<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-20985
CALYPTE BIOMEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1226727
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1440 FOURTH STREET, BERKELEY, CALIFORNIA 94710
(Address of principal executive offices) (Zip Code)
(510) 749-5100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- -------
The registrant had 13,424,073 shares of common stock outstanding as of
July 31, 1998.
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<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets at
June 30, 1998 (unaudited) and December 31,
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Operations for
the Three and Six Months Ended June 30, 1998 and 1997
(unaudited). . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 (unaudited). . . 5
Notes to Consolidated Condensed Financial
Statements (unaudited) . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 17
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
6/30/98 12/31/97
----------- ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 4,222 $ 10,820
Securities available for sale . . . . . . . . . . 1,873 --
Accounts receivable . . . . . . . . . . . . . . . 232 133
Inventories . . . . . . . . . . . . . . . . . . . 603 161
Notes receivable - officers and employees . . . . 319 239
Note receivable - related party . . . . . . . . . 300 --
Other current assets. . . . . . . . . . . . . . . 155 150
-------- --------
Total current assets. . . . . . . . . . 7,704 11,503
Property and equipment, net of accumulated
depreciation of $3,083 at June 30, 1998 and
$2,824 at December 31, 1997 . . . . . . . . . . . 1,140 1,219
Other assets . . . . . . . . . . . . . . . . . . . . 212 228
-------- --------
$ 9,056 $ 12,950
-------- --------
-------- --------
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . $ 635 $ 610
Accrued expenses. . . . . . . . . . . . . . . . . 781 912
Capital lease obligations - current portion . . . 413 479
Deferred revenue. . . . . . . . . . . . . . . . . 500 585
-------- --------
Total current liabilities . . . . . . . 2,329 2,586
Deferred rent obligation . . . . . . . . . . . . . . . 34 37
Capital lease obligations - long-term portion. . . . . 118 282
-------- --------
Total liabilities . . . . . . . . . . . 2,481 2,905
Mandatorily redeemable Series A preferred stock,
$0.001 par value; no shares authorized, 100,000
shares issued and outstanding; aggregate
redemption and liquidation value of $1,000 plus
cumulative dividends. . . . . . . . . . . . . . . 2,036 1,976
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding. . . -- --
Common Stock, $0.001 par value; 20,000,000 shares
authorized; 13,414,073 and 13,198,781 shares issued
and outstanding as of June 30, 1998 and December 31,
1997, respectively. . . . . . . . . . . . . . . 13 13
Additional paid-in capital. . . . . . . . . . . . 56,958 56,847
Deferred compensation . . . . . . . . . . . . . . (335) (496)
Accumulated deficit . . . . . . . . . . . . . . . (52,097) (48,295)
-------- --------
Total stockholders' equity. . . . . . . 4,539 8,069
-------- --------
-------- --------
$ 9,056 $ 12,950
-------- --------
-------- --------
</TABLE>
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<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Product sales. . . . . . . . . . . . . . . . . . . . $ 296 $ 117 $ 537 $ 132
------- ------- ------- -------
Total revenue . . . . . . . . . . . . . . . . . . 296 117 537 132
------- ------- ------- -------
Operating expenses:
Product costs. . . . . . . . . . . . . . . . . . . . 560 684 1,049 1,218
Research and development costs . . . . . . . . . . . 938 984 1,728 2,142
Selling, general and administrative costs. . . . . . 1,078 593 1,763 1,186
------- ------- ------- -------
Total expenses. . . . . . . . . . . . . . . . . . 2,576 2,261 4,540 4,546
------- ------- ------- -------
Loss from operations. . . . . . . . . . . . . . . (2,280) (2,144) (4,003) (4,414)
Interest income, interest expense and other income. . . 86 21 203 52
------- ------- ------- -------
Loss before income taxes. . . . . . . . . . . . . (2,194) (2,123) (3,800) (4,362)
Income taxes. . . . . . . . . . . . . . . . . . . . . . (2) (2) (2) (2)
------- ------- ------- -------
Net loss. . . . . . . . . . . . . . . . . . . . . (2,196) (2,125) (3,802) (4,364)
Less dividends on mandatorily redeemable
Series A preferred stock. . . . . . . . . . . . . . . (30) (30) (60) (60)
------- ------- ------- -------
Net loss attributable to common stockholders. . . . . . $(2,226) $(2,155) $(3,862) $(4,424)
------- ------- ------- -------
------- ------- ------- -------
Net loss per share attributable to common
stockholders (basic and diluted). . . . . . . . . . . $ (0.17) $ (0.21) $ (0.29) $ (0.42)
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares used to compute
net loss per share attributable to common
stockholders (basic and diluted). . . . . . . . . . . 13,412 10,477 13,395 10,471
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
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<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,802) $ (4,364)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 259 368
Amortization of deferred compensation. . . . . . . . . . . 211 94
Forgiveness of note receivable from officer. . . . . . . . 41 --
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (99) (56)
Inventory . . . . . . . . . . . . . . . . . . . . . . . (442) 66
Other current assets. . . . . . . . . . . . . . . . . . (5) (158)
Other assets. . . . . . . . . . . . . . . . . . . . . . 16 35
Accounts payable, accrued expenses and
deferred revenue . . . . . . . . . . . . . . . . . . (191) 138
Deferred rent obligation. . . . . . . . . . . . . . . . (3) (15)
--------- ---------
Net cash used in operating activities. . . . . . . (4,015) (3,892)
--------- ---------
Cash flows from investing activities:
Purchase of equipment, net. . . . . . . . . . . . . . . . . . (180) (75)
Notes receivable from officers. . . . . . . . . . . . . . . . (121) (150)
Loan to Pepgen. . . . . . . . . . . . . . . . . . . . . . . . (300) --
Purchase of securities available for sale . . . . . . . . . . (1,873) --
--------- ---------
Net cash used in investing activities. . . . . . . (2,474) (225)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of stock . . . . . . . . . . . . . . . . . 121 24
Principal payments on capital lease obligations . . . . . . . (230) (255)
Proceeds from notes payable . . . . . . . . . . . . . . . . . -- 500
--------- ---------
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . . . . (109) 269
--------- ---------
Net decrease in cash and cash equivalents. . . . . . . . . . . . (6,598) (3,848)
Cash and cash equivalents at beginning of period . . . . . . . . 10,820 7,924
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 4,222 $ 4,076
--------- ---------
--------- ---------
Supplemental disclosure of cash flow activities:
Cash paid for interest . . . . . . . . . . . . . . . . . . . $ 67 $ 103
Cash paid for income taxes . . . . . . . . . . . . . . . . . 2 2
Supplemental disclosure of noncash activities:
Dividends on mandatorily redeemable Series A
preferred stock. . . . . . . . . . . . . . . . . . . . . . 60 60
Deferred compensation attributable to
stock grants . . . . . . . . . . . . . . . . . . . . . . . 50 37
</TABLE>
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<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(UNAUDITED)
(1) THE COMPANY AND BASIS OF PRESENTATION
Calypte Biomedical Corporation (the Company) was incorporated on November 11,
1989. The Company's primary activities are to sell its FDA-approved urine
EIA screening test, perform research and development on new products and
obtain FDA approval for its urine-based diagnostic tests. Prior to March 31,
1998, the Company was considered a development stage enterprise. On June 1,
1998, the Company announced that the U.S. Food and Drug Administration
licensed the urine HIV-1 Western Blot test that confirms the presence of
antibodies to Human Immondeficiency Virus Type I (HIV-1) in urine samples.
The new test is used on samples that are repeatedly reactive in the Company's
HIV-1 urine antibody screening test. The new test completes the only
available urine-based HIV test system. Accordingly, the Company ceased being
a development stage enterprise.
The accompanying unaudited consolidated condensed financial statements have
been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC), and reflect all adjustments
(consisting of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the Company's financial
position as of June 30, 1998 and the results of its operations for the three
and six months ended June 30, 1998 and 1997 and its cash flows for the six
months ended June 30, 1998 and 1997. Interim results are not necessarily
indicative of the results to be expected for the full year. This information
should be read in conjunction with the Company's audited consolidated
financial statements for each of the years in the three year period ended
December 31, 1997 included in Form 10-K filed with the SEC on March 25, 1998.
Certain information in footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the rules and
regulations of the SEC. The data disclosed in these notes to consolidated
financial statements for these periods is unaudited.
(2) SIGNIFICANT ACCOUNTING POLICIES
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic net loss per share attributable to common stockholders has been
computed using the weighted average number of common shares outstanding
during each period presented. Diluted net loss per share attributable to
common stockholders has been computed using the weighted average number of
common shares and all dilutive potential common shares outstanding during
each period presented. For the three and six months ended June 30, 1998 and
1997, the number of shares used in the calculation of all net loss per share
amounts did not include common stock equivalents relating to outstanding
stock options as they were antidilutive.
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<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(UNAUDITED)
(3) INVENTORIES
Inventories are stated at the lower of cost or market and the cost is
determined using the first-in, first-out method. Inventory as of June 30,
1998 and December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
6/30/98 12/31/97
(in thousands) (in thousands)
-------------- --------------
<S> <C> <C>
Raw Materials $ 269 $ 53
Work-in-Process 81 103
Finished Goods 253 5
------ ------
Total Inventory $ 603 $ 161
------ ------
------ ------
</TABLE>
(4) NOTES RECEIVABLE - OFFICERS AND EMPLOYEES
During May 1998, the loan to Dr. Urnovitz related to a Technology Rights
Agreement was increased from $165,000 to $265,000 subject to the same terms
of the initial loan agreement. The Technology Rights Agreement gives the
Company the first right of refusal for an exclusive, worldwide license to
practice, make or have made, use, sell, distribute and license to other any
invention or discovery made by Dr. Urnovitz in exchange for a one-time cash
payment and the payment of royalties.
(5) NOTE RECEIVABLE - RELATED PARTY
During January 1998, the Company loaned Pepgen Corporation, a related party
of the Company, $250,000 at an effective interest rate of 10%. During June
1998, the Company loaned Pepgen an additional $50,000 under the same terms
of the initial loan agreement, increasing the total amount due from Pepgen to
$300,000. Subsequent to June 1998, the Company extended the due date on the
loan to December 31, 1998.
(6) SUBSEQUENT EVENT
In July 1998, the loan to Dr. Urnovitz related to a Technology Rights
Agreement was increased from $265,000 to $315,000 subject to the same terms
of the initial loan agreement.
-7-
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE STATEMENTS IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" THAT RELATE TO FUTURE PLANS, EVENTS OR
PERFORMANCE ARE FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS, EVENTS OR PERFORMANCE MAY DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A
VARIETY OF FACTORS, INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT
FUTURE RESULTS, EVENTS OR PERFORMANCE" BELOW. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
OVERVIEW
The Company's efforts are primarily focused on selling, developing and
obtaining approval for its urine-based diagnostic tests for sexually
transmitted diseases. In August 1996, the Company received a product license
and an establishment license from the U.S. Food and Drug Administration (FDA)
to manufacture and sell the Company's urine-based HIV-1 screening test for
use in professional laboratory settings. In June 1998, the Company announced
that the FDA had licensed the urine HIV-1 Western Blot test that confirms the
presence of antibodies to HIV-1 in urine samples. The new test is used on
samples that are repeatedly reactive in the Company's HIV-1 urine antibody
screening test. The new test completes the only available urine-based HIV
test system. There can be no assurance that Calypte will have significant
revenues from sales of the HIV-1 urine screening assay or the confirmatory
test.
The Company expects operating losses to continue as it continues its
marketing and sales activities for its first FDA-approved product and
conducts additional research and development for subsequent products. The
Company's marketing strategy is to use distributors and focused direct
selling and marketing partners to penetrate certain targeted domestic
markets. The Company plans to maintain a small direct sales force to market
the Company's urine-based HIV-1 test to major laboratories serving the life
insurance, military, immigration and criminal justice markets. Other U.S. and
international markets will be targeted utilizing diagnostic product
distributors. The Company has limited experience in manufacturing, marketing
or selling its products in commercial quantities. There can be no assurance
that the Company's products will be successfully commercialized or that the
Company will achieve significant product revenues. In addition, there can be
no assurance that the Company will achieve or sustain profitability in the
future.
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<PAGE>
RESULTS OF OPERATIONS
The following represents selected financial data:
<TABLE>
<CAPTION>
(in thousands)
--------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total revenue $ 296 $ 117 $ 537 $ 132
------- ------- ------- -------
Operating expenses:
Product costs 560 684 1,049 1,218
Research and development 938 984 1,728 2,142
Selling, general and administrative 1,078 593 1,763 1,186
------- ------- ------- -------
Total expenses 2,576 2,261 4,540 4,546
------- ------- ------- -------
Loss from operations (2,280) (2,144) (4,003) (4,414)
Interest income, interest expense and other income 86 21 203 52
------- ------- ------- -------
Loss before income taxes $(2,194) $(2,123) $(3,800) $(4,362)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
In the second quarter of 1998, revenue increased $179,000 to $296,000 from
$117,000 in the prior year's comparable period due to an increase in sales
made primarily to laboratories for research and evaluation purposes.
Product costs decreased 18% to $560,000 for the three months ended June 30,
1998 from $684,000 for the three months ended June 30, 1997. Product costs
during the three months ended June 30, 1997 were higher because a greater
quantity of product produced was expensed since it was not retained as
saleable inventory. During the three months ended June 30, 1998, a greater
quantity of product was valued as inventory (raw materials and finished
goods) in anticipation of FDA approval of the confirmatory test for Calypte's
HIV-1 urine screening test.
Research and development expenses decreased 5% to $938,000 for the three
months ended June 30, 1998 from $984,000 in the corresponding period of the
prior year. The decrease was principally due to clinical investigations
performed in the second quarter of 1997 for the additional data requested by
the FDA in October, 1996 and the reduction in the use of regulatory
consultants offset by research funding made to outside organizations.
Selling, general and administrative expenses increased $485,000 or 82% to
$1.1 million for the three months ended June 30, 1998 from $593,000 for the
three months ended June 30, 1997. The increase was primarily related to the
increase in the use of consultants related to various projects and increased
marketing efforts related to the Company's HIV-1 urine screening test.
Interest income, interest expense and other income increased $65,000 to
$86,000 for the three months ended June 30, 1998 from $21,000 for the three
months ended June 30, 1997. The increase was primarily due to the interest
earned from Private Placement proceeds and the decrease in interest paid for
capital leases.
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<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenue increased $405,000 to $537,000 for the six month period ended June
30, 1998 as compared to $132,000 in the corresponding period of the prior
year due to an increase in sales made primarily to laboratories for research
and evaluation purposes.
Product costs decreased $169,000 to $1.0 million for the six month period
ended June 30, 1998 from $1.2 million for the six months ended June 30, 1997.
Product costs during the six months ended June 30, 1997 were higher because
a greater quantity of product produced was expensed since it was not retained
as saleable inventory. During the six months ended June 30, 1998, a greater
quantity of product was valued as inventory (raw materials and finished
goods) in anticipation of FDA approval of the confirmatory test for Calypte's
HIV-1 urine screening test.
Research and development expenses decreased 19% to $1.7 million for the six
months ended June 30, 1998 from $2.1 million in the corresponding period of
the prior year. The decrease was principally due to clinical investigations
performed in 1997 for the additional data requested by the FDA in October,
1996 and the reduction in the use of regulatory consultants offset by
research funding made to outside organizations.
Selling, general and administrative expenses increased $577,000 or 49% to
$1.8 million for the six months ended June 30, 1998 from $1.2 million for the
six months ended June 30, 1997. The increase was primarily related to the
increase in the use of consultants related to various projects and increased
marketing efforts related to the Company's HIV-1 urine screening test.
Interest income, interest expense and other income increased $151,000 to
$203,000 for the six months ended June 30, 1998 from $52,000 for the six
months ended June 30, 1997. The increase was primarily due to the interest
earned from Private Placement proceeds and the decrease in interest paid for
capital leases.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
The Company has financed operations primarily through the private placement
of preferred stock and common stock, the Company's Initial Public Offering
(IPO) of common stock and, to a lesser extent, from payments related to
research and development agreements, a bank line of credit, equipment lease
financings and borrowings from notes payable.
During 1996, the Company completed its IPO of 2,536,259 shares of its Common
Stock at $6.00 per share. After deducting underwriters' discounts and
commissions and additional expenses associated with the IPO, the Company
received net proceeds of $13.2 million.
In October 1997, the Company completed a private placement of 2,600,999
shares of its common stock at $4.25 per share. The Company received net
proceeds of approximately $10.2 million after deducting placement agent
commissions and additional expenses associated with the private placement.
Although the Company believes current cash will be sufficient to meet the
Company's operating expenses and capital requirements through December 31,
1998, the Company's future liquidity and capital
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<PAGE>
requirements will depend on a number of factors, including market acceptance
of its products, regulatory actions by the FDA and other international
regulatory bodies, and intellectual property protection.
There can be no assurance that the Company's products will be successfully
commercialized or that the Company will achieve significant product revenue.
In addition, there can be no assurance that the Company will achieve or
sustain profitability in the future. There can be no assurance that the
Company will not be required to raise additional capital or that such capital
will be available on acceptable terms, if at all.
OPERATING ACTIVITIES
For the six months ended June 30, 1998 and June 30, 1997, the Company's cash
used in operations was $4.0 million and $3.9 million, respectively. The cash
used in operations was primarily for inventory, marketing the complete
urine-based HIV-1 testing system, funding research and development,
manufacturing, selling, general and administrative expenses of the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS, EVENTS OR PERFORMANCE
The Company wishes to caution readers that the following important factors,
among others, may affect the Company's future results, events or performance
and could cause actual results, events or performance to differ materially
from those expressed in any forward-looking statements made by the Company in
this report or presented elsewhere by the Company from time to time.
UNCERTAINTY OF MARKET ACCEPTANCE; LACK OF SALES AND MARKETING EXPERIENCE
The Company's products represent a new method of determining the presence of
HIV antibodies and there can be no assurance that these products will gain
any significant degree of market acceptance among physicians, patients or
health care payors, even if necessary international and U.S. regulatory and
reimbursement approvals are obtained. The Company believes that
recommendations and endorsements by the medical community will be essential
for market acceptance of the products and there can be no assurance that any
such recommendations or endorsements will be obtained. The Company has no
experience marketing and selling its products either directly or through its
distributors. The Company's marketing strategy relies upon its alliance with
third-party distributors for the success of its products. There can be no
assurance that the Company's direct sales force will be effective, that its
distributors will market successfully the Company's products or that, if such
relationships are terminated, the Company will be able to establish
relationships with other distributors on satisfactory terms, if at all. Any
disruption in the Company's distribution, sales or marketing network, or
failure of the Company's products to achieve market acceptance, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON A SINGLE PRODUCT
The Company's HIV-1 urine-based screening test is the Company's only
FDA-approved product. Because the screening test is the Company's sole
product, the Company could be required to cease operations if the Company's
test, together with the Cambridge Biotech urine confirmatory test, fail to
achieve market acceptance or generate significant revenue.
-11-
<PAGE>
RELIANCE ON PROPRIETARY TECHNOLOGY AND KNOW-HOW
The Company believes that its future success will depend in large part on its
ability to protect its patents and proprietary rights. Accordingly, the
Company's ability to compete effectively will depend in part on its ability
to develop and maintain proprietary aspects of its technology. In addition,
the Company currently has the right to utilize certain patents and
proprietary rights under licensing agreements with New York University,
Cambridge Biotech, Repligen, and Texas A&M University System. These license
arrangements secure intellectual property rights for the manufacture and sale
of the Company's products. There can be no assurance that such intellectual
property rights will be sufficient or that such patents and proprietary
rights can be adequately protected.
DEPENDENCE UPON SOLE SOURCE SUPPLIERS
The Company purchases raw materials and components used in the manufacture of
its product from various suppliers and relies on single sources for several
of these components. Establishment of additional or replacement suppliers
for these components cannot be accomplished quickly. The Company has a
number of single-source components and any delay or interruption in supply of
these components could significantly impair the Company's ability to
manufacture its products in sufficient quantities, and therefore would have a
material adverse effect on the Company's business, financial condition and
results of operations, particularly as the Company scales up its
manufacturing activities in support of commercial sales.
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK
The Company has limited experience in manufacturing its products. The
Company does not have experience in manufacturing its products in commercial
quantities. Manufacturers often encounter difficulties in scaling-up
production of new products, including problems involving production yields,
quality control and assurance, raw material supply and shortages of qualified
personnel. The implementation of manufacturing at the larger Alameda facility
will be needed if initial demand exceeds the more limited capacity of the
Berkeley facility. In order to manufacture at the Alameda facility, it is
required that the Company apply for and obtain FDA approval for that
facility. Difficulties encountered by the Company in manufacturing scale-up
to meet demand, including delays in receiving FDA approval for the Alameda
facility, could have a material adverse effect on its business, financial
condition and results of operations.
DEPENDENCE UPON INTERNATIONAL DISTRIBUTORS AND SALES
The Company anticipates that a significant portion of its revenues for the
next several years will be derived from international distributor sales.
International sales and operations involve a number of inherent risks and may
be limited or disrupted by the imposition of government controls, export
license requirements, political instability, trade restrictions, changes in
tariffs, difficulties in managing international operations and fluctuations
in foreign currency exchange rates. Certain of the Company's distributors
have limited international marketing experience, and there can be no
assurance that the Company's distributors will be able to market successfully
the Company's products in any international market.
INTENSE COMPETITION IN COMPANY'S MARKETS AND RAPID TECHNOLOGICAL ADVANCES BY
COMPETITORS
Competition in the IN VITRO diagnostic market is intense and is expected to
increase. Within the United
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<PAGE>
States, the Company will face competition from a number of well-established
manufacturers of blood-based enzyme immunoassays, plus at least one system
for the detection of HIV antibodies using oral fluid samples. In addition,
the Company may face intense competition from competitors with significantly
greater financial, marketing and distribution resources than the Company,
several of whom may have already submitted applications to the FDA for
approval of their over-the-counter (OTC) products. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that are more effective than those developed by the
Company or that would render the Company's technologies or products obsolete
or otherwise commercially unattractive. In addition, there can be no
assurance that competitors will not succeed in obtaining regulatory approval
for such products, or introducing or commercializing them prior to the
Company. Such developments could have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company expects that its revenues and results of operations may fluctuate
significantly from quarter to quarter and will depend on a number of factors,
many of which are outside the Company's control. These factors include
actions relating to regulatory matters, the extent to which the Company's
products gain market acceptance, the timing and size of distributor
purchases, introduction of alternative means for testing for HIV,
competition, the timing and cost of new product introductions and general
economic conditions.
EXTENSIVE GOVERNMENT REGULATION
The Company's products are subject to extensive regulation by the FDA and, to
varying degrees, by state and foreign regulatory agencies. The Company's
products are regulated by the FDA under the Federal Food, Drug and Cosmetic
Act (the Act), as amended by the Medical Device Amendments of 1976 and the
Safe Medical Devices Act of 1990, among other laws. Under the Act, the FDA
regulates the preclinical and clinical testing, manufacturing, labeling,
distribution, sale and promotion of medical devices in the United States.
The FDA prohibits a device, whether or not cleared under a 510(k) premarket
notification or approved under a pre-market application, from being marketed
for unapproved clinical uses. If the FDA believes that a company is not in
compliance with the regulations, it can institute proceedings to detain or
seize a product, issue a recall, prohibit marketing and sales of such
company's products and assess civil and criminal penalties against such
company, its officers and/or its employees. Furthermore, the Company plans to
sell products in certain foreign countries which impose local regulatory
requirements. The preparation of required applications and subsequent FDA
and foreign regulatory approval process is expensive, lengthy and uncertain.
Failure to comply with the FDA and similar foreign requirements could result
in civil monetary penalties or criminal sanctions, restrictions on or
injunctions against marketing of the Company's products. Additional
enforcement actions potentially may include seizure or recall of the
Company's products and other regulatory action. There can be no assurance
that the Company will be able to obtain necessary regulatory approvals or
clearances in a timely manner or at all, and delays in receipt of or failure
to receive such approvals or clearances, loss of previously received
approvals or clearances, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
ESTABLISHMENT AND REGULATION OF REFERENCE LABORATORY
The Company may establish a clinical reference laboratory in connection with
seeking approval for an OTC home urine collection kit for HIV-1. There are a
number of risks in establishing a reference laboratory especially for testing
for HIV. The Company must, among other actions, seek to hire and retain key
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<PAGE>
laboratory personnel, purchase necessary equipment, secure required permits,
incur marketing expenses, obtain customers and comply with government
regulations. The Company's planned laboratory would test for HIV using the
Company's urine-based HIV-1 test and, if approvals are obtained, receive home
collected urine for HIV testing. The Company may be required to offer
counseling in connection with the reporting of results to laboratory
customers. There can be no assurance that the Company can establish or
receive the necessary approval for the laboratory.
PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE
The manufacture and sale of medical diagnostic products entail the risk of
product liability claims or product recalls. While the Company maintains
$10,000,000 of product liability insurance, the Company faces the risk of
litigation in the event of false positive or false negative reports. There
can be no assurance that the Company's existing insurance coverage limits
will be adequate to protect the Company from any liabilities it might incur
in connection with the clinical trials or sales of its products. In
addition, the Company may require increased product liability coverage as its
products are commercialized. Such insurance is expensive and in the future
may not be available on acceptable terms, if at all. A successful product
liability claim or series of claims brought against the Company in excess of
its insurance coverage, or a recall of the Company's products, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses in each year since its inception including a
net loss of $3.9 million for the six months ended June 30, 1998. The Company
does not expect that revenues from product sales or other sources will be
sufficient to fund operations or that the Company will achieve profitability
or positive cash flow prior to raising additional financing. Additional
financing will be required to fund the Company's continuing operations and
product and business development activities in the form of debt or equity
securities or bank financing. There can be no assurance that such financing
will be available on acceptable terms, if at all. The unavailability of such
financing could delay or prevent the development, testing, regulatory
approval, manufacturing or marketing of some or all of the Company's products
and could have a material adverse effect on the Company's business, financial
condition or results of operations.
HAZARDOUS MATERIALS
As with many diagnostic companies, the Company's research and development
involves the controlled use of hazardous materials. There can be no
assurance that the Company's safety procedures for handling and disposing of
such materials will comply with the standards prescribed by federal, state
and local regulations or that it will not be subject to the risk or
accidental contamination or injury from these materials. In the event of
such an accident, the Company could be held liable for any damages that
result and any such liability could materially adversely affect the Company's
business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent upon a number of key management and technical
personnel. The Company's ability to manage its transition to
commercial-scale operations, and hence its success, will depend on the
efforts of these individuals, among others. The loss of the services of one
or more key employees could
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<PAGE>
have a material adverse effect on the Company. The Company's success will
also depend on its ability to attract and retain additional highly qualified
management and technical personnel. The Company faces intense competition for
qualified personnel, many of whom are often subject to competing employment
offers, and there can be no assurance that the Company will be able to
attract and retain such personnel.
POSSIBLE VOLATILITY OF STOCK PRICE
There can be no assurance than an active trading market will be maintained in
the Company's Common Stock. The Company's Common Stock is listed on the
NASDAQ SmallCap Market System. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In addition, the market price of the shares of Common Stock is likely
to be highly volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new products
by the Company or its competitors, FDA and international regulatory actions,
actions with respect to reimbursement matters, developments with respect to
patents or proprietary rights, public concern as to the safety of products
developed by the Company or others, changes in health care policy in the
United States and internationally, changes in stock market analysts'
recommendations regarding the Company, other medical products companies or
the medical product industry generally and general market conditions may have
a significant effect on the market price of the Common Stock.
POTENTIAL ADVERSE EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
Substantially all of the shares of the Company's outstanding Common Stock are
freely tradeable. Sales of Common Stock (including shares issued upon the
exercise of outstanding options) in the public market could materially
adversely affect the market price of the Common Stock. Such sales also might
make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common
Stock. Such provisions may also inhibit increases in the market price of the
Common Stock that could result from takeover attempts. In addition, the
Board of Directors of the Company, without further stockholder approval, may
issue Preferred Stock with such terms as the Board of Directors may
determine, that could have the effect of delaying or preventing a change in
control of the Company. The issuance of Preferred Stock could also adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others.
LIMITED PUBLIC MARKET; POSSIBLE REMOVAL FROM NASDAQ SMALLCAP
The public trading volume of the Company's Common Stock has been relatively
limited. There can be no assurance that a more active trading market for the
Company's Common Stock will develop or, if it develops, that it will be
sustained. In addition, in the past year the Nasdaq Stock Market has made
inquiries
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<PAGE>
of the Company regarding whether the Company continues to meet the
maintenance criteria for trading on the Nasdaq SmallCap market. While the
Company currently meets the maintenance criteria, the Company's ability to
continue to do so will depend on whether the Company becomes profitable or is
able to raise additional financing. If the Company were to fail to meet the
maintenance criteria and be removed from the Nasdaq SmallCap market, the
public trading volume and the ability of stockholders to sell their shares
could be significantly impaired.
YEAR 2000
The Company is reviewing its internal computer system to ensure these systems
are adequately able to address the issues expected to arise in connection
with the upcoming Year 2000. If necessary, the Company expects to implement
the systems necessary to address Year 2000 issues and is reviewing the cost
of such actions, if any. The Company expects such modifications to its
internal systems, if necessary, will be made on a timely basis, and presently
believes that, with modifications to existing software or converting to new
software, if necessary, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems or other operations;
however, there can be no assurance there will not be a delay in, or increased
costs associated with, the implementation of such changes, if necessary, and
the Company's inability to implement such changes could have an adverse
effect on future results of operations.
The Company has not fully determined the extent to which the Company may be
impacted by third parties' systems, which may not be Year 2000 compliant.
The Year 2000 computer issue may create risk for the Company from third
parties with whom the Company deals. There can be no assurance that the
systems of other companies which the Company deals with will be timely
converted, or that any such failure to convert by another company could not
have an adverse effect on the Company.
-16-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 10.45 Lease Extension Agreement
Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K
The Registrant filed a report on Form 8-K dated June 1, 1998 on June 9,
1998. The Registrant filed the report to announce that the U.S. Food and
Drug Administration had licensed the urine HIV-1 Western Blot test that
confirms the presence of antibodies to HIV-1 in urine samples.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALYPTE BIOMEDICAL CORPORATION
------------------------------
(Registrant)
Date: August 12, 1998 By: /s/ John J. DiPietro
---------------------------
John J. DiPietro
CHIEF OPERATING OFFICER, VICE PRESIDENT
FINANCE, CHIEF FINANCIAL OFFICER AND
SECRETARY
(Principal Accounting Officer)
<PAGE>
EXHIBIT 10.45
LEASE EXTENSION AGREEMENT
This agreement is dated April 25, 1998 for reference purposes and is an
additional modification to the current Lease dated November 30, 1990 between
Charles A. Grant and Mark Greenberg (LESSOR) and Urnotech Calypte Biomedical
Corporation (LESSEE) for the property known as 1440 Fourth Street, Berkeley,
California:
1) LEASE EXTENDED THROUGH JUNE 1999. The Lease is hereby extended six months
through June 30, 1999. The lease rate for this extension period will be at
$18,500 per month.
2) HOLDING OVER. If LESSEE remains in possession of the premises per
Paragraph 26 (Holding Over), then the agreed monthly rent is $20,000.
SIGNED: /s/ Charles A. Grant Gen Part. 4-27-98
---------------------------------------------------
FOR LESSOR TITLE DATE
SIGNED: /s/ John DiPietro COO 5-12-98
---------------------------------------------------
FOR LESSEE TITLE DATE
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