non-professionals and a safe, non-invasive oral fluid test, we expect strong
demand for our initial test.
Beijing Marr has existing manufacturing facilities that have been renovated and
upgraded for the production of our AwareTM HIV-1/2 rapid oral fluid (OMT) test,
and we are implementing procedures to ensure our compliance with the GMP
requirements that we must meet in manufacturing our AwareTM line of HIV-1/2
rapid test products for sale in or export from China. We have manufacturing
equipment and personnel on-site and expect to have the necessary GMP approval in
sufficient time to produce inventory for commercial sales upon SFDA approval of
the OMT rapid test. This facility will also support manufacture of our AwareTM
products for export from China to our other international markets. We are also
evaluating existing products at these facilities although our primary focus is
on our AwareTM HIV-1/2 OMT rapid test.
We have completed the regulatory approval process for our Aware TM HIV-1/2 BSP
test in South Africa, Uganda, Zimbabwe and Kenya and for our Aware TM HIV-1/2
OMT test in South Africa, Uganda and Kenya , providing opportunities for
humanitarian organizations to sponsor our product in their testing programs. The
Mineseeker Foundation ("Mineseeker") has announced plans to use our HIV-1/2
Rapid OMT tests in a program it plans to begin in Sub-Saharan Africa later this
year. We have received an order and cash deposit from an entity working with
Mineseeker and have manufactured approximately 35,000 Aware TM HIV-1/2 OMT tests
which we expect to ship during the fourth quarter of 2006 to their first
location. This shipment is expected to inaugurate Mineseeker's announced program
to test at least one million persons over the next twelve months. We believe
that cooperating with humanitarian organizations to help fight the HIV/AIDS
pandemic in critical areas where we are obtaining regulatory approval,
particularly in South Africa, will be an important trend in 2007 as we seek to
achieve significant sales growth of our Aware(TM) HIV-1/2 rapid OMT test.
Sales are also beginning in the Middle East following the initial approval of an
over-the-counter ("OTC") version of our Aware(TM) HIV-1/2 oral fluid rapid test.
We continue to pursue business opportunities in the Middle East, targeting the
UAE as our first market. We have received an order and cash deposit and have
completed manufacturing 100,000 Aware TM HIV-1/2 OMT rapid tests which we expect
to ship to our distributor in the UAE during the fourth quarter of 2006. Our
distributor has informed us that regulatory approvals are progressing in several
additional countries within the region. We expect that the Middle East will be a
significant market for us in 2007, particularly as we obtain additional
approvals for our unique OTC test product.
During the third quarter of 2006, we received approval for our Aware(TM) HIV-1/2
OMT rapid test for both the professional and OTC markets in the Russian
Federation. The Russian Federation is now the second market, following the UAE,
to approve the use of an HIV-1/2 test in OTC settings, permitting significantly
greater access to HIV testing in these countries. We expect to utilize Marr's
expertise and contacts in the Russian Federation as we establish our
distribution system and our sales and marketing activities in that region. We
have initiated contacts in the private sector, where a number of large
corporations are focusing a portion of their social budgets on the HIV/AIDS
problem in their communities. Russia currently has the fastest growing rate of
increase in HIV/AIDS infection worldwide. We expect significant sales in this
market beginning in early 2007.
In India, we have commenced product evaluations for the military and private
sectors. The process is expected to generate sales in this important region
during 2007. By the end of 2007, we expect to have achieved our initial sales
and marketing milestone - regulatory approvals and distribution networks
consummating sales in the four parts of the world having the greatest HIV/AIDS
prevalence, namely Sub-Saharan Africa and the three regions identified by The
Gates Foundation as comprising the "Next Wave" trend in the AIDS pandemic,
specifically China, India and Russia.
We are in the process of developing additional distribution channels and plan to
conduct additional trials in several African and Asian countries. The clinical
trial and regulatory approval process will be on-going through the remainder of
2006 and beyond. We are primarily targeting countries which have been selected
for funding by PEPFAR, the $15 billion President's Emergency Plan for AIDS
Relief, and currently have
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representation in more than half of them. Many HIV intervention programs in
developing countries are supported by foreign funding. In the case of funding
from the United States, typically through PEPFAR or USAID, products that are not
approved locally or by the USFDA may be used provided they have a waiver issued
by the USAID and CDC. We have compiled the required data in terms of
"manufacturer's claims" and independent trials for both our OMT and blood, serum
and plasma HIV-1/2 rapid tests. We have recently been notified that our blood,
serum and plasma product has been evaluated and is approved for addition to the
USAID waiver list. We are actively pursuing a USAID waiver for our OMT product
as well. We believe that obtaining a USAID waiver is another important milestone
in facilitating international sales of our rapid tests.
Financial Considerations
Our operating cash burn rate has been trending downward since 2004. The burn
rate for the year ended December 31, 2005 declined to approximately $0.7 million
per month from $1.1 million per month in 2004. Our consolidated operating cash
burn rate for the first nine months of 2006 has averaged less than $0.5 million
per month, including the impact of our Chinese joint venture operations. Our
domestic burn rate decreased primarily as a result of the restructuring of our
business and the discontinuation of our Legacy Business.
During the first nine months of 2006, we incurred a net loss of $11.4 million,
including a charge for $7.1 million in non-cash interest expense primarily
attributable to the accounting for our convertible debt and related derivatives
and the re-pricing of certain warrants. At September 30, 2006, we had a working
capital deficit of $10.7 million and our accumulated deficit was $165.3 million.
Based upon our financial condition at December 31, 2005, which included working
capital and stockholders' deficits of $3.0 million and $7.2 million,
respectively, recurring losses and our accumulated deficit of $154 million, our
independent accountants issued an opinion on our financial statements as of
December 31, 2005 citing substantial doubt about our ability to continue our
business operations as a going concern. During June 2006, we entered into
Subscription Agreements to sell an aggregate of $3 million of our common stock
in a private placement; and have received $495,000 of the subscribed amounts
through November 2, 2006. Between November 2005 and September 2006, we have
issued an aggregate of $5,500,000 of 7% Promissory Notes to Marr, availing
ourselves of the entire amount committed under this facility. As a result of our
July 2006 offer to amend to $0.15 per share the exercise price of warrants
issued in conjunction with our May and July 2004 Private Placements, our April
2005 8% Convertible Notes and our Credit Facility Agreements with Marr for those
warrant holders agreeing to exercise all or a portion of their warrants by July
21, 2006, we received approximately $258,000 in cash proceeds and entered into
agreements with certain warrant holders for the cancellation of our obligations
to repay an aggregate of $959,000 of our 8% Convertible Notes and $2,545,000 of
our 7% Promissory Notes issued under the 2005 Marr Credit Facility in lieu of
cash payments for the warrant exercises. In the absence of additional
conversions, both the 8% Convertible Notes and the 7% Promissory Notes, an
aggregate of approximately $7.9 million including the 8% Interst Notes issued on
October 2006, are due in April 2007. Our current cash resources and commitments
are insufficient to provide us with the liquidity required to fully attain our
business milestones, achieve positive cash flow and meet our obligations when
due. We do not believe that our current cash resources are sufficient to sustain
our operations through 2006 without obtaining additional financing.
Our longer-term liquidity and capital requirements are dependent on constraints
similar to those which impact our current liquidity and capital resource
considerations and which will be critical in validating our business model
during the remainder of 2006 and in 2007. In the absence of adequate resources
from current working capital and existing financing arrangements, we will be
required to raise additional capital to sustain our operations.
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