Filed Pursuant to Rule 424(b)(3)
Registration Number 333-119646
PROSPECTUS
CALYPTE BIOMEDICAL CORPORATION
1,172,205 Shares of Common Stock, $0.03 Par Value
o This Prospectus relates to the resale of our common stock by the selling
security holder, who has been issued securities pursuant to an exemption
under Regulation S of:
o 1,172,205 shares of our common stock in connection with a License
Agreement and Technology Transfer Agreement (the "License
Agreement").
o We will not receive any proceeds from the sale of these shares.
o Our common stock is traded on the American Stock Exchange under the symbol
"HIV." The last reported sales price for our common stock on December 16,
2004 was $0.27 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 January 4, 2005.
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 Recent Financings 19
Dilution 27
Selling Security Holder 27
Plan of Distribution 28
Legal Proceedings 30
Directors, Executive Officers, Promoters and Control Persons 31
Security Ownership of Certain Beneficial Owners and Management 36
Description of the Securities 37
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 37
Description of Business 38
Management's Discussion and Analysis 58
Recent Developments 80
Description of Property 82
Certain Relationships and Related Transactions 81
Market for Common Stock and Related Stockholder Matters 82
Executive Compensation 84
Financial Statements 92
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 92
Interest of Named Experts and Counsel 94
Index to Consolidated Financial Statements F-1
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
5000 Hopyard Road, Suite 480
Pleasanton, California 94588
Attention: President
Telephone: (925) 730-7200.
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 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 have recently conducted field trials of serum- urine- and oral
fluid-based HIV-1 and HIV-2 rapid tests in a dipstick format and believe that
the results have validated our technology. While we will continue to
commercialize the dipstick format tests, we intend to modify those tests into
the format using the technology acquired with the License Agreement. We
anticipate that our primary focus for the current and longer-term future will be
the commercialization of these 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.
During June 2004, we relocated our headquarters to 5000 Hopyard Road, Suite 480,
Pleasanton, California 94588, telephone number (925) 730-7200 from our previous
office and manufacturing site in Alameda, California. Our manufacturing facility
is located in Rockville, Maryland. Historically, our Alameda facility had
manufactured our EIA screening test and the Rockville facility manufactured our
urine and serum Western Blot tests. We have consolidated our domestic
manufacturing operations by moving all manufacturing to our Rockville facility.
We closed the Alameda facility effective June 30, 2004, when the lease expired.
As of December 3, 2004, we had approximately 62 full-time and temporary
employees.
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, including those acquired in conjunction with the License Agreement and
Technology Transfer Agreement ("License Agreement") we entered into with Ani
Biotech Oy in September 2004, 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 this time period, we have completed private placements
of our common stock with 12 accredited investors and received aggregate net
proceeds of approximately $10.2 million. Additionally, under the amended terms
of the Marr Credit Facility between us and Marr Technologies BV ("Marr"), our
largest stockholder and a participant in one of the private placements, we
currently have access to an additional $3.6 million from the issuance of 9%
promissory notes that we may issue through December 31, 2004, should our Board
of Directors unanimously approve the issuance of one or more such notes before
2
the commitment period ends. Marr has two designated representatives currently
serving on our Board of Directors. In the absence of any unanticipated material
costs and expenses that are not factored into our cash flow projections, we
believe that these resources will be adequate to sustain our operations at
expected levels through early 2005. Although we do not presently have any
agreements in place with respect to additional financing, we intend to seek
additional financing aggregating up to $16.5 million by the issuance of Common
Stock or equivalents and/or the issuance of warrants to purchase shares of
Common Stock on terms and conditions that, based on the current market price of
our Common Stock and the size of the financing, may result in the issuance of
more than 20% of our currently issued and outstanding Common Stock and/or that
may trigger certain anti-dilution protections that are included in existing
financing agreements or that may be included in subsequent financing agreements
and that would result in substantial dilution to our existing stockholders.
Under the rules of the American Stock Exchange, in the event that either of
these conditions occurs as a result of a prospective financing, we would need to
obtain stockholder approval of such financing. There can be no assurance that we
will enter into such agreements or secure such financing, or that our
stockholders will approve the terms of such financing, if so required. Further,
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 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.
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 requested, among other things,
documents related to certain press releases we issued. We voluntarily provided
the information sought by the SEC and cooperated with the SEC in connection with
its informal inquiry. Independently, the Audit Committee of our Board of
Directors 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
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 had 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 thereafter 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 Regulation S-B. We
filed our Form 10-QSB for the quarterly period ended September 30, 2003 in
accord with the presecribed time period required to be in compliance for filing
the report, 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.
3
Although we 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 having timely filed all reports required to
be filed during the preceding twelve calendar months. 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 register the common stock issued or to be issued under the
License Agreement and we have elected to use Form SB-2 to register the subject
shares of our common stock for resale.
Subsequently, by letter dated July 14, 2004, the SEC Division of Enforcement
notified us that the matter has been terminated and that no enforcement action
has been recommended by the Commission at this time.
THE OFFERING
COMMON STOCK, $0.03 par value per share ("Common Stock"),
outstanding as of December 16, 2004: 169,425,169 shares
SHARES OFFERED BY SELLING SECURITY HOLDERS 1,172,205 shares, all of which have been issued to the
selling security holder 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
shareholder. We are registering the shares for re-sale to
provide the selling shareholder 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 shareholder. All proceeds from the
sale of shares sold under this prospectus will go to the
selling shareholder.
AMERICAN STOCK EXCHANGE TRADING SYMBOL HIV
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.
RISKS RELATED TO OUR FINANCIAL CONDITION
If We are Unable to Obtain Additional Financing When Required We May Have to
Significantly Curtail the Scope of Our Operations and Alter Our Business Model.
We believe that the balance of the aggregate of approximately $10.2 million of
net proceeds of our 2004 private placements and the availability of
approximately $3.6 million of borrowing capability from 9% promissory notes that
we may issue through December 31, 2004 under the terms of the amended Marr
Credit Facility will be adequate to sustain our operations at expected levels
through early 2005. 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 will be required 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. Although we do
not presently have any agreements in place with respect to additional financing,
we intend to seek additional financing aggregating up to $16.5 million by the
issuance of Common Stock or equivalents and/or the issuance of warrants to
purchase shares of Common Stock on terms and conditions that, based on the
current market price of our Common Stock and the size of the financing, may
result in the issuance of more than 20% of our currently issued and outstanding
Common Stock and/or that may trigger certain anti-dilution protections that are
included in existing financing agreements or that may be included in subsequent
financing agreements and that would result in substantial dilution to our
existing stockholders. Under the rules of the American Stock Exchange, in the
event that either of these conditions occurs as a result of a prospective
financing, we would need to obtain stockholder approval of such financing. There
can be no assurance that we will enter into such agreements or secure such
financing, or that our stockholders will approve the terms of such financing, if
so required. If such 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.
5
IF, UNDER THE TERMS OF A PROSPECTIVE FINANCING, WE ARE REQUIRED TO ISSUE
ADDITIONAL SHARES TO INVESTORS IN PRIOR FINANCINGS UNDER THE TERMS OF
ANTI-DILUTION PROTECTION PROVISIONS AND DO NOT OBTAIN STOCKHOLDER APPROVAL TO DO
SO AS REQUIRED BY THE AMERICAN STOCK EXCHANGE, WE MAY BE FORCED TO DE-LIST FROM
THE AMERICAN STOCK EXCHANGE.
The anti-dilution protection provisions granted to investors in our May 2004
PIPE and July 2004 PIPE require that we issue additional shares of our Common
Stock and reprice and grant additional warrants to purchase our Common Stock to
those investors if we issue additional shares of stock at less than $0.40 per
share pursuant to financing(s) completed within one year of the May and July
2004 transactions, respectively. As a condition of our listing on the American
Stock Exchange, we agreed, as a precondition to listing with the Exchange and
issuing any shares of our Common Stock that may become issuable under the temrs
of the anti-dilution protection provisions contained in these financing
agreements, to obtain stockholder approval prior to such issuance. If we enter
into a subsequent financing transaction to issue shares of our Common Stock at
less than $0.40 per share that triggers the anti-dilution protection provisions
in the previous agreements, and if our stockholders do not approve the issuance
of additional shares and new and re-priced warrants under the terms of such
provisions, and if one or more of the PIPE investors do not waive their
anti-dilution rights, we will be delisted by the American Stock Exchange or be
forced to withdraw our listing from the American Stock Exchange in order to
complete a financing transaction, at which time our Common Stock would again
trade on the Over-the Counter Bulletin Board.
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 September 30, 2004 our accounts payable totaled $1.6 million, of which
$1.1 million was over sixty days old. We currently have many cash-only
arrangements with suppliers and certain arrangements require that we pay down
certain outstanding amounts due when we make a current payment. While we are
current according to contract or current under the terms of payment plans with
our primary patent licensors, as of September 30, 2004 we have accrued an
aggregate of approximately $310,000 in royalty obligations to our patent
licensors, of which approximately $177,000 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 current products and could also
impact our ability to commercialize our rapid test 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 current products or introduce our new 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
nine months ended September 30, 2004 was $11.1 million and for the year ended
December 31, 2003 was $26.5 million; our accumulated deficit at September 30,
2004 was $139.0 million. We expect operating losses to continue during 2004 and
into 2005, as we complete the development and/or commercialization of our rapid
tests, complete our manufacturing consolidation and international technology
transfers, and conduct additional research and development and clinical trials
for 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.
6
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.
We May be Faced with A Legal Claim for Damages with Respect to the Issuance of
Shares of Common Stock on a Claimed Conversion of Our 12% Convertible
Debentures.
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 notices 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 have not yet achieved a
resolution of the claims and there can be no assurance that the Company will not
be responsible for damages including legal fees and expenses in the event that
the claim is pursued.
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 $0.35 per share and as high as $1.74 per
share in the twelve months ended September 30, 2004. It has traded as low as
$0.18 per share in the fourth quarter of 2004 through December 16, 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;
o certain world conditions, such as SARS, an economic downturn or terrorist
attacks; and
o anti-American sentiment in certain international markets.
7
Our Registration of a Significant Amount of Our Outstanding Stock and the
Availability of a Significant Number of Registered Shares Eligible for Future
Sale May Have a Negative Effect on the Trading Price of Our Stock.
On June 15, 2004, we filed a registration statement covering the resale of
approximately 83 million shares of our common stock. That registration statement
was declared effective on July 8, 2004. At that time, investors in our common
stock held approximately 71 million shares of restricted stock, of which
approximately 41 million shares related to acquisitions of our common stock by
Marr Technologies BV ("Marr" or "MTBV"), our largest stockholder and the
provider of our 9% promissory note credit facility, through their participation
in private placements in 2003 and 2004 and conversion of debentures.
Approximately 15.8 million additional outstanding shares were related to
issuances of restricted shares of our common stock to other participants in our
May 2004 private placement; another 11.6 million restricted shares were related
to issuances pursuant to our convertible notes and debentures and a further 2.6
million shares were 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 2.4 million
additional shares of our common stock if various warrant holders exercise their
outstanding warrants or the holders of currently outstanding convertible
debentures elect to convert the remaining principal and accrued interest of
their debentures. We registered essentially all of these outstanding restricted
shares and the shares underlying the warrants and outstanding convertible
debentures in the June 2004 registration statement. Essentially all of the
shares registered are now freely tradable or would be so upon the exercise of
the warrants or conversion of the debentures. Futhermore, we issued
approximately 3.7 million shares of our common stock and immediately exercisable
warrants to purchase an additional 2.6 million shares to investors in our July
2004 private placement. We registered all of the outstanding shares of common
stock and the shares underlying the warrants related to that private placement
in a registration statement that was declared effective in July 2004. If
investors holding a significant number of freely tradable shares decided to sell
them in a short period of time, 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.
From inception through December 16, 2004, we have issued approximately 169.3
million shares of our common stock and raised approximately $142 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. We have the ability 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 three quarters of 2004, we issued
approximately 2.1million additional shares in payment for consulting services
and for the acquisition of intellectual property and equipment. 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.
8
Our Stockholders May Experience Substantial Dilution as a Result of Our Recent
PIPE Financings 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 and our July 2004 PIPE purchased shares of our common stock is
significantly higher than the book value of our common stock. Had the 2004 PIPE
transactions occurred in aggregate as of September 30, 2004, the investors would
have invested, net of fees, an amount equal to approximately $16.7 million in
excess of our total stockholders' equity as of that date, but would own only
approximately 16% of our outstanding common stock.
Although we believe that we have sufficient funds to continue our operations
through early 2005, we expect 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 July 2004 PIPE and the related warrants for each 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
respective closing dates, except under the provisions of previously outstanding
convertible debt, option plans, or option or warrant agreements. Although the
License Agreement and Technology Transfer Agreement we entered into with Ani
Biotech Oy in September 2004 limits the issuance of shares of our common stock
for the acquisition of assets to a price of $0.40 per share or greater, if we
find it necessary to issue additional common stock to fund our operations in the
year following the May 2004 PIPE and the July 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 PIPEs 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.
The "penny stock" rules adopted by the Commission under the Exchange Act subject
the sale of the shares of our common stock to certain regulations which impose
sales practice requirements on broker/dealers. For example, brokers/dealers
selling such securities must, prior to effecting the transaction, provide their
customers with a document that discloses the risks of investing in such
securities. Included in this documents are the following:
o the bid and offer price quotes in and for the "penny stock", and the
number of shares to which the quoted prices apply.
o the brokerage firm's compensation for the trade.
o the compensation received by the brokerage firm's sales person for the
trade.
In addition, the brokerage firm must send the investor:
o a monthly account statement that gives an estimate of the value of each
"penny stock" in the investor's account.
o a written statement of the investor's financial situation and investment
goals.
Legal remedies, which may be available to you as an investor in "penny stocks",
are as follows:
o if "penny stock" is sold to you in violation of your rights listed above,
or other federal or states securities laws, you may be able to cancel your
purchase and get your money back.
o if the stocks are sold in a fraudulent manner, you may be able to sue the
persons and firms that caused the fraud for damages.
o if you have signed an arbitration agreement, however, you may have to
pursue your claim through arbitration.
If the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker/dealer, the broker/dealer must
also approve the potential customer's account by obtaining information
concerning the customer's financial situation, investment experience and
investment objectives. The broker/dealer must also make a determination whether
the transaction is suitable for the customer and whether the customer has
sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the Commission's rules may limit the number of
potential purchasers of the shares of our common stock.
9
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 impose 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 have consolidated our manufacturing facilities 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 US. If the consolidation does not
continue to 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 commercialization of our HIV rapid tests, or that our
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 of our Rockville facility to be completed during the first
half of 2005. We believe that we manufactured sufficient inventories of our
HIV-1 Urine EIA test prior to the closing of our FDA appoved Alameda facility to
continue to satisfy expected customer orders during the period required to
obtain FDA approval of our Rockville facility. We considered historical sales
levels and our estimate of 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. In the absence of substantial firm new international purchase
orders, we reserved approximately $1 million, or approximately half the value of
our EIA inventory, in the third quarter of 2004, as our current inventory of
these tests exceeds the expected demand by the insurance business alone prior to
expiration of the tests.
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 or
Natural Disasters.
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 Africa upon successful
commercialization of our rapid products. Should conditions beyond our control,
such as SARS, natural disasters, war or political unrest, redirect attention
from the worldwide HIV/AIDS epidemic, our customers' ability to meet their
contractual purchase obligations and/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.
10
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 regulatory 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 nine months of 2004, we
incurred $1.5 million and $1.6 million, respectively, in research and
development expenses. We expect to incur even more significant costs as a result
of our research and development activities in the future.
A primary focus of our efforts has been, and is expected to continue to be,
rapid HIV tests, that we expect to develop as a result of the License Agreement
or that are in the process of being developed and/or commercialized. However,
there can be no assurance that we will succeed in our commercialization of these
tests or 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 current revenues or anticipated
future revenues and adversely affect our results of operations, cash flows and
business.
11
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 rapid test products. Our 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 many 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 Our ELISA Products -- Our HIV-1
Urine-Based Screening Test, Our Urine and Blood Based Supplemental Tests and Our
BED Incidence Test.
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 nine months
ended September 30, 2004 decreased by approximately 8% compared to the
comparable period in 2003. Although we do not expect that such a trend will
continue, there can be no assurance that it will not. Further, we have incurred
a loss from operations in both calendar 2003 and in the first nine months of
2004. We have now completed the technology transfer for our HIV-1 incidence test
and have that product available for sale, but we have no experience marketing
that test or our rapid tests currently being developed and/or commercialized. If
we cannot profitably introduce significant new products on a timely basis and if
these products and our current ELISA tests fail to achieve market acceptance or
generate significant revenues, 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.
We May Not be Able to Successfully Develop and Market New Products That We Plan
to Introduce.
We plan to develop and/or commercialize other urine-based, serum-based and
oral-fluid based diagnostic products including rapid HIV-1/2 screening tests and
tests for other infectious diseases or health conditions. We also plan to
develop, along with the Centers for Disease Control and Prevention, 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 or 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 rapid HIV tests currently
being commercialized, rapid HIV tests that we expect to develop using the
technology obtained in the License Agreement 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.
12
Our Success Depends on Our Ability to Protect Our Proprietary Technology.
The medical 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, such as that obtained in the License Agreement, 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, when filed, are intended to 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 the required
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.
We are Dependent Upon Patents, Licenses and Other Proprietary Rights From Third
Parties.
To facilitate development and commercialization of a proprietary technology
base, we have obtained licenses to patents or other proprietary rights from
other parties. Obtaining such licenses has required the payment of substantial
amounts and will require the payment of royalties to maintain them in the
future.
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 in 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 September 30, 2004 we had accrued
an aggregate of approximately $177,000 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 nine months of 2004,
revenues subject to the New York University, Cambridge Biotech and Texas A&M
license agreements were $2.0 million and $1.3 million, respectively, and
revenues subject to the National Institutes of Health agreement were $1.3
million and $0.9 million in calendar 2003 and in the first nine months 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 current products or
introduce new HIV diagnostic products since the license agreements provide
necessary proprietary processes or components for the manufacture of our
products.
13
Additionally, we have recently acquired licenses to technologies that we believe
are critical to our ability to sell our rapid tests currently being developed
and/or commercialized and other rapid tests that we may plan to develop and/or
commercialize in the future. There are numerous patents in the United States and
other countries which claim lateral flow assay methods and related devices, some
of which cover the technology used in our rapid test products and are in force
in the United States and other countries. In the second quarter of 2004, we
entered into a non-exclusive sublicense agreement with Abbott Laboratories that
grants us worldwide rights related to patents for lateral flow assay methods and
related devices. We believe that the acquisition of these rights will enable us
to make or sell our rapid test products in countries where these patents are in
force. In the third quarter of 2004, we acquired a sublicense from Bio-Rad
Laboratories and Bio-Rad Pasteur for patents related to the 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. We
believe that this sub-license agreement makes it possible for us 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.
Additionally, in the third quarter of 2004, we acquired rights from Ani Biotech
for its rapid test diagnostic platform and sample applicator, which we believe
is a viable alternative to current lateral flow technologies and with
potentially worldwide applicability. The loss of any one of these licenses or
challenges to the patents would be detrimental to the commercialization of our
rapid tests by delaying or limiting our ability to sell our rapid test products,
which would adversely affect our results of operations, cash flows and business.
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.
14
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 Being Commercialized.
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 and commercialization of
our current or planned 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 approximately 11% of our
revenue in the first nine months 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. Manufacturers from Japan, Canada, Europe, and
Australia offer a number of HIV screening tests in those markets, including
HIV-1/2 rapid 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. The following risks may limit or disrupt our
international sales:
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;
15
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 our business.
The Chinese Government Could Change Its Policies Toward Private Enterprises or
Even Nationalize or Expropoiate Them, Which Could Result in the Total Loss of
Business in That Country.
We have established a joint venture in China with an entity related to our
largest stockholder through which we are currently planning to sell both our
existing products and our rapid products that we are in the process of
developing and/or commercializing. 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 pursued 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, 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.
Our Research and Development of HIV Urine Tests Involves the Controlled Use of
Hazardous Materials.
There can be no assurance that our safety procedures for handling and disposing
of hazardous materials such as azide will comply with applicable regulations.
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 our business.
16
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;
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.
17
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. 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 if we establish our international
manufacturing operations.
18
SUMMARY OF RECENT FINANCINGS
The following table summarizes our financings since the beginning of 2002 by
major category and the subsequent table provides the details of these
financings. All amounts 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.
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 $7.8
million of these financings. In June 2004, we filed a registration statement for
the Common Stock underlying an additional $22.5 million of these financings and
in July 2004 we filed a registration statement for an additional $1.5 million of
financing. Since May 2002 and through December 16, 2004, we have raised
approximately $31.8 million in gross proceeds from the intial May 2002 restart
financings and those completed subsequently.
TOTAL
GROSS NET SHARES
FINANCING SOURCE PROCEEDS PROCEEDS ISSUED
---------------- -------- -------- -----------
Securities in March 2002
Registration Statement (1):
Bristol 12% Convertible
Debentures and Warrants $ 562 $ 505 1,476.1
Securities in July 2003 Registration
Statement (2):
8% Convertible Notes 3,232 2,594 46,084.3
Other Restart Financings 750 730 2,720.3
Mercator 12% and 10% Debentures 3,850 2,950 32,229.3
------- ------- -----------
7,832 6,274 81,033.9
------- ------- -----------
Securities in June 2004
Registration Statement (3):
Mercator 12% Debentures:
Purchased by Marr 570 570 5,181.8
Purchased by others (4) 130 130 118.4
Marr Private Placements 12,500 11,900 28,333.3
May 2004 Private Placement:
PIPE at $0.40 per share 9,300 8,769 23,250.0
------- ------- -----------
22,500 21,369 56,883.5
------- ------- -----------
Securities in July 2004 Registration
Statement (5):
July 2004 Private Placement:
PIPE at $0.40 per share 1,488 1,384 3,720.0
------- ------- -----------
1,488 1,384 3,720.0
------- ------- -----------
Total $32,382 $29,532 143,113.5
======= ======= ===========
- ---------------
(1) The registration statement for 1.01 million shares underlying the
$525,000 of the Bristol debentures (File No. 333-84660) became
effective on Februry 14, 2003.
19
(2) The registration statement for the shares underlying 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 common 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. Many of these
holders subsequently sold their restricted shares under the
provisions of Rule 144. The June 2004 registration statement
included approximately 12.2 million outstanding restricted shares of
our common stock previously issued to these holders of the
convertible notes and debentures.
(3) The registration statement for the approximately 67.1 million shares
of our Common Stock underlying these financings (File No.
333-116491) became effective on July 8, 2004. That registration
statement included the shares underlying the financings indicated as
well as approximately 12.2 million shares related to earlier
financings as described in Note 2. Additionally, that registration
statement included approximately 3.3 million shares of our Common
Stock that have been issued, that we are contractually obligated to
issue, or that may be issued pursuant to warrant agreements with
certain vendors, consultants and other parties who have agreed to
accept shares of our Common Stock in lieu of cash. That registration
statement also included additional shares which may be issuable
pending the resolution of the dispute regarding certain debentures
as described in Note 12 in Detail of Financings, following.
(4) At December 16, 2004, the holders have converted all but $60,000 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 0.4 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 these 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 Note 12 to Detail of Financings.
(5) The registration for the approximately 6.5 million shares of our
Common Stock underlying this financing (File No. 333-117439) became
effective on July 28, 2004.
The remainder of this page is intentionally left blank.
20
DETAIL OF RECENT FINANCINGS - JANUARY 2002 TO DECEMBER 16, 2004
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE $ REDEEMED (3)
- ------------------ ---------- -------- -------- ----------- ------- -----------------
12% CONVERTIBLE DEBENTURES AND WARRANTS
Bristol Investment Fund, Ltd. Lesser of (i) $ 425 2/11/02 $ 7.50 1,019.4 / $525
60% of the 100 5/10/02 $ 0.90
average of 3 -------
lowest closing $ 525 $ 468
bid prices for
22 days
preceding
conversion or
(ii)$1.50
Class A Warrant Lesser of (i) $ 4 $ 4 2/11/02 $ 7.50 56.7 / N/A
70% of the
average of
lowest 3
trading prices
for 20 days
preceding
conversion or
(ii)$3.45
Class B Warrant Lesser of (i) $ 33 $ 33 2/11/02 $ 7.50 400 / N/A
70% of the ------- ------- -----------------
average of
lowest 3
trading pricing
for 20 days
preceding
conversion or
(ii) $6.45.
Total Bristol $ 562 $ 505 1,476.1 / $525
======= ======= =================
8% CONVERTIBLE NOTES
Alpha Capital Aktiengesellshaft Lesser of $ 500 5/24/02 $ 3.60 7,260.7 / $500
Stonestreet Limited Partnership (i) $3.00 or $ 500 5/24/02 $ 3.60 7,075.7 / $500
Filter International Ltd. (ii) 70% of $ 150 5/24/02 $ 3.60 2,452.4 / $150
Camden International Ltd. the average of $ 350 5/24/02 $ 3.60 5,279.1 / $350
Domino International Ltd. the 3 lowest $ 150 5/24/02 $ 3.60 1,767.4 / $150
Thunderbird Global Corporation trades for 30 $ 75 5/24/02 $ 3.60 1,083.1 / $75
BNC Bach International Ltd. days 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
======= ======= =================
21
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE $ REDEEMED (3)
- ------------------ ---------- -------- -------- ----------- ------- -----------------
OTHER RESTART FINANCINGS:
10% CONVERTIBLE NOTE
BNC Bach International Ltd. (Note: on 50% of the $ 150 $ 150 5/14/02 $4.20 2,217.8 / $150
7/14/02 the maturity date was extended average of 3 $10.80 on
until 12/31/02; on December 27, 2002, lowest closing 7/14/02;
the maturity date was extended until bid prices $1.92 on
January 15, 2003; on January 15, 2003 for 22 days 12/27/02;
the maturity date was extended until preceding $1.80 on
March 17, 2003, on March 17, 2003 the conversion 1/15/03;
maturity date was extended until April $1.50 on
4, 2003; on April 2, 2003, the 3/17/03;
maturity date was extended until May $0.99 on
5, 2003; on April 30, 2003, the 4/2/03
maturity date was subsequently $0.75 on
extended until May 10, 2004)(5) 4/30/03
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
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 Limited share $ 200 $ 200 8/28/02 $ 4.80 225.0 / N/A
------- ------- -----------------
Total Other Restart Financings $ 750 $ 730 2,720.3 / $350
======= ======= =================
22
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE $ REDEEMED (3)
- ------------------ ---------- -------- -------- ----------- ------- -----------------
MERCATOR 12% AND 10% DEBENTURES (2)(3)
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
trading prices
Mercator assigned its rights to: for the 20
Alpha Capital AG trading days 250 250 7/24/03 $0.115 2,673.8 / $250
Gamma Opportunity Capital Partners, LP preceding 250 250 7/24/03 $0.115 2,685.6 / $250
Goldplate Investment Partners conversion (8) 250 250 7/24/03 $0.115 2,673.8 / $250
Marr Technologies, B.V. (11) 570 570 9/1/03 $0.498 5,181.8 / $570
------- -------
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 Preservation Inc. 40 40 10/2/03 (12) $1.310 --
------- ------- -----------------
$ 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 3,475.7 / $300
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 share $ 0 $ 0 10/22/02 $3.90 0
10% CONVERTIBLE DEBENTURES
Mercator Focus Fund, L.P. (10) 80% of the $ 1,000 $510(6) 1/14/03 $1.92 7,941.1 / $1,000
average of the
3 lowest
trading prices
for the 20
trading days
preceding
conversion, but
not more than
$3.00
23
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) 80% of the $ 450 $ 440 1/30/03 $1.86 2,857.7 / $450
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 the ------- ------- -----------------
3 lowest $ 500 $ 400 5,055.2 / $500
trading prices ------- ------- -----------------
for the 20
trading days
preceding
conversion, but
not more than
$2.10
Total Mercator Debentures $ 4,550 $ 3,650 37,529.5 / $4,490
======= ======= =================
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
======= ======= =================
MAY 2004 PRIVATE PLACEMENT
PIPE AT $0.40 PER SHARE (13) Units
SF Capital Partners LP issued at $ 4,000 $ 3,720 5/28/04 $0.50 10,000.0
Marr Technologies BV $0.40, 3,000 2,910 5/28/04 $0.50 7,500.0
Proximity Fund LP including 500 465 5/28/04 $0.50 1,250.0
Proximity Partners LP shares 500 465 5/28/04 $0.50 1,250.0
MTB Small Cap Growth Fund and 5 year 500 465 5/28/04 $0.50 1,250.0
MTB Multi Cap Growth Fund warrant 500 465 5/28/04 $0.50 1,250.0
Bridges & PIPES LLC exercisable 300 279 5/28/04 $0.50 750.0
at $0.50 per ------- ------- -----------------
share
Total May 2004 PIPE $ 9,300 $ 8,769 23,250.0
======= ======= =================
JULY 2004 PRIVATE PLACEMENT
PIPE AT $0.40 PER SHARE (13) Units
Sunrise Equity Partners, L.P. issued at $ 750 $ 698 7/9/04 $0.615 1,875.0
Amnon Mandelbaum $0.40, 80 74 7/9/04 $0.615 200.0
David I. Goodfriend including 8 7 7/9/04 $0.615 20.0
TCMP3 Partners shares 150 140 7/9/04 $0.615 375.0
United Capital Partners, LLC and 5 year 500 465 7/9/04 $0.615 1,250.0
warrant ------- ------- -----------------
exercisable
Total July 2004 PIPE at $0.50 per $ 1,488 $ 1,384 3,720.0
share ======= ======= =================
- ---------------------
(1) The Bristol Debentures and Warrants, 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 and the July 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, 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.
24
(2) At December 16, 2004, the holders have converted all but $60,000 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 0.4 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 (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. On July 8, 2004, the registration statement for 83,056,050 shares
underlying Marr Private Placements, the May 2004 PIPE, certain of the Mercator
12% Convertible Debentures, approximately 12.2 million additional shares
attributable to financings included in the July 2003 registration statement and
approximately 3.3 million shares issued or issuable to vendors consultants and
other parties who agreed to accept shares of our Common Stock in lieu of cash
became effective (File No. 333-116491). On July 28, 2004, the registration
statement for 6,472,800 shares of our Common Stock underlying the July 2004 PIPE
and related warrants became effective (File No. 333-117439).
(4) Includes fee shares.
(5) 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.
(6) 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 we
registered the shares underlying the final $700,000 in our June 2004
registration statement.
(7) 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.
(8) 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.
(9) The Securities Purchase Agreements for both transactions between the
Company and MTBV required that we provide cost-free registration rights to MTBV;
however, MTBV was 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 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. Such shares were included in our June 15,
2004 registration statement which was declared effective on July 8, 2004. All of
the subject convertible debentures were converted prior to the extended maturity
date.
25
(11) 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 were included in our June 15, 2004 registration statement, which was
declared effective on July 8, 2004.
(12) The holders claim an earlier transaction date with respect to a
conversion of the debentures, which we dispute. These debentures have not yet
been converted. 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 reserving our rights with respect to the number of shares calculated as
issuable based on the disputed transaction date, we registered that number of
shares of Common Stock in our June 15, 2004 registration statement pending
resolution of the dispute. 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.
(13) In conjunction with the May 2004 PIPE, we issued to each investor
5-year warrants at $0.50 per share to purchase shares of our common stock in an
amount equal to 35% of the number of shares purchased by the investor. In
conjunction with the July 2004 PIPE, we issued to each investor 5-year warrants
at $0.50 per share to purchase shares of our common stock in an amount equal to
70% of the number of shares purchased by the investor. The shares issued
pursuant to the May 2004 PIPE and the July 2004 PIPE and the related warrants
for each 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 respective closing dates, except under the provisions of
previously outstanding convertible debt, option plans, or option or warrant
agreements.
Marr Credit Facility
On November 13, 2003, when the market price of our common stock was $0.88 per
share, the Company and Marr, our 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 we may issue to Marr on an
as-needed basis (the "Notes"). Each Note would bear interest at the rate of 5%
per annum and 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 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 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 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 a party designated by
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.
26
On May 26, 2004, when the market price of our Common Stock was $0.46 per share,
we and Marr again amended the Marr Credit Facility whereby Marr has committed to
subscribe for up to $5,000,000 of Promissory Notes that we may issue through
December 31, 2004, should our Board of Directors unanimously approve the
issuance of one or more such notes before the commitment period expires. Marr
currently has two designated representatives serving on our Board of Directors.
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 is 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, exclusive of the
proceeds from the May 2004 Private Placement. Accordingly, the commitment has
been reduced to approximately $3.6 million as a result of the closing of the
July 2004 PIPE. As consideration for the extension of the commitment period
reflected in the second amendment of the Marr Credit Facility, we issued to Marr
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 shares underlying these three
warrants were included in our June 15, 2004 registration statement. At December
16, 2004, we have not issued any Notes under the Marr Credit Facility.
DILUTION
The shares included in this registration statement were issued to the selling
security holder at September 30, 2004 and were included in our outstanding
shares as of that date, we are not registering additional shares for issuance
under the agreement at this time; therefore we do not expect any additional
dilution as a result of the resale of the shares being registered.
SELLING SECURITY HOLDER
The number of shares set forth in the table for the selling security holder
represents an estimate of the number of shares of Common Stock it will offer to
sell. The actual number of shares of Common Stock we will issue pursuant to the
Ani Biotech License Agreement and Technology Transfer Agreement is
indeterminate, and could be materially less 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 and the currency exchange
rate between U.S. Dollars and Euros. 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 as a result of stock splits, stock dividends or similar
transactions in accordance with Rule 416 under the Securities Act of 1933, as
amended.
The applicable percentage of ownership listed below is based on 169,425,169
shares of Common Stock outstanding as of December 16, 2004.
27
Common Stock Common Stock
Beneficially Beneficially
Owned Prior to Common Stock Owned
Offering to be Sold(a) After Offering
--------------------------------------------------------
Holder Number Number Number Percent
Ani Biotech Oy (1) 1,172,205 1,172,205 -- *
- ------------------
* Represents beneficial ownership of less than 1%
(a) Assumes all shares included in this offering are sold by the selling
security holder.
(1) Ani Biotech Oy is engaged in the business of developing, manufacturing,
marketing and selling in vitro clinical diagnostic rapid tests for the
professional and over-the-counter markets worldwide. Ani Biotech's primary
offices are located at Museokatu 13 B, 00100 Helsinki, Finland. Dr. Aimo
Niskanen has voting and investment control over investments held by Ani
Biotech.
PLAN OF DISTRIBUTION
The selling security holder and any of its 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 holder 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 holder 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 holder 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 holder does not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling security holder may from time to time pledge or grant a security
interest in some or all of the Shares owned by it and, if it defaults in the
performance of its 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 the 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.
28
The selling security holder may also 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 holder 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. At
the time the shares were acquired, the selling security holder had a
pre-existing agreement with Joseph Stevens & Company to distribute such
securities.
The Company has advised the 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 the 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
holder 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 holder in connection with resales of its 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. If the 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.
29
LEGAL PROCEEDINGS
Calypte is a party to a lawsuit which has arisen in the ordinary course of
business. The Company believes that the outcome of such lawsuit will not have a
material adverse effect on its business, financial condition or results of
operations. The Company has product liability and general liability insurance
policies in amounts that it believes to be reasonable given its current level of
business. Although historically the Company has not had to pay any product
liability claims, it is conceivable that the Company could incur claims for
which it is not insured.
The remainder of this page is intentionally left blank.
30
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our directors, executive officers and significant employees are listed below.
DIRECTOR
NAME AGE POSITION WITH THE COMPANY / PRINCIPAL OCCUPATION SINCE
Roger I. Gale 52 Chairman / Executive Chairman, Wavecrest Group 11/04
Enterprises Limited
John J. DiPietro 46 Director / Chief Financial Officer, Chronix 10/99
Biomedical, Inc.
Paul E. Freiman 70 Director / President and Chief Executive Officer, 12/97
Neurobiological Technologies, Inc.
Julius R. Krevans, M.D. 80 Director / Retired Chancellor Emeritus, Director of 3/95
International Medical Services University of
California, San Francisco
Maxim A. Soulimov 32 Director / Director of Legal Affairs, Global Corporate 4/04
Ventures Limited
J. Richard George, Ph.D. 63 President and Chief Executive Officer n/a
Richard D. Brounstein 54 Executive Vice President and Chief Financial Officer n/a
ROGER I. GALE was appointed to the Company's Board of Directors and
elected Chairman in November 2004. Mr. Gale has served since October 2001 as
Executive Chairman of the Board of Directors of Wavecrest Group Enterprises
Limited, a United Kingdom-based communications service provider. He is also a
founder and director of Starnorth Limited, a communications and media
consultancy. From 1999 to 2001, he was Chairman and co-founder of End2End
Wireless Limited, a UK wireless access services provider. From 1996 to 1998, Mr.
Gale was Chief Executive Officer of AIG-Brunswick Capital Management, a $300
million Russian investment fund. Previously, Mr. Gale held senior positions at
the International Finance Corporation (IFC), Washington, DC and the Asian
Development Bank (ADB), Manila. Mr. Gale has lectured in economics at the
University of New England (Australia) and Lincoln College (New Zealand). He
serves as a Director of Mechel Steel Group, a Russian corporation recently
listed on the New York Stock Exchange (NYSE: "MTL"). Mr. Gale holds a Master of
Economics degree from the University of New England, Australia and a Higher
National Diploma from the Royal Agricultural College, Cirencester,
Gloucestershire, England. Mr. Gale is the second director appointed to the
Company's Board 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 granted MTBV the right to nominate two mutually-agreeable
representatives for appointment to the Board. MTBV is currently the Company's
largest stockholder, holding approximately 27% of the Company's outstanding
Common Stock.
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.
31
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. He is the first of two Directors appointed 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 granted MTBV the
right to nominate two mutually-agreeable representatives for appointment to the
Board. 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.
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, Mr.
Brounstein 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.
Audit Committee
The Audit Committee currently consists of Mr. Freiman as Chairman, Mr.
DiPietro, and Dr. Krevans. 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.
32
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, who subsequently resigned from the Board on June 30,
2004, 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. Dr. Krevans was re-appointed to the Audit Committee on June
30, 2004, as a result of Dr. Randawa's resignation from the Board.
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 Incentive
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.
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.
33
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 the 2004 Proxy Statement.
34
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
35
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 December 16, 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
BENEFICIALLY % OF
5% STOCKHOLDERS, DIRECTORS AND OFFICERS(1) OWNED TOTAL(2)
------------------------------------------ ------------ --------
Marr Technologies BV (3) 49,540,151 28.73
Strawinskylaan 1431
1077XX, Amsterdam
The Netherlands
SF Capital Partners Ltd. (4) 10,322,000 6.10
3600 South Lake Drive
St. Francis, WI 53235
Roger I. Gale (5) 165,000 *
J. Richard George (6) 2,562,384 1.49
Richard D. Brounstein (7) 1,507,371 *
John J. DiPietro (8) 307,977 *
Paul E. Freiman (9) 309,901 *
Julius Krevans, M.D.(10) 308,468 *
Maxim A. Soulimov (11) 200,000 *
All current directors and executive officers
as a group (7 persons) 5,361,101 3.07
* 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, 5000 Hopyard Road, Suite 480,
Pleasanton, California 94588.
(2) Based on 169,425,169 shares outstanding as of December 16, 2004.
(3) As reported in Amendment No. 4 to Schedule 13D dated August 9, 2004 filed
with the Securities and Exchange Commission. 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 Capital Partners Ltd.
(5) Marr Technologies BV ("Marr"), the beneficial owner of 49,540,151 shares
of Calypte Common stock (the "Marr Holdings") was granted the right to
nominate two (2) mutuall-agreeable candidates for appointment to the
Calypte Board of Directors pursuant to an August 2003 agreement. Mr. Gale
was nominated by Marr and subsequently appointed as a Director on November
15, 2004 upon approval of the Calypte Board of Directors. Mr. Gale
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.
(6) Includes 2,562,384 shares subject to options exercisable within 60 days.
36
(7) Includes 1,507,371 shares subject to options exercisable within 60 days.
(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 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") was granted the right to
nominate two (2) mutually agreeable candidates for appointment to the
Calypte Board of Directors pursuant to an August 2003 agreement. Mr.
Soulimov was nominated by Marr and subsequently appointed as a director on
April 2, 2004 upon approval of the Calypte Board of Directors. He was
re-elected as a Director at the annual Meeting of Stockholders on June 22,
2004. 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
LICENSE AGREEMENT AND TECHNOLOGY TRANSFER AGREEMENT ("LICENSE AGREEMENT") WITH
ANI BIOTECH OY
On September 30, 2004, when the market price of our Common Stock was $0.39 per
share and pursuant to Regulation S, we entered into a licensing, technology
transfer and equipment purchase agreement with Ani Biotech Oy ("Ani") pursuant
to which we are required to pay to Ani an aggregate of 1,232,840 Euros
(approximately US $1,500,000) in either our Common Stock or cash to acquire
certain licenses and manufacturing equipment. On September 30, 2004, we issued
1,172,205 restricted shares of our Common Stock to Ani, representing the first
installment under the License Agreement. This registration statement includes
only the 1,172,205 of our Common Stock which were issued prior to the filing of
this registration statement.
Subsequent installments under the License Agreement are due over the next
several months, beginning five days following the effectiveness of this
registration statement. Such payments may be paid in registered shares of our
Common Stock or in cash, in our sole discretion. Should we elect to file a
subsequent registration statement registering such shares, the License Agreement
provides that we would issue shares of our Common Stock to Ani at a price equal
to the average closing price of our Common Stock as quoted on the American Stock
Exchange for the five days immediately preceding the transfer, but not at less
than $0.40 per share. The License Agreement further provides that the conversion
rate from Euros into US dollars will be the 12 Noon Eastern Time buying rate on
the day of the transfer as reported by the Federal Reserve Bank of New York.
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.
37
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.
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 and we recently introduced an HIV-1 EIA serum-based
incidence test. Our revenues are currently generated from sales of these
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 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
sexually-transmittted or 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 have recently conducted field trials of
serum- urine- and oral fluid-based HIV-1 and HIV-2 rapid tests and believe that
the results have validated our technology. We anticipate that our primary focus
for the current and longer-term future will be the commercialization of these
rapid test products and additional rapid tests that we plan to develop and
commercialize using the technology acquired in the License Agreement, 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.
38
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:
- --------------------------------------------------------------------------------
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.
39
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 o No special handling. Urine is stable for 4 weeks without refrigeration
TO COLLECT 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 o Similar commercialized urine tests exist for drugs of abuse, pregnancy,
TESTS 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.
OTHER SEXUALLY TRANSMITTED DISEASES
A report issued by the Centers for Disease Control, Tracking the Hidden
Epidemics: Trends in STDs in the United States 2000, states, "In the United
States, more than 65 million people are currently living with an incurable
sexually transmitted disease (STD)." Persons living with HIV account for
approximately 10% of this population. The report continues, "An additional 15
million people become infected with one or more STDs each year, roughly half of
whom contract lifelong infections. Yet, STDs are one of the most
under-recognized health problems in the country today. Despite the fact that
STDs are extremely widespread, have severe and sometimes deadly consequences,
and add billions of dollars to the nation's healthcare costs each year, most
people in the United States remain unaware of the risks and consequences of all
but the most prominent sexually transmitted disease - the human immunodeficiency
virus or HIV." These diseases constitute significant health problems not just in
the US, but in many international locales as well.
Under the terms of the License Agreement with Ani Biotech, we have been granted
an exclusive license to develop, manufacture and sell rapid diagnostic tests for
a number of sexually transmitted diseases, including HIV, HPV, Hepatitis B,
Hepatitis C, Syphilis, Gonorrhea, and Chlamydia when urine or oral fluid are the
sample media. We have also been granted a non-exclusive license to develop,
manufacture and sell the same sexually transmitted disease tests when blood,
serum, plasma, or urogenital swabs are the sample media. In the next few years,
we plan to consider the development or acquisition and commercialization of
diagnostic tests for some or all of these diseases for both domestic and
international applications using the Ani Biotech platform.
40
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 Pleasanton, California. During June 2004 we relocated
our headquarters to Pleasanton from our previous office and manufacturing site
in Alameda, California. Our manufacturing facility is located in Rockville,
Maryland. Historically, our Alameda facility had manufactured our EIA screening
test and our Rockville facility manufactured our Urine and Serum Western Blot
tests. However, we are currently consolidating our manufacturing operations by
moving all manufacturing to our Rockville facility. We closed the Alameda
facility effective June 30, 2004, when the lease expired.
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 27% of our outstanding stock as of
December 16, 2004.
Currently, we and our distributors market our ELISA tests in approximately half
a dozen countries worldwide. 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.
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. During 2004, we have completed private placements of our common
stock with 12 accredited investors and received aggregate net proceeds of
approximately $10.2 million. Additionally, under the amended terms of the Marr
credit Facility between us and Marr Technologies BV, our largest stockholder and
a participant in one of the private placements, we have access to an additional
$3.6 million from the issuance of 9% promissory notes that we may issue, upon
unanimous approval by our Board of Directors, through December 31, 2004. We
expect to raise additional capital, however, there can be no assurance that
additional financing will 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 require stockholder approval or could require us to obtain
waivers of certain covenants that are contained in existing agreements. Although
we do not presently have any agreements in place with respect to additional
financing, we intend to seek additional financing aggregating up to $16.5
million by the issuance of Common Stock or equivalents and/or the issuance of
warrants to purchase shares of Common Stock on terms and conditions that, based
on the current market price of our Common Stock and the size of the financing,
may result in the issuance of more than 20% of our currently issued and
outstanding Common Stock and/or that may trigger certain anti-dilution
protections that are included in existing financing agreements or that may be
included in subsequent financing agreements and that would result in substantial
dilution to our existing stockholders. Under the rules of the American Stock
Exchange, in the event that either of these conditions occurs as a result of a
prospective financing, we would need to obtain stockholder approval of such
financing. There can be no assurance that we will enter into such agreements or
secure such financing, or that our stockholders will approve the terms of such
financing, if so required. Further, 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
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.
41
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 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."
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.
42
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.
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.
43
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.
Incidence Test On April 12, 2004, we announced that the 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. Our
production capabilities are now in place. We expect that the US FDA will
classify this product as being for research use only, thereby minimizing the
regulatory approval process. This product is now available for international
distribution, and we have shipped our first order..
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 and/or Being Commercialized
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
following a traditional laboratory-based test 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.
We have already conducted in-house trials of our development stage blood, oral
fluid and urine rapid tests using a dipstick format and have conducted field
trials 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 the first phase of our initial field trials, we tested our development-stage
blood and urine rapid tests. These studies identified certain refinements that
we have implemented.
44
We began the second phase of our initial field trials of our blood, oral fluid
and urine rapid HIV antibody assays in April 2004 at the Thai Red Cross
Anonymous HIV Clinic in Bangkok, Thailand. We completed this prospective and
random study in June 2004 and provided the results to delegates of the XV
International AIDS Conference held July 11-16, 2004 in Bangkok. This study
tested a total of 1023 subjects, 392 seropositive subjects, including 37
seropositive subjects receiving anti-retroviral therapy, and 631 seronegative
subjects. The true antibody status of these subjects was determined by testing
of a blood sample using the standard testing method routinely used by the
Anonymous Clinic for diagnostic testing. Our blood rapid test was 100%
concordant with the results of the standard blood tests. Our oral fluid test
demonstrated 99.5% sensitivity (390 of 392 subjects). The two false negative
results were from two known positive subjects who were on anti-retroviral
therapy. These patients are known to have diminished antibody levels and would
not normally be seeking HIV diagnostic testing. The specificity of the oral
fluid test was 100%. Our rapid urine assay was found to be 99.0% sensitive (388
of 392 subjects) and 100% specific. Our rapid blood, oral fluid, and urine tests
correctly identified 1023 of 1023 subjects, 1021 of 1023 subjects, and 1019 of
1023 subjects for an overall accuracy of 100%, 99.8%, and 99.6%, respectively.
We believe that the field studies have validated the technology for all of our
rapid tests. All three of the rapid assays will be moved into manufacturing
sequentially. We have commenced the technology transfer of the blood rapid test
to our Thailand manufacturer with the objective of completing our first pilot
production lots late in 2004. We plan to initiate manufacturing of the oral
fluid test in Thailand shortly following the start-up of blood test
manufacturing. The urine test is expected to follow. While we believe that the
results of the urine test to date are acceptable, scale-up is more difficult.
Further, we believe that the urine test used in the initial trials can be
improved with respect to accuracy as well as stability and reproducibility as we
scale up. We are investigating what improvements are necessary prior to initial
commercialization. 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, especially those who are receiving anti-retroviral
therapy, even more difficult. There can, however, be no assurance that we will
complete the development and testing process of an improved urine product or
that we will successfully manufacture and commercialize a urine rapid test, or
our other rapid tests.
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.
On May 13, 2004, we announced that we had selected Beijing Tiantan Biological
Products Co, Ltd. ("BTBP") as a manufacturing partner for the production of our
rapid tests in China. BTBP is a biotech company that manufactures multiple
vaccines for both viral and bacterial infections. The National Vaccine & Serum
Institute of the Peoples' Republic of China currently owns approximately 66% of
BTBP's outstanding shares. On the basis of a memorandum of understanding between
the parties executed earlier this year, we are negotiating a formal joint
venture agreement with BTBP. Prior to the construction of the manufacturing
facility contemplated in the Memorandum of Understading, BTBP has made
facilities available to us to manufacture the rapid test products required for
clinical trials in China. We expect the clinical trials to begin in the fourth
quarter of 2004.
In April 2004, 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. In June 2004, we entered into a sublicense agreement with Abbott
Laboratories, Inc. for certain worldwide rights to patents relating to the
design, manufacture and sale of lateral-flow rapid diagnostic tests. Under the
terms of the agreement, we were granted certain worldwide rights to use a family
of patents known as the "Guire/Swanson" patents in both the professional and
over-the-counter (OTC) markets. The technology underlying these patents is
fundamental to nearly all lateral-flow rapid diagnostic tests. In September
2004, we entered into a worldwide, non-exclusive license agreement with Bio-Rad
Laboratories for HIV-2 rights. Also in September 2004, we were granted access,
under the License Agreement with Ani Biotech, to Ani's new patent pending
diagnostic test platform and sample applicator, that we believe is a viable
alternative to certain current lateral flow platforms. We believe that these
rapid technology licenses will give us the ability to compete on a global basis
in both the professional and OTC markets, including in the US, European and
Japanese markets for HIV as well as for other STD diagnostic tests.
45
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.
Incidence Tests. 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. We believe this feature will strongly distinguish
Calypte's rapid blood product in a "me-too marketplace" by providing a test that
is comparably priced with oher tests but having a stronger diagnostic ability.
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. We plan to introduce this product using the Ani
Biotech technology acquired in the License Agreement. Although we believe that
we have demonstrated feasibility for this product, there remains significant
effort, including regulatory approvals, before it will be ready for market.
Over-the-Counter. There are currently no FDA approved over-the-counter ("OTC")
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 currently expect to develop an OTC HIV diagnostic
product at our Rockville, MD facility based on the license and technology
acquired in the License Agreement. We expect to begin the development process
for this product no later than the first half of 2005 and commence the
regulatory process for professional and OTC market approval with the US FDA in
late 2005.
Other Diagnostics. We intend to develop and/or market additional or improved
tests, focusing on urine and oral fluid, for other infectious and viral
diseases, including other sexually transmitted diseases ("STDs"). 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 before 2005, 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 the development and commercialization of HIV-1/2 rapid
tests and improvements for our existing products, and most significantly, using
the technology and equipment acquired in the License Agreement for the
development of blood, oral-fluid and urine HIV-1/2 rapid tests, and rapid tests
for other STDs. 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.
We believe that other international approvals for the ELISA urine tests are
pending. We are working collaboratively with our third party distributors and
through our Chinese joint ventures 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.
46
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 16,
2004. Material terms of the respective distribution arrangements are described
in more detail below.
EFFECTIVE DATE TERM OF GEOGRAPHIC TYPE OF
MARKETING PARTNER / COMPANY OF ARRANGEMENT ARRANGEMENT REGION MARKETS / PRODUCTS ARRANGEMENT (1)
- --------------------------- -------------- ----------- ---------- ------------------ ---------------
Calypte United States All
and Canada
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 2 Malaysia Exclusive -
year renewal urine
option Non-exclusive
- serum
BioBras S. A. 5/00 3 years, with 2 Brazil All Exclusive -
year renewal urine
option Non-exclusive
- serum
Medicure, Inc. 3/01 3 years with 2 Philippines All Exclusive-
oear renewal urine
Option Non-exclusive
- serum
PCN Healthcare 6/01 3 years with 2 Thailand All Exclusive-
year renewal urine
option Non-exclusive
- serum
REM Industria E. Comerica LTDA 12/01 3 years with 2 Brazil Serum only Non-Exclusive
year renewal
option
Beijing Calypte Biomedical 11/03 Not applicable China All 51%-owned
Technology Ltd. joint venture
Sumit Exports and Trades Pvt. 6/02 3 years, with 2 India All Exclusive -
Ltd.. year renewal urine
option Non-exclusive
- serum
bioMerieux Mexico S.A. de C.V. 12/01 3 years with 2 Mexico Serum only Non-exclusive
year renewal
option
bioCiencia Tecnologia e Comercio 4/02 3 years with 2 Brazil Serum only Non-exclusive
Ltda. year renewal
option
Adaltis Inc. 3/02 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 GCC;
option Council, non-exclusive
Botswana - urine and
serum in
Botswana
Dow Biomedica 10/04 3 years with South Korea Serum only Non-exclusive
2-year renewal
option
Daison Development and Investment 10/04 3 years with Vietnam All Exclusive
Corproation 2-year renewal within territory
option
- ----------------
(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.
47
In 2003, our revenue from product sales totaled $3.5 million from the sale of
our ELISA tests. Approximately 95% of our 2003 revenues were derived from sales
to customers in the United States. Our current international focus, specifically
in China and Africa, is expected to come from sales of our rapid tests currently
being developed and/or commercialized.
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 was
completed at 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 half of 2005.
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 pre-market approval ("PMA") from the FDA for the manufacture and sale of our
urine Western Blot tests for our Rockville facility. We had previously obtained
a PMA from the FDA for the manufacture and sale of our EIA screening test for
our Alameda, California 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 increased our production of EIA screening tests at our Alameda
facility prior to its closure 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.
The lease for our Alameda facility expired on June 30, 2004 and, as part of our
Rockville consolidation, we have ceased manufacturing operations there. We have
relocated our corporate headquarters within the San Francisco bay area 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 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.
48
Subject to limitations imposed by licensed patent right restrictions and other
regulatory or government imposed considerations, we expect to both
self-manufacture and outsource the manufacture of our rapid test products. We
have initially entered into a manufacturing agreement with Pacific Biotech in
Thailand to manufacture our rapid test products for distribution in southeast
Asia and potentially in parts of Africa and we are negotiating an arrangement
with BTBP to act as a joint venture manufacturing partner in China. We may seek
to identify other manufacturers and/or potential joint venture partners that we
believe could manufacture the rapid tests in the quantity and quality that we
desire. We plan to install the equipment acquired from Ani under the terms of
the License Agreement in our Rockville, Maryland facility and manufacture the
rapid tests using that technology platform there. We believe that we may have
worldwide freedom to operate using this technology and can ultimately limit the
number of manufacturing partners required. There can, however, be no assurance
that we can successfully develop and transfer our rapid test technologies to
another manufacturer, if necessary, 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.
49
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 was manufactured in our Alameda facility and has been 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.
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.
50
The format of our urine, oral fluid and blood rapid tests currently being
developed and/or commercialized 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. The tests currently being developed and/or commercialized
are based on a dipstick format, however we also plan to develop additional tests
in an alternative format using the technology acquired in the License Agreement.
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 OF
ISSUER OF LICENSE OWNER DESCRIPTION ADDITIONAL PROVISIONS PATENT IN:
- ------------------------------------------------------------------------------------------------------------------------------------
EIA:
- ------------------------------------------------------------------------------------------------------------------------------------
NYU NYU Exclusive license for using Right to make, use, sell 2009
urine in place of blood as a and sublicense products
specimen sample for detecting HIV utilizing the technology
described in the patent
- ------------------------------------------------------------------------------------------------------------------------------------
Texas A&M University TAMUS Non-exclusive license for using Right to make, have made, 2009
System (TAMUS) insect cells to obtain gp160 use and sell products
based on its proprietary
recombinant expression
systems
- ------------------------------------------------------------------------------------------------------------------------------------
bioMerieux (Cambridge Harvard Non-exclusive license for using Sublicense to make, have 2005
Biotech Corporation) University gp160 to detect HIV infection made, use and sell
products that relate to
the licensed technology
- ------------------------------------------------------------------------------------------------------------------------------------
URINE WESTERN BLOT
- ------------------------------------------------------------------------------------------------------------------------------------
NYU NYU Exclusive license for using Right to make, use, sell 2009
urine in place of blood as a and sublicense products
specimen sample for detecting HIV utilizing the technology
described in the patent
- ------------------------------------------------------------------------------------------------------------------------------------
NIH Institute HIV 1 virus 2112
Pasteur
- ------------------------------------------------------------------------------------------------------------------------------------
SERUM WESTERN BLOT
- ------------------------------------------------------------------------------------------------------------------------------------
NIH Institute HIV 1 virus 2112
Pasteur
- ------------------------------------------------------------------------------------------------------------------------------------
51
As we pursue the commercialization of our rapid HIV tests, we have obtained
licenses or other rights under certain patents or made other business
arrangements in connection with HIV-2, peptides, analytes and lateral flow
technology, to manufacture and sell our rapid HIV tests. See the Section
entitled, "Risk Factors" for a further discussion of these issues. To obtain
certain of these licenses, we have had to pay upfront fees and will be required
to pay 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. In August 2004, we announced that we had entered
into a sublicense agreement with Abbott Laboratories, Inc for certain worldwide
rights to patents relating to the design, manufacture and sale of lateral-flow
rapid diagnostic tests. In October 2004, we announced that we received a
worldwide, non-exclusive sublicense from Bio-Rad Laboratories under patents
relating to HIV-2 and that we have acquired rights to Ani's patent pending rapid
test diagnostic platform and sample applicator under the License Agreement. The
table below identifies the additional primary patent suites that we have now
acquired for the manufacture of our rapid tests.
- ------------------------------------------------------------------------------------------------------------------------------------
EXPIRATION - UPON
EXPIRATION OF
ISSUER OF LICENSE OWNER DESCRIPTION ADDITIONAL PROVISIONS PATENT IN:
- ------------------------------------------------------------------------------------------------------------------------------------
RAPID URINE:
- ------------------------------------------------------------------------------------------------------------------------------------
Adaltis, Inc. Adaltis, Inc. Non-exclusive license for use of Right to make, have made, 2010 - 2012
HIV-1 and HIV-2 peptide sequences use and sell Calypte
products throughout the
world, except in Canada,
utilizing the technology
described in the patent
- ------------------------------------------------------------------------------------------------------------------------------------
Bio-Rad Laboratories and Institute Pasteur Non-exclusive license for use of Right to make, have made, 2006 - 2015
Bio-Rad Pasteur HIV-2 virus use and sell products
utilizing the technology
described in the patent
- ------------------------------------------------------------------------------------------------------------------------------------
Abbott Laboratories Surmodics Non-exclusive sublicense of the Right to make, have made, 2008 - 2017
Corporation Swanson, et al and Guire et al use and sell products
lateral flow patent suite utilizing the technology
described in the patent
- ------------------------------------------------------------------------------------------------------------------------------------
Ani Biotech Oy Ani Biotech Oy Exclusive license for use of Right to make, have made, Pending
rapid test diagnostic platform use and sell products
and sample applicator for utilizing the technology
certain STDs when urine or oral described in the patent
fluid are sample media;
non-exclusive license when
blood, serum, plasma or
urogenital swabs are sample media
- ------------------------------------------------------------------------------------------------------------------------------------
52
We expect to use the rights to the technology that we have acquired under the
terms of the License Agreement in the development and commercialization of
certain over-the-counter rapid tests, as well as applications in certain
professional markets in the US and worldwide.
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.
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.
53
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. As a
result of the closure of our Alameda facility and the planned transfer of EIA
screening test manufacturing to Rockville, 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.
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.
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
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 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.
54
International
Our Alameda, California manufacturing site was awarded International
Organization for Standardization ("ISO") 9001/EN 46001/ ISO 13485 certification
on March 14, 2001 and maintained that certification until the facility was
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. We believe
that the attributes of our rapid tests for HIV-1/2 in urine, oral fluid 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 plan, as a part of our rapid test
commercialization process, to request that WHO focus its resources on evaluation
of the technology employed by the rapid tests.
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, we believe that 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.
We have not begun the regulatory process for our dipstick-format rapid 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. 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 a
joint venture involving BTBP.
55
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. We currently expect to develop an OTC HIV diagnostic product at our
Rockville, MD facility based on the license and technology acquired in the
License Agreement. We expect to begin the development process for this product
no later than the first half of 2005 and commence the regulatory process for
professional and OTC market approval with the US FDA in late 2005. We plan to
subsequently develop diagnostic tests for other STDs. 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.
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.
56
EMPLOYEES
As of December 3, 2004, following the cessation of our Alameda, California
manufacturing operations, we had an aggregate of 62 full time, part time and
temporary employees, 12 of whom were engaged in or directly supported our
research and development activities, 43 of whom were in manufacturing,
manufacturing support and quality assurance, one of whom was in marketing and 6
of whom were in administration. Our employees are not represented by a union or
collective bargaining entity. We believe our relations with our employees are
good.
57
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 December
16, 2004, and Calypte undertakes no duty to update this information. Should
events occur subsequent to December 16, 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 received
regulatory approval to sell our ELISA tests in China, Malaysia, Indonesia, and
in parts of Africa. Unfortunately, these laboratory-based 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, however, that
rapid tests are more suitable in many of the countries in which HIV/AIDS is
epidemic, and particularly so in sub-Saharan Africa and the "next wave"
countries of Russia, China, India and in northern Africa. 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.
58
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 $10.2 million in aggregate net proceeds from
our recently-completed PIPE financings, in which Marr also
participated. Marr now owns approximately 27% 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, under the amended terms of the Marr Credit
Facility between us and Marr, we currently have access to an
additional $3.6 million from the issuance of 9% promissory notes
that we may issue through December 31, 2004, should our Board of
Directors unanimously approve the issuance of one or more such notes
before the commitment period expires. We believe that our currently
available cash, plus the funds that would be available, if
necessary, through the Marr Credit Facility, and in the absence of
any unanticipated material costs and expenses that are not factored
into our cash flow projections, will be adequate to sustain our
operations at expected levels through early 2005.. If we elect to
issue notes under the Marr Credit Facilty, those notes would be due
and payable on May 31, 2005. Although we do not presently have any
agreements in place with respect to additional financing, we intend
to seek additional financing aggregating up to $16.5 million by the
issuance of Common Stock or equivalents and/or the issuance of
warrants to purchase shares of Common Stock on terms and conditions
that, based on the current market price of our Common Stock and the
size of the financing, may result in the issuance of more than 20%
of our currently issued and outstanding Common Stock and/or that may
trigger certain anti-dilution protections that are included in
existing financing agreements or that may be included in subsequent
financing agreements and that would result in substantial dilution
to existing stockholders. Under the rules of the American Stock
Exchange, in the event that either of these conditions occurs as a
result of a prospective financing, we would need to obtain
stockholder approval of such financing. Although we filed a
preliminary proxy statement with the Securities and Exchange
Commission on October 29, 2004, in furtherance of seeking such
approval, we have determined not to proceed with that preliminary
proxy statement and proposal and intend to file a new preliminary
proxy statement, if required. There can be no assurance that we will
enter into such agreements or secure such financing, or that we will
obtain stockholder approval, if so required.
o We have closed our former manufacturing facility in Alameda,
California. The consolidation of our domestic manufacturing
operations is progressing according to our schedule. It is largely
completed, and eliminates approximately $1 million of annual
expense, including approximately $500,000 in annual occupancy costs.
We believe that our consolidation will create a more efficient and
cost effective manufacturing structure at our Rockville, Maryland
facility once we complete the approval process for the
just-transferred urine EIA product.
o We are committed to and focused on the introduction of one or more
rapid HIV-1/2 diagnostic tests in international markets in the
dipstick format. Using the technology acquired in the License
Agreement, we will also focus on rapid tests for HIV and other STDs
in the US, Europe, Japan and possibly other countries as well. 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. Additionally, we plan to
support international public health HIV surveillance efforts with
our BED Incidence test which we released in the third quarter of
2004.
Guidance We project full-year 2004 revenue from the sale of our current ELISA
tests and the BED Incidence test to be in the range of $2.6 million to $3.2
million. as our reference lab customers continue to rebalance their inventories
following accelerated purchases in the second quarter during our transition of
EIA manufacturing from our former Alameda, California facility to our Rockville,
Maryland location.
59
We have previously indicated that our primary focus for 2004 is completing the
development and commercialization of certain rapid HIV tests. We have recently
completed the second phase of our initial international field trials of our
developmental stage urine, blood and oral fluid rapid HIV tests in Thailand. We
believe that the studies validated the technology for all of our rapid tests.
All three assays will be moved into manufacturing sequentially. We have
commenced the technology transfer of the blood rapid test to our Thailand
manufacturer with the objective of completing our first pilot production lots by
year-end 2004. We plan to initiate manufacturing of the oral fluid test in
Thailand shortly following the start-up of blood test manufacturing. The urine
test is expected to follow. While we believe that the results of the urine test
to date are acceptable, scale-up is more difficult. Further, we believe that the
urine test used in the initial trials can be improved with respect to accuracy
as well as stability and reproducibility as we scale it up. We are investigating
what improvements are necessary prior to initial commercialization. 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,
especially those who are receiving anti-retroviral therapy, even more difficult.
There can, however, be no assurance that we will complete the development and
testing process of an improved urine product or that we will successfully
manufacture and commercialize a urine rapid test, or our other rapid tests.
Additionally, we have begun the research on a blood-based rapid HIV incidence
test for diagnostic and surveillance purposes under the terms of a Cooperative
Research and Development Agreement with the CDC.
Our plans are to begin marketing one or more of our dipstick-format rapid tests
in select international markets over the coming months. Commercialization of
these 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 rapid HIV tests.
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 processes, we do not expect to generate any revenues from
the sale of any rapid HIV test products during 2004. It is expected to take at
least six months from the time we commence the process to complete the
regulatory approval process in China. We expect to commence clinical trials
there in the fourth quarter of 2004. We expect Pacific Biotech, our Thailand
manufacturer, to manufacture our rapid tests for distribution in Southeast Asia
and certain parts of Africa, subject to regulatory approval in each
jurisdiction. We cannot estimate the regulatory approval process in various
other international markets.
We continue to pursue the rights to intellectual property and related materials
that will be necessary for the manufacture and sale of our rapid tests. In April
2004, 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. In June 2004, we entered into a sublicense agreement with Abbott
Laboratories, Inc. for certain worldwide rights to patents relating to the
design, manufacture and sale of lateral-flow rapid diagnostic tests. Under the
terms of the agreement, we were granted certain worldwide rights to use a family
of patents known as the "Guire/Swanson" patents in both the professional and
over-the-counter (OTC) markets. The technology underlying these patents is
fundamental to nearly all lateral-flow rapid diagnostic tests. We believe that
obtaining the license to this patent suite is essential for our freedom to
manufacture and sell our dipstick-format HIV rapid tests that were are currently
in the process of commercializing for the worldwide professional markets.
Additionally, we believe that the technology to which we were granted access
under the License Agreement with Ani Biotech provides us with an alternative
product format with potential applicability in both the professional and OTC
markets worldwide. In September 2004, we entered into a worldwide, non-exclusive
sub-license agreement with Bio-Rad Laboratories for HIV-2 rights. This agreement
will permit us to commercialize and market our rapid tests in areas where HIV-2
is increasing in prevalence or where it is required to achieve regulatory
approval for our tests.
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We believe that the key to our penetration of the Chinese market will hinge on
the success of the Beijing Calypte Joint Venture with Marr Technologies Limited
in obtaining regulatory approval for and manufacturing and marketing our rapid
HIV test products in China. Early indications, based on meetings with Chinese
authorities in which both we and representatives of our joint venture partner
participated, lead us to expect that there is great potential for revenues from
the sale of rapid HIV tests in China. We commenced our Chinese clinical trials
in November 2004 and expect to complete data collection by the end of 2004.
Further, we are negotiating a joint venture agreement with Beijing Tiantan
Biological Products, Co., Inc. ("BTBP") based on a memorandum of understanding
executed earlier this year. Prior to the construction of the manufacturing
facility contemplated in the Memorandum of Understanding, BTBP has made
facilities available to us to manufacture the rapid test products required for
clinical trials in China. 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. 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.
Our operating cash burn rate for the nine months ended September 30, 2004
averaged approximately $1.0 million per month and for the year ended December
31, 2003 averaged approximately $1.1 million per month. Our cash balance of $4.5
million at September 30, 2004 reflects the remainder of the approximately $8.8
million in net proceeds we received from our May 2004 private placement, the
approximately $1.4 million in net proceeds received from our July 2004 private
placement, and the approximately $0.4 million in net proceeds received as a
result of our equipment leasing transaction. Additionally, we have a commitment
for approximately $3.6 million from the issuance of 9% promissory notes through
December 31, 2004 under the amended Marr Credit Facility, should our Board of
Directors unanimously approve the issuance of one or more such notes before the
commitment period expires. If we elect to issue notes under the Marr Credit
Facilty, those notes would be due and payable on May 31, 2005. In the absence of
any unanticipated material costs and expenses that are not factored into our
cash flow projections, we believe that these resources will be adequate to
sustain our operations at expected levels through early 2005. Although we do not
presently have any agreements in place with respect to additional financing, we
intend to seek additional financing aggregating up to $16.5 million by the
issuance of Common Stock or equivalents and/or the issuance of warrants to
purchase shares of Common Stock on terms and conditions that, based on the
current market price of our Common Stock and the size of the financing, may
result in the issuance of more than 20% of our currently issued and outstanding
Common Stock and/or that may trigger certain anti-dilution protections that are
included in existing financing agreements or that may be included in subsequent
financing agreements and that would result in substantial dilution to existing
stockholders. Under the rules of the American Stock Exchange, in the event that
either of these conditions occurs as a result of a prospective financing, we
would need to obtain stockholder approval of such financing. There can be no
assurance that we will enter into such agreements or secure such financing, or
that our stockholders will approve the terms of such financing, if so required.
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 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 cash
requirements.
There can be no assurance that subsequent additional financing will 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 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.
61
Off-Balance Sheet Arrangements The Company does 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.
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. We
increased the inventory of our urine screening test prior to
transferring its manufacturing to our Rockville, MD facility; demand
for this product could fall significantly below the historical
levels on which the production was based, in which case we may have
built excess inventory that we may have to dispose of at additional
cost, or at a loss. In the absence of substantial firm new
international purchase orders, we reserved approximately $1 million,
or approximately half the value of our EIA inventory, in the third
quarter of 2004, as our current inventory of these tests exceeds the
expected demand by the insurance business alone prior to expiration
of the tests.
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.
62
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, prior to the closure of our
Alameda, California manufacturing facility in June 2004, we had returned to our
approximate pre-wind-down headcount levels. Not all of the pre-wind-down
employees were rehired. We believe that our current employee complement is
generally sufficient to meet our operational needs.
The costs of the wind-down and restart are difficult to quantify precisely. 2002
operations reflected 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 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
ELISA Test Sales Sales of our EIA Screening Test accounted for 60% and 63% of
our total sales for the nine months ended September 30, 2004 and the year ended
December 31, 2003, respectively. Sales of our Urine Western Blot supplemental
test accounted for approximately 3% and 4% of our sales for the same periods,
respectively. 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. Although we have no firm orders at this time, we have an
adequate supply of the Chinese version of our urine EIA test kits to launch that
business quickly upon receipt of additional regulatory approvals and the
acceptance of orders. 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.
Domestic Sales Sales of our EIA Screening Test to domestic life insurance
reference laboratories accounted for 96% and 89% of screening test revenue
for the first three quarters of 2004 and calendar year 2003, respectively.
Reference laboratory sales were distributed among three laboratories
during the first three quarters of 2004 and four laboratories during
calendar 2003. Individual laboratory sales as a percentage of total
reference laboratory sales ranged from 21% to 54% during the first nine
months of 2004 and from 2% to 63% during 2003, with LabOne being our
largest customer in both periods. In October 2003, LabOne acquired the
smallest of our four reference laboratory customers, bringing the number
of laboratories to which we sell to three. This acquisition has not to
date, nor do we expect it 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. Each of the three
insurance lab customers increased their urine test purchases during the
second quarter of 2004 in anticipation of the closure of our California
facility and consolidation of manufacturing operations in our Rockville,
Maryland facility. Following those larger-than-normal second quarter
purchases, we believe that these labs had sufficient inventory of our
tests during the third quarter and, accordingly, purchases were
significantly below normal for two of the labs and LabOne did not purchase
any tests at all. We do not believe that our revenues from the sale of
63
urine tests for the third quarter reflect any long term material change in
this business, however, we expect that urine test revenues for the fourth
quarter of 2004 will continue to reflect a period of inventory
rebalancing. Direct or distributor sales of our screening test to domestic
diagnostic clinics, public health agencies and community-based
organizations were not material in either 2004 or 2003. We do not
currently expect significant future sales of our current screening test in
this market segment and 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 was assumed by the Beijing Calypte Joint Venture earlier in
2004, and, as the distributor did not achieve the minimum purchase
requirements, we did not renew the agreement when it expired in October
2004. We are attempting to expand 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.
We have commenced the technology transfer of the blood rapid test to our
Thailand manufacturer with the objective of completing our first pilot
production lots late in 2004. We plan to initiate manufacturing of the
oral fluid test in Thailand shortly following the start-up of blood test
manufacturing. The urine test is expected to follow. We may or may not
modify this test prior to initial commercialization. In China, we have
manufactured product for clinical trials and expect the trials to start in
the fourth quarter of 2004. While we believe there is interest in our
rapid HIV tests, the timing of revenues from our rapid HIV tests will be
contingent upon completing our clinical trials and related matters
associated with a commercial scale-up, including establishing
manufacturing operations, initially in Thailand and China, obtaining the
necessary regulatory approvals and developing or expanding distribution
relationships, as more fully discussed in the comments on Guidance earlier
in this Item 2.
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 HIV-1/2 rapid
tests as discussed above for use with urine, blood and oral fluid 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, we plan, as part of our rapid test
commercialization process, to request that 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 40% and 32% of our revenues for the nine months ended September
30, 2004 and the year ended December 31, 2003, respectively. In mid-April 2004,
our primary domestic distributor for our serum Western Blot was acquired by
another entity and informed us that it would no longer serve as a U.S.
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 supplemental test
is key in the FDA-regulated testing algorithm today, it is unclear if, or when,
rapid testing or other testing formats may substantially replace ELISA-based
testing. If that trend occurs, the need for Western Blot supplemental tests may
also be significantly reduced or eliminated.
64
Incidence Tests In April, 2004, we announced that the 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. Our
production capabilities are now in place. We expect that the US FDA will
classify this product as being for research use only, thereby minimizing the
regulatory approval process. This product is now available for international
distribution, and in October 2004 we shipped our first order.
Additionally, in April 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. We believe this feature will strongly distinguish
Calypte's rapid blood product in a "me-too marketplace" by providing a test that
is comparably priced with other tests but having a stronger diagnostic ability.
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. We plan to introduce this product using the
technology acquired in September 2004 in the License Agreement with Ani Biotech
of Finland. Although we believe that we have demonstrated feasibility for this
product, there remains significant effort, including regulatory approvals,
before it will be ready for market.
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 nine months 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 2003
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.
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.
65
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
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.
66
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
======= ======== =======
Three months ended September 30, 2004 and 2003
Revenue for the third quarter of 2004 decreased 60% or $536,000, to $361,000,
compared with $897,000 for the third quarter of 2003. Sales of our EIA screening
tests to domestic insurance company reference labs decreased by $266,000, or by
approximately 60%. Our insurance lab customers increased their urine test
purchases during the second quarter of 2004 in anticipation of the closure of
our California facility and consolidation of manufacturing operations in our
Rockville, Maryland facility. Following those larger-than-normal second quarter
purchases, third quarter purchases were significantly below normal. Domestic EIA
test sales through the direct diagnostic channel were insignificant during the
third quarter in both 2004 and 2003. Third quarter 2003 revenue included EIA
test sales to our Chinese distributor. There were no significant EIA test sales
to international distributors during the third quarter of 2004. Revenue from the
sale of our supplemental tests decreased $32,000 or 32% during the third quarter
of 2004 compared with the third quarter of 2003, primarily as a result of
decreased international sales primarily to our Brazilian and Mexican
distributors.
Gross margin declined to a loss of $1,734,000 (-480% of third quarter sales in
2004) from a loss of $853,000 (-95% of third quarter sales in 2003). As noted
above, sales of our EIA screening tests to domestic insurance company reference
labs decreased during the third quarter, consequentially reducing gross margin.
During the first half of 2004, we built significant amounts of EIA test
inventory to provide a seamless transition for our domestic insurance lab
customers and potential international customers with respect to our
manufacturing consolidation. In the absence of substantial firm new
international purchase orders, we reserved approximately $1 million, or
approximately half the value of the EIA inventory, in the third quarter of 2004,
as our current inventory of these tests exceeds the expected demand by the
insurance business alone prior to expiration of the tests. We continue to look
for opportunities to utilize this inventory.
67
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 $112,000 and $125,000 in the third 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 both 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 each period was recorded as royalty expense.
Research and development expense increased $205,000 or 67% to $509,000 for the
third quarter of 2004 from $304,000 for the third quarter of 2003. Approximately
one-half of the increase relates to expenses incurred in connection with the
field trials of our rapid HIV-1/2 tests in Thailand, including acquisition of
specimens and product prototypes in preparation for clinical trials, and for
technology transfer in China and Thailand. An additional component of the
increase relates to additional compensation and benefits expense attributable to
new research and development personnel involved in developing our rapid tests.
Selling, general and administrative expense decreased by $954,000 or 35% to
$1,800,000 during the third quarter of 2004 from $2,754,000 during the third
quarter of 2003. The primary components of the decrease include
o a net decrease of approximately $970,000 in consulting and investor
relations expenses, of which approximately $1,100,000 was non-cash
expense recorded in connection with the issuance of warrants and
options to consultants and other parties in 2003; partially offset
by expenses incurred in connection with our listing on the American
Stock Exchange.
o a decrease of approximately $200,000 in salary and benefits expense
resulting from both the termination of the domestic sales force
during the third quarter of 2003 as well as changes in executive
management within the Company.
o a decrease in travel expense of approximately $100,000 as there was
a significant African trip during the third quarter of 2003; all
partially offset by
o approximately $300,000 of expense associated with our Chinese joint
venture, which has been offset in arriving at our third quarter 2004
net loss by our minority partner's (Marr Technologies Limited, an
entity related to Marr, our largest stockholder) 49% interest in
this venture; and
o approximately $200,000 in expenses attributable to the closure of
our Alameda, California facility in 2004.
The third quarter 2004 loss from operations of $4,043,000 reflects a 3% increase
compared with the $3,911,000 loss reported for the third quarter of 2003.
We recorded net interest income of $79,000 for the third quarter of 2004
compared with $3,282,000 of net interest expense in the third quarter of 2003, a
decrease of $3,361,000. 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 discounts and
deferred offering costs associated with those debt instruments.
Nine Months Ended September 30, 2004 and 2003
Revenue for the first three quarters of 2004 decreased by $188,000, or 8%, from
$2,430,000 in the first three quarters of 2003 to $2,242,000 in the first three
quarters of 2004. Sales of our urine-based HIV-1 screening tests in the first
three quarters of 2004 decreased by $115,000, or 8%, from $1,465,000 to
$1,350,000, compared with sales in the first three quarters of 2003. The
decrease is almost entirely related to a sale during the third quarter of 2003
to our former Chinese distributor. There were no significant sales to this
distributor, or to any other international distributor, during 2004. Domestic
EIA test sales through the direct diagnostic channel were insignificant in both
2004 and 2003. Revenue from the sale of our western blot supplemental tests
decreased $71,000 or 7% during the first three quarters of 2004 compared with
the first three quarters of 2003. This decrease is principally attributable to
lower sales of our urine blot product.
Of customers individually accounting for more than 10% of our revenue, two
domestic reference lab customers who primarily purchase our EIA screening test
accounted for an aggregate of 32% and 16%, respectively, of revenue for the
first three quarters of 2004 and 30% and 15%, respectively, of revenue for the
first three quarters of 2003.
68
Gross margin on sales declined by $562,000 from a loss of $2,284,000 (-94% of
sales for the first three quarters of 2003) to a loss of $2,846,000 (-127% of
sales for the first three quarters of 2004). During the first half of 2004, we
produced EIA test inventory in our California location in excess of historical
levels required by our domestic insurance lab customers in anticipation of the
shutdown of that facility in June 2004. Related labor and overhead costs
attributable to product held in inventory are allocated to inventory as an asset
rather than being expensed during the period incurred. The increased level of
production and the build-up of EIA inventory combined to result in a reduction
of costs expensed, particularly in the second quarter of 2004, leading to an
improvement in our gross margin for the first nine months of 2004. Offsetting
the increased margin attributable to the expanded production, in the absence of
firm new international EIA test orders, we reserved approximately $1 million, or
approximately half the value of the EIA inventory, in the third quarter of 2004,
as our current inventory of these tests exceeds the expected demand by the
insurance business alone prior to expiration of the tests.
Research and development expense increased $670,000 or 70% from $953,000 in the
first three quarters of 2003 to $1,623,000 in the first three quarters of 2004.
Approximately one third of the increase is attributable to compensation and
benefits expense for new personnel and temporary staffing expense for personnel
involved in developing and commercializing our rapid tests. Additional
components of the increase are costs associated with the field trials of our
HIV-1/2 rapid tests in Thailand, technology transfer efforts in Thailand and
China and for the acquisition of specimens and product prototypes required for
clinical trials for our rapid test initiatives.
Selling, general and administrative expenses decreased by $5,835,000, from
$12,371,000 for the first three quarters of 2003 to $6,536,000 for the first
three quarters of 2004. Approximately $6.2 million of the decrease is
attributable to a decrease in consulting and investor relations expenses, of
which $5.9 million was non-cash, recorded in connection with the issuance of
warrants and options to various consultants providing investor relations,
business development, marketing and operational effectiveness services who were
willing to accept stock, warrants or options in lieu of cash for their services.
These decreases are partially offset by an increase in international business
development-related travel expenses, charges for severance and other costs
related to the closure of the Alameda, California manufacturing facility during
2004; $707,000 in expenses associated with the Chinese joint venture, of which
our minority partner's (Marr Technologies Limited, an entity related to Marr,
our largest stockholder) 49% interest in this venture has been offset in
arriving at our net loss for the first nine months of 2004; and expenses
associated with the addition of a Corporate Compliance Officer.
The loss from operations decreased by $4,603,000 for the first three quarters of
2004, from $15,608,000 in 2003 to $11,005,000 in 2004.
Net interest expense decreased by $5,603,000, from $6,054,000 for the first
three quarters of 2003 to $451,000 for the first three quarters of 2004. The
decrease is primarily the result of the conversion of a significant portion of
the Company's convertible debt during 2003 and earlier in 2004 and the
accounting treatment applicable to the discounts and deferred offering costs
associated with those debt instruments.
LIQUIDITY AND CAPITAL RESOURCES
Financing Activities
The following table summarizes our financing activities from January 2002
through December 16, 2004 by major category and the subsequent table provides
the details of these financings. All amounts are in thousands, except per share
closing prices 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.)
69
SUMMARY OF RECENT FINANCINGS - JANUARY 2002 TO DECEMBER 16, 2004
TOTAL
GROSS NET SHARES
FINANCING SOURCE PROCEEDS PROCEEDS ISSUED
- ----------------------------------- -------- -------- ---------
Bristol 12% Convertible Debentures
and Warrants $ 562 $ 505 1,476.1
8% Convertible Notes 3,232 2,594 46,084.3
Other Restart Financings 750 730 2,720.3
Mercator 12% and 10% Debentures (1) 4,550 3,650 37,529.5
Marr 2003 Private Placements 12,500 11,900 28,333.3
May 2004 PIPE 9,300 8,769 23,250.0
July 2004 PIPE 1,488 1,384 3,720.0
-------- -------- ---------
Total $32,382 $29,532 143,113.5
======== ======== =========
(1) At December 16, 2004, the holders have converted all but $60,000 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 0.4 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 these 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 Note 12 to Detail of Financings.
70
DETAIL OF RECENT FINANCINGS - JANUARY 2002 TO DECEMBER 16, 2004
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
12% CONVERTIBLE DEBENTURES
Bristol Investment Fund, Ltd. Lesser of (i) $425 $468 2/11/02 $ 7.50 1,019.4/$525
60% of the 100 5/11/02 $ 0.90
average of 3 ----
lowest closing
bid prices for
22 days
preceding
conversion or
(ii)$1.50
Class A Warrant Lesser of (i) $4 $4 2/11/02 $ 7.50 56.7/N/A
70% of the
average of
lowest 3
trading prices
for 20 days
preceding
conversion or
(ii)$3.45
Class B Warrant Lesser of (i) $33 $33 2/11/02 $ 7.50 400/N/A
70% of the ----- ----- ----------
average of
lowest 3
trading pricing
for 20 days
preceding
conversion or
(ii)$6.45
Total Bristol $562 $505 1,476.1/$525
===== ===== ============
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
====== ====== ================
71
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
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
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
===== ===== =============
72
CALYPTE SHARES
FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $
INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (3)
- ------------ ------- -------- -------- ---- ----- ------------
MERCATOR 12% AND 10% DEBENTURES
(2)(3)
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 $1.310 -
Southwest Resource 40 (12) $1.310
-------- ----------
Preservation Inc. 40 $1,795 10/2/03 -
-------- ---------- ----------------
$ 2,000 (12) 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 3,475.7/ $300
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 (6) 1/14/03 $1.92 7,941.1/ $1,000
average of
the 3 lowest
trading
prices for
the 20
trading days
preceding
conversion,
but not more
than $3.00
73
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) 80% of the $450 $440 1/30/03 $1.86 2,857.7/ $450
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 37,529.5/ $4,490
====== ====== ================
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
======= ======= ========
MAY 2004 PRIVATE PLACEMENT
- --------------------------
PIPE AT $0.40 PER SHARE (13) Units
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 and 5 year 500 465 5/28/04 $0.50 1,250.0
MTB Small Cap Growth Fund warrant 500 465 5/28/04 $0.50 1,250.0
exercisable
$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
====== ======= ========
JULY 2004 PRIVATE PLACEMENT
- ---------------------------
PIPE AT $0.40 PER SHARE (13) Units
Sunrise Equity Partners, L.P. issued at $ 750 $698 7/9/04 $0.615 1,875.0
Amnon Mandelbaum $0.40 per 80 74 7/9/04 $0.615 200.0
David I. Goodfriend share; 5 8 7 7/9/04 $0.615 20.0
year
TCMP3 Partners warrant
exercisable 150 140 7/9/04 $0.615 375.0
United Capital Partners, LLC at $0.50 per
share 500 465 7/9/04 $0.615 1,250.0
--- --- -------
Total July 2004 PIPE $ 1,488 $ 1,384 3,720.0
======= ======= =======
74
- ---------------------
(1) The Bristol Debentures and Warrants, the 8% Convertible Notes, the
Other Restart Financings, the Mercator 12% and 10% Debentures and warrants, and
the Common Stock underlying MTBV's 2003 PIPE's, the May 2004 and the July 2004
PIPEs 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., 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 December 16, 2004, the holders have converted all but $60,000 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 0.4 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 (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. On July 8, 2004, the registration statement for 83,056,050 shares
underlying Marr Private Placements, the May 2004 PIPE, certain of the Mercator
12% Convertible Debentures, approximately 12.2 million additional shares
attributable to financings included in the July 2003 registration statement and
approximately 3.3 million shares issued or issuable to vendors consultants and
other parties who agreed to accept shares of our Common Stock in lieu of cash
became effective (File No. 333-116491). On July 28, 2004, the registration
statement for 6,472,800 shares of our Common Stock underlying the July 2004 PIPE
and related warrants became effective (File No. 333-117439).
(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 were
included in our June 2004 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.
(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. required that we provide cost-free
registration rights to Marr; however, Marr was 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.
75
In return for the extension of the maturity dates, we agreed to pay an 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. Such shares were included in our June 15,
2004 registration statement, which was declared effective on July 8, 2004. All
of the subject convertible debentures were converted prior to the extended
maturity date.
(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 the Company's 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 the
Common Stock was $0.625, we 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 were included in our June 15, 2004 registration
statement, which was declared effective on July 8, 2004.
(12) The holders claim an earlier transaction date with respect to a
conversion of the debentures, which we dispute. These debentures have not yet
been converted. 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 reserving our rights with respect to the number of shares calculated as
issuable based on the disputed transaction date, we registered that number of
shares of Common Stock in our June 15, 2004 registration statement pending
resolution of the dispute. 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.
(13) In conjunction with the May 2004 PIPE, we issued to each investor
5-year warrants at $0.50 per share to purchase shares of our common stock in an
amount equal to 35% of the number of shares purchased by the investor. In
conjunction with the July 2004 PIPE, we issued to each investor 5-year warrants
at $0.50 per share to purchase shares of our common stock in an amount equal to
70% of the number of shares purchased by the investor. The shares issued
pursuant to the May 2004 PIPE and the July 2004 PIPE and the related warrants
for each 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 respective closing dates, except under the provisions of
previously outstanding convertible debt, option plans, or option or warrant
agreements.
Marr Credit Facility
On November 13, 2003, when the market price of our common stock was $0.88 per
share, the Company and Marr, our 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 we may issue to Marr on an
as-needed basis (the "Notes"). Each Note would bear interest at the rate of 5%
per annum and have a 12-month term. The Marr Credit Facility was available
76
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 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 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 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 a party designated by
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 Marr again amended the Marr Credit Facility whereby Marr has committed to
subscribe for up to $5,000,000 of Promissory Notes that we may issue through
December 31, 2004, should our Board of Directors unanimously approve the
issuance of one or more such notes before the commitment period expires. Marr
currently has two designated representatives serving on our Board of Directors.
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 is 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, exclusive of the
proceeds from the May 2004 Private Placement. Accordingly, the commitment has
been reduced to approximately $3.6 million as a result of the closing of the
July 2004 PIPE. At December 16, 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, we issued
to Marr 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 shares underlying these
three warrants were included in our June 15, 2004 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 10.5 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, we issued warrants and options to purchase 633,333 shares of our
common stock under agreements with consultants to perform legal, financial,
business advisory and other services associated with the restart of our
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 we issued 633,333 shares and received proceeds of $292,500. All but
one of the consulting agreements discussed above expired in August 2002 and we
entered into new agreements with certain of the consultants 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
77
organizations. In November 2002, we 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. We 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. We 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 we had received aggregate proceeds of $1.425 million. We issued
986,667 shares of our common stock pursuant to the exercises of the November
2002 warrant and stock grants. In January and February 2003, we 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 our stock was $2.01, we issued warrants exercisable at $1.50 per share and
stock grants for an aggregate of 975,216 shares of our 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 we had
received proceeds of $0.8 million.
During March 2003, when the market price of our stock ranged from $1.32 to $1.50
per share, we 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 we had received proceeds of approximately
$0.9 million.
In April 2003, when the price of our stock ranged from $0.81 to $0.885 per
share, we 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. We issued warrants at $0.75 per share and stock grants for an aggregate
of 1,490,600 shares of our 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 we had received proceeds of approximately
$0.1 million.
In May 2003, when the price of our stock ranged from $0.552 to $0.576 per share,
we 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. We issued warrants at $0.30 per share and stock grants for an aggregate
of 2,080,305 shares of our 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 we had received proceeds of
approximately $0.5 million.
In July 2003, when the price of our stock ranged from $0.11 to $0.30 per share,
we extended a contract for consulting and other services and granted the
consultant a warrant to purchase 722,500 shares of our 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 we had received proceeds of
approximately $0.4 million. Also during July 2003, we issued stock grants to
consultants for an aggregate of 356,344 shares of our common stock as
compensation under their contracts.
On August 20, 2003, when the price of our stock was $0.18 per share, we issued
consulting contracts to two new consultants pursuant to which we 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. In December 2004, one
of the consultants exercised warrants to purchase 100,000 shares our common
stock. At December 16, 2004, the other consultant has not exercised any of the
warrants granted to him.
In September 2003, when the price of our stock ranged from $0.50 to $1.80 per
share, we issued an aggregate of 800,000 shares of our 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 our stock ranged from $0.53 to
$1.65 per share, we issued an aggregate of 125,000 shares of our common stock to
consultants and other service providers who agreed to take shares of stock in
lieu of cash as compensation under their contracts.
78
In February 2004, when the price of our stock was $0.67 per share, we issued
500,000 shares of our common stock to a consultant who had agreed to accept
shares of stock as a portion of its compensation under a consulting agreement.
We issued approximately 67,000 additional shares of our 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 our stock was $0.465 per share, we issued
warrants to purchase 150,000 shares of our 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.
In June 2004, when the price of our stock was $0.52 per share, we issued 250,000
shares of our common stock to a consultant who had agreed to accept shares of
stock as compensation under a consulting agreement.
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.
Capital Lease
In September 2004, when the price of our stock was $0.38 per share, we entered
into a lease for $500,000 of equipment used in our Rockville, Maryland
manufacturing facility. The lease has a minimum term of 3 years with an
extension option of 3 months, and requires monthly payments of $17,250 during
the initial term and extension periods. In conjunction with the lease, we issued
to the lessor a warrant to purchase 55,000 shares of our common stock at a price
of $0.4060 per share. The warrant is exercisable for a period of three years.
Intellectual Property and Equipment Purchase Using Stock
On September 30, 2004, when the market price of our common stock was $0.39 per
share and pursuant to Regulation S, we entered into the License Agreement
pursuant to which we are required to pay to Ani Biotech an aggregate of
1,232,840 Euros (approximately US $1,500,000) in either our common stock or cash
to acquire certain licenses and manufacturing equipment. On September 30, 2004,
we issued 1,172,205 restricted shares of our common stock to Ani, representing
the first installment under the License Agreement. These shares are being
registered in this registration statement. Subsequent installments under the
License Agreement are due over the next several months, beginning five days
following the effectiveness of this registration statement. Such payments may be
paid in registered shares of our common stock, or in cash, at our sole
discretion. Should we elect to file a subsequent registration statement
registering such shares, the License Agreement provides that we would issue such
shares of our Common Stock to Ani Biotech at a price equal to the average
closing price of our Common Stock as quoted on the American Stock Exchange for
the five days immediately preceding the transfer, but not at less than $0.40 per
share.
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 early 2005. During 2004, we have completed
private placements of our common stock with 12 accredited investors and received
net proceeds of approximately $10.2 million. Additionally, under the amended
terms of the Marr Credit Facility between us and Marr Technologies BV, our
largest stockholder and a participant in one of the private placements, we
currently have access to an additional $3.6 million from the issuance of 9%
promissory notes that we may issue through December 31, 2004, should our Board
of Directors unanimously approve the issuance of one or more such notes before
the commitment period expires. If we elect to issue notes under the Marr Credit
Facility, those notes would be due and payable on May 31, 2005. If sufficient
funds are not available from our operations to repay a promissory note issued
under that facility when due, we may need to arrange additional financing,
attempt to extend or otherwise modify the promissory note or make other
arrangements. Although we do not presently have any agreements in place with
respect to additional financing, we intend to seek additional financing
aggregating up to $16.5 million by the issuance of Common Stock or equivalents
and/or the issuance of warrants to purchase shares of Common Stock on terms and
conditions that, based on the current market price of our Common Stock and the
size of the financing, may result in the issuance of more than 20% of our
currently issued and outstanding Common Stock and/or that may trigger certain
anti-dilution protections that are included in existing financing agreements or
that may be included in subsequent financing agreements and that would result in
79
substantial dilution to our existing stockholders. Under the rules of the
American Stock Exchange, in the event that either of these conditions occurs as
a result of a prospective financing, we would need to obtain stockholder
approval of such financing. There can be no assurance that we will enter into
such agreements or secure such financing, or that our stockholders will approve
the terms of such financing, if so required. 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 the remainder of 2004 and during 2005. 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.
RECENT DEVELOPMENTS
INCIDENCE TEST
On October 28, 2004 we shipped our first order of approximately 8,000 of our
HIV-1 BED Incidence EIA tests (Incidence Test) to South Africa. Additionally, we
have initial orders for additional tests for shipment to China and Brazil that
we expect to commence later in the fourth quarter of 2004.
In April 2004, we announced that we had been granted a worldwide non-exclusive
license by the United States Centers for Disease Control and Prevention (CDC) to
commercially manufacture and sell a unique test that was developed by the CDC in
order to help epidemiologists and researchers estimate the spread of HIV-1
infection. The Incidence Test employs epitopes from three subtypes of HIV-1
known as B, E, and D, so that the test can be used on all of the major subtypes
of HIV-1 that are found around the world.
Unlike most HIV antibody tests that are designed as a screening test to
determine if an individual has been exposed to HIV-1, the Incidence Test is a
population research tool intended to be used on populations already known to be
infected in order to determine how many of the infections occurred in the last 6
months. Such information may give policy makers and program managers valuable
insights regarding the success of their prevention programs and how best to
allocate resources.
We believe that the test is valuable for targeting populations with a high
incidence of HIV infections for interventional studies and/or vaccine trials. It
can also be used to evaluate the effectiveness of intervention efforts by
showing either a negative or positive change in the incidence of infections
following the intervention effort. Our HIV-1 BED Incidence EIA test is for use
in research to estimate the incidence of HIV-1 in a population. It is not for
use as a diagnostic test. Workshops are currently being planned to train people
to use the test by various major public health organizations both
internationally and in the United States.
80
MANAGEMENT CHANGE
On November 15, 2004, Mr. Anthony J. Cataldo resigned from his position as
Executive Chairman and as a Director of the Company, as well as from all other
positions he held with affiliated entities. In connection with his resignation,
the Company and Mr. Cataldo entered into an Agreement (the "Agreement") pursuant
to which Mr. Cataldo will receive a total cash payment of $513,389, payable on a
monthly basis over a two-year period commencing on December 15, 2004, subject to
the acceleration of up to $375,000 in the event the Company closes a financing
in excess of $10,000,000. Additionally, on January 3, 2005, the Company will
provide the equivalent of $520,000 for Mr. Cataldo to exercise 1,625,000 options
at an exercise price of $0.32 per share. Further, the Agreement provides that
Mr. Cataldo's remaining options to purchase 2,500,000 shares at $0.585 per share
will vest immediately. Mr. Cataldo's total remuneration under the Agreement is
$1,033,389, plus the payment of a portion of his medical insurance costs. Mr.
Cataldo shall provide advisory services as may be requested by the Company's
Chief Executive Officer. The Agreement effectively terminates in its entirety
the employment agreement between the Company and Mr. Cataldo dated May 10, 2002
(the "Employment Agreement") pursuant to which Mr. Cataldo was entitled to an
annual salary of $400,000 through May 10, 2007 and an automobile allowance. The
Company's total remaining liability under the Employment Agreement was
$1,033,389, plus certain medical insurance benefits. Mr. Cataldo's financial
entitlements under the Agreement are an aggregation of his financial
entitlements under the Employment Agreement.
Subsequently, on November 15, 2004, the Company's Board of Directors appointed
Roger I. Gale as a member of its Board of Directors and as its Chairman. Mr.
Gale succeeds Mr. Cataldo as Chairman of the Board of Directors. Mr. Gale was
recommended to the Nominating Committee of the Board of Directors by Marr
Technologies Limited, which has the right to designate two directors to the
Board in connection with its August 2003 investment in Calypte. Mr. Gale will
not serve on any committees of the Board. Mr. Gale, is, and will continue to be,
Chairman of the Board of Directors, Chief Executive Officer and a shareholder of
WaveCrest Group Enterprises Limited, a communications service provider, which is
majority-owned by Marr T&T Limited, an affiliate of Marr Technologies BV, the
Company's largest stockholder. Mr. Gale is also a Non-Executive Director of
Mechel Steel Group, recently listed on the New York Stock Exchange (NYSE: MTL).
Mr. Gale is also a founder and director of StarNorth Limited, a communications
and media consultancy firm. Previously he was Chairman and co-founder of End2End
Wireless Limited, a wireless access services provider, as well as Chief
Executive Officer of AIG-Brunswick Capital Management, a $300 million investment
fund. Mr. Gale held senior positions at the International Finance Corporation
(IFC), Washington, DC and the Asian Development Bank (ADB), Manila. Mr. Gale has
lectured in economics at the University of New England (Australia) and Lincoln
College (New Zealand). He holds a a Master of Economics from the University of
New England, Australia.
RAPID TEST CLINICAL TRIALS IN CHINA
On December 1, 2004, we anounced that we had commenced a clinical trial program
for our rapid HIV-1/2 test platform and our HIV-1 Western blot supplemental
tests in The People's Republic of China. The trial will evaluate the sensitivity
and specificity of our three rapid HIV-1/2 Antibody Tests; Blood, Oral Fluid and
Urine. The trial will also evaluate the Company's HIV-1 Western Blot
supplemental tests in Blood and Urine. We plan to test approximately 1,500
patients using no less than 7 locations that will perform the rapid HIV 1/2
tests and using at least 3 laboratories that will perform the HIV-1 Western Blot
supplemental tests. We expect to complete the data collection by the end of this
year and have a full statistical analysis available approximately two weeks
after the last patient has been enrolled. We will release the performance
results when the trials have been completed and certified by our Chinese
contractor. Our objective is to file the required regulatory applications with
the Chinese FDA (SFDA) in early 2005.
DESCRIPTION OF PROPERTY
We 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 also lease approximately 3,000 square feet of research and development
laboratory space in Vancouver, Washington under a sublease that expires in June
2006.
Until the expiration of the lease on June 30, 2004, we leased approximately
20,000 square feet of office, research and manufacturing space in Alameda,
California. In conjunction with the consolidation of our domestic manufacturing
operations at our Rockville, Maryland location, we vacated this space prior to
June 30, 2004. On May 7, 2004, we signed a three year lease that commenced on
June 18, 2004 for approximately 4,400 square feet of office space in Pleasanton,
California that now houses our corporate headquarters.
81
We believe that the facilities described above are adequate for our current and
expected future domestic manufacturing requirements, including those for our
prospective rapid products. We are currently evaluating our requirements for
international operations and for our future research and development activities.
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.
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 April 2004, upon the nomination by MTBV and
the recommendation of the Nominating Committee of the Board, Maxim A. Soulimov
was appointed to the Company's Board of Directors as one of the two
mutually-agreeable representatives.
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.
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 stockholders approved a 1:30 reverse stock split, which became
effective on May 28, 2003. From May 28, 2003 until August 17, 2004, our stock
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. Since August 18, 2004, our stock has traded on
the American Stock Exchange under the symbol "HIV." High and low quotations
reported by the Over the Counter Bulletin Board or the American Stock Exchange,
as applicable, 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 December 16 4th $ 0.44 $ 0.18
2004 3rd 0.74 0.36
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
82
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 December 16, 2004 was $0.27 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.
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. At December 16, 2004, there were 169,425,169 shares of Common
Stock outstanding, which were held of record by approximately 450 registered
stockholders and approximately 16,000 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 December 16, 2004, we had outstanding warrants to purchase
13,445,210 shares of Common Stock, at a weighted average exercise price of $0.75
per share. Such warrants expire on various dates, the latest of which is July 9,
2009.
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.
83
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 $50,000 or 10% of the total salary and
bonus earned by each of the named Executive Officers in each fiscal year.
SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
UNDERLYING
OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) 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 served as Executive Chairman of the Board from May 2002
through November 15, 2004, when he resigned as Executive Chairman and as
a Director.
(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.
84
(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 $0.32 per share.
The latter options were exercisable 50% upon grant and 50% on the one
year anniversary of the grant.
(13) Represents option grant for 16,667 shares pursuant to an employment
agreement between Mr. Brounstein and the Company and an option grant for
8,333 shares made pursuant to a July 2001 Consulting Contract between Mr.
Brounstein and the Company under which he served as a financial
consultant to the Company. All of these options were cancelled in the
fourth quarter of 2002.
(14) Represents cash payments made to Mr. Brounstein pursuant to the July 2001
Consulting Contract referred to in Note (13).
85
STOCK OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
The following table sets forth information concerning stock options
granted to the Named Executive Officers during the fiscal year ended December
31, 2003:
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTE EXERCISE
UNDERLYING TO EMPLOYEES PRICE EXPIRATION
NAME OPTIONS GRANTED IN FISCAL YEAR(1) ($/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.
86
(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 $0.32 per share. Under the terms of the
January 19, 2004 Separation Agreement and Release between the Company
and Mr. Oyakawa, the options became fully-vested. Mr. Oyakawa may
exercise the options for two years from the date of grant.
(12) Options granted under the 2000 Plan. The grant was made pursuant to Mr.
Brounstein's January 2003 Employment Agreement with the Company, but was
deferred until May 29, 2003, following stockholder approval at the May
20, 2003 Annual Stockholders' Meeting of amendments to the 2000 Plan.
The options expire five years from the date of grant. In the event of a
change of control, the options will become fully vested and Mr.
Brounstein may exercise them for the shorter of the remainder of their
five year term or two years from the effective date of the change of
control.
The following table sets forth information concerning option exercises for the
year ended December 31, 2003, with respect to each of the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN 2003
AND DECEMBER 31, 2003 OPTION VALUES
AGGREGATED OPTION EXERCISES IN 2003
AND DECEMBER 31, 2003 OPTION VALUES
NUMBER OF SECURITIES VALUE OF 1NEXERCISED
UNDERLYING UNEXERCISABLE IN-THE-MONEY
OPTIONS AT FISCAL YEAR OPTIONS AT FISCAL
SHARES END (#) YEAR END ($)
ACQUIRED ON VALUE EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE (#) REALIZED ($)(2) (UNEXERCISABLE)(1) (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.
87
(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.
(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.
88
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.
89
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.
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
90
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
91
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-39 of this
Prospectus. The Company's unaudited Condensed Consolidated Financial Statements
for the period ended June 30, 2004 are included on pages F-40 through F-52 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 advised the Company that the inquiry should not be construed as an
indication by the Commission or its staff that any violation of law had
occurred. The Company voluntarily provided the information sought by the
Commission and cooperated with the Commission in connection with its informal
inquiry. Independently, the Company's Audit 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 Audit Committee 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.
Subsequently, by letter dated July 14, 2004, the SEC Division of Enforcement
notified the Company that the matter has been terminated and that no enforcement
action has been recommended by the Commissiion at this time.
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:
92
"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.
93
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-39
in this registration statement in reliance upon the reports of Odenberg Ullakko
Muranishi & Co. LLP, independent auditors 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.
94
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 THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003
Condensed Consolidated Balance Sheets (unaudited) F-40
Condensed Consolidated Statements of Operations (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 net proceeds of $10.2
million in equity financing in May and July 2004, and also amended a financing
agreement with its largest stockholder. Under the amended agreement, the Company
may borrow up to approximately $3.6 million, subject to adjustment, for general
corporate purposes until December 31, 2004, in exchange for 9% promissory notes
maturing on May 31, 2005. Management believes that the foregoing financing
agreement will provide adequate funds to finance operations at least through
2004, and plans to raise additional capital to meet financing needs in future
periods.
/s/ Odenberg Ullakko Muranishi & Co. LLP
San Francisco, California March 19, 2004, except for Note 18, as to which the
date is December 16, 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 dividends 2,696 2,576
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 3,437 -- 5 -- -- 5
Plan
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 922,801 28 2,964 -- -- 2,992
exercise)
Cost of issuance of common
stock under Equity Line -- -- (280) -- -- (280)
agreement
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 489,540 15 389 -- -- 404
delayed registration
penalties
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 -- -- (224) -- -- (224)
debentures
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
NUMBER OF COMMON ADDITIONAL DEFERRED ACCUMULATED STOCKHOLDERS'
COMMON SHARES STOCK PAID-IN CAPITAL COMPENSATION DEFICIT EQUITY (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 540 546
debentures
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 $271 308 789
and $546 in 2003 and 2002, respectively)
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, -- 525 -- (60) 465 (273) 192
Ltd
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,
F-21
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
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.
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
F-22
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
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.
(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
============================================= ================================
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/03 YEARS TO EXPIRATION PRICE AT 12/31/03 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 - $210.00 45,629 7.35 $ 33.318 42,181 $ 35.571
============= =========
$0.010 - $210.00 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. Refer to Note 18 for additional information regarding the
informal inquiry by the SEC.
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. Such shares were included in the Company's June 15, 2004
registration statement, which was declared effective on July 8, 2004.
On July 12, 2004, when the market price of the Company's common stock was $0.58
per share, Mercator Momentum Fund converted the remaining $91,597 principal
balance of its January 2003 10% convertible debenture and the remaining $6,113
principal balance of its April 2003 12% convertible debenture plus related
accrued interest and extension fees for each into 285,276 registered shares of
the Company's common stock.
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. Such shares were included in the Company's June 15, 2004
registration statement, which was declared effective on July 8, 2004.
F-36
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
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, should the Company's Board of
Directors unanimously approve the issuance of one or more such Notes before the
commitment period expires. 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 is
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, exclusive of the proceeds of the May 2004 Private
Placement. Accordingly, the commitment has been reduced to approximately $3.6
million as a result of the closing of the July 2004 PIPE. 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 included the shares of its Common Stock underlying
these three warrants in its June 15, 2004 registration statement, which was
declared effective on July 8, 2004. At December 16, 2004, the Company has issued
no Notes under the Marr Credit Facility.
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 five 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 was 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 June 18, 2004. Such shares
were included in the Company's June 15, 2004 registration statement, which was
declared effective on July 8, 2004.
July 2004 PIPE
On July 9, 2004, when the market price of the Company's Common Stock was $0.615
per share and pursuant to Regulation S, the Company issued 3,720,000 restricted
shares of its Common Stock at a price of $0.40 per share to 5 unaffiliated
investors and received gross proceeds of $1,488,000. Under the terms of the
subscription agreement, each investor received warrants to purchase the
Company's Common Stock in an amount equal to 70% of the number of shares
purchased in the private placement. Accordingly, the Company issued warrants to
purchase an aggregate of 2,604,000 shares of its Common Stock to the investors
and warrants to purchase an additional 148,800 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 five years from the July 9, 2004 date of
issuance.
F-37
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The securities purchase agreements for the July 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 July 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 included
the shares issued in the July PIPE and the shares underlying the related
warrants in its July 16, 2004 registration statement on Form SB-2, which was
declared effective on July 28, 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 expired on June 30, 2004. The Company has initiated the consolidation
of its domestic manufacturing operations at its Rockville facility and completed
the physical relocation of its Alameda operations prior to the expiration of the
Alameda lease. On May 7, 2004, the Company signed a three year lease that
commenced on June 18, 2004 for approximately 4,400 square feet of office space
in Pleasanton, California that now houses its corporate headquarters. The base
rent for the Pleasanton office space will be approximately $7,750 per month for
the term of the lease.
Informal Inquiry by the SEC
By letter dated July 14, 2004, the SEC Division of Enforcement notified the
Company that the matter has been terminated and that no enforcement action is
recommended by the Commission at this time.
Capital Lease
In September 2004, when the price of its stock was $0.38 per share, the Company
entered into a lease for $500,000 of equipment used in its Rockville, Maryland
manufacturing facility. The lease has a minimum term of 3 years with an
extension option of 3 months, and requires monthly payments of $17,250 during
the initial term and extension periods. In conjunction with the lease, the
Company issued to the lessor a warrant to purchase 55,000 shares of its common
stock at a price of $0.406 per share. The warrant is exercisable for a period of
three years.
Intellectual Property and Equipment Purchase
On September 30, 2004, when the market price of the Company's Common Stock was
$0.39 per share and pursuant to Regulation S, the Company entered into a
licensing, technology transfer and equipment purchase agreement ("License
Agreement") with Ani Biotech Oy ("Ani") pursuant to which the Company is
required to pay to Ani an aggregate of 1,232,840 Euros (approximately US
$1,500,000) in either its Common Stock or cash to acquire certain licenses and
manufacturing equipment. On September 30, 2004, the Company issued 1,172,205
restricted shares of its Common Stock to Ani, representing the first installment
under the License Agreement. These shares are being registered in a registration
statement the Company filed on October 8, 2004. Subsequent installments under
the License Agreement are due over the next several months following the
effectiveness of the October 2004 registration statement. Such payments may be
made in registered shares of the Company's Common Stock, or in cash, at the
Company's sole discretion. Should the Company elect to file a subsequent
registration statement registering such shares, the License Agreement provides
that the Company would issue such shares of its Common Stock to Ani at a price
equal to the average closing price of its Common Stock as quoted on the American
Stock Exchange for the five days immediately preceding the transfer, but not at
less than $0.40 per share.
F-38
CALYPTE BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
During 2004, the Company has committed to invest approximately $2,500,000 in
intangible assets associated with license agreements for technology necessary
for the commercialization of its rapid tests. These licenses provide the Company
with access to the HIV-2 antigen and to certain lateral flow technologies,
including that acquired in the License Agreement with Ani described above. Each
of the license agreements also contains a royalty on sales component that takes
into consideration the different pricing realities of markets around the world.
Management Change
On November 15, 2004, Mr. Anthony J. Cataldo resigned from his position as
Executive Chairman and as a Director of the Company, as well as from all other
positions he held with affiliated entities. In connection with his resignation,
the Company and Mr. Cataldo entered into an Agreement (the "Agreement") pursuant
to which Mr. Cataldo will receive a total cash payment of $513,389, payable on a
monthly basis over a two-year period commencing on December 15, 2004, subject to
the acceleration of up to $375,000 in the event the Company closes a financing
in excess of $10,000,000. Additionally, on January 3, 2005, the Company will
provide the equivalent of $520,000 for Mr. Cataldo to exercise 1,625,000 options
at an exercise price of $0.32 per share. Further, the Agreement provides that
Mr. Cataldo's remaining options to purchase 2,500,000 shares at $0.585 per share
will vest immediately. Mr. Cataldo's total remuneration under the Agreement is
$1,033,389, plus the payment of a portion of his medical insurance costs. Mr.
Cataldo shall provide advisory services as may be requested by the Company's
Chief Executive Officer. The Agreement effectively terminates in its entirety
the employment agreement between the Company and Mr. Cataldo dated May 10, 2002
(the "Employment Agreement") pursuant to which Mr. Cataldo was entitled to an
annual salary of $400,000 through May 10, 2007 and an automobile allowance. The
Company's total remaining liability under the Employment Agreement was
$1,033,389, plus certain medical insurance benefits. Mr. Cataldo's financial
entitlements under the Agreement are an aggregation of his financial
entitlements under the Employment Agreement.
Subsequently, on November 15, 2004, the Company's Board of Directors appointed
Roger I. Gale as a member of its Board of Directors and as its Chairman. Mr.
Gale succeeds Mr. Cataldo as Chairman of the Board of Directors. Mr. Gale was
recommended to the Nominating Committee of the Board of Directors by Marr
Technologies Limited, which has the right to designate two directors to the
Board in connection with its August 2003 investment in Calypte. Mr. Gale will
not serve on any committees of the Board. Mr. Gale, is, and will continue to be,
Chairman of the Board of Directors, Chief Executive Officer and a shareholder of
WaveCrest Group Enterprises Limited, a communications service provider, which is
majority-owned by Marr T&T Limited, an affiliate of Marr Technologies BV, the
Company's largest stockholder. Mr. Gale is also a Non-Executive Director of
Mechel Steel Group, recently listed on the New York Stock Exchange (NYSE: MTL).
Mr. Gale is also a founder and director of StarNorth Limited, a communications
and media consultancy firm. Previously he was Chairman and co-founder of End2End
Wireless Limited, a wireless access services provider, as well as Chief
Executive Officer of AIG-Brunswick Capital Management, a $300 million investment
fund. Mr. Gale held senior positions at the International Finance Corporation
(IFC), Washington, DC and the Asian Development Bank (ADB), Manila. Mr. Gale has
lectured in economics at the University of New England (Australia) and Lincoln
College (New Zealand). He holds a a Master of Economics from the University of
New England, Australia.
F-39
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,504 $ 5,084
Accounts receivable, net of allowance of $36 at September 30, 2004 and December 31, 2003
159 369
Inventory 2,423 2,153
Prepaid expenses 400 872
Deferred offering costs, net of accumulated amortization of $333 at December 31, 2003 -- 14
Other current assets 38 63
--------- ---------
Total current assets 7,524 8,555
Property and equipment, net 1,213 727
Intangible assets 2,844 150
Other assets 644 85
--------- ---------
$ 12,225 $ 9,517
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 5,476 $ 4,313
Notes and debentures payable, net of discount of $30 and $90 at September 30, 2004 and
December 31, 2003, respectively 30 868
Capital lease obligations - current portion 152 9
Deferred revenue 500 500
--------- ---------
Total current liabilities 6,158 5,690
Capital lease obligations - non-current portion 346 8
Other long term liabilities 80 149
Mandatorily redeemable Series A preferred stock, $0.001 par value; no
shares authorized at September 30, 2004 and December 31, 2003;
100,000 shares issued and outstanding at September 30, 2004 and
December 31, 2003; aggregate redemption and liquidation value of
$1,000 plus cumulative dividends
2,786 2,696
Minority interest in consolidated joint venture -- 57
--------- ---------
Total liabilities 9,370 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 September 30, 2004 and
December 31, 2003; 169,301,932 and 136,300,885 shares issued and outstanding as of
September 30, 2004 and December 31, 2003, respectively 5,079 4,089
Additional paid-in capital 136,731 124,699
Deferred compensation (4) (7)
Accumulated deficit (138,951) (127,864)
--------- ---------
Total stockholders' equity 2,855 917
--------- ---------
$ 12,225 $ 9,517
========= =========
See accompanying notes to consolidated financial statements.
F-40
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Product sales $ 361 $ 897 $ 2,242 $ 2,430
--------- --------- --------- ---------
Operating expenses:
Product costs 2,095 1,750 5,088 4,714
Research and development costs 509 304 1,623 953
Selling, general and administrative costs (non-cash of $45 and $461
for the three months and nine months ended September 30, 2004,
respectively and non-cash of $1,165 and $6,354 for the three
months and nine months ended September 30, 2003, respectively) 1,800 2,754 6,536 12,371
--------- --------- --------- ---------
Total operating expenses 4,404 4,808 13,247 18,038
--------- --------- --------- ---------
Loss from operations (4,043) (3,911) (11,005) (15,608)
Interest income (expense), net (non-cash of $ 68 and $(407) for the
three months and nine months ended September 30, 2004,
respectively and non-cash of $(3,168) and $(5,655) for the three
months and nine months ended September 30, 2003, respectively) 79 (3,282) (451) (6,054)
Minority interest in consolidated joint venture 156 -- 346 --
Other income, net (non-cash) 6 (30) 25 174
--------- --------- --------- ---------
Loss before income taxes (3,802) (7,223) (11,085) (21,488)
Income taxes -- -- 2 2
--------- --------- --------- ---------
Net loss (3,802) (7,223) (11,087) (21,490)
Less dividends on mandatorily redeemable Series A preferred stock
-- (30) -- (90)
--------- --------- --------- ---------
Net loss attributable to common stockholders $ (3,802) $ (7,253) $ (11,087) $ (21,580)
========= ========= ========= =========
Net loss per share attributable to common stockholders (basic and
diluted) $ (0.02) $ (0.11) $ (0.07) $ (0.75)
========= ========= ========= =========
Weighted average shares used to compute net loss per share
attributable to common stockholders (basic and diluted) 167,703 68,862 150,950 28,796
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-41
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
----------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net loss $(11,087) $(21,490)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 300 402
Amortization of deferred compensation 1 3
Non-cash interest expense attributable to:
Amortization of debenture discounts and charge for beneficial conversion feature 59 4,469
Amortization of deferred offering costs 14 921
Liquidated damages due to delayed registration of stock underlying convertible debentures (205) 540
Dividends on mandatorily redeemable Series A preferred stock 90 --
Non-cash loss (gain) on settlement of trade debt -- 55
Fair market value of common stock warrants, options and bonuses granted 1,364 6,575
Gain on repurchase of beneficial conversion feature -- (128)
Warrant liability adjustment -- (275)
Loss on sale of equipment 2 55
Minority interest in joint venture (347) --
Changes in operating assets and liabilities:
Accounts receivable 210 23
Inventory (270) (579)
Prepaid expenses and other current assets 131 (1,232)
Deferred offering costs and other assets (173) (1,719)
Accounts payable and accrued expenses 982 1,048
Other long-term liabilities (69) 1,623
-------- --------
Net cash used in operating activities (8,998) (9,709)
-------- --------
Cash flows from investing activities:
Proceeds from sales of equipment 16 --
Investment in intangibles (1,350) --
Purchase of equipment (804) (266)
-------- --------
Net cash used in investing activities (2,138) (266)
-------- --------
Cash flows from financing activities:
Proceeds from sale of stock 10,832 16,979
Expenses related to sale of stock (757) (677)
Net proceeds from issuance of notes and debentures -- 3,223
Repayment of notes and debentures -- (735)
Proceeds from issuance of capital lease 500 --
Principal payments on capital lease obligations (19) (2)
-------- --------
Net cash provided by financing activities 10,556 18,788
-------- --------
Net increase (decrease) in cash and cash equivalents (580) 8,813
Cash and cash equivalents at beginning of period 5,084 147
-------- --------
Cash and cash equivalents at end of period $ 4,504 $ 8,960
======== ========
(continued)
F-42
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
Nine Months Ended
September 30,
-----------------
2004 2003
------ ------
Supplemental disclosure of cash flow activities:
Cash paid for interest $ 67 $ 37
Cash paid for income taxes 2 2
Supplemental disclosure of non-cash activities:
Dividend on mandatorily redeemable Series A preferred stock -- 90
Common stock grants -- 435
Conversion of notes and debentures payable and accrued interest to common stock 1,047 8,230
Fair market value of warrants issued in conjunction with debenture -- 81
Beneficial conversion feature, net of write off upon conversion -- 1,986
Fair value of warrants issued in connection with May and July 2004 PIPE 6,042 --
Common stock issued for intangible assets and equipment 469 --
Accrued interest converted to note payable -- 148
See accompanying notes to consolidated financial statements
F-43
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and our recently introduced BED incidence
test that can be used to identify those regions and the populations within those
regions where HIV transmission is occurring most recently. Our revenues are
currently generated from sales of these 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 have recently completed initial field trials of our serum,
oral fluid and urine rapid HIV-1/2 antibody assays in Thailand. We plan to
initiate clinical trials in pursuit of regulatory approvals for these tests and
to complete the technology transfer and begin international manufacturing of
these products. We anticipate that our primary focus for the current and
longer-term future will be completing the development and commencing the
commercialization 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 September 30,
2004 and the results of its operations for the three and nine month periods
ended September 30, 2004 and 2003 and its cash flows for the nine months ended
September 30, 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.
F-44
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
During the first three quarters of 2004, Calypte incurred a net loss of $11.1
million and its accumulated deficit at September 30, 2004 was $139.0 million. In
this time period, the Company has completed two private placements of its common
stock with 12 accredited investors and received aggregate net proceeds of
approximately $10.2 million. Additionally, under the amended terms of the Marr
Credit Facility between the Company and Marr Technologies BV ("Marr"), the
Company's largest stockholder and a participant in one of the private
placements, the Company currently has access to an additional $3.6 million from
the issuance of 9% promissory notes that it may issue through December 31, 2004
upon unanimous approval by its Board of Directors. Marr has a designated
representative currently serving on the Company's Board of Directors. If the
Company elects to issue notes under the Marr Credit Facility, those notes would
be due and payable on May 31, 2005. If sufficient funds are not available from
operations to repay a promissory note issued under that facility when due, the
Company may need to arrange additional financing, attempt to extend or otherwise
modify the promissory note or make other arrangements. In the absence of any
unanticipated material costs and expenses that are not factored into its cash
flow projections, the Company believes that these resources will be adequate to
sustain its operations at expected levels through early 2005. Although the
Company does not presently have any agreements in place with respect to
additional financing, it intends to seek additional financing aggregating up to
$16.5 million by the issuance of Common Stock or equivalents and/or the issuance
of warrants to purchase shares of Common Stock on terms and conditions that,
based on the current market price of its Common Stock and the size of the
financing, may result in the issuance of more than 20% of its currently issued
and outstanding Common Stock and/or that may trigger certain anti-dilution
protections that are included in existing financing agreements or that may be
included in subsequent financing agreements and that would result in substantial
dilution to existing stockholders. Under the rules of the American Stock
Exchange, in the event that either of these conditions occurs as a result of a
prospective financing, the Company would need to obtain stockholder approval of
such financing. There can be no assurance that the Company will enter into such
agreements or secure such financing, or that its stockholders will approve the
terms of such financing, if so required. Further, the Company would or might be
required to consider strategic opportunities, such as a merger, consolidation,
sale or other comparable transactions, to sustain its operations. The Company
does 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 it on acceptable terms, or at all. The Company's future
liquidity and capital requirements will depend on numerous factors, including
successful completion of the development and commercialization of its new rapid
tests, protection and acquisition, as required, of intellectual property rights,
the costs of developing its new products, its ability to transfer technology,
set up manufacturing and obtain regulatory approvals of its new rapid tests, the
market's acceptance of its products, the existence and acceptance of competing
products in the Company's current and anticipated markets, actions by the FDA
and other international regulatory bodies, and its ability to raise additional
capital. If additional financing is not available when required or is not
available on acceptable terms, or if we are unable to arrange a suitable
strategic opportunity, we will be in significant financial jeopardy and may be
unable to continue our operations at current levels, 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 and nine month periods ended September 30:
F-45
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net loss attributable to common stockholders, as reported $ (3,802) $ (7,253) $(11,087) $(21,580)
Add: Stock-based compensation expense included in reported net loss, net
of related tax effects 3 368 266 1,083
Less: Stock-based compensation expense determined under fair value based
method for all awards, net of related tax effects (1,386) (631) (7,809) (2,434)
-------- -------- -------- --------
Pro forma net loss attributable to common stockholders $ (5,185) $ (7,516) $(18,630) $(22,931)
======== ======== ======== ========
Basic and diluted net loss per share attributable to common stockholders:
As reported $ (0.02) $ (0.11) $ (0.07) $ (0.75)
Pro forma $ (0.03) $ (0.11) $ (0.12) $ (0.80)
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 40,519,078 and
7,361,364 shares at September 30, 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 three and nine month periods ended September 30, 2003 relates to accrued
dividends on the Company's mandatorily redeemable Series A preferred stock.
Beginning 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.
F-46
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
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
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) INVENTORY
Inventory as of September 30, 2004 and December 31, 2003 consisted of the
following (in thousands):
2004 2003
------ ------
Raw materials $ 249 $ 708
Work-in-process 1,343 962
Finished goods 831 483
------ ------
Total Inventory $2,423 $2,153
====== ======
F-47
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(4) INTANGIBLE ASSETS
During 2004, the Company has committed to invest approximately $2,500,000 in
intangible assets associated with license agreements for the technology
necessary for the commercialization of its rapid tests. These licenses provide
the Company with access to the HIV-2 antigen, to certain lateral flow
technologies and to certain HIV-1/2 peptides to be used in its rapid tests. The
Company has recorded the license amount due under each license agreement as an
intangible asset and has accrued amounts not yet paid in cash or settled in
stock as a current liability. The Company will begin amortizing these intangible
assets when commercial sales of the products employing the licensed technology
or materials commence. Each of the license agreements also contains a royalty on
sales component that takes into consideration the different pricing realities of
markets around the world.
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of September 30, 2004 and December 31,
2003 consisted of the following (in thousands):
2004 2003
------ ------
Trade accounts payable $1,640 $2,189
Accrued royalty payments 310 582
Accrued salary and vacation pay 202 125
Accrued interest (including non-cash penalties for delayed registration of $271 at
December 31, 2003) 14 308
Accrued restructuring expenses -- 109
Accrued consulting contract expenses 539 100
Accrued payments under intellectual property license agreements 2,119 --
Other 652 900
------ ------
Total accounts payable and accrued expenses $5,476 $4,313
====== ======
(6) 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
In return for the extension of the maturity dates, the Company agreed to pay an
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
and the shares issuable as a portion of the extension fee by no later than April
29, 2004. 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
was 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 was required to file a registration
statement including shares of its common stock issued or potentially issuable
upon conversion. Such shares were included in the Company's June 15, 2004
registration statement, which was declared effective on July 8, 2004.
F-48
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
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 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 on March 18, 2006, two
years from its date of issuance. The warrant was valued at $0.56 per share on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: risk free interest rate of 1.54%; expected dividend rate
of 0.00%; volatility of 316.37%; and expected term of 2 years. The calculated
value of the warrant was recorded as interest expense.
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 subscribe for 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 is reduced by the amount of any equity financing the Company obtained
after the May 26, 2004 effective date of the second amendment and through the
December 31, 2004 commitment period, exclusive of the proceeds of the May 2004
Private Placement. Accordingly, the commitment has been reduced to approximately
$3.6 million as a result of the closing of the July 2004 Private Placement.
Refer to Note 7 for a description of the Private Placements. 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 warrant was valued at $0.35 per share on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 2.53%; expected dividend rate of 0.00%;
volatility of 161.78%; and expected term of 2 years. The calculated value of the
warrant was recorded as interest expense.
The Company included the shares of its Common Stock underlying the March 2004
and May 2004 warrants in its June 15, 2004 registration statement, which was
declared effective on July 8, 2004. At September 30, 2004, the Company has
issued no Notes under the Marr Credit Facility.
Conversion of 10% and 12% Convertible Debentures
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 the Company's 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 the Company's March 2003 10% convertible debenture plus related
accrued interest and extension fees into 991,465 shares of restricted common
stock.
On July 12, 2004, when the market price of the Company's common stock was $0.58
per share, Mercator Momentum Fund converted the remaining $91,597 principal
balance of the Company's January 2003 10% convertible debenture and the
remaining $6,113 principal balance of the Company's April 2003 12% convertible
debenture plus related accrued interest and extension fees for each into 285,276
registered shares of the Company's common stock. The shares undelying these
debentures were included in the Company's June 15, 2004 registration statement,
which was declared effective on July 8, 2004.
F-49
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(7) 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. 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. Such shares were included in the Company's June 15, 2004
registration statement, which was declared effective on July 8, 2004.
Private Placements
On May 28, 2004, when the market price of its 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 and warrants to purchase its common stock in an
amount equal to 35% of the number of shares purchased 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 to Marr 7,500,000
restricted shares of its Common Stock and warrants to purchase its common stock
in an amount equal to 35% of the number of shares purchased by 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. In accordance with the subscription
agreements, the Company issued warrants to purchase an aggregate of 8,137,500
shares of its Common Stock to the investors, including Marr, and warrants to
purchase an additional 630,000 shares of its Common Stock pursuant to placement
agent agreements. The warrants are exercisable at a price of $0.50 per share for
a period of five years from the May 28, 2004 date of issuance. The warrants were
valued on the date of issue at $0.4971 per share using the Black-Scholes
option-pricing model with the following assumptions: expected dividend yield of
0.0%; risk free interest rate of 3.85%, the contractual life of 5 years, and
volatility of 243.71%. The warrants were recorded as an expense of the
financing.
The securities purchase agreements for the May 2004 private placement 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 securities
purchase agreements also contain anti-dilution provisions that could require the
Company to issue additional shares of common stock to the investors if it 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 included the shares issued in the May 2004 private placement and the
shares underlying the related warrants in the registration statement it filed on
June 15, 2004 and which was declared effective on July 8, 2004.
F-50
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
On July 9, 2004, when the market price of the Company's Common Stock was $0.615
per share and pursuant to Regulation D, the Company issued 3,720,000 restricted
shares of its Common Stock and warrants to purchase its Common Stock in an
amount equal to 70% of the number of shares purchased to 5 unaffiliated
investors and received gross proceeds of $1,488,000. In accordance with the
subscription agreements, the Company issued warrants to purchase an aggregate of
2,604,000 shares of its Common Stock to the investors and warrants to purchase
an additional 148,800 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 five years from the July 9, 2004 date of issuance. The warrants are
exercisable at a price of $0.50 per share for a period of five years from the
July 9, 2004 date of issuance. The warrants were valued on the date of issue at
$0.6117 per share using the Black-Scholes option-pricing model with the
following assumptions: expected dividend yield of 0.0%; risk free interest rate
of 3.69%, the contractual life of 5 years, and volatility of 243.47%. The
warrants were recorded as an expense of the financing.
The securities purchase agreements for the July 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 July 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 included
the shares issued in the July PIPE and the underlying warrant shares in its July
16, 2004 registration statement on Form SB-2, which was declared effective on
July 28, 2004.
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.
During the second quarter of 2004, the Company issued stock grants for
approximately 286,000 shares of its common stock, including grants from its 2003
Non-Qualified Stock Option Plan, as compensation under two consulting
agreements. The Company recorded non-cash selling, general and administrative
expense of $222,000 attributable to these stock grants and the amortized expense
attributable to stock grants made in prior periods.
In May 2004, when the market price of the Company's common stock was $0.465, the
Company issued a warrant to a consultant providing financial advisory services
to purchase 150,000 shares of its common stock at an exercise price of $0.50.
The warrant grant was non-forfeitable and fully-vested at the date of issuance.
The warrants were valued on the date of issue at $0.462 per share using the
Black-Scholes option-pricing model with the following assumptions: expected
dividend yield of 0.0%; risk free interest rate of 3.74%, contractual life of 5
years, and volatility of 243.73%. The Company recorded non-cash selling, general
and administrative expense of $69,000 attributable to this warrant.
During the third quarter of 2004, the Company issued stock grants for
approximately 43,000 shares of its common stock, including grants from its 2003
Non-Qualified Stock Option Plan, as compensation under a consulting agreement.
The Company recorded non-cash expense of $97,000 attributable to these stock
grants and the amortized expense attributable to stock grants made in prior
periods.
Intellectual Property and Equipment Purchase Using Stock
On September 30, 2004, when the market price of the Company's Common Stock was
$0.39 per share and pursuant to Regulation S, the Company entered into a
licensing, technology transfer and equipment purchase agreement ("License
Agreement") pursuant to which the Company is required to pay to the licensor an
aggregate of 1,232,840 Euros (approximately US $1,500,000) in either its Common
Stock or cash to acquire certain licenses and manufacturing equipment. On
September 30, 2004, the Company issued 1,172,205 restricted shares of its Common
Stock to the licensor, representing the first installment under the License
Agreement. These shares are being registered in a registration statement the
Company filed on October 8, 2004. Subsequent installments under the License
Agreement are due over the next several months beginning five days following the
effectiveness of the October 2004 registration statement. Such payment may be
paid in registered shares of the Company's Common Stock, or in cash, at the
Company's sole discretion. Should the Company elect to file a subsequent
registration statement registering such shares, the License Agreement provides
that the Company would issue such shares of its Common Stock to the licensor at
a price equal to the average closing price of its Common Stock as quoted on the
American Stock Exchange for the five days immediately preceding the transfer,
but not at less than $0.40 per share.
F-51
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(8) LEASE COMMITMENTS
Operating Lease
The Company's lease of its office and manufacturing facility in Alameda,
California expired on June 30, 2004. The Company consolidated its domestic
manufacturing operations at its Rockville, Maryland facility and completed the
physical relocation of its Alameda operations prior to the expiration of the
Alameda lease. On May 7, 2004, the Company signed a three year lease that
commenced on June 18, 2004 for approximately 4,400 square feet of office space
in Pleasanton, California that now houses its corporate headquarters. The base
rent for the Pleasanton office space will be approximately $7,750 per month for
the term of the lease.
Capital Lease
In September 2004, when the price of its stock was $0.37 per share, the Company
entered into a lease for $500,000 of equipment used in its Rockville, Maryland
manufacturing facility. The lease has a minimum term of 3 years with an
extension option of 3 months, and requires monthly payments of $17,250 during
the initial term and extension periods. In conjunction with the lease, the
Company issued to the lessor a three-year warrant to purchase 55,000 shares of
its common stock at a price of $0.406 per share. The warrants were valued on the
date of issue at $0.3628 per share using the Black-Scholes option-pricing model
with the following assumptions: expected dividend yield of 0.0%; risk free
interest rate of 2.86%, contractual life of 3 years, and volatility of 269.99%.
The expense of the warrants was recorded as non-cash interest expense.
(9) SUBSEQUENT EVENT
Management Change
On November 15, 2004, Mr. Anthony J. Cataldo resigned from his position as
Executive Chairman and as a Director of the Company, as well as from all other
positions he held with affiliated entities. In connection with his resignation,
the Company and Mr. Cataldo entered into an Agreement (the "Agreement") pursuant
to which Mr. Cataldo will receive a total cash payment of $513,389, payable on a
monthly basis over a two-year period commencing on December 15, 2004, subject to
the acceleration of up to $375,000 in the event the Company closes a financing
in excess of $10,000,000. Additionally, on January 3, 2005, the Company will
provide the equivalent of $520,000 for Mr. Cataldo to exercise 1,625,000 options
at an exercise price of $0.32 per share. Further, the Agreement provides that
Mr. Cataldo's remaining options to purchase 2,500,000 shares at $0.585 per share
will vest immediately. Mr. Cataldo's total remuneration under the Agreement is
$1,033,389, plus the payment of a portion of his medical insurance costs. Mr.
Cataldo shall provide advisory services as may be requested by the Company's
Chief Executive Officer. The Agreement effectively terminates in its entirety
the employment agreement between the Company and Mr. Cataldo dated May 10, 2002
(the "Employment Agreement") pursuant to which Mr. Cataldo was entitled to an
annual salary of $400,000 through May 10, 2007 and an automobile allowance. The
Company's total remaining liability under the Employment Agreement was
$1,033,389, plus certain medical insurance benefits. Mr. Cataldo's financial
entitlements under the Agreement are an aggregation of his financial
entitlements under the Employment Agreement.
F-52
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
Subsequently, on November 15, 2004, the Company's Board of Directors appointed
Roger I. Gale as a member of its Board of Directors and as its Chairman. Mr.
Gale succeeds Mr. Cataldo as Chairman of the Board of Directors. Mr. Gale was
recommended to the Nominating Committee of the Board of Directors by Marr
Technologies Limited, which has the right to designate two directors to the
Board in connection with its August 2003 investment in Calypte. Mr. Gale will
not serve on any committees of the Board. Mr. Gale, is, and will continue to be,
Chairman of the Board of Directors, Chief Executive Officer and a shareholder of
WaveCrest Group Enterprises Limited, a communications service provider, which is
majority-owned by Marr T&T Limited, an affiliate of Marr Technologies BV, the
Company's largest stockholder. Mr. Gale is also a Non-Executive Director of
Mechel Steel Group, recently listed on the New York Stock Exchange (NYSE: MTL).
Mr. Gale is also a founder and director of StarNorth Limited, a communications
and media consultancy firm. Previously he was Chairman and co-founder of End2End
Wireless Limited, a wireless access services provider, as well as Chief
Executive Officer of AIG-Brunswick Capital Management, a $300 million investment
fund. Mr. Gale held senior positions at the International Finance Corporation
(IFC), Washington, DC and the Asian Development Bank (ADB), Manila. Mr. Gale has
lectured in economics at the University of New England (Australia) and Lincoln
College (New Zealand). He holds a a Master of Economics from the University of
New England, Australia.
F-53