<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------
FORM 10-Q
-----------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 000-20985
CALYPTE BIOMEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1226727
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
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 20,390,234 shares of common stock outstanding as of
August 5, 1999.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
June 30, 1999 (unaudited) and December 31,
1998........................................................ 3
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1999 and 1998 (unaudited)......... 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (unaudited).................... 5
Notes to Condensed Consolidated Financial
Statements (unaudited)...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................... 19
Item 6. Exhibits and Reports on Form 8-K............................ 19
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
6/30/99 12/31/98
---------------- ---------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 7,333 $ 3,121
Securities held to maturity.................................................... 1,250 650
Accounts receivable............................................................ 398 157
Inventories.................................................................... 1,809 1,748
Notes receivable - officers and employees...................................... 504 498
Note receivable - related party................................................ - 768
Other current assets........................................................... 195 666
---------------- ---------------
Total current assets.................................................. 11,489 7,608
Property and equipment, net of accumulated depreciation of $3,732
at June 30, 1999 and $3,357 at December 31, 1998............................... 1,463 1,783
Intangibles, net of accumulated amortization of $8 at June
30, 1999 and $3 at December 31, 1998........................................... 48 346
Other assets ...................................................................... 208 208
---------------- ---------------
$ 13,208 $ 9,945
---------------- ---------------
---------------- ---------------
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 537 $ 1,147
Accrued expenses............................................................... 1,616 1,227
Note payable - current......................................................... 2,000 -
Capital lease obligations - current portion.................................... 151 290
Deferred revenue............................................................... 500 500
---------------- ---------------
Total current liabilities............................................. 4,804 3,164
Deferred rent obligation............................................................ 28 31
Capital lease obligations - long-term portion....................................... 68 23
---------------- ---------------
Total liabilities..................................................... 4,900 3,218
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............................................ 2,156 2,096
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; 30,000,000 shares authorized; 20,390,234
and 13,870,453 shares issued and outstanding as of June 30, 1999 and
December 31, 1998, respectively............................................ 20 14
Common Stock subscribed........................................................ - 3
Additional paid-in capital..................................................... 68,147 61,476
Deferred compensation.......................................................... (69) (107)
Accumulated deficit............................................................ (61,946) (56,755)
---------------- ---------------
Total stockholders' equity............................................ 6,152 4,631
---------------- ---------------
---------------- ---------------
$ 13,208 $ 9,945
---------------- ---------------
---------------- ---------------
</TABLE>
-3-
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales............................................... $ 914 $ 296 $ 1,748 $ 537
------------ ------------ ------------ ------------
Total revenue............................................. 914 296 1,748 537
------------ ------------ ------------ ------------
Operating expenses:
Product costs............................................... 1,119 560 2,116 1,049
Research and development costs.............................. 913 938 2,573 1,728
Selling, general and administrative costs................... 1,216 1,078 2,346 1,763
------------ ------------ ------------ ------------
Total expenses............................................ 3,248 2,576 7,035 4,540
------------ ------------ ------------ ------------
Loss from operations.................................... (2,334) (2,280) (5,287) (4,003)
Interest income, interest expense and other income............. 69 86 98 203
------------ ------------ ------------ ------------
Loss before income taxes................................ (2,265) (2,194) (5,189) (3,800)
Income taxes................................................... - (2) (2) (2)
------------ ------------- ------------ ------------
Net loss.............................................. (2,265) (2,196) (5,191) (3,802)
Less dividends on mandatorily redeemable Series A
preferred stock.............................................. (30) (30) (60) (60)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders................... $ (2,295) $ (2,226) $ (5,251) $ (3,862)
============ ============ ============ ===========
Net loss per share attributable to common stockholders
(basic and diluted).......................................... $ (0.11) $ (0.17) $ (0.29) $ (0.29)
=========== ============ ============ ============
Weighted average shares used to compute
net loss per share attributable to common
stockholders (basic and diluted)............................. 20,120 13,412 18,238 13,395
============ ============ ============ ============
</TABLE>
-4-
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................................. $ (5,191) $ (3,802)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization......................................................... 380 259
Amortization of deferred compensation................................................. 38 211
Forgiveness of note receivable from officer........................................... - 41
Write-off of note and interest receivable to research and development costs........... 890 -
Changes in operating assets and liabilities:
Accounts receivable............................................................... (241) (99)
Inventories....................................................................... 232 (442)
Other current assets.............................................................. (37) (5)
Other assets...................................................................... - 16
Accounts payable, accrued expenses and deferred
revenue...................................................................... (139) (191)
Deferred rent obligation.......................................................... (3) (3)
------------- -------------
Net cash used in operating activities...................................... (4,071) (4,015)
------------ ------------
Cash flows from investing activities:
Purchase of equipment..................................................................... (55) (180)
Notes receivable from officers............................................................ (6) (121)
Loan to Pepgen............................................................................ (64) (300)
Purchase of securities held to maturity................................................... (1,450) (1,873)
Sales of securities held to maturity...................................................... 850 -
------------ ------------
Net cash used in investing activities ..................................... (725) (2,474)
------------ -------------
Cash flows from financing activities:
Proceeds from sale of stock............................................................... 8,106 121
Expenses related to sale of stock......................................................... (854) -
Expenses related to purchase of certain assets of Cambridge Biotech....................... (68) -
Principal payments on capital lease obligations........................................... (176) (230)
Proceeds from notes payable............................................................... 2,000 -
------------ ------------
Net cash provided by (used in) financing activities........................ 9,008 (109)
------------ -------------
Net increase (decrease) in cash and cash equivalents......................................... 4,212 (6,598)
Cash and cash equivalents at beginning of period............................................. 3,121 10,820
------------ ------------
Cash and cash equivalents at end of period................................................... $ 7,333 $ 4,222
============ ============
Supplemental disclosure of cash flow activities:
Cash paid for interest.................................................................. $ 93 $ 67
Cash paid for income taxes.............................................................. 2 2
Supplemental disclosure of noncash activities:
Refinance of capital lease obligation................................................... 82 -
Dividends accrued on mandatorily redeemable Series A preferred stock.................... 60 60
Revaluation of acquisition of certain assets of Cambridge Biotech....................... 293 -
Conversion of common stock subscribed to common stock................................... 3 -
Deferred compensation attributable to stock grants...................................... - 50
</TABLE>
-5-
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(UNAUDITED)
(1) THE COMPANY AND BASIS OF PRESENTATION
Calypte Biomedical Corporation (the Company) was incorporated on November 11,
1989. The Company's primary activities are to sell its FDA-approved urine Human
Immunodeficiency Virus Type I (HIV-1) enzyme immunoassay (EIA) screening test,
its FDA-approved urine and serum HIV-1 Western Blot supplemental tests, perform
research and development on new products and obtain FDA approval for its
urine-based diagnostic tests. Prior to March 31, 1998, the Company was
considered a development stage enterprise. On June 1, 1998, the Company
announced that the U.S. Food and Drug Administration licensed the urine HIV-1
Western Blot test that confirms the presence of antibodies to HIV-1 in urine
samples. The new test is used on samples that are repeatedly reactive in the
Company's HIV-1 urine antibody screening test. The new test completes the only
available urine-based HIV test method. Accordingly, the Company ceased being a
development stage enterprise.
In December 1998, Calypte acquired from Cambridge Biotech Corporation certain
assets relating to the Western Blot product line for certain infectious
diseases. The acquisition included the urine-based and serum-based HIV-1 Western
Blot products, as well as a supplemental test for Lyme Disease and Human
T-Lymphotropic Virus (HTLV).
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC), and reflect all adjustments (consisting of normal
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation of the Company's financial position as of June 30, 1999 and
the results of its operations for the three and six months ended June 30, 1999
and 1998 and its cash flows for the six months ended June 30, 1999 and 1998.
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, 1998 included in Form 10-K filed with the SEC on
March 25, 1999.
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.
(2) SIGNIFICANT ACCOUNTING POLICIES
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic net loss per share attributable to common stockholders is computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during the period presented. 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
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 were
excluded from the computation of loss per share as their effect is antidilutive.
-6-
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(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, 1999 and December
31, 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Raw Materials $ 311 $ 300
Work-in-Process 1,323 1,134
Finished Goods 175 314
---------- ---------
Total Inventory $ 1,809 $ 1,748
========== =========
</TABLE>
(4) ADJUSTMENT OF PURCHASE PRICE ALLOCATION
On December 17, 1998, the Company acquired the assets relating to the Western
Blot product line for certain infectious diseases from Cambridge Biotech
Corporation for a total purchase price of $2,090,000. During the first quarter
of 1999, management adjusted its estimates of the fair value of assets acquired
in connection with the allocation of the purchase price. As a result, intangible
assets were reduced and inventory was increased by $293,000.
(5) NOTES RECEIVABLE - OFFICERS AND EMPLOYEES
During the second quarter of 1999, the Company extended the due date on the
loan to an officer who is also a director related to a Technology Rights
Agreement to December 31, 1999.
(6) NOTE RECEIVABLE - RELATED PARTY (PEPGEN CORPORATION)
Pepgen Corporation is a development stage company in which Calypte has a
minority equity interest.
During 1998, the Company loaned Pepgen $768,000 at an interest rate of 10%.
During the first quarter of 1999, the Company loaned Pepgen an additional
$64,000 at an interest rate of 10%. The Company's note receivable from Pepgen
totaling $832,000 as of March 31, 1999 was secured by all intellectual property
of Pepgen. The entire loan plus interest was due July 1, 1999.
In May 1999, Pepgen received a financing offer from a third party that was
contingent upon Calypte converting its note receivable due from Pepgen into
an additional equity interest in Pepgen. At a meeting of the Calypte Board of
Directors, the Board agreed for such a conversion to take place. Effective
March 31, 1999, the Company has written off its total investment in the note
receivable from Pepgen including all accrued interest as research and
development costs. Additional amounts of $63,000 were spent on in-process
research and development related to Pepgen during the second quarter of 1999.
(7) LINE OF CREDIT
In January 1999, the Company entered into a line of credit agreement to borrow
up to $2.0 million at an interest rate of prime plus 1 1/4%. At June 30, 1999,
the prime rate was 7.75% The agreement requires the
-7-
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(UNAUDITED)
Company to maintain certain financial covenants and comply with certain
reporting and other requirements. In addition, borrowings under the line of
credit agreement are secured by Calypte's assets. In January 1999, Calypte
drew down $2.0 million on the line of credit. The line of credit is to be
repaid in twelve equal monthly installments of principal, plus accrued
interest, beginning July 20, 1999.
(8) PRIVATE PLACEMENT
In April 1999, the Company sold 3,398,000 shares of its Common Stock to
institutional investors. The net proceeds were approximately $7.0 million after
deducting placement agent commissions and additional expenses associated with
the private placement.
-8-
<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
Calypte's efforts are primarily focused on selling, developing and obtaining
approval for Calypte's urine-based and serum-based diagnostic tests for sexually
transmitted diseases. In August 1996, we received a product license and an
establishment license from the U.S. Food and Drug Administration (FDA) to
manufacture and sell Calypte's urine-based HIV-1 screening test for use in
professional laboratory settings. In June 1998, we announced that the FDA had
licensed the urine HIV-1 Western Blot supplemental test that confirms the
presence of antibodies to HIV-1 in urine samples. The new test is used on
samples that are repeatedly reactive in our HIV-1 urine antibody screening test.
The new test completes the only available FDA-approved urine-based HIV test
method. There can be no assurance the Company will have significant revenues
from sales of the HIV-1 urine screening assay or the supplemental test.
In December 1998, Calypte acquired from Cambridge Biotech certain assets
relating to the Western Blot product line for certain infectious diseases. The
acquisition included the urine-based and serum-based HIV-1 Western Blot
products, as well as a supplemental test for Lyme Disease and Human
T-Lymphotropic Virus (HTLV).
The Company expects operating losses to continue as the Company continues its
marketing and sales activities for its FDA-approved products and conducts
additional research and development for subsequent products. Our marketing
strategy is to use distributors, focused direct selling and marketing partners
to penetrate certain targeted domestic and international markets. The Company
plans to maintain a small direct sales force to sell the Company's urine-based
HIV-1 test to laboratories serving the life insurance market. International and
other U.S. markets will be addressed utilizing diagnostic product distributors.
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.
-9-
<PAGE>
RESULTS OF OPERATIONS
The following represents selected financial data:
<TABLE>
<CAPTION>
(in thousands) (in thousands)
--------------------- ---------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Total revenue $ 914 $ 296 $ 1,748 $ 537
--------- -------- -------- ---------
Operating expenses:
Product costs 1,119 560 2,116 1,049
Research and development 913 938 2,573 1,728
Selling, general and administrative 1,216 1,078 2,346 1,763
--------- -------- -------- ---------
Total expenses 3,248 2,576 7,035 4,540
--------- -------- -------- ---------
Loss from operations (2,334) (2,280) (5,287) (4,003)
Interest income (net of interest expense) and other income 69 86 98 203
--------- -------- -------- ---------
Loss before income taxes $ (2,265) $ (2,194) $ (5,189) $ (3,800)
========= ======== ========= =========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
In the second quarter of 1999, revenue increased $618,000 or 209% to $914,000
from $296,000 in the prior year's comparable period, due primarily to the
acquisition of certain assets of Cambridge Biotech Corporation and the sale of
products related to that acquisition.
Product costs increased $559,000 or 100% to $1.1 million for the three months
ended June 30, 1999 from $560,000 for the three months ended June 30, 1998.
Product costs during the three months ended June 30, 1999 were higher due to the
sale of products related to the acquisition of certain assets of Cambridge
Biotech Corporation.
Research and development expenses decreased $25,000 or 3% to $913,000 for the
three months ended June 30, 1999 from $938,000 in the corresponding period of
the prior year. The decrease is due to research funding made to outside
organizations in 1998, offset by increased clinical investigations performed in
1999.
Selling, general and administrative expenses increased $138,000 or 13% to $1.2
million for the three months ended June 30, 1999 from $1.1 million for the three
months ended June 30, 1998. The increase was primarily related to general and
administrative costs associated with assets acquired from Cambridge Biotech
Corporation offset by a decrease in the use of outside consultants and sales
conferences in 1999.
Interest income (net of interest expense) and other income decreased $17,000 or
20% to $69,000 for the three months ended June 30, 1999 from $86,000 for the
three months ended June 30, 1998. The decrease was primarily due to a decrease
in the interest earned from cash reserves and securities held to maturity and
the increase in interest expense related to borrowings on the bank line of
credit.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
-10-
<PAGE>
In the first six months of 1999, revenue increased $1.2 million or 226% to $1.7
million from $537,000 in the prior year's comparable period due primarily to the
acquisition of certain assets of Cambridge Biotech Corporation and the sale of
products related to that acquisition.
Product costs increased $1.1 million or 102% to $2.1 million for the six months
ended June 30, 1999 from $1.0 million for the six months ended June 30, 1998.
Product costs during the six months ended June 30, 1999 were higher due to the
sale of products related to the acquisition of certain assets of Cambridge
Biotech Corporation.
Research and development expenses increased $845,000 or 49% to $2.6 million for
the six months ended June 30, 1999 from $1.7 million in the corresponding period
of the prior year. The increase was primarily due to the write-off of notes and
interest receivable from a related party as in-process research and
development.
Selling, general and administrative expenses increased $583,000 or 33% to $2.3
million for the six months ended June 30, 1999 from $1.8 million for the six
months ended June 30, 1998. The increase was primarily related to general and
administrative costs associated with assets acquired from Cambridge Biotech
Corporation offset by a decrease in the use of outside consultants and sales
conferences in 1999.
Interest income (net of interest expense) and other income decreased $105,000 or
52% to $98,000 for the six months ended June 30, 1999 from $203,000 for the six
months ended June 30, 1998. The decrease was primarily due to a decrease in the
interest earned from cash reserves and securities held to maturity and the
increase in interest expense related to borrowings on the bank line of credit.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
The Company has financed operations from inception 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.
In January 1999, the Company completed a private placement of 3,102,500 shares
of its Common Stock at $1.00 per share. The Company received net proceeds of
approximately $2.8 million after deducting placement agent commissions and
additional expenses associated with the private placement.
In January 1999, the Company executed a $2.0 million on a line of credit with a
bank. The borrowings
-11-
<PAGE>
under the line of credit agreement are secured by Calypte's assets. The line
of credit is to be repaid in twelve equal monthly installments of principal,
plus accrued interest, beginning July 20, 1999.
In April 1999, the Company completed a private placement of 3,398,000 shares of
its Common Stock at $2.25 per share. The Company received net proceeds of
approximately $7.0 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, the Company's future
liquidity and capital requirements will depend on numerous factors, including
market acceptance of its products, regulatory actions by the FDA and other
international regulatory bodies, intellectual property protection and the
ability to raise additional capital in a timely manner.
There can be no assurance that the Company's products will be successfully
commercialized or that the Company will achieve significant product revenue. In
addition, there can be no assurance that the Company will achieve or sustain
profitability in the future. There can be no assurance that the Company will not
be required to raise additional capital or that such capital will be available
on acceptable terms, if at all. Any failure to raise additional financing will
likely place us in significant financial jeopardy. Therefore, the Company cannot
predict the adequacy of its capital resources on a long-term basis.
Our independent auditors have issued their report on our 1998 financial
statements which states in part that we have suffered recurring losses and
have limited liquidity, both of which raise substantial doubt about our
ability to continue as a going concern.
OPERATING ACTIVITIES
For the six months ended June 30, 1999 and June 30, 1998, the Company's cash
used in operations was $4.1 million and $4.0 million, respectively. The cash
used in operations was primarily for inventory, marketing the complete
urine-based HIV-1 testing method, funding research and development,
manufacturing, selling, and general and administrative expenses of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 delays the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. The Company does not expect
that the adoption of SFAS Nos. 133 and 137 will have a material impact on its
consolidated financial statements because the Company does not currently hold
any derivative instruments.
-12-
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS, EVENTS OR PERFORMANCE
You should consider carefully the following risk factors, along with the other
information contained or incorporated by reference in this Form 10-Q, in
evaluating the Company. These factors, among others, may cause actual results,
events or performance to differ materially from those expressed in any
forward-looking statements we make in this Form 10-Q or in press releases or
other public disclosures.
UNCERTAIN MARKET ACCEPTANCE OF OUR NEW METHOD OF DETERMINING THE PRESENCE
OF HIV ANTIBODIES. Our products incorporate a new method of determining the
presence of HIV antibodies. There can be no assurance that we will obtain:
- any significant degree of market acceptance among physicians, patients
or health care payors; or
- recommendations and endorsements by the medical community which are
essential for market acceptance of the products.
We have FDA approval to market our urine HIV-1 screening and confirmatory test
in the United States and in July, 1998 we began marketing this product. However,
to date this product has only generated limited revenues and not achieved
significant market penetration. The failure of our products to obtain market
acceptance would have a material adverse effect on us.
WE HAVE LITTLE EXPERIENCE SELLING AND MARKETING OUR HIV-1 URINE-BASED
SCREENING TEST. We have little experience marketing and selling our products
either directly or through our distributors, since we only began such sales in
the second half of 1998. The success of our products depends upon alliances with
third-party distributors. There can be no assurance that:
- our direct selling efforts will be effective;
- our distributors will successfully market our products; or
- if our relationships with distributors terminate, we will be able to
establish relationships with other distributors on satisfactory terms,
if at all.
Any disruption in our distribution, sales or marketing network could have a
material adverse effect on us.
WE HAVE SUSTAINED LOSSES IN THE PAST AND WE EXPECT TO SUSTAIN LOSSES IN THE
FUTURE. We have incurred losses in each year since our inception. Our net loss
for the six months ended June 30, 1999 was $5.2 million and our accumulated
deficit as of June 30, 1999 was $61.9 million. We expect operating losses to
continue as we continue our marketing and sales activities for our FDA-approved
products and conduct additional research and development for subsequent
products.
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:
- actions taken by the FDA or foreign regulatory bodies relating to our
products;
- the extent to which our products gain market acceptance;
- the timing and size of distributor purchases; and
- introductions by competitors of alternative means for testing for HIV.
WE DEPEND UPON THE VIABILITY OF THREE PRODUCTS - OUR HIV-1 URINE-BASED
SCREENING TEST AND OUR URINE AND BLOOD BASED SUPPLEMENTAL TESTS. Our HIV-1
urine-based screening test and urine and blood-based supplemental tests are
our only products. Accordingly, we may have to cease operations if our
screening or supplemental tests fail to achieve market acceptance or generate
significant revenues.
OUR PRODUCT DEPENDS UPON RIGHTS TO TECHNOLOGY THAT WE HAVE LICENSED FROM THIRD
PARTY PATENT
-13-
<PAGE>
HOLDERS AND THERE CAN BE NO ASSURANCE THAT THE RIGHTS WE HAVE UNDER THESE
LICENSING AGREEMENTS ARE SUFFICIENT OR THAT WE CAN ADEQUATELY PROTECT THOSE
RIGHTS. We currently have the right to use patent and proprietary rights
which are material to the manufacture and sale of our HIV-1 urine-based
screening test under licensing agreements with New York University, Cambridge
Biotech Corporation, Repligen Corporation, and the Texas A&M University
System.
WE RELY ON SOLE SOURCE SUPPLIERS THAT WE CANNOT QUICKLY REPLACE FOR CERTAIN
COMPONENTS CRITICAL TO THE MANUFACTURE OF OUR PRODUCTS. Any delay or
interruption in the supply of these 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.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND LITTLE
EXPERIENCE IN MANUFACTURING OUR PRODUCTS IN COMMERCIAL QUANTITIES. We may
encounter difficulties in scaling-up production of new products,
including problems involving:
- production yields;
- quality control and assurance;
- raw material supply; and
- shortages of qualified personnel.
THE SUCCESS OF OUR PLANS TO ENTER INTERNATIONAL MARKETS MAY BE LIMITED OR
DISRUPTED DUE TO RISKS RELATED TO INTERNATIONAL TRADE AND MARKETING AND THE
CAPABILITIES OF OUR DISTRIBUTORS. We anticipate that international distributor
sales will generate a significant portion of our revenues for the next several
years. We believe that our urine-based test can provide significant benefits in
countries that do not have the facilities or personnel to safely and effectively
collect and test blood samples. The following risks may limit or disrupt our
international sales;
- the imposition of government controls;
- export license requirements;
- political instability;
- trade restrictions;
- changes in tariffs;
- difficulties in managing international operations; and
- fluctuations in foreign currency exchanges rates.
Some of our distributors have limited international marketing experience.
There can be no assurance that these distributors will be able to market
successfully our products in foreign markets.
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. Within the United States, our
competitors 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. 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.
These developments could render our technologies or products obsolete or
noncompetitive or otherwise have a material adverse effect on us.
OUR ABILITY TO MARKET OUR PRODUCT DEPENDS UPON OBTAINING AND MAINTAINING
FDA AND FOREIGN REGULATORY APPROVALS. Numerous governmental authorities in the
United States and other countries
-14-
<PAGE>
regulate our products. The FDA regulates our products under federal statutes
and regulations related to pre-clinical and clinical testing, manufacturing,
labeling, distribution, sale and promotion of medical devices in the United
States.
If we fail to comply with FDA regulations, or if the FDA believes that we
are not in compliance with such regulations, the FDA can:
- detain or seize our products;
- issue a recall of our products;
- prohibit marketing and sales of our products; and
- assess civil and criminal penalties against us, our officers or our
employees.
We also plan to sell our products in certain foreign countries where they
may be subject to similar local regulatory requirements. The imposition of any
of the sanctions described above could have a material adverse effect on us.
The regulatory approval process in the United States and other countries is
expensive, lengthy and uncertain. We may not obtain necessary regulatory
approvals or clearances in a timely manner, if at all. We may lose previously
obtained approvals or clearances or fail to comply with regulatory requirements.
The occurrence of any of these events would have a material adverse effect on
Calypte.
Before we begin to manufacture our product at the Alameda facility, we must
obtain FDA approval for that facility. Delays in receiving the FDA's approval or
other difficulties which we encounter in scaling-up our manufacturing capacity
to meet demand could have a material adverse effect on us.
WE HAVE RECEIVED WARNING LETTERS FROM THE FDA AND WE MUST SATISFY THE FDA'S
CONCERNS IN ORDER TO AVOID REGULATORY ACTION AGAINST US. In November 1998, the
Company received a Warning Letter from the FDA following an inspection by the
FDA of the Company's manufacturing facility in Berkeley, California. On December
11, 1998, the Company responded in writing to each of the alleged deficiencies
cited in the Warning Letter. Subsequently, the Company received a letter from
the FDA in which the FDA requested further responses from the Company with
regard to certain of such alleged deficiencies. The Company responded to the
subsequent letter on June 1, 1999. If the FDA is not satisfied with the
Company's responses and the Company's corrective actions, it could take
regulatory actions against the Company including license suspension, revocation,
or denial, seizure of products or injunction, or civil penalties or criminal
sanctions. Any such FDA action would have a material adverse effect upon the
Company's ability to conduct operations. In addition, failure of the Company to
satisfy the FDA as to such Warning Letter could adversely affect the Company's
pending FDA license application for the Alameda facility.
In May 1999, the Company received a Warning Letter from the FDA following an
inspection by the FDA of the Company's manufacturing facility in Rockville,
Maryland. The Warning Letter was based upon an inspection of the Rockville
manufacturing facility that was conducted between November 30 and December 11,
1998, which cited a number of significant observations. If the FDA is not
satisfied with the Company's responses and the Company's corrective actions, it
could take regulatory actions against the Company including license suspension,
revocation, or denial, seizure of products or injunction, or civil penalties or
criminal sanctions. Any such FDA action would have a material adverse effect
upon the Company's ability to conduct operations. In addition, failure of the
Company to satisfy the FDA as to such Warning Letter could adversely affect the
Company's pending FDA license application for the Rockville facility. On May 24,
1999, the Company responded in writing to each of the alleged deficiencies cited
in the Warning Letter.
AS A SMALL MANUFACTURER OF A MEDICAL DIAGNOSTIC PRODUCT, 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 subject us to risks of product liability claims or product
-15-
<PAGE>
recalls, particularly in the event of false positive or false negative
reports. A product recall or a successful product liability claim or claims
which exceed our insurance coverage could have 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 which 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:
- discourage potential acquisition proposals;
- delay or prevent a change in control of Calypte;
- diminish stockholders' opportunities to participate in tender offers
for our common stock, including tender offers at prices above the then
current market price; or
- inhibit increases in the market price of our common stock that could
result from takeover attempts.
INVESTOR'S ABILITY TO TRADE OUR COMMON STOCK MAY BE LIMITED BY TRADING
VOLUME. The trading volume in our common shares has been relatively limited. A
consistently active trading market for our common stock may not develop.
WE HAVE ADOPTED A SHAREHOLDER RIGHTS PLAN THAT HAVE 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 is payable to the
stockholders of record on January 5, 1999 with respect to share of Common Stock
issued thereafter until a subsequent "distribution date" defined in a Rights
Agreement and, in certain circumstances, with respect to share of Common Stock
issued after the Distribution Date. The description and terms of the Rights are
set forth in a Rights Agreement between the Company and ChaseMellon Shareholder
Service, L.L.C. as Rights Agent, dated as of December 15, 1998.
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 a permitted offer or other acquisition
exempted by the Board.
WE MAY BE REMOVED FROM THE NASDAQ SMALLCAP MARKET IF WE FAIL TO MEET
CERTAIN MAINTENANCE CRITERIA. The Nasdaq Stock Market inquired on one
occasion whether we continue to meet the maintenance criterion for trading on
the Nasdaq SmallCap Market. We currently meet the maintenance criterion but
our ability to continue to do so will depend on whether we are able to
maintain net tangible assets of at least $2,000,000. The public trading
volume of our common stock and the ability of our stockholders to sell their
shares could be significantly impaired if we fail to meet the maintenance
criteria and are removed from the Nasdaq SmallCap Market. In that case, our
common stock would trade on either the OTC bulletin board, a regional
exchange or in the pink sheets, which would likely result in an even more
limited trading volume.
THE PRICE OF CALYPTE'S COMMON STOCK HAS BEEN HIGHLY VOLATILE DUE TO SEVERAL
FACTORS WHICH WILL CONTINUE TO EFFECT THE PRICE OF OUR STOCK. Our common stock
has traded as low as $1.00 and as high as $4.25 during the first six months of
1999. Some of the factors leading to the volatility include:
- price and volume fluctuations in the stock market at large which do
not relate to our operating performance;
- fluctuations in our operating results;
-16-
<PAGE>
- announcements of technological innovations or new products which we or
our competitors make;
- FDA and international regulatory actions;
- availability of reimbursement for use of our products from private
health insurers, governmental health administration authorities and
other third-party payors;
- developments with respect to patents or proprietary rights;
- public concern as to the safety of products that we or others develop;
- changes in health care policy in the United States or abroad;
- changes in stock market analysts' recommendations regarding Calypte,
other medical products companies or the medical product industry
generally; and
- issuance by us of additional shares of Common Stock in public or
private financings.
CALYPTE AND THE PRICE OF CALYPTE SHARES MAY BE ADVERSELY EFFECTED BY THE
PUBLIC SALE OF A SIGNIFICANT NUMBER OF THE SHARES ELIGIBLE FOR FUTURE SALE.
Nearly all outstanding shares of our common stock are freely tradable. Sales of
common stock in the public market could materially adversely affect the market
price of our common stock. Such sales also may inhibit our ability to obtain
future equity or equity-related financing on acceptable terms.
OUR RESEARCH AND DEVELOPMENT OF THE HIV-1 URINE-BASED TEST 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. 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 us.
WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND RESEARCH AND
DEVELOPMENT PERSONNEL. As a small company with only 50 employees, 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.
WE HAVE NOT COMPLETED OUR YEAR 2000 COMPLIANCE PROGRAM SO THE POTENTIAL
COSTS AND COMPLICATIONS ASSOCIATED WITH YEAR 2000 COMPLIANCE CANNOT BE
DETERMINED AT THIS TIME. Calypte has a formal Year 2000 Program focusing on five
key readiness areas: 1) hardware, addressing information technology; 2)
software; addressing business, research, financial, inventory planning,
production control, product distribution and customer support; 3) firmware,
addressing built-in microprocessors that control production and non-production
equipment; 4) third party suppliers of critical inventory; and 5) third party
service providers.
Calypte established a Year 2000 Task Force earlier this year. The task
force is systematically examining each of the five key readiness areas by 1)
identifying items with Year 2000 compliance concerns; 2) assessing the risk and
impact of noncompliance for each item identified; and 3) correcting
non-compliant items and testing the corrections to ensure readiness at both
component and system levels. Calypte is in the process of contacting key
suppliers to identify any concerns which may arise due to such suppliers'
potential non-compliance. The task force will develop contingency plans if it
discovers areas where there is a substantial possibility that Year 2000
compliance will not be achieved. Calypte has identified items with Year 2000
compliance concerns in three readiness areas: software, third party suppliers of
critical inventory and third party service providers. We have completed risk
assessment in each area for our California and Maryland facilities, and the
correction, testing and the development of contingency plans are in process. We
expect to complete the development and testing of our contingency plans by
October 1, 1999. Until we develop any necessary contingency plans, we will not
be in a position to identify our most reasonably likely worst case Year 2000
scenario. We have presently completed correction and testing in the Hardware
readiness area for our California facility and it is now Year 2000 compliant in
California. As of June 30,
-17-
<PAGE>
1999, we have spent a total of approximately $12,900 on our Year 2000 program.
We estimate that total Year 2000 costs to upgrade systems for our
California and Maryland facilities will range from $24,000 to $35,000 with the
majority of total costs to be incurred in the next two months. At this time we
do not anticipate that Calypte will incur significant operating expenses or be
required to invest heavily in computer system improvements because our
manufacturing process does not rely heavily on automation and our existing
computer hardware has proven to be Year 2000 compliant. However, Calypte is
continuing to assess and develop alternatives that will require refinement of
its cost estimate over time. There can be no assurance that there will not be a
delay in, or increased costs associated with, our Year 2000 compliance program.
Therefore, the potential impact of possible complications on Calypte's financial
condition and results of operations cannot be determined at this time. If
computer systems used by Calypte or its suppliers or the product integrity of
products provided to Calypte by suppliers fail or experience significant
difficulties related to the Year 2000, Calypte's operations and financial
condition could be adversely effected.
Item 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Since December 31, 1998, there have been no material changes in the Company's
market risk exposure.
-18-
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Within the three years ended June 30, 1999, the Company completed three
private placements of shares of its Common Stock. See "Financing Activities" in
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section. The shares sold in each private placement were exempt from
registration with the Securities and Exchange Commission pursuant to Rule 506 of
Regulation D of the Securities Act of 1933 as amended ("Securities Act"). Shares
were sold only to accredited investors as defined in Rule 501 of the Securities
Act and were registered for resale by such investors on Forms S-3 filed on
October 21, 1997, January 19, 1999 and March 30, 1999. The proceeds from each
private placement have been used to finance operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K
None.
-19-
<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 16, 1999 By: /s/ John J. DiPietro
-----------------------------------------
John J. DiPietro
CHIEF OPERATING OFFICER, VICE PRESIDENT -
FINANCE, CHIEF FINANCIAL OFFICER AND SECRETARY
(Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,333
<SECURITIES> 1,250
<RECEIVABLES> 398
<ALLOWANCES> 0
<INVENTORY> 1,809
<CURRENT-ASSETS> 11,489
<PP&E> 5,195
<DEPRECIATION> (3,732)
<TOTAL-ASSETS> 13,208
<CURRENT-LIABILITIES> 4,804
<BONDS> 68
2,156
0
<COMMON> 20
<OTHER-SE> 6,132
<TOTAL-LIABILITY-AND-EQUITY> 13,208
<SALES> 1,748
<TOTAL-REVENUES> 1,748
<CGS> 2,116
<TOTAL-COSTS> 2,116
<OTHER-EXPENSES> 4,919
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (108)
<INCOME-PRETAX> (5,189)
<INCOME-TAX> (2)
<INCOME-CONTINUING> (5,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,251)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
