50,000 or 10% of the total salary and
bonus earned by each of the named Executive Officers in each fiscal year.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
UNDERLYING
OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) GRANTED (1) COMPENSATION ($)
- ------------------------------------------------------------------------------------------------------------------------
Anthony J. Cataldo (2) 2003 445,667(3) 0 2,492,341(4) 0
Executive Chairman of the Board 2002 185,726(3) 0 30,000(4) 0
J. Richard George (5) 2003 135,692 0 103,494(6) 0
Chief Executive Officer and
President
Nancy E. Katz (7) 2003 121,073 0 1,544,476(8) 312,692 (9)
Former President, Chief Executive 2002 265,269 0 14,049(8) 0
Officer and Member of the Board 2001 239,039 0 30,000 0
of Directors
Jay Oyakawa (10) 2003 209,941 0 0 0
Former President and Chief
Operating Officer and Member of
the Board
Richard D. Brounstein (11) 2003 201,792 0 757,371(12) 0
Executive Vice President and Chief 2002 122,596 15,000 0 0
Financial Officer; Former 2001 4,808 0 25,000(13 26,000(14)
Member of the Board
- --------------
(1) All figures in this column represent options to purchase Common Stock.
(2) Mr. Cataldo has served as Executive Chairman of the Board since May 2002.
(3) At the Company's request, Mr. Cataldo deferred approximately 30% of his
cash salary from May 2002 through April 2003. The figure reported here for
calendar 2002 is net of the deferral. At December 31, 2002, the Company
had recorded expense totaling approximately $266,000, including an accrual
of approximately $80,000 for Mr. Cataldo's deferred salary. All deferred
amounts due Mr. Cataldo were paid during 2003 and the figure reported here
for calendar 2003 reflects the payment of all such deferred amounts.
(4) On May 10, 2002, when the market price of the Common Stock was $0.90 per
share and pursuant to his employment agreement, Mr. Cataldo was granted
fully-vested options to purchase 65,556 shares at $0.45 per share and
options to purchase 200,000 shares at $0.90 per share, with the option to
purchase 100,000 shares vested immediately and the option to purchase the
remainder vested on the one-year anniversary of the option grant. In the
fourth quarter of 2002, the Company renegotiated the terms of the option
grant in Mr. Cataldo's employment agreement, canceling all but 30,000 of
the options granted at $0.90. Mr. Cataldo was subsequently granted 235,556
fully-vested options at an exercise price of $0.32 per share, the market
price of the Common Stock on the May 29, 2003 grant date, following
stockholder approval at the May 20, 2003 Annual Stockholders' Meeting of
amendments to the Company's 2000 Plan. Additionally, on May 29, 2003, Mr.
Cataldo was granted fully-exercisable options to purchase 256,785 shares
at $0.01 per share, in recognition of an additional temporary salary
deferral arrangement beyond that described in (3) above, and options to
purchase 2,000,000 shares at $0.32 per share. The latter options were
exercisable 50% upon grant and 50% on the one year anniversary of the
grant.
93
(5) Dr. George has served as President and Chief Executive Officer since
January 2004. He joined the Company in January 2003 as Vice President of
Government Affairs.
(6) Represents a fully-vested option grant for 16,827 shares at an exercise
price of $0.01 per share in recognition of a temporary salary deferral
arrangement and grants of 6,667 shares and 80,000 shares, both at an
exercise price of $0.32 per share, which vest over a three year period
from the grant date.
(7) Ms. Katz served as President and Chief Executive Officer from December
2001 to June 2003. From June 2000 through December 2001, she served as
President, Chief Executive Officer and Chief Financial Officer. She joined
the Company in October 1999 as President, Chief Operating Officer, and
Chief Financial Officer.
(8) All of Ms. Katz' unexercised options, together aggregating options to
purchase 62,573 shares, were cancelled in the fourth quarter of 2002.
Subsequently, Ms. Katz was granted 62,573 fully-vested options at an
exercise price of $0.32 per share, the market price of the Common Stock on
the May 29, 2003 grant date, following stockholder approval at the May 20,
2003 Annual Stockholders' Meeting of amendments to the 2000 Plan. She was
also granted 146,667 fully vested options at $0.32 per share on May 29,
2003 pursuant to her amended October 2002 employment agreement.
Additionally, on May 29, 2003, Ms. Katz was granted fully-exercisable
options to purchase 85,236 shares at $0.01 per share, in recognition of a
temporary salary deferral arrangement, and options to purchase 1,250,000
shares of the Common Stock at $0.32 per share. The latter options were
exercisable 50% upon grant and 50% on the one year anniversary of the
grant.
(9) Under the terms of a Separation Agreement, Mutual Release and Waiver of
Claims, Ms. Katz resigned effective June 2, 2003 as the Company's
President and Chief Executive Officer and effective June 27, 2003 as a
member of the Company's Board of Directors. Under the terms of the
Separation Agreement, the Company agreed to pay Ms. Katz approximately
$313,000 over a period of up to one year and to permit previously issued
options to vest in accordance with the terms of their grants. The Company
paid Ms. Katz all amounts due pursuant to the Separation Agreement during
2003.
(10) Mr. Oyakawa served as the Company's President and Chief Operating Officer
and member of the Board from June 2003 to January 2004. Under the terms of
a January 19, 2004 Separation Agreement and Release, Mr. Oyakawa resigned
effective January 19, 2004 from his positions as an officer and director
of the Company. The Company agreed to pay Mr. Oyakawa a severance equal to
one year's salary of $350,000 over a twelve month period. On January 15,
2004, the Company granted Mr. Oyakawa options to purchase 750,000 shares
of Common Stock at an exercise price of $0.32 per share. At the time of
Mr. Oyakawa's grant, the market price of the Common Stock was $0.62 per
share. Under the terms of the Separation Agreement and Release, the
options were fully vested. Mr. Oyakawa may exercise the options for two
years from the date of grant.
(11) Mr. Brounstein has served as Executive Vice President and Chief Financial
Officer since joining the Company in December 2001. He had served the
Company as a financial consultant from July 2001 through December 2001. He
served as a member of the Board from December 2001 until May 2003, when he
did not stand for re-election.
(12) All of Mr. Brounstein's options, together aggregating options to purchase
25,000 shares, were cancelled in the fourth quarter of 2002. Mr.
Brounstein was granted 25,000 fully-vested options at an exercise price of
$0.32 per share, the market price of the Common Stock on the May 29, 2003
grant date, following stockholder approval at the May 20, 2003 Annual
Stockholders' Meeting of amendments to the 2000 Plan. Under the terms of a
January 2003 employment agreement, Mr. Brounstein was granted fully vested
options to purchase 83,333 shares at an exercise price of $0.32 per share
on May 29, 2003. Additionally, on May 29, 2003, Mr. Brounstein was granted
fully-exercisable options to purchase 24,038 shares at $0.01 per share, in
recognition of a temporary salary deferral arrangement, and options to
purchase 625,000 shares at $0.32 per share. The latter options were
exercisable 50% upon grant and 50% on the one year anniversary of the
grant.
(13) Represents option grant for 16,667 shares pursuant to an employment
agreement between Mr. Brounstein and the Company and an option grant for
8,333 shares made pursuant to a July 2001 Consulting Contract between Mr.
Brounstein and the Company under which he served as a financial consultant
to the Company. All of these options were cancelled in the fourth quarter
of 2002.
(14) Represents cash payments made to Mr. Brounstein pursuant to the July 2001
Consulting Contract referred to in Note (13).
94
STOCK OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
The following table sets forth information concerning stock options
granted to the Named Executive Officers during the fiscal year ended December
31, 2003:
PERCENT OF TOTAL
OPTIONS GRANTE1
NUMBER OF SECURITIES TO EMPLOYEES EXERCISE
UNDERLYING IN FISCAL PRICE EXPIRATION
NAME OPTIONS GRANTED YEAR(1) ($/SH)(2) DATE
- ----------------------------------------------------------------------------------------------
Anthony J. Cataldo 256,785 (3) 2.80 % 0.01 5/29/13
235,556 (4) 2.57 % 0.32 5/29/08
2,000,000 (5) 21.83 % 0.32 5/29/13
J. Richard George 16,827 (3) 0.18 % 0.01 5/29/13
6,667 (6) 0.07 % 0.32 5/29/13
80,000 (7) 0.87 % 0.32 5/29/13
Nancy E. Katz (8) 85,236 (3) 0.93 % 0.01 5/29/13
62,573 (9) 0.68 % 0.32 5/29/13
146,667 (10) 1.60 % 0.32 5/29/08
1,250,000 (5) 13.65 % 0.32 5/29/13
Jay Oyakawa (11) - - - -
Richard D. Brounstein 24,038 (3) 0.26% 0.01 5/29/13
25,000 (9) 0.27% 0.32 5/29/13
83,333 (12) 0.91% 0.32 5/29/08
625,000 (5) 6.82% 0.32 5/29/13
- ------------------
(1) Based on the aggregate of 8,528,626 options granted under the 2000 Plan to
employees and consultants to the Company and 631,667 options granted to
Directors under the Director Plan during the year ended December 31, 2003,
including grants to the Named Executive Officers.
(2) All options grants reported here were made on May 29, 2003, when the
market price of the Common Stock as reported on the
Over-The-Counter-Bulletin-Board was $0.32 per share.
(3) Options granted as fully vested under the 2000 Plan in recognition of a
temporary salary deferral arrangement. The options expire ten years from
the date of grant.
(4) Options granted as fully-vested under the 2000 Plan. The grant was made
pursuant to Mr. Cataldo's May 2002 Employment Agreement with the Company,
but was deferred until May 29, 2003, following stockholder approval at the
May 20, 2003 Annual Stockholders' Meeting of amendments to the 2000 Plan.
The options expire five years from the date of grant. In the event of a
change of control, the options will become fully vested and Mr. Cataldo
may exercise them for the shorter of the remainder of their five year term
or two years from the effective date of the change of control.
(5) Options granted under the 2000 Plan. The options vest 50% on the date of
grant and 50% on the one-year anniversary of the grant date. The options
expire ten years from the date of grant. In the event of a change of
control, the options will become fully vested and the grantee may exercise
them for the shorter of the remainder of their ten year term or two years
from the effective date of the change of control.
(6) Options granted under the 2000 Plan. The options vest at the rate of 1,117
shares on the six month anniversary of the May 29, 2003 grant date and at
185 shares per month for the remaining 30 months. The options will expire
10 years from the date of grant.
(7) Options granted under the 2000 Plan. The options vest at the rate of
13,340 shares on the six month anniversary of the May 29, 2003 grant date
and at 2,222 shares per month for the remaining 30 months. The options
will expire 10 years from the date of grant.
95
(8) Under the terms of the Separation Agreement, Mutual Release and Waiver of
Claims between the Company and Ms. Katz, the Company agreed to permit the
options issued to Ms. Katz during 2003 prior to her termination to vest in
accordance with the terms of their grants.
(9) Options granted under the 2000 Plan. These options were issued pursuant to
the Company's fourth quarter 2002 cancellation of the grantee's
previously-unexercised options. The options were granted as fully-vested
and expire ten years from the May 29, 2003 grant date. In the event of a
change of control, the grantee may exercise the options for the shorter of
the remainder of their ten year term or two years from the effective date
of the change of control.
(10) Options granted under the 2000 Plan. The grant was made pursuant to Ms.
Katz' October 2002 Employment Agreement with the Company, but was deferred
until May 29, 2003, following stockholder approval at the May 20, 2003
Annual Stockholders' Meeting of amendments to the 2000 Plan. The options
expire five years from the date of grant. In the event of a change of
control, the options will become fully vested and Ms. Katz may exercise
them for the shorter of the remainder of their five year term or two years
from the effective date of the change of control.
(11) Pursuant to the Employment Agreement between the Company and Mr. Oyakawa,
on January 15, 2004, when the market value of the Common Stock was $0.62,
the Company granted Mr. Oyakawa options to purchase 750,000 shares of
Common Stock at $0.32 per share. Under the terms of the January 19, 2004
Separation Agreement and Release between the Company and Mr. Oyakawa, the
options became fully-vested. Mr. Oyakawa may exercise the options for two
years from the date of grant.
(12) Options granted under the 2000 Plan. The grant was made pursuant to Mr.
Brounstein's January 2003 Employment Agreement with the Company, but was
deferred until May 29, 2003, following stockholder approval at the May 20,
2003 Annual Stockholders' Meeting of amendments to the 2000 Plan. The
options expire five years from the date of grant. In the event of a change
of control, the options will become fully vested and Mr. Brounstein may
exercise them for the shorter of the remainder of their five year term or
two years from the effective date of the change of control.
The following table sets forth information concerning option exercises for the
year ended December 31, 2003, with respect to each of the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN 2003
AND DECEMBER 31, 2003 OPTION VALUES
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISABLE IN-THE-MONEY
ON VALUE OPTIONS AT FISCAL YEAR OPTIONS AT FISCAL
EXERCISE REALIZED END (#) YEAR END ($)
NAME (#) ($)(2) EXERCISABLE/UNEXERCISABLE)(1) (EXERCISABLE/UNEXERCISABLE)(1)(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Anthony J. Cataldo 0 0 1,522,341 / 1,000,000 227,639 / 145,000
J Richard George 0 0 33,495 / 69,999 10,073 / 10,150
Nancy E. Katz (4) 919,477 227,666 0 / 624,999 0 / 90,625
Jay Oyakawa (5) 0 0 0 / 0 0 / 0
Richard D. Brounstein 0 0 444,871 / 312,500 71,958 / 45,313
- ------------
(1) Reflects in-the-money options granted under the 2000 Plan.
(2) Value realized is based on the fair market value of the shares on the date
of exercise as reported on the Over-The-Counter Bulletin Board minus the
exercise price multiplied by the number of shares acquired on exercise.
(3) Value realized and value of unexercised in-the-money options is based on a
value of $0.465 per share of the Common Stock, the closing price on
December 31, 2003 as quoted on the Over-The-Counter-Bulletin-Board.
Amounts reflect such fair market value minus the exercise price multiplied
by the number of shares to be acquired on exercise and do not indicate
that the optionee actually sold such stock.
96
(4) Under the terms of the Separation Agreement, Mutual Release and Waiver of
Claims between the Company and Ms. Katz, the Company agreed to permit
options previously issued to Ms. Katz to vest in accordance with the terms
of their grants.
(5) Pursuant to the Employment Agreement between the Company and Mr. Oyakawa,
on January 15, 2004, when the fair market value of the Common Stock was
$0.62, the Company granted Mr. Oyakawa options to purchase 750,000 shares
of the Common Stock at $0.32 per share. Under the terms of the January 19,
2004 Separation Agreement and Release between the Company and Mr. Oyakawa,
the options became fully-vested. Mr. Oyakawa may exercise the options for
two years from the date of grant.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is responsible for
administering the Company's executive compensation policies and programs. The
Compensation Committee also reviews and approves the salaries and bonuses, if
any, of the Company's executive officers as well as all grants of long term
incentive and equity-based compensation awards. The Compensation Committee
currently consists of two directors, each of whom are independent of management
and free from any relationship that, in the opinion of the Board of Directors,
would interfere with the exercise of their independent judgment as a
Compensation Committee member. Further, the members of the Compensation
Committee are directors who qualify as "non-employee directors" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended and
as "outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code.
Executive Officer Compensation Policy. The Compensation Committee
administers the Company's executive compensation policies with the objectives
of:
o aligning the interests of executive officers with the long-term
interests of the Company's stockholders;
o providing competitive levels of compensation which are, in large
part, conditioned on the Company's attainment of specified
performance targets and/or stock price appreciation; and
o attracting, motivating and retaining the best possible executive
talent for the benefit of the Company's stockholders.
In assessing overall compensation for executive officers, the Compensation
Committee considers the Company's performance and industry position, and general
industry data. In furtherance of these goals, the components of executive
compensation are linked to both Company and individual performance.
Employment Agreements. Each Named Executive Officer is employed by the
Company pursuant to a written agreement of employment. Each employment agreement
reflects the terms that the Compensation Committee believed were appropriate
and/or necessary to retain the services of the particular executive officer at
the time it was executed, within the framework of the Company's compensation
policies and its financial condition. The Compensation Committee has considered
the advisability of using employment agreements and determined that under
certain circumstances it is in the best interests of the Company and its
stockholders insofar as it permits the Company to achieve its desired goals of
retaining the best possible executive talent. In addition, each employment
agreement contains restrictive covenants, including non-competition,
non-solicitation and confidentiality covenants, for the benefit of the Company.
The Compensation Committee has determined that the use of employment agreements
may be necessary in certain cases to help ensure the retention of key executive
officers, to attract additional executive talent to the Company and to impose
appropriate restrictive covenants on such officers.
Components of Executive Compensation. The material elements of the
Company's current executive compensation arrangements include base salary and
equity incentive awards. In 2003 and prior years, equity awards were generally
granted in the form of options to purchase shares of Common Stock. This strategy
is intended to increase the beneficial ownership of Common Stock by Company
executives while at the same time continuing to align their interests with those
of the Company's stockholders.
97
The Company does not presently have a formal annual bonus plan.
Nevertheless, subject to the availability of sufficient cash resources,
executives and certain other key employees are eligible to earn annual cash or
stock bonuses for achievement of both Company-wide and individual or
departmental goals.
For 2004, the Company expects to continue to use options to purchase
Common Stock as a primary vehicle for equity grants to further align the
interests of Company employees with Company stockholders. Subject to the
stockholders' approval at the 2004 Annual Meeting of Proposal 2 adopting the
Company's 2004 Incentive Plan, the Committee plans to grant options to purchase
an aggregate of 18,000,000 shares of Common Stock at an exercise price of $0.585
per share to seven executives and other key employees. The Compensation
Committee and Company management view this approach as the most appropriate and
effective manner of meeting the critical goals of retaining key management
employees and minimizing cash outflows while at the same time aligning the
interests of key employees and stockholders. If approved by the stockholders,
the 2004 Incentive Plan permits the Company to issue a variety of other
equity-based awards in addition to stock options, which the Compensation
Committee and management may consider in the future.
Base Salaries. Base salary represents the fixed component of the executive
compensation program. Base salaries of the Executive Chairman, Chief Executive
Officer, Chief Financial Officer, Chief Operating Officer and senior management
are determined by reviewing comparable market base salary compensation,
individual performance, and relevant experience and demonstrated capabilities in
meeting the requirements of the position. The base salaries of the Executive
Chairman, Chief Executive, Financial and Operating Officers and other members of
Senior Management are determined by the Compensation Committee's evaluation of
the Company's attainment of its stated overall goals and targets and the
individual's contribution toward and performance in attaining such goals.
Long-term Incentive Awards. As noted previously, the Committee believes
that stock option grants serve to align the goals of the Company's stockholders
and employees. In addition to that objective, the Company's stock option and
purchase plans, including the proposed 2004 Incentive Plan also assist the
Company in providing (1) a long-term incentive to help reduce employee turnover,
(2) a competitive package for recruiting new employees, (3) a long-term reward
for loyalty, dedication and service, and (4) the vehicle for employees to share
in the rewards of "building stockholder value."
Executive Chairman Compensation
In May 2002, in conjunction with the financing proposal enabling the
restart of the Company's operations, the independent members of the Company's
Board entered into a five-year employment agreement with Anthony Cataldo to
serve as the Company's new Executive Chairman. The employment agreement
specifies a base annual salary of $400,000 and allows for annual increases based
on the Company's performance and approval of the Compensation Committee. The
Compensation Committee has not adjusted Mr. Cataldo's base salary during 2003 or
subsequently. The Company deferred approximately 30% of Mr. Cataldo's cash
compensation during 2002, which it accrued. The Company continued to defer and
accrue this compensation until it was paid during the third quarter of 2003. On
May 10, 2002, when the market price of the Common Stock was $0.90 per share, the
Company granted Mr. Cataldo fully-vested options to purchase 65,556 shares of
Common Stock at $0.45 per share and options to purchase 200,000 shares of Common
Stock at $0.90 per share, with the option to purchase 100,000 shares vested
immediately and the option to purchase the remainder vesting on the one-year
anniversary of the option grant. Both option grants have a five-year term. In
the fourth quarter of 2002, the Company renegotiated the terms of the option
grant contained in Mr. Cataldo's Employment Agreement, canceling all but 30,000
of the options granted at $0.90. Subsequently, following stockholder approval at
the May 20, 2003 Annual Stockholders' Meeting of amendments to the 2000 Plan, on
May 29, 2003, Mr. Cataldo was granted 235,556 fully-vested options at an
exercise price of $0.32 per share, the market price of the Common Stock on that
date. Additionally, on May 29, 2003, Mr. Cataldo was granted fully-exercisable
options to purchase 256,785 shares of Common Stock at $0.01 per share, in
recognition of an additional salary deferral arrangement, and options to
purchase 2,000,000 shares of Common Stock at $0.32 per share. The latter options
were exercisable 50% upon grant and 50% on the one year anniversary of the
grant. Subject to the approval by the Company's stockholders of Proposal 2 to
adopt the Company's 2004 Incentive Plan, the Committee plans to grant options to
purchase 5,000,000 shares of the Company's common stock to Mr. Cataldo at an
exercise price of $0.585 per share, the price of the Common Stock on February
24, 2004, the date the Committee approved the grant. The options will have a
ten-year term and will be exercisable 50% upon grant and 50% one year
thereafter. The Compensation Committee considers this level of compensation
appropriate in view of Mr. Cataldo's background, leadership and accomplishments.
98
Chief Executive Officer, President, and Chief Operating Officer
Compensation
In October 2002, the Company entered into a five-year employment agreement
with Nancy E. Katz, the Company's former President and Chief Executive Officer
and member of the Board, that included an annual salary of $300,000, subject to
annual review. The Compensation Committee did not adjust Ms. Katz' base salary
prior to her resignation in June 2003. In conjunction with the agreement, the
Company granted Ms. Katz options to purchase 146,667 shares of Common Stock, at
an exercise price of $2.40, subject to stockholder approval of amendments at the
2003 Annual Meeting of Stockholders to the 2000 Plan. These options were to be
fully vested on the grant date. In February 2003, the exercise price of this
option was reduced to the lesser of $1.50 per share or the market price on the
grant date. In the fourth quarter of 2002, Ms. Katz permitted the Company to
cancel all outstanding options previously granted to her under the 1991
Incentive Stock Plan and the 2000 Plan, an aggregate of 62,573 options.
Subsequently, following stockholder approval at the May 20, 2003 Annual
Stockholders' Meeting of amendments to the 2000 Plan, on May 29, 2003, the
Company granted Ms. Katz 62,573 fully-vested options at an exercise price of
$0.32 per share, the market price of the Common Stock on that date. The options
granted conditionally under Ms. Katz' October 2002 Employment Agreement were
also granted as fully vested at $0.32 per share on May 29, 2003. Additionally,
on May 29, 2003, Ms. Katz was granted fully-exercisable options to purchase
85,236 shares of Common Stock at $0.01 per share, in recognition of an earlier
salary deferral arrangement, and options to purchase 1,250,000 shares of Common
Stock at $0.32 per share. The latter options were exercisable 50% upon grant and
50% on the one year anniversary of the grant. Under the terms of a Separation
Agreement, Mutual Release and Waiver of Claims, Ms. Katz resigned effective June
2, 2003 as the Company's President and Chief Executive Officer and effective
June 27, 2003 as a member of the Company's Board. Under the terms of the
Separation Agreement, the Company agreed to pay approximately $313,000 over a
period of up to one year and to permit previously issued options to vest in
accordance with the terms of their grants. All amounts due to Ms. Katz under the
Separation Agreement were paid during 2003.
In June 2003, the Company entered into a five year employment agreement
with Jay Oyakawa, the Company's former President and Chief Operating Officer and
member of the Board, that included an annual base salary of $350,000. On January
15, 2004, when the market price of the Common Stock was $0.62 per share, Mr.
Oyakawa was granted options to purchase 750,000 shares of Common Stock
exercisable at $0.32 pursuant to the 2000 Plan. The options vested 50% upon
grant and 50% on the one-year anniversary of the grant. On January 19, 2004, Mr.
Oyakawa resigned from his position as President, Chief Operating Officer and as
a member of the Board. The Company entered into a Separation Agreement and
Release with Mr. Oyakawa effective on January 19, 2004 pursuant to which the
Company will pay him severance in an amount equal to one year's salary of
$350,000 over a twelve month period. Under the terms of the Separation Agreement
and Release, the options became fully-vested. Mr. Oyakawa may exercise the
options for two years from the date of grant.
In January 2004, the Company entered into a three year employment
agreement with J. Richard George to serve as the Company's Chief Executive
Officer and President and that includes an annual base salary of $250,000.
Subject to the approval by the Company's stockholders of Proposal 2 to adopt the
Company's 2004 Incentive Plan, the Committee plans to grant options to purchase
5,000,000 shares of the Company's common stock to Dr. George at an exercise
price of $0.585 per share, the price of the Common Stock on February 24, 2004,
the date the Committee approved the grant. The options will have a ten-year term
and will be exercisable 50% upon grant and 50% one year thereafter. The
Compensation Committee considers this level of compensation appropriate in view
of Dr. George's background, leadership and accomplishments.
99
Chief Financial Officer Compensation
On January 1, 2003, the Company entered into a twelve month employment
agreement, with automatic renewal options, with Richard D. Brounstein, the
Company's Executive Vice President and Chief Financial Officer, that included an
annual base salary of $200,000, and the grant of options to purchase 83,333
shares of Common Stock at an exercise price of $1.50 per share, subject to
stockholder approval of amendments at the 2003 Annual Meeting of Stockholders to
the 2000 Plan. The Compensation Committee did not adjust Mr. Brounstein's base
salary during 2003 or subsequently. The options granted were to be fully vested
on the grant date. Mr. Brounstein had previously been granted options to
purchase an aggregate of 25,000 shares of Common Stock in 2001 and 2002,
pursuant to a July 2001 consulting contract under which he served as a financial
consultant to the Company. In the fourth quarter of 2002, Mr. Brounstein
permitted the Company to cancel all outstanding options previously granted to
him. Subsequently, following stockholder approval at the May 20, 2003 Annual
Stockholders' Meeting of amendments to the 2000 Plan, on May 29, 2003 Mr.
Brounstein was granted 25,000 fully-vested options at an exercise price of $0.32
per share, the market price of the Common Stock on that date. The options
granted conditionally to Mr. Brounstein under his Employment Agreement were also
granted as fully vested at $0.32 per share on May 29, 2003. Additionally, on May
29, 2003, Mr. Brounstein was granted fully-exercisable options to purchase
24,038 shares of Common Stock at $0.01 per share, in recognition of an earlier
temporary salary deferral arrangement, and options to purchase 625,000 shares of
Common Stock at $0.32 per share. The latter options were exercisable 50% upon
grant and 50% on the one year anniversary of the grant. Subject to the approval
by the Company's stockholders of Proposal 2 to adopt the Company's 2004
Incentive Plan, the Committee plans to grant options to purchase 1,500,000
shares of the Company's common stock to Mr. Brounstein at an exercise price of
$0.585 per share, the price of the Common Stock on February 24, 2004, the date
the Committee approved the grant. The options will have a ten-year term and will
be exercisable 50% upon grant and 50% one year thereafter. The Committee
considers this level of compensation appropriate in view of Mr. Brounstein's
background, leadership and accomplishments.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD
Julius Krevans, M.D.
Paul Freiman
April 16, 2004
100
FINANCIAL STATEMENTS
The Company's audited Consolidated Financial Statements for the years ended
December 31, 2003 and 2002 are included on pages F-1 through F-38 of this
Prospectus. The Company's unaudited Condensed Consolidated Financial Statements
for the quarter ended March 31, 2004 are included on pages F-39 through F-50 of
this Prospectus.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Calypte was contacted by the San Francisco District Office of the Securities and
Exchange Commission ("Commission") on October 28, 2003 and advised of an
informal inquiry being conducted by the enforcement staff of the Commission
regarding the Company. The staff requested, among other things, documents and
information related to certain press releases issued by the Company. The
Commission has advised the Company that the inquiry should not be construed as
an indication by the Commission or its staff that any violation of law has
occurred. The Company has voluntarily provided the information sought by the
Commission and is cooperating with the Commission in connection with its
informal inquiry. Independently, the Company's Audit Committee has investigated
the matter and has retained outside counsel to assist in its investigation by
reviewing the press releases and related information that were the subject
matter of the Commission's informal inquiry letter. The Audit Committee has
completed its investigation and reported the results of its investigation and
associated recommendations to the Board of Directors. Counsel for the Audit
Committee advised the Audit Committee and the Board of Directors that the
results of their investigation, interviews and review of documents provided in
response to the Commission's informal inquiry letter indicated no evidence of
management malfeasance with respect to its inquiry. The Audit Committee, based
upon its counsel's recommendations, proposed that the Company implement certain
practices and procedures, some of which represent a continuation or
formalization of present practices. The recommendations and proposals of the
Audit Committee that were approved by the Board of Directors include certain
improvements in the Company's press release issuance process and investor
relations and regulatory recordkeeping procedures. Additionally, the Board of
Directors directed management to implement the American Stock Exchange corporate
governance standards (SR-AMEX-2003-65) approved by the Commission on December 1,
2003. The Company continues to implement the directives of its Board of
Directors regarding Corporate Governance and has submitted to the Board, and the
Board has approved, certain policies and guidelines related to press releases
and investor relations that reflect the recommendations of the Audit Committee.
The interim financial statements contained in a Form 10-QSB are required to be
reviewed under Statement of Auditing Standards No. 100 ("SAS 100") by an
independent public accountant pursuant to Item 310(b) of the Commission's
Regulation S-B. Calypte's former independent auditors, KPMG LLP ("KPMG"),
informed the Company that they could not complete their quarterly review of the
Company's interim financial statements contained in the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended September 30, 2003 or audit
the Company's financial statements for its fiscal year ended December 31, 2003
until such time as the Company's Audit Committee had completed the investigation
related to the Commission's informal inquiry letter, the same was reviewed by
KPMG, and KPMG was satisfied that, in its opinion, an adequate investigation was
conducted and appropriate conclusions were reached and actions taken. On
December 23, 2003, the Company dismissed KPMG as independent auditors for the
Company, effective immediately. The decision to dismiss KPMG was recommended by
the Audit Committee of the Board of Directors. As of the date of KPMG's
dismissal, KPMG had advised the Company that, in KPMG's opinion, the conditions
necessary for KPMG to complete its review had not yet been satisfied. At the
time of KPMG's dismissal, the Audit Committee had completed its investigation,
had reported the results of its investigation and associated recommendations to
the Board of Directors, and the Board of Directors had approved such
recommendations. In addition, at such time, counsel for the Audit Committee had
advised the Company that it had commenced to provide information to KPMG
concerning the investigation conducted, the conclusions reached and the actions
taken by the Company.
KPMG's reports on the financial statements of the Company for its fiscal years
ended December 31, 2002 and December 31, 2001 did not contain an adverse opinion
or a disclaimer of opinion nor were such reports qualified or modified as to
uncertainty, audit scope or accounting principles, except that the report of
KPMG on the financial statements of the Company for its fiscal year ended
December 31, 2002 included the following separate paragraph:
101
"The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a working capital
deficit and an accumulated deficit that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty."
and the report of KPMG on the financial statements of the Company for its fiscal
year ended December 31, 2001 included the following separate paragraph:
"The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has an accumulated deficit
that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty."
During the Company's 2001 and 2002 fiscal years and through the date of
dismissal of KPMG, there were no disagreements with KPMG on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
KPMG, would have caused KPMG to make reference to the subject matter of such
disagreements in connection with its reports.
Prior to its dismissal, KPMG informed the Company that it could not complete its
quarterly review of the interim financial statements of the Company contained in
the Company's Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 2003 or audit the Company's financial statements for its fiscal
year ending December 31, 2003 until such time as the Company's Audit Committee
had completed the investigation referred to in such report, the same was
reviewed by KPMG, and KPMG was satisfied that, in its opinion, an adequate
investigation was conducted and appropriate conclusions were reached and actions
taken. As of the date of KPMG's dismissal, KPMG had advised the Company that in
KPMG's opinion these conditions had not yet been satisfied. At the time of
KPMG's dismissal, the Audit Committee had completed its investigation, had
reported the results of its investigation and associated recommendations to the
Board of Directors, and the Board of Directors had approved such
recommendations. In addition, at such time counsel for the Audit Committee had
commenced to provide information to KPMG concerning the investigation conducted,
the conclusions reached and the actions taken by the Company.
The Company provided KPMG with a copy of the disclosures contained in its
Current Report on Form 8-K, Item 4 filed on January 2, 2004 and requested KPMG
to furnish the Company with a letter addressed to the Securities and Exchange
Commission (the "SEC") stating whether KPMG agreed with the above statements,
and, if not, the respects in which it did not agree. On January 7, 2004, the
Company received a copy of a letter dated January 6, 2004 addressed to the SEC
by KPMG and filed it as Exhibit 16.1 to its Amended Form 8-K, Item 4 on January
9, 2004. The KPMG letter stated "we disagree with the statement that at the time
of KPMG's dismissal, counsel for the Audit Committee had commenced to provide
information to KPMG concerning the investigation conducted, conclusions reached
and the actions taken by the Company." Contrary to KPMG's statement, the Company
was advised by counsel for the Audit Committee that it had commenced to provide
information to KPMG concerning the investigation conducted, the conclusions
reached and the actions taken by the Company.
In responding to the statement in the KPMG letter regarding KPMG's disagreement
as to the Audit Committee's counsel's provision of information to KPMG, the
Company provided the following additional disclosure in its Amended Form 8-K,
Item 4 filed on January 9, 2004. "In connection with the SEC's informal inquiry
letter dated October 27, 2003, the Audit Committee of the Company (the "Audit
Committee" or "Committee") retained counsel to review the press releases and
related information that were the subject matter of the SEC informal inquiry
letter. Counsel for the Audit Committee advised the Committee and the Board of
Directors that the results of their investigation, interviews and review of
documents provided in response to the SEC informal inquiry letter indicated no
evidence of management malfeasance with respect to its inquiry. The Audit
Committee, based upon its counsel's recommendations, proposed that the Company
implement certain practices and procedures, some of which represent a
continuation or formalization of present practices. The recommendations and
proposals of the Audit Committee that were approved by the Board of Directors
include certain improvements in the Company's press release issuance process and
investor relations and regulatory recordkeeping procedures. Additionally, the
Board of Directors has directed management to implement the American Stock
Exchange corporate governance standards (SR-AMEX-2003-65) approved by the SEC on
December 1, 2003." The Company has not had any further communication with KPMG
since receiving a copy of its January 6, 2004 letter.
102
On December 24, 2003, upon approval of the Audit Committee, the Company engaged
Odenberg Ullakko Muranishi & Co. LLP ("OUM") to audit the consolidated financial
statements of the Company for the two years ending December 31, 2003 and 2002
and to review the interim financial statements of the Company contained in the
Company's Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 2003. During the Company's two most recent fiscal years and
through December 24, 2003, the Company had not consulted with OUM regarding
either (i) the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on the Company's financial statements, and neither a written report nor
oral advice was provided that was an important factor considered by the Company
in reaching a decision as to the accounting, auditing or financial reporting
issue; or (ii) any matter that was either the subject of a disagreement, as that
term is defined in Item 304(a)(1)(iv)(A) of Regulation S-B and the related
instructions to Item 304 of Regulation S-B.
The Company has provided OUM with a copy of the disclosures contained in its
Form 8-K, Item 4 filings and has provided OUM with an opportunity to furnish the
Company with a letter addressed to the SEC containing any new information,
clarification of the Company's expression of its views, or the respects in which
it does not agree with the statements made by the Company herein. OUM has
advised the Company that it has reviewed this filing and has no basis on which
to submit a letter addressed to the SEC in response to Item 304(a) of Regulation
S-B.
INTEREST OF NAMED EXPERTS AND COUNSEL
The consolidated financial statements of Calypte Biomedical Corporation and
subsidiaries as of December 31, 2003 and 2002, and for each of the years in the
two-year period ended December 31, 2003, are included on pages F-1 through F-38
in this registration statement in reliance upon the reports of Odenberg Ullakko
Muranishi & Co. LLP, independent auditors, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The validity of the issuance of the shares being offered hereby will be passed
upon for us by Baratta & Goldstein, New York, New York.
103
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article VIII of the Registrant's Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the corporation if
such person acted in good faith and in a manner reasonably believed to be in and
not opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his conduct was unlawful.
Calypte has entered into indemnification agreements with its directors and
executive officers, in addition to indemnification provided for in Calypte's
Bylaws, and intends to enter into indemnification agreements with any new
directors and executive officers in the future.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC registration fees $ 5,683.00
Legal fees and expenses $ 25,000.00
Accountants' fees $ 5,000.00
Miscellaneous $ 1,317.00
--------------
Total $ 37,000.00
==============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES`
Private Placements of Common Stock
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 holders in the principal amount of
$550,000, pursuant to Regulation S of the Securities Act. 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 6,667 shares of common stock at an exercise price of $45.
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.
II-1
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 169,500 shares of its common stock, the
total number registered for the equity line with the Securities and Exchange
Commission, at an average price of $12.60 per share and had received net
proceeds of approximately $2,014,000 after deducting expenses of the
transaction. There are no further funds available to the Company under this
equity line.
In August 2001, the Company and the same private investment fund mentioned in
the preceding paragraph 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 in
October 2001. Under this arrangement, the Company, at its sole discretion, could
draw down on this facility, sometimes termed an equity line, from time to time,
and the investment fund was obligated to purchase shares of the Company's common
stock. The purchase price of the common stock purchased pursuant to any draw
down was 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, in October 2001, the Company issued a 7-year
fully-vested warrant to the investment fund to purchase up to 139,742 shares of
common stock at an exercise price of $8.23 per share and 3,833 shares of its
common stock as additional fees to the investment fund. The private placement of
the related warrants was exempt from registration pursuant to Regulation S. From
the time the Registration statement became effective in November 2001 through
the expiration of the facility in October 2003, the Company issued a total of
855,776 shares of its common stock at an average price of $3.93 per share and
received proceeds of approximately $3.2 million after deducting expenses of the
transactions. At the time the facility expired, 633 registered shares remained
available for sale under this facility.
In November 2001, the Company sold 52,528 shares of common stock under
Regulation D of the Securities Act of 1933 ("the Securities Act") to various
investors in a private placement at $5.70 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. Three former members of the Company's Board of Directors, Nancy Katz,
Mark Novitch and David Collins, purchased an aggregate of 24,038 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 the time.
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 459,500 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 148,747 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 870,695 shares
of registered common stock. In September 2003, the investor exercised warrants
to purchase 456,667 shares of the Company's common stock and the Company's
received proceeds of approximately $37,000. The Company's registration statement
on Form S-2/A (No. 6) registering 1,010,000 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 issuance of
the debentures and from the exercise of the warrants were used to finance
operations.
II-2
Subsequently, beginning in May 2002, the Company negotiated several new
financings from which, through June 10, 2004, it has raised approximately $30.3
million in gross proceeds. The following table summarizes these financings by
major category and the subsequent table provides the details of these
financings.
SUMMARY OF FINANCINGS - MAY 1, 2002 TO 10, 2004
TOTAL RESTRICTED
GROSS NET SHARES SHARES
FINANCING SOURCE PROCEEDS PROCEEDS ISSUED OUTSTANDING (2)
---------------- -------- -------- ------ ---------------
8% Convertible Notes $ 3,232 $ 2,594 46,084.3 3,088.6
Other Restart Financings 750 730 2,720.3 -
Mercator 12% and 10% Debentures(1) 4,550 3,650 37,244.2 13,730.3
Marr Private Placements 12,500 11,900 28,333.3 28,333.3
May 2004 PIPE 9,300 8,769 23,250.0 23,250.0
-------- -------- --------- --------
Total Financings $ 30,332 $ 27,643 137,632.1 68,402.2
Shares issued to consultants
and others in non-financing
-related transactions - - 2,569.8 2,569.8
-------- -------- --------- --------
Total $ 30,332 $ 27,643 140,201.9 70,972.0
======== ======== ========= ========
- ----------------
(1) At June 10, 2004, the holders have converted all but approximately
$158,000 of principal of the convertible debentures issued since
September 2002. Based on current market prices, the Company
estimates that it would be required to issue approximately
0.3million additional shares of its common stock if the holders
elected to convert the remaining principal and accrued interest of
their debentures at this time. The holders of an aggregate of
$60,000 principal of the Company's outstanding 12% convertible
debentures claim a transaction date, which is disputed by the
Company. These debentures have not yet been converted by the Company
pending resolution of the transaction date dispute, which may impact
the number of shares of the Company's stock to which the holder is
entitled upon conversion. See Legal Proceedings and Note 12 to
Detail of Financings.
(2) Based upon ownership information supplied by the Company's transfer
agent as of June 10, 2004. Certain of the restricted shares issued
pursuant to these financings are eligible for resale under Rule 144
now or may become so at various times in the future. Certain of the
investors who were issued restricted shares subsequently sold the
shares under exemptions provided by Rule 144 or to other accredited
investors. As of June 10, 2004, approximately 43% of the Company's
outstanding shares, or approximately 71.0 million shares, were
restricted. In addition to the restricted shares issued pursuant to
financing transactions that are summarized here, certain vendors,
consultants and other parties who have agreed to accept our common
stock in lieu of cash hold an additional 2.6 million restricted
shares, also summarized here.
II-3
DETAIL OF FINANCINGS - MAY 1, 2002 TO JUNE 10, 2004
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
8% CONVERTIBLE NOTES Lesser of
Alpha Capital Aktiengesellshaft (i) $3.00 or $500 5/24/02 $ 3.60 7,260.7/ $500
Stonestreet Limited Partnership (ii) 70% of $500 5/24/02 $ 3.60 7,075.7/ $500
Filter International Ltd. the average $150 5/24/02 $ 3.60 2,452.4/ $150
of
Camden International Ltd. the 3 lowest $350 5/24/02 $ 3.60 5,279.1/ $350
Domino International Ltd. trades for $150 5/24/02 $ 3.60 1,767.4/ $150
30
Thunderbird Global Corporation days $ 75 5/24/02 $ 3.60 1,083.1/ $75
BNC Bach International Ltd. preceding $200 5/24/02 $ 3.60 2,463.8/ $200
Excalibur Limited Partnership conversion $200 5/24/02 $ 3.60 1,678.9/ $200
Standard Resources Ltd. $100 5/24/02 $ 3.60 1,542.5/ $100
SDS Capital International Ltd. $300 7/10/02 $ 10.20 4,189.8/ $300
Camden International Ltd. $100 7/10/02 $ 10.20 1,707.9/ $100
Excalibur Limited Partnership $250 7/24/02 $ 6.60 4,238.3/ $250
Stonestreet Limited Partnership $250 8/21/02 $ 3.90 4,042.2/ $250
Alpha Capital Aktiengesellshaft $107 5/9/03 $ 0.63 1,302.5/ $107
------ ------ -------- ------
Total 8% Convertible Notes $3,232 $2,594 46,084.3/ $3,232
====== ====== ======== ======
OTHER RESTART FINANCINGS:
10% CONVERTIBLE NOTE
BNC Bach International Ltd. 50% of the $ 150 $ 150 5/14/02 $4.20 2,217.8/ $150
(Note: on 7/14/02 the average of 3 $10.80 on
maturity date was extended lowest 7/14/02;
until 12/31/02; on December closing bid $1.92 on
27, 2002, the maturity date prices for 12/27/02;
was extended until January 22 days $1.80 on
15, 2003; on January 15, preceding 1/15/03;
2003 the maturity date was conversion $1.50 on
extended until March 17, 3/17/03;
2003, on March 17, 2003 the $0.99 on
maturity date was extended 4/2/03
until April 4, 2003; on $0.75 on
April 2, 2003, the maturity 4/30/03
date was extended until May
5, 2003; on April 30, 2003,
the maturity date was
subsequently extended until
May 10, 2004)(5)
8% CONVERTIBLE DEBENTURES
Su So 80% of the $ 100 $ 90 6/17/02 $4.20 36.7 (4)/ $100
lower of the
average
closing bid
or trade
price for
the 5 days
preceding
conversion,
but not less
than $3.00
II-4
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
Jason Arasheben 70% of the $ 100 $ 90 7/03/02 $8.10 15.8 (4)/ $100
lower of the
average
closing bid
or trade
price for
the 5 days
preceding
conversion,
but not less
than $3.00
PIPE AT $1.50 PER SHARE
Careen Ltd. $1.50 per $ 200 $ 200 8/28/02 $ 4.80 225.0/ N/A
Caledonia Corporate Group Share $ 200 $ 200 8/28/02 $ 4.80 225.0/ N/A
----- ----- ----------
Limited
Total Other Restart
Financings $ 750 $ 730 2,720.3/ $350
===== ===== =============
MERCATOR 12% AND 10% DEBENTURES (2)
12% CONVERTIBLE DEBENTURES
Mercator Momentum Fund, L.P. 85% of the $ 550 $345 (6) 9/12/02 $3.00 4,866.4(4)/$550
($2,000 total commitment) average of
the 3 lowest
Mercator assigned its rights to: trading
Alpha Capital AG prices for 250 250 7/24/03 $0.115 2,673.8/ $250
Gamma Opportunity Capital the 20 250 250 7/24/03 $0.115 2,685.6/ $250
Partners, LP trading days
Goldplate Investment Partners preceding 250 250 7/24/03 $0.115 2,673.8/ $250
Marr Technologies, B.V. (11) conversion 570 570 9/1/03 $0.498 5,181.8/ $570
(8) 1,870 1,665
Dr. Khalid Ahmed 50 50 10/2/03 $1.310 84.6/ $ 50
Roger Suyama 20 20 10/2/03 $1.310 33.8/ $ 20
Logisticorp, Inc. 20 20 10/2/03(12) $1.310 -
Southwest Resource 40 40 10/2/03(12) $1.310 -
------ ------ -------- ------
Preservation Inc. $2,000 $1,795 18,199.8/ $1,940
------ ------ -------- ------
Mercator Momentum Fund, L.P. 80% of the $300 $260 10/22/02 $3.90 0/ $300 (7)
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not less
than $1.50
II-5
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
Mercator Momentum Fund L.P. (10) 70% of the $300 $245 4/29/03 $0.825 3,455.5/ $294
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $1.20
Mercator warrant $3.00 per $0 $0 10/22/02 $3.90 0
share
10% CONVERTIBLE DEBENTURES
Mercator Focus Fund, L.P. (10) 80% of the $1,000 $510 1/14/03 $1.92 7,941.1/ $1,000
average of (6)
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $3.00
Mercator Momentum Fund, L.P. 80% of the $450 $440 1/30/03 $1.86 2,592.6/ $358
(10) average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $3.00
Mercator Focus Fund, L.P. (10) $400 3/13/03 $1.47 3,428.9/ $400
Mercator Momentum Fund III, L.P. 65% of the 100 1,626.3/ $100
------ ------ -------- ------
average of $500 $400 5,055.2/ $500
------ ------ -------- ------
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $2.10
Total Mercator Debentures $4,550 $3,650 37,244.2/ $4,392
====== ====== ======== ======
MARR PRIVATE PLACEMENTS
PIPE AT $0.30 PER SHARE
Marr Technologies B.V. (9)(11) $0.30 per $2,500 $2,300 8/1/03 $0.152 8,333.3
share
PIPE AT $0.50 PER SHARE
Marr Technologies B.V. (9)(11) $0.50 per $10,000 $9,600 9/1/03 $0.498 20,000.0
share ------- ------- --------
Total Marr Private Placements $12,500 $11,900 28,333.3
======= ======= ========
II-6
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
MAY 2004 PRIVATE PLACEMENT
PIPE AT $0.40 PER SHARE (13) Shares
SF Capital Partners LP issued at $4,000 $3,720 5/28/04 $0.50 10,000.0
Marr Technologies BV $0.40 per 3,000 2,910 5/28/04 $0.50 7,500.0
Proximity Fund LP share; 500 465 5/28/04 $0.50 1,250.0
Proximity Partners LP 5 year 500 465 5/28/04 $0.50 1,250.0
MTB Small Cap Growth Fund warrant at 500 465 5/28/04 $0.50 1,250.0
$0.50
MTB Multi Cap Growth Fund per share 500 465 5/28/04 $0.50 1,250.0
Bridges & PIPES LLC 300 279 5/28/04 $0.50 750.0
------ ------- --------
Total May 2004 PIPE $9,300 $ 8,769 23,250.0
====== ======= ========
- ---------------------
(1) The 8% Convertible Notes, the Other Restart Financings, the Mercator
12% and 10% Debentures and warrants, the 2003 Marr Technologies B.V. PIPE's, and
the May 2004 PIPE were issued under exemptions provided by Regulation S and
Regulation D. With the exception of Marr Technologies B.V., which is an
affiliate of the Company based on its August and September 2003 PIPE investments
and participation in the May 2004 PIPE, none of the entities listed above is or
has been an affiliate of the Company. Other than Marr Technologies B.V. and SF
Capital Partners, Ltd., all of the listed investors were subject to ownership
limitations restricting their ownership of the Company's stock to a maximum of
4.9% or 9.9%, depending on the specific agreement.
(2) At June 10, 2004, the holders have converted all but approximately
$158,000 of principal of the convertible notes and debentures issued since
February 2002. Based on current market prices, the Company estimates that it
would be required to issue approximately 0.3 million additional shares of its
common stock if the holders elected to convert the remaining principal and
accrued interest of their debentures at this time. See also Note 12.
(3) On July 18, 2003, the registration statement for 52,500,000 shares
underlying the 8% Convertible Notes, the Other Restart Financings and $1,300,000
of the Mercator 12% and 10% Convertible Debentures became effective. As a result
of a decline in the market price of the Company's stock subsequent to the
effective date of the July 2003 registration statement, the number of shares
registered was insufficient to permit the complete conversion of the notes and
debentures into registered shares. The shares underlying certain of the
convertible securities have become eligible for resale under Rule 144, and
certain investors have availed themselves of that eligibility to convert
restricted shares issued pursuant to conversions into free-trading shares. As of
June 10, 2004, approximately 43% of the Company's outstanding common stock, or
approximately 71.0 million shares, are unregistered. Of this amount, Marr
Technologies holds 41.0 million restricted shares issued pursuant to their two
2003 PIPE transactions, the conversion of their investment in $570,000 principal
value of 12% convertible debentures and their participation in the May 2004
PIPE. Other investors in our convertible notes and debentures hold approximately
11.6 million restricted shares issued pursuant to their conversions. Investors
in our May 2004 PIPE other than Marr hold an additional 15.75 million restricted
shares. The Company is registering the shares of common stock on a cost-free
basis to the holders of said shares of common stock in this registration
statement.
(4) Includes fee shares.
(5) On April 30, 2003, when the market price of Calypte common stock was
$0.75, the Company and BNC Bach amended the conversion price to eliminate a
conversion price ceiling of $1.50 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. BNC Bach subsequently converted the outstanding
principal and accrued interest into shares of the Company's common stock.
(6) Reflects a 10% cash commitment fee on the entire $2 million commitment
paid to The Mercator Group less additional fees and expenses. The Company
registered shares underlying $1,300,000 of the total $2,000,000 commitment in
July 2003 and plans to register the shares underlying the final $700,000 of this
commitment during the second quarter of 2004.
(7) In conjunction with the issuance of the $1 million 10% convertible
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.
II-7
(8) On March 31, 2003, when the market price of Calypte Common Stock was
$0.885, the Company amended the conversion price to eliminate a conversion price
floor of $1.50 per share in return for an extension of time in which to register
the shares of common stock underlying the various Mercator financings.
(9) The Securities Purchase Agreements for both transactions between the
Company and Marr Technologies B.V. require that the Company provide cost-free
registration rights to Marr; however, Marr is subject to a one-year lock-up
provision following the transaction date with respect to the shares purchased.
(10) On January 14, 2004, when the market price of Calypte common stock
was $0.60, the Company extended the maturity date of the following debentures
until July 14, 2004:
o 10% Convertible Debenture dated January 14, 2003 issued to Mercator
Focus Fund, LP
o 10% Convertible Debenture dated January 30, 2003 issued to Mercator
Momentum Fund, LP
o 10% Convertible Debentures dated March 13, 2003 issued to Mercator
Focus Fund, and
o 12% Convertible Debenture dated April 29, 2003 issued to Mercator
Momentum Fund, LP.
In return for the extension of the maturity dates, the Company has agreed to pay
an additional extension fee equal to 2% of the outstanding principal balance per
month until the earlier of the extended maturity date or conversion. The
extension fee is payable 1% in cash and 1% in shares of the Company's common
stock. Additionally, the Company agreed to file a registration statement
including the shares potentially applicable to the conversion of the outstanding
debenture balances by no later than April 29, 2004. The shares issuable as a
portion of the extension fee are to be included in the Registration Statement on
Form SB-2 that the Company plans to file in the second quarter of 2004. On April
23, 2004, when the market price of the Common Stock was $0.625, the Company and
the various Mercator Funds agreed to extend until May 14, 2004 the period for
filing the registration statement including the shares issued or potentially
issuable upon conversion. On May 7, 2004, when the market price of the Company's
common stock was $0.48 per share, the Company and the various Mercator Funds
agreed to further extend from May 14, 2004 until 21 days following the closing
of a private placement of equity financing of at least $5,000,000, but in any
case to no later than June 30, 2004, the period in which the Company is required
to file a registration statement including shares of its common stock issued or
potentially issuable upon conversion.
(11) On January 23, 2004, when the market price of Calypte common stock
was $0.695, the Company and Marr agreed to extend the registration rights period
attributable to 5,181,818 shares of the Company's common stock issued in
conjunction with Marr's conversion of $570,000 principal amount of the Company's
12% Convertible Debentures from February 27, 2004 to April 29, 2004. In return
for the extension, the Company agreed to include in its next registration
statement an aggregate of 28,333,333 shares of its common stock purchased by
Marr in PIPE transactions in the third quarter of 2003. On April 23 2004, when
the market price of the Common Stock was $0.625, the Company and MTBV agreed to
extend until May 14, 2004 the period for filing the registration statement
including the shares issued to MTBV upon conversion of the 12% convertible
debenture and in the 2003 PIPE transactions. On May 7 2004, when the market
price of the Company's common stock was $0.48 per share, MTBV agreed to further
extend from May 14, 2004 until 21 days following the closing of a private
placement of equity financing of at least $5,000,000, but in any case to no
later than June 30, 2004, the period in which the Company is required to file a
registration statement including shares of its common stock issued to MTBV upon
conversion of the 12% convertible debenture and in the 2003 PIPE transactions.
Such shares are included in this registration statement.
(12) The holder claims an earlier transaction date, which is disputed by
the Company. This debenture has not yet been converted . The ultimate resolution
of the transaction date dispute may determine the number of shares of the
Company's stock to which the holder is entitled upon conversion. See Legal
Proceedings.
(13) The shares issued pursuant to the May 2004 PIPE and the related
warrants have an anti-dilution feature that will require the Company to issue
additional shares to the PIPE investors and modify their warrants if the Company
subsequently issues additional equity at a per share price of less than $0.40
for a period of one year from the closing date, except under the provisions of
previously outstanding convertible debt, option or warrant agreements.
II-8
On November 13, 2003, when the market price of the Company's common stock was
$0.88 per share, the Company and Marr, its largest stockholder, entered into an
agreement in which Marr agreed to provide the Company up to an aggregate of
$10,000,000 (the "Marr Credit Facility") pursuant to promissory notes issuable
to Marr on an as-needed basis by the Company (the "Notes"). Each Note will bear
interest at the rate of 5% per annum and will have a 12-month term. The Marr
Credit Facility is available during the period beginning on February 28, 2004
and ending on May 31, 2004. The aggregate amount available under the Marr Credit
Facility will be proportionally reduced by the amount of any equity financing
obtained by the Company during the term of the Marr Credit Facility. Marr has
participation rights in any such equity financing on the same terms as the other
investors. The Marr Credit Facility provides for earlier termination as of March
31, 2004, if the Company fails to have its common stock listed on an established
stock exchange by that date. Moreover, upon the failure to obtain such stock
exchange listing, any outstanding Notes would be due and payable on April 30,
2004. As of March 31, 2004, no Notes have been issued under the Marr Credit
Facility. As consideration for the Marr Credit Facility, the Company issued to
Marr a warrant to purchase 375,000 shares of its common stock at an exercise
price of $0.80 per share. The warrant is immediately exercisable and expires two
years after issuance on November 12, 2005.
On March 19, 2004, when the market price of the Company's common stock was
$0.575 per share, the Company and Marr amended the Marr Credit Facility to
increase the aggregate amount available under the Marr Credit Facility to
$15,000,000 and to eliminate the termination provision upon failure to have the
common stock listed on an established stock exchange by March 31, 2004. As
additional consideration for the amendment of the Marr Credit Facility, the
Company issued to Marr an additional warrant to purchase 400,000 shares of its
common stock at an exercise price of $0.46 per share. This warrant is
immediately exercisable and expires two years from its date of issuance on March
18, 2006.
On May 26, 2004, when the market price of the Common Stock was $0.46 per share,
the Company and MTBV again amended the Marr Credit Facility whereby MTBV has
committed to purchase up to $5,000,000 of Promissory Notes that the Company may
issue through December 31, 2004. Any Notes issued pursuant to this second
amendment will bear interest at 9% per annum and will have a maturity date of
May 31, 2005. The $5,000,000 amount available under the amended Marr Credit
Facility will be reduced by the amount of any equity financing obtained by the
Company after the May 26, 2004 effective date of the second amendment and
through the December 31, 2004 commitment period. At June 10, 2004, the Company
has issued no Notes under the Marr Credit Facility. As consideration for the
extension of the commitment period reflected in the second amendment of the Marr
Credit Facility, the Company issued to MTBV a warrant to purchase 500,000 shares
of its Common Stock at an exercise price of $0.40 per share. This warrant is
immediately exercisable and expires two years from its date of issuance on May
26, 2006. The Company has provided piggyback registration rights and is
registering the shares underlying these three warrants in this registration
statement.
Warrants, Options and Stock Grants
Since January 2002, the Company has entered into various contracts and
agreements with consultants who have agreed to accept payment for their services
in the form of warrants, options and/or stock grants. The Company has obtained
various services under these arrangements, including legal, financial, business
advisory, and other services including business introductions and arrangements
with respect to potential domestic and international product placement and the
development of potentially synergistic relationships with appropriate public
service or other governmental and non-governmental organizations. The Company
has generally issued the warrants at a discount to the then-current market price
and has registered the shares underlying the warrants, options and stock grants
on Form S-8 Registration Statements for resale by the consultants. The Company
has, since January 2002, issued approximately 9.6 million shares of its common
stock as a result of warrant or option exercises and stock grants related to
these consulting agreements, of which approximately 7.9 million shares have been
issued during 2003.
In May 2002, Calypte issued warrants and options to purchase 633,333 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 $0.45 per share on May 9, 2002 when the
market price of our common stock was $0.90 per share. The option was granted at
$0.90 per share on May 10, 2002, when the market price of our common stock was
$0.90 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 633,333 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 950,000 shares of our common stock and stock
grants for 70,000 shares of our stock to consultants under the terms of these
new agreements. The Company issued 350,000 warrants at an exercise price of
$1.50 per share on November 1, 2002, when the market price of our stock was
$4.20 per share. The Company issued an additional 600,000 warrants at an
exercise price of $1.50 on November 20, 2002, when the market price of our
common stock was $2.70. All of the warrant grants were non-cancelable 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 986,667 shares of its common stock pursuant to the exercises
of the November 2002 warrant and stock grants.
II-9
In January and February 2003, the Company entered into new contracts and
extended certain other contracts with existing consultants to perform services
as described above. On February 14, 2003, when the market price of the Company's
stock was $2.01, the Company issued warrants exercisable at $1.50 per share and
stock grants for an aggregate of 975,216 shares of its common stock as
compensation for these services. The warrants were non-cancelable and
fully-vested at the date of issuance. By May 31, 2003, the consultants had
exercised warrants to purchase all of the shares granted to them and the Company
had received proceeds of $0.8 million.
During March 2003, when the market price of the Company's stock ranged from
$1.32 to $1.50 per share, the Company issued warrants exercisable at $0.75 per
share and stock grants for an aggregate of 1,350,400 as compensation for
services under new or extended contracts. The warrants were non-cancelable and
fully-vested at the date of issuance. By May 31, 2003, the consultants had
exercised warrants to purchase all of the shares granted to them and the Company
had received proceeds of approximately $0.9 million.
In April 2003, when the price of the Company's stock ranged from $0.81 to $0.885
per share, the Company entered into additional contracts, extended certain
contracts, and modified certain other contracts with existing consultants who
agreed to settle a portion of the outstanding balance due for services under
their contracts in stock. The Company issued warrants at $0.75 per share and
stock grants for an aggregate of 1,490,600 shares of its common stock as
compensation or settlement for these services. The warrants were non-cancelable
and fully-vested at the date of issuance. By May 31, 2003, the consultants had
exercised warrants to purchase all of the shares granted to them and the Company
had received proceeds of approximately $0.1 million.
In May 2003, when the price of the Company's stock ranged from $0.552 to $0.576
per share, the Company again entered into new contracts, extended certain
contracts, and modified certain other contracts with existing consultants who
agreed to settle a portion of the outstanding balance due for services under
their contracts in shares of stock. The Company issued warrants at $0.30 per
share and stock grants for an aggregate of 2,080,305 shares of its common stock
as compensation or settlement for these services. The warrants were
non-cancelable and fully-vested at the date of issuance. By September 30, 2003,
the consultants had exercised warrants to purchase all of the shares granted to
them and the Company had received proceeds of approximately $0.5 million.
In July 2003, when the price of the Company's stock ranged from $0.11 to $0.30
per share, the Company extended a contract for consulting and other services and
granted the consultant a warrant to purchase 722,500 shares of its common stock
at 50% of the closing market price on the date of any exercise as compensation
under the contract. The warrant was granted as fully-vested and expired on
September 30, 2003. By September 30, 2003, the consultant had exercised the
entire warrant at prices ranging from $0.08 to $0.61 per share and the Company
had received proceeds of approximately $0.4 million. Also during July 2003, the
Company issued stock grants to consultants for an aggregate of 356,344 shares of
its common stock as compensation under their contracts.
On August 20, 2003, when the price of the Company's stock was $0.18 per share,
the Company issued consulting contracts to two new consultants pursuant to which
it issued warrants for 100,000 shares each, exercisable at $0.18 per share. The
warrants were non-cancelable and fully-vested at the date of issuance. At
December 31, 2003, the consultants had exercised none of the warrants.
In September 2003, when the price of the Company's stock ranged from $0.50 to
$1.80 per share, the Company issued an aggregate of 800,000 shares of its common
stock to consultants and other service providers who agreed to take shares of
stock in lieu of cash as compensation under their contracts.
II-10
In October and November 2003, when the price of the Company's stock ranged from
$0.53 to $1.65 per share, the Company issued an aggregate of 125,000 shares of
its common stock to consultants and other service providers who agreed to take
shares of stock in lieu of cash as compensation under their contracts.
In February 2004, when the price of the Company's stock was $0.67 per share, the
Company issued 500,000 shares of its common stock to a consultant who had agreed
to accept shares of stock as a portion of its compensation under a consulting
agreement. The Company issued approximately 67,000 additional shares of its
common stock during the first quarter of 2004 to another consultant under the
terms of a long-term consulting agreement.
In May 2004, when the price of the Company's stock was $0.465 per share, the
Company issued warrants to purchase 150,000 shares of its common stock at an
exercise price of $0.50 as a portion of the compensation under a consulting
contract. The warrants were exercisable immediately and remain so for a period
of five years.
To conserve cash and to obtain goods and services, the Company may continue to
issue options and warrants at discounts to market or issue direct stock grants.
In the event that the Company issues additional options and warrants, it is
anticipated that the securities will contain cost-free registration rights which
will be granted to holders of the options and warrants, and that there may be
dilution to the Company's existing stockholders.
ITEM 27. EXHIBITS.
The exhibits filed as part of this Registration Statement are as follows:
2.1 Asset Purchase Agreement, dated as of November 18, 1998, between
Calypte and Cambridge; incorporated by reference from an exhibit
filed with the Company's Report on Form 8-K dated December 16,
1998.
3.1 Bylaws of the Registrant, as amended on January 19, 2004.
incorporated by reference from an exhibit filed with the
Company's Quarterly report on Form 10-QSB/A (No. 1) dated January
29, 2004.
3.2 Restated Certificate of Incorporation of Calypte Biomedical
Corporation, a Delaware corporation, filed July 31, 1996;
incorporated by reference from an exhibit filed with the
Company's Report on Form 10-K dated March 28, 1997.
3.3 Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of Calypte Biomedical Corporation effective as
of February 14, 2003 incorporated by reference from an exhibit
filed with the Company's Report on Form 10-K dated March 26,
2003.
3.4 Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of Calypte Biomedical Corporation, effective as
of May 27, 2003.
3.5 Certificate of Correction of Calypte Biomedical Corporation,
effective as of May 28, 2003.
4.1 Rights Agreement between the Registrant and Chase Mellon
Shareholders L.L.C. as Rights Agents dated December 15, 1998;
incorporated by reference from an exhibit filed with the
Company's Report on Form 8-K dated December 16, 1998.
5.1* Opinion of Baratta & Goldstein.
10.1 Form of Indemnification Agreement between the Company and each of
its directors and officers, as amended January 19, 2004.
10.2 1991 Incentive Stock Plan; incorporated by reference from
exhibits filed with the Company's Registration Statement on Form
S-1 (File No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
10.3 1995 Director Option Plan, as amended effective May 20, 2003;
incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-8 (File No.
333-106389) dated June 23, 2003.
10.4 1995 Employee Stock Purchase Plan, amended as of May 20, 2003;
incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-8 (File No.
333-106389) dated June 23, 2003.
10.9 Standard Form Lease 1255-1275 Harbor Bay Parkway Harbor Bay
Business Park between Commercial Center Bank and the Registrant,
dated as of August 22, 1992; incorporated by reference from
exhibits filed with the Company's Registration Statement on Form
S-1 (File No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
10.15^ License Agreement between the Registrant and New York University,
dated as of August 13, 1993; incorporated by reference from
exhibits filed with the Company's Registration Statement on Form
S-1 (File No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
10.16 First Amendment to License Agreement between the Registrant and
New York University, dated as of January 11, 1995; incorporated
by reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
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10.17 Second Amendment to License Agreement between the Registrant and
New York University, dated as of October 15, 1995; incorporated
by reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996..
10.18^ Third Amendment to License Agreement between the Registrant and
New York University, dated as of January 31, 1996; incorporated
by reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
10.21^ Sublicense Agreement between the Registrant and Cambridge Biotech
Corporation, dated as of March 31, 1992; incorporated by
reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
10.22^ Master Agreement between the Registrant and Cambridge Biotech
Corporation, dated as of April 12, 1996; incorporated by
reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
10.23^ Sub-License Agreement between the Registrant and Cambridge
Biotech Corporation, dated as of April 12, 1996; incorporated by
reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
10.24^ Agreement between the Registrant and Repligen Corporation, dated
as of March 8, 1993; incorporated by reference from exhibits
filed with the Company's Registration Statement on Form S-1 (File
No. 333-04105) filed on May 20, 1996, as amended to June 25,
1996, July 15, 1996 and July 26, 1996.
10.25^ Non-Exclusive License Agreement between the Registrant and The
Texas A&M University System, dated as of September 12, 1993;
incorporated by reference from exhibits filed with the Company's
Registration Statement on Form S-1 (File No. 333-04105) filed on
May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July
26, 1996.
10.33 Form of Option Agreement for Stockholders of Pepgen Corporation,
dated as of October 12, 1995; incorporated by reference from
exhibits filed with the Company's Registration Statement on Form
S-1 (File No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
10.41 Second Addendum to Lease between the Registrant and Commercial
Center Bank dated as of July 21, 1997; incorporated by reference
from exhibits filed with the Company's Report on Form 10-K dated
March 25, 1998.
10.51 Non-Exclusive Patent and License Agreement between the Registrant
and Public Health Service, dated June 30, 1999; incorporated by
reference from an exhibit filed with the Company's Report on Form
10-Q dated November 15, 1999.
10.55 Master Lease Agreement between Aquila Biopharmaceuticals, Inc.,
Landlord, and Biomerieux Vitek, Inc., Tenant, dated as of October
22, 1996; incorporated by reference from an exhibit filed with
the Company's Report on Form 10-K dated March 30, 2000.
10.56 First Amendment to Lease between Aquila Biopharmaceuticals, Inc.
Landlord, and Biomerieux Vitek, Inc., Tenant, dated October 2,
1997; incorporated by reference from an exhibit filed with the
Company's Report on Form 10-K dated March 30, 2000.
10.57 Sublease Agreement between Registrant and Cambridge Biotech
Corporation, assignee of Biomerieux, Inc. dated as of December
17, 1998; incorporated by reference from an exhibit filed with
the Company's Report on Form 10-K dated March 30, 2000.
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10.58 Sublease Agreement between Registrant and Cambridge Biotech
Corporation, sub-lessee of DynCorp, dated as of December 17,
1998; incorporated by reference from an exhibit filed with the
Company's Report on Form 10-K dated March 30, 2000.
10.62 Employment Agreement between the Registrant and Nancy E. Katz,
dated as of October 18, 1999; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-K dated March
30, 2000.
10.66 Restated Technology Rights Agreement between Registrant and
Howard B. Urnovitz, Ph.D. dated as of March 1, 2000; incorporated
by reference from an exhibit filed with the Company's Report on
Form 10-Q dated May 12, 2000.
10.67 Technology Rights Agreement between Registrant and Chronix
Biomedical dated as of March 1, 2000; incorporated by reference
from an exhibit filed with the Company's Report on Form 10-Q
dated May 12, 2000.
10.70^ Distribution Agreement between the Registrant and Biobras S.A.,
dated as of May 11, 2000; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-Q dated August
10, 2000.
10.73^ Fourth Amendment to the License Agreement between the Registrant
and New York University, dated as of June 1, 2000; incorporated
by reference from an exhibit filed with the Company's Report on
Form 10-Q dated August 10, 2000.
10.74 2000 Equity Incentive Plan, amended as of May 20, 2003;
incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-8 (File No.
333-106389) dated June 23, 2003.
10.79 Convertible Debentures and Warrants Purchase Agreement between
the Registrant and AMRO International, S.A. dated January 22,
2001; incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-3 (File No. 333-58960)
filed on April 13, 2001.
10.84 Stock Purchase Warrant to purchase common stock dated January 24,
2001 issued to Townsbury Investments Limited; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-54316) filed on January 25,
2001, as amended on February 9, 2001.
10.85 Common Stock Purchase Agreement between Calypte and Townsbury
Investments Limited dated November 2, 2000; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-54316) filed on January 25,
2001, as amended on February 9, 2001.
10.86 Registration Rights Agreement between Calypte and Townsbury
Investments Limited dated November 2, 2000; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-54316) filed on January 25,
2001, as amended on February 9, 2001.
10.87 Escrow Agreement among Calypte, Townsbury Investments Limited and
Epstein, Becker & Green, P.C. dated November 2, 2000;
incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-2 (File No. 333-54316)
filed on January 25, 2001, as amended on February 9, 2001.
10.88 Amendment to Common Stock Purchase Agreement between Calypte and
Townsbury Investments Limited dated January 24, 2001;
incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-2 (File No. 333-54316)
filed on January 25, 2001, as amended on February 9, 2001.
10.91 Third Addendum to Lease between the Registrant and Gee-Aspora LLC
dated as of October 31, 2001; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-K dated March
11, 2002.
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10.92 Registration Rights Agreement between the Registrant and AMRO
International, S.A. dated January 22, 2001; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-3 (File No. 333-58960) filed on April 13,
2001.
10.93 Escrow Agreement between the Registrant and AMRO International,
S.A. dated January 22, 2001; incorporated by reference from an
exhibit filed with the Company's Registration Statement on Form
S-3 (File No. 333-58960) filed on April 13, 2001.
10.94 Stock Purchase Warrant to purchase common stock issued to AMRO
International, S.A. on January 24, 2001; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-3 (File No. 333-58960) filed on April 13,
2001.
10.95 6% Convertible Debenture in the principal amount of $550,000, due
April 26, 2001, issued to AMRO International, S.A. ; incorporated
by reference from an exhibit filed with the Company's
Registration Statement on Form S-3 (File No. 333-58960) filed on
April 13, 2001
10.96 6% Convertible Debenture in the principal amount of $550,000, due
June 11, 2001, issued to AMRO International, S.A. ; incorporated
by reference from an exhibit filed with the Company's
Registration Statement on Form S-3 (File No. 333-58960) filed on
April 13, 2001
10.97 Common Stock Purchase Agreement between Calypte and Townsbury
Investments Limited dated August 23, 2001; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-72268) filed on October 26,
2001.
10.98 Registration Rights Agreement between Calypte and Townsbury
Investments Limited dated August 23, 2001; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-72268) filed on October 26,
2001.
10.99 Escrow Agreement among Calypte, Townsbury Investments Limited and
New York Escrow Services, LLC dated August 23, 2001; incorporated
by reference from an exhibit filed with the Company's
Registration Statement on Form S-2 (File No. 333-72268) filed on
October 26, 2001.
10.100 Stock Purchase Warrant to purchase Common Stock dated October 19,
2001 issued to Townsbury Investments Limited; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-72268) filed on October 26,
2001.
10.101 Securities Purchase Agreement between the Registrant and Bristol
Investment Fund, Ltd. dated as of February 11, 2002; incorporated
by reference from an exhibit filed with the Company's Report on
Form 8-K dated February 15, 2002.
10.102 Registration Rights Agreement between the Registrant and Bristol
Investment Fund, Ltd. dated as of February 11, 2002; incorporated
by reference from an exhibit filed with the Company's Report on
Form 8-K dated February 15, 2002.
10.103 Security Agreement between the Registrant and Bristol Investment
Fund, Ltd. dated as of February 11, 2002; incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K dated February 15, 2002.
10.104 Form of Secured Convertible Debenture Securities Purchase
Agreement between the Registrant and Bristol Investment Fund,
Ltd. dated as of February 11, 2002; incorporated by reference
from an exhibit filed with the Company's Report on Form 8-K dated
February 15, 2002.
10.105 Class A Stock Purchase Warrant for 56,667 shares of Common Stock
issued to Bristol Investment Fund, Ltd.; incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K dated February 15, 2002.
10.106 Class B Stock Purchase Warrant for 400,000 shares of Common Stock
issued to Bristol Investment Fund, Ltd.; incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K dated February 15, 2002.
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10.107 Stock Purchase Warrant for 283 shares of Common Stock issued to
Alexander Dunham Capital Group, Inc.; incorporated by reference
from an exhibit filed with the Company's Report on Form 8-K dated
February 15, 2002.
10.108 Stock Purchase Warrant for 2,550 shares of Common Stock issued to
Bristol Capital, LLC. ; incorporated by reference from an exhibit
filed with the Company's Report on Form 8-K dated February 15,
2002.
10.109 Form of Common Stock Purchase Agreement between the Registrant
and certain Purchasers dated November 13, 2001; incorporated by
reference from an exhibit filed with the Company's Report on Form
10-K dated March 11, 2002.
10.110 Form of Common Stock Purchase Agreement with certain trade
creditors issued pursuant to a private placement completed on
February 12, 2002; incorporated by reference from an exhibit
filed with the Company's Report on Form 10-K dated March 11,
2002.
10.111 Form of Subscription Agreement and 8% Convertible Note;
incorporated by reference from an exhibit filed with the
Company's Report on Form 8-K dated June 3, 2002.
10.112 Form of Subscription Agreement and 8% Convertible Note Issued
July 17, 2002 by Registrant; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-Q dated August
14, 2002.
10.113 Employment Agreement between the Registrant and Anthony J.
Cataldo dated May 10, 2002; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-Q dated August
14, 2002.
10.114 Amendment to Non-Exclusive Patent and License Agreement between
Registrant and Public Health Service, dated April 5, 2002;
incorporated by reference from an exhibit filed with the
Company's Report on Form 10-Q dated August 14, 2002.
10.115 Investment Commitment Arrangement with Cataldo Investment Group;
incorporated by reference from an exhibit filed with the
Company's Report on Form 8-K dated November 12, 2002.
10.116 Term Sheet for Mercator Momentum Fund LP and Form of Registration
Rights Agreement; incorporated by reference from an exhibit filed
with the Company's Report on Form 8-K dated November 12, 2002.
10.117 Form of Subscription Agreement under Regulation S for Caledonia
Corporate Group Ltd. and Careen Ltd.; incorporated by reference
from an exhibit filed with the Company's Report on Form 8-K dated
November 12, 2002
10.118 Bi-Coastal Consulting, Inc. Agreements; incorporated by reference
from an exhibit filed with the Company's Report on Form 8-K dated
November 12, 2002.
10.119 Employment Agreement between the Registrant and Nancy E. Katz,
dated October 31, 2002; incorporated by reference from an exhibit
filed with the Company's Report on Form 10-Q dated November 14,
2002.
10.120 12% Convertible Debenture Agreement and related Warrant and
Registration Rights Agreement dated as of October 22, 2002
between Registrant and Mercator Momentum Fund, L.P.; incorporated
by reference from an exhibit filed with the Company's Report on
Form 8-K dated December 10, 2002.
10.121 Distribution Agreement between the Registrant and Zhong Yang Pute
Co. dated as of October 10, 2002; incorporated by reference from
an exhibit filed with the Company's Report on Form 10-Q/A (No.3)
dated February 4, 2003.
10.122 Amendment to Agreement with Mercator Momentum Fund dated as of
December 23, 2002; incorporated by reference from an exhibit
filed with the Company's Report on Form 8-K/A dated January 21,
2003.
10.123 10% convertible Debenture and related Registration Rights
Agreement dated as of January 14, 2003 between Registrant and
Mercator Focus Fund, L.P.; incorporated by reference from an
exhibit filed with the Company's Report on Form 8-K dated January
21, 2003.
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10.124 Distribution and Usage Memorandum of Understanding between
Registrant and Safe Blood for Africa Foundation, dated as of
December 10, 2002; incorporated by reference from an exhibit
filed with the Company's Registration Statement on Form S-2/A
(No. 5) (File No. 333-84660) dated February 4, 2003.
10.125 Employment Agreement between Registrant and Richard D. Brounstein
dated as of January 1, 2003; incorporated by reference from an
exhibit filed with the Company's Annual Report on Form 10-K dated
March 26, 2003.
10.126 Letter Agreement between Registrant and Nancy E. Katz dated
February 14, 2003; incorporated by reference from an exhibit
filed with the Company's Annual Report on Form 10-K dated March
26, 2003.
10.127 Letter Agreement between Registrant and Bristol Investment Fund,
Ltd. dated February 28, 2003; incorporated by reference from an
exhibit filed with the Company's Annual Report on Form 10-K dated
March 26, 2003.
10.128 2003 Non-Qualified Stock Option Plan; incorporated by reference
from an exhibit filed with the Company's Registration Statement
on Form S-8 (File No. 333-106387) dated June 23, 2003.
10.129 Consulting Agreement between Registrant and Junebug Enterprises
effective as of April 23, 2003; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-QSB dated
August 14, 2003.
10.130 Employment Agreement between Registrant and Jay Oyakawa, dated as
of August 12, 2003; incorporated by reference from an exhibit
filed with the Company's Report on Form 10-QSB dated August 14,
2003.
10.131 Separation Agreement, Mutual Release and Waiver of Claims between
Registrant and Nancy E. Katz, effective as of June 27, 2003;
incorporated by reference from an exhibit filed with the
Company's Report on Form 10-QSB dated August 14, 2003.
10.132 Subscription Agreement between Registrant and Marr Technologies
B.V. dated as of August 1, 2003 incorporated by reference from an
exhibit filed with the Company's Report on Form 10-QSB dated
August 14, 2003.
10.133 Subscription Agreement between the Company and Marr Technologies
B.V. for 20,000,000 shares of Registrant's Common Stock dated
August 28, 2003; incorporated by reference from an exhibit filed
with the Company's Report on Form 8-K dated September 12, 2003.
10.134 Agreement for Commitment to Purchase Aggregate of $10,000,000 of
5% Promissory Notes between the Company and Marr Technologies
B.V. dated November 13, 2003; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-QSB dated
November 14, 2003.
10.135 Separation Agreement and Release between the Company and Jay
Oyakawa dated January 19, 2004; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-QSB/A (No. 1)
dated January 29, 2004.
10.136 Employment Agreement between the Company and J. Richard George
effective as of January 20, 2004; incorporated by reference from
an exhibit filed with the Company's Annual Report on Form 10-KSB
dated March 29, 2004.
10.137 Lease Agreement between the Company and ARE-1500 East Gude LLC
dated as of March 1, 2004; incorporated by reference from an
exhibit filed with the Company's Annual Report on Form 10-KSB
dated March 29, 2004.
10.138 Amendment No. 1 to Agreement for Commitment to Purchase Aggregate
of $10,000,000 of 5% Promissory Notes between the Company and
Marr Technologies B.V. dated March 19, 2004 incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K dated March 19, 2004.
II-16
10.139 Common Stock Purchase Warrant to Purchase 400,000 Shares of
Common Stock between the Company and Boodle Hatfield dated March
19, 2004 incorported by reference from filed as an exhibit with
the Company's Report on Form 8-K dated March 19, 2004
10.140 Amendment No. 1 to Separation Agreement and Release between the
Company and Jay Oyakawa dated February 25, 2004 incorporated by
reference from filed as an exhibit with the Company's Quarterly
Report on Form 10-QSB dated May 13, 2004.
10.141 Form of Securities Purchase Agreement between the Company and the
investors in the May 2004 PIPE financing incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K on June 1, 2004.
10.142 Form of Registration Rights Agreement between the Company and the
investors in the May 2004 PIPE financing incorported by reference
from an exhibit filed with the Company's Report on Form 8-K on
June 1, 2004.
10.143 Form of Warrant between the Company and the investors in the May
2004 PIPE financing incorported by reference from an exhibit
filed with the Company's Report on Form 8-K on June 1, 2004
10.144 Amendment No. 2 to Agreement for Commitment to Purchase Aggregate
of $10,000,000 of 5% Promissory Notes between the Company and
Marr Technologies B.V. effective May 26, 2004, incorporated by
reference from an exhibit filed with the Company's report on Form
8-K on June 3, 2004.
10.145 Common Stock Purchase Warrant to Purchase 500,000 Shares of
Common Stock issued by the Company to Marr Technologies B.V.
dated May 26, 2004, incorporated by reference from an exhibit
filed with the Company's report on Form 8-K on June 3, 2004.
15.1 Letter from Odenberg Ullakko Muranishi & Co. LLP dated June 8,
2004 regarding Interim Financial Statements
16.1 Letter from KPMG to SEC regarding Registrant's change in
accountants; incorporated by reference from an exhibit filed on
the Company's Report on Form 8-K dated January 2, 2004 and
amended January 9, 2004.
21.1 Subsidiaries of the Registrant; incorporated by reference from
exhibits filed with the Company's Registration Statement on Form
S-1 (File No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
23.1 Consent of Odenberg Ullakko Muranishi & Co. LLP, Independent
Registered Public Accounting Firm.
23.2 Consent of Baratta & Goldstein (included in opinion filed as
Exhibit 5.1).
24.1 Power of Attorney (see page II-19 to II-20).
^ Confidential treatment has been granted as to certain portions of this
exhibit.
* To be filed by Amendment
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
II-17
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof), which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
4. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as
amended, each filing of the Registrant's Annual Report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934, as amended, that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
5. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to
directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy
as expressed in the Act and will be governed by the final
adjudication of such issue.
6. The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14-a or
Rule 14c-3 under the Securities Exchange Act of 1934, as amended;
and, where interim financial information required to be presented by
Article 3 of Regulations S-X are not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the
prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide
such interim financial information.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant, Calypte Biomedical Corporation, certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form SB-2
and has duly caused this Registration Statement on Form SB-2 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Alameda,
State of California, on the 14th day of June , 2004.
CALYPTE BIOMEDICAL CORPORATION
By: /s/ J. Richard George
============================================
J. RICHARD GEORGE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints J. Richard
George and Richard Brounstein his true and lawful attorneys in fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments
(including post effective amendments) to the Registration Statement, and to sign
any registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and all post effective amendments thereto,
and to file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-2 has been signed below by the following
persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------------------------------------------------------------------------------------------------------
/s/ Anthony J. Cataldo Chairman of the Board of Directors June 14, 2004
===========================================
ANTHONY J. CATALDO
/s/ J. Richard George President and Chief Ececutive Officer June 14, 2004
===========================================
J. RICHARD GEORGE P
/s/ Richard D. Brounstein Executive Vice President, Chief Financial June 14, 2004
=========================================== Officer (Principal Financial and Accounting
RICHARD D. BROUNSTEIN Officer)
II-19
SIGNATURE TITLE DATE
- ------------------------------------------------------------------------------------------------------------------------------
/s/ John J. DiPietro Director June 14, 2004
===========================================
JOHN J. DIPIETRO
/s/ Paul Freiman Director June 14, 2004
===========================================
PAUL FREIMAN
/s/ Julius R. Krevans, M.D. Director June 14, 2004
===========================================
JULIUS R. KREVANS, M.D.
/s/ Maxim A. Soulimov Director June 14, 2004
===========================================
MAXIM A. SOULIMOV
/s/ Zafar I. Randawa, Ph.D. Director June 14, 2004
===========================================
ZAFAR I. RANDAWA, PH.D.
II-20
EXHIBIT INDEX
2.1 Asset Purchase Agreement, dated as of November 18, 1998, between
Calypte and Cambridge; incorporated by reference from an exhibit
filed with the Company's Report on Form 8-K dated December 16,
1998.
3.1 Bylaws of the Registrant, as amended on January 19, 2004.
incorporated by reference from an exhibit filed with the
Company's Quarterly report on Form 10-QSB/A (No. 1) dated January
29, 2004.
3.2 Restated Certificate of Incorporation of Calypte Biomedical
Corporation, a Delaware corporation, filed July 31, 1996;
incorporated by reference from an exhibit filed with the
Company's Report on Form 10-K dated March 28, 1997.
3.3 Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of Calypte Biomedical Corporation effective as
of February 14, 2003 incorporated by reference from an exhibit
filed with the Company's Report on Form 10-K dated March 26,
2003.
3.4 Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of Calypte Biomedical Corporation, effective as
of May 27, 2003.
3.5 Certificate of Correction of Calypte Biomedical Corporation,
effective as of May 28, 2003.
4.1 Rights Agreement between the Registrant and Chase Mellon
Shareholders L.L.C. as Rights Agents dated December 15, 1998;
incorporated by reference from an exhibit filed with the
Company's Report on Form 8-K dated December 16, 1998.
5.1* Opinion of Baratta & Goldstein.
10.1 Form of Indemnification Agreement between the Company and each of
its directors and officers, as amended January 19, 2004.
10.2 1991 Incentive Stock Plan; incorporated by reference from
exhibits filed with the Company's Registration Statement on Form
S-1 (File No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
10.3 1995 Director Option Plan, as amended effective May 20, 2003;
incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-8 (File No.
333-106389) dated June 23, 2003.
10.4 1995 Employee Stock Purchase Plan, amended as of May 20, 2003;
incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-8 (File No.
333-106389) dated June 23, 2003.
10.9 Standard Form Lease 1255-1275 Harbor Bay Parkway Harbor Bay
Business Park between Commercial Center Bank and the Registrant,
dated as of August 22, 1992; incorporated by reference from
exhibits filed with the Company's Registration Statement on Form
S-1 (File No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
10.15^ License Agreement between the Registrant and New York University,
dated as of August 13, 1993; incorporated by reference from
exhibits filed with the Company's Registration Statement on Form
S-1 (File No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
10.16 First Amendment to License Agreement between the Registrant and
New York University, dated as of January 11, 1995; incorporated
by reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
10.17 Second Amendment to License Agreement between the Registrant and
New York University, dated as of October 15, 1995; incorporated
by reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996..
II-21
10.18^ Third Amendment to License Agreement between the Registrant and
New York University, dated as of January 31, 1996; incorporated
by reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
10.21^ Sublicense Agreement between the Registrant and Cambridge Biotech
Corporation, dated as of March 31, 1992; incorporated by
reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
10.22^ Master Agreement between the Registrant and Cambridge Biotech
Corporation, dated as of April 12, 1996; incorporated by
reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
10.23^ Sub-License Agreement between the Registrant and Cambridge
Biotech Corporation, dated as of April 12, 1996; incorporated by
reference from exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996,
as amended to June 25, 1996, July 15, 1996 and July 26, 1996.
10.24^ Agreement between the Registrant and Repligen Corporation, dated
as of March 8, 1993; incorporated by reference from exhibits
filed with the Company's Registration Statement on Form S-1 (File
No. 333-04105) filed on May 20, 1996, as amended to June 25,
1996, July 15, 1996 and July 26, 1996.
10.25^ Non-Exclusive License Agreement between the Registrant and The
Texas A&M University System, dated as of September 12, 1993;
incorporated by reference from exhibits filed with the Company's
Registration Statement on Form S-1 (File No. 333-04105) filed on
May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July
26, 1996.
10.33 Form of Option Agreement for Stockholders of Pepgen Corporation,
dated as of October 12, 1995; incorporated by reference from
exhibits filed with the Company's Registration Statement on Form
S-1 (File No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
10.41 Second Addendum to Lease between the Registrant and Commercial
Center Bank dated as of July 21, 1997; incorporated by reference
from exhibits filed with the Company's Report on Form 10-K dated
March 25, 1998.
10.51 Non-Exclusive Patent and License Agreement between the Registrant
and Public Health Service, dated June 30, 1999; incorporated by
reference from an exhibit filed with the Company's Report on Form
10-Q dated November 15, 1999.
10.55 Master Lease Agreement between Aquila Biopharmaceuticals, Inc.,
Landlord, and Biomerieux Vitek, Inc., Tenant, dated as of October
22, 1996; incorporated by reference from an exhibit filed with
the Company's Report on Form 10-K dated March 30, 2000.
10.56 First Amendment to Lease between Aquila Biopharmaceuticals, Inc.
Landlord, and Biomerieux Vitek, Inc., Tenant, dated October 2,
1997; incorporated by reference from an exhibit filed with the
Company's Report on Form 10-K dated March 30, 2000.
10.57 Sublease Agreement between Registrant and Cambridge Biotech
Corporation, assignee of Biomerieux, Inc. dated as of December
17, 1998; incorporated by reference from an exhibit filed with
the Company's Report on Form 10-K dated March 30, 2000.
10.58 Sublease Agreement between Registrant and Cambridge Biotech
Corporation, sub-lessee of DynCorp, dated as of December 17,
1998; incorporated by reference from an exhibit filed with the
Company's Report on Form 10-K dated March 30, 2000.
II-22
10.62 Employment Agreement between the Registrant and Nancy E. Katz,
dated as of October 18, 1999; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-K dated March
30, 2000.
10.66 Restated Technology Rights Agreement between Registrant and
Howard B. Urnovitz, Ph.D. dated as of March 1, 2000; incorporated
by reference from an exhibit filed with the Company's Report on
Form 10-Q dated May 12, 2000.
10.67 Technology Rights Agreement between Registrant and Chronix
Biomedical dated as of March 1, 2000; incorporated by reference
from an exhibit filed with the Company's Report on Form 10-Q
dated May 12, 2000.
10.70^ Distribution Agreement between the Registrant and Biobras S.A.,
dated as of May 11, 2000; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-Q dated August
10, 2000.
10.73^ Fourth Amendment to the License Agreement between the Registrant
and New York University, dated as of June 1, 2000; incorporated
by reference from an exhibit filed with the Company's Report on
Form 10-Q dated August 10, 2000.
10.74 2000 Equity Incentive Plan, amended as of May 20, 2003;
incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-8 (File No.
333-106389) dated June 23, 2003.
10.79 Convertible Debentures and Warrants Purchase Agreement between
the Registrant and AMRO International, S.A. dated January 22,
2001; incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-3 (File No. 333-58960)
filed on April 13, 2001.
10.84 Stock Purchase Warrant to purchase common stock dated January 24,
2001 issued to Townsbury Investments Limited; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-54316) filed on January 25,
2001, as amended on February 9, 2001.
10.85 Common Stock Purchase Agreement between Calypte and Townsbury
Investments Limited dated November 2, 2000; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-54316) filed on January 25,
2001, as amended on February 9, 2001.
10.86 Registration Rights Agreement between Calypte and Townsbury
Investments Limited dated November 2, 2000; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-54316) filed on January 25,
2001, as amended on February 9, 2001.
10.87 Escrow Agreement among Calypte, Townsbury Investments Limited and
Epstein, Becker & Green, P.C. dated November 2, 2000;
incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-2 (File No. 333-54316)
filed on January 25, 2001, as amended on February 9, 2001.
10.88 Amendment to Common Stock Purchase Agreement between Calypte and
Townsbury Investments Limited dated January 24, 2001;
incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-2 (File No. 333-54316)
filed on January 25, 2001, as amended on February 9, 2001.
10.91 Third Addendum to Lease between the Registrant and Gee-Aspora LLC
dated as of October 31, 2001; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-K dated March
11, 2002.
10.92 Registration Rights Agreement between the Registrant and AMRO
International, S.A. dated January 22, 2001; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-3 (File No. 333-58960) filed on April 13,
2001.
II-23
10.93 Escrow Agreement between the Registrant and AMRO International,
S.A. dated January 22, 2001; incorporated by reference from an
exhibit filed with the Company's Registration Statement on Form
S-3 (File No. 333-58960) filed on April 13, 2001.
10.94 Stock Purchase Warrant to purchase common stock issued to AMRO
International, S.A. on January 24, 2001; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-3 (File No. 333-58960) filed on April 13,
2001.
10.95 6% Convertible Debenture in the principal amount of $550,000, due
April 26, 2001, issued to AMRO International, S.A. ; incorporated
by reference from an exhibit filed with the Company's
Registration Statement on Form S-3 (File No. 333-58960) filed on
April 13, 2001
10.96 6% Convertible Debenture in the principal amount of $550,000, due
June 11, 2001, issued to AMRO International, S.A. ; incorporated
by reference from an exhibit filed with the Company's
Registration Statement on Form S-3 (File No. 333-58960) filed on
April 13, 2001
10.97 Common Stock Purchase Agreement between Calypte and Townsbury
Investments Limited dated August 23, 2001; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-72268) filed on October 26,
2001.
10.98 Registration Rights Agreement between Calypte and Townsbury
Investments Limited dated August 23, 2001; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-72268) filed on October 26,
2001.
10.99 Escrow Agreement among Calypte, Townsbury Investments Limited and
New York Escrow Services, LLC dated August 23, 2001; incorporated
by reference from an exhibit filed with the Company's
Registration Statement on Form S-2 (File No. 333-72268) filed on
October 26, 2001.
10.100 Stock Purchase Warrant to purchase Common Stock dated October 19,
2001 issued to Townsbury Investments Limited; incorporated by
reference from an exhibit filed with the Company's Registration
Statement on Form S-2 (File No. 333-72268) filed on October 26,
2001.
10.101 Securities Purchase Agreement between the Registrant and Bristol
Investment Fund, Ltd. dated as of February 11, 2002; incorporated
by reference from an exhibit filed with the Company's Report on
Form 8-K dated February 15, 2002.
10.102 Registration Rights Agreement between the Registrant and Bristol
Investment Fund, Ltd. dated as of February 11, 2002; incorporated
by reference from an exhibit filed with the Company's Report on
Form 8-K dated February 15, 2002.
10.103 Security Agreement between the Registrant and Bristol Investment
Fund, Ltd. dated as of February 11, 2002; incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K dated February 15, 2002.
10.104 Form of Secured Convertible Debenture Securities Purchase
Agreement between the Registrant and Bristol Investment Fund,
Ltd. dated as of February 11, 2002; incorporated by reference
from an exhibit filed with the Company's Report on Form 8-K dated
February 15, 2002.
10.105 Class A Stock Purchase Warrant for 56,667 shares of Common Stock
issued to Bristol Investment Fund, Ltd.; incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K dated February 15, 2002.
10.106 Class B Stock Purchase Warrant for 400,000 shares of Common Stock
issued to Bristol Investment Fund, Ltd.; incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K dated February 15, 2002.
10.107 Stock Purchase Warrant for 283 shares of Common Stock issued to
Alexander Dunham Capital Group, Inc.; incorporated by reference
from an exhibit filed with the Company's Report on Form 8-K dated
February 15, 2002.
10.108 Stock Purchase Warrant for 2,550 shares of Common Stock issued to
Bristol Capital, LLC. ; incorporated by reference from an exhibit
filed with the Company's Report on Form 8-K dated February 15,
2002.
II-24
10.109 Form of Common Stock Purchase Agreement between the Registrant
and certain Purchasers dated November 13, 2001; incorporated by
reference from an exhibit filed with the Company's Report on Form
10-K dated March 11, 2002.
10.110 Form of Common Stock Purchase Agreement with certain trade
creditors issued pursuant to a private placement completed on
February 12, 2002; incorporated by reference from an exhibit
filed with the Company's Report on Form 10-K dated March 11,
2002.
10.111 Form of Subscription Agreement and 8% Convertible Note;
incorporated by reference from an exhibit filed with the
Company's Report on Form 8-K dated June 3, 2002.
10.112 Form of Subscription Agreement and 8% Convertible Note Issued
July 17, 2002 by Registrant; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-Q dated August
14, 2002.
10.113 Employment Agreement between the Registrant and Anthony J.
Cataldo dated May 10, 2002; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-Q dated August
14, 2002.
10.114 Amendment to Non-Exclusive Patent and License Agreement between
Registrant and Public Health Service, dated April 5, 2002;
incorporated by reference from an exhibit filed with the
Company's Report on Form 10-Q dated August 14, 2002.
10.115 Investment Commitment Arrangement with Cataldo Investment Group;
incorporated by reference from an exhibit filed with the
Company's Report on Form 8-K dated November 12, 2002.
10.116 Term Sheet for Mercator Momentum Fund LP and Form of Registration
Rights Agreement; incorporated by reference from an exhibit filed
with the Company's Report on Form 8-K dated November 12, 2002.
10.117 Form of Subscription Agreement under Regulation S for Caledonia
Corporate Group Ltd. and Careen Ltd.; incorporated by reference
from an exhibit filed with the Company's Report on Form 8-K dated
November 12, 2002
10.118 Bi-Coastal Consulting, Inc. Agreements; incorporated by reference
from an exhibit filed with the Company's Report on Form 8-K dated
November 12, 2002.
10.119 Employment Agreement between the Registrant and Nancy E. Katz,
dated October 31, 2002; incorporated by reference from an exhibit
filed with the Company's Report on Form 10-Q dated November 14,
2002.
10.120 12% Convertible Debenture Agreement and related Warrant and
Registration Rights Agreement dated as of October 22, 2002
between Registrant and Mercator Momentum Fund, L.P.; incorporated
by reference from an exhibit filed with the Company's Report on
Form 8-K dated December 10, 2002.
10.121 Distribution Agreement between the Registrant and Zhong Yang Pute
Co. dated as of October 10, 2002; incorporated by reference from
an exhibit filed with the Company's Report on Form 10-Q/A (No.3)
dated February 4, 2003.
10.122 Amendment to Agreement with Mercator Momentum Fund dated as of
December 23, 2002; incorporated by reference from an exhibit
filed with the Company's Report on Form 8-K/A dated January 21,
2003.
10.123 10% convertible Debenture and related Registration Rights
Agreement dated as of January 14, 2003 between Registrant and
Mercator Focus Fund, L.P.; incorporated by reference from an
exhibit filed with the Company's Report on Form 8-K dated January
21, 2003.
10.124 Distribution and Usage Memorandum of Understanding between
Registrant and Safe Blood for Africa Foundation, dated as of
December 10, 2002; incorporated by reference from an exhibit
filed with the Company's Registration Statement on Form S-2/A
(No. 5) (File No. 333-84660) dated February 4, 2003.
II-25
10.125 Employment Agreement between Registrant and Richard D. Brounstein
dated as of January 1, 2003; incorporated by reference from an
exhibit filed with the Company's Annual Report on Form 10-K dated
March 26, 2003.
10.126 Letter Agreement between Registrant and Nancy E. Katz dated
February 14, 2003; incorporated by reference from an exhibit
filed with the Company's Annual Report on Form 10-K dated March
26, 2003.
10.127 Letter Agreement between Registrant and Bristol Investment Fund,
Ltd. dated February 28, 2003; incorporated by reference from an
exhibit filed with the Company's Annual Report on Form 10-K dated
March 26, 2003.
10.128 2003 Non-Qualified Stock Option Plan; incorporated by reference
from an exhibit filed with the Company's Registration Statement
on Form S-8 (File No. 333-106387) dated June 23, 2003.
10.129 Consulting Agreement between Registrant and Junebug Enterprises
effective as of April 23, 2003; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-QSB dated
August 14, 2003.
10.130 Employment Agreement between Registrant and Jay Oyakawa, dated as
of August 12, 2003; incorporated by reference from an exhibit
filed with the Company's Report on Form 10-QSB dated August 14,
2003.
10.131 Separation Agreement, Mutual Release and Waiver of Claims between
Registrant and Nancy E. Katz, effective as of June 27, 2003;
incorporated by reference from an exhibit filed with the
Company's Report on Form 10-QSB dated August 14, 2003.
10.132 Subscription Agreement between Registrant and Marr Technologies
B.V. dated as of August 1, 2003 incorporated by reference from an
exhibit filed with the Company's Report on Form 10-QSB dated
August 14, 2003.
10.133 Subscription Agreement between the Company and Marr Technologies
B.V. for 20,000,000 shares of Registrant's Common Stock dated
August 28, 2003; incorporated by reference from an exhibit filed
with the Company's Report on Form 8-K dated September 12, 2003.
10.134 Agreement for Commitment to Purchase Aggregate of $10,000,000 of
5% Promissory Notes between the Company and Marr Technologies
B.V. dated November 13, 2003; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-QSB dated
November 14, 2003.
10.135 Separation Agreement and Release between the Company and Jay
Oyakawa dated January 19, 2004; incorporated by reference from an
exhibit filed with the Company's Report on Form 10-QSB/A (No. 1)
dated January 29, 2004.
10.136 Employment Agreement between the Company and J. Richard George
effective as of January 20, 2004; incorporated by reference from
an exhibit filed with the Company's Annual Report on Form 10-KSB
dated March 29, 2004.
10.137 Lease Agreement between the Company and ARE-1500 East Gude LLC
dated as of March 1, 2004; incorporated by reference from an
exhibit filed with the Company's Annual Report on Form 10-KSB
dated March 29, 2004.
10.138 Amendment No. 1 to Agreement for Commitment to Purchase Aggregate
of $10,000,000 of 5% Promissory Notes between the Company and
Marr Technologies B.V. dated March 19, 2004 incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K dated March 19, 2004.
10.139 Common Stock Purchase Warrant to Purchase 400,000 Shares of
Common Stock between the Company and Boodle Hatfield dated March
19, 2004 incorporated by reference from an exhibit filed with the
Company's Report on Form 8-K dated March 19, 2004
II-26
10.140 Amendment No. 1 to Separation Agreement and Release between the
Company and Jay Oyakawa dated February 25, 2004 incorporated by
reference from an exhibit filed with the Company's Quarterly
Report on Form 10-QSB dated May 13, 2004.
10.141 Form of Securities Purchase Agreement between the Company and the
investors in the May 2004 PIPE financing incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K on June 1, 2004.
10.142 Form of Registration Rights Agreement between the Company and the
investors in the May 2004 PIPE financing incorporated by
reference from an exhibit filed with the Company's Report on Form
8-K on June 1, 2004.
10.143 Form of Warrant between the Company and the investors in the May
2004 PIPE financing incorporated by reference from an exhibit
filed with the Company's Report on Form 8-K on June 1, 2004.
10.144 Amendment No. 2 to Agreement for Commitment to Purchase Aggregate
of $10,000,000 of 5% Promissory Notes between the Company and
Marr Technologies B.V. effective May 26, 2004, incorporated by
reference from an exhibit filed with the Company's report on Form
8-K on June 3, 2004.
10.145 Common Stock Purchase Warrant to Purchase 500,000 Shares of
Common Stock issued by the Company to Marr Technologies B.V.
dated May 26, 2004, incorporated by reference from an exhibit
filed with the Company's report on Form 8-K on June 3, 2004.
15.1 Letter from Odenberg Ullakko Muranishi & Co. LLP dated June 8,
2004 regarding Interim Financial Statements
16.1 Letter from KPMG LLP to SEC regarding Registrant's change in
accountants; incorporated by reference from an exhibit filed on
the Company's Report on Form 8-K dated January 2, 2004 and
amended January 9, 2004.
21.1 Subsidiaries of the Registrant; incorporated by reference from
exhibits filed with the Company's Registration Statement on Form
S-1 (File No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
23.1 Consent of Odenberg Ullakko Muranishi & Co. LLP, Independent
Registered Public Accounting Firm.
23.2 Consent of Baratta & Goldstein (included in opinion filed as
Exhibit 5.1).
24.1 Power of Attorney (see page II-19 through II-20).
^ Confidential treatment has been granted as to certain portions of this
exhibit.
* To be filed by Amendment
II-27
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTERS ENDED MARCH 31, 2004 AND 2003
Condensed Consolidated Balance Sheets (unaudited) F-39
Condensed Consolidated Statements of Operations (unaudited) F-40
Consolidated Statement of Stockholders' Deficit (unaudited) F-41
Consolidated Statements of Cash Flows (unaudited) F-42
Notes to Condensed Consolidated Financial Statements (unaudited) F-44
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Calypte Biomedical Corporation:
We have audited the accompanying consolidated balance sheets of Calypte
Biomedical Corporation and its subsidiaries as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of Calypte Biomedical
Corporation and its subsidiaries at December 31, 2003 and 2002, and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company has
adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. As a result, the gain from settlement of debt in 2002 has been
reclassified from an extraordinary to an ordinary gain.
As described in Notes 1, 6 and 18, the Company raised $9.3 million in equity
financing in May 2004, and also amended a financing agreement with its largest
stockholder. Under the amended agreement, the Company may borrow up to $5
million, subject to adjustment, for general corporate purposes until December
31, 2004, in exchange for 9% promissory notes maturing on May 31, 2005.
/s/ Odenberg Ullakko Muranishi & Co. LLP
San Francisco, California
March 19, 2004, except for Note 18, as to which the date is June 10, 2004
F-2
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31,
------------------------
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5,084 $ 147
Accounts receivable, net of allowance of $36 and $32 at December 31, 2003 and 369 327
2002, respectively
Inventory 2,153 963
Prepaid expenses 872 163
Deferred offering costs, net of accumulated amortization of $333 and $213 at
December 31, 2003 and 2002, respectively 14 662
Other current assets 63 15
--------- ---------
Total current assets 8,555 2,277
Property and equipment, net 727 917
Other assets 235 103
--------- ---------
$ 9,517 $ 3,297
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 4,322 $ 5,145
Notes and debentures payable, net of $90 and $2,638 discount at December 31, 2003
and 2002, respectively 868 2,181
Deferred revenue 500 500
--------- ---------
Total current liabilities 5,690 7,826
Warrant liability -- 356
Other long term liabilities 157 33
Mandatorily redeemable Series A preferred stock, $0.001 par value; no shares
authorized at December 31, 2003 and 2002; 100,000 shares issued and
outstanding at December 31,
2003 and 2002; aggregate redemption and liquidation value of $1,000 plus cumulative 2,696 2,576
dividends
Minority interest in consolidated joint venture 57 --
--------- ---------
Total liabilities 8,600 10,791
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued -- --
or outstanding
Common stock, $0.03 par value; 800,000,000 and 200,000,000 shares
authorized at December 31, 2003 and 2002; 136,300,885 and 5,058,484
shares issued and
outstanding as of December 31, 2003 and 2002, respectively 4,089 152
Additional paid-in capital 124,699 93,804
Deferred compensation (7) --
Accumulated deficit (127,864) (101,450)
--------- ---------
Total stockholders' equity (deficit) 917 (7,494)
--------- ---------
$ 9,517 $ 3,297
========= =========
See accompanying notes to consolidated financial statements.
F-3
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
---------------------------
2003 2002
-------------- ------------
Revenues:
Product sales $ 3,467 $ 3,670
-------- --------
Operating expenses:
Product costs 6,121 6,162
Research and development costs 1,544 929
Selling, general and administrative costs (non-cash of $6,648 and $3,243 in 2003 and
2002, respectively) 15,517 9,006
-------- --------
Total operating expenses 23,182 16,097
-------- --------
Loss from operations (19,715) (12,427)
Interest expense, net (non-cash of $6,559 and $1,874 in 2003 and 2002, respectively) (6,969) (2,203)
Gain on settlement of trade debt -- 1,319
Minority interest in joint venture 90 --
Other income, net 182 16
-------- --------
Loss before income taxes (26,412) (13,295)
Income taxes 2 2
-------- --------
Net loss (26,414) (13,297)
Less dividends on mandatorily redeemable Series A preferred stock (60) (120)
-------- --------
Net loss attributable to common stockholders $(26,474) $(13,417)
======== ========
Net loss per share attributable to common stockholders (basic and diluted) $ (0.47) $ (5.18)
======== ========
Weighted average shares used to compute net loss per share attributable to common
stockholders (basic and diluted) 55,903 2,591
======== ========
See accompanying notes to consolidated financial statements.
F-4
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2002 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
Total
Number of Common Additional Deferred Accumulated Stockholders'
Common Shares Stock Paid-in Capital Compensation Deficit Equity (Deficit)
------------- ------ --------------- ------------ ------- ----------------
Balances at December 31,
2001 1,259,738 $ 38 $ 82,623 $ (8) $ (88,153) $ (5,500)
Shares issued under the
Employee Stock Purchase
Plan 3,437 -- 5 -- -- 5
Stock issued in lieu of
cash to employees,
vendors and consultants 450,494 13 1,320 -- -- 1,333
Shares issued under Equity
Line agreements
(including warrant
exercise) 922,801 28 2,964 -- -- 2,992
Cost of issuance of common
stock under Equity Line
agreement -- -- (280) -- -- (280)
Shares issued through
private placement 266,667 8 392 -- -- 400
Costs for issuance of
private placement 16,666 -- (109) -- -- (109)
Shares issued upon
conversion of debentures,
accrued interest and
delayed registration
penalties 489,540 15 389 -- -- 404
Shares issued upon exercise
of warrants and options 1,649,141 50 1,865 -- -- 1,915
Fair value of warrants and
beneficial conversion
feature granted in
conjunction with issuance
of convertible debentures -- -- 3,626 -- -- 3,626
Amortization of deferred
offering costs associated
with convertible notes,
debentures and equity line -- -- (953) -- -- (953)
Write off of deferred
offering costs upon
conversion of notes and
debentures -- -- (224) -- -- (224)
Dividend requirements of
mandatorily redeemable
Series A preferred stock -- -- (120) -- -- (120)
Compensation related to
stock option grants -- -- 2,306 (75) -- 2,231
Amortization of deferred
compensation -- -- -- 83 -- 83
Net loss -- -- -- -- (13,297) (13,297)
--------- ------- -------- ---------- ---------- -----------
Balances at December 31,
2002 5,058,484 $ 152 $ 93,804 $ -- $ (101,450) $ (7,494)
========= ======= ======== ========== ========== ===========
(Continued)
F-5
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
Total
Stockholders'
Number of Common Additional Deferred Accumulated Equity
Common Shares Stock Paid-in Capital Compensation Deficit (DEFICIT)
------------- ------ --------------- ------------ ----------- -------------
Balances at December 31,
2002 5,058,484 $ 152 $ 93,804 $ -- $ (101,450) $ (7,494)
Shares issued under the
Employee Stock Purchase
Plan 18,192 -- 4 -- -- 4
Stock issued in lieu of
cash to employees,
vendors and consultants 6,374,523 183 3,716 -- -- 3,899
Shares issued through
private placement 28,333,333 850 11,650 -- -- 12,500
Shares issued upon
conversion of debentures,
accrued interest and
delayed registration
penalties 83,067,064 2,492 5,902 -- -- 8,394
Shares issued upon exercise
of warrants and options 13,418,728 411 4,029 -- -- 4,440
Costs for issuance of stock -- -- (677) -- -- (677)
Fair value of warrants and
beneficial conversion
feature granted in
conjunction with issuance
of convertible debentures -- -- 2,287 -- -- 2,287
Repurchase of beneficial
conversion feature -- -- (128) -- -- (128)
Dividend requirements of
mandatorily redeemable
Series A preferred stock -- -- (60) -- -- (60)
Compensation related to
stock option grants -- -- 4,136 (10) -- 4,126
Amortization of deferred
compensation -- -- -- 3 -- 3
Shares issued to acquire
intellectual property 30,561 1 36 -- -- 37
Net loss -- -- -- -- (26,414) (26,414)
----------- --------- --------- ----------- ---------- ----------
Balances at December 31,
2003 136,300,885 $ 4,089 $ 124,699 $ (7) $ (127,864) $ 917
=========== ========= ========= =========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended
December 31,
--------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net loss $(26,414) $(13,297)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 567 512
Amortization of deferred compensation 3 83
Non-cash interest expense attributable to:
Amortization of debenture discounts and charge for beneficial conversion feature 4,835 1,187
Amortization of deferred offering costs 997 214
Liquidated damages due to delayed registration of stock underlying convertible
debentures 540 546
Dividends on mandatorily redeemable Series A preferred stock 60 --
Non-cash loss (gain) on settlement of trade debt 54 (1,319)
Fair market value of common stock warrants, options and bonuses granted 7,082 2,952
Gain on repurchase of beneficial conversion feature (128) --
Warrant liability adjustment (275) (69)
Loss on sale of equipment 55 --
Minority interest in joint venture 57
Changes in operating assets and liabilities:
Accounts receivable (41) (2)
Inventory (1,190) 166
Prepaid expenses and other current assets (299) 127
Deferred offering costs and other assets 19 25
Accounts payable and accrued expenses 502 238
Other long-term liabilities 129 (28)
-------- --------
Net cash used in operating activities (13,447) (8,665)
Cash flows from investing activities:
Acquisition of intellectual property (113) --
Purchase of equipment (433) (242)
-------- --------
Net cash used in investing activities (546) (242)
-------- --------
Cash flows from financing activities:
Proceeds from sale of stock 16,994 5,311
Expenses related to sale of stock (678) (444)
Net proceeds from issuance of notes and debentures 3,353 3,980
Repayment of notes and debentures (735) (42)
Principal payments on capital lease obligations (4) (38)
-------- --------
Net cash provided by financing activities 18,930 8,767
-------- --------
Net increase (decrease) in cash and cash equivalents 4,937 (140)
Cash and cash equivalents at beginning of period 147 287
-------- --------
Cash and cash equivalents at end of period $ 5,084 $ 147
======== ========
(continued)
F-7
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
Year Ended
December 31,
-------------------------
2003 2002
----------- ------------
Supplemental disclosure of cash flow activities:
Cash paid for interest $ 37 $ 73
Cash paid for income taxes 2 2
Supplemental disclosure of non-cash activities:
Dividend on mandatorily redeemable Series A preferred stock 60 120
Common stock grants 435 612
Conversion of notes and debentures payable and accrued interest to common stock 8,488 408
Fair market value of warrants issued in conjunction with debenture 81 900
Beneficial conversion feature, net of write off upon conversion 2,287 3,452
Accrued interest converted to note payable 148 --
See accompanying notes to consolidated financial statements.
F-8
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(1) THE COMPANY
Calypte Biomedical Corporation (the "Company") develops, manufactures and
markets urine-based screening and supplemental tests for the detection of
antibodies to the Human Immunodeficiency Virus, Type-1 ("HIV-1"), the cause of
Acquired Immunodeficiency Syndrome ("AIDS"). The Company's tests include its
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 Company also manufactures and markets an
FDA-licensed serum-based supplemental test for detecting HIV-1 antibodies in
serum. In December 1998, Calypte acquired from Cambridge Biotech Corporation
certain assets primarily relating to the manufacture of its HIV-1 urine and
serum Western Blot products. The Company's revenues are currently generated from
the sale of its EIA and its urine- and serum-based Western Blot supplemental
tests, together referred to as its "ELISA tests". The ELISA tests are
manufactured in a format that makes them most suitable for high-volume
laboratory settings. In November 2003, the Company filed an Investigational
Device Exemption ("IDE") with the FDA announcing its intent to develop a rapid
serum-based screening test that provides a test result in less than twenty
minutes and which is more suitable for point-of care applications, particularly
in international venues. The Company is currently developing both serum- and
urine-based rapid screening tests and anticipates that the primary source of its
future revenues will be from sales of its rapid products, both internationally
and domestically.
Calypte commenced operations in 1989 and was incorporated as a Delaware
corporation in June 1996, concurrent with the initial public offering of its
stock. On June 1, 1998, the Company ceased being a development stage enterprise
when it announced that the FDA had approved its urine HIV-1 Western Blot test.
That test is used on samples that are repeatedly reactive in the Company's HIV-1
urine antibody screening test. The supplemental test completed the only
available urine-based HIV-1 test method. Calypte is headquartered in Alameda,
California and manufactures its HIV-1 screening test there. The Company
manufactures its urine and serum HIV-1 Western Blot supplemental tests at its
facilities in Rockville, Maryland. At December 31, 2003, both the Alameda and
Rockville manufacturing facilities were FDA approved.
Calypte and its distributors market its ELISA tests in approximately half a
dozen countries worldwide. The Company's marketing strategy is to use
distributors, focused direct selling and joint-venture marketing partners to
penetrate targeted domestic and international markets. We are currently selling
internationally primarily in the People's Republic of China and Brazil.
The Company incurred net losses attributable to common stockholders of $26.5
million and $13.4 million in 2003 and 2002, respectively. The accumulated
deficit at December 31, 2003 was $127.8 million. As described more completely in
Note 18, since December 31, 2003, the Company has amended a financing
arrangement that management believes will provide adequate funds to sustain
operations at expected levels at least through 2004. To the extent that the
Company issues notes under this financing arrangement, however, it must repay
those notes at their maturity dates during the first half of 2005. The Company
must achieve profitability and sustainable cash flows for its business model to
succeed. If sufficient funds are not available from the Company's operations to
repay the promissory notes when due, however, the Company may need to arrange
additional financing, attempt to extend or otherwise modify the promissory notes
or make other arrangements. There can be no assurance that additional financing
would be available, or it if is available, that it would be on acceptable terms.
The Company's future liquidity and capital requirements will depend on numerous
factors, including successful completion of the development of its new rapid
tests, acquisition and protection of intellectual property rights, costs of
developing its new products, ability to transfer technology, set up
manufacturing and obtain regulatory approvals of its new rapid tests, market
acceptance of all its products, existence of competing products in its current
and anticipated markets, actions by the FDA and other international regulatory
bodies, and its ability to raise additional capital in a timely manner.
Management expects to be able to raise additional capital; however, the Company
may not be able to obtain additional financing on acceptable terms, or at all.
STOCK SPLIT
On May 20, 2003, the Company's shareholders approved a 1:30 reverse stock split,
which became effective on May 28, 2003. The stated par value of the common
shares was changed to $0.03 from $0.001 per share. The number of authorized
shares of common stock remained at 800 million. All share and per share amounts
presented reflect the stock split.
F-9
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the results of
operations of the Company, its wholly-owned subsidiary, Calypte, Inc. and its
51% owned joint venture in China, Beijing Calypte Biomedical Technology Ltd. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash equivalents consist of investments in money market accounts.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts on a specific
identification basis when, due to passage of time or receipt of information,
there is appropriate evidence of a customer's inability to make the required
payments.
Inventories
Inventories are stated at the lower of cost or market with cost determined using
the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Machinery and equipment, furniture
and fixtures, and computer equipment are depreciated using the straight line
method over the estimated useful lives of the assets, generally as follows:
Computer equipment 3 years
Machinery and equipment 5 years
Furniture and fixtures 5 years
Leasehold improvements 3-7 years
Leasehold improvements and equipment under capital leases are amortized or
depreciated over the shorter of the remaining lease term or the useful life of
the equipment or improvement.
Long-Lived Assets
Long-lived assets are comprised of property and equipment and intangible assets.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. An estimate of undiscounted future cash flows produced by the
asset, or by the appropriate grouping of assets, is compared to the carrying
value to determine whether impairment exists. If an asset is determined to be
impaired, the loss is measured based on quoted market prices in active markets,
if available. If quoted market prices are not available, the estimate of fair
value is based on various valuation techniques, including a discounted value of
estimated future cash flow and fundamental analysis. The Company reports an
asset to be disposed of at the lower of its carrying value or its estimated net
realizable value.
Fair Value of Financial Instruments
Financial assets and short-term liabilities, with the exception of the
convertible notes and debentures, have carrying values which approximate their
fair values for all periods presented. The carrying amounts of cash equivalents
approximate fair value because of their short-term nature and because such
amounts are invested in accounts earning market rates of interest. The face
amount of the convertible notes and debentures approximate fair value and are
offset by the calculated value of the beneficial conversion feature embedded in
the respective notes or debentures.
F-10
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Revenue Recognition
The Company records revenues only upon the occurrence of all of the following
conditions:
o The Company has received a binding purchase order or similar
commitment from the customer or distributor authorized by a
representative empowered to commit the purchaser (evidence of a
sale).
o The purchase price has been fixed, based on the terms of the
purchase order.
o The Company has delivered the product from one of its manufacturing
plants to a common carrier acceptable to the purchaser. The
Company's customary shipping terms are FOB shipping point. Because
of the need for controlled conditions during shipment, the Company
suggests, but leaves to the purchaser's discretion, acquiring
insurance for the value of the shipment. If the purchaser elects to
insure the shipment, the insurance is at the purchaser's expense.
o The Company deems the collection of the amount invoiced probable.
The Company currently deals with a limited number of customers or
distributors, with most of whom it has had a relationship for a
number of years. To eliminate the credit risk associated with
international distributors with whom the Company has had little or
no experience, the Company requires prepayment of the order or a
letter of credit before shipment.
The Company does not permit product returns. The Company's products must be
maintained under rigidly controlled conditions that it cannot control after the
product has been shipped to the customer.
The Company provides no price protection. With the exception of sales to one
distributor through October 2003, the Company recognizes revenue upon shipment
of product. In the case of that distributor, the distributor held the Company's
inventory on consignment and reported monthly its usage of the products. The
Company recorded revenue on sales to this distributor based on the distributor's
reported usage. In October, 2003, this distributor purchased from the Company
the inventory on hand and switched to a standard contractual relationship;
thereafter, the Company recognized revenue upon shipment.
Deferred Revenue
Pursuant to a 1991 License and Supply Agreement, a Japanese distributor made a
payment of $500,000 to Calypte representing an advance creditable against
royalties and other payments to be paid by the distributor to Calypte under the
terms of the Agreement. In a 1994 Distribution Agreement between Calypte and the
distributor, the distributor agreed to waive its right to have the advance
payment credited to subsequent payments it might owe Calypte under the License
and Supply Agreement or the Distribution Agreement in return for a 50% discount
on products supplied by Calypte to the distributor, until such time as the
distributor has received cumulative discounts totaling $500,000. Pursuant to
that agreement, Calypte recorded the $500,000 payment as deferred revenue that
was to be recognized as product was sold at the stipulated 50% discount. As of
this date, Calypte has sold no product to the distributor under the terms of the
Distribution Agreement and the deferred revenue balance remains unchanged.
The Company's current sales practices do not require the deferral of revenues
and no entries to record deferred revenue have been made during the period
included in the accompanying consolidated financial statements.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS No. 109 requires an
asset and liability approach for the financial reporting of income taxes. Under
SFAS No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
F-11
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
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 has recorded 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 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.
Had the Company determined compensation cost based on the fair value at the
grant date for its employee stock options and purchase rights under SFAS No.
123, the Company's net loss would have been increased to the pro forma amounts
indicated below for the years ended December 31:
2003 2002
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Net loss attributable to common stockholders, as reported $(26,474) $(13,417)
Add: Stock-based employee compensation expense included in
reported net loss, net of related tax effects 1,082 131
Less: Stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax
effects (2,794) (355)
-------- --------
Pro forma net loss attributable to common stockholders $(28,186) $(13,641)
======== ========
Net loss per share attributable to common stockholders:
As reported $ (0.47) $ (5.18)
Pro forma $ (0.50) $ (5.26)
Net Loss Per Share Attributable to Common Stockholders
Basic net loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock
outstanding during the year. The computation of diluted earnings per common
share is similar to the computation of basic net loss per share attributable to
common stockholders, except that the denominator is increased for the assumed
conversion of convertible securities and the exercise of options and warrants to
the extent they are dilutive using the treasury stock method. The weighted
average shares used in computing basic and diluted net loss per share
attributable to common stockholders were the same for the two years ended
December 31, 2003 and 2002. Options and warrants for 707,783 shares and 717,970
shares were excluded from the computation of loss per share at December 31, 2003
and 2002, respectively, as their effect is anti-dilutive. The difference between
net loss and net loss attributable to common stockholders relates to accrued
dividends on the Company's mandatorily redeemable Series A preferred stock
discussed in Note 10.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents and trade
accounts receivable. The Company has investment policies that limit investments
to short-term, low-risk investments. Concentration of credit risk with respect
to trade accounts receivable are limited due to the fact that the Company sells
its products primarily to established distributors and laboratories and requires
prepayment for certain orders where the relationship between the parties is not
well-established.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-12
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Risks and Uncertainties
Calypte purchases certain raw materials and components used in manufacturing its
products from a number of suppliers, but relies on single sources for certain
other components. Establishment of additional or replacement suppliers for these
components cannot be accomplished quickly. Any delay or interruption in the
supply of these components could have a material adverse effect on the Company
by significantly impairing its ability to manufacture products in sufficient
quantities to meet commercial sales demand. Additionally, if the Company's
financial condition reduces its ability to pay for critical components or to
make royalty payments under its license agreements, suppliers may delay or cease
selling critical components to it or its rights to use license agreements could
be jeopardized, both of which could also impair its ability to manufacture.
Comprehensive Loss
The Company has no components of other comprehensive loss other than its net
loss, and, accordingly, its comprehensive loss is equivalent to its net loss for
all periods presented.
Segment and Geographic Information
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" requires an enterprise to report segment information based on how
management internally evaluates the operating performance of its business units
(segments). The Company's operations are currently confined to a single business
segment: the development and sale of HIV diagnostics.
Substantially all of the Company's sales through 2003 have been to United States
customers. Sales to international customers accounted for 5% and 4% of the
Company's revenues in 2003 and 2002, respectively.
Sales to two major domestic customers accounted for approximately 50% of total
net sales for the year ended December 31, 2003. Sales to those customers
accounted for approximately 36% and 14% of the Company's 2003 net sales and 24%
and 11%, respectively, of the Company's net sales in 2002. The Company made no
sales in 2003 to a customer who had accounted for approximately 17% of its net
sales in 2002.
Reclassifications
Certain previously-reported amounts in the financial statements have been
reclassified to conform to the current year presentation.
Newly-Adopted Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards ("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. The Company adopted SFAS 145 in 2003 and
as a result, the gain from settlement of debt in 2002 has been reclassified from
an extraordinary gain to an ordinary gain.
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 supersedes
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. This standard did not have a material impact on the Company's consolidated
financial position or results of operations, however the Company has recognized
exit costs associated with the closure of its Alameda, California manufacturing
facility in accordance with the standard.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, many
of which have been previously classified as equity or on the "mezzanine". The
Company adopted this standard during the third quarter of 2003 and, accordingly,
has classified its mandatorily redeemable Series A preferred stock as a long
term liability for all periods presented. Additionally, effective with the
adoption and on a prospective basis, the dividend on the mandatorily redeemable
Series A preferred stock is classified as interest expense in the consolidated
statement of operations.
F-13
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies the financial accounting and reporting requirements, as were
originally established in SFAS 133, for derivative instruments and hedging
activities. SFAS 149 provides greater clarification of the characteristics of a
derivative instrument so that contracts with similar characteristics will be
accounted for consistently. This statement is effective for contracts entered
into or modified after June 30, 2003, as well as for hedging relationships
designated after June 30, 2003, excluding certain implementation issues that
have been effective prior to this date under SFAS 133. The Company's adoption of
this statement has not had a material impact on our results of operations or
financial condition.
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51. FIN 46 provides guidance on how to apply the controlling financial
interest criteria in ARB 51 to variable interest entities ("VIE"). Given the
complexity of FIN 46 and implementation issues after its original issuance,
particularly with respect to its scope and application of the consolidation
model, the FASB staff issued several FASB staff positions throughout 2003 to
clarify the Board's intent on certain of the interpretation's provisions. In
December 2003, the Board issued FIN 46R to address certain technical corrections
and clarify the implementation issues that had arisen.
In general, a VIE is subject to consolidation if it has (1) an insufficient
amount of equity for the entity to carry on its principal operations without
additional subordinated financial support provided by any parties, (2) a group
of equity owners that are unable to make decisions about the entity's activities
or (3) equity that does not absorb the entity's losses or receive the entity's
benefits. Variable interest entities are to be evaluated for consolidation based
on all contractual, ownership or other interests that expose their holders to
the risks and rewards of the entity. These interests may include equity
investments, loans, leases, derivatives, guarantees, service and management
contracts and other instruments whose values change with changes in the VIE. Any
of these interests may require its holder to consolidate the entity. The holder
of a variable interest that receives the majority of the potential variability
in gains or losses of the VIE is the VIE's primary beneficiary and is required
to consolidate the VIE. FIN 46R became effective immediately for entities
created after January 31, 2003. It applies in the first fiscal year or interim
period beginning after December 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it acquired before February 1,
2003. The Company has determined that the adoption of the provisions of FIN 46
will not have an impact upon its financial condition or results of operations.
(3) INVENTORY
Inventory as of December 31, 2003 and 2002 consisted of the following (in
thousands):
2003 2002
-------- --------
Raw materials $ 708 $ 197
Work-in-process 962 443
Finished goods (including consigned inventory of $101 at
December 31, 2002) 483 323
-------- --------
Total Inventory $ 2,153 $ 963
======== ========
F-14
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(4) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2003 and 2002 consisted of the
following (in thousands):
2003 2002
---------- ----------
Computer equipment $ 424 $ 766
Machinery and equipment 3,582 3,344
Furniture and fixtures 289 276
Leasehold improvements 1,227 1,132
---------- ----------
5,522 5,518
Accumulated depreciation and amortization (4,795) (4,601)
---------- ----------
Property and equipment, net $ 727 $ 917
========== ==========
The Company recognized depreciation expense of $527,000 and $512,000 for the
years ended December 2003 and 2002, respectively. Included in leasehold
improvements is approximately $90,000 related to improvements in the Rockville,
Maryland facility. The Company has committed approximately an additional
$400,000 in 2004 to complete leasehold improvements at this facility.
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 2003 and 2002 consisted
of the following (in thousands):
2003 2002
--------- ---------
Trade accounts payable $ 2,189 $ 3,462
Accrued royalties 582 338
Accrued salary and vacation pay 125 240
Accrued interest (including non-cash liquidated damages
related to delayed registration of stock underlying
convertible and other securities of $271 and $546 in
2003 and 2002, respectively) 308 789
Other 1,118 316
--------- ---------
Total accounts payable and accrued expenses $ 4,322 $ 5,145
========= =========
(6) NOTES AND DEBENTURES PAYABLE
The table below summarizes notes and debentures payable activity for the years
ended December 31, 2003 and 2002 (in thousands).
Discount Net
Balance Balance At Balance At
12/31/02 Additions Payments Conversions 12/31/03 12/31/03 12/31/03
------- --------- -------- ----------- -------- -------- ----------
8% Convertible Notes $ 2,985 $ 107 $ -- $(3,092) $ -- $ -- $ --
8.5% Note - LHC Corporation 393 42 (435) -- -- -- --
10% Convertible Note - BNC Bach 126 -- -- (126) -- -- --
10% Convertible Debentures -
Mercator -- 1,950 -- (1,058) 892 (36) 856
12% Convertible Debenture -
Bristol Investment Fund,
Ltd 465 -- -- (465) -- -- --
12% Convertible Debenture -
Mercator 850 1,750 (300) (2,234) 66 (54) 12
------- ------- ------- ------- ------- ------- -------
Total $ 4,819 $ 3,849 $ (735) $(6,975) $ 958 $ (90) $ 868
======= ======= ======= ======= ======= ======= =======
F-15
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Discount Net
Balance Balance At Balance At
12/31/01 Additions Payments Conversions 12/31/02 12/31/02 12/31/02
------- --------- -------- ----------- -------- -------- ----------
8% Convertible Notes $ -- $ 3,125 $ -- $ (140) $ 2,985 $(2,052) $ 933
8% Convertible Debentures -- 200 -- (200) -- -- --
8.5% Note - LHC Corporation 411 -- (18) -- 393 -- 393
10% Convertible Note - BNC Bach -- 150 (24) -- 126 -- 126
12% Convertible Debenture -
Bristol Investment Fund,
Ltd -- 525 -- (60) 465 (273) 192
12% Convertible Debenture -
Mercator Group, LLP -- 850 -- -- 850 (313) 537
------- ------- ------- ------- ------- ------- -------
Total current notes payable $ 411 $ 4,850 $ (42) $ (400) $ 4,819 $(2,638) $ 2,181
======= ======= ======= ======= ======= ======= =======
8% Convertible Notes
Pursuant to Regulation S, Calypte has issued a series of 8% convertible notes in
the aggregate principal amount of $3.125 million in 2002 and an additional
$107,000 in 2003. These notes have a 24 month term and are convertible into
shares of the Company's common stock at the lesser of $3.00 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. Calypte has received
approximately $2.6 million in proceeds after deducting fees and costs associated
with these notes. The note issued during 2003 represented accrued interest due
on one of the previous notes.
During 2003, various holders of the 8% convertible notes converted $3,092,000
face value plus accrued interest and liquidated damages resulting from delayed
registration of the underlying common stock into approximately 45.7 million
shares of the Company's common stock at conversion prices ranging from $1.014 to
$0.077 per share. During 2002, various holders of the 8% convertible notes
converted $140,000 face value plus accrued interest into approximately 0.3
million shares of the Company's common stock at a conversion price of $0.49 per
share.
The Company was required to file a registration statement for the shares
underlying the convertible notes within 30 days of the closing date. The Company
did not file a registration statement for those shares until July 8, 2003. As a
result of the delayed registration, the Company was required to pay, in cash or
stock, at the subscribers' option, liquidated damages in an amount equal to 2%
of the note principal for each month of delay. Between July 2002 and December
31, 2003, the Company recognized an aggregate of approximately $768,000 as
liquidated damages attributable to these notes, substantially all of which was
recorded as non-cash interest expense. The shares underlying these agreements
were included in the Company's S-2 registration statement filed with the SEC
that became effective on July 18, 2003.
F-16
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The following table sets forth the investors who subscribed to the 8%
convertible notes in 2003 and 2002:
Transaction Calypte Shares
Investor Amount Date Closing Price Issued (000) (1)
-------- ------ ---- ------------- ----------------
8% CONVERTIBLE NOTES
--------------------
2003
----
Alpha Capital Aktiengesellshaft $ 107,000 5/9/03 $ 0.63 1,302.5
========== ========
2002
----
Alpha Capital Aktiengesellshaft $ 500,000 5/24/02 $ 3.60 7,260.7
Stonestreet Limited Partnership 500,000 5/24/02 $ 3.60 7,075.7
Filter International Ltd. 150,000 5/24/02 $ 3.60 2,452.4
Camden International Ltd. 350,000 5/24/02 $ 3.60 5,279.1
Domino International Ltd. 150,000 5/24/02 $ 3.60 1,767.4
Thunderbird Global Corporation 75,000 5/24/02 $ 3.60 1,083.1
BNC Bach International Ltd. 200,000 5/24/02 $ 3.60 2,463.8
Excalibur Limited Partnership 200,000 5/24/02 $ 3.60 1,678.9
Standard Resources Ltd. 100,000 5/24/02 $ 3.60 1,542.5
SDS Capital International Ltd. 300,000 7/10/02 $10.20 4,062.1
Camden International Ltd. 100,000 7/10/02 $10.20 1,707.9
Excalibur Limited Partnership 250,000 7/24/02 $ 6.60 4,238.3
Stonestreet Limited Partnership 250,000 8/21/02 $ 3.90 4,042.2
---------- --------
$3,125,000 44,654.1
========== ========
(1) includes shares issued for accrued interest and liquidated damages
as of December 31, 2003
8% Convertible Debentures
In 2002, Calypte issued two (2) 8% convertible debentures in the aggregate face
amount of $200,000 pursuant to Regulation S. One of these debentures was
convertible into shares of the Company's common stock at a 20% discount to the
average closing price for the five trading days prior to conversion, the other
at a 30% discount, and each had a conversion floor of $3.00 per share. Both of
these debentures have been converted into shares of Calypte's common stock.
Calypte received cash of $180,000, net of fees, from the issuance of these two
debentures. The Company agreed to use its best efforts to register the shares of
common stock and provided cost free piggyback registration rights to the
debenture holders. There were no defined penalties and/or time requirements
imposed on Calypte with respect to filing and achieving the effectiveness of a
registration statement for the underlying shares. The shares underlying these
agreements were included in the Company's S-2 registration statement filed with
the SEC that became effective on July 18, 2003.
The following table lists the individual investors and transaction dates related
to the issuance of the 8% convertible debentures:
Calypte
Transaction Closing Shares
8% CONVERTIBLE DEBENTURES Amount Date Price Issued (1)
------------------------- ------ ---- ----- -----------
Su So $100,000 6/17/02 $4.20 36,667
Jason Arasheben $100,000 7/03/02 $8.10 15,826
(1) includes fee shares
The Company determined that the above 8% convertible notes and 8% convertible
debentures were issued with beneficial conversion features. The beneficial
conversion features were recognized by allocating an amount equal to the
intrinsic value of each feature to note or debenture discount to be amortized
over the life of the note or debenture, subject to a limitation of the face
amount of the respective note or debenture. Upon earlier conversion, the
proportionate share of unamortized discount was charged to interest expense. The
intrinsic value was calculated at the date of issue as the difference between
the conversion price of the note or debenture and the fair value of the
Company's common stock into which the note or debenture was convertible,
multiplied by the number of common shares into which the debenture was
convertible. In the case of the 8% convertible notes, the beneficial conversion
feature was generally limited by the face amount of the note. The beneficial
conversion feature for each of the 8% convertible debentures was less than the
face amount of the debenture, however, both debentures were converted soon after
issuance.
F-17
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
8.5% Note
In August 2001, the Company executed a promissory note in the amount of $400,000
to 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. 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. The note required interest at 8.5% per
annum and principal payments were due beginning in February 2002. In February
2002, the Company renegotiated the payment terms to require monthly principal
payments of $17,500 in February and March 2002, increasing to $35,000 thereafter
unless and until the Company secured at least $2 million in additional
financing, excluding the $850,000 of 12% convertible debentures and warrants
discussed below, at which time a $200,000 principal payment would be required.
The Company made the payment required on February 28, 2002. In March 2002, the
Company further renegotiated the repayment terms of this note, suspending any
required principal or interest payments until 30 days after the Company's
registration statement for the 12% convertible debentures described below, at
which time the Company was required to make a $200,000 payment and to resume
making monthly payments of $35,000 until the principal and accrued interest were
repaid in full. On February 28, 2003, the Company and the investor executed a
new note in the amount of $435,000, representing the unpaid principal and
accrued but unpaid interest on the December 2001 note between the parties. The
Company renegotiated the terms of the December 2001 note due to a lack of
available funds and to avoid a default. The terms of the February 2003 note
required monthly principal payments of $17,500 plus interest from March 2003
through May 2003, increasing to $35,000 monthly, plus interest, thereafter,
until the Company secured at least $5,000,000 in additional financing, at which
time the remaining outstanding balance became due and payable. The remaining
balance of the note was repaid in September 2003 following the securing of
financing.
10% Convertible Note
On May 14, 2002, the Company issued, pursuant to Regulation S, a $150,000 10%
convertible promissory note to BNC Bach International Ltd. ("BNC Bach"), a
private investment fund that is a related party to Townsbury Investments Ltd.
("Townsbury"), the investor in a prior investment that provided the Company with
financing pursuant to an equity line. The closing price for Calypte common stock
on May 14, 2002 was $4.20. This note was originally convertible into shares of
the Company's common stock at $1.50 per share and was due on the earlier of July
14, 2002 or the settlement date of Calypte's next drawdown under the equity
line. On July 14, 2002, Calypte and BNC Bach agreed to extend the maturity date
of the note from July 14, 2002 to December 31, 2002. The market price for
Calypte common stock was $10.80 on July 14, 2002. In return for the extension of
the maturity date, Calypte agreed to amend the conversion price of the note from
$1.50 per share to the lesser of (a) $1.50 per share or (b) 60% of the lowest
three closing bid prices of Calypte's common stock during the 22 business days
prior to the date BNC Bach notifies Calypte of its election to convert the note.
No accounting adjustments were required as a result of the extension of the
note's maturity or the amendment of the conversion price. In December 2002, the
Company repaid approximately $24,000 of the outstanding principal plus accrued
interest from the proceeds of a draw down under its equity line with Townsbury.
On January 15, 2003, the Company and BNC Bach agreed to extend the maturity date
of the 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. On April 2, 2003,
the Company and BNC Bach agreed to extend the maturity date of the 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 $1.50 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. No accounting adjustments were required
as a result of any of the extensions of the note's maturity. In September 2003,
BNC Bach converted the remaining $126,000 face value plus accrued interest into
approximately 2.2 million shares of the Company's common stock at a conversion
price of $0.0612 per share.
10% Convertible Debentures-Mercator Focus Fund, Mercator Momentum Fund and
Mercator Momentum Fund III
On January 14, 2003, when the market price of the Company's stock was $1.92, 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. ("MMF"). 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 $3.00. 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 $2.01, the
Company and Focus Fund agreed to extend the registration period until April 4,
2003. On March 31, 2003, when the market price of Calypte's common stock was
$0.885, 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. On May 1, 2003, when the market price of Calypte's common stock was
$0.711, the Company received a further extension until July 1, 2003. On June 26,
2003, when the trading price for the Company's stock was $0.36 per share, Focus
Fund agreed to extend the period for filing the registration statement through
July 15, 2003. The shares underlying this agreement were included in the
Company's S-2 registration statement that was filed with the SEC on July 8, 2003
and which became effective on July 18, 2003. During the third quarter of 2003,
Focus Fund converted $422,000 face value plus accrued interest and $43,000 of
liquidated damages due to delayed registration into approximately 5.8 million
shares of the Company's common stock at conversion prices ranging from $0.07 to
$0.09 per share. See Note 18 for information regarding the extension of the
maturity of this note.
F-18
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
On January 30, 2003, when the market price of the Company's stock was $1.86, the
Company issued a $450,000 10% convertible debenture to MMF 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 $3.00. 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 $2.01, the Company and MMF agreed to extend the
registration period 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 $0.885, MMF granted the Company an
additional extension, until May 5, 2003, in which to register the shares of
common stock underlying this financing. On May 1, 2003, when the market price of
Calypte's common stock was $0.711, the Company received a further extension
until July 1, 2003. On June 26, 2003, when the trading price for the Company's
stock was $0.36 per share, MMF agreed to extend the period for filing the
registration statement through July 15, 2003. The shares underlying this
agreement were included in the Company's S-2 registration statement that was
filed with the SEC on July 8, 2003 and which became effective on July 18, 2003.
During the third and fourth quarters of 2003, MMF converted $358,000 face value
plus accrued interest and $29,000 of liquidated damages due to delayed
registration into approximately 2.6 million shares of the Company's common stock
at conversion prices ranging from $0.11 to $0.14 per share. See Note 18 for
information regarding the extension of the maturity of this note.
On March 13, 2003, when the market price of the Company's stock was $1.50, 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 $2.10. 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. On April
11, 2003, when the market price of Calypte's common stock was $0.735, the
Company received an extension until May 5, 2003 in which to register the shares
of common stock underlying this financing. On May 1, 2003, when the market price
of Calypte's common stock was $0.711, the Company received an extension until
July 1, 2003. On June 26, 2003, when the trading price for the Company's stock
was $0.36 per share, Focus Fund and Momentum Fund III agreed to extend the
period for filing the registration statement through July 15, 2003. The shares
underlying this agreement were included in the Company's S-2 registration
statement that was filed with the SEC on July 8, 2003 and which became effective
on July 18, 2003. During the third quarter of 2003, Focus Fund and Momentum Fund
III converted an aggregate of $278,000 face value plus accrued interest and
$50,000 of liquidated damages due to delayed registration into approximately 4.1
million shares of the Company's common stock at conversion prices ranging from
$0.07 to $0.10 per share. See Note 18 for information regarding the extension of
the maturity of this note.
The Company determined that each of the 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. Upon conversion of all or a portion of the debenture, the
proportionate share of unamortized discount has been charged to interest
expense.
12% Convertible Debentures
On February 11, 2002, the Company signed a securities purchase agreement with a
private investment fund, Bristol Investment Fund, Ltd. ("Bristol") pursuant to
which Bristol agreed to purchase two 12% secured convertible debentures for an
aggregate of $850,000, each of which matures two years after its issuance. The
first debenture, in the amount of $425,000, was purchased by Bristol, under an
exemption provided by Regulation S, on February 11, 2002 and the Company
received net proceeds of $368,000. The closing price for Calypte stock on
February 11, 2002 was $7.50. On May 10, 2002, Calypte issued a second $100,000
12% convertible debenture to Bristol, also under an exemption provided by
Regulation S, and received net proceeds of $90,000. This debenture has the same
terms as those of the initial debenture and reduced the remaining commitment
under the agreement to $325,000. The closing price for Calypte stock on May 10,
2002 was $0.90. The outstanding 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 debentures, Bristol could elect at any time prior to maturity to
convert the balance outstanding on the debentures into shares of the Company's
common stock. The conversion price, as modified, for any debenture issued
pursuant to this agreement is equal to the lesser of (i) the average of the
lowest three closing bid prices during the 20 trading days immediately prior to
the conversion date discounted by 40% and (ii) $1.50, subject to certain
anti-dilution provisions.
F-19
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
During May 2002, Bristol converted a principal amount of approximately $60,000
plus accrued interest into 148,747 shares of the Company's common stock at $0.42
per share. 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") in February 2002, Bristol
converted its remaining balance due under the debentures, an aggregate of
$465,000 face value, plus accrued interest and $122,000 of liquidated damages
due to delayed registration, into approximately 0.9 million shares of the
Company's common stock at conversion prices ranging from $0.525 to $0.966 per
share during the first half of 2003. The debenture discounts were eliminated
concurrent with the conversions.
In conjunction with this transaction, the Company issued a Class A warrant to
purchase up to 56,667 shares of its common stock. The Class A warrant was
exercisable for a period of seven years after issuance at a price per share
equal to the lesser of (i) the average of the lowest three trading prices during
the 20 trading days immediately prior to the exercise date discounted by 30% and
(ii) $3.45. Bristol exercised the warrant in September 2003 at a price of $0.077
per share.. The warrant was valued on the date of issue at $6.30 per share using
the Black-Scholes option-pricing model with the following assumptions: expected
dividend yield of 0.0%; risk free interest rate of 4.7%, the contractual life of
7 years, and volatility of 80%. As additional fees for this transaction, the
Company also issued a warrant to purchase 2,833 shares of its common stock. The
warrant to purchase the 2,833 shares has the same terms and the same fair market
value as the Class A warrant and has not yet been exercised.
The Company also issued Bristol a Class B warrant to purchase an additional
400,000 shares of its common stock. Upon the effectiveness of the related
registration statement for the shares underlying the Class B warrant, Bristol
was required to exercise the Class B warrant in conjunction with the mandatory
monthly conversion of its debentures so that each month the Company would issue
to Bristol, 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. The Class B warrant was exercisable at a price per share equal to
the lesser of (i) the average of the lowest three trading prices during the 20
trading days immediately prior to the exercise date discounted by 30% and (ii)
$6.45. The Company was not permitted to include the shares underlying the
400,000 share Class B warrant in its registration statement, and Bristol was not
obligated to begin exercising the warrant until such time as the underlying
shares were registered, however Bristol exercised it in its entirety in
September 2003 at a price of $0.0825 per share. The warrant was valued on the
date of issue at $4.20 per share using the Black-Scholes option-pricing model
with the following assumptions: expected dividend yield of 0.0%; risk free
interest rate of 2.2%, the contractual life of 1 year, and volatility of 80%.
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
$425,000 debenture, which was to be amortized as interest expense over the 24
month term of the debenture. The combined fair values of the Class A and Class B
warrants treated as a discount to the debenture exceeded the $425,000 amount of
the debenture. Accordingly, the aggregate amount of the warrant liability and
the offsetting debenture discount recorded attributable to the Class A and Class
B warrants was limited to $425,000 at the time of issuance. In September 2003,
Bristol exercised both the Class A and Class B warrants. The Company issued
456,667 shares of its common stock and received proceeds of approximately
$38,000. The Company reclassified the warrant liability to equity at the time of
the exercise of the warrants. Until the warrants were exercised, the liability
was marked to market through earnings. The Company recorded a net non-cash
interest expense reduction of approximately $275,000 attributable to the
re-measurement of the warrant liability for the year ended December 31, 2003.
Non-cash interest income in 2002 attributable to the re-measurement of the
warrant liability was approximately $70,000. This is recorded as a reduction of
non-cash interest expense in the financial statements.
The Company did not receive any additional consideration over and above the
negotiated price for the debentures in connection with the issuance of the Class
A and B warrants. The Class A and B warrants were contemplated and considered a
part of the negotiated transaction for the debentures issued to Bristol. The
Class A and Class B warrants were intended to act as consideration for the
investment by Bristol and also provided the Company with immediate cash upon
their exercise. The Class B warrants were intended to provide the Company with
cash over a one year period following the effective date of the registration
statement for the shares underlying the debentures and warrants. Management
believed that the terms of the financing were on the best possible terms
available as a result of the Company's tenuous financial condition at the time
of the arrangement.
F-20
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The Company determined that both of the debentures issued to Bristol were issued
with a beneficial conversion feature. Upon conversion of a portion of the
debenture, the Company charged the proportionate share of unamortized discount
to interest expense. 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. Because the Company also issued warrants in conjunction with the
first $425,000 debenture, as described above, the value of the beneficial
conversion feature was not accorded treatment as a discount to the debenture,
since the valuation of the accompanying warrants had reduced the carrying value
of the debenture to zero at the time of issuance. The beneficial conversion
feature attributable to the second $100,000 debenture was limited to $100,000 by
the face amount of the debenture and recorded as a discount to the debenture to
be amortized to interest expense over the life of the debenture.
12% Convertible Debentures
On September 12, 2002, the Company issued a $550,000 12% convertible debenture
to MMF. The debenture was convertible into the Company's common stock at 85% of
the average of the three lowest trades for the 20 days preceding conversion.
This debenture was the first tranche of a $2.0 million commitment that was to
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 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 an extension of the
registration period through February 18, 2003. On February 14, 2003, when the
price of the Company's common stock was $2.01, the Company and MMF agreed to
extend the registration period until April 4, 2003. On March 31, 2003, when the
market price of Calypte common stock was $0.885, the Company amended the
conversion price to eliminate a conversion price floor of $1.50 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. On May
1, 2003, when the market price of Calypte's common stock was $0.711, the Company
received a further extension until July 1, 2003. On June 26, 2003, when the
trading price for the Company's stock was $0.36 per share, MMF agreed to further
extend the period for filing the registration statement through July 15, 2003.
The shares underlying this agreement were included in the Company's S-2
registration statement that was filed with the SEC on July 8, 2003 and that
became effective on July 18, 2003. During the third quarter 2003, MMF converted
$550,000 face value plus accrued interest into approximately 4.8 million shares
of the Company's common stock at conversion prices ranging from $0.09 to $0.22
per share.
On October 22, 2002, the Company issued a $300,000 12% convertible debenture to
MMF. 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
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 repurchase of
the beneficial conversion feature upon repayment of the debenture resulted in a
non-cash gain of $128,000, recorded as other income, during the first quarter of
2003.
On April 29, 2003, when the price of the Company's common stock was $0.82, the
Company issued a $300,000 12% convertible debenture to MMF and recorded net
proceeds of $245,000. 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 $1.20. Under the terms of the debenture agreement,
Calypte 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 $0.711, the Company received an
extension until July 1, 2003 in which to file a registration statement for the
underlying shares. On June 26, 2003, when the trading price for the Company's
stock was $0.36 per share, MMF agreed to extend the period for filing the
registration statement through July 15, 2003. The shares underlying this
agreement were included in the Company's S-2 registration statement that was
filed with the SEC on July 8, 2003 and which became effective on July 18, 2003.
During the third quarter 2003, MMF converted $294,000 face value plus accrued
interest and $11,000 liquidated damages due to delayed registration was
converted into approximately 3.5 million shares of the Company's common stock at
prices ranging from $0.077 to $0.12 per share. See Note 18 for information
regarding the extension of the maturity of this note.
Pursuant to the Registration Statement filed on July 8, 2003 and effective July
18, 2003, the Company registered shares underlying a 12% convertible debenture
for $250,000 which was to be funded upon the filing of the Registration
Statement and another for $500,000 to be funded by July 25, 2003 as portions of
the September 2002 $2 million commitment by MMF. On July 24, 2003, when the
market price for the Company's common stock was $0.115, the Company issued 12%
convertible debentures in the principal amount of $250,000 each to Alpha Capital
AG, Gamma Opportunity Capital Partners, LP and Goldplate Investment Partners,
assignees under the MMF $2 million commitment agreement mentioned above covering
these two commitments. The Company had prepaid $75,000 in fees and received
gross proceeds of $750,000. A portion of the proceeds were used to repay a
$400,000 MMF advance from June 6, 2003, along with a fee of $12,000. The
debentures were convertible into the Company's common stock at 85% of the
average of the three lowest trades for the 20 days preceding conversion. During
the third quarter 2003, the investors converted $750,000 face value plus accrued
interest into approximately 8.0 million shares of the Company's common stock at
conversion pricees of approximately $0.09 per share.
F-21
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
On September 1, 2003, when the market price for the Company's common stock was
$0.498 per share, the Company issued a $570,000 12% convertible debenture to
Marr Technologies BV, an additional assignee from MMF under the $2 million
September 2002 commitment, and received net proceeds of $570,000. The debenture
was 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 $0.11
per share. On September 1, 2003, this note was converted into approximately 5.2
million shares of the Company's common stock at a conversion price of $0.11 per
share.
On October 2, 2003, when the market price for the Company's stock was $1.31 per
share, the Company issued the final $130,000 of debentures to four assignees of
MMF under the $2 million September 2002 12% convertible debenture commitment,
and received net proceeds of $130,000. During October 2003, two of these
investors converted $70,000 of principal of these debentures at a price of $0.59
per share and the Company issued approximately 118,400 shares of its common
stock.
The Company determined that the MMF 12% convertible debentures, including those
issued to MMF assignees, 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 treated the beneficial conversion
feature as a discount to the face amount of the debenture and amortized it over
the respective term. Upon conversion of all or a portion of the debenture, the
proportionate share of unamortized discount is charged to interest expense.
The table below summarizes the components of net interest expense reported in
the consolidated statements of operations (in thousands).
2003 2002
------- -------
Accrued interest on debt instruments $ 425 $ 332
Non-cash interest expense composed of:
Amortization and proportional write-off upon conversion of note and
debenture discounts 4,835 1,188
Liquidated damages due to delayed registration of shares underlying
convertible and other securities 620 546
Amortization and proportional write-off upon conversion of deferred
offering costs 997 210
Expense attributable to warrants issued in conjunction with the Marr
$10 million Promissory Note Agreement 322 --
Warrant liability mark-to-market adjustment attributable to Bristol
Class A and Class B warrants (275) (70)
Expense attributable to dividends on mandatorily redeemable Series A
preferred stock 60 --
------- -------
Total interest expense 6,984 2,206
Interest income (15) (3)
------- -------
Net interest expense $ 6,969 $ 2,203
======= =======
5% Note Purchase Agreement
On November 13, 2003, when the market price of the Company's common stock was
$0.88 per share, the Company and Marr, its largest stockholder, entered into an
agreement in which Marr agreed to provide the Company up to an aggregate of
$10,000,000 (the "Marr Credit Facility") pursuant to promissory notes issuable
to Marr on an as-needed basis by the Company (the "Notes"). Each Note will bear
interest at the rate of 5% per annum and will have a 12-month term. The Marr
Credit Facility is available during the period beginning on February 28, 2004
and ending on May 31, 2004. The aggregate amount available under the Marr Credit
Facility will be proportionally reduced by the amount of any equity financing
obtained by the Company during the term of the Marr Credit Facility. Marr has
the right of first refusal to participate in any such equity financing on the
same terms as the other investors. The Marr Credit Facility provides for earlier
termination as of March 31, 2004, if the Company fails to have its common stock
listed on an established stock exchange by that date. Moreover, upon the failure
to obtain such stock exchange listing, any outstanding Notes would be due and
payable on April 30, 2004. As of March 19, 2004, no Notes have been issued under
the Marr Credit Facility. As consideration for the Marr Credit Facility, the
Company issued to Marr a warrant to purchase 375,000 shares of its common stock
at an exercise price of $0.80 per share. The warrant is immediately exercisable
and expires two years after issuance on November 12, 2005. The warrant was
valued at $0.859 per share on the date of grant using the Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of 1.93%;
expected dividend rate of 0.00%; volatility of 316.42%; and expected term of 2
years. The calculated value of the warrant was charged to interest expense.
Refer to Note 18 for information regarding an amendment to this agreement in the
first quarter of 2004.
F-22
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(7) GAIN ON SETTLEMENT 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 other obligations with
27 of its trade creditors. Under the restructuring, the Company issued
approximately 47,000 restricted shares of its common stock at various negotiated
prices per share to trade creditors in satisfaction of specified debt. The
issuance of the shares was pursuant to Regulation D of the Securities Act. The
shares issued are now eligible for resale under the provisions of Rule 144. The
creditors accepted the shares plus deferred cash payments ranging from 0% to 25%
of the outstanding balance in satisfaction of $1,699,000 of indebtedness plus
certain patent rights for 2002. On the date the shares were issued, the
aggregate value of the Company's common stock issued to the trade creditors was
$248,000 and the aggregate deferred cash payment yet to be made to the trade
creditors totaled $132,000. During the third quarter of 2002, the Company made
cash payments to the various creditors totaling 10% of the deferred cash
balance, or approximately $13,000, leaving $119,000 remaining to be paid at
December 31, 2003 and 2002. The Company recognized a gain of $1,319,000 during
the first quarter of 2002 as a result of restructuring this indebtedness.
(8) LEASE COMMITMENTS
Capital Leases
The Company has acquired equipment under capital lease agreements that are
collateralized by the related equipment. The lease agreements carry effective
interest rates of approximately 18% per annum. During 1993, the Company issued
stock warrants for the purchase of 1,172 shares of the Company's common stock at
exercise prices ranging from $150.00 to $225.00 per share as partial
consideration for obtaining two of the lease agreements. These warrants expired
in 2003. In 2000, the Company exercised its option to renew one of the capital
leases for an additional three year term. In 2001, the Company acquired
laboratory equipment under a capital lease having a four-year term and an
effective interest rate of approximately 17.5% per annum. In 2002, the Company
settled its liability under one of these leases by issuing 9,804 shares of its
common stock.
Equipment acquired under capital leases included in property and equipment as of
December 31, 2003 and 2002 consisted of the following (in thousands):
2003 2002
------- -------
Machinery and equipment $ 1,729 $ 1,763
Other 92 92
------- -------
1,821 1,855
Accumulated depreciation and amortization (1,802) (1,790)
------- -------
$ 19 $ 65
======= =======
F-23
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Future minimum lease payments under capital leases as of December 31, 2003 were
(in thousands):
Year ended December 31,
2004 12
2005 8
-------
20
Less amount representing interest (2)
-------
Present value of capital lease obligation 18
Capital lease obligations - current portion (12)
-------
Capital lease obligations - long-term portion $ 6
=======
Operating Leases
The Company leases office and manufacturing space in Alameda, California, under
a noncancelable operating lease which expires in June 2004. The Company also
leases manufacturing space in Rockville, Maryland under two operating subleases.
Total rent expense under these leases was $836,000 and $867,000 for the years
ended December 2003 and 2002, respectively. Future minimum rental payments under
all noncancelable operating leases as of December 31, 2003 were (in thousands):
Year ended December 31,
2004 $ 584
2005 385
2006 321
Thereafter --
-------
Total $ 1,290
=======
Refer to Note 18 for information regarding an extension of the lease for the
Company's Rockville, Maryland facilities.
(9) MANDATORILY REDEEMABLE PREFERRED STOCK
At the time of its original incorporation, the Company issued both common stock
and $1,000,000 of mandatorily redeemable Series A preferred stock. The Company
is required to redeem all shares of mandatorily redeemable Series A preferred
stock within 60 days of any fiscal year-end in which the Company attains
$3,000,000 in retained earnings, and funds are legally available. Based on
losses accumulated through December 31, 2003, the Company must achieve in excess
of $130,800,000 in future earnings before any repayment is required. The
mandatorily redeemable Series A preferred stock is nonvoting and holders of
these shares are entitled to receive cumulative dividends at the rate of $1.20
per share per annum. Through June 30, 2003, cumulative preferred dividends
totaling $1,636,000 have been charged to stockholders' equity (deficit) to
accrete for the mandatorily redeemable Series A preferred stock redemption value
with a corresponding increase in the recorded amount of the mandatorily
redeemable Series A preferred stock. Since the Company's third quarter 2003
adoption of SFAS No. 150, as described in Note 2, cumulative preferred dividends
totaling $60,000 have been charged to interest expense to accrete for the
mandatorily redeemable Series A preferred stock redemption value with a
corresponding increase in the recorded amount of the mandatorily redeemable
Series A preferred stock.
In anticipation of using a portion of the proceeds from its Initial Public
Offering to redeem the Series A preferred stock, the Company eliminated the
Series A preferred stock from its articles of incorporation upon reincorporation
of the Company in Delaware in June 1996. However, management subsequently chose
not to redeem the Series A preferred stock and as of December 31, 2003 it
remains outstanding. The holders of such shares maintain the same rights as held
before the reincorporation.
(10) STOCKHOLDERS' EQUITY (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 the 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.
F-24
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Private Placements
As detailed in the Consolidated Statements of Stockholders' Equity (Deficit),
the Company raised net proceeds $0.4 million and $12.5 million in private
placement transactions with accredited investors who purchased 266,667 and
28,333,333 shares during 2002 and 2003, respectively.
Under the terms of the August 2002 private placement, Calypte 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 was required to issue, as liquidated damages, 8,333
shares of its common stock for each ten days of delay past November 27, 2002.
The shares underlying this agreement were included in the Company's S-2
registration statement that was filed with the SEC on July 8, 2003 and which
became effective on July 18, 2003. Through the effective date of the
Registration Statement, the Company charged an aggregate of $225,000 to interest
expense representing the value of 183,333 shares issuable as liquidated damages.
On April 1, 2003, when the price of the Company's common stock was $0.849, the
Company issued 100,000 shares of its common stock in settlement of accumulated
liquidated damages through March 27, 2003, pursuant to the terms of the
agreement. On September 19, 2003, when the price of the Company's common stock
was $1.43, the Company issued an additional 83,333 shares of its common stock in
final settlement of liquidated damages under this agreement.
On July 31, 2003, when the market price of the Company's stock was $0.18 the
Company announced that it had entered into a financing agreement with Marr
Technologies B.V. ("Marr") in which the Company would issue 8,333,333 restricted
shares of its common stock priced at $0.30 for an aggregate of $2.5 million. The
Company's stock just prior to the announcement had been trading in a range
between $0.11 and $0.12 per share. The agreement contains a 12 month lock-up
(holding period) provision. In conjunction with the investment, Marr has the
right to nominate two mutually-agreeable individuals for appointment to the
Calypte Board of Directors at a mutually-agreeable future date. The two
companies also signed a Memorandum of Understanding and have formed a joint
venture in China, with the intent of creating a platform for manufacturing,
distribution and sale of Calypte's products in China. Calypte's existing
distribution agreement has been assigned to the joint venture under the terms of
this agreement. On September 2, 2003, when the market price of the Company's
stock was $0.82, the Company announced that it had entered into an additional
$10 million equity financing agreement with Marr in which the Company would
issue 20 million restricted shares of its common stock priced at $0.50 per
share. This agreement also contains a 12 month lock-up provision.
Equity Line of Credit
In August 2001, the Company and Townsbury Investments, Ltd. ("Townsbury"), 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 in
October 2001. Under this arrangement, the Company, at its sole discretion, could
draw down on this facility, sometimes termed an equity line, from time to time,
and the investment fund was obligated to purchase shares of the Company's common
stock. The purchase price of the common stock purchased pursuant to any draw
down was 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, in October 2001, the Company issued a 7-year
fully-vested warrant to Townsbury to purchase approximately 140,000 shares of
common stock at an exercise price of $8.229 per share and issued approximately
3,800 shares of its common stock as a fee to Townsbury. In October 2001, the
Company filed a Registration Statement on Form S-2 with the Securities and
Exchange Commission to register for resale 10,000,000 shares of common stock
that it might issue in conjunction with the equity line facility, the warrant
and the fee shares. During November and December 2001, the Company issued two
draw down requests under this facility in the aggregate amount of $430,000. The
Company issued 72,738 shares of its common stock and received aggregate net
proceeds of $406,000 after deducting fees and expenses in settling these two
draw downs. During 2002, the Company issued 783,038 shares of its common stock
and received aggregate net proceeds of approximately $2.7 million after
deducting fees and expenses in settling these fourteen draw downs. At the
expiration of the facility in October 2003, the Company had issud all but
approximately 633 shares of the registered stock.
The warrant issued to Townsbury was valued on the date of issue at $6.60 per
share using the Black-Scholes option-pricing model with the following
assumptions: expected dividend yield of 0.0%; risk free interest rate of 4.3%,
the contractual life of 7 years, and volatility of 80%. The warrant was
accounted for as a deferred offering cost and was recognized as a cost of the
financing in proportion to the amount of each draw-down in relation to the $10
million nominal commitment amount. The unamortized balanced was written off as
interest expense at the termination of the facility.
F-25
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
In conjunction with the issuance of the 10% convertible note to BNC Bach
described in Note 6, on May 10, 2002 when the market price of the Company's
common stock was $0.90, Calypte repriced from $8.23 to $0.45 the 140,000 share
warrant issued to Townsbury pursuant to the equity line, as permitted by the
warrant's originally negotiated terms. Townsbury exercised the warrant for the
entire 140,000 shares and Calypte received $63,000 in proceeds. In light of the
Company's precarious financial condition and its being in danger of ceasing
operations, the exercise price was modified to serve as an inducement for the
investor to exercise the warrant. The Company viewed the modification of the
exercise price as fair and reasonable under the circumstances. Townsbury was and
is viewed as an unaffiliated party of the Company. The fair value of the warrant
had originally been treated as a deferred offering cost associated with the
equity line. The fair value of the repriced warrant was less than that of the
original warrant and therefore no accounting adjustment attributable to the
repricing was required. Upon the exercise of the warrant, the Company
reclassified the $807,000 unamortized balance of the deferred offering cost to
additional paid-in capital.
Warrants, options and stock grants
During 2002, the Company looked for ways to minimize its use of cash while
obtaining required services. It issued warrants and options to purchase an
aggregate of 1,583,333 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 1,550,000 shares of the Company's common stock
and they exercised the balance in 2003. The Company received approximately $1.7
million in proceeds in 2002 and 2003. The warrant and option grants were
non-forfeitable and fully-vested at the date of issuance and were valued using
the Black-Scholes option pricing model using the following range of assumptions:
LOW HIGH
-------- --------
Exercise price per share $0.45 $1.50
Market price of Calypte's stock on date of issuance $0.90 $4.20
Assumptions:
Expected dividend yield 0.0% 0.0%
Risk free rate of return 1.25% 5.16%
Contractual life 3 months 10 years
Volatility 80% 80%
Fair Market Value $0.465 $7.59
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
non-cash selling, general and administrative expense in the amount of $2.1
million attributable to these warrants at the date of grant in 2002.
In addition to the above warrants and options, the Company issued stock grants
for approximately 103,000 shares of its common stock to certain consultants and
other vendors under various agreements and recorded non-cash selling, general
and administrative expense of $364,000 based on the intrinsic value of the stock
on the date granted during 2002.
During 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 4,463,834 shares of its
common stock as compensation for these services. During 2003, the consultants
exercised warrants to purchase 4,263,834 shares of the Company's common stock
and the Company received proceeds of $2,707,000. The warrants were
non-forfeitable and fully-vested at the date of issuance and were valued using
the Black-Scholes option pricing model using the following range of assumptions:
LOW HIGH
-------- --------
Exercise price per share $0.080 $1.50
Market price of Calypte's stock on date of issuance $0.18 $2.01
Assumptions:
Expected dividend yield 0.0% 0.0%
Risk free rate of return 0.92% 1.86%
Contractual life 3 months 24 months
Volatility 131.35% 411.50%
Fair Market Value $0.11 $1.46
F-26
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
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
non-cash selling, general and administrative expense in the amount of $2.8
million attributable to these warrants at the date of grant in 2003.
In addition to the warrants and options described above, during 2003, the
Company also issued stock grants for approximately 3,637,000 shares of its
common stock to certain consultants and other vendors under various agreements
and recorded non-cash selling, general and administrative expense of $2,712,000
based on the intrinsic value of the stock on the date of grant.
Change of Control Provisions
Certain provisions of the Company's Certificate of Incorporation and Bylaws may
have the effect of preventing, discouraging or delaying any change in the
control of the Company and may maintain the incumbency of the Board of Directors
and management. The authorization of undesignated preferred stock makes it
possible for the Board of Directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company. Additionally, in December 1998, the Company's
Board of Directors declared a dividend distribution of one preferred share
purchase right (a Right) for each outstanding share of common stock of the
Company. The dividend was payable to the stockholders of record on January 5,
1999. The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired. However, the Rights should not interfere with
any tender offer or merger approved by the Company because the Rights do not
become exercisable in the event of a permitted offer or other acquisition
exempted by the Board.
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS
Stock option grants to employees are generally issued with an exercise price
equal to the market price at the grant date. To the extent that the market price
of the common stock exceeds the exercise price of the options, deferred
compensation is recognized for the intrinsic value in accordance with APB 25 and
FIN 44. This deferred compensation would be amortized on a straight-line basis
over the vesting period of the option.
Option grants to non-employees are valued at the date of grant using the
Black-Scholes option-pricing model in accordance with FAS 123. Option grants
that do not include sufficient disincentive for non-performance are accounted
for in accordance with EITFs 96-18 and 00-18. In such instances, the deferred
compensation is amortized over the term of the agreement on a straight-line
basis. Until the awards are fully vested or a measurement date is achieved, the
Company records an adjustment to deferred compensation and consultant expense to
reflect the impact of the fair value, as remeasured at quarter-end, of the
options based on changes to the Company's stock price.
Stock bonuses and awards reflect shares of Calypte common stock granted to
employees and consultants. Compensation expense is recognized at the time of
grant, and is determined based on the number of shares awarded and the closing
market price at the date of the award, in accordance with APB 25.
2000 Equity Incentive Plan
In June 2000, the Company's Board of Directors and stockholders approved the
adoption of the Company's 2000 Equity Incentive Plan (the "2000 Incentive Plan")
to replace the Company's 1991 Incentive Stock Plan, which expired in April 2001.
At the Annual Meeting of Stockholders in May 2003, the Company's stockholders
approved an increase to 10,000,000 shares in the number of shares of the
Company's common stock authorized for issuance under this plan. The Compensation
Committee of the Company's Board of Directors administers the Plan. The Board of
Directors may amend or modify the 2000 Incentive Plan at any time. It will
expire in June 2010, unless terminated earlier by the Board of Directors.
Under the terms of the 2000 Incentive Plan, nonstatutory stock options,
restricted stock and stock bonuses may be granted to employees, including
directors who are employees, non-employee directors, and consultants. Incentive
stock options may be granted only to employees.
Nonstatutory stock options may be granted under the 2000 Incentive Plan at a
price less than the fair market value of the common stock on the date the option
is granted. Prior to the amendment of the 2000 Incentive Plan approved by the
Company's stockholders at the May 2003 Annual Meeting of Stockholders,
nonstatutory stock options could not be granted at a price less than 85% of the
common stock on the grant date. Incentive stock options may be not be granted
under the 2000 Incentive Plan at a price less than 100% of the fair market value
of the common stock on the date the option is granted.
F-27
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Incentive stock options granted to employees who, on the date of grant, own
stock representing more than 10% of the voting power of all classes of stock of
the Company are granted at an exercise price not less than 110% of the fair
market value of the common stock. Options granted to employees under the 2000
Incentive Plan generally vest monthly over periods of up to three years, as
specified in the option agreements. The term of nonstatutory and incentive stock
options granted is 10 years or less from the date of the grant, as provided in
the option agreements.
Restricted stock awards may be granted to purchase stock either in addition to,
or in tandem with, other awards under the 2000 Incentive Plan, under conditions
determined by the Compensation Committee. The purchase price for such awards
must be no less than 85% of the fair market value of the Company's Common Stock
on the date of the grant. The Compensation Committee may also grant stock bonus
awards to employees or consultants for services rendered to the Company. Such
awards may also be granted either in addition to, or in tandem with, other
awards under the 2000 Incentive Plan, under conditions determined by the
Compensation Committee.
Deferred compensation is recorded related to options granted to non-employees
and options granted to employees when the exercise price is below the fair
market value of the underlying common stock, if any. For the years ended
December 31, 2003 and 2002, the Company recorded deferred compensation of
$10,000, and $75,000, respectively, for certain of the Company's common stock
options granted under the Stock Plan. This amount is amortized over the relevant
period of service. The amortized compensation expense for the years ended
December 31, 2003 and December 31, 2002 was $3,000 and $83,000, respectively.
The Company recorded compensation expense of $94,000 and $721,000, respectively,
attributable to stock bonus awards of 48,667 shares of common stock granted
during 2003 and 300,974 shares of common stock granted during 2002. Compensation
expense attributable to stock bonuses is determined by multiplying the closing
market price of the Company's common stock on the date of grant by the number of
shares granted. The weighted average price of shares issued as stock bonuses was
$1.92 in 2003 and $2.40 in 2002.
In December 2002, at the Company's request, employees agreed to the cancellation
of an aggregate of approximately 440,000 options (including approximately 88,000
options granted to officers) to purchase the Company's common stock previously
issued from this Plan and from the 1991 Incentive Stock Plan. The cancelled
options had exercise prices above the then-current market price. The Company
agreed to reissue these options on a fully vested basis with an exercise price
of the lesser of (i) $1.92 per share or (ii) market at the date of the 2003
Annual Stockholders' Meeting, subject to stockholder approval at the meeting of
an amendment to the 2000 Incentive Plan to increase the number of authorized
shares for the 2000 Incentive Plan and to increase the number of shares
permitted to be granted annually to a plan participant from 900,000 to 2,500,000
shares. The Company's stockholders approved the amendment and the options were
issued on May 29, 2003 at the market price of $0.32.
The following table summarizes option grant activity under the 2000 Incentive
Plan:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
=========== ==============
Outstanding as of December 31, 2001 292,418 $ 13.34
Granted 317,860 3.03
Exercised (99,140) 2.60
Cancelled (453,727) 9.70
Outstanding as of December 31, 2002 57,411 $ 3.74
Granted 8,528,626 0.33
Exercised (1,426,510) 0.38
Cancelled (562,778) 0.36
Outstanding as of December 31, 2003 6,596,749 $ 0.35
Exercisable as of December 31, 2002 38,710 $ 3.68
Exercisable as of December 31, 2003 2,431,636 $ 0.34
F-28
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
As of December 31, 2003, 1,579,884 shares of common stock were available for
grant under the 2000 Incentive Plan. The following table summarizes the per
share weighted-average fair value of stock options granted during 2003 and 2002,
on the date of grant using the Black-Scholes option-pricing model with the
indicated weighted-average assumptions:
2003 2002
========= =========
Per share weighted average fair value of options granted $0.336 $1.389
Expected dividend yield 0.00% 0.00%
Risk-free interest rate 3.44% 3.55%
Volatility 226.1% 80.0%
Expected life 8.0 years 4.9 years
1991 Incentive Stock Plan
In April 1991, the Company's Board of Directors approved the adoption of the
Company's Incentive Stock Plan (the Stock Plan). A total of 141,366 shares of
common stock were reserved for issuance under the Stock Plan. Since the adoption
of the 2000 Equity Incentive Plan in June 2000, no additional shares have been
granted from the Stock Plan. All of the shares reserved but not issued or
subject to options granted under the Stock Plan, including shares subject to
cancelled options, are available for grant under the 2000 Incentive Plan. At
December 31, 2003, there were no shares of common stock available for grant
under the Stock Plan.
The following table summarizes activity under the Stock Plan:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
======= ================
Outstanding as of December 31, 2001 40,386 $ 50.45
Cancelled (33,630) 38.23
------- ----------
Outstanding as of December 31, 2002 6,756 $ 111.31
Cancelled (500) 210.00
------- ----------
Outstanding as of December 31, 2003 6,256 $ 103.42
======= ==========
Exercisable as of December 31, 2002 6,756 $ 111.31
Exercisable as of December 31, 2003 6,256 $ 103.42
1995 Director Option Plan
In December 1995, the Company's Board of Directors approved the Company's 1995
Director Option Plan (the Director Option Plan). At the Annual Meeting of
Stockholders in May 2003, the Company's stockholders approved an increase to
2,000,000 shares in the number of shares of the Company's common stock
authorized for issuance under this plan. Under the Director Option Plan, the
Company's Board of Directors determines the number of shares of the Company's
stock that will be granted each year to newly-elected and re-elected directors.
Options may be granted under this plan to non-employee directors or, pursuant to
an agreement between the Company and another person, entity or affiliate with
whom a non-employee director is associated, that other person, entity, or
affiliate. Each option granted under the Director Option Plan is exercisable at
100% of the fair market value of the Company's common stock on the date the
option was granted. Each grant under the plan vests monthly over the twelve
month period commencing with the director's date of election or re-election,
provided that the option will become vested and fully exercisable on the date of
the next annual meeting of stockholders if such meeting occurs less than one
year after the date of the grant. The plan will expire in December 2005 unless
terminated earlier in accordance with certain provisions of the Plan.
The Company has not recorded any deferred compensation for the Company's common
stock options granted under the Director Option Plan.
F-29
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The following table summarizes activity under the Director Option Plan:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
======= ================
Outstanding as of December 31, 2001 21,930 $ 37.65
Granted 6,667 4.80
Cancelled (7,916) 4.99
--------
Outstanding as of December 31, 2002 20,681 $ 39.56
Granted 631,667 0.33
Exercised (8,333) 0.32
Cancelled (206,335) 0.87
--------
Outstanding as of December 31, 2003 437,680 $ 1.93
========
Exercisable as of December 31, 2002 20,681 $ 39.56
Exercisable as of December 31, 2003 271,004 $ 2.93
As of December 31, 2003, 1,553,962 shares of common stock were available for
grant under the Director Option Plan. The following table summarizes the per
share weighted-average fair value of stock options granted during 2003 and 2002,
on the date of grant using the Black-Scholes option-pricing model with the
indicated weighted-average assumptions:
2003 2002
========== =========
Per share weighted-average fair value of options granted $0.332 $1.760
Expected dividend yield 0.00% 0.00%
Risk-free interest rate 3.57% 5.16%
Volatility 217.1% 80.0%
Expected life 10.0 years 1.3 years
2003 Non-Qualified Stock Option Plan
In June 2003, the Company's Board of Directors authorized and the Company
registered a total of 10,000,000 shares of its common stock under a Form S-8
Registration Statement for issuance under the Company's 2003 Non-Qualified Stock
Option Plan (the "2003 Plan"). Under the 2003 Plan, at the discretion of the
Board of Directors, shares may be awarded in consideration of services rendered
to the Company. Options or awards may be granted under this plan only to
non-officer employees and consultants. The plan will expire in June 2013 unless
terminated earlier in accordance with certain provisions of the plan.
The following table summarizes 2003 option activity for the 2003 Plan:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
======= ================
Granted 7,227,500 $ 0.16
Exercised (7,227,500) 0.16
----------
Outstanding as of December 31, 2003
-- $ --
==========
Exercisable as of December 31, 2003 -- $ --
F-30
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The following table summarizes the per share weighted-average fair value of
stock options granted during 2003, on the date of grant using the Black-Scholes
option-pricing model with the indicated weighted-average assumptions:
2003
==========
Per share weighted-average fair value of options granted $0.114
Expected dividend yield 0.00%
Risk-free interest rate 0.918%
Volatility 156.1%
Expected life 0.22 years
The Company also granted stock awards from the 2003 Plan for an aggregate of
2,689,552 shares of its common stock during 2003 and recorded compensation
expense of $788,000. Compensation expense attributable to stock awards is
determined by multiplying the closing market price of the Company's common stock
on the date of grant by the number of shares granted. The weighted average price
of shares issued as stock awards was $0.36 in 2003. At December 31, 2003, a
total of 82,978 shares of common stock were available for grant as options or
other awards under the 2003 Plan.
The following table summarizes information about stock options outstanding at
December 31, 2003 under the 2000 Equity Incentive Plan, the 1991 Incentive Stock
Plan, and the 1995 Director Option Plan
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
============================================= =============================
WEIGHTED-
AVERAGE WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER WEIGHTED-
OUTSTANDING YEARS TO EXERCISE EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES AT 12/31/03 EXPIRATION PRICE AT 12/31/03 EXERCISE PRICE
========================== ============= ============= ============= ============= ==============
$0.010 - $0.123 359,564 9.42 $ 0.014 345,564 $ 0.010
$0.126 - $0.180 819,000 3.78 $ 0.127 10,000 $ 1.126
$0.320 - $0.320 5,169,592 8.25 $ 0.320 2,281,151 $ 0.320
$0.610 - $1.405 646,900 9.29 $ 0.762 30,000 $ 0.900
$3.000 - $210.000 45,629 7.35 $ 33.318 42,181 $ 35.571
========= =========
$0.010 - $210.000 7,040,685 7.88 $ 0.536 2,708,896 $ 0.835
========= =========
1995 Employee Stock Purchase Plan
In December 1995, the Company's Board of Directors approved the Company's
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code (the Code).
At the Annual Meeting of Stockholders in May 2003, the Company's stockholders
approved an increase to 1,000,000 shares in the number of shares of the
Company's common stock authorized for issuance under this plan. Under the
Purchase Plan, an eligible employee may purchase shares of common stock from the
Company through payroll deductions of up to 10% of his or her compensation, at a
price per share equal to 85% of the lower of (i) the fair market value of the
Company's common stock on the first day of an offering period under the Purchase
Plan or (ii) the fair market value of the common stock on the last day of the
six month purchase period during the offering period. Each offering period lasts
for twenty four months; prior to 2002, stock purchases occurred on April 30 and
October 31 of each year. The purchase period beginning November 1, 2001 and
ending April 30, 2002 was terminated due to the wind-down of the Company's
operations and all payroll deductions withheld from employees were returned. A
new purchase period began on July 1, 2002 and was completed on December 31,
2002, when employees purchased 3,437 shares of the Company's common stock.
During the year ended December 31, 2003, employees purchased 18,192, shares
under the Purchase Plan. Cumulative purchases under the Purchase Plan through
December 31, 2003 totaled 28,380 shares, leaving 971,620 shares reserved for
future purchases.
F-31
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(12) SECTION 401(K) PLAN
Effective January 1, 1995, the Company adopted a Retirement Savings and
Investment Plan (the 401(k) Plan) covering the Company's full-time employees
located in the United States. The 401(k) Plan is intended to qualify under
Section 401(k) of the Internal Revenue Code. Under the terms of the 401(k) Plan,
employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit and to have the amount of such reduction
contributed to the 401(k) Plan. The Company matched participant's contributions
up to the first $2,000 during 2003, for approximately $98,000; no such Company
contribution was made in 2002.
(13) INCOME TAXES
The provision for income taxes for all periods presented in the consolidated
statements of operations represents minimum California franchise taxes. Income
tax expense differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to pretax losses as a result of the following:
2003 2002
----------- -----------
Computed expected tax expense $ (8,960) $ (4,520)
Losses and credits for which no benefits have been recognized 8,950 4,514
Meals and entertainment expenses, and officers life
insurance not deductible for income tax purposes 11 7
State tax expense, net of federal income tax benefit 1 1
----------- -----------
$ 2 $ 2
=========== ===========
The tax effect of temporary differences that give rise to significant portions
of the deferred tax asset is presented below:
DECEMBER 31,
--------------------------
2003 2002
----------- -----------
Deferred tax assets:
Employee benefit reserves, including accrued vacation $ 46 $ 50
and bonuses
Start-up and other capitalization 556 673
Fixed assets, due to differences in depreciation 300 173
Deferred rent and revenue 199 210
Net operating loss carryovers 44,070 33,544
Research and development credits 1,576 1,596
Other 622 704
----------- -----------
Total gross deferred tax assets 47,369 36,950
Valuation allowance (47,369) (36,950)
----------- -----------
Net deferred tax asset -- --
=========== ===========
The net change in the valuation allowance for the years ended December 2003 and
2002 was an increase of $10,419,000 and $4,623,000, respectively. Because there
is uncertainty regarding the Company's ability to realize its deferred tax
assets, a 100% valuation allowance has been established. When realized,
approximately $171,000 of deferred tax assets will be creditable to additional
paid-in capital.
As of December 31, 2003, the Company had federal tax net operating loss
carryforwards of approximately $122,977,000, which will expire in the years 2004
through 2023. The Company also has federal research and development credit
carryforwards as of December 31, 2003 of approximately $1,156,000, which will
expire in the years 2005 through 2022.
State tax net operating loss carryforwards were approximately $38,700,000 and
state research and development credit carryforwards were $619,000 as of December
31, 2003. The state net operating loss carryforwards will expire in the years
2004 through 2013 and the state research and development credits will
carryforward indefinitely.
F-32
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The Company's ability to utilize its net operating loss and research and
development tax credit carryforwards may be limited in the future if it is
determined that the Company experienced an ownership change, as defined in
Section 382 of the Internal Revenue Code.
(14) ROYALTY, LICENSE, AND RESEARCH AGREEMENTS
Royalty and License Agreements
The Company has entered into arrangements with various organizations to receive
the right to utilize certain patents and proprietary rights under licensing
agreements in exchange for the Company making certain royalty payments based on
sales of certain products and services. The royalty obligations are based on a
percentage of net sales of licensed products and include minimum annual royalty
payments under some agreements. The Company pays royalties to five entities on
its urine-based screening test and to one entity on its serum- and urine-based
Western Blot supplemental tests. The patents underlying the royalties expire
between 2004 and 2009. There are minimum payments required by certain of the
agreements that apply regardless of the amount of actual sales. The Company did
not make all of the required minimum and sales-based payments for 2003 or 2002.
At December 31, 2003, the Company is approximately $409,000 in arrears on the
payment of royalties under certain of its licensing agreements. Under certain of
the Company's licensing agreements, the patent holder or other organization
granting rights to the Company has the right to revoke the license for
non-payment of royalties. Should the patent holder or other granting
organization take that step, the Company could find it necessary to modify its
manufacturing practices or change its business plan. During 2002, the Company
settled approximately $1 million of its past due royalties by issuing 25,000
shares of its common stock. This transaction was a part of the debt
restructuring discussed in Note 7. In September 2003, the Company issued 500,000
shares of its common stock valued at the date of issuance at approximately
$610,000 to maintain its exclusivity under certain license agreements for the
years 2003 and 2004. The portion applicable to exclusivity during 2004 is
recorded as a prepaid expense at December 31, 2003.
(15) EMPLOYMENT AND CONSULTING AGREEMENTS
In October 2001, the Company renewed an agreement with a former member of the
Board of Directors to serve as Chairman of the Board of Directors for a twelve
month term. The director was granted options to purchase 10,000 shares of the
Company's stock at an exercise price of $6.60. The options were to vest ratably
over the twelve-month term of the agreement. The Board member resigned as
Chairman and as a member of the Board in May 2002. All options not vested at the
time of his resignation were cancelled.
In May 2002, in conjunction with the financing proposal enabling the restart of
operations, the independent members of the Company's Board of Directors entered
into an employment agreement with the Company's new Executive Chairman. The
employment agreement specifies an annual salary of $400,000 and allows for
annual increases based on the Company's performance and approval of the
Compensation Committee of the Board of Directors. The Company deferred
approximately 30% of the Executive Chairman's cash compensation during 2002,
which the Company accrued. The Company continued to defer and accrue this
compensation until it was paid during the third quarter of 2003. In the event
the Company terminates the Executive Chairman's employment other than for cause,
he is entitled to receive his base salary for at least twelve months. On May 10,
2002, when the market price of the Company's common stock was $0.90 per share,
the Executive Chairman was granted fully-vested options to purchase 65,556
shares of the Company's common stock at $0.45 per share and options to purchase
200,000 shares of the Company's common stock at $0.90 per share, with the option
to purchase 100,000 shares vested immediately and the option to purchase the
remainder vested on the one-year anniversary of the option grant. The options
have a five-year term. In the fourth quarter of 2002, the Company renegotiated
the terms of the option grant contained in the Executive Chairman's Employment
Agreement, canceling all but 30,000 of the options granted at $0.90. The
Executive Chairman was granted 235,556 fully-vested options at an exercise price
of $0.32 per share, the market price of the Company's stock on the May 29, 2003
grant date, following stockholder approval at the May 20, 2003 Annual
Stockholders' Meeting of amendments to the Company's 2000 Equity Incentive Plan.
Additionally, on May 29, 2003, the Executive Chairman was also granted
fully-exercisable options to purchase 256,785 shares of the Company's stock at
$0.01 per share, in recognition of an additional salary deferral arrangement,
and options to purchase 2,000,000 shares of the Company's stock at $0.32 per
share. The latter options were exercisable 50% upon grant and 50% on the one
year anniversary of the grant.
F-33
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
In October 2002, the Company entered into a new five-year agreement with a
former officer and director that included an annual salary of $300,000, subject
to annual review. The previous agreement, which commenced in October 1999,
provided for an initial annual salary of $220,000, subject to annual increases.
In conjunction with the new agreement, the Company also granted the officer
options to purchase 146,667 shares of common stock, at an exercise price of
$2.40, subject to stockholder approval of amendments at the 2003 Annual Meeting
of Stockholders to the Company's 2000 Equity Incentive Plan. These options were
to be fully vested on the grant date. In February 2003, the exercise price of
this option was reduced to the lesser of $1.50 per share or the market price on
the grant date. In the fourth quarter of 2002, the officer agreed to cancel all
outstanding options previously granted under the 1991 Incentive Stock Plan and
the 2000 Equity Incentive Plan, an aggregate of 62,573 options. The officer was
granted 62,573 fully-vested options at an exercise price of $0.32 per share, the
market price of the Company's stock on the May 29, 2003 grant date, following
stockholder approval at the May 20, 2003 Annual Stockholders' Meeting of
amendments to the Company's 2000 Equity Incentive Plan. The options granted
conditionally under the Employment Agreement were also granted as fully vested
at $0.32 per share on May 29, 2003. Additionally, on May 29, 2003, the officer
was also granted fully-exercisable options to purchase 85,236 shares of the
Company's stock at $0.01 per share, in recognition of a salary deferral
arrangement, and options to purchase 1,250,000 shares of the Company's stock at
$0.32 per share. The latter options were exercisable 50% upon grant and 50% on
the one year anniversary of the grant. Under the terms of a Separation
Agreement, Mutual Release and Waiver of Claims, the officer resigned effective
June 2, 2003 as the Company's President and Chief Executive Officer and
effective June 27, 2003 as a member of the Company's Board of Directors. Under
the terms of the Separation Agreement, the Company agreed to pay approximately
$313,000 over a period of up to one year and to permit previously issued options
to vest in accordance with the terms of their grants.
On January 1, 2003, the Company entered into a twelve month employment
agreement, with automatic renewal options, with an officer of the Company that
included a base salary of $200,000, and the grant of options to purchase 83,333
shares of the Company's common stock at an exercise price of $1.50 per share,
subject to stockholder approval of amendments at the 2003 Annual Meeting of
Stockholders to the Company's 2000 Equity Incentive Plan. These options were to
be fully vested on the grant date. The officer had previously been granted
options to purchase an aggregate of 25,000 shares of the Company's common stock
in 2001 and 2002, pursuant to an earlier consulting contract. In the fourth
quarter of 2002, the officer agreed to cancel all outstanding options previously
granted to him. The officer was granted 25,000 fully-vested options at an
exercise price of $0.32 per share, the market price of the Company's stock on
the May 29, 2003 grant date, following stockholder approval at the May 20, 2003
Annual Stockholders' Meeting of amendments to the Company's 2000 Equity
Incentive Plan. The options granted conditionally under the Employment Agreement
were also granted as fully vested at $0.32 per share on May 29, 2003.
Additionally, on May 29, 2003, the officer was also granted fully-exercisable
options to purchase 24,038 shares of the Company's stock at $0.01 per share, in
recognition of a salary deferral arrangement, and options to purchase 625,000
shares of the Company's stock at $0.32 per share. The latter options were
exercisable 50% upon grant and 50% on the one year anniversary of the grant.
In June 2003, the Company entered into a five year employment agreement with a
director and officer of the Company that included a base annual salary of
$350,000. Refer to Note 18 regarding management changes.
In April 2003, the Company entered into a three-year consulting agreement for
advisory and other services related to the marketing, distribution and sale of
its products. The agreement obligates the Company to pay the consultant an
aggregate of $3,000,000 in cash as follows: $750,000 in 2003, $1,000,000 in both
2004 and 2005, and $250,000 in 2006. At December 31, 2003, the Company had paid
an aggregate of $675,000 pursuant to the contract and had accrued the remaining
liability for the balance due in 2003. Additionally, the agreement requires the
Company to issue 66,667 shares of its common stock annually as directed by the
consultant in 2003, 2004 and 2005.
(16) RELATED PARTY TRANSACTIONS
As described in Note 6, in September 2001, the Company issued a $400,000 8.5%
Promissory Note to the parent company of its then-largest stockholder. The
Company renegotiated the note during 2001, 2002 and subsequently in 2003. This
note was repaid in 2003.
In connection with the aggregate $12.5 million investments by Marr Technologies
BV during 2003, the Company signed a Memorandum Of Understanding to create a
joint venture in China to market the Company's current and future products.
Additionally, the Nominating Committee of the Company's Board of Directors
agreed to grant Marr the right to appoint two mutually-agreeable representatives
to the Company's Board of Directors at a mutually-agreeable future date.
In November 2003, the joint venture, Beijing Calypte Biomedical Technology Ltd.,
was formed, with the Company owning 51% of its stock.
F-34
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(17) CONTINGENCIES
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. On April 30, 2003, the Company and Heller reached a
settlement agreement whereby the Company agreed to pay a total of $463,000 to
settle this claim, after which the suit will be dismissed. 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. The Company made
the final required payment to Heller in February 2004 and Heller filed a request
for dismissal of the suit with prejudice.
On January 24, 2003, the Company was informed that one if its former vendors,
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. On September 9, 2003
the Court dismissed Validation's lawsuit against the Company due to the failure
of Validation's counsel to appear at a mediation status review and to respond to
an order to show cause regarding the failure to appear. Validation has filed a
motion to vacate this dismissal on grounds of inadvertence, mistake, surprise
and excusable neglect. The Court vacated the dismissal and reinstated the case
at a hearing on December 2, 2003 in return for Validation's payment of fees
incurred by the Company in connection with Validation's failure to appear.
Additonally, the Court ordered the parties to mediation. The parties are in the
process of scheduling the mediation. The Company believes that it has
meritorious defenses to the action.
On May 22, 2003, the Company was informed that a former vendor, Professional
Maintenance Management LLC ("PMM"), had instituted an action against the Company
in the Montgomery County Circuit Court of Maryland for the sum of $64,925 plus
post-judgment interest. The Company agreed to resolve the matter by making an
initial payment in the amount of $10,000 and subsequent monthly payments in the
amount of $7,500 toward the outstanding amount claimed by PMM. All payments have
been made and plaintiff's counsel has filed a dismissal of the action with the
Court.
In September of 2003, the Company was served a lawsuit filed in the United
States District Court for the Northern District of California by three
individuals, Michael Serro, Michael Caland and Assad Ali Assad, seeking shares
of the Company to which they claim they are entitled based on consulting
services they claim to have provided pursuant to consulting agreements they had
with the Company. The Company disputed the liability and contended that these
three individuals did not provide the consulting services to the Company upon
which their claims are based. A Stipulation of Dismissal was filed with the
Court in February 2004 and the matter is now closed.
The Company was contacted by the San Francisco District Office of the Securities
and Exchange Commission ("SEC") on October 28, 2003 and advised of an informal
inquiry being conducted by the enforcement staff of the SEC regarding the
Company. The staff has requested, among other things, documents and information
related to certain press releases issued by the Company. The SEC has advised the
Company that the inquiry should not be construed as an indication by the SEC or
its staff that any violation of law has occurred. The Company has voluntarily
provided the information sought by the SEC and is cooperating with the SEC in
connection with its informal inquiry. Independently, the Company's Audit
Committee has investigated the matter and has retained outside counsel to assist
in its investigation by reviewing the press releases and related information
that were the subject matter of the SEC's informal inquiry letter. The Audit
Committee has completed its investigation and reported the results of its
investigation and associated recommendations to the Board of Directors. Counsel
for the Audit Committee advised the Audit Committee and the Board of Directors
that the results of their investigation, interviews and review of documents
provided in response to the SEC's informal inquiry letter indicated no evidence
of management malfeasance with respect to its inquiry. The Audit Committee,
based upon its counsel's recommendations, proposed that the Company implement
certain practices and procedures, some of which represent a continuation or
formalization of present practices. The recommendations and proposals of the
Audit Committee that were approved by the Board of Directors include certain
improvements in the Company's press release issuance process and investor
relations and regulatory recordkeeping procedures. Additionally, the Board of
Directors has directed management to implement the American Stock Exchange
corporate governance standards (SR-AMEX-2003-65) approved by the SEC on December
1, 2003. The Company is in the process of implementing the directives of its
Board of Directors regarding Corporate Governance and has submitted to the
Board, and the Board has approved, certain policies and guidelines related to
press releases and investor relations that reflect the recommendations of the
Audit Committee.
F-35
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(18) SUBSEQUENT EVENTS
Extension of Mercator Debentures
On January 14, 2004, the Company extended the maturity date of the following
debentures until July 14, 2004:
o 10% Convertible Debenture dated January 14, 2003 issued to Mercator
Focus Fund, LP
o 10% Convertible Debenture dated January 30, 2003 issued to Mercator
Momentum Fund, LP
o 10% Convertible Debentures dated March 13, 2003 issued to Mercator
Momentum Fund III, LP and Mercator Focus Fund, LP
o 12% Convertible Debenture dated April 29, 2003 issued to Mercator
Momentum Fund, LP
In return for the extension of the maturity dates, the Company has agreed to pay
an additional extension fee equal to 2% of the outstanding principal balance per
month until the earlier of the extended maturity date or conversion. The
extension fee is payable 1% in cash and 1% in stock. Additionally, the Company
agreed to file a registration statement including the shares potentially
applicable to the conversion of the outstanding debenture balances and the
extension fees by no later than April 29, 2004.
Conversion of Mercator Debentures and Extension of Time to File a Registration
Statement
On April 22, 2004, when the market price of the Company's common stock was
$0.625 per share, Mercator Focus Fund converted the remaining $577,754 balance
of its January 2003 10% convertible debenture plus related accrued interest and
extension fees into 2,109,366 shares of restricted common stock. Also on April
22, 2004, Mercator Focus Fund converted the remaining $222,318 balance of its
March 2003 10% convertible debenture plus related accrued interest and extension
fees into 991,465 shares of restricted common stock.
On April 23, 2004, when the market price of the Company's common stock was
$0.625 per share, Mercator Focus Fund and Mercator Momentum Fund each agreed to
extend from April 29, 2004 until May 14, 2004 the period in which the Company is
required to file a registration statement including shares of its common stock
previously issued to them or, in the case of Mercator Momentum Fund, issuable to
it upon conversion of outstanding debentures. On May 7, 2004, when the market
price of the Company's common stock was $0.48 per share, the Company and
Mercator Momentum Fund and Mercator Focus Fund agreed to further extend from May
14, 2004 until 21 days following the closing of a private placement of equity
financing of at least $5,000,000, but in any case to no later than June 30,
2004, the period in which the Company is required to file a registration
statement including shares of its common stock issued or potentially issuable
upon conversion. The Company plans to file a registration statement on Form SB-2
including these shares no later than June 18, 2004.
Extension of Registration Rights
On January 23, 2004, the Company and Marr agreed to extend the registration
rights period attributable to 5,181,818 shares of the Company's common stock
issued in conjunction with Marr's conversion of $570,000 principal amount of the
Company's 12% Convertible Debentures from February 27, 2004 to April 29, 2004.
In return for the extension, the Company agreed to include in its next
registration statement an aggregate of 28,333,333 shares of its common stock
purchased by Marr in PIPE transactions in the third quarter of 2003. On April 23
2004, when the market price of the Common Stock was $0.625, the Company and Marr
agreed to extend until May 14, 2004 the period for filing the registration
statement including the shares issued to Marr upon conversion of the 12%
convertible debenture and in the 2003 PIPE transactions. On May 7 2004, when the
market price of the Company's common stock was $0.48 per share, Marr agreed to
further extend from May 14, 2004 until 21 days following the closing of a
private placement of equity financing of at least $5,000,000, but in any case to
no later than June 30, 2004, the period in which the Company is required to file
a registration statement including shares of its common stock issued to Marr
upon conversion of the 12% convertible debenture and in the 2003 PIPE
transactions. The Company plans to file a registration statement on Form SB-2
including these shares no later than June 18, 2004.
Amendment of Marr Credit Facility
On March 19, 2004, when the market price of the Company's common stock was
$0.575 per share, the Company and Marr amended the Marr Credit Facility to
increase the aggregate amount available under the Marr Credit Facility to
$15,000,000 and to eliminate the termination provision upon failure to have the
common stock listed on an established stock exchange by March 31, 2004. As
additional consideration for the amendment of the Marr Credit Facility, the
Company issued to a party designated by Marr a warrant to purchase 400,000
shares of its common stock at an exercise price of $0.46 per share. This warrant
is immediately exercisable and expires two years from its date of issuance on
March 18, 2006. On May 26, 2004, when the market price of the Common Stock was
$0.46 per share, the Company and Marr again amended the Marr Credit Facility
whereby Marr has committed to purchase up to $5,000,000 of Promissory Notes that
the Company may issue through December 31, 2004. Any Notes issued pursuant to
this second amendment will bear interest at 9% per annum and will have a
maturity date of May 31, 2005. The $5,000,000 amount available under the amended
Marr Credit Facility will be reduced by the amount of any equity financing
obtained by the Company after the May 26, 2004 effective date of the second
amendment and through the December 31, 2004 commitment period. At June 10, 2004,
the Company has issued no Notes under the Marr Credit Facility. As consideration
for the extension of the commitment period reflected in the second amendment of
the Marr Credit Facility, the Company issued to Marr a warrant to purchase
500,000 shares of its Common Stock at an exercise price of $0.40 per share. This
warrant is immediately exercisable and expires two years from its date of
issuance on May 26, 2006. The Company has granted piggyback registration rights
and plans to register the shares underlying the March 18, 2004 and the May 26,
2004 warrants in a registration statement on Form SB-2 no later than June 18,
2004.
F-36
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Additional Financing
May 2004 PIPE
On May 28, 2004, when the market price of the Company's Common Stock was $0.50
per share and pursuant to Regulations S and D, the Company issued 15,750,000
restricted shares of its Common Stock at a price of $0.40 per share to 6
unaffiliated investors and received gross proceeds of $6,300,000. Under the
terms of the Marr Credit Facility, which provides Marr a right of first refusal
to participate in subsequent financings on the same terms as other investors,
Marr invested $3,000,000 in this private placement and the Company issued
7,500,000 restricted shares of its Common Stock to Marr. Under the terms of the
subscription agreement, each investor received warrants to purchase the
Company's Common Stock in an amount equal to 35% of the number of shares
purchased in the private placement. Accordingly, the Company issued warrants to
purchase an aggregate of 8,137,500 shares of its Common Stock to the investors
and warrants to purchase an additional 630,000 shares of its Common Stock
pursuant to placement agency agreements. The warrants are exercisable at a price
of $0.50 per share for a period of two years from the May 28, 2004 date of
issuance.
The securities purchase agreements for the May 2004 PIPE provide the investors
with participation rights on the same terms and conditions as other investors in
any subsequent financing transactions the Company may complete within one year
of the closing of this placement. The shares issued pursuant to the May 2004
PIPE and the related warrants also contain anti-dilution provisions that will
require the Company to issue additional shares of its common stock to the PIPE
investors and modify their outstanding warrants if the Company raises additional
equity financing at a price below $0.40 per share in the year following the
closing of the PIPE transaction, except under the provisions of previously
outstanding convertible debt, option or warrant agreements. The Company has
granted piggyback registration rights and is required to register the shares
issued in the May 2004 PIPE and the shares underlying the related warrants in a
registration statement on Form SB-2 no later than June18, 2004.
Management Changes
On January 24, 2004, the Company announced the appointment of J. Richard George,
Ph.D. as its new President and Chief Executive Officer and Richard Van Maanen as
its new Vice President of Operations. The Company also announced that Jay
Oyakawa had resigned from his position as President, Chief Operating Officer and
as a member of the Company's Board of Directors. The Company entered into a
Separation Agreement and Release with Mr. Oyakawa wherein he will be paid a
severance of one year's salary of $350,000 over a twelve month period and was
vested in options to purchase 750,000 shares of the Company's common stock
exercisable at $0.32 granted to him in accordance with the Company's 2000 Equity
Incentive Plan. Dr. George has been the Company's Vice President of Government
Affairs since January 2003 and Mr. Van Maanen has been employed by the Company
since 1993 as Director of Marketing and Director of International Business
Development.
Operating Leases
In March 2004, the Company entered into a new lease agreement with the primary
landlord of its manufacturing facility in Rockville, Maryland. The new agreement
extends the lease of the premises through February 28, 2009, or 28 months beyond
the expiration of the curent sublease. Additionally, the new lease provides for
tenant improvements to be made in connection with the Company's consolidation of
its manufacturing operations at this facility in the amount of approximately
$250,000. The base rent for the tenant improvements will be approximately $5,500
per month from March 2004 through October 2006. Following the expiration of the
Company's current sublease, the base rent from November 2006 through February
2009 will be approximately $40,000 per month.
The Company's lease of its office and manufacturing facility in Alameda,
Californa expires on June 30, 2004. The Company plans to consolidate its
manufacturing operations at its Rockville facility and expects to complete the
physical relocation of those operations prior to the expiration of the Alameda
lease. On May 7, 2004, the Company signed a three year lease that commences on
June 15, 2004 for approximately 4,400 square feet of office space in Pleasanton,
California that will house its corporate headquarters. The base rent for the
Pleasanton office space will be approximately $7,750 per month for the term of
the lease.
F-37
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,656 $ 5,084
Accounts receivable, net of allowance of $36 at March 31, 2004 and December 31, 2003 446 369
Inventory 2,165 2,153
Prepaid expenses 858 872
Deferred offering costs, net of accumulated amortization of $347 and $333 at March 31,
2004 and December 31, 2003, respectively -- 14
Other current assets 60 63
----------- -----------
Total current assets 5,185 8,555
Property and equipment, net 871 727
Other assets 285 235
----------- -----------
$ 6,341 $ 9,517
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 4,186 $ 4,322
Notes and debentures payable, net of discount of $45 and $90 at March 31, 2004 and
December 31, 2003, respectively 913 868
Deferred revenue 500 500
----------- -----------
Total current liabilities 5,599 5,690
Other long term liabilities 140 157
Mandatorily redeemable Series A preferred stock, $0.001 par value; no
shares authorized at March 31, 2004 and December 31, 2003; 100,000 shares
issued and outstanding at March 31, 2004 and December 31, 2003; aggregate
redemption and liquidation value of $1,000
plus cumulative dividends 2,726 2,696
Minority interest in consolidated joint venture 57 57
----------- -----------
Total liabilities 8,522 8,600
=========== ===========
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or
outstanding -- --
Common stock, $0.03 par value; 800,000,000 shares authorized at March 31, 2004 and
December 31, 2003; 137,050,557 and 136,300,885 shares issued and outstanding as of
March 31, 2004 and December 31, 2003, respectively 4,112 4,089
Additional paid-in capital 125,618 124,699
Deferred compensation (7) (7)
Accumulated deficit (131,904) (127,864)
----------- -----------
Total stockholders' equity (deficit) (2,181) 917
----------- -----------
$ 6,341 $ 9,517
=========== ===========
See accompanying notes to consolidated financial statements.
F-38
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months ended
March 31,
--------------------------
2004 2003
----------- -----------
Revenues:
Product sales $ 971 $ 784
Operating expenses:
Product costs 1,980 1,415
Research and development costs 541 314
Selling, general and administrative costs (non-cash of $371 and $2,219 for the three
months ended March 31, 2004 and 2003, respectively) 2,196 4,009
----------- -----------
Total operating expenses 4,717 5,738
----------- -----------
Loss from operations (3,746) (4,954)
Interest expense, net (non-cash of $255 and $1,373 for the three months ended March 31,
2004 and 2003, respectively) (297) (1,516)
Other income, net (non-cash) 5 128
----------- -----------
Loss before income taxes (4,038) (6,342)
Income taxes 2 2
----------- -----------
Net loss (4,040) (6,344)
Less dividends on mandatorily redeemable Series A preferred stock -- (30)
----------- -----------
Net loss attributable to common stockholders $ (4,040) $ (6,374)
----------- -----------
Net loss per share attributable to common stockholders (basic and diluted) $ (0.03) $ (1.11)
----------- -----------
Weighted average shares used to compute net loss per share attributable to common
stockholders (basic and diluted) 136,679 5,755
----------- -----------
See accompanying notes to consolidated financial statements.
F-39
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
TOTAL
NUMBER OF COMMON ADDITIONAL DEFERRED ACCUMULATED STOCKHOLDERS'
COMMON SHARES STOCK PAID-IN CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
------------- ----- --------------- ------------ ------- ----------------
BALANCES AT DECEMBER 31, 2003 136,300,885 $ 4,089 $ 124,699 $ (7) $ (127,864) $ 917
Stock issued in lieu of
cash to employees,
vendors and consultants 596,289 18 389 -- -- 407
Shares issued upon
conversion of debentures,
accrued interest and
delayed registration
penalties 127,742 4 62 -- -- 66
Shares issued upon exercise
of warrants and options 25,641 1 3 -- -- 4
Compensation related to
stock option grants -- -- 465 -- -- 465
Net loss -- -- -- -- (4,040) (4,040)
------------ -------- --------- ----- ---------- --------
BALANCES AT MARCH 31, 2004 137,050,557 $ 4,112 $ 125,618 $ (7) $ (131,904) $ (2,181)
============ ======== ========= ===== ========== ========
See accompanying notes to consolidated financial statements.
F-40
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $ (4,040) $ (6,344)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 100 134
Amortization of deferred compensation 1 --
Non-cash interest expense attributable to:
Amortization of debenture discounts and charge for beneficial conversion feature 44 840
Amortization of deferred offering costs 13 184
Liquidated damages due to delayed registration of stock underlying convertible
debentures (80) 312
Dividends on mandatorily redeemable Series A preferred stock 30 --
Non-cash loss (gain) on settlement of trade debt -- 55
Fair market value of common stock warrants, options and bonuses granted 713 2,214
Gain on repurchase of beneficial conversion feature -- (128)
Warrant liability adjustment -- 37
Loss on sale of equipment 3 --
Changes in operating assets and liabilities:
Accounts receivable (77) 8
Inventory (12) (308)
Prepaid expenses and other current assets (147) (130)
Deferred offering costs and other assets (50) 20
Accounts payable and accrued expenses 334 314
Other long-term liabilities (14) 1
----------- -----------
Net cash used in operating activities (3,182) (2,791)
Cash flows from investing activities:
Purchase of equipment (247) (16)
----------- -----------
Net cash used in investing activities (247) (16)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of stock 4 1,661
Expenses related to sale of stock -- (50)
Net proceeds from issuance of notes and debentures -- 1,658
Repayment of notes and debentures -- (318)
Principal payments on capital lease obligations (3) 3
----------- -----------
Net cash provided by financing activities 1 2,954
----------- -----------
Net increase (decrease) in cash and cash equivalents (3,428) 147
Cash and cash equivalents at beginning of period 5,084 147
----------- -----------
Cash and cash equivalents at end of period $ 1,656 $ 294
=========== ===========
(continued)
F-41
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
Three Months Ended
March 31,
-------------------------
2004 2003
----------- -----------
Supplemental disclosure of cash flow activities:
Cash paid for interest $ 23 $ 3
Cash paid for income taxes 2 2
Supplemental disclosure of non-cash activities:
Dividend on mandatorily redeemable Series A preferred stock -- 30
Common stock grants -- 292
Conversion of notes and debentures payable and accrued interest to common stock 66 635
Beneficial conversion feature, net of write off upon conversion -- 827
Accrued interest converted to note payable -- 42
See accompanying notes to consolidated financial statements
F-42
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
(UNAUDITED)
(1) THE COMPANY AND BASIS OF PRESENTATION
Calypte Biomedical Corporation ("Calypte" or the "Company") develops,
manufactures and markets in vitro diagnostic tests primarily for the detection
of antibodies to the Human Immunodeficiency Virus ("HIV") and other sexually
transmitted and infectious diseases. We have historically focused our business
on urine-based screening and supplemental tests for use in laboratories. By
integrating several proprietary technologies, we developed urine HIV antibody
tests, the Calypte urine-based enzyme immunoassay ("EIA") HIV Type 1 ("HIV-1")
screening test and the Cambridge Biotech urine-based HIV-1 western blot ("Urine
Western Blot") supplemental test. We also manufacture and market the Cambridge
Biotech serum-based western blot ("Serum Western Blot") supplemental test for
detecting HIV-1 antibodies in serum. Our revenues are currently generated from
sales of these three products, which we refer to collectively as our "ELISA
tests." The ELISA tests are manufactured in formats that make them most suitable
for high-volume laboratory settings.
We are the only company with Food and Drug Administration ("FDA") approval for
the marketing and sale of urine-based HIV-1 antibody tests. Our EIA HIV-1
screening test received FDA approval for use in laboratories in August 1996. Our
Urine Western Blot supplemental test received FDA approval in May 1998. Our
urine-based ELISA tests together, with their screening and confirmatory testing
components, are the only complete FDA approved urine-based HIV testing method.
Our business is also involved in developing new test products for the rapid
detection of HIV-1 and HIV Type 2, a second type of HIV ("HIV-2"), and other
infectious diseases. Rapid tests provide test results in less than 20 minutes
and are particularly suitable for point-of-care testing, especially in lesser
developed countries which lack the medical infrastructure to support laboratory
based testing. We are currently developing both serum- and urine-based HIV-1 and
HIV-2 rapid tests and are evaluating an oral fluid version of these tests. We
anticipate that our primary focus for the current and longer-term future will be
the development, manufacture and sale of our rapid test products, both
internationally and domestically.
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, 2004
and the results of its operations for the three months ended March 31, 2004 and
2003 and its cash flows for the three months ended March 31, 2004 and 2003.
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 two year
period ended December 31, 2003 included in its Form 10-KSB filed with the SEC on
March 30, 2004.
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 2004, Calypte incurred a net loss of $4 million and
its accumulated deficit at March 31, 2004 was $132 million.
During March 2004, the Company amended a financing arrangement that currently
provides a commitment for up to $15,000,000 in proceeds from the Company's
issuance of 5% Promissory Notes having a term of one year that it may issue
prior to May 31, 2004. (See Note 5.) This agreement provides that the commitment
will be reduced dollar-for dollar for any equity financing that the Company
might complete during the term of the agreement. The Company has not issued any
notes under this agreement. Management believes that the funds available under
this commitment plus its current cash balances will provide adequate funds to
sustain operations at expected levels at least into the second quarter of 2005.
To the extent that the Company issues one or more notes under this financing
arrangement, however, it must repay that note at its maturity date in the second
quarter of 2005. The Company must achieve profitability and sustainable cash
flows for its business model to succeed. If sufficient funds are not available
F-43
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
(UNAUDITED)
from the Company's operations to repay the promissory note when due, however,
the Company may need to arrange additional financing, attempt to extend or
otherwise modify the promissory note or make other arrangements. There can be no
assurance that additional financing would be available, or it if is available,
that it would be on acceptable terms. The Company's future liquidity and capital
requirements will depend on numerous factors, including successful completion of
the development of its new rapid tests, acquisition and protection of
intellectual property rights, costs of developing its new products, ability to
transfer technology, set up manufacturing and obtain regulatory approvals of its
new rapid tests, market acceptance of all its products, existence of competing
products in its current and anticipated markets, actions by the FDA and other
international regulatory bodies, and its ability to raise additional capital in
a timely manner. The Company may seek to raise additional capital; however, the
Company may not be able to obtain additional financing on acceptable terms, or
at all.
(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 has recorded 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 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.
Had the Company determined compensation cost based on the fair value at the
grant date for its employee stock options and purchase rights under SFAS No.
123, the Company's net loss would have been increased to the pro forma amounts
indicated below for the three month periods ended March 31:
Three months ended
March 31,
--------------------------
2004 2003
----------- -----------
Net loss attributable to common stockholders, as reported $ (4,040) $ (6,374)
Add: Stock-based compensation expense included in reported net loss, net
of related tax effects 225 84
Less: Stock-based compensation expense determined under fair value based
method for all awards, net of related tax effects (1,086) (104)
----------- -----------
Pro forma net loss attributable to common stockholders $ (4,901) $ (6,394)
=========== ===========
Basic and diluted net loss per share attributable to common stockholders:
As reported $ (0.03) $ (1.11)
Pro forma $ (0.04) $ (1.11)
F-44
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
(UNAUDITED)
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic net loss per share attributable to common stockholders is computed by
dividing net loss attributable to common stockholders by the weighted average
number of shares of common stock outstanding during the period presented. The
computation of diluted net loss per share attributable to common stockholders is
similar to the computation of basic net loss per share attributable to common
stockholders, except that the denominator is increased for the assumed
conversion of convertible securities and the exercise of dilutive options using
the treasury stock method. The weighted average shares used in computing basic
and diluted net loss per share attributable to common stockholders are
equivalent for the periods presented. Options and warrants for 10,200,899 and
1,144,729 shares at March 31, 2004 and 2003, respectively, were excluded from
the computation of loss per share attributable to common stockholders as their
effect was anti-dilutive.
The difference between net loss and net loss attributable to common stockholders
for the period ended March 31, 2003 relates to accrued dividends on the
Company's mandatorily redeemable Series A preferred stock. In the third quarter
of 2003, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity," which establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity, many of which were previously
classified as equity or on the "mezzanine." In conformity with SFAS No. 150, the
Company has classified its mandatorily redeemable Series A preferred stock as a
long term liability for all periods presented and has, effective with the
adoption of SFAS No. 150, classified the dividend on the mandatorily redeemable
Series A preferred stock as interest expense in its consolidated statement of
operations.
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 from
those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies the financial accounting and reporting requirements, as were
originally established in SFAS 133, for derivative instruments and hedging
activities. SFAS 149 provides greater clarification of the characteristics of a
derivative instrument so that contracts with similar characteristics will be
accounted for consistently. This statement is effective for contracts entered
into or modified after June 30, 2003, as well as for hedging relationships
designated after June 30, 2003, excluding certain implementation issues that
have been effective prior to this date under SFAS 133. The Company's adoption of
this statement has not had a material impact on its results of operations or
financial condition.
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51. FIN 46 provides guidance on how to apply the controlling financial
interest criteria in ARB 51 to variable interest entities ("VIE"). Given the
complexity of FIN 46 and implementation issues after its original issuance,
particularly with respect to its scope and application of the consolidation
model, the FASB staff issued several FASB staff positions throughout 2003 to
clarify the Board's intent on certain of the interpretation's provisions. In
December 2003, the Board issued FIN 46R to address certain technical corrections
and clarify the implementation issues that had arisen.
In general, a VIE is subject to consolidation if it has (1) an insufficient
amount of equity for the entity to carry on its principal operations without
additional subordinated financial support provided by any parties, (2) a group
of equity owners that are unable to make decisions about the entity's activities
or (3) equity that does not absorb the entity's losses or receive the entity's
benefits. Variable interest entities are to be evaluated for consolidation based
on all contractual, ownership or other interests that expose their holders to
the risks and rewards of the entity. These interests may include equity
investments, loans, leases, derivatives, guarantees, service and management
contracts and other instruments whose values change with changes in the VIE. Any
of these interests may require its holder to consolidate the entity. The holder
F-45
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
(UNAUDITED)
of a variable interest that receives the majority of the potential variability
in gains or losses of the VIE is the VIE's primary beneficiary and is required
to consolidate the VIE. FIN 46R became effective immediately for entities
created after January 31, 2003. It applies in the first fiscal year or interim
period beginning after December 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it acquired before February 1,
2003. The Company has determined that the adoption of the provisions of FIN 46
will not have an impact upon its financial condition or results of operations.
In December 2003, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104), which superseded
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101). SAB 104 rescinds accounting guidance contained in SAB 101 related to
multiple element revenue arrangements, superseded as a result of the issuance of
Emerging Issues Task Force Issue No. 00-21 (EITF 00-21), Accounting for Revenue
Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the
SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the FAQ) issued with SAB 101 that had been codified in SEC topic 13,
Revenue Recognition. While the wording of SAB 104 has changed to reflect the
issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The Company adopted SAB 104 on the
first day of its 2004 fiscal year. The adoption of SAB 104 did not have an
impact on the Company's financial condition or results of operations.
(3) INVENTORIES
Inventory as of March 31, 2004 and December 31, 2003 consisted of the following
(in thousands):
2004 2003
----------- -----------
Raw materials $ 515 $ 708
Work-in-process 1,338 962
Finished goods 312 483
----------- -----------
Total Inventory $ 2,165 $ 2,153
=========== ===========
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of March 31, 2004 and December 31, 2003
consisted of the following (in thousands):
2004 2003
----------- -----------
Trade accounts payable $ 2,049 $ 2,189
Accrued royalty payments 551 582
Accrued salary, severance and vacation pay 498 125
Accrued interest (including non-cash penalties for delayed registration of
$125 and $271 at March 31, 2004 and December 31, 2003, respectively) 218 308
Other 870 1,118
----------- -----------
Total accounts payable and accrued expenses $ 4,186 $ 4,322
=========== ===========
(5) NOTES AND DEBENTURES PAYABLE
On January 14, 2004, when the market price of the Company's common stock was
$0.60 per share, the Company obtained extensions of the maturity date of the
following debentures until July 14, 2004:
o 10% Convertible Debenture dated January 14, 2003 issued to Mercator
Focus Fund, LP
o 10% Convertible Debenture dated January 30, 2003 issued to Mercator
Momentum Fund, LP
o 10% Convertible Debentures dated March 13, 2003 issued to Mercator
Focus Fund, LP
o 12% Convertible Debenture dated April 29, 2003 issued to Mercator
Momentum Fund, LP
F-46
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
(UNAUDITED)
In return for the extension of the maturity dates, the Company has agreed to pay
an additional extension fee equal to 2% of the outstanding principal balance per
month until the earlier of the extended maturity date or conversion. The
extension fee is payable 1% in cash and 1% in shares of the Company's common
stock. Additionally, the Company agreed to file a registration statement
including the shares potentially applicable to the conversion of the outstanding
debenture balances by no later than April 29, 2004. The shares issuable as a
portion of the extension fee are to be included in the registration statement.
The Company issued no new notes or debentures nor were there any repayments or
conversions of any debentures during the first quarter of 2004. See Note 7,
Subsequent Events, regarding the conversion of certain of the debentures after
March 31, 2004 and a further extension of the period in which the Company must
file a registration statement.
Amendment of 5% Note Purchase Agreement
On March 19, 2004, when the market price of the Company's common stock was
$0.575 per share, the Company and Marr Technologies BV ("Marr") amended the
agreement under which Marr was obligated to purchase up to $10,000,000 of 5%
Promissory Notes which the Company may issue between February 28, 2004 and May
31, 2004 (the "Marr Credit Facility") to increase the aggregate amount available
under the Marr Credit Facility to $15,000,000 and to eliminate the termination
provision upon failure to have the common stock listed on an established stock
exchange by March 31, 2004. As consideration for the amendment of the Marr
Credit Facility, the Company issued to a party designated by Marr a warrant to
purchase 400,000 shares of its common stock at an exercise price of $0.46 per
share. The warrant is immediately exercisable and expires two years from its
date of issuance on March 18, 2006. The Company did not issue any notes under
the Marr Credit Facility during the first quarter of 2004.
(6) STOCKHOLDERS' EQUITY (DEFICIT) Extension of Registration Rights
On January 23, 2004, when the market price of the Company's common stock was
$0.695 per share, the Company and Marr agreed to extend the registration rights
period attributable to 5,181,818 shares of the Company's common stock issued in
conjunction with Marr's conversion of $570,000 principal amount of the Company's
12% Convertible Debentures from February 27, 2004 to April 29, 2004. In return
for the extension, the Company agreed to include in its next registration
statement an aggregate of 28,333,333 shares of its common stock purchased by
Marr in PIPE transactions in the third quarter of 2003. See Note 7, Subsequent
Events, regarding a further extension of the period in which the Company must
file a registration statement.
Warrants, options and stock grants
During the first quarter of 2004, the Company issued stock grants for
approximately 596,000 shares of its common stock, including grants from its 2003
Non-Qualified Stock Option Plan, as compensation under three consulting
agreements. The Company recorded non-cash selling, general and administrative
expense of $371,000 attributable to stock grants made in the first quarter of
2004, the amortized expense attributable to stock grants made in prior periods
and the first quarter 2004 grant of below-market options granted to an employee,
for which the expense was recognized using the intrinsic value method.
(7) SUBSEQUENT EVENTS
Conversion of Mercator Debentures and Extension of Time to File a Registration
Statement
On April 22, 2004, when the market price of the Company's common stock was
$0.625 per share, Mercator Focus Fund converted the remaining $577,754 balance
of its January 2003 10% convertible debenture plus related accrued interest and
extension fees into 2,109,366 shares of restricted common stock. Also on April
22, 2004, Mercator Focus Fund converted the remaining $222,318 balance of its
March 2003 10% convertible debenture plus related accrued interest and extension
fees into 991,465 shares of restricted common stock.
F-47
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
(UNAUDITED)
On April 23, 2004, when the market price of the Company's common stock was
$0.625 per share, Mercator Focus Fund and Mercator Momentum Fund each agreed to
extend from April 29, 2004 until May 14, 2004 the period in which the Company is
required to file a registration statement including shares of its common stock
previously issued to them or, in the case of Mercator Momentum Fund, issuable to
it upon conversion of outstanding debentures. On May 7, 2004, when the market
price of the Company's common stock was $0.48 per share, the Company and
Mercator Momentum Fund and Mercator Focus Fund agreed to further extend from May
14, 2004 until 21 days following the closing of a private placement of equity
financing of at least $5,000,000, but in any case to no later than June 30,
2004, the period in which the Company is required to file a registration
statement including shares of its common stock issued or potentially issuable
upon conversion. The Company plans to file a registration statement on Form SB-2
including these shares no later than June 18, 2004.
Extension of Marr Registration Rights
On April 23 2004, when the market price of the Company's Common Stock was
$0.625, the Company and Marr agreed to extend until May 14, 2004 the period for
filing the registration statement including the shares issued to Marr upon
conversion of the 12% convertible debenture and in the 2003 PIPE transactions.
On May 7, 2004, when the market price of the Company's common stock was $0.48
per share, Marr agreed to further extend from May 14, 2004 until 21 days
following the closing of a private placement of equity financing of at least
$5,000,000, but in any case to no later than June 30, 2004, the period in which
the Company is required to file a registration statement including shares of its
common stock issued to Marr upon conversion of the 12% convertible debenture and
in the 2003 PIPE transactions. The Company plans to file a registration
statement on Form SB-2 including these shares no later than June 18, 2004.
Amendment of Marr Credit Facility
On May 26, 2004, when the market price of the Common Stock was $0.46 per share,
the Company and Marr again amended the Marr Credit Facility whereby Marr has
committed to purchase up to $5,000,000 of Promissory Notes that the Company may
issue through December 31, 2004. Any Notes issued pursuant to this second
amendment will bear interest at 9% per annum and will have a maturity date of
May 31, 2005. The $5,000,000 amount available under the amended Marr Credit
Facility will be reduced by the amount of any equity financing obtained by the
Company after the May 26, 2004 effective date of the second amendment and
through the December 31, 2004 commitment period. At June 10, 2004, the Company
has issued no Notes under the Marr Credit Facility. As consideration for the
extension of the commitment period reflected in the second amendment of the Marr
Credit Facility, the Company issued to Marr a warrant to purchase 500,000 shares
of its Common Stock at an exercise price of $0.40 per share. This warrant is
immediately exercisable and expires two years from its date of issuance on May
26, 2006. The Company has granted piggyback registration rights and plans to
register the shares underlying the warrants in a registration statement on Form
SB-2 to be filed no later than June 18, 2004.
Additional Financing
May 2004 PIPE
On May 28, 2004, when the market price of the Company's Common Stock was $0.50
per share and pursuant to Regulations S and D, the Company issued 15,750,000
restricted shares of its Common Stock at a price of $0.40 per share to 6
unaffiliated investors and received gross proceeds of $6,300,000. Under the
terms of the Marr Credit Facility, which provides Marr a right of first refusal
to participate in subsequent financings on the same terms as other investors,
Marr invested $3,000,000 in this private placement and the Company issued
7,500,000 restricted shares of its Common Stock to Marr. Under the terms of the
subscription agreement, each investor received warrants to purchase the
Company's Common Stock in an amount equal to 35% of the number of shares
purchased in the private placement. Accordingly, the Company issued warrants to
purchase an aggregate of 8,137,500 shares of its Common Stock to the investors
and warrants to purchase an additional 630,000 shares of its Common Stock
pursuant to placement agency agreements. The warrants are exercisable at a price
of $0.50 per share for a period of two years from the May 28, 2004 date of
issuance.
F-48
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
(UNAUDITED)
The securities purchase agreements for the May 2004 PIPE provide the investors
with participation rights on the same terms and conditions as other investors in
any subsequent financing transactions the Company may complete within one year
of the closing of this placement. The shares issued pursuant to the May 2004
PIPE and the related warrants also contain anti-dilution provisions that will
require the Company to issue additional shares of its common stock to the PIPE
investors and modify their outstanding warrants if the Company raises additional
equity financing at a price below $0.40 per share in the year following the
closing of the PIPE transaction, except under the provisions of previously
outstanding convertible debt, option or warrant agreements. The Company has
granted piggyback registration rights and is required to register the shares
issued in the May 2004 PIPE and the shares underlying the related warrants in a
registration statement on Form SB-2 no later than June18, 2004.
Operating Lease
The Company's lease of its office and manufacturing facility in Alameda,
Californa expires on June 30, 2004. The Company plans to consolidate its
manufacturing operations at its Rockville facility and expects to complete the
physical relocation of those operations prior to the expiration of the Alameda
lease. On May 7, 2004, the Company signed a three year lease that commences on
June 15, 2004 for approximately 4,400 square feet of office space in Pleasanton,
California that will house its corporate headquarters. The base rent for the
Pleasanton office space will be approximately $7,750 per month for the term of
the lease.
F-49