10-Q/A 1 d10qa.htm FORM 10-Q AMENDMENT #2 DATED 06/30/2002 Form 10-Q Amendment #2 dated 06/30/2002
Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 


 

FORM 10-Q/A(No. 2)

 

(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, 2002

 

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

(State or other jurisdiction of

incorporation or organization)

 

06-1226727

(I.R.S. Employer

Identification Number)

 

1265 Harbor Bay Parkway, Alameda, California  94502

(Address of principal executive offices)  (Zip Code)

 

(510) 749-5100

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨

 

The registrant had 84,768,082 shares of common stock outstanding as of August 5, 2002.

 



Table of Contents

 

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

FORM 10-Q/A (No. 2)

 

INDEX

 

           

Page No.


PART I.    Financial Information

      

Item 1.

  

Financial Statements (unaudited) :

      
    

Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001

    

3

    

Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2002 and 2001

    

4

    

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001

    

5

    

Notes to Condensed Consolidated Financial Statements

    

6

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    

19

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

    

54

PART II.    Other Information

      

Item 2.

  

Changes in Securities and Use of Proceeds

    

56

Item 4.

  

Submission of Matters to a Vote of Security Holders

    

57

Item 5

  

Other Information – Subsequent Events

    

57

Item 6.

  

Exhibits and Reports on Form 8-K

    

59

    

Signature and Certifications

    

60

 

2


Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

 

    

June 30, 2002


    

December 31, 2001


 

ASSETS

                 

Current assets:

                 

Cash and cash equivalents

  

$

395

 

  

$

287

 

Accounts receivable, net of allowance of $191 at June 30, 2002 and December 31, 2001

  

 

246

 

  

 

325

 

Inventories

  

 

732

 

  

 

1,129

 

Prepaid expenses

  

 

86

 

  

 

304

 

Deferred offering costs, net of accumulated amortization of $32 at June 30, 2002 and $40 at December 31, 2001

  

 

365

 

  

 

901

 

Other current assets

  

 

22

 

  

 

1

 

    


  


Total current assets

  

 

1,846

 

  

 

2,947

 

Property and equipment, net of accumulated depreciation of $4,336 at June 30, 2002 and $4,089 at December 31, 2001

  

 

1,067

 

  

 

1,187

 

Other assets

  

 

123

 

  

 

128

 

    


  


    

$

3,036

 

  

$

4,262

 

    


  


LIABILITIES, MANDATORILY REDEEMABLE

PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

                 

Current liabilities:

                 

Accounts payable

  

$

3,237

 

  

$

4,120

 

Accrued expenses

  

 

972

 

  

 

2,118

 

Note payable – current portion, net of discount of $38 at June 30, 2002

  

 

505

 

  

 

411

 

Capital lease obligations – current portion

  

 

8

 

  

 

87

 

Deferred revenue

  

 

500

 

  

 

500

 

    


  


Total current liabilities

  

 

5,222

 

  

 

7,236

 

Convertible notes and debentures, net of discount of $2,366 at June 30, 2002

  

 

184

 

  

 

—  

 

Warrant liability

  

 

2,559

 

  

 

—  

 

Deferred rent obligation

  

 

51

 

  

 

48

 

Capital lease obligations – long-term portion

  

 

18

 

  

 

22

 

    


  


Total liabilities

  

 

8,034

 

  

 

7,306

 

    


  


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

  

 

2,516

 

  

 

2,456

 

    


  


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; 200,000,000 shares authorized; 77,859,188 and 37,792,134 shares issued and outstanding as of June 30, 2002 and December 31, 2001, respectively

  

 

78

 

  

 

38

 

Additional paid-in capital

  

 

86,141

 

  

 

82,623

 

Deferred compensation

  

 

—  

 

  

 

(8

)

Accumulated deficit

  

 

(93,733

)

  

 

(88,153

)

    


  


Total stockholders’ equity

  

 

(7,514

)

  

 

(5,500

)

    


  


    

$

3,036

 

  

$

4,262

 

    


  


 

3


Table of Contents

 

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

    

Three Months Ended June 30,


    

Six Months Ended

June 30,


 
    

2002


    

2001


    

2002


    

2001


 

Revenues:

                                   

Product sales

  

$

1,209

 

  

$

1,612

 

  

$

2,368

 

  

$

3,014

 

    


  


  


  


Operating expenses:

                                   

Product costs

  

 

1,397

 

  

 

1,743

 

  

 

3,027

 

  

 

3,732

 

Research and development costs

  

 

180

 

  

 

354

 

  

 

421

 

  

 

851

 

Selling, general and administrative costs, including $393 and $438 of non-cash expense related to warrant, stock option and stock bonus grants for the three and six months of 2002, respectively

  

 

2,087

 

  

 

2,138

 

  

 

3,302

 

  

 

4,094

 

    


  


  


  


Total expenses

  

 

3,664

 

  

 

4,235

 

  

 

6,750

 

  

 

8,677

 

    


  


  


  


Loss from operations

  

 

(2,455

)

  

 

(2,623

)

  

 

(4,382

)

  

 

(5,663

)

Interest income

  

 

1

 

  

 

1

 

  

 

2

 

  

 

7

 

Interest expense

  

 

(46

)

  

 

(8

)

  

 

(67

)

  

 

(33

)

Non-cash interest expense

  

 

(2,446

)

  

 

(830

)

  

 

(2,472

)

  

 

(1,318

)

Other income, net

  

 

14

 

  

 

501

 

  

 

22

 

  

 

524

 

    


  


  


  


Loss before income taxes and extraordinary items

  

 

(4,932

)

  

 

(2,959

)

  

 

(6,897

)

  

 

(6,483

)

Income taxes

  

 

—  

 

  

 

—  

 

  

 

(2

)

  

 

(2

)

    


  


  


  


Net loss before extraordinary items

  

 

(4,932

)

  

 

(2,959

)

  

 

(6,899

)

  

 

(6,485

)

Extraordinary gain:

                                   

On extinguishment of debt, net of income taxes

  

 

—  

 

  

 

—  

 

  

 

1,319

 

  

 

—  

 

On repurchase of beneficial conversion feature, net of income taxes

  

 

—  

 

  

 

145

 

  

 

—  

 

  

 

145

 

    


  


  


  


Net loss

  

 

(4,932

)

  

 

(2,814

)

  

 

(5,580

)

  

 

(6,340

)

Less dividends on mandatorily redeemable Series A preferred stock

  

 

(30

)

  

 

(30

)

  

 

(60

)

  

 

(60

)

    


  


  


  


Net loss attributable to common stockholders

  

$

(4,962

)

  

$

(2,844

)

  

$

(5,640

)

  

$

(6,400

)

    


  


  


  


Net loss per share attributable to common stockholders (basic and diluted)

  

$

(0.08

)

  

$

(0.10

)

  

$

(0.11

)

  

$

(0.23

)

    


  


  


  


Weighted average shares used to compute net loss per share attributable to common stockholders (basic and diluted)

  

 

58,434

 

  

 

29,070

 

  

 

49,564

 

  

 

27,451

 

    


  


  


  


 

4


Table of Contents

 

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

    

Six Months Ended June 30,


 
    

2002


    

2001


 

Cash flows from operating activities:

                 

Net loss

  

$

(5,580

)

  

$

(6,340

)

Adjustments to reconcile net loss to net cash used in operating activities:

                 

Depreciation and amortization

  

 

247

 

  

 

257

 

Amortization of deferred compensation

  

 

40

 

  

 

(25

)

Amortization of debenture discount and charge for beneficial conversion feature

  

 

306

 

  

 

646

 

Extraordinary gain on extinguishments of debt

  

 

(1,319

)

  

 

—  

 

Warrant liability

  

 

2,134

 

  

 

—  

 

Amortization of deferred offering costs

  

 

32

 

  

 

672

 

Expense related to stock options and common stock bonuses granted

  

 

485

 

  

 

144

 

Provision for doubtful accounts receivable

  

 

—  

 

  

 

156

 

Extraordinary gain on repurchase of beneficial conversion feature

  

 

—  

 

  

 

(145

)

Loss (gain) on sale of equipment

  

 

18

 

  

 

(23

)

Changes in operating assets and liabilities:

                 

Accounts receivable

  

 

79

 

  

 

(292

)

Inventories

  

 

397

 

  

 

(279

)

Prepaid expenses and other current assets

  

 

367

 

  

 

324

 

Deferred offering costs and other assets

  

 

(433

)

  

 

18

 

Accounts payable, accrued expenses and deferred revenue

  

 

(417

)

  

 

2,434

 

Deferred rent obligation

  

 

3

 

  

 

6

 

    


  


Net cash used in operating activities

  

 

(3,641

)

  

 

(2,447

)

    


  


Cash flows from investing activities:

                 

Purchase of equipment

  

 

(127

)

  

 

(63

)

Proceeds from sales of equipment

  

 

—  

 

  

 

23

 

    


  


Net cash provided by (used in) investing activities

  

 

(127

)

  

 

(40

)

    


  


Cash flows from financing activities:

                 

Proceeds from sale of stock

  

 

1,299

 

  

 

2,369

 

Expenses related to sale of stock

  

 

(98

)

  

 

(394

)

Proceeds from issuance of notes and debentures, net of transaction costs

  

 

2,726

 

  

 

925

 

Repayment of debentures

  

 

—  

 

  

 

(932

)

Principal payments on notes payable

  

 

(18

)

  

 

(471

)

Refund of cash pledged to bank pursuant to loan agreement

  

 

—  

 

  

 

480

 

Principal payments on capital lease obligations

  

 

(33

)

  

 

(41

)

    


  


Net cash provided by financing activities

  

 

3,876

 

  

 

1,936

 

    


  


Net increase (decrease) in cash and cash equivalents

  

 

108

 

  

 

(551

)

Cash and cash equivalents at beginning of period

  

 

287

 

  

 

723

 

    


  


Cash and cash equivalents at end of period

  

$

395

 

  

$

172

 

    


  


Supplemental disclosure of cash flow activities:

                 

Cash paid for interest

  

$

7

 

  

$

33

 

Cash paid for income taxes

  

 

2

 

  

 

2

 

Supplemental disclosure of non-cash activities:

                 

Acquisition of equipment through capital lease obligations

  

 

—  

 

  

 

35

 

Dividends accrued on mandatorily redeemable Series A preferred stock

  

 

60

 

  

 

60

 

Deferred compensation attributable to stock option grants

  

 

32

 

  

 

(139

)

Conversion of notes, debentures and accrued interest to common stock

  

 

304

 

  

 

175

 

Common stock grants to employees, consultants and vendors

  

 

455

 

  

 

290

 

Original issue discount and expenses withheld from debenture proceeds

  

 

438

 

  

 

175

 

Fair market value of warrants issued in conjunction with debenture

  

 

2,559

 

  

 

—  

 

 

 

5


Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

(1)    The Company and Basis of Presentation

 

Calypte Biomedical Corporation (the Company) is a health care company dedicated to the development and commercialization of urine-based diagnostic products and services for Human Immunodeficiency Virus Type 1 (HIV-1), sexually transmitted diseases and other chronic illnesses. The Company’s tests include the screening enzyme immunoassay (EIA) and supplemental Western Blot tests, the only two FDA-licensed HIV-1 antibody tests that can be used on urine samples. The Company believes that accurate, non-invasive urine-based testing methods for HIV and other chronic diseases make important contributions to public health by helping to foster an environment in which testing may be done safely, economically, and painlessly.

 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), and reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the Company’s financial position as of June 30, 2002 and the results of its operations for the three and six months ended June 30, 2002 and 2001 and its cash flows for the six months ended June 30, 2002 and 2001. 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, 2001 included in its Form 10-K/A (No. 2) filed with the SEC on December 20, 2002.

 

Certain information in footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America has been condensed or omitted pursuant to the rules and regulations of the SEC. The data disclosed in these condensed consolidated financial statements and in the related notes is unaudited.

 

During the first half of 2002, the Company has incurred a net loss of $5.6 million and its accumulated deficit at June 30, 2002 was $93.7 million. For us to successfully implement our business plan, we must overcome certain impediments. Specifically, in April of 2002, we announced the winding down of our business operations because we lacked sufficient capital to continue to successfully implement our business model. Subsequently, in May of 2002, we announced an arrangement for new funding, which allowed for Calypte to resume and recommence regular business operations. Based upon our tenuous financial condition, our independent auditors have issued an opinion that raises substantial doubt about our ability to continue our business operations as a going concern. We continue to reassess our business plan and capital requirements as a result of the wind-down and subsequent restart of our operations. We do not believe that our currently available financing will be adequate to sustain operations at current levels through the remainder of 2002 unless new financing is arranged. Although, as of June 30, 2002, we have completed new financings in which we have received an aggregate of approximately $2.7 million against an initial funding commitment of $5 million, as more fully disclosed in note 6, we do not know if we will succeed in raising additional funds through further offerings of debt or equity. We must achieve profitability for our business model to succeed. Prior to accomplishing this goal, we believe that we will need to arrange additional financing in addition to the above-mentioned commitment of at least $5 million in the next twelve months. There can be no assurance that subsequent additional financings will be made available to the Company on a timely basis or that the additional capital that the Company requires will be available on acceptable terms, if at all. The terms of a subsequent financing may involve a change of control and/or require stockholder approval, or require the Company to obtain waivers of certain covenants that are contained in existing agreements.

 

6


Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

We are actively engaged in seeking additional financing in a variety of venues and formats and we continue to impose actions designed to minimize our operating losses. We would consider strategic opportunities, including investment in the Company, a merger or other comparable transaction, to sustain our operations. We do not currently have any agreements in place with respect to any such strategic opportunity, and there can be no assurance that such opportunity will be available to us on acceptable terms, or at all. If additional financing is not available when required or is not available on acceptable terms, or we are unable to arrange a suitable strategic opportunity, it will place the Company in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all.

 

(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 attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period presented. The computation of diluted loss per common share is similar to the computation of basic loss per share attributable to common stockholders, except that the denominator is increased for the assumed conversion of convertible securities and the exercise of dilutive options using the treasury stock method. The weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders are equivalent for the periods presented. Options and warrants for 40,645,575 and 7,637,002 shares at June 30, 2002 and 2001, respectively, were excluded from the computation of loss per share attributable to common stockholders as their effect was antidilutive.

 

7


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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

(3)    Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the Company’s financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

(4)    Inventories

 

Inventory is stated at the lower of cost or market and the cost is determined using the first-in, first-out method. Inventory as of June 30, 2002 and December 31, 2001 consisted of the following (in thousands):

 

    

2002


  

2001


Raw Materials

  

$

256

  

$

243

Work-in-Process

  

 

400

  

 

544

Finished Goods

  

 

76

  

 

342

    

  

Total Inventory

  

$

732

  

$

1,129

    

  

 

(5)    Current Notes Payable

 

At December 31, 2001, the Company had executed a promissory note in the amount of $411,000 to the parent company of its then-largest stockholder. The note required interest at 8.5% per annum and principal payments were due beginning in February 2002. In February 2002, the Company renegotiated the payment terms to require monthly principal payments of $17,500 in February and March 2002, increasing to $35,000 thereafter unless and until the Company secured at least $2 million in additional financing, excluding the $850,000 of convertible debentures and warrants discussed in Note 6, at which time a $200,000 principal payment would be required. The Company made the payment required on February 28, 2002, but has made no payments subsequently. In March 2002, the Company further renegotiated the repayment terms of this note, suspending any required principal or interest payments until the Company’s registration statement for the 12% convertible debentures described in Note 6 becomes effective, at which time the Company is required to make a $200,000 payment and then to resume making monthly payments of $35,000 until the principal and accrued interest are repaid in full. The Company renegotiated the terms of the note due to a lack of available funds and to avoid a default.

 

As a component of the new financing described more fully in Note 6, in May 2002, the Company issued pursuant to Regulation S, a $150,000 10% convertible promissory note to BNC Bach International Ltd. (“BNC Bach”), a private investment fund that is a related party to Townsbury Investments Ltd. (“Townsbury”), the investor in a prior investment that provided for an existing equity line of credit. This note is convertible into shares of the Company’s common stock at $0.05 per share and was due on the earlier of July 14, 2002 or the settlement date of Calypte’s next draw down under the equity line.

 

In conjunction with the issuance of the note to BNC Bach, Calypte repriced from $0.27 to $0.015 the 4.2 million-share warrant issued to Townsbury pursuant to the equity line as permitted by the warrant’s

 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

originally negotiated terms. Refer to Note 9, Subsequent Events, for recent developments regarding this note. Townsbury exercised the warrant for the entire 4.2 million, shares and Calypte received $63,000 in proceeds.

 

In light of the Company’s precarious financial condition and its being in danger of ceasing operations, the exercise price was modified to serve as an inducement for the investor to exercise the warrant. The Company viewed the modification of the exercise price as fair and reasonable under the circumstances. Townsbury was and is viewed as an unaffiliated party of the Company. The fair value of the warrant had originally been treated as a deferred offering cost associated with the equity line. The fair value of the repriced warrant was less than that of the original warrant and therefore no accounting adjustment attributable to the repricing was required. Upon the exercise of the warrant, the Company reclassified the $807,000 unamortized balance of the deferred offering cost to additional paid-in capital.

 

(6)    Notes and Debentures Payable

 

$850,000 12% Convertible Debentures

On February 11, 2002, the Company signed a securities purchase agreement with a private investment fund Bristol Investment Fund, Ltd. (“Bristol”) pursuant to which Bristol agreed to purchase two 12% secured convertible debentures for an aggregate of $850,000, each of which matures two years after its issuance. The first debenture, in the amount of $425,000, was purchased by Bristol, under an exemption provided by Regulation S, on February 11, 2002 and the Company received net proceeds of $368,000. The closing price for Calypte stock on February 11, 2002 was $0.25. On May 10, 2002, Calypte issued a second $100,000 12% convertible debenture to Bristol, also under an exemption provided by Regulation S, and received net proceeds of $90,000. This debenture has the same terms as those of the initial debenture and reduces the remaining commitment under the agreement to $325,000. The closing price for Calypte stock on May 10, 2002 was $0.03. The outstanding debenture bears interest at the annual rate of 12% payable quarterly in common stock or cash at Bristol’s option. Under the terms of the debenture, Bristol can elect at any time prior to maturity to convert the balance outstanding on the debenture into shares of the Company’s common stock. The Conversion Price for any debenture issued pursuant to this agreement is equal to the lesser of (i) the average of the lowest three trading prices during the 20 trading days immediately prior to the conversion date discounted by 30% and (ii) $0.115. During May 2002, Bristol converted a principal amount of approximately $60,000 plus accrued interest into 4,462,425 shares of the Company’s common stock at $0.014 per share.

 

Under the Security Purchase Agreement, Bristol would be obligated to purchase the remaining debenture no later than ten (10) business days after the effective date of a registration statement for the shares of common stock underlying the debenture, provided that there are no material adverse effects on the business operations, assets, financial conditions or prospects of the Company or its subsidiaries, if any, as of the date of the effectiveness of the registration statement and so long as the shares underlying the debenture (in the amount of $325,000) are included in the registration statement. However, since the Company is not including the shares underlying the remaining $325,000 of the debenture commitment in its current registration statement, Bristol is not obligated to purchase the $325,000 of the remaining debenture until such time as the underlying shares are registered. The Company will not register the shares underlying the $325,000 remaining debenture until it has been issued and is at market risk. Upon the effectiveness of the registration statement, Bristol is required to convert the debentures at a monthly rate equal to 5% of the aggregate trading volume of the Company’s common stock for the 60 trading days immediately preceding such conversions.

 

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Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

In conjunction with this transaction, the Company issued a Class A warrant to purchase up to 1,700,000 shares of its Common Stock. The Class A warrant is exercisable for a period of seven years after issuance at a price per share equal to the Conversion Price. Bristol has sole discretion with respect to when and if it chooses to exercise any or all of the Class A warrant prior to its expiration. The warrant was valued on the date of issue at $0.21 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 4.7%, the contractual life of 7 years, and volatility of 80%. As additional fees for this transaction, the Company also issued a warrant to purchase 85,000 shares of its common stock. The warrant to purchase the 85,000 shares has the same terms and the same fair market value as the Class A warrant.

 

The Company also issued Bristol a Class B warrant to purchase an additional 12,000,000 shares of its Common Stock. Upon the effectiveness of the related registration statement, Bristol is required to exercise the Class B warrant in conjunction with the mandatory monthly conversion of its debentures so that each month the Company will issue to Bristol, pursuant to the Class B warrant, a number of shares equal to 150% of the shares issued to the fund pursuant to the monthly conversion of the debentures. Because Bristol is required to convert the debentures for a minimum number of shares equal to 5% of the Company’s aggregate trading volume for the preceding 60 trading days, this means that Bristol must exercise the Class B warrant during each monthly conversion period for a number of shares equal to 7.5% of such trading volume, provided that more than 2 million shares will not be issued per month pursuant to such conversion and exercise without the Company’s consent. However, since the Company is not including the shares underlying the 12,000,000 share Class B warrant in its current registration statement, Bristol is not obligated to begin exercising the warrant until such time as the underlying shares are registered. The Company is not including the shares underlying the Class A and Class B warrants in the current Pre-effective Amendment to the Registration Statement. It will not register them until the warrants have been exercised and the warrant shares are subject to market risk. The term of the Class B warrant is 12 months from the effective date of the related registration statement. The exercise price for the Class B warrant is the lesser of (i) the average of the lowest three trading prices during the 20 trading days immediately prior to exercise discounted by 25%; and (ii) $0.215 per share. The warrant was valued on the date of issue at $0.14 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 2.2%, the contractual life of 1 year, and volatility of 80%.

 

The Company did not receive any additional consideration over and above the negotiated price for the debentures in connection with the issuance of the Class A and B warrants. The Class A and B warrants were contemplated and considered a part of the negotiated transaction for the debentures issued to Bristol. The Class A and Class B warrants are intended to act as consideration for the investment by Bristol and will also provide the Company with immediate cash upon their exercise. The Class B warrants are intended to provide the Company with cash over a one year period following the effective date of the registration statement for the shares underlying the debentures and warrants. Management believes that the terms of the financing were on the best possible terms available as a result of the Company’s tenuous financial condition at the time of the arrangement.

 

In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In, a Company’s Own Stock,” and the terms of the warrants, the fair value of the warrants was accounted for as a liability, with an offsetting discount to the carrying value of the first $425,000 debenture, which is being amortized as interest expense over the 24 month term of the debenture. The combined fair values of the Class A and Class B warrants treated as a discount to the debenture exceeded the $425,000 amount of the debenture. Accordingly, the aggregate amount of the warrant liability and the offsetting debenture discount recorded attributable to the Class A and Class B

 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

warrants was limited to $425,000 at the time of issuance. The warrant liability will be reclassified to equity at the time the Company has registered sufficient shares to allow for the exercise of the warrants. Until that time, it will be marked to market through earnings. Accordingly, the Company recognized $2,134,000 of non-cash interest expense attributable to the remeasurement or “adjustment to market” of the warrant liability in the second quarter of 2002. The Company also recognized approximately $77,000 in non-cash interest expense related to the amortization of the debenture discount during the first half of 2002.

 

The Company determined that both of the debentures were issued with a beneficial conversion feature. The intrinsic value was calculated at the date of issue as the difference between the conversion price of the debenture and the fair value of the Company’s common stock into which the debenture was convertible, multiplied by the number of common shares into which the debenture was convertible. Because the Company also issued warrants in conjunction with the first, $425,000 debenture, as described above, the value of the beneficial conversion feature was not accorded treatment as a discount to the debenture, since the valuation of the accompanying warrants had reduced the carrying value of the debenture to zero at the time of issuance. The beneficial conversion feature attributable to the second $100,000 debenture was limited to $100,000 by the face amount of the debenture and recorded as a discount to the debenture to be amortized to interest expense over the life of the debenture. The Company has recognized approximately $7,000 in non-cash interest expense attributable to the amortization of this discount through June 30, 2002.

 

New Financing from Cataldo Investment Group (“CIG”)

On April 17, 2002, the Company announced that it would begin winding down its operations as it did not have sufficient working capital or the necessary funds to continue with its business plan or operations. The Company also announced that it might file for bankruptcy protection. At that time, the Company furloughed most of its employees and notified its customers of a likely cessation of operations. On May 9, 2002, the Company entered into a letter agreement with CIG pursuant to which CIG agreed to commit an aggregate of approximately of $1.5 million to the Company within the following 90 days. It was further agreed that CIG would raise an aggregate of at least $5 million over the next 12 months to fund Calypte’s operations. As a result of the CIG investment commitment, the Company announced on May 13, 2002 that it would not complete the wind down of its business as previously announced. Furthermore, the Company discontinued any plans to file for bankruptcy protection at the current time. The Company recalled many of its furloughed employees and has restarted its business. The Company can give no assurance that its revenues and customer base will not be negatively impacted over the long term by the announcement and commencement of the wind down of its business.

 

CIG is essentially a de facto entity comprised of a number of unaffiliated investors assembled by Mr. Anthony Cataldo, the Company’s executive chairman, to facilitate investments in the Company. Mr. Cataldo does not have an affiliation or any agreements with any of the individual investors that are categorized as CIG. As a condition precedent to the initial investment, it was requested that Mr. Cataldo be appointed Executive Chairman in connection with the restart of the Company’s operation. Additionally, Mr. Cataldo was granted a temporary limited right on behalf of CIG to appoint new directors constituting a majority of the Board of Directors. During the time period of the right, Mr. Cataldo recommended the appointment of one director, as a result of the resignation of a director during the limited time period. The Company initially came into contact with individual investors that comprise CIG via certain existing security holders of the Company who were concerned about the Company winding down its business affairs and their investment (holdings) in the Company. Thereafter, Mr. Cataldo arranged for new financings, which were categorized under the acronym CIG. The individual

 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

investors that comprise the de facto entity referred as to CIG are not affiliated and Mr. Cataldo has disclaimed any affiliation or beneficial ownership with the individual investors that comprise CIG. To the best of the Company’s knowledge, the individual investors of CIG are not affiliated with each other. Mr. Cataldo was a designee of the investors chosen in light of the tenuous financial condition of the Company at the time of the new financing. He continues to actively pursue raising the necessary capital to fund the Company’s on-going operations. There are no defined terms with respect to investments that can be attributed to CIG and as such all financing arrangements must be negotiated on an individual basis. To date, to the best of the Company’s knowledge, all investors that have been aggregated under the acronym CIG are offshore residents. Additional new investors not a part of the original CIG investment in the Company may be referred to going forward under the acronym CIG.

 

There can be no assurance that the terms of such capital will be made available to the Company on a timely basis and there can be no assurance that the additional capital that the Company requires will be available on acceptable terms, if at all. Any failure to secure additional financing on a timely basis will place the Company in significant financial jeopardy.

 

In conjunction with the acceptance of the CIG financing proposal, the Company’s Board of Directors appointed Anthony J. Cataldo as Executive Chairman and further agreed to issue to Mr. Cataldo an aggregate of 7,966,666 stock options pursuant to an employment agreement negotiated between Mr. Cataldo and the independent members of the Board of Directors. Mr. Cataldo was appointed to the Board replacing David E. Collins, who resigned as Chairman of the Board and from the Board of Directors. On May 10, 2002, when the market price of our common stock was $0.03 per share, Mr. Cataldo was granted fully-vested options to purchase 1,966,666 shares of the Company’s common stock at $0.015 per share and options to purchase 6,000,000 shares of the Company’s common stock at $0.03 per share, with the option to purchase 3,000,000 shares vested immediately and the option to purchase the remainder vested on the one-year anniversary of the option grant. The options have a five-year term. As options granted to an employee, Mr. Cataldo’s options were accounted for under the provisions of APB 25 and FIN 44. The Company recognized compensation expense of $29,500 based on the intrinsic value of the below-market grant of 1,966,666 shares and no expense based on the at-market grant of 6,000,000 shares. See Note 9 for information regarding a subsequent modification of Mr. Cataldo’s option grant.

 

As of June 30, 2002, Calypte has received approximately $2.8 million in financing, primarily pursuant to the CIG commitments, and including $100,000 from Bristol as discussed above. As of June 30 and since the restart of operations, we have received no proceeds from draw downs under our equity line with Townsbury, but we did receive $63,000 through the exercise of Townsbury warrants as discussed below. The components of the financing through June 30, 2002 include the following:

 

    As discussed in Note 5, on May 14, 2002, Calypte issued a $150,000 10% convertible promissory note pursuant to Regulation S to BNC Bach International Ltd., an investor who is a related party to Townsbury Ltd., the investor that provides the Company’s existing equity line of credit. The closing price for Calypte Common Stock on May 14, 2002 was $0.14. This note is convertible into shares of the Company’s common stock at $0.05 per share and is due on the earlier of July 14, 2002 or the settlement date of Calypte’s next drawdown under the equity line. In conjunction with the issuance of this note, Calypte repriced from $0.27 to $0.015 the 4.2 million-share warrant issued pursuant to the equity line. Townsbury has exercised the warrant for the entire 4.2 million shares and Calypte received $63,000  in proceeds.

 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

 

    As discussed earlier in Note 6, on May 10, 2002, Calypte issued a second $100,000 12% convertible debenture to the private investment fund Bristol Investment Fund Ltd. under an exemption provided by Regulation S. This debenture has the same terms as those of the initial debenture and reduces the remaining commitment under the agreement to $325,000. The closing price for Calypte stock on May 10, 2002 was $0.03.

 

    Pursuant to Regulation S, Calypte has issued a series of 8% convertible notes in the aggregate principal amount of $2.225 million. These notes have a 24 month term and are convertible into shares of the Company’s common stock at the lesser of $.10 or 70% of the average of the three lowest trades during the 30 day period preceding conversion and are convertible at any time prior to maturity. Calypte has received approximately $1.9 million in proceeds after deducting fees and costs associated with these notes. Under the terms of the subscription agreement, Calypte agreed to file a registration statement for the shares of common stock underlying the notes and use its reasonable commercial efforts to cause the registration statement to be declared effective within ninety days of the closing date. In the event there is a registration default under the agreement, the Company shall pay, at the subscribers’ option, in cash or stock, as liquidated damages an amount equal to 2% of the note principal per month.

 

        The following table sets forth the individual investors who have subscribed to the 8% convertible notes:

 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

 

Investor


  

Amount


  

Transaction

Date


  

Calypte

Closing

Price


  

Shares

Issued/

Converted


                     

8% Convertible Notes


                   

Alpha Capital Aktiengesellshaft

  

$

500,000

  

5/24/02

  

$

0.12

      

Stonestreet Limited Partnership

  

$

500,000

  

5/24/02

  

$

0.12

      

Filter International Ltd.

  

$

150,000

  

5/24/02

  

$

0.12

      

Camden International Ltd.

  

$

250,000

  

5/24/02

  

$

0.12

  

 

4,324,490/

                       

$
 

70,000
converted

Camden International Ltd.

  

$

100,000

  

5/24/02

  

$

0.12

      

Domino International Ltd.

  

$

150,000

  

5/24/02

  

$

0.12

  

 

4,324,490/

                       

$
 

70,000
converted

Thunderbird Global Corporation

  

$

75,000

  

5/24/02

  

$

0.12

      

BNC Bach International Ltd.

  

$

200,000

  

5/24/02

  

$

0.12

      

Excalibur Limited Partnership

  

$

200,000

  

5/24/02

  

$

0.12

      

Standard Resources Ltd.

  

$

100,000

  

5/24/02

  

$

0.12

      
    

                  
    

$

2,225,000

                  
    

                  

 

    Calypte has issued one 8% convertible debenture in the face amount of $100,000 pursuant to Regulation S. This debenture was convertible into shares of the Company’s common stock at a 20% discount to the average closing price for the five trading days prior to conversion and had a conversion floor of $.10 per share. This debenture was converted into shares of Calypte’s common stock during the second quarter. Calypte received cash of $90,000, net of fees, from the issuance of these two debentures. The Company has agreed to use its best efforts to register the shares of common stock and has provided cost free piggyback registration rights to the debenture holder. There are no defined penalties and/or time requirements imposed on Calypte with respect to filing a registration statement and having the registration statement for the shares declared effective.

 

The following table lists the individual investors and transaction dates related to the issuance of the 8% convertible debentures:

 

8% Convertible Debentures


  

Amount


  

Transaction

Date


  

Calypte

Closing

Price


  

Shares

Issued (1)


Su So

  

$

100,000

  

6/17/02

  

$

0.14

  

1,100,000

 

 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

(1)   includes fee shares

 

    The Company determined that the above convertible notes and debentures were issued with a beneficial conversion feature. The beneficial conversion feature was recognized by allocating an amount equal to the intrinsic value of that feature to debenture discount to be amortized over the life of the note or debenture, subject to a limitation of the face amount of the respective note or debenture. Upon earlier conversion, the proportionate share of unamortized discount is charged to additional paid-in capital. The intrinsic value was calculated at the date of issue as the difference between the conversion price of the note or debenture and the fair value of the Company’s common stock into which the note or debenture was convertible, multiplied by the number of common shares into which the debenture was convertible. In the case of the 8% convertible notes, the beneficial conversion feature was generally limited by the face amount of the note. The beneficial conversion feature for the 8% convertible debentures was less than the face amount of the debenture, however, it was converted soon after issuance. The Company has recorded approximately $229,000 of such note or debenture amortization as non-cash interest expense through June 30, 2002.

 

    Calypte has issued warrants and options to purchase 19,000,000 shares of its Common Stock under agreements with consultants to perform legal, financial, business advisory and other services associated with the restart of its operations. The warrants were issued at $0.015 per share on May 9, 2002 when the market price of our common stock was $0.03 per share. The option was granted at $0.03 per share on May 10, 2002, when the market price of our common stock was $0.03 per share. All of the warrant and option grants were non-forfeitable and fully-vested at the date of issuance and were registered for resale by the consultants under Form S-8. The aggregate of 18,500,000 warrants were valued on the date of issue at $0.0155 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 5.2%, the contractual life of 4 months, and volatility of 80%. Pursuant to the requirements of FASB Statement No. 123 and EITFs 96-18 and 00-18 related to accounting for stock-based compensation,, the Company recognized approximately $287,000 in expense attributable to these warrants in the second quarter of 2002. The Company valued 500,000 options on the date of issue at $0.0253 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 5.16%, the contractual life of 10 years, and volatility of 80%. Pursuant to the requirements of FASB Statement No. 123 and EITFs 96-18 and 00-18 related to accounting for stock-based compensation, the Company recognized approximately $13,000 in expense attributable to this option during the second quarter of 2002.

 

The consultants have exercised warrants and options aggregating 13,333,333 shares as of June 30, 2002 and Calypte has received proceeds of $200,000.

 

    At this time, the Company is in the registration process for $525,000 of the Bristol debentures and has not begun the process for any CIG financings.

 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

 

(7)    Equity Line Financing

 

In August 2001, the Company and a private investment fund signed a Common Stock Purchase Agreement for the future issuance and purchase of the Company’s common stock. The stock purchase agreement established what is sometimes termed an equity line of credit or an equity draw down facility. During the first half of 2002, the Company completed five draw downs under the facility, issuing 5.6 million shares of its Common Stock at an average price of $0.177 per share and receiving cash proceeds totaling $0.9 million after deducting fees and expenses in settling these draw downs. Since the effectiveness of the related registration statement through June 30, 2002, the Company has completed seven draw downs under the facility, issuing 7.8 million shares of its common stock and receiving $1.3 million in net proceeds. Also during the first half of 2002, the Company recognized as a cost of the financing $0.1 million of the deferred offering cost attributable to a warrant to purchase 4.2 million shares of its Common Stock issued to Townsbury in conjunction with the draw down facility. As described in Note (6) above, the deferred offering cost associated with this financing facility was reclassified to equity upon the repricing and exercise of the warrants. The Company continues to draw on the equity line facility as indicated in Note 9.

 

(8)    Gain on Extinguishment of Debt

 

On February 12, 2002, the Company completed a restructure of approximately $1.7 million of its past due accounts payable and certain obligations with 27 of its trade creditors. Under the restructuring, in March 2002, the Company issued approximately 1.4 million restricted shares of its common stock at various negotiated prices per share to trade creditors in satisfaction of specified debt. The issuance of the shares was pursuant to Regulation D of the Securities Act. The Company agreed to use its best efforts to register the shares within 45 business days of the closing date. As of the current date, the Company has not filed the registration statement, however, the agreement does not provide for any specific penalties on the Company for its failure to file a registration statement within the prescribed period. The creditors accepted the shares plus deferred cash payments of from 0% to 25% of the outstanding balance in satisfaction of $1,699,000 of indebtedness plus certain patent rights for 2002. On the date the shares were issued, the aggregate value of the Company’s common stock issued to trade creditors was $248,000 and the aggregate deferred cash payment yet to be made to the trade creditors totaled $132,000. The Company recognized an extraordinary gain of $1,319,000 during the first quarter of 2002 as a result of restructuring this indebtedness. During the third quarter of 2002, the Company made cash payments to the various creditors totaling 10% of the deferred cash balance or approximately $13,000.

 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

 

(9)    Subsequent Events

 

Between July 1 and August 5, 2002, in addition to $0.4 million received under our equity line with Townsbury, Calypte has received an additional $0.825 million in financing, again primarily pursuant to the CIG commitments.

 

The components of the financing include the following:

 

    Pursuant to Regulation S, Calypte has issued 3 additional 8% convertible notes in the aggregate principal amount of $0.650 million. Like the previous notes, these have a 24 month term and are convertible into shares of the Company’s common stock at the lesser of $.10 or 70% of the average of the three lowest trades during the 30 day period preceding conversion and are convertible at any time prior to maturity. Calypte has received approximately $0.5 million in proceeds after deducting fees and costs associated with these notes. Under the terms of the subscription agreement, Calypte agreed to file a registration statement for the shares of common stock underlying the notes and use its reasonable commercial efforts to cause the registration statement to be declared effective within ninety days of the closing date. In the event there is a registration default under the agreement, the Company shall pay, at the subscribers’ option, in cash or stock, as liquidated damages an amount equal to 2% of the note principal per month.

 

The following table sets forth the individual investors who have subscribed to the 8% convertible notes between July 1 and August 5, 2002:

 

Investor


  

Amount


  

Transaction

Date


  

Calypte

Closing

Price


    

Shares

Issued/

Converted


SDS Capital International Ltd.

  

$

300,000

  

7/10/02

  

$

0.34

    

—  

Camden International Ltd.

  

$

100,000

  

7/10/02

  

$

0.34

    

—  

Excalibur Limited Partnership

  

$

250,000

  

7/24/02

  

$

0.22

    

—  

 

Calypte issued a second 8% convertible debenture in the face amount of $100,000 pursuant to Regulation S. This debenture was convertible into shares of the Company’s common stock at a 30% discount to the market price, and had a conversion floor of $.10 per share. This debenture was converted into shares of Calypte’s common stock shortly after its issuance. Calypte received cash of $90,000, net of fees, from the issuance of this debenture. The Company has agreed to use its best efforts to register the shares of common stock and has provided cost free piggyback registration rights to the debenture holder. There are no defined penalties and/or time requirements imposed on Calypte with respect to filing a registration statement and having the registration statement for the shares declared effective.

 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001

(unaudited)

 

 

The following table lists the investor and transaction information related to the issuance of the 8% convertible debentures:

 

8% Convertible

Debentures


  

Amount


  

Transaction Date


  

Calypte

Closing

Price


  

Shares

Issued (1)


                                    Jason Arasheben

  

$

100,000

  

7/03/02

  

$

0.27

  

474,793

 

(1) includes fee shares

 

Consistent with the earlier notes and debenture, the Company determined that the above convertible notes and debenture were issued with a beneficial conversion feature. The beneficial conversion feature was recognized by allocating an amount equal to the intrinsic value of that feature to note or debenture discount to be amortized over the life of the note or debenture, subject to a limitation of the face amount of the respective note or debenture. The intrinsic value was calculated at the date of issue as the difference between the conversion price of the note or debenture and the fair value of the Company’s common stock into which the note or debenture was convertible, multiplied by the number of common shares into which the note or debenture was convertible. In the case of the 8% convertible notes, the beneficial conversion feature was limited by the face amount of the note. The beneficial conversion feature for the 8% convertible debenture was less than the face amount of the debenture, however, it was converted soon after issuance.

 

On July 14, 2002, Calypte and BNC Bach agreed to extend the maturity date of the $150,000 10% convertible promissory note issued on May 14, 2002 from July 14, 2002 to December 31, 2002. The market price for Calypte Common Stock was $0.36 on July 14, 2002. In return for the extension of the maturity date, Calypte has agreed to amend the conversion price of the note from $0.05 per share to the lesser of (a) $0.05 per share or (b) 60% of the lowest three closing bid prices of Calypte’s common stock during the 22 business days prior to the date the investor notifies Calypte of its election to convert the note. The Company received no additional proceeds as a result of this modification and no accounting adjustments were required as a result of the extension of the note’s maturity or the amendment of the conversion price.

 

Two consultants who had been granted warrants to purchase 2,500,000 and 1,500,000 shares of the Company’s stock at $0.015 per share exercised their warrants in their entirety. The consultant who had been granted an option to purchase 500,000 shares of the Company’s stock at $0.03 per share, exercised his option in its entirety. The Company received proceeds of $75,000 from the exercises of the option and warrants.

 

 

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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. The forward-looking information set forth in this Quarterly Report on Form 10-Q/A (No. 2) is as of August 5, 2002, and Calypte undertakes no duty to update this information. Should events occur subsequent to August 5, 2002 that make it necessary to update forward-looking information contained in this Form 10-Q/A (No. 2), the update forward-looking information will be filed with the SEC in a subsequent Quarterly Report on Form 10-Q or as an earnings release included as an exhibit to a Form 8-K, each of which will be available at the SEC’s website at www.sec.gov. More information about potential factors that could affect Calypte’s business and financial results is included in the section entitled “Risk Factors” beginning on page 24 of this Form 10-Q/A (No. 2).

 

Overview

 

During the first quarter of 2002, Calypte’s financial condition and cash availability deteriorated significantly, to the point that by early April 2002 the Company determined that it would need to curtail its operations and possibly consider filing for bankruptcy protection. The Company announced that the situation had reached a critical point in mid-April 2002, at which time management began the process of furloughing employees and winding down Calypte’s operations, with complete cessation of operations a likely possibility. In early May 2002, however, before the wind-down process was completed, Calypte received commitments for what it deemed to be sufficient additional financing to resume its operations and its Board of Directors appointed a new chairman. At this time, Calypte has recalled a large number of its employees and resumed operations at both of its manufacturing facilities and continues to reassess current and longer-term business plans and objectives. During the second quarter of 2002, Calypte incurred non-recurring costs associated with the re-start of operations and expects that similar costs will continue into the third quarter of 2002. Calypte continues to evaluate the impact of the announcement and commencement of the wind down of its business on its revenues and customer base and currently can give no assurance that either its revenues or customer base has not been negatively impacted in the long term. Although Calypte continues to reassess its business plan and capital requirements as a result of the wind down and subsequent re-start of its operations, it does not believe that its currently available financing will be able to sustain operations at current levels through the remainder of 2002 unless new financing is arranged There can be no assurance that the additional capital that Calypte requires will be available on acceptable terms, if at all. In the absence of such additional capital, Calypte does not have sufficient capital to sustain itself through the third quarter of 2002 and its business will be placed in significant financial jeopardy. Additionally, there can be no assurance that Calypte’s products will be successfully commercialized or that Calypte will achieve significant product revenues. In addition, there can be no assurance that Calypte will achieve or sustain profitability in the future.

 

Critical Accounting Policies and Estimates

 

Calypte’s discussion and analysis of its financial condition and results of operations are based upon Calypte’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Calypte to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Calypte evaluates its estimates and judgments, including those related to bad debts, inventories, intangible assets, income taxes, restructuring costs, and contingencies and litigation. Calypte bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities

 

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that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Calypte believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Calypte recognizes revenue from product sales upon shipment to customers and when all requirements related to the shipments have occurred. Should changes in terms cause Calypte to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Calypte maintains an allowance for doubtful accounts on a specific account identification basis for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Calypte’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Calypte adjusts the value of its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Further, as the company has continued to incur negative gross profits, with high fixed manufacturing costs, Calypte also reviews its inventories for lower of cost or market valuation. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Calypte records a full valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While Calypte has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event Calypte were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

 

 

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Results of Operations

 

The following represents selected financial data:

 

    

Three Months Ended

June 30,


    

Six Months Ended

June 30,


 
    

2002


    

2001


    

2002


    

2001


 
    

(in thousands)

    

(in thousands)

 

Total revenue

  

$

1,209

 

  

$

1,612

 

  

$

2,368

 

  

$

3,014

 

Product costs

  

 

1,397

 

  

 

1,743

 

  

 

3,027

 

  

 

3,732

 

    


  


  


  


Gross Margin

  

 

(188

)

  

 

(131

)

  

 

(659

)

  

 

(718

)

Operating expenses

                                   

Research and development

  

 

180

 

  

 

354

 

  

 

421

 

  

 

851

 

Selling, general and administrative

  

 

2,087

 

  

 

2,138

 

  

 

3,302

 

  

 

4,094

 

    


  


  


  


Total operating expenses

  

 

2,267

 

  

 

2,492

 

  

 

3,723

 

  

 

4,945

 

    


  


  


  


Loss from operations

  

 

(2,455

)

  

 

(2,623

)

  

 

(4,382

)

  

 

(5,663

)

Interest income

  

 

1

 

  

 

1

 

  

 

2

 

  

 

7

 

Interest expense

  

 

(2,492

)

  

 

(838

)

  

 

(2,539

)

  

 

(1,351

)

Other income, net

  

 

14

 

  

 

501

 

  

 

22

 

  

 

524

 

    


  


  


  


Loss before income taxes and extraordinary items

  

$

(4,932

)

  

$

(2,959

)

  

$

(6,897

)

  

$

(6,483

)

    


  


  


  


 

Customer Trends

 

HIV-1 Urine Test Sales    Sales of our urine HIV-1 screening test accounted for 29% and 43% of our total sales for the year ended December 31, 2001 and the six months ended June 30, 2002, respectively. Sales of our urine Western Blot supplemental test accounted for approximately 2% of calendar year 2001 revenue and approximately 3% of revenue for the first half of 2002.

 

Domestic Sales     Sales of our HIV-1 screening test to domestic life insurance reference labs accounted for 85% of screening test revenue for calendar year 2001 and for 90% of screening test revenue in the first half of 2002. These reference lab sales are distributed between five labs in 2001 and four in the first half of 2002. LabOne acquired Osborn Laboratories during 2001, resulting in the reduction in the number of reference lab customers. The individual lab sales as a percentage of total reference lab sales range from 6% to 50% in 2001 and from 2% to 50% in the first half of 2002, with LabOne being the largest of the five or four, respectively, in both periods. We market our HIV-1 urine screening test to both the reference labs and to over 100 life insurance companies who have committed to urine testing for HIV screening of at least some of their policy applicants and who employ the labs to conduct their applicant testing. Individual life insurance companies can and do move their business from one lab to another based on a number of considerations, including the availability of urine testing. As the only supplier of an FDA-approved urine based testing algorithm for HIV-1, reference labs must use our testing products to satisfy the demand of insurance companies desiring urine testing. Although Calypte does not expect to lose LabOne or any other reference lab as a customer, should such a loss occur, we believe that its impact would be only short-term, while the insurance companies using urine-based testing in their policy underwriting determinations realigned themselves with another lab offering our urine-based testing algorithm. Direct or distributor sales of our screening test to domestic clinics, public health agencies or community-based organizations were not material in 2001 or in the first half of 2002.

 

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Sales of our urine Western Blot test are generally made to the same reference lab customers who purchase the urine based screening test.

 

International Sales    International sales of our urine-based screening test are not currently a material component of our revenue, but we see significant potential for international distribution of our urine-based testing algorithm. Our primary focus is currently on developing distribution relationships in China and Africa and qualifying our products through the World Health Organization (“WHO”). We plan to qualify all of our urine-based testing products for WHO, which serves as both a quasi-regulatory body and a potential funding source for many countries that might not otherwise possess the regulatory infrastructure or financial resources to avail themselves of our products.

 

Serum Western Blot Sales    Sales of our serum based Cambridge Biotech HIV-1 Western Blot supplemental test kit accounted for 42% of our revenues for the year ended December 31, 2001 and 43% of our revenues for the first six months of 2002. Sales of this product to bioMerieux Inc. accounted for approximately 25% of our total revenues for the year ended December 31, 2001 and approximately 27% of our revenues for the first six months of 2002. Subsequent to the restart of our operations in May 2002, we have not sold to bioMerieux. We have, however, signed a new distributor for this product, Adaltis, U.S., Inc. We believe that the loss of serum Western Blot sales to bioMerieux will only impact revenues on a short-term basis. Since there is limited competition in the supplemental testing market, we anticipate that we will be able to rebuild market share and revenues to previous levels.

 

Viral Lysate Sales    Sales of viral lysate accounted for approximately 20% of our revenue for the year ended December 31, 2001 and approximately 9% of total revenue for the first half of 2002. The HIV viral lysate that we sell is a component of the production of our urine based screening tests. There is a limited and sporadic demand for our HIV viral lysate. The largest customer for our viral lysate in 2001 and our only customer in the half of 2002 was the Murex division of Abbott Laboratories, Inc. We believe that the large percentage of 2001 revenue attributed to the sale of our HIV viral lysate may have resulted from Murex’s decision to stockpile larger than normal quantities of viral lysate in light of our tenuous financial condition in an effort to avoid a potential interruption of supply. Their second quarter 2002 purchase may have been motivated by the same considerations. Subsequent to the restart of our operations in May 2002, we have not sold a significant amount of viral lysate. We expect HIV viral lysate sales to remain low for the balance of 2002. We are seeking new customers for this product but have no expectation of near-term demand for this product. However, as we view our HIV viral lysate as a component material, its sale is not considered to be a major component of our anticipated future revenue but rather a supplemental revenue source.

 

Results of Operations

 

Calypte’s operations during the second quarter of 2002 were significantly impacted by the almost complete wind down of its manufacturing and other functions at both of its locations resulting from an insufficient level cash to fund the operations, followed by the restart of operations based upon the commitment for additional operating capital. Calypte announced early in the second quarter of 2002 that it was contemplating the need to file for bankruptcy protection and, correspondingly, management took steps to maximize the value of any potential bankruptcy estate, including conversion of the remainder of as much raw material and in-process inventory as possible to finished product available for shipment, while simultaneously preparing both facilities for what could have been a complete cessation of operations. By mid-quarter, when new financing made it possible to restart manufacturing operations, Calypte was faced with recalling as many furloughed employees as necessary, acquiring new quantities of materials and supplies with which to begin process and equipment testing prior to the actual commencement of production, and re-establishing customer and vendor relationships. Variations in the results of operations

 

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between the reported quarters must, consequently, be viewed in the context just described and are primarily attributable to the reduced level of functional activity during the second quarter of 2002.

 

Three Months Ended June 30, 2002 and 2001

 

Revenues for the second quarter of 2002 decreased by 25% or $403,000 from $1,612,000 for the second quarter of 2001 to $1,209,000 for the second quarter of 2002. Screening test sales to domestic insurance laboratories decreased by $224,000 or 34% on a comparable percentage volume decrease. Calypte had no international sales of its screening test in the second quarter of either 2002 or 2001. Second quarter 2002 sales of supplemental tests and viral lysate decreased by $196,000 or 21%, from $930,000 to $734,000, compared to second quarter 2001 levels. Sales of the urine Western Blot supplemental test decreased by $2,000 or 4%, and sales of the serum Western Blot decreased $183,000 or 29% compared to second quarter 2001 levels. The decrease in sales for all of these products reflects the absence of sales activity for approximately half of the second quarter of 2002. Second quarter 2002 sales following the restart were primarily the result of inventory that had reached partial completion prior to the wind down. Sales of new product lots both begun and completed following the restart will not occur until the third quarter of 2002. During the second quarter of 2002, prior to the wind down, Calypte made a $220,000 sale of viral lysate, posting an increase of $132,000 or 150% in sales of that product compared with its sales in the second quarter of 2001. Calypte discontinued the sale of its research-use HTLV product at the end of calendar 2001; that product had accounted for approximately $154,000 or 10% of second quarter 2001 revenues.

 

Gross margin was –16% for the second quarter of 2002, compared with –8% for the second quarter of 2001. Although Calypte’s gross margin remained negative for the second quarter of 2002, product costs decreased by $346,000 compared to the second quarter of 2001, from $1,743,000 in 2001 to $1,397,000 in 2002. As noted earlier, Calypte experienced certain non-recurring costs associated with the restart of its manufacturing operations, but those costs were more than offset by the reduced level of employee and infrastructure costs incurred during the wind down and restart. Additionally, second quarter 2002 is the first quarter to be impacted by the reduction in occupancy costs resulting from the consolidation of space at the Rockville, Maryland manufacturing facility, which is expected to result in annualized cost savings of approximately $200,000.

 

Research and development expense decreased by $174,000, or 49%, from $354,000 in the second quarter of 2001 to $180,000 in the second quarter of 2002. Approximately half of the decrease is attributable to the restructuring of the license agreement between Calypte and one of its patent licensors in which the licensor agreed to accept Calypte common stock in partial satisfaction of 2002 royalties. Calypte’s expenditures for pure research, specimen acquisition and clinical trials decreased compared to the second quarter of 2001 in response to its cash flow situation, however the Company continued to pursue its rapid test initiative, although at reduced levels, through the second quarter of 2002.

 

Selling, general and administrative expenses decreased by $51,000 or 2%, from $2,138,000 in the second quarter of 2001 to $2,087,000 in the second quarter of 2002. Sales and marketing expenses decreased by $643,000 or 71%. Those activities were among the first to be wound down and the last to be restarted during the second quarter of 2002. General and administrative expenses increased by $592,000 or 48% compared to the second quarter of 2001.

 

As a small public company (OTCBB: CALY) with little institutional investor following, we struggle to achieve corporate awareness, which has a direct impact on our business. Adding visibility in the financial community builds both our corporate identity and is an important indicator to our current and potential customers. In our opinion, customers select our urine-based HIV-testing platform not only for the safety and

 

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efficacy of our FDA-approved products, but because of our financial status and stature. This is a key factor in choosing Calypte and spending the time and money to qualify a new testing source in an FDA-regulated industry. To that end, and in conjunction with our restart of operations, we have elected to increase discretionary funding to create awareness of us within the public investment community - using a variety of means. These initiatives have included the engagement of a new investor relations firm, the funding of a paid investment research report, participation in various types of internet-based investor communications, and other activities designed to introduce the company to potential new investment sources. Costs incurred in the second quarter also included those attributable to consulting efforts by our new Executive Chairman, prior to his employment, in his effort to arrange restart financing from the unaffiliated investors aggregated under the acronym CIG. In aggregate, these costs have amounted to approximately $500,000 during the second quarter of 2002. Additionally, the Company recorded approximately $350,000 in non-cash expense associated with fully-vested warrants granted to consultants involved in the restart of the Company’s operations. That level of warrant expense is expected to be non-recurring, however the awareness efforts are expected to continue at a higher-than-historical level through at least the third quarter of 2002.

 

The Company’s loss from operations decreased 6% from a loss of $2,623,000 for the second quarter of 2001 to a loss of $2,455,000 for the second quarter of 2002.

 

Second quarter interest expense increased by $1,654,000, from $838,000 in 2001 to $2,492,000 in 2002, primarily as a result of non-cash interest charges including the $2,134,000 mark-to-market adjustment of the warrant liability associated with warrants for 13,700,000 shares of the Company’s common stock issued during the first quarter of 2002 and $338,000 attributable to the amortization of note and debenture discounts on debt instruments issued in the first and second quarters of 2002. The Company recognized a $500,000 gain on the sale of its 29% interest in the stock of Pepgen Corporation, a privately-held therapeutic company, in the second quarter of 2001.

 

Six Months Ended June 30, 2002 and 2001

 

The wind down and restart of Calypte’s operations during the second quarter of 2002 has had an impact on first half 2002 results similar to that of second quarter 2002 and variations in the results of operations between the first half of 2001 and 2002 must be viewed in that context. Additionally, prior to the wind down of operations in 2002, the Company was operating with very limited cash resources and had curtailed expenses compared to the prior year’s levels to the greatest extent possible consistent with maintaining operational viability.

 

Revenues for the first half of 2002 decreased $646,000 or 21%, from $3,014,000 in 2001 to $2,368,000 in 2002. Screening test revenues decreased by $73,000 or 7%, however domestic sales to insurance company reference labs and other direct customers increased by $65,000 or 7% due to an increase in the number of insurance companies using urine testing and, in some cases, the broadening of policy limits for which urine testing is accepted by the underwriters. International screening test sales accounted for approximately $171,000 or 6% of first half 2001 revenues, including a significant sale to Calypte’s previous distributor for sub-Saharan Africa, while international sales accounted for just $27,000 or 1% of first half 2002 revenues. Sales of supplemental HIV-1 tests and viral lysate in the first half of 2002 decreased by $572,000 or 30% compared to sales in the first half of 2001. Urine western blot sales increased $8,000 or 10%, which is reasonable in comparison to the increase in domestic urine screening test sales. Serum western blot sales decreased $167,000 or 14%, due primarily to the second quarter 2002 wind down. Viral lysate sales decreased by $173,000 or 44% in 2002, compared to 2001. During the first half of 2001, Calypte’s one primary customer for lysate had expressed its intention to stockpile sufficient quantities of viral lysate for use until it could qualify a self-manufactured product with the FDA. That customer subsequently

 

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discontinued those plans and continues to purchase from Calypte. Calypte discontinued sales of its research-use HTLV product at the end of calendar 2001. Sales of that product accounted for approximately $270,000 or 9% of first half 2001 revenue.

 

Gross margin decreased from a loss of 24% in the first half of 2001 to a loss of 28% for the first half of 2002. In spite of the deterioration in margin, product cost decreased by $705,000, or 19%, in the first half of 2002 compared to the first half of 2001. The reduction in personnel and infrastructure costs attributable to the 2002 wind down coupled with the impact of the space consolidation initiative at Calypte’s Rockville, Maryland facility in April 2002 plus the closure of the Company’s Berkeley, California facility in February 2001, following the FDA inspection and approval of its Alameda, California manufacturing plant, all contributed to the reduction in costs. Offsetting the impact of these reductions in product cost on gross margin is the effect of the reduction in sales of viral lysate, Calypte’s highest-margin product, during the first half of 2002.

 

Research and development costs decreased by $430,000 or 51%, from $851,000 for the first half of 2001 to $421,000 for the first half of 2002. Approximately one quarter of the decrease is attributable to the restructuring of the license agreement between Calypte and one of its patent licensors in which the licensor agreed to accept Calypte common stock in partial satisfaction of 2002 royalties. The remainder of the reduction is attributable primarily to reductions in the costs associated with consultants, clinical trials, and specimen acquisition. Although spending on research and development decreased between 2001 and 2002, and in spite of its cash constraints, Calypte continued to support its HIV rapid test initiative as its primary new product effort throughout 2002.

 

Selling, general and administrative expenses decreased $792,000 or 19%, from $4,094,000 for the first half of 2001 to $3,302,000 for the first half of 2002. Sales and marketing expenses decreased by $936,000 or approximately 59%, reflecting unfilled sales positions in 2002 and related decreases in sales-related travel expenses as well as significant reductions in the costs of outside consultants, primarily those in both general corporate awareness and community based organization marketing initiatives. General and administrative expenses increased by $144,000 or approximately 6% in the first half of 2002, primarily, as described earlier, attributable to expenses associated with the restart of operations and efforts to increase the visibility of the company within the investment community. As noted previously, Calypte recorded approximately $350,000 in non-cash expense associated with fully-vested warrants granted to consultants involved in the restart of the Company’s operations. Partially offsetting this non-recurring 2002 expense is the absence of the $156,000 provision for an uncollectible distributor receivable recorded in 2001.

 

The Company’s loss from operations decreased $1,281,000 or 23% from a loss of $5.7 million for the first half of 2001 to a loss of $4.4 million for the first half of 2002.

 

Interest expense increased by $1,188,000 from $1,351,000 for the first half of 2001 to $2,539,000 for the first half of 2002. $2.5 million of the 2002 expense and $1.3 million of the 2001 expense represents non-cash charges relating to the accounting for various components of the convertible debt, warrants, and equity line financing vehicles Calypte has employed in 2001 and 2002. In 2001, the Company sold its 29% minority interest in the stock of Pepgen Corporation, a privately held therapeutic company, for $500,000 and recognized a gain in that amount.

 

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Liquidity and Capital Resources

 

Financing Activities

 

Prior to the second quarter wind down and restart of its operations, Calypte had generally financed its operations from its inception through private placements of preferred and common stock, its Initial Public Offering (IPO) of common stock and, to a much lesser extent, from payments related to research and development agreements, a bank loan facility, equipment lease financings and borrowings from short-term notes payable. During the first half of 2001, Calypte began drawing funds under an equity line of credit or equity draw down facility that was completed at the end of the second quarter. Calypte also issued short-term convertible debentures in the first quarter of 2001 that were repaid or converted during the second quarter of 2001. In the third quarter of 2001, Calypte received proceeds from the exercise of warrants that it had issued in conjunction with the equity line and debentures. In the fourth quarter of 2001 and during the first half of 2002, Calypte drew funds under a second equity line facility and in the fourth quarter of 2001 completed a small private placement. In the first quarter of 2002, Calypte issued a two-year debenture that remains outstanding. In conjunction with the restart of its operations based on a financing commitment by the CIG in May 2002, Calypte has issued a series of one- and two-year convertible notes and restricted shares of its common stock in a PIPE transaction during the second quarter of 2002, as described more completely below under the subheading, New Financing from Cataldo Investment Group (“CIG”).

 

In January 1999, the Company completed a private placement of 3,102,500 shares of common stock to institutional investors at $1.00 per share. Calypte received net proceeds of approximately $3.1 million after deducting placement agent commissions and additional expenses associated with the private placement.

 

Also in January 1999, the Company entered into a loan agreement with a bank to borrow up to $2.0 million at an interest rate of prime plus 1 1/4%. The agreement required the Company to maintain certain financial covenants and comply with certain reporting and other requirements. In addition, the Company’s assets secured its borrowings under the agreement. In January 2000, the loan was modified to extend the repayment term through August 2000. In May 2000, the loan was again modified to increase the then outstanding principal balance by $250,000. The $471,000 outstanding balance on this loan as of December 31, 2000 plus accrued interest was repaid in full in January 2001.

 

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.

 

In April 2000, the Company completed a private placement of 4,096,000 shares of its Common Stock at $2.05 per share. The Company received proceeds of approximately $8.3 million, after deducting expenses associated with the transaction. In connection with a bridge loan of $1 million from one of the investors, Calypte also issued warrants for 100,000 shares of Common Stock with an exercise price of $3.62 per share. The bridge loan was converted to equity upon closing of the private placement.

 

In January 2001, the Company signed an agreement to place up to $1.1 million in convertible short-term debentures. Under this arrangement, the Company issued two convertible debentures to the debentureholder in the principal amount of $550,000 each to the institutional investor pursuant to Regulation S. Each debenture had an interest rate of 6% and was issued at an original issue discount of 9.1%. The Company issued the first debenture on January 26, 2001 and the second on March 13, 2001. Each debenture matured 90 days from the date of issue, or on April 26, 2001 and June 11, 2001, respectively. Under the terms of the debentures, the debenture holder could elect at any time prior to maturity to convert the balance outstanding on the debentures into shares of the Company’s common stock at a fixed price that represented a 5%

 

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discount to the average trading price of the shares for the 10 trading days preceding the issuance of each debenture. If the Company chose not to redeem the debentures upon maturity, as in the case of the second debenture, the conversion discount to the debenture holder increased to 15% of the average low bid price for the Company’s common stock for any three of the 22 trading days prior to the date of conversion. Concurrent with the issuance of the first debenture, the Company also issued a warrant to the debenture holder for 200,000 shares of common stock at an exercise price of $1.50. The Company received aggregate net proceeds from the issuance of the two debentures of $925,000 during the first quarter of 2001. The Company redeemed the first debenture, plus accrued interest, prior to its contractual maturity using the proceeds from the sales of its common stock. The Company also redeemed a portion of the second debenture prior to its contractual maturity. On June 12, 2001, the debenture holder converted the remaining $168,000 balance on the second debenture plus accrued interest into 1,008,525 shares of the Company’s Common Stock, in accordance with the conversion provisions of the debenture. In August 2001, the Company modified the warrant that it had issued to the debenture holder pursuant to the terms of the warrant, reducing its exercise price to $0.15 per share, and the debenture holder exercised it for the entire 200,000 shares. The Company received $28,500 in net proceeds from the exercise of the warrants.

 

Also in January 2001, Calypte amended a common stock purchase agreement for the issuance and purchase of its common stock. The initial closing of the transaction took place on November 2, 2000. The stock purchase agreement established what is sometimes termed an equity line of credit or an equity draw down facility. The facility generally operated as follows. The investor committed up to $25 million or up to 20% of Calypte’s outstanding shares to purchase Calypte’s common stock over a twelve-month period. Once during each draw down pricing period, Calypte could request a draw, subject to a formula based on its average stock price and average trading volume setting the maximum amount of the request for any given draw. The amount of money that the investor provided to Calypte and the number of shares Calypte issued to the investor in return for that money was settled during a 22 day trading period following the draw down request based on the formula in the stock purchase agreement. The investor received a 5% discount to the market price for the 22 day period and Calypte received the settled amount of the draw down. By June 30, 2001, Calypte had issued 5,085,018 shares of its common stock, the total number registered for the equity line with the Securities and Exchange Commission, at an average price of $0.42 per share and had received net proceeds of approximately $2,014,000 after deducting expenses of the transactions. This equity line transaction has been terminated. The terms of the convertible debentures discussed earlier required that 50% of the net proceeds of any equity sales, including sales under the equity draw down facility, be used to repay the debentures and related accrued interest. Accordingly, approximately $938,000 of the net proceeds from sales under the equity draw down facility was used to pay down the debentures. In conjunction with the agreement, Calypte issued a 3-year warrant to the investor to purchase up to 1,000,000 shares of its stock at an exercise price of $1.55 per share. During August 2001, Calypte modified the exercise price for 600,000 shares of the warrant to $0.20 per share, when the market price of Calypte’s common stock was $0.30 per share and the investor exercised it for the entire 600,000 shares. Calypte received $114,000 in net proceeds from the exercise of these warrants. Later in August 2001, Calypte modified the exercise price for the remaining 400,000 shares of the warrant to $0.15 per share, when the market price of Calypte’s common stock was $0.24 per share. The investor exercised the remaining balance of the warrant and Calypte received net proceeds of $57,000 after deducting expenses of the transaction. Calypte could not execute a draw down under the equity line prior to the effectiveness of the registration statement for the resale of the shares and it registered the shares underlying the warrant concurrently with the registration for the equity line draw down shares.

 

In April 2001, the Company announced that it had concluded negotiations to sell its 29% minority interest in the stock of Pepgen Corporation, a privately held therapeutic company, for $500,000. The Company received the proceeds from the sale in two installments in April and May 2001.

 

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In August 2001, Calypte executed a promissory note in the amount of $400,000 to the parent company of its then-largest stockholder. The Note required interest at 8.5% per annum and principal plus accrued interest was due no later than September 14, 2001. The Note was renegotiated in December 2001 to include accrued interest through that date and now bears a face amount of $411,000. In February 2002, the Company renegotiated the payment terms to require monthly principal payments of $17,500 in February and March 2002, increasing to $35,000 thereafter unless and until the Company secured at least $2 million in additional financing, excluding the $850,000 12% convertible debentures and warrants transaction it entered into in February 2002, at which time a $200,000 principal payment would be required. The Company made the payment required on February 28, 2002, but has made no payments subsequently. In March 2002, the Company further renegotiated the repayment terms of this note, suspending any required principal or interest payments until the Company’s registration statement for the 12% convertible debentures becomes effective, at which time the Company is required to resume a $200,000 payment and resume making monthly payments of $35,000 until the remaining principal and accrued interest is repaid in full. The Company renegotiated the terms of the note due to a lack of available funds and to avoid a default.

 

In August 2001, Calypte and a private investment fund signed a common stock purchase agreement for the future issuance and purchase of up to $10 million of Calypte’s common stock over a twenty-four month period. The initial closing of the transaction occurred in October 2001. Under this arrangement, Calypte, at its sole discretion, may draw down on this facility, sometimes termed an equity line, from time to time, and the investment fund is obligated to purchase shares of Calypte’s common stock. This facility operates similarly to the previous equity line facility employed earlier in 2001. The purchase price of the common stock purchased pursuant to any draw down under this facility is equal to 88% of the daily volume weighted average price of Calypte’s common stock on the applicable date. Through August 5, 2002, Calypte has issued an aggregate of 9,350,787 shares of its common stock at an average price of $0.193 per share under this facility and has received net proceeds of $1,701,000 after payment of fees and expenses attributable to the draw downs. In conjunction with the signing of the stock purchase agreement, on October 19, 2001, the Company issued a 7-year warrant to the investment fund to purchase up to 4,192,872 shares of common stock at an exercise price of $0.2743 per share. This warrant has since been exercised as part of the restart as described more fully below under the subheading, New Financing from Cataldo Investment Group (“CIG”), in May 2002.

 

On February 11, 2002, Calypte signed a securities purchase agreement with a private investment fund, (“Bristol”), pursuant to which the fund agreed to purchase two 12% secured convertible debentures for an aggregate of $850,000, each of which matures two years after its issuance. The first debenture, in the amount of $425,000, was purchased by the investment fund on February 11, 2002 and the Company received net proceeds of $368,000. The Company originally expected to issue the second debenture, also in the amount of $425,000, upon the effectiveness of a registration statement filed by the Company in March 2002. As described more fully below under the subheading New Financing from Cataldo Investment Group (“CIG”), in May 2002, the Company issued a second debenture in the amount of $100,000 pursuant to this agreement and still expects to issue another debenture in the amount of $325,000 upon effectiveness of the registration statement. In conjunction with the initial debentue issuance, Calypte issued mandatorily exercisable warrants to purchase shares of its common stock. The mandatory exercise feature will commence upon effectiveness of the registration statement for the shares underlying the warrants.

 

On February 12, 2002, the Company completed a restructure of approximately $1.7 million of its past due accounts payable and certain obligations with 27 of its trade creditors. Under the restructuring, the Company issued approximately 1.4 million restricted shares of common stock at various negotiated prices per share to trade creditors in satisfaction of specified debt. The issuance of the shares was pursuant to Regulation D of the Securities Act. The Company agreed to use its best efforts to register the shares within 45 business days of the closing date. As of the current date, the Company has not filed the registration statement, however, the agreement does not provide for any specific penalties on the Company for its failure to file a registration statement within the prescribed period.

 

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New Financing from Cataldo Investment Group (“CIG”)

 

On April 17, 2002, the Company announced that it would begin winding down its operations as it did not have sufficient working capital or the necessary funds to continue with its business plan or operations. The Company also announced that it might file for bankruptcy protection. At that time, the Company furloughed most of its employees and notified its customers of a likely cessation of operations. On May 9, 2002, the Company entered into a letter agreement with the Cataldo Investment Group (“CIG”) pursuant to which CIG agreed to provide approximately $1.5 million to the Company within the following 90 days. It was further agreed that CIG would raise an aggregate of at least $5 million over the next 12 months to fund Calypte’s operations. As a result of the CIG investment commitment, the Company announced on May 13, 2002 that it would not complete the wind down of its business as previously announced. Furthermore, the Company discontinued any plans to file for bankruptcy protection at the current time. The Company recalled many of its furloughed employees and has restarted its business. The Company can give no assurance that its revenues and customer base will not be negatively impacted in the long term by the announcement and commencement of the wind down of its business.

 

CIG is essentially a de facto entity comprised of a number of unaffiliated investors assembled by Mr. Anthony Cataldo, the Company’s executive chairman, to facilitate investments in the Company. Mr. Cataldo does not have an affiliation or any agreements with any of the individual investors that are categorized as CIG. As a condition precedent to the initial investment, it was requested that Mr. Cataldo be appointed Executive Chairman in connection with the restart of the Company’s operation. Additionally, Mr. Cataldo was granted a temporary limited right on behalf of CIG to appoint new directors constituting a majority of the Board of Directors. During the time period of the right, Mr. Cataldo recommended the appointment of one director, as a result of the resignation of a director during the limited time period. The Company initially came into contact with individual investors that comprise CIG via certain existing security holders of the Company who were concerned about the Company winding down its business affairs and their investment (holdings) in the Company. Thereafter, Mr. Cataldo arranged for new financings, which were categorized under the acronym CIG. The individual investors that comprise the de facto entity referred to as CIG are not affiliated and Mr. Cataldo has disclaimed any affiliation or beneficial ownership with the individual investors that comprise CIG. To the best of the Company’s knowledge, the individual investors of CIG are not affiliated with each other. Mr. Cataldo was a designee of the investors chosen in light of the tenuous financial condition of the Company at the time of the new financing. He continues to actively pursue raising the necessary capital to fund the Company’s on-going operations. There are no defined terms with respect to investments that can be attributed to CIG and as such all financing arrangements must be negotiated on an individual basis. To date, to the best of the Company’s knowledge, all investors that have been aggregated under the acronym CIG are offshore residents. Additional new investors not a part of the original CIG investment in the Company may be referred to going forward under the acronym CIG.

 

There can be no assurance that the terms of such capital will be made available to the Company on a timely basis and there can be no assurance that the additional capital that the Company requires will be available on acceptable terms, if at all. Any failure to secure additional financing on a timely basis will place the Company in significant financial jeopardy.

 

In conjunction with the acceptance of the CIG financing proposal, the Company’s Board of Directors appointed Anthony J. Cataldo as Executive Chairman and further agreed to issue to Mr. Cataldo an aggregate of 7,966,666 stock options pursuant to an employment agreement negotiated between Mr. Cataldo and the independent members of the Board of Directors. Mr. Cataldo was appointed to the Board replacing

 

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David E. Collins, who resigned as Chairman of the Board and from the Board of Directors. On May 10, 2002, when the market price of our common stock was $0.03 per share, Mr. Cataldo was granted fully-vested options to purchase 1,966,666 shares of the Company’s common stock at $0.015 per share and options to purchase 6,000,000 shares of the Company’s common stock at $0.03 per share, with the option to purchase 3,000,000 shares vested immediately and the option to purchase the remainder vested on the one-year anniversary of the option grant. The options have a five-year term. See Note 9 for information regarding a subsequent modification of Mr. Cataldo’s option grant.

 

The following table summarizes our 2002 Recent Financings (the Convertible Debenture Agreement with Bristol, the CIG Financings and the Equity Line of Credit with Townsbury) through August 5, 2002: (Table in thousands, except share price and per share data.)

 

Investor (1)


  

Conversion Feature


  

Gross Amount $000


  

Net Amount $000


  

Transaction Date


  

Calypte Closing Price


  

Shares
Issued (000)/ $000 Converted


  

Shares Issuable at June 30,

2002 (2)


Bristol:

12% Convertible Debenture

  

Lesser of (1) 70% of the average of lowest 3 trading prices for 20 days preceding

  

$    425

       

2/11/02

  

$0.25

  

4,462/ $60

    
    

conversion or

  

$    100

       

5/10/02

  

$0.03

         
    

(2)$0.115

  

$    525

  

$  468

                 

27.1 million

CIG Financings: (3)

                                  

8% Convertible Notes

                                  

Alpha Capital Aktiengesellshaft

       

$    500

       

5/24/02

  

$0.12

         

Stonestreet Limited Partnership

       

$    500

       

5/24/02

  

$0.12

         

Filter International Ltd.

       

$    150

       

5/24/02

  

$0.12

         

Camden International Ltd.

       

$    250

       

5/24/02

  

$0.12

  

4,324/ $70

    

Camden International Ltd.

       

$    100

       

5/24/02

  

$0.12

         

Domino International Ltd.

       

$    150

       

5/24/02

  

$0.12

  

4,324/ $70

    

Thunderbird Global Corporation

       

$      75

       

5/24/02

  

$0.12

         

BNC Bach International Ltd.

       

$    200

       

5/24/02

  

$0.12

         

Excalibur Limited Partnership

       

$    200

       

5/24/02

  

$0.12

         

Standard Resources Ltd.

       

$    100

       

5/24/02

  

$0.12

         
    

Lesser of

(1) $0.10 or

  

$ 2,225

                        

SDS Capital International Ltd.

  

(2) 70% of

  

$    300

       

7/10/02

  

$0.34

         

Camden International Ltd.

  

the average of the

  

$    100

       

7/10/02

  

$0.34

         

Excalibur Limited Partnership

  

3 lowest

  

$    250

       

7/24/02

  

$0.22

         
    

trades for 30 days

  

$ 2,875

                      

41.9 million

8% Convertible Debentures

                                  

Su So

  

80% of the

  

$   100

  

$   85

  

6/17/02

  

$0.14

  

1,100 (4)/

  

0

 

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Investor (1)


  

Conversion Feature


  

Gross Amount $000


  

Net Amount $000


  

Transaction Date


  

Calypte Closing Price


  

Shares Issued (000)/ $000

Converted


  

Shares Issuable at June 30,

2002 (2)


    

lower of the average

closing bid or trade

price for the 5 days

preceding conversion,

but not less than $0.10

                      

$100

    

Jason Arasheben

  

70% of the lower of the average closing bid or trade price for the 5 days preceding conversion, but not less than $0.10

  

$100

  

$85

  

7/03/02

  

$0.27

  

  475 (4)/

$100

  

0

10% Convertible Note

                                  

BNC Bach International Ltd. (Note: on 7/14/02 the maturity date was extended until 12/31/02)

  

Lesser of (1) $0.05 or (2) 60% of the average of 3 lowest closing bid prices for 22 days preceding conversion

  

$150

  

$150

  

5/14/02

  

$0.14

$0.36

on

7/14/02

  

  0

  

3.0 million

Townsbury: Equity Line

       

—  

                        

January 2002 to March 29, 2002

  

88% of volume weighted average

  

$993

  

$938

  

Five

draws

       

  5,619

    

May 10, 2002 to August 8, 2002

  

price during draw down pricing period

  

$377

  

$356

  

Two

draws

       

  1,550

  

16.3 million

Townsbury Warrant – repriced from $0.27 per share on 5/10/02

  

$0.015 per share

  

$  63

  

$63

  

5/10/02

       

$4,193

  

0

 

(1) The Bristol debentures and warrants and all of the CIG financings were issued under exemptions provided by Regulation S. The Company could issue no shares under the equity line with Townsbury until it had completed an effective registration for the underlying shares. The warrants issued to Townsbury were issued under an exemption provided by Regulation S.

 

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(2)    Based on market prices as of June 30, 2002, where applicable. Includes shares based on remaining unissued portions of commitment and related warrants and expense shares, where applicable.

 

(3)    At this time we are currently in the registration process for $525,000 of the Bristol Debentures and have not begun the process for any CIG financing. Many of these financings have requirements for registration and impose liquidated damages for delays. The Company has incurred approximately $23,000 in liquidated damages resulting from the delay in registration of the Bristol Debentures and approximately $98,000 in liquidated damages attributable to the delay in the registration of the remaining financings. In most instances, the investor has the option of receiving liquidated damages in either cash or the Company’s common stock. As of August 5, 2002, the Company has neither paid cash nor issued stock in settlement of liquidated damages. Refer to “Risks Related to Our Recent Financings” in this document for additional discussion.

 

(4)    Includes fee shares

 

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In May, 2002 Calypte issued warrants and options to purchase 19,000,000 shares of its Common Stock under agreements with consultants to perform legal, financial, business advisory and other services associated with the restart of its operations. The warrants were issued at $0.015 per share on May 9, 2002 when the market price of our common stock was $0.03 per share. The option was granted at $0.03 per share on May 10, 2002, when the market price of our common stock was $0.03 per share. All of the warrant and option grants were non-forfeitable and fully-vested at the date of issuance and were registered for resale by the consultants under Form S-8. As of June 30, 2002, the consultants have exercised warrants and options aggregating 13,333,333 shares and Calypte has issued the shares and has received proceeds of $200,000. All but one of the consulting agreements discussed above expires in August and we may seek to enter into new agreements for legal, financial, business advisory, and other services including introductions and arrangements with respect to potential domestic and international product distribution agreements, assistance with international product trials and regulatory qualifications, and the development of synergistic relationships with appropriate public service organizations. We may continue to issue options and warrants at significant discounts to market or issue direct stock grants in return for necessary consulting services. We would subsequently register the underlying shares on a Form S-8 for resale by the consultants.

 

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Calypte has previously implemented steps to reduce its costs in areas that are not vital to its ability to generate revenues or that would adversely impact its manufacture of quality products. Calypte’s future liquidity and capital requirements will depend on numerous factors in addition to the ability to draw on recent capital commitments or potential future sources in a timely manner, including expanded market acceptance of its current products, improvements in the costs and efficiency of its manufacturing processes, its ability to develop and commercialize new products, regulatory actions by the FDA and other international regulatory bodies, and intellectual property protection. There can be no assurance that the Company will be able to achieve improvements in its manufacturing processes or that it will achieve significant product revenues from its current or potential new products. In addition, there can be no assurance that the Company will achieve or sustain profitability in the future.

 

The report of KPMG LLP dated February 8, 2002 covering the Company’s December 31, 2001 consolidated financial statements contains an explanatory paragraph that states that the Company’s recurring losses from operations and accumulated deficit raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.

 

Operating Activities

 

In the six month periods ended June 30, 2002 and 2001, the Company used cash of $3.6 million and $2.4 million, respectively, in its operations. The cash used in operations was primarily for promoting and marketing the Company’s complete urine-based HIV-1 testing method, for manufacturing, and for research, selling, and general and administrative expenses of the Company, and, in 2002, for deferred offering costs attributable to CIG restart financing.

 

New Accounting Pronouncements

 

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In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets.”

 

SFAS No. 141 addresses the accounting for and reporting of business combinations and requires that all business combinations be accounted for using the purchase method of accounting for acquisitions and eliminates the use of the pooling method. This Statement applies to all business combinations initiated after June 30, 2001. Implementation of this Statement had no effect on our consolidated financial statements.

 

SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. This Statement changes the accounting for goodwill from an amortization method to an impairment-only method. The amortization of goodwill, including goodwill recorded in past business combinations will cease upon adoption of this Statement, which will begin with the Company’s fiscal year beginning January 1, 2002. However, goodwill and intangible assets acquired after June 30, 2001 will be subject to immediate adoption of the Statement. The adoption of SFAS No. 142 had no effect on our consolidated financial statements.

 

In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires liability recognition for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt the provisions of SFAS No. 143 beginning with its fiscal year that starts January 1, 2003. The Company does not expect that adoption of SFAS No. 143 will have a material effect on its consolidated financial statements.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, in that it removes goodwill from its impairment scope and allows for different approaches in cash flow estimation. However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of. SFAS No. 144 also supersedes the business segment concept in APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” in that it permits presentation of a component of an entity, whether classified as held for sale or disposed of, as a discontinued operation. However, SFAS No.144 retains the requirement of APB Opinion No. 30 to report discontinued operations separately from continuing operations. The Company is required to adopt the provision of SFAS No. 144 beginning with its fiscal year that starts January 1, 2002. The Company does not believe that adoption of SFAS No. 144 will have a material effect on its consolidated financial statements.

 

In May 2002, the FASB approved for issuance SFAS No. 145, “Rescission of FASB Statements no. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 requires gains and losses from extinguishment of debt to be classified as an extraordinary item only if the criteria in APB No. 30 has been met. Further, lease modifications with economic effects similar to sale-leaseback transactions must be accounted for in the same manner as sale-leaseback transactions. While the technical corrections to existing pronouncements are not substantive in nature, in some instances they may change accounting practice. SFAS No. 145 will be effective January 1, 2003 for the Company. Management does not expect this standard to have a material impact on the Company’s consolidated financial position or results of operations, however it may require the reclassification in 2003 of certain previously-recognized gains currently classified as extraordinary.

 

In June 2002, the FASB approved for issuance SFAS No. 146, “Accounting for Costs Associated with Exit

 

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or Disposal Activities.” SFAS No. 146 addresses accounting and reporting for costs associated with exit and disposal activities and supercedes Emerging Issues Task Force Issue No. 94-3 (EITF 94-3), “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, as defined by the Statement. Under EITF 94-3, an exit cost was recognized at the date an entity committed to an exit plan. Additionally, SFAS No. 146 provides that exit and disposal costs should be measured at fair value and that the associated liability will be adjusted for changes in estimated cash flows. The provisions of SFAS No. 146 are effective for exit and disposal activities that are initiated after December 31, 2002. Management does not expect this standard to have a material impact on the Company’s consolidated financial position or results of operations.

 

Factors That May Affect Future Results, Events or Performance

 

Calypte has identified a number of risk factors and uncertainties that it faces. These factors, among others, may cause actual results, events or performance to differ materially from those expressed in any forward-looking statements made in this Form 10-Q/A (No. 2) or in press releases or other public disclosures. Investors should be aware of the existence of these factors.

 

Risks Related to Our Financial Condition

 

If We are Unable to Obtain Additional Funds We May Have to Significantly Curtail the Scope of Our Operations and Alter Our Business Model.

 

We do not believe that our currently available financing will be adequate to sustain operations at current levels through third quarter of 2002, unless new financing is arranged. Although, as of August 5, 2002, we have completed new financings in which we received an aggregate of approximately $3.7 million (inclusive of draw downs under our equity line facility with Townsbury ($2.8 million as of June 30, 2002) and we have commitments for approximately $1.3 million in additional funding over the next 9 months from a private investment group, we do not know if we will succeed in raising funds through the investment commitment or have offerings of debt or equity. We must achieve profitability for our business model to succeed. Prior to accomplishing this goal, we will need to raise additional funds, from equity or debt sources. We believe that we may need to arrange additional financing of approximately $5 million in the next twelve months because amounts available under our October 2001 equity line of credit with Townsbury Investments Limited and upon the conversion of the convertible debentures and warrants issued to Bristol may not be sufficient to meet our cash needs in the future. If additional financing is not available when required or is not available on acceptable terms, we may be unable to continue our operations at current levels.

 

As of June 30, 2002, our cash on-hand was $395,000. During the first half of 2002, our cash receipts exceeded our cash expenditures by only $108,000, in spite of net cash provided by financing activities of $3.9 million from January 1, 2002 through June 30, 2002. We are actively engaged in seeking additional financing in a variety of venues and formats and we continue to impose actions designed to minimize our operating losses. We would consider strategic opportunities, including investment in the Company, a merger or other comparable transaction, to sustain our operations. We do not currently have any agreements in place with respect to any such strategic opportunity, and there can be no assurance that additional capital will be available to us on acceptable terms, or at all. If we are unable to obtain additional financing or to arrange a suitable strategic opportunity, our business will be placed in significant financial jeopardy.

 

Our Independent Auditors have Stated that Our Recurring Losses from Operations and Our Accumulated Deficit Raise Substantial Doubt about Our Ability to Continue as a Going Concern.

 

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The report of KPMG LLP dated February 8, 2002 covering the December 31, 2001 consolidated financial statements contains an explanatory paragraph that states that our recurring losses from operations and accumulated deficit raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. We will need to raise more money to continue to finance our operations. We may not be able to obtain additional financing on acceptable terms, or at all. Any failure to raise additional financing will likely place us in significant financial jeopardy.

 

Our Prior Announcement that We Would be Winding Down Our Business Operations May Have A Detrimental Effect on Our Business.

 

During the first quarter of fiscal year 2002, our financial condition and availability of operating funds deteriorated significantly to the point that in early April 2002, it was determined that we would need to curtail our business operations and possibly consider filing for bankruptcy protection. We announced that our financial condition had reached a critical point in mid April 2002 at which time we publicly announced and began the process of furloughing employees as a part of the winding down of our business operations. We had announced that the complete cessation of our business operations was a likely possibility at that time. Subsequently, in May of 2002, before we finalized the winding down process, we received a commitment for sufficient additional financing to allow us to resume our full operations. The winding down of operations and our subsequent recommencement of our business did not have an adverse effect on the majority of our relationships with suppliers and customers, however, we did encounter certain non-recurring costs associated with the re-start of operations in our second quarter and expect that these costs will continue through the remainder of 2002. Although, to date we have not seen a significant adverse effect from our prior announcement of winding down and our subsequent recommencement of our business, there can be no assurances that it will not have an adverse effect on our future revenues and customer base in the long term. If we are unable to re-establish our manufacturing efficiency, including the ability to procure an orderly flow of manufacturing materials and supplies, we may subsequently have difficulty fulfilling orders and maintaining customers.

 

Our Financial Condition has Adversely Effected Our Ability to Pay Suppliers, Service Providers and Licensors on a Timely Basis Which May Jeopardize Our Ability to Continue Our Operations and to Maintain License Rights Necessary to Continue Shipments and Sales of Our Products.

 

We have engaged in negotiations with our creditors to restructure and reschedule our payment of certain obligations. On February 12, 2002, we closed a restructuring approximately $1.7 million of our trade debt, including approximately $1.0 million of a royalty obligation, pursuant to which 27 creditors agreed to discharge such debt and minimum royalty obligations in exchange for a total of 1.4 million shares of our common stock. As of June 30, 2002, our accounts payable totaled $3.2 million, of which $3.0 million was over 60 days old. We currently have arrangements with suppliers primarily on a cash basis as well as paying down certain outstanding amounts due when making a current payment. These payments of past-due amounts have averaged approximately $200,000 per month since the restart of operations in May, 2002. As of June 30, 2002 we have accrued an aggregate of approximately $412,000 in past due royalty obligations to our key patent licensors. We anticipate that this amount will be brought current by the end of 2002 under agreed payment plans that are in effect and are current. However, if we are unable to obtain additional financing on acceptable terms, our ability to make timely payments to our critical suppliers, service providers and to licensors of intellectual property used in our products will be jeopardized and we may be unable to obtain critical supplies and services and to maintain licenses necessary for us to continue to manufacture, ship and sell our products.

 

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The Company and the Price of Our Shares May be Adversely Affected By the Public Sale of a Significant Number of the Shares Eligible for Future Sale.

 

At June 30, 2002, approximately 62.5 million, or 80%, of the 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.

 

From inception through June 30, 2002, we have issued approximately 78 million shares and raised $86 million. At our Annual Meeting of Stockholders on September 20, 2001, our stockholders approved an increase in the number of authorized shares of the Company’s common stock from 50 million to 200 million shares. The continuing need to raise funds through the sale of equity in the Company will likely result in the issuance of a significant number of shares of common stock in relation to the number of shares currently outstanding. In the past, we have raised money through the sale of shares of our common stock at a discount to the current market price. Such arrangements have included the private sale of shares to accredited investors on the condition that we register such shares for resale by the investors to the public. These arrangements have taken various forms including private investments in public equities or “PIPE” transactions, equity lines of credit, and other transactions summarized in the table included in the “Liquidity and Capital Resources” section of MD&A in this document.

 

We will continue to seek financing on an as needed basis on terms that are negotiated in arms length transactions. Moreover, the perceived risk of dilution may cause holders of our common to sell shares, which would contribute to a decrease in our stock price. In this regard, significant downward pressure on the trading price of our stock may also cause investors to engage in short sales, which would further contribute to significant downward pressure on the trading price of our stock.

 

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We Have Issued or Reserved for Issuance Under Certain Convertible Securities A Large Portion of Our Currently Authorized Common Stock and Our Failure to Obtain Stockholder Approval for an Increase in Our Authorized Common Stock Will Have an Adverse Effect on Our Ability to Raise Working Capital Required to Fund Our Business Operations.

 

Our Amended Restated Certificate of Incorporation presently provides for 200,000,000 shares of common stock with a $.001 par value. Following the announced wind down of our business we commenced a restart of operations in May of 2002, and in order to do so, since the restart of our business operations we have issued a significant number of warrants, debentures and notes convertible into shares of our common stock as described in “Liquidity and Capital Resources” section of MD&A herein.

 

Upon conversion or exercise of these warrants, debentures and notes, depending upon the trading price of our common stock at the time of a conversion, we may have insufficient shares available for issuance or a limited number of remaining shares available for issuance from our current authorized shares of common stock. Essentially all of our 200 million authorized common shares are either issued and outstanding or reserved or otherwise necessary for the CIG investments. In the event we fail to obtain shareholder approval to an amendment to our Amended Restated Certificate of Incorporation authorizing an increase in the number of authorized shares of common stock, we may be compelled to change our business plans due to an inability to raise additional working capital through the issuance of available shares of common stock or we may fail to have a sufficient number of shares for issuance upon exercise or conversion of issued and outstanding convertible securities.

 

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We Have Incurred Losses in the Past and We Expect to Incur Losses in the Future.

 

We have incurred losses in each year since our inception. Our net loss for the six months ended June 30, 2002 was $5.6 million and our accumulated deficit as of June 30, 2002 was $93.7 million. We expect operating losses to continue for the next several quarters as we continue and expand our marketing and sales activities for our FDA-approved products and conduct additional research and development for product and process improvements and new products.

 

Risks Related to “Our Recent Financings” — Our Equity Line of Credit with Townsbury and the

Convertible Debentures and Warrants Agreement with Bristol and the CIG Financings

 

If the Price or the Trading Volume of Our Common Stock Does Not Sustain Certain Levels, We Will be Unable to Raise All or Substantially All of the Expected Proceeds Under Our Recent Financings, Which May Force Us to Significantly Curtail the Scope of Our Operations and Alter Our Business Plan.

 

The maximum amount of a draw down under the Townsbury equity line facility is equal to a formula based

 

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upon the weighted average price for our common stock and its trading volume during the 60 calendar day period immediately prior to the date that we deliver notice to Townsbury of our intention to exercise a draw down, multiplied by the number of days in the draw down period. We are allowed to exceed the maximum draw down amount only if we agree to set the minimum threshold price of the draw down, which is the stock price below which we will not draw down on the equity line, at 80% of the average of the five daily volume weighted average prices immediately prior to the issuance of the draw down notice. Days on which the price of our common stock is less than the minimum threshold price will be excluded from the calculation of the draw down amount and will therefore reduce the amount of funds that we may draw down.

 

As a result, if our stock price and trading volume fall below certain levels, then either the maximum draw down amount formula or the mandatory threshold price will probably prevent us from being able to draw down all $10 million pursuant to the Townsbury equity line facility. At current trading volume and pricing levels, we could draw the entire $10 million under the line, however should volume or price decrease, we might not be able to access the full amount of the line. For example, during the 60 calendar day period ended October 19, 2001, our weighted average stock price was $0.24 per share and our total trading volume was approximately 10.28 million shares. Based on those stock price and trading volume levels during such period, the maximum draw down amount available to us over the two-year term of the equity line facility would be approximately $4.4 million.

 

Similarly, the amount of funds that we may receive upon exercise of the warrants issued to Bristol in conjunction with the convertible debentures is likewise limited by our trading volume. We issued two types of warrants to Bristol — Class A and Class B warrants. Bristol has sole discretion over the exercise of the Class A warrants. However, Bristol may be obligated to exercise the Class B warrants whenever it converts the debentures and it is obligated to convert the debentures each month at a rate that will result in the exercise of a number of warrants equal to at least 7.5% of the trading volume of our shares for the 60 days immediately preceding the conversion. The exercise price of the Class B warrants is in turn set at the lesser of 75% of the average of the three lowest trading prices for our common stock for the twenty trading days immediately preceding the conversion and exercise and $0.215 per share. Accordingly, if the trading volume of our shares does not reach certain levels and our stock price declines significantly, the number of warrant shares that Bristol may exercise upon conversion of the debentures and the price that Bristol pays for such shares may decrease and reduce the amount of funds that we may receive upon exercise of the Class B warrants.

 

Therefore, if our trading volume and stock price decline, Bristol may not completely convert the debentures and the warrants, and we may not receive the approximately $2.1 million in expected proceeds from the conversions. If we are unable to draw down the full $10 million under the equity line and/or realize the expected proceeds from the debentures and warrants on a timely basis, we may have to curtail the scope of our operations as contemplated by our business plan.

 

A Delay in the Effectiveness of the Bristol Registration Statement Will Delay Our Access to the Additional Financing Committed Under the Agreement.

 

The SEC is currently reviewing our amendment of the registration statement and there can be no assurance when or if it will be declared effective. As a result, the timing of approximately $1.7 million of these expected proceeds is uncertain. There is no assurance that the SEC will approve the form of debt and warrants in the registration statement or that we will be able to access any additional funds related to this transaction. Any undue delay in receipt of these proceeds could place us in significant financial jeopardy, depending on the timing and success of the private investment group funding commitments.

 

We May Be in Default In Payment of Principal and Interest Under the Terms of Our Previously Issued 8%

 

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Convertible Notes.

 

Under the terms of the subscription agreements for our 8% Convertible Notes, we agreed to file a registration statement for the shares of common stock underlying the notes and use our reasonable commercial efforts to cause the registration statement for the shares to be declared effective within ninety days of the closing date. To date, despite our efforts, due to a prior pending registration statement, we have been unable to file a registration statement for the shares of common stock underlying the 8% Convertible Notes. In the event of a registration default under the terms of the agreement, we may be required to pay, at the Holder’s option, in cash or stock, as liquidated damages an amount equal to 2% of the note principal per month in addition to the principal amount of the note.

 

Our “Recent Financings” and the Issuance of Shares to the “Recent Financings” May Cause Significant Dilution to Our Stockholders and May Have a Negative Impact on the Market Price of Our Common Stock.

 

The resale by Townsbury and Bristol and the investors through CIG of the common stock that they purchase from us has increased and will continue to increase the number of our publicly traded shares, which could put downward pressure on the market price of our common stock. Moreover, as all the shares we sell to the investors will be available for immediate resale, the mere prospect of our sales to the investors could depress the market price for our common stock. The shares of our common stock issuable to Townsbury under the equity line facility will be sold at 88% of the daily volume weighted average price of our common stock on the date of purchase subject to adjustment if our market capitalization increases significantly. If we were to require Townsbury to purchase our common stock at a time when our stock price is low, our existing stockholders would experience substantial dilution.

 

Similarly, the shares of our common stock issuable to the Bristol upon conversion of the debenture and upon exercise of the Class A warrant will be issued at a price equal to the lesser of 70% of the average of the 3 lowest trading prices of our common stock during the 20 trading days immediately preceding the conversion or exercise or at $0.115 per share and the shares issuable pursuant to the exercise of the Class B warrants will be issued at an exercise price equal to the lesser of 75% of the average of the 3 lowest trading prices of our common stock during the same period or $0.215 per share. We are registering 16 million shares for resale upon debenture conversions.

 

Further, the investors that have come to us through CIG have the ability to purchase shares of new common stock or to convert their Notes and Debentures, and their related warrant shares based upon the market price of our common stock. The common stock and the common stock underlying the notes and debentures issued to CIG investors are unregistered and all of the agreements include ownership limitations by the investors that would prohibit a change of control. None of the Recent Financings permit ownership by the respective investors of more than 9.9% of the Company’s outstanding stock without the Company’s agreement. These common shares as well as the notes and debentures areconvertible at discounts to the market price of our common stock.

 

Refer to the table in the “Liquidity and Capital Resources” section of MD&A for a summary of potential dilution by type of security to the Recent Financings.

 

Consequently, the issuance of shares to Townsbury pursuant to the equity line facility and to Bristol upon conversion and exercise of the debentures and warrants and to CIG investors on the purchase of their shares or the conversion of their Notes and Debentures will dilute the equity interest of existing stockholders and could have an adverse effect on the market price of our common stock. In addition, depending on the price per share of our common stock during the life of these financings, we may need to

 

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register additional shares for resale to access the full amount of financing available, which could have a further dilutive effect on the value of our common stock.

 

The perceived risk of dilution may cause our stockholders to sell their shares, which would contribute to a downward movement in the stock price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.

 

We Cannot Determine the Precise Amount by Which the Interests of Our Stockholders Will Be Diluted by Draw Downs and Conversions Under the Recent Financings Because the Number, Size and the Timing of Draw Downs, Debenture and Warrant Conversions, and the Minimum Threshold Price for Each Depends Upon a Number of Factors.

 

We have substantial discretion and are also subject to mandatory requirements regarding the number, size and timing of the draw downs and debt and warrant conversions that will occur under the Recent Financings. In addition, when we are not subject to mandatory draw downs under the equity line, at the time we make a draw down request, we have the right to limit the amount of dilution that will occur by setting a minimum threshold price below which shares may not be sold in that draw down. However, if we set the minimum threshold price at a level high enough to limit the sale of our shares, the amount of funds we can raise in that draw down will also be reduced. Some of the factors that we will consider in determining the size and amount of each draw down and the minimum threshold price are:

 

    our short-term and long-term operating capital requirements;

 

    our actual and projected revenues and expenses;

 

    our assessment of general market and economic conditions;

 

    our assessment of risks and opportunities in our targeted markets;

 

    the availability and cost of alternative sources of financing; and

 

    the trading price of our common stock and our expectations with respect to its future trading price.

 

Our discretion with respect to the number, size and timing of each draw down request is also subject to a number of contractual limitations.

 

We Cannot Determine the Precise Amount by Which the Interests of Other Stockholders Will be Diluted by Sales of Our Common Stock Under the Recent Financings Because the Number of Shares We Will Issue Depends Upon the Trading Price of the Shares During each Equity Line Draw Down and Debenture Conversion Period.

 

The number of shares that we will issue is directly related to the trading price and volume of our common stock preceding and during each draw down and debt conversion period. If the price of our common stock decreases, and if we decide to or are required to draw down on the equity line of credit, we will be required to issue more shares of our common stock for any given dollar amount invested by Townsbury. Similarly, the number of shares issuable pursuant to conversions of the debenture and the exercise of the Class B warrants increases as the trading price of our common stock decreases, although such number of shares is

 

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subject to a minimum equal to 12.5% of the trading volume for the 60 trading days immediately preceding the date of conversion up to a maximum of 2 million shares per month, which maximum may be waived by the Company. Accordingly, investors may find it difficult to predict the number of shares of our common stock that will be sold on the public market and which may adversely affect the market price of our common stock.

 

The Sale of Material Amounts of Our Common Stock Could Reduce the Price of Our Common Stock and Encourage Short Sales.

 

As we issue shares of our common stock to Townsbury and Bristol pursuant to the Recent Financings and the investors then resell the common stock, our common stock price may decrease due to the additional shares in the market. As the price of our common stock decreases, and if we or as we decide to draw down on the equity line of credit, and as we are required to issue shares upon conversions of the debentures and Class B warrants, we will be required to issue more shares of our common stock for any given dollar amount invested by Townsbury and Bristol. This may encourage short sales, which could place further downward pressure on the price of our common stock.

 

Because the Investors in the Recent Financings are Residents of Foreign Countries, It May be Difficult or Impossible to Obtain or Enforce Judgments Against Them and the Investors are also Subject to United States and Foreign Laws that Could Affect Our Ability to Access the Funds.

 

Both Townsbury and Bristol, and the unaffiliated investors who comprise CIG are off-shore residents and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult or impossible to effect service of process on the investors within the United States. It may also be difficult or impossible to enforce judgments entered against the investors in courts in the United States based on civil liability provisions of the securities laws of the United States. In addition, judgments obtained in the United States, especially those awarding punitive damages, may not be enforceable in foreign countries.

 

As overseas investment funds, the investors are also subject to United States and foreign laws regulating the international flow of currency over which we have no control and which could affect the availability of the funds. Any delay in our ability to receive funds under the Recent Financings when expected could prevent us from receiving necessary capital and place us in significant financial jeopardy.

 

We Have Recently Reduced the Exercise Price of Certain Warrants Issued to Investors Which In Turn May Result in Dilution to Existing Shareholders As Well As a Downward Pressure on the Trading Price of Our Common Stock.

 

In accordance with the terms of previously negotiated warrants, we had the ability to reduce the exercise price of certain outstanding warrants, which may induce the warrant holder to exercise the warrants. We re-priced from $0.27 to $0.015 a 4.2 million share warrant issued pursuant to our equity line to Townsbury. The investor has exercised the warrant for the entire 4.2 million shares of our common stock and we received $63,000 in net proceeds. The reduction in exercise price served as a stimulus for the exercise and issuance of underlying shares of our common stock, which may have a dilutive effect on existing shareholders and place downward pressure on the trading price of our common stock otherwise known as a market overhang. We do not intend to issue securities that allow for reduction in the negotiated exercise price in the future unless the Company has no alternative with respect to raising financing for its continued operations

 

Under the Terms of Our Recent Financings We Have or May Have to Grant Partial or Complete Liens On Substantially All of Our Assets

 

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In the event of a default under the terms of securities purchase agreements obtained as part our Recent Financings to date and in the future, the security holders can typically foreclose on the security interest in our assets. If this were to happen, we may be required to file a petition under Chapter 11 of the Bankruptcy Code seeking protection, or file Chapter 7 and liquidate.

 

Risks Related to the Market for Our Common Stock

 

We Have Been Removed From the Nasdaq SmallCap Market and We Are Uncertain How Trading on the Over the Counter Bulletin Board Will Affect the Liquidity and Share Value of Our Stock.

 

On July 13, 2001 our stock was removed from trading on the Nasdaq SmallCap Market as a result of the failure to comply with the Nasdaq Stock Market rules that required the minimum bid price for our common stock to exceed $1.00 per share and that we meet at least one of the following criteria:

 

    Have net tangible assets equal at least $2.0 million;

 

    Have market capitalization is equal to $35.0 million in public float; or

 

    recognize net income of at least $500,000 in our most recent fiscal year or in two of our three previous fiscal years.

 

Beginning on July 13, 2001, our stock has traded on the Over-the-Counter Bulletin Board. Although the per share price of our common stock has declined since it was delisted from the Nasdaq SmallCap Market, trading volume in our stock has remained fairly constant. We are uncertain, however, about the long-term impact, if any, on trading volume and share value as a result of trading on the Over-the-Counter Bulletin Board.

 

The Price of Our Common Stock Has Been Highly Volatile Due to Several Factors Which Will Continue to Affect the Price of Our Stock.

 

Our common stock has traded as low as $0.012 per share and as high as $0.580 per share in the twelve months ended June 30, 2002. Some of the factors leading to the volatility include:

 

    concerns about our ability to finance our continuing operations, including the impact of the April 17, 2002 announcement of our wind down;

 

    price and volume fluctuations in the stock market at large which do not relate to our operating performance;

 

    fluctuations in our operating results;

 

    financing arrangements, including the Recent Financings, and other financings, including but not limited to the investment commitment from the private investment group which may require the issuance of a significant number of shares in relation to the number of shares currently outstanding;

 

    announcements of technological innovations or new products which we or our competitors make;

 

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    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

 

    fluctuations in market demand for and supply of our products.

 

An 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 continue on the Over the Counter Bulletin Board. The average daily trading volume in our common stock on the Over the Counter Bulletin Board from the start of trading on July 13, 2001 through June 30, 2002 was approximately 441,000 shares. Daily volume during that period ranged from 13,200 shares to 7,019,600 shares. The average daily trading volume in our common stock on the Nasdaq SmallCap Market was approximately 386,000 shares for the twelve months ended July 12, 2001. Our daily volume during that period ranged from 33,800 to 22,257,600 shares.

 

Our Issuance of Warrants and Options to Consultants for Services May Have a Negative Effect on the Trading Price of Our Common Stock.

 

As of June 30, 2002, we have issued as consideration to several individual unaffiliated consultants performing legal, financial and advisory services in connection with the recommencement of our business operations a total of 18.5 million warrants exercisable at $0.015 per warrant share and 500,000 options exercisable at $0.03 per share. At the time the warrants and options were granted, the trading price of Calypte’s stock was $0.03. The consultants have exercised the warrants and options and the Company has issued and registered the underlying 13,333,333 shares. As we continue to look for ways to minimize our use of cash while obtaining required services, we plan to issue additional warrants and options at or below the current market price. Any such offerings will be disclosed in a subsequent registration statement. In addition to the potential dilutive effect of a large number of shares and a low exercise price for the warrants and options, there is the potential that a large number of the underlying shares may be sold on the open market at any given time, which could place downward pressure on the trading price of our common stock.

 

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Our Common Stock is Subject to the “Penny Stock” Rules of the SEC and the Trading Market In Our Securities is Limited, Which Makes Transaction in Our Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.

 

Shares of our common stock are “penny stocks” as defined in the Exchange Act, which are traded in the Over-The-Counter Market on the OTC Bulletin Board. As a result, investors may find it more difficult to dispose of or obtain accurate quotations as to the price of the shares of the common stock being registered hereby. In addition, the “penny stock” rules adopted by the Commission under the Exchange Act subject the sale of the shares of our common stock to certain regulations which impose sales practice requirements on broker/dealers. For example, brokers/dealers selling such securities must, prior to effecting the transaction, provide their customers with a document that discloses the risks of investing in such securities. Included in this document are the following:

 

  ·   The bid and offer price quotes in and for the “penny stock”, and the number of shares to which the quoted prices apply.

 

  ·   The brokerage firm’s compensation for the trade.

 

  ·   The compensation received by the brokerage firm’s sales person for the trade.

 

In addition, the brokerage firm must send the investor:

 

  ·   A monthly account statement that gives an estimate of the value of each “penny stock” in the investor’s account.

 

  ·   A written statement of the investor’s financial situation and investment goals.

 

Legal remedies, which may be available to you as an investor in “penny stocks”, are as follows:

 

  ·   If “penny stock” is sold to you in violation of your rights listed above, or other federal or states securities laws, you may be able to cancel your purchase and get your money back.

 

  ·   If the stocks are sold in a fraudulent manner, you may be able to sue the persons and firms that caused the fraud for damages.

 

  ·   If you have signed an arbitration agreement, however, you may have to pursue your claim through arbitration.

 

If the person purchasing the securities is someone other than an accredited investor or an established customer of the broker/dealer, the broker/dealer must also approve the potential customer’s account by obtaining information concerning the customer’s financial situation, investment experience and investment objectives. The broker/dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the Commission’s rules may limit the number of potential purchasers of the shares of our common stock.

 

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Resale restrictions on transferring “penny stocks” are sometimes imposed by some states, which may make transaction in our stock more difficult and may reduce the value of the investment. Various state securities laws pose restrictions on transferring “penny stocks” and as a result, investors in our common stock may have the ability to sell their shares of our common stock impaired.

 

Risks Related to Our Business

 

Our 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 and our HIV and STD testing service gain market acceptance;

 

    the timing and size of distributor purchases;

 

    introductions of alternative means for testing for HIV by competitors; and

 

    customer concerns about the stability of our business which could cause them to seek alternatives to our products.

 

We Have Limited Experience Selling and Marketing Our HIV-1 Urine-Based Screening Test.

 

Our urine-based products incorporate a unique method of determining the presence of HIV antibodies and we have limited experience marketing and selling them either directly or through our distributors. Calypte’s success depends upon the ability of domestic marketing efforts to penetrate expanded markets and upon alliances with third-party international distributors. There can be no assurance that:

 

    our direct selling efforts will be effective;

 

    we will obtain any expanded degree of market acceptance among physicians, patients or health care payors; or others in the medical or public health community which are essential for expanded market acceptance of the products;

 

    our international 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.

 

We have had FDA approval to market our urine HIV-1 screening and supplemental tests in the United States and have been marketing these products since July 1998. We have achieved significant market penetration within the domestic life insurance industry. Based upon our internal estimates, we believe that as of the end of 2001, out of approximately 7 million HIV-1 tests given by the domestic life insurance industry in 2001,

 

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approximately 0.7 million were administered with our urine based tests. However, we have not achieved significant marketing penetration in domestic public health agencies or international markets. Any disruption in our distribution, sales or marketing network could reduce our sales revenues and cause us to either cease operations or expend more resources on market penetration.

 

Our Distribution and Sales Network for U.S. Hospitals, Public Health and Reference Laboratory Markets Has Thus Far Failed to Yield Significant Sales and Revenues.

 

Domestic health agencies are a fragmented marketplace with many small outlets which makes achieving market acceptance difficult. In that we lack sufficient working capital, we have experienced difficulty in penetrating independent public health markets and agencies, as sales to public agencies require direct selling efforts. As a result, we entered into distribution agreements with distributors of medical products to domestic healthcare markets, including the distribution agreement announced in September 1999 with Carter Wallace Inc. and the Sentinel HIV and STD Testing Service announced in May 2000. Due to the fragmented nature of the domestic health care market place, among other factors that may have been encountered by the distributor, these agreements did not yield significant sales and revenues and we terminated the agreement with Carter-Wallace effective March 31, 2001. We have expanded our own direct sales force to penetrate the domestic healthcare markets and, in conjunction with other business partners, have re-launched Sentinel. If our efforts to market our products to domestic hospitals, public health and reference laboratories fail to yield significant amounts of revenue, we may have to cease operations.

 

We Depend Upon the Viability of Three Primary Products — Our HIV-1 Urine-Based Screening Test and Our Urine and Blood Based Supplemental Tests.

 

Our HIV-1 urine-based screening test and urine and blood-based supplemental tests are our only products. In addition, we have from time to time been able to make significant sales of our HIV viral lysate or antigen stock (a protein or carbohydrate substance capable of stimulating an immune response) that we use in producing our Western Blot tests. Our HIV viral lysate is an inactivated and disrupted HIV virus preparation used in, and is a byproduct of, the manufacturing of our Western Blot supplemental test. Accordingly, we may have to cease operations if our screening and supplemental tests fail to achieve market acceptance or generate significant revenues.

 

We Have Experienced a Decrease in the Sale of Our Cambridge Biotech Serum Western Blot Test.

 

Our Cambridge Biotech HIV -1 Serum Western Blot kit is the first of four supplemental blot tests for blood HIV-1 antibodies licensed by the FDA. The Western Blot test has been in commercial distribution for more than nine years. We sell the serum based Western Blot test for HIV-1 as a supplemental test to HIV-1 screening test products made by other manufacturers. In our most recent fiscal year, serum Western Blot sales accounted for 42% of our revenues and sales of our Western Blot test to bioMerieux Inc. accounted for a total 25% of our sales revenues. Subsequent to our re-start of operations in May 2002, we have not sold any of our Western Blot test to bioMerieux although we have signed several new customers. As there is limited competition in the supplemental testing market and the cost and time attributed to the only known production process makes it unlikely that additional companies will seek to qualify and engage in the production of these supplemental tests, we expect to regain our market share. Until this occurs, the loss in sales to bioMerieux will have a detrimental impact on our cash flow and may (1) delay or disrupt our plans to expand the Company’s business and (2) require us to raise additional equity capital, thereby further increasing dilution, which could place further downward pressure on the price of our common stock.

 

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We May Experience a Decrease In The Sales Of Our HIV Viral Lysate Which Previously Accounted For a Material Amount Of Our Revenue.

 

Our HIV viral lysate is a component of the production of our urine based screening tests. There is a limited demand for our HIV viral lysate, which we have in the past been able to sell to certain customers. The sale of our viral lysate accounted for approximately 20% of our revenue for the fiscal year ended December 31, 2001. This large percentage of revenues attributed to the sale of our HIV viral lysate may have resulted from our principal customer stockpiling larger than normal quantities of our viral lysate in light our tenuous financial condition in an effort to avoid a potential interruption of supply. Due to our principal customer stockpiling viral lysate, we may experience a decrease in the level of our sales of HIV viral lysate. However, as we view our HIV viral lysate as a manufacturing component, the sale of the viral lysate is not considered to be a major contributor to our anticipated future revenue but rather a supplemental revenue source.

 

We May Not be Able to Successfully Develop and Market New Products That We Plan to Introduce.

 

We plan to develop other urine-based diagnostic products including a rapid HIV screening test and tests for other infectious diseases or health conditions. There are numerous developmental and regulatory issues that may preclude the introduction of these products into commercial sale. If we are unable to demonstrate the feasibility of these products or meet regulatory requirements with respect to their marketing, we may have to abandon them and alter our business plan. Such modifications to our business plan will likely delay achievement of milestones related to revenue increases and achievement of profitability.

 

Our Products Depend Upon Rights to Technology That We Have Licensed From Third Party Patent Holders and There Can be No Assurance That the Rights We Have Under These Licensing Agreements are Sufficient or That We Can Adequately Protect Those Rights.

 

We currently have the right to use patent and proprietary rights which are material to the manufacture and sale of our HIV-1 urine-based screening test under licensing agreements with New York University, Cambridge Biotech Corporation, Repligen Corporation, and the Texas A&M University System. We also have the right to use patent and proprietary rights material to the manufacture and sale of our HIV-1 serum-based supplemental test under a licensing agreement with National Institutes of Health. In the event that our financial condition inhibits our ability to pay royalty payments due under our license agreements, our rights to use those licenses could be jeopardized. Specifically, in the past fiscal year, revenues subject to the New York University, Cambridge Biotech, Repligen and Texas A&M license agreements were $2.0 million and revenues subject to the National Institutes of Health agreement were $4.3 million. The loss of any of the foregoing licenses could have a materially adverse effect on our ability to continue to produce our products in that the license agreements provide necessary proprietary processes or components for the manufacture of our products. As of June 30, 2002 we had accrued an aggregate of approximately $412,000 in past due royalty obligations to our patent licensors.

 

We Rely on Sole Source Suppliers that We Cannot Quickly Replace for Certain Components Critical to the Manufacture of Our Products.

 

Among the critical items we purchase from sole qualified source suppliers are various conjugates, fetal bovine serum, and HIV-positive and HIV-negative urine samples. Any delay or interruption in the supply of these or other sole source components could have a material adverse effect on us by significantly impairing our ability to manufacture products in sufficient quantities, particularly as we increase our manufacturing activities in support of commercial sales. In addition, if our financial condition reduces our ability to pay for critical components on a timely basis, it may cause suppliers to delay or cease selling critical components to us, which could also impair our ability to manufacture. We typically do not have long-term supply agreements with these suppliers, instead using purchase orders to arrange for our purchases of materials.

 

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We Have Limited Experience in Manufacturing Our Products and Little Experience in Manufacturing Our Products In Commercial Quantities.

 

Our lack of working capital has resulting in material production difficulties in the past including problems involving:

 

    scaling up production of new products;

 

    developing market acceptance for new products;

 

    production yields;

 

    quality control and assurance;

 

    raw material supply; and

 

    shortages of qualified personnel.

 

These difficulties that we have had and may experience in the future could affect our ability to meet increases in demand should our products gain market acceptance and reduce growth in our sales revenues. Any such difficulty would affect our ability to meet increases in demand should our products gain market acceptance and reduce growth in our sales revenues.

 

The Success of Our Plans to Enter International Markets May Be Limited or Disrupted Due to Risks Related to International Trade and Marketing and the Capabilities of Us and 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 or other bodily fluid samples. However, sales to international customers in the first half of 2002 accounted for 1% of our revenue. A majority of the companies we compete with in the sale of HIV screening test actively market their diagnostic products outside of the U.S. In addition, as regulatory requirements for HIV screening tests outside the United States are less demanding than those of the FDA, we compete with our EIA products against a much wider range of competitors that may not be FDA approved. Manufacturers from Japan, Canada, Europe, and Australia offer a number of HIV screening tests in those markets including HIV-1/HIV-2 tests, rapid tests and other non-EIA format tests, which are not approved for sale in the US market. There can be no assurances that our products will compete effectively against these products in foreign markets, or that these competing products will not achieve FDA approval. The following risks may limit or disrupt our international sales:

 

    the imposition of government controls (regulatory approval);

 

    export license requirements;

 

    political instability;

 

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    trade restrictions;

 

    changes in tariffs;

 

    difficulties in managing international operations (difficulty in establishing a relationship with a foreign distributor with the financial and logistical ability to maintain quality control of product);

 

    fluctuations in foreign currency exchanges rates;

 

    the financial stability of our distributors;

 

    the ability of our distributors to successfully sell into their contractual market territory or to successfully cover their entire territory;

 

    the possibility that a distributor may be unable to meet minimum contractual commitments; and

 

    establishing market awareness.

 

Some of our distributors have limited international marketing experience. There can be no assurance that these distributors will be able to successfully market our products in foreign markets. Any such failure will delay or disrupt our plans to expand the Company’s business.

 

We Face Intense Competition in the Medical Diagnostic Products Market and Rapid Technological Advances by Competitors.

 

Competition in our diagnostic market is intense and we expect it to increase. The marketplace where we sell our products is divided into two segments: (i) screenings, and (ii) confirmatory testing. Within the United States, our competitors for screening test include a number of well-established manufacturers of HIV tests using blood samples, plus at least one system for the detection of HIV antibodies using oral fluid samples sold by Orasure Technologies, Inc. With the confirmatory segment of the market, we offer the only FDA approved urine-based test in conjunction with a blood-based test. Bio-RAD Laboratories, Inc. is the only other company that offers a confirmatory blood test. In addition to our urine and blood-based confirmation test, Orasure also offers a saliva based confirmatory test that competes with our test. Many of our competitors have significantly greater financial, marketing and distribution resources than we do. Our competitors may succeed in developing or marketing technologies and products that are more effective than ours. These developments could render our technologies or products obsolete or noncompetitive or otherwise affect our ability to increase or maintain our products’ market share.

 

Our Ability to Market Our Product Depends Upon Obtaining and Maintaining FDA and Foreign Regulatory Approvals.

 

Numerous governmental authorities in the United States and other countries regulate our products. The FDA regulates our products under federal statutes and regulations related to pre-clinical and clinical testing, manufacturing, labeling, distribution, sale and promotion of medical devices in the United States. In addition, our facilities are inspected periodically by the FDA with regard to the sufficiency of our manufacturing records and production procedures and we must continue to satisfy the FDA’s concerns in order to avoid regulatory action against us.

 

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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 by delaying or reducing the growth in our sales revenue or causing us to expend more resources to penetrate our target markets. The regulatory approval process in the United States and other countries is expensive, lengthy and uncertain. We may not obtain necessary regulatory approvals or clearances in a timely manner, if at all. We may lose previously obtained approvals or clearances or fail to comply with regulatory requirements. The occurrence of any of these events would be likely to have a material adverse effect on Calypte by disrupting our marketing and sales efforts.

 

Our Research and Development of HIV Urine Tests Involves the Controlled Use of Hazardous Materials.

 

There can be no assurance that the Company’s safety procedures for handling and disposing of hazardous materials such as azide (a chemical added to some of the liquid Calypte kit components to act as a preservative. If present in high concentrations, there is a possibility of an explosive reaction if not diluted with water) 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 the Company.

 

We May Not Be Able to Retain Our Key Executives and Research and Development Personnel.

 

As a small company, our success depends on the services of key employees in executive and research and development positions. The loss of the services of one or more of such employees could have a material adverse effect on us.

 

As a Small Manufacturer of Medical Diagnostic Products, We Are Exposed to Product Liability and Recall Risks For Which Insurance Coverage is Expensive, Limited and Potentially Inadequate.

 

We manufacture medical diagnostic products, which subjects us to risks of product liability claims or product recalls, particularly in the event of false positive or false negative reports. A product recall or a successful product liability claim or claims that exceed our insurance coverage could have a material adverse effect on us. We maintain a $10,000,000 claims made policy of product liability insurance. However, product liability insurance is expensive. In the future we may not be able to obtain coverage on acceptable terms, if at all. Moreover, our insurance coverage may not adequately protect us from liability that we incur in connection with clinical trials or sales of our products.

 

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Our Charter Documents May Inhibit a Takeover.

 

Certain provisions of our Certificate of Incorporation and Bylaws could:

 

    discourage potential acquisition proposals (i.e. shareholder rights plan also known as a “poison pill”);

 

    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;

 

    inhibit increases in the market price of our common stock that could result from takeover attempts; or

 

    grant to the Board of Directors discretionary right to designate specific rights and preferences of preferred stock greater than those of our common stock.

 

We Have Adopted a Stockholder Rights Plan That Has Certain Anti-takeover Effects.

 

On December 15, 1998, the Board of Directors of Calypte declared a dividend distribution of one preferred share purchase right (“Right”) for each outstanding share of common stock of the Company. The dividend was payable to the stockholders of record on January 5, 1999 with respect to each share of common stock issued thereafter until a subsequent “distribution date” defined in a Rights Agreement and, in certain circumstances, with respect to shares of common stock issued after the Distribution Date.

 

The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on the Rights being redeemed or a substantial number of Rights being acquired. However, the Rights should not interfere with any tender offer, or merger, which is approved by the Company because the Rights do not become exercisable in the event of an offer or other acquisition exempted by Calypte’s Board of Directors.

 

Our Board of Directors has Certain Discretionary Rights With Respect to Our Preferred Shares That May Adversely Effect the Rights of our Common Stockholders

 

Our Board may without shareholder approval designate and issue our preferred stock in one or more series. Additionally, our Board may designate the rights and preferences of each series of preferred stock it designates which may be greater than the rights of our common stock. Potential effects on our common stock may include among other things:

 

    restricting dividends;

 

    dilution of voting power;

 

    impairment of liquidation rights; and

 

    delay or preventing a change in control of the Company.

 

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

 

We have exposure to changes in the price of our common stock, as it relates to the conversion price of the 12% convertible debentures and the exercise price of the related exercisable Class A and mandatorily exercisable Class B warrants issued to Bristol Investment Fund in February 2002 as disclosed in Note 6 to the condensed consolidated financial statements and in the “Financing Activities” subheading of Liquidity

 

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and Capital Resources in Part I, Item 2. We also face exposure to changes in the price of our common stock as it relates to the conversion price of the aggregate of $2,225,000 face value of 8% convertible notes issued during the second quarter of 2002, also disclosed in Note 6 to the condensed consolidated financial statements and in Financing Activities.

 

The 12% debentures issued to Bristol are convertible at a price (the Conversion Price) equal to the lesser of (i) the average of the lowest three trading prices during the 20 days immediately prior to the conversion date discounted by 30%, and (ii) $0.115. The Class A warrant for up to 1,700,000 shares of common stock is exercisable at a price per share equal to the Conversion Price. The Class B warrant for up to 12,000,000 shares of common stock is exercisable at a price equal to the lesser of (i) the average of the lowest three trading prices during the 20 days immediately prior to the exercise price discounted by 25%; and $0.215 per share.

 

In addition, until such time that a registration statement covering the shares related to the Class A and Class B warrants described above is declared effective, the fair value of these warrants will be marked to market through earnings.

 

The 8% notes issued in May 2002 and thereafter are convertible into shares of the Company’s common stock at the lower of $0.10 or 70% of the average of the three lowest trades during the 30-day period preceding conversion.

 

There have been no other material changes in the Company’s market risk exposure since December 31, 2001.

 

 

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PART II. OTHER INFORMATION

 

Item 2.   Changes in Securities and Use of Proceeds

 

During the three years ended June 30, 2002, the Company completed private placements of shares of its Common Stock in January 1999, April 1999, April 2000, November 2001; issued $1.1 million face value of convertible debentures in January 2001, issued $425,000 face value of 12% convertible debentures in February 2002 and an additional $100,000 face value to the same party and under the same terms in May2002; and in May 2002 also issued $2.225 million face value of 8% convertible notes and a $0.150 million convertible promissory note. In June 2002, the Company issued a $0.1 million face value 8% convertible. Additionally, in January 2001 the Company entered in a stock sale and purchase agreement in a form generally referred to as an equity line of credit or equity draw down facility. Upon the termination of that facility, the Company entered into a second equity line facility in August 2001. See “Financing Activities” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section. The shares sold in each of the private placements and pursuant to the equity line of credit facility were exempt from registration with the Securities and Exchange Commission pursuant to Section 4(2) or Rule 506 of Regulation D of the Securities Act of 1933 as amended (“Securities Act”). Shares were sold only to accredited investors as defined in Rule 501 of the Securities Act and, with the exception of shares in the most recent private placement in November 2001,were registered for resale by such investors on Forms S-3 filed on March 30, 1999, and March 13, 2000 for the private placements and on Form S-2 filed on January 25, 2001 and subsequently amended on February 9, 2001 and March 5, 2001 for the first equity line of credit. Shares sold pursuant to the second equity line were registered for resale by the investor on a Form S-2 filed on October 26, 2001. Shares issued in the November 2001 private placement were also sold to accredited investors but the transfer of the securities did not include registration rights; pursuant to Rule 144 of the Securities Act the transfer of these securities will be restricted for twelve months from the date of purchase. The debentureholder in the $1.1 million transaction was also an accredited investor as defined by Rule 501 of the Securities Act and the Company registered for resale shares that were converted pursuant to the debenture agreements on Form S-3 filed on April 13, 2001. The proceeds from each private placement, from each of the debentures, and from the equity lines of credit have been used to finance operations.

 

In February 2002, the Company entered into an agreement to issue up to $850,000 face value of 12% secured convertible debentures. The Company issued one debenture in the face amount of $425,000 concurrent with signing the agreement and a second debenture in the face amount of $100,000 in May 2002. The Company also issued warrants to purchase up to 13,785,000 shares of its common stock in conjunction with the convertible debenture agreement. During the second quarter of 2002, the investor converted principal of approximately $60,000 plus accrued interest attributable to the February debenture into 4,462.425 shares of restricted common stock. No warrants have been exercised as of June 30, 2002. The Company filed a registration statement on Form S-2 for resale of the shares by the investor pursuant to conversion of the debentures or exercise of the warrants on March 20, 2002. At July 31, 2002, the registration statement is not yet effective. The proceeds from the debentures were used to finance operations.

 

During May 2002, in conjunction with the restart of its operations, the Company issued $2.225 million face value of 8% convertible notes, a $0.150 million face value convertible promissory note and a $0.1 million face value 8% convertible debenture to several accredited offshore investors pursuant to subscription agreements under Regulation S. The agreements provide cost-free registration rights to the

 

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holders of the notes and debentures for the registration of the underlying conversion shares of the Company’s common stock. The Company has not yet filed a registration statement applicable to these transactions. The proceeds from the notes and debentures were used to finance operations.

 

Item 4.   Submission of Matters to a Vote of Security Holders

 

No items were submitted to a vote of security holders during the second quarter of 2002.

 

Item 5.   Other Information – Subsequent Events

 

Between July 1 and August 5, 2002, in addition to $0.4 million received under our equity line with Townsbury, Calypte has received an additional $0.825 million in financing in the form of 3 additional 8% convertible notes and an 8% convertible debenture. See the table in Liquidity and Capital Resources – Financing Activities for additional information, again primarily pursuant to the CIG commitments.

 

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On July 14, 2002, Calypte and BNC Bach agreed to extend the maturity date of the $150,000 10% convertible promissory note issued on May 14, 2002 from July 14, 2002 to December 31, 2002. The market price for Calypte Common Stock was $0.21 on July 14, 2002. In return for the extension of the maturity date, Calypte has agreed to amend the conversion price of the note from $0.05 per share to the lesser of (a) $0.05 per share or (b) 60% of the lowest three closing bid prices of Calypte’s common stock during the 22 business days prior to the date the investor notifies Calypte of its election to convert the note.

 

Two consultants who had been granted warrants to purchase 2,500,000 and 1,500,000 shares of the

 

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Company’s stock at $0.015 per share exercised their warrants in their entirety. The consultant who had been granted an option to purchase 500,000 shares of the Company’s stock at $0.03 per share, exercised his option in its entirety. The Company received proceeds of $75,000 from the exercises of the option and warrants.

 

Item 6.   Exhibits and Reports on Form 8-K

 

a.

  

Exhibits

      
    

Exhibit 10.112 Form of Subscription Agreement and 8% Convertible Note issued June 17, 2002 by Registrant*

      
    

Exhibit 10.113 Employment Agreement between the Registrant and Anthony J. Cataldo dated May 10, 2002.*

      
    

Exhibit 10.114 Amendment to Non-Exclusive Patent and License Agreement between Registrant and Public Health Service, dated April 5, 2002.*

      

b.

  

Reports on Form 8-K

      
    

None.

 

*   Previously filed

 

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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:

 

February 4, 2003

     

By:

 

/s/  Richard D. Brounstein


               

Richard D. Brounstein

Executive Vice President and Chief Financial Officer

(Principal Accounting Officer)

 

 

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CERTIFICATION PURSUANT TO

THE SARBANES-OXLEY ACT OF 2002

 

I, Anthony J. Cataldo, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q/A (No. 2) of Calypte Biomedical Corporation;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

Date: February 4, 2003

 

/s/ Anthony J. Cataldo        


Anthony J. Cataldo

Executive Chairman

 

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CERTIFICATION PURSUANT TO

THE SARBANES-OXLEY ACT OF 2002

 

I, Nancy E. Katz, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q/A (No. 2) of Calypte Biomedical Corporation;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

Date: February 4, 2003

 

/s/  Nancy E. Katz         


Nancy E. Katz

Chief Executive Officer

 

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CERTIFICATION PURSUANT TO

THE SARBANES-OXLEY ACT OF 2002

 

I, Richard D. Brounstein, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q/A (No. 2) of Calypte Biomedical Corporation;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

Date: February 4, 2003

 

/s/ Richard D. Brounstein


Richard D. Brounstein

Executive Vice President and Chief Financial Officer

 

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