UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





(Mark One)x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010

or ̈
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _______________ to _________________



Commission file number: 000–20985








CALYPTE BIOMEDICAL CORPORATION


(Name of small business issuer in its charter)





DELAWARE

06-1226727(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)15875 SW 72nd Ave,  Portland, OR

97224(Address of principal executive offices)

(Zip Code)





Issuer’s Telephone Number: (503) 726-2227





Securities registered under Section 12(b) of the Exchange Act:





None





Securities registered under Section 12(g) of the Exchange Act:





Common Stock, $.03 par value per share





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No  x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o  No  x





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No o





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained in this form and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o





Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).


Large accelerated filer  o                                                             Accelerated Filer  o


Non-accelerated filer    o                                                              Smaller reporting company  x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No  x





The aggregate market value of the voting and non-voting common equity held by non–affiliates of the registrant as of June 30, 2010 was approximately $2,864,000 based on the $0.006 per share closing price reported for such date on the OTC Bulletin Board.





The number of shares of the registrant’s common stock outstanding as of April 14, 2011 was 547,826,416.








CALYPTE BIOMEDICAL CORPORATION


FORM 10-K


INDEX





Page No.PART I.Item 1.
Business

1Item 1A.
Risk Factors

12Item 2.
Properties

25Item 3.
Legal Proceedings

26Item 4.
Submission of Matters to a Vote of Security Holders

26PART II.Item 5.
Market for the Registrant’s Common Equity and Related Stockholder Matters

28Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

28Item 8.
Financial Statements and Supplementary Data

40Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

40Item 9A
Controls and Procedures

40PART III.Item 10.
Directors, Executive Officers and Corporate Governance

43Item 11.
Executive Compensation

45Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

48Item 13.
Certain Relationships and Related Transactions, and Director Independence

50Item 14.
Principal Accountant Fees and Services

51PART IV.Item 15.
Exhibits, Financial Statement Schedules

52Signatures

S-1Certifications

IV-1











PART I





Item 1. Business.


Recent Developments





As of April 3, 2009, we were in default under the 2005 Credit Facility, as amended (the “Credit Facility”), between us and Marr Technologies BV (“Marr”), our largest stockholder, holding approximately 14.1% of our outstanding capital stock as of December 31, 2010, and joint venture partner in the People’s Republic of China (“China’), and under our Secured 8% Convertible Promissory Notes, as amended (the “Convertible Notes”), issued to three note holders, one of whom is Marr, pursuant to a Purchase Agreement dated April 4, 2005.  As of December 31, 2009, we owed $6.3 million under the 8% Convertible Promissory Notes and related Interest Notes and $5.2 million under the 7% Promissory Notes.





In July 2010 we entered into a series of agreements providing for (i) the restructuring of our outstanding indebtedness to Marr and SF Capital (the “Debt Agreement”) and (ii) the transfer of our interests in two Chinese joint ventures, Beijing Marr and Beijing Calypte, to Kangplus (the “Equity Agreement”). Under the Debt Agreement, $6,393,353 in outstanding indebtedness was agreed to be converted to 152,341,741 shares of our common stock, and our remaining indebtedness to Marr, totaling $3,000,000 was cancelled. In consideration for such debt restructuring, we transferred our equity interests in Beijing Marr to Kangplus pursuant to the Equity Transfer Agreement and transferred certain related technology to Beijing Marr.  We have also agreed to transfer our equity interests in Beijing Calypte to Marr or a designate of its choosing. The transactions contemplated by the Debt Agreement and the Equity Transfer Agreement are subject to Chinese government registration of the transfer of the equity interests. Under the debt agreement with SF Capital, $2,008,259 in outstanding indebtedness was converted to 47,815,698 shares of our common stock.





In November, 2010, Calypte was awarded a grant of $244,479 under the U.S. Government's Qualifying Therapeutic Discovery Project (QTDP) program. The QTDP grant is provided under the new section 48D of the Internal Revenue Code, enacted as part of the Patient Protection and Affordable Care Act of 2010. The grant is targeted to therapeutic discovery projects that show a reasonable potential to prevent, diagnose, and treat acute and chronic diseases. Allocation of the grant also takes into consideration which projects show the greatest potential to create and sustain high-quality, high-paying U.S. jobs and to advance U.S. competitiveness in life sciences. While these funds will help sustain current R&D activity for the AwareTM II product, we will need additional funding to finish development and bring the product to market.





Notwithstanding the above termination of debt and QTDP grant, failure to obtain additional financing will likely cause us to seek bankruptcy protection under Chapter 7 of Title 11 of the United States Code, 11 U.S.C. § 101 et seq., which would have a material adverse effect on our business, on our ability to continue our operations and on the value of our equity.





Business Development





Calypte Biomedical Corporation was incorporated in California in 1989 and reincorporated in Delaware in 1996 in connection with our initial public offering.





We develop, manufacture, and distribute in vitro diagnostic tests, primarily for the diagnosis of Human Immunodeficiency Virus (“HIV”) infection. Up until late 2005, we manufactured and marketed urine-based HIV-1 diagnostic screening tests and urine and serum-based Western Blot supplemental (sometimes called “confirmatory”) tests for use in high-volume laboratories, which we called our “Legacy Business.”  In November 2005, we sold our Legacy Business and began to concentrate primarily on our rapid test platform products which we began developing in 2003.  Our emphasis has been the development and commercialization of our AwareTM HIV-1/2 rapid tests.  In 2007, we completed field trials and product evaluations of our AwareTM HIV-1/2 OMT (oral fluid) rapid test covering an aggregate of over 8,000 samples in China, India, South Africa and elsewhere and believe that the results of these studies and evaluations have validated the test.  In our studies, AwareTM HIV-1/2 OMT averaged 99.7% accuracy.  We have obtained regulatory approvals in a number of key countries in Africa, Southeast Asia, the Middle East, Russia, India and China, and we expect to expand our market reach on a steady basis.  Sales of our rapid test products have continued to increase at a slow, but steady, pace primarily through the efforts of our distributors in South Africa and the United Arab Emirates (“U.A.E.”).




1





In November 2003, we became the 51% owner of a joint venture, Beijing Calypte Biomedical Technology Ltd. (“Beijing Calypte”), created to market our rapid test products in China.  The remaining 49% of the joint venture is owned by Marr Technologies Limited, an affiliate of Marr.  Through 2009, the operations of Beijing Calypte were primarily organizational and financially insignificant.





In January 2006, we became the 51% owner of Beijing Marr Bio-Pharmaceuticals Co., Ltd. (“Beijing Marr”).  We purchased our equity interest from Marr Technologies Asia Limited (“Marr Asia”), an affiliate of Marr, which owns the remaining 49% interest of Beijing Marr.  In 2008, Beijing Marr obtained the necessary governmental approvals to manufacture, market, distribute and sell our AwareTM HIV-1/2 OMT test and has begun to manufacture and market the test. The intent of this venture was to have the capability to manufacture our products for sale in China and for export to other countries that only permit import of products that have governmental approval in the country of manufacture.





In July 2010, we transferred our equity interests in Beijing Marr and Beijing Calypte to Kangplus and Marr Technologies Limited respectively as part of the debt restructuring discussed in Recent Developments.





Since late 2004, we have been manufacturing and selling an HIV-1 BED Incidence EIA test, our AwareTM BED Incidence Test, through an arrangement with the U. S. Centers for Disease Control and Prevention (the “CDC”).





In the first quarter of 2008, we introduced AwareMessengerTM, our oral fluid sample collection device.  Although we do not currently have approval to sell this device for diagnostic purposes, we can sell it for “research use only” in situations where assay developers and test laboratories can qualify the product for use with their own assays.





During the second half of 2010, we started internal trials of our Aware II prototype, designed for the US and other western markets. The trials were performed at two sites – one in South Africa and one in the US – and generated data from 577 subjects at various levels of risk for HIV infection.  In combined results, Calypte’s new Aware II HIV-1/2 oral fluid rapid test showed an accuracy of 100%.





Requirements of Additional Capital and Business Plan





The development of our business took a steep downturn in the fourth quarter of 2008, when our expected sources of financing dried up and others failed to materialize.  Marr, which had previously indicated its commitment to continue funding our operations, advised us that it would no longer finance us.  This required us to focus on scaling down our operations and looking for short term funding support.  With the help of two investors who provided all of our required financing in 2009 and 2010, we were able to restructure our operations and start executing on our strategic goals for a new product designed for the US and western markets. Specifically:




1.
We have successfully concluded the restructuring of our debt.


2.
Our small-scale research and development operations have continued to successfully sustain the manufacturing and support of our existing products.


3.
We have frozen the prototype design of our Aware II product for US and western markets


4.
We conducted our internal trials of Aware II in South Africa and the US. In combined results, Calypte’s new Aware II HIV-1/2 oral fluid rapid test showed an accuracy of 100%.





We have developed a business plan for 2011 that has what we believe to be an appropriate mix of focus on existing product sales and development of new products.  However, there is substantial risk that we will not be able to carry out this business plan.  Our cash resources are insufficient to continue our operations through the near-term and, given the current market price of our common stock, we may not have sufficient authorized shares of common stock available to raise sufficient capital to continue operations.  Moreover, during recent years our stock price has been below its par value, which may make it difficult to raise capital through the issuance of equity securities.  We do not have any definitive agreements with respect to additional financing or a strategic opportunity, and there is no assurance that any such financing or strategic opportunity will be available to us on acceptable terms, or at all.  If such additional financing is not available to us when required or is not available to us on acceptable terms, or we are unable to arrange a suitable strategic opportunity, we will be in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all.




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Our Products




Our product line includes our AwareTMline of low cost rapid tests, our AwareTMHIV-1 BED Incidence test and our recently-introduced AwareMessengerTM specimen collection device.  At present, our rapid tests are designed for use in international markets.  We plan to introduce rapid tests for the domestic market in the future.




The AwareTM Rapid Test Product Line




Our HIV 1/2 rapid tests are used for the rapid detection of antibodies to HIV-1 and HIV Type 2 (“HIV-2”) in oral fluid and blood samples using a lateral flow dipstick design (the “HIV-1/2 Rapid Tests”).  Rapid tests provide diagnostic results in less than 20 minutes and are particularly suitable for point-of-care testing in both the professional sector, such as in developing countries that lack the medical infrastructure to support laboratory based testing, and, for the first time, in the over-the-counter or “OTC” market.





Our AwareTM line of low cost rapid tests are especially suited to address the needs of developing world markets in Africa and parts of Southeast Asia, as well as the Middle East and Eastern Europe.  We have developed our AwareTM line of low cost rapid tests in a simple, easy to use format suitable for use in point of care settings in remote locations.  We have developed rapid tests for the detection of antibodies to HIV-1 and HIV-2 that can use either oral fluid or blood as a specimen sample.  We have also developed a rapid test that uses urine as a specimen sample, but it is currently not a primary focus.  We are primarily concentrating on introducing our oral fluid rapid tests into international markets.





Our current AwareTM line includes the following products:





AwareTM HIV-1/2 OMT (Oral fluid) PRO (Professional)





We developed the AwareTM HIV-1/2 OMT test to address the drawbacks of blood testing. We believe this test is ideally suited to clinical or professional settings in the developing world.  Although the range of other assays that can presently be performed on OMT samples is limited, OMT samples can be easily collected anywhere, including public settings, giving the test a unique advantage over tests using blood or other sample media.  Evaluations suggest that the accuracy of our OMT test is only slightly lower than a test using a laboratory blood sample and on a par with the best of rapid blood tests.  The strengths of the AwareTM HIV-1/2 OMT test are:





·
It has a true IgG control line that indicates not only that the device is functional but that a human sample has been added (some assays feature a control line that appears even if the correct sample is not added)·
Kit packaging is designed to permit multiple users to use the kit simultaneously·
Unlike its primary competitor, the AwareTM OMT sample preparation step produces surplus sample, which can be used to repeat the test, or to perform a confirmatory assay such as an oral fluid Western Blot test or a second rapid oral fluid test.·
AwareTM OMT testing is painless, safe, and non-invasive


·
Although more expensive than blood tests, the all-in costs (including costs of handling and disposal of blood) are comparable or less.  Further, we expect the AwareTM OMT to have a cost advantage over its primary current oral fluid competitor.  Additionally, it has a significantly longer shelf life than that of its primary competitor.





3





AwareTM HIV-1/2 Oral OTC





The AwareTM HIV-1/2 Oral OTC test is an over-the-counter version of our oral fluid rapid test.  The test was designed for markets in which we see substantial demand for a low-cost self-administered, over-the-counter HIV test, including the Middle East, Russia and other Eastern European and Central Asian countries.  The AwareTM HIV-1/2 Oral OTC has the same performance attributes as the PRO version but is packaged for individual sale and includes simplified usage instructions tailored for the non-professional consumer.




HIV-1 BED Incidence EIA





The HIV-1 BED Incidence EIA Test, recently re-named the AwareTM BEDTM HIV-1 Incidence Test (the “Incidence Test”), is designed to estimate the rate of new HIV infections in a population by determining what proportion of a population of HIV infected people were infected recently (e.g. within approximately the past 6 months).  Under a license from the CDC, we serve as the contract manufacturer of this test and have the right to market it worldwide.  The guidelines that dictate how the test is to be interpreted and how the data generated by the test are to be used are determined by the CDC and other authoritative public health entities such as UNAIDS.  We also market a control kit that contains materials required to use the Incidence Test for testing dried blood, serum or plasma spots.





We believe that the capability of this test is significant because a critical element of reducing HIV transmission rates is identifying where the increased rates are occurring and instituting prevention programs accordingly.  The Incidence Test is useful as an epidemiological measurement tool to track the expansion of HIV infection into susceptible populations, which will allow public health agencies to more efficiently use their resources by focusing their prevention efforts on those groups having the greatest need.  Incidence estimates help determine the effectiveness of prevention programs from both a disease spread and financial resource perspective and allow managers to evaluate areas appropriate for alternative therapeutic media, such as vaccine trials.





Aware MessengerTM Oral Fluid Sample Collection Device





Our Aware MessengerTM oral fluid collection device is intended for the collection, stabilization, and transport of an oral fluid specimen to be used for the detection of specific antibodies or other substances.  Aware MessengerTM specimens may be tested with conventional laboratory-based immunoassays (e.g. ELISA) enabling high-throughput batch testing, automation, quantitative results, and lower costs.  Oral fluid specimens collected with this device are easily obtained and have been shown to yield high quality samples rich with various analytes representative of those found in blood.  This device is based on the same collection principle as employed in our AwareTM HIV-1/2 OMT test.  The device can be used to collect oral fluid analytes for not only HIV antibodies, but also other screening application such as cotinine (a metabolite of nicotine indicative of smoking) and cocaine.  Our initial target for this product is for research use and to reference laboratories in the life insurance risk assessment market having the capability to self-validate assays employing the device.  We envision that many blood tests can be optimized for use with the Aware MessengerTM device, potentially providing a much larger market for this product.





New Products





AwareTM II





Our current AwareTM product line is a rapid testing solution that is well suited for developing countries.  However, in the U.S. and other developed countries, a cassette-enclosed format may be more acceptable.   We plan to introduce the AwareTM II product line for these markets using such a format.





The AwareTM II line provides a cassette-housed strip in a unique two-step platform that we have licensed from Ani Biotech Oy (the “Ani Platform”).  This license and the associated technology provides us the platform and the required technology to commercially sell into the developed world markets.





There are currently no U.S. FDA-approved over-the-counter HIV tests; however an FDA advisory panel has recommended that the FDA consider an approval protocol for such a test.  We believe that OTC tests would be advantageous in the battle against HIV transmission and that a rapid test platform such as the AwareTM II platform would be appropriate for use in an FDA-approved OTC application.




4





Potential Future Products





We believe that the Ani Platform provides us with an alternative product format having potential applicability in both the professional and OTC markets worldwide.  We are also evaluating the development of a rapid test for non-HIV applications such as the detection of syphilis.





Before we are be able to exploit any of these opportunities, we will need to prove the viability of the Ani Platform by completing development of the AwareTM II product line, filing an IDE (Investigational Device Exemption) for those tests in the U.S. and establishing manufacturing capacity with which to begin FDA clinical trials, initially for an HIV test.





Our Aware Messenger oral fluid sample collection device is another platform on which future opportunities might build.  In addition to rapid tests for diseases other than HIV-1/2, there is the potential to enter the drug abuse testing market.  This is a multi-billion dollar global market in which oral fluid testing has several strong advantages over urine testing, including reduction of privacy concerns, immediacy of testing and resistance to sample tampering.


Marketing, Sales and Distribution





We generally rely upon local distributors to explore local market conditions, pursue sales opportunities, follow up on leads we provide, train and support local customers and assist in the regulatory approval process.  Additionally, we work with the CDC to distribute the Incidence Test in the US and internationally.





Traditionally, we have appointed exclusive distributors whose ongoing right to exclusivity is predicated upon the distributor’s purchase of mutually agreed minimum volumes of product.  The distributors may, in turn, appoint sub-distributors.  Where appropriate, we also consider more direct routes to market, or in the case of OTC, private sector or charity-backed programs, or strategic relationships.  On an individual distributor basis, agreement terms are typically set at one, two, or three years, and with a few exceptions, all purchases must be prepaid.





Our marketing efforts are severely curtailed at this time, due to the lack of financing and uncertainty about our ability to continue in business and our reduced workforce.





During 2010, we focused on the following primary markets:





Africa





In Africa, we have been pursuing individual country markets for our AwareTM HIV-1/2 OMT rapid test products where we expect growth rates for HIV testing to be the highest.  Our AwareTM HIV-1/2 OMT test is currently approved in South Africa, Cote d’Ivoire, Kenya, and Uganda.  We received our initial orders for the AwareTM HIV-1/2 OMT test in 2006 from South Africa, and sales to our South African distributor have continued regularly since then.  We have focused our marketing activity mostly in Kenya, Uganda and South Africa during 2010.  We have received favorable responses from the Kenyan government.  We have abandoned the registration efforts in other African countries.





Middle East





In the Middle East we have product approval in Iraq and U.A.E.  In 2009 we terminated our relationship with the prior distributor in U.A.E.  In 2010 we focused on finding suitable partners to help us grow the vast potential for oral fluid based HIV testing in the gulf countries to a significant business for Calypte. While we have had some strategic discussions with a few distributors we don’t have a definitive agreement with any of them at this time.




5





Competition





Throughout the world there are numerous manufacturers of rapid HIV antibody tests.  Competitors include specialized biotechnology firms as well as pharmaceutical companies with biotechnology divisions and medical diagnostic companies.  Many of the tests are manufactured in countries with emerging biotechnology industries such as India, China and Korea.  With few exceptions, the products offered are blood tests and, while their quality varies, they are generally of adequate accuracy to pass local regulatory requirements.  The tests are often marketed at very low prices to the end-user, which may indicate that the manufacturers are not paying royalties on certain key patents such as those for detection of HIV-2.  While many of these manufacturers were initially established to supply products for their regional or domestic markets, many have now begun to expand into other regions having less-stringent regulatory and intellectual property environments and strong demand for low-cost HIV tests.





Among these manufacturers, there are a few that sell products meeting North American and Western European quality standards in developing countries.  These global players typically have an established presence in more than one geographic region and their products set the performance standard for the industry.  While these companies are primarily headquartered in Western Europe or the United States, they may manufacture in lower cost developing countries.  Their HIV rapid diagnostic tests are considered to be the quality leaders in the market, with accuracies easily exceeding 99%.




We believe our OMT tests have unique advantages compared with blood based tests, as indicated below.




·
Non-invasive and painless sampling.  Studies show greater acceptance of HIV testing without the pain and risks of drawing blood, which translates into higher testing rates




·
Safer than blood tests.  Eliminates the risk of infection through accidental needle or lancet stick injuries for both patients and health care workers




·
Easier to use.  Enables self sampling and self testing--no technicians, no needles, no lancets




·
Sample can be collected anywhere, anytime, including open public settings




·
More cost effective than blood diagnostic tests (considering the all-in costs of drawing, handling and disposing of venous blood)




·
Risk of exposure to infectious agents during handling is minimal to non-existent




·
The over-the-counter version may foster increased use as a result of increased privacy




·
Unlike other oral fluid tests, the AwareTM sampling system allows for a sample to be tested multiple times with different test devices and stored for future use





Research and Development Spending





Our product research and development spending increased from $0.2 million in 2009 to $0.3 million in 2010.  Our R&D spending increased by approximately $0.1 million in 2010 as we slowly ramp up our R&D department.  Our goal is to continue the gradual increase in spending in our R&D department as we focus on our Aware II research.


Component Supply




Our manufacturing operations employ a number of components, including antigens and recombinants that we purchase from various suppliers for our various tests.  We also use some single-source components.  Any delay or interruption in the supply of these components, especially with respect to single-source components, could significantly impair our ability to manufacture products in sufficient quantities to meet demand because additional or replacement suppliers cannot be quickly established. Certain antigens and recombinants used in our HIV 1/2 Rapid Tests are provided by single contract suppliers pursuant to supply agreements.  If for any reason these suppliers were no longer able to supply our antigen or recombinant needs, we believe that alternative supplies could be obtained at competitive costs.  However, a change in any antigen or recombinant might require additional changes to our products, potentially subjecting them to additional regulatory requirements and reviews.  Any changes would require significant time to complete and could disrupt our ability to manufacture and sell our HIV 1/2 Rapid Tests.





6




Intellectual Property





Our success depends, in part, on our ability to obtain patent protection for our products, to preserve our trade secrets and to avoid infringing the proprietary rights of third parties.




We have acquired patent and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our research and development activities.  We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to develop new products.





Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business.  Competitors may be able to produce products competing with our products without infringing our licensed patent rights.  The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent that we license.  Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. Accordingly, we cannot assure that our patents rights, trademarks or trade secrets will afford adequate protection to our products or that our competitors will not be able to design around such patents, trademarks and trade secrets.




We are not aware of any pending claims of infringement or other challenges to our rights to use this intellectual property or our rights to use our trademarks or trade secrets in the U.S. or in other countries.





We require our employees, consultants, outside collaborators, and other advisors to execute confidentiality and assignment of invention agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. The agreements also provide that all inventions conceived by the individual during his or her tenure with us are our exclusive property.  Although we believe these agreements are enforceable, there can be no assurance that they would be upheld in court or that, if they are breached, we will have adequate remedies.


Rapid Tests





We believe we have secured rights to intellectual property and related materials necessary for the manufacture and worldwide sale of our HIV-1/2 Rapid Tests.





Synthetic Antigen (Adaltis, Inc.): In April 2004, we entered into a license and supply agreement with Adaltis, Inc. under which Adaltis supplies us with HIV-1/2 peptides for use in our HIV-1/2 Rapid Tests.





Guire/Swanson Patent Suite (Abbott Laboratories, Inc.): In June 2004, we entered into a sublicense agreement with Abbott Laboratories, Inc. for certain worldwide rights to patents relating to the design, manufacture and sale of lateral-flow rapid diagnostic tests.  Under the terms of the agreement, we were granted certain worldwide rights to use a family of patents known as the “Guire/Swanson” patents in both the professional and OTC markets.





HIV-2 (Bio-Rad Laboratories): In September 2004, we entered into a worldwide, non-exclusive sub-license agreement with Bio-Rad Laboratories and Bio-Rad Pasteur for HIV-2 rights.  This agreement permits us to commercialize and market our HIV-1/2 Rapid Tests in areas where HIV-2 is increasing in prevalence or where it is required to achieve regulatory approval for our tests.




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Ani Platform (Ani Biotech Oy): In September 2004, we acquired a license to the Ani Platform from Ani Biotech Oy.  Under the terms of the license, we have the exclusive right to develop, manufacture and sell rapid diagnostic tests for sexually transmitted diseases, including HIV, HPV, Hepatitis B, Hepatitis C, Syphilis, Gonorrhea, and Chlamydia when urine or oral fluid are the sample media.  Additionally, we have the non-exclusive right to develop, manufacture and sell the same sexually transmitted disease tests when blood, serum, plasma, or urogenital swabs are the sample media.





Gold Sols Patent: We have been advised that our patent, “One-step production of gold sols” (11/242,732) is about to issue.  This patent secures our rights in a proprietary method of producing colloidal gold (“gold sols”) a key reagent in our rapid tests.





Incidence Test





We initiated a technology transfer of the Incidence Test in April 2004 fromthe CDC (Center for Disease Control). We have non-exclusive licenses for the development, manufacture and sale of the BED capture EIA, and for the use of the rIDR-M recombinant antigen which underpins second generation incidence tests currently under development.





Manufacturing




To meet the challenges of testing for HIV in the developing world, we have adopted a manufacturing strategy for our rapid tests that utilizes the reduced labor and overhead rates typical of the regions in which we expect to sell our tests.  We have established manufacturing capabilities in the U.S. and Thailand and China, through our Beiing Marr joint venture.


Pacific Biotech





We have outsourced production of our AwareTM product line to Pacific Biotech in Thailand.  Under the terms of the contract manufacturing agreement, we pay Pacific Biotech a volume-variable price per test for assembly of AwareTM test kits. Pacific Biotech is a GMP and ISO 13485 certified manufacturing facility.





MML





We have outsourced production of the Incidence Test and the Aware MessengerTMoral fluid sampling device to MML in Troutdale, Oregon.  The terms of the MML agreement are similar to the Pacific Biotech agreement. MML is an FDA registered GMP and ISO certified manufacturing facility.





Government Regulation


AwareTM Rapid Tests





Regulatory approvals to sell products are characteristic of the diagnostic industry.  Throughout the developing world, countries can generally be classified in one of the following three categories regarding regulatory approvals:





1.
Those requiring no local approval;2.
Those requiring local approvals, and possibly clinical trials; or those requiring approval in the country of manufacture; or


3.
Those that may or may not require local approvals, but that rely on “approval” from organizations such as the United States Agency for International Development (USAID) “approval” as a proxy for their own and for access to U.S. President's Emergency Plan for AIDS Relief (PEPFAR) funding.





Though few in number, countries that lack regulatory mechanisms represent the path of least resistance.  Generally, however, these countries are less likely to make purchasing decisions based upon product quality and demonstrated performance, but rather, based upon price.  We designed our AwareTM products to be high in quality, which typically makes them ill-suited to compete with locally-produced tests based solely on price.  The majority of our target markets, therefore, have a local or other regulatory process.




8





Local Approvals





The time, effort, and cost of market entry for non-blood tests is significantly higher than for blood tests.  In many countries, blood HIV tests may be evaluated using archived sets of well characterized blood samples known as standardized panels. While readily available for blood, such panels do not exist for oral fluid tests.  Consequently, we must demonstrate the clinical performance of our oral fluid tests through formal clinical trials.  Regulatory requirements represent a potential barrier to our timely entry to certain markets due to the high cost and time required for clinical trials.





We have obtained regulatory approval for our AwareTM OMT product line in the following countries as of December 2010 China, India, Kenya, Russia, South Africa, Uganda, Iraq, Cote d’Ivoire, United Arab Emirates and Peru.





USAID Waiver





Many international HIV intervention programs are supported by foreign funding.  In the case of funding supplied by the United States, typically through USAID or PEPFAR, products that are not approved locally in the country of intended use or by the USFDA may be used, provided they have a waiver issued by the USAID and CDC.  Since the end of 2007, our AwareTM HIV-1/2 rapid oral fluid test has been included on the USAID waiver list.


BED Incidence Test




Our Incidence Test is regulated by the FDA Center for Biologics Evaluation and Research.  The FDA has classified the test as being “for surveillance use” and not for clinical diagnosis within the U. S. and “for research use” internationally, simplifying its availability for use by both domestic and foreign public health organizations.


Other Regulations




We are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, discharge, handling and disposal of certain materials and wastes.




Product Liability and Recall Risk; Limited Insurance Coverage




The manufacture and sale of medical diagnostic products subjects us to risks of product liability claims or product recalls, particularly in the event of false positive or false negative reports.  A product recall or a successful product liability claim or claims that exceed our insurance coverage could have a material adverse effect on us.  We maintain a $5,000,000 claims-made products liability insurance policy.  However, our insurance coverage may not adequately protect us from liability that we incur in connection with clinical trials or sales of our products.




Employees




As of March 31, 2011, we have three full time and two part time employees and five consultants, including all of our senior management.  Our employees are not represented by a union or collective bargaining entity.  We believe our relations with our employees are good.





Where to get more information





We file or furnish annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”).  Our SEC filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file at the SEC's public reference rooms in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.




9




Item 1A.  Risk Factors.





The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or which we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected.





Risks Related to Our Financial Condition





Because Of Our Recurring Operating Losses And Negative Cash Flows From Operations, Our Audit Report Expresses Substantial Doubt About Our Ability To Continue As A Going Concern.





Because of our recurring operating losses and negative cash flows from operations and substantial indebtedness, our audit report expresses substantial doubt about our ability to continue as a going concern. At December 31, 2010 and 2009, we had working capital deficits of $3.5 million and $16.6 million, respectively.  As of December 31, 2009, the $11.6 million outstanding under our Credit Facility and Convertible Notes was under default . Our cash on hand and existing sources of cash are insufficient to fund our cash needs over the next twelve months under our current capital structure. We have prepared our financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  The consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue in existence.





We Will Need Additional Financing To Meet Our Financial Needs.





Our current plan is to obtain additional financing after reviewing all possible options in detail, including, but not limited to, the issuance of equity or debt securities or alliances or joint ventures with other biotechnology firms, pharmaceutical companies with biotechnology divisions or medical diagnostic companies. It may be difficult, or impossible, for us to raise additional capital because our stock price has recently been trading at below its par value and because we may not have sufficient shares of authorized stock to issue to investors. If we are able to raise capital, funds raised from the issuance of additional equity securities may have a negative effect on our stockholders, such as a dilution of their percentage of ownership, and the rights, preferences or privileges of the new security holders may be senior to those of our current stockholders. There is no assurance that we will be able to obtain any financing on favorable terms, or at all. There is no assurance that we will be able to obtain any financing on favorable terms, or at all. If we cannot obtain additional financing, we will likely not be able to continue our operations.




Our Working Capital Deficit May Adversely Affect Our Ability To Further Implement Our Growth Strategy And Expand Our Presence In The International Market for HIV And Other Diagnostic Tests.





Neither our cash flow from operations nor our capital resources are sufficient to meet our existing financial needs or sustain our operations. If we are unable to generate significant revenue or attain profitability, we will not be able to sustain operations and will have to curtail significantly or cease operations.





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





At December 31, 2010, our domestic trade accounts payable totaled $1.3 million, of which essentially all was over sixty days past due.  Further, we currently have a number of cash-only arrangements with suppliers.  Certain vendors and service providers may choose to bring legal action against us to recover amounts they deem due and owing.  While we may dispute certain of these claims, should a creditor prevail, we may be required to pay all amounts due to the creditor.  If the working capital that enables us to make payments is not available when required, we will be placed in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all.  Additionally, our financial condition has prevented us from ordering certain materials in the most economical order quantities, which increases the cost of our products and reduces our margins.




10





We Have Federal and State Net Operating Losses and Research and Development Credits Which May Expire Before We Can Utilize Them.





At December 31, 2010, we had federal net operating loss carryforwards of approximately $148 million. Section 382 of the Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards following a “change in ownership.”  The amount of the limitation is based on a statutory rate of return and the value of the corporation at the time of the change of ownership.  Our private placements and other sales of our equity securities can potentially cause a change of ownership either individually or in the aggregate. We have conducted a preliminary analysis of our stock ownership changes which indicates that ownership changes within the meaning of Section 382 of the Internal Revenue Code may have occurred in 2003 and 2004.  After applying the Section 382 limitations resulting from these presumed ownership changes, approximately $83 million and $5.8 million of federal and state net operating loss carryforwards, respectively, are available at December 31, 2010.  If a change of ownership has occurred as a result of past financings and an annual limitation is imposed, we may not be able to fully utilize all of our federal and state loss carryforwards and resesarch and development credit carryforwards.  Our inability to fully utilize our net operating loss carryforwards and tax credits could have a negative impact on our tax asset, financial position and results of operations.





Risks Related to the Market for Our Common Stock





We have a history of operating losses and expect to report future losses that may cause our stock price to decline and a loss of your investment.





Since our inception of operations through December 31, 2010, we have incurred a cumulative loss of $179.2 million. We expect to continue to incur losses as we spend additional capital to market our products and establish our infrastructure and organization to support anticipated operations. We cannot be certain whether we will ever earn a significant amount of revenue or profit, or if we do, that we will be able to continue earning such revenues or profit. Any economic weakness or global recession, including the current environment, may limit our ability to ultimately market our products. Any of these factors could cause our stock price to decline and result in a loss of a portion or all of your investment.





The price and trading volume of our common stock is subject to certain factors beyond our control that may result in significant price and volume volatility, which substantially increases the risk that you may not be able to sell your shares at or above the price that you pay for the shares.





Factors beyond our control that may cause our share price to fluctuate significantly include, but are not limited to, the following:





●
the development of a market for our products;





●
changes in market valuations of similar companies;





●
announcement by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;





●
Additions or departures of key personnel; and





●
fluctuations in stock market price and volume.





11




Additionally, in recent years the stock market in general, and the OTC Bulletin Board (the "OTCBB") stocks in particular, have experienced extreme price and volume fluctuations. In some cases these fluctuations are unrelated or disproportionate to the operating performance of the underlying company. These market and industry factors may materially and adversely affect our stock price regardless of our operating performance. The historical trading of our common stock is not necessarily an indicator of how it will trade in the future and our trading price as of the date of this report is not necessarily an indicator of what the trading price of our common stock might be in the future.





In the past, class action litigation has often been brought against companies following periods of volatility in the market price of those companies' common stock. If we become involved in this type of litigation in the future it could result in substantial costs and diversion of management attention and resources, which could have a further negative effect on your investment in our stock.





Our issuance of Convertible Notes, warrants and stock options may have a negative effect on the trading price of our common stock.





We currently have a large number of Convertible Notes, stock options and warrants outstanding.  The conversion of the Convertible Notes into shares of common stock and the exercise and conversion of stock options and warrants into shares of common stock could cause significant dilution to our stockholders.  In addition to the potential dilutive effect of issuing a large number of shares upon conversion or exercise of Convertible Notes, stock options and warrants, there is the potential that a large number of the shares may be sold in the public market at any given time, which could place significant downward pressure on the trading price of our common stock.





There is no assurance of an established public trading market, which would adversely affect the ability of investors in our company to sell their securities in the public markets.





Although our common stock trades on the OTCBB, a regular trading market for our common stock may not be sustained in the future. The Financial Industry Regulatory Authority (FINRA) limits quotation on the OTCBB to securities of issuers that are current in their reports filed with the SEC. If we fail to be current in the filing of our reports with the SEC, after a grace period of approximately 30 days, our common stock will not be able to be traded on the OTCBB.  The OTCBB is an inter-dealer market that provides significantly less liquidity than a national securities exchange or automated quotation system.





Market prices for our common stock may be influenced by a number of factors, including:





●
the issuance of new equity securities;





●
changes in interest rates;





●
competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;





●
variations in quarterly operating results;





●
change in financial estimates by securities analysts;





●
the depth and liquidity of the market for our common stock;





●
investor perceptions of our company and the technologies industries generally; and





●
general economic and other national conditions.





12





Our common stock is a "penny stock."





Our common stock is a "penny stock" for purposes of Section 15(g) of the Exchange Act because common stock trades at a price less than $5.00 per share and is not traded on a "recognized" national exchange or quoted on The NASDAQ Stock Market, and we have net tangible assets of less than $2,000,000. The principal result or effect of being designated a "penny stock" is that securities broker-dealers cannot recommend our common stock but can only trade in it on an unsolicited basis.





Resale restrictions on transferring “penny stocks” are sometimes imposed by some states, which may make transactions in our common stock more difficult and may reduce the value of the investment. Various state securities laws impose restrictions on transferring “penny stocks” and as a result, investors in our common stock may have the ability to sell their shares of our common stock impaired. Certain foreign countries also impose limitations and restrictions on the ability of their citizens to own stock that is not traded on a recognized exchange, which, in certain instances, does not include the OTCBB.





Failure to achieve and maintain internal controls in accordance with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and stock price.





We are examining and evaluating our internal control procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, as required for our Annual Report on Form 10-K for the year ending December 31, 2010.  If we fail to maintain adequate internal controls or fail to implement required new or improved controls, as such control standards are modified, supplemented or amended from time to time, we may not be able to assert that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Effective internal controls are necessary for us to produce reliable financial reports and are important in the prevention of financial fraud.  If we cannot produce reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and there could be a material adverse effect on our stock price.





Risks Related to Our Business





A viable market for our products may not develop or we may not be able to successfully develop and market new products that we plan to introduce.





Our future success will depend, in large part, on the market acceptance, and the timing of such acceptance, of our AwareTM HIV-1/2 OMT rapid test and the HIV-1 BED Incidence Test and such other new products or technologies that we may develop or acquire. To achieve market acceptance, we must make substantial marketing efforts and spend significant funds to inform potential customers and the public of the perceived benefits of these products.  We currently have extremely limited resources with which to stimulate market interest in and demand for our products and limited evidence on which to evaluate the market’s reaction to products that may be developed.





We currently have approval to sell our AwareTM HIV-1/2 OMT rapid test product in countries including China, Russia, India, South Africa, U.A.E., Iraq, Uganda, Kenya, Cote d’Ivoire and Peru.  We plan to seek regulatory approval in other countries as resources permit.  Sub-Saharan Africa, China, India and Russia are the areas predicted to have the greatest increase in HIV infections over the next few years.  We believe that a simple, non-invasive test such as ours will have significant demand as it can be used as an integral part of a real-time treatment program.  Although we are optimistic regarding the future sales prospects for our AwareTM HIV-1/2 OMT rapid test, obtaining regulatory approval has not resulted in significant product sales to date.  In Africa and elsewhere, government Ministries of Health or similar agencies are the primary purchasers of HIV tests, typically through a tender process which currently requires the exclusive use of blood tests.  Such tenders often consider only the purchase cost of an HIV diagnostic test, ignoring the ancillary costs of administration, including costs such as personnel and materials required to draw and dispose of blood samples.  We are directing considerable effort, including product donations to key user agencies, to encourage the consideration and inclusion of our oral fluid tests in such tenders.  We consider these efforts to be part of an “enabling” strategy in which the standard of care for HIV diagnosis evolves from the exclusive use of blood tests to more widespread use of non-invasive oral fluid-based tests.  This process is time-consuming and expensive.  There can be no assurance that our AwareTM HIV-1/2 OMT rapid tests will obtain widespread market acceptance internationally or that significant sales will occur on a timetable that we can accurately project.




13





We manufacture the HIV-1 BED Incidence Test on behalf of the CDC and that test is available for sale, but we have limited experience marketing it and sales to-date have been modest.  The CDC has issued an Information Sheet acknowledging that the assay may cause over-estimation under certain conditions and has issued revised recommendations and protocols for its use.  As a result, although we believe that the Incidence Test is a valuable technology in the fight against the spread of HIV/AIDS and expect that the process of refining its applications will continue as its use expands, there can be no assurance that the Incidence Test will achieve widespread acceptance, either in the U. S. or internationally.





We have recently introduced our Aware MessengerTM oral fluid sample collection device, have no experience marketing such a product and our financial condition has allowed us to do only limited marketing for the product at present .





If our current products fail to achieve additional regulatory approvals or market acceptance or generate significant revenues, we may have to abandon them and alter our business plan.  Such modifications to our business plan will likely delay achievement of sustainable cash flow from product sales and profitability.  As a result, we may have to seek additional financing, which may not be available on the timetable required or on acceptable terms, or we may have to curtail our operations, or both.





Additionally, neither we nor our marketing partners have significant experience marketing and selling rapid diagnostic tests. Our success depends upon alliances with third-party international distributors and joint venture partners and upon our ability to penetrate expanded markets with such distributors and partners.  There can be no assurance that:





•
our international distributors and joint ventures will successfully market our products;•
our future selling efforts will be effective, as we have not yet introduced in significant volume either an HIV-1/2 product or other point of care test;•
we will obtain market acceptance in the medical or public health community, including government and humanitarian funding sources critical in many international markets, which are essential for acceptance of our products; or that the relationships we develop with humanitarian agencies or their intermediaries will prove to be reliable and sustainable; or•
if our relationships with distributors or marketing partners terminate, we will be able to establish relationships with other distributors or marketing partners on satisfactory terms, if at all.





Consequently, there can be no assurance that any of our current or potential new products will obtain widespread market acceptance and fill the market need that is perceived to exist.  Additionally, although we plan to introduce an over the counter HIV diagnostic test for the domestic over the counter market, there can be no assurance regarding the timeline for which or certainty that the FDA will develop protocols for evaluation and approval of such a product.





We are dependent upon patents, licenses and other proprietary rights from third parties.





To facilitate the development and commercialization of a proprietary technology base for our rapid test products, we have obtained licenses to patents or other proprietary rights from other parties. Obtaining such licenses has required the payment of substantial amounts and will require the payment of royalties to maintain them in the future.  We believe that the licenses to the technologies we have acquired are critical to our ability to sell our rapid tests currently being commercialized and other rapid tests that we may plan to develop and/or commercialize in the future.





There are numerous patents in the United States and other countries which claim lateral flow assay methods and related devices, some of which cover the technology used in our rapid test products and are in force in the United States and other countries. In 2004, we entered into a non-exclusive sublicense agreement with Abbott Laboratories that grants us worldwide rights related to patents for lateral flow assay methods and related devices.  We believe that the acquisition of these rights will enable us to make or sell our rapid test products in countries where these patents are in force.  In 2004, we also acquired a sublicense from Bio-Rad Laboratories and Bio-Rad Pasteur for patents related to the detection of the HIV-2 virus.  HIV-2 is a type of the HIV virus estimated to represent a small fraction of the known HIV cases worldwide.  Nevertheless, HIV-2 is considered to be an important component in the testing regimen for HIV in many markets.  We believe that this sub-license agreement makes it possible for us to sell HIV-2 tests in countries where such patents are in force, or to manufacture in countries where such patents are in force and then sell into non-patent markets.  Additionally, in 2003 we licensed an antigen necessary for certain of our rapid HIV-1/2 products from Adaltis, Inc., and in 2004, we acquired rights from Ani Biotech for its rapid test diagnostic platform and sample applicator, which we believe is a viable alternative to current lateral flow technologies and with potentially worldwide applicability.  The loss of any one of these licenses or challenges to the patents would be detrimental to the commercialization of our rapid tests by delaying or limiting our ability to sell our rapid test products, which would adversely affect our results of operations, cash flows and business.




14





In the event that our financial condition inhibits our ability to pay license fees or royalty payments due under our license agreements, our rights to use, transfer or sublicense those licenses could be jeopardized in the event of a default in payment of fees or royalties.  The loss of any of the foregoing licenses could have a materially adverse effect on our ability to produce our products or introduce new HIV or other diagnostic products in countries covered by those patents since the license agreements provide necessary proprietary processes or components for the manufacture of our products.





Our success depends on our ability to protect our proprietary technologies.





The medical diagnostics test industry places considerable importance on obtaining patent, trademark, and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or to obtain licenses to patents for products and technologies, both in the United States and in other countries.





As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology. These patent applications and patents, when filed, are intended to cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products, and apparatus relating to the use or manufacture of those products. We will also rely on trade secrets, know-how, and continuing technological advancements to protect our proprietary technology.  There is, however, no assurance that we will be successful in obtaining the required patent protection or that such protection will be enforced in certain countries in which we compete.





We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. However, these parties may not honor these agreements and we may not be able to successfully protect our rights to unpatented trade secrets and know-how. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.





Certain of our employees, including scientific and management personnel, were previously employed by competing companies.  Although we encourage and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us.





We have collaborated in the past and expect to collaborate in the future with universities and governmental research organizations which, as a result, may acquire part of the rights to any inventions or technical information derived from collaboration with them.





We may incur substantial costs and be required to expend substantial resources in asserting or protecting our intellectual property rights, or in defending suits against us related to intellectual property rights. Disputes regarding intellectual property rights could substantially delay product development or commercialization activities. Disputes regarding intellectual property rights might include state, federal or foreign court litigation as well as patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office. An adverse decision in any proceeding regarding intellectual property rights could result in the loss or limitation of our rights to a patent, an invention or trademark.




15





We may need to establish additional collaborative agreements, and this could have a negative effect on our freedom to operate our business or profit fully from sales of our products.





We may seek to collaborate with other companies to gain access to their research and development, manufacturing, marketing and financial resources.  However, we may not be able to negotiate arrangements with any collaborative partners on acceptable terms. Any collaborative relationships that we enter into may include restrictions on our freedom to operate our business or to profit fully from the sales of our products.





Once a collaborative arrangement is established, the collaborative partner may discontinue funding any particular program or may, either alone or with others, pursue alternative technologies for the protects or diseases we are targeting. Competing products, developed by a collaborative partner or to which a collaborative partner has rights, may result in the collaborative partner withdrawing support as to all or a portion of our technology.





Without collaborative arrangements, we must fund our own research and development activities, accelerating the depletion of our financing resources and requiring us to develop our own marketing capabilities. Therefore, if we are unable to establish and maintain collaborative arrangements, we could experience a material adverse effect on our ability to develop products and, once developed, to market them successfully.





The time needed to obtain regulatory approvals and respond to changes in regulatory requirements could adversely affect our business.





Our existing and proposed products are subject to regulation by the FDA, Russian and Indian regulatory bodies and other governmental or public health agencies.  In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products.  In addition, we are often required to obtain approval or registration with other foreign governments or regulatory bodies before we can import and sell our products in these countries.





The process of obtaining required approvals or clearances from governmental or public health agencies can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities and other costly, time-consuming procedures.  The submission of an application to the SFDA, the FDA or other regulatory authority does not guarantee that an approval or clearance to market a product will be received.  Each authority may impose its own requirements and delay or refuse to grant approval or clearance, even though a product has been approved in another country or by another agency.





Moreover, the approval or clearance process for a new product can be complex and lengthy.  This time span increases our costs to develop new products as well as the risk that we will not succeed in introducing or selling them in our target markets.





Newly promulgated or changed regulations could also require us to undergo additional trials or procedures, or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all.





We engage contract manufacturers and plan to conduct international manufacturing operations to produce some of our products, including our rapid tests currently being commercialized.





We have engaged a domestic contract manufacturer to produce our BED Incidence tests and our Aware MessengerTM sampling device and another in Thailand to produce our rapid HIV tests. We intend to subsequently introduce a new line of products using the Ani technology platform, and again expect to rely on outsourced or overseas manufacturing organizations. Initially, none of these entities will have more than limited experience, if any, in manufacturing our products and will have no experience in manufacturing them in commercial quantities.  Furthermore, our rapid tests are not yet approved for sale in Thailand, which precludes us from selling them in certain countries in which approval in the country of manufacture, i.e. a “Certificate of Origin,” is a prerequisite to local product approval.  While outsourcing our manufacturing processes to contract manufacturers may permit us to expand our manufacturing capacity more quickly, it may also subject us to problems in such areas as:




16





•
transferring the technology from the laboratory or pilot operation to the contract manufacturer on a commercial scale;•
lack of technical knowledge regarding regulated procedures and the ability of the contract manufacturer to obtain and maintain the necessary GMP or other regulatory certifications;•
uncertain or unreliable production yields;•
maintaining quality control and assurance;•
regulatory compliance, since most rapid test manufacturers do not produce products that are as stringently controlled as HIV diagnostics;•
misappropriation of intellectual property, particularly in foreign countries where patent protection is less stringent, and depending on the extent of manufacturing processes that are outsourced;•
developing market acceptance for new product;•
production yields;•
raw material supply;•
shortages of qualified personnel; and•
maintaining appropriate financial controls and procedures.





Any of these problems could affect our ability to meet increases in demand should our products gain market acceptance and could impede the growth of our sales revenues.





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





Among the critical items we purchase from qualified sole source suppliers are various conjugates, and HIV-positive and HIV-negative testing 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 or our contract manufacturer’s ability to manufacture products in sufficient quantities, particularly as we increase our manufacturing activities in support of commercial sales.  Further, price increases imposed by these suppliers may result in increased costs and reduced margins to us, if we are unable to pass the increased costs on to our customers.  In addition, if our financial condition impairs our ability to pay for critical components on a timely basis, our suppliers may delay or cease selling critical components to us, which could also restrict our ability to manufacture.  We typically do not have long-term supply agreements with these suppliers, relying instead on periodic purchase orders to acquire materials with the result that suppliers could delay or decline to ship components until payment is made in advance or on a COD basis.





We May Not Be Able to Retain and/or Attract Key Executives and Other Personnel.





A large percentage of our executives and senior employees left the Company during 2008.  As a small company, our success depends on the services of key employees in various research and development, administrative, marketing and quality systems positions.  Our inability to replace or attract key employees in certain positions as a result of our financial condition, or for other reasons, could have a material adverse effect on our operations.





Our Research, Development and Commercialization Efforts May Not Succeed or Our Competitors May Develop and Commercialize More Effective or Successful Diagnostic Products.





In order to remain competitive, we must regularly commit substantial resources to research and development and the commercialization of new products.  The research and development process generally takes a significant amount of time and money from inception to commercial product launch.  This process is conducted in various stages.  During each stage there is a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a product in which we have invested substantial amounts of money.




17





A primary focus of our efforts has been rapid HIV tests that we are commercializing or that are in the process of being developed.  We plan to expand our product line to include tests for other STD’s or synergistic diseases or conditions.  However, there can be no assurance that we will have the funds to perform the necessary research and development to do this.  Moreover, there can be no assurance that will succeed in our research and development efforts with respect to rapid tests or other technologies or products or in our commercialization of these tests.





Successful products require significant development and investment, including testing, to demonstrate their efficacy, cost-effectiveness and other benefits prior to commercialization.  In addition, regulatory approval must be obtained before most products may be sold.  Regulatory authorities may not approve these products for commercial sale.  In addition, even if a product is developed and all applicable regulatory approvals are obtained, there may be little or no market for the product at a price that will allow us to earn a reasonable profit, or we may be unable to obtain the requisite licenses to sell the product or to qualify for a government tender, which are often requirements in third world countries where the greatest need and largest market for HIV diagnostic testing exists.  Accordingly, if we fail to develop commercially successful products, or if competitors develop more effective products or a greater number of successful new products, or there are governmental limitations affecting our ability to sell our products, customers may decide to use products developed by our competitors.  This would result in a loss of current or anticipated future revenues and adversely affect our results of operations, cash flows and 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.  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.  In addition, if acceptance for oral fluid testing expands, we may experience competition from companies in areas where intellectual property rights may not be as stringent as in the United States.  These developments could render our technologies or products obsolete or noncompetitive or otherwise affect our ability to increase or maintain our products’ market share. Further, the greater resources of our competitors could enable them to develop competing products more quickly so as to make it difficult for us to develop a share of the market for these products.  By having greater resources, our competitors may also be able to respond more quickly to technology changes in the marketplace and may be able to obtain regulatory approval for products more quickly than we can.  Our future success will depend on our ability to remain competitive with other developers of medical devices and therapies.





Our Quarterly Results May Fluctuate Due to Certain Regulatory, Marketing, Financing 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 products we are commercializing or seeking to develop;•
the extent to which our current or proposed new products gain market acceptance;•
the timing and size of purchases by our customers, distributors or joint venture partners;•
introductions of alternative means for testing for HIV by competitors;•
changes in the way regulatory authorities evaluate HIV testing, including supplemental testing of the results of a rapid HIV screening test;•
the failure to raise funds to continue our operations; and•
customer concerns about the stability of our business which could cause them to seek alternatives to our product.





The Success of Our Plans to Enter International Markets May Be Limited or Disrupted Due to Risks Related to International Trade and Marketing and the Capabilities of Our Distributors, Manufacturers and Joint Venture Partners.




18





We must rely on revenues to be generated from sales of our current or planned incidence and rapid tests, largely to international distributors and/or joint ventures.  We believe that our alternative fluid-based tests can provide significant benefits in countries that do not have the facilities or personnel to safely and effectively collect and test blood samples.  To date, however, sales to international customers have resulted in relatively insignificant revenues.  A majority of the companies with which we compete in the sale of HIV screening tests actively market their diagnostic products outside of the United States.  Manufacturers from Japan, Canada, Europe, and Australia offer a number of HIV screening tests in those markets, including HIV-1/2 rapid tests, which are not approved for sale in the U.S. market.  There can be no assurance that our products will compete effectively against these products in foreign markets.  The following risks may limit or disrupt the success of our international efforts:





•
the imposition of government controls (regulatory approval);•
export license requirements;•
political and economic instability;•
trade restrictions;•
changes in tariffs;•
difficulties in managing international operations (difficulty in establishing a relationship with a foreign distributor, joint venture partner, or contract manufacturer with the financial and logistical ability to maintain quality control of product);


•
the ability to secure licenses for intellectual property or technology that are necessary to manufacture or sell our products in the selected countries;•
fluctuations in foreign currency exchanges rates;•
the financial stability of our distributors and/or their expertise in obtaining local country regulatory approvals;•
the financial capabilities of potential customers in lesser-developed countries or, alternatively, our inability to obtain approvals which would enable such countries access to outside financing, such as the World Bank;•
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;•
establishing market awareness; and•
external conditions such as regional conflicts, health crises or natural disasters.





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





An Economic Downturn, Terrorist Attacks or Other Conditions Beyond Our Control May Adversely Affect Our Business or Our Customers May Not Be Able to Satisfy Their Contractual Obligations and We May Not Be Able to Deliver Our Products as a Result of the Impact of Conditions Such as Certain World Events or Natural Disasters.





Changes in economic conditions could adversely affect our business.  For example, in a difficult economic environment, customers may be unwilling or unable to invest in new diagnostic products, may elect to reduce the amount of their purchases or may perform less HIV testing.  A weakening business climate could also cause longer sales cycles and slower growth, and could expose us to increased business or credit risk in dealing with customers adversely affected by economic conditions.





Terrorist attacks or regional conflicts and subsequent governmental responses to these attacks could cause further economic instability or lead to further acts of terrorism in the United States and elsewhere.  These actions could adversely affect economic conditions outside the United States and reduce demand for our products internationally. Terrorist attacks could also cause regulatory agencies, such as the FDA or agencies that perform similar functions outside the United States, to focus their resources on vaccines or other products intended to address the threat of biological or chemical warfare.  This diversion of resources could delay our ability to obtain regulatory approvals required to manufacture, market or sell our products in the United States and other countries.




19





Our business model and future revenue forecasts call for a significant expansion of sales in the People’s Republic of China as well as in Africa, Russia, India and elsewhere upon successful commercialization of our rapid test products.  Should conditions beyond our control, such as disease outbreaks, natural disasters, war or political unrest, redirect attention from the worldwide HIV/AIDS epidemic or concern for other STD’s, if and when we are able to develop and introduce such diagnostic products, our customers’ ability to meet their contractual purchase obligations and/or our ability to supply product internationally for either evaluation or commercial use may prevent us from achieving the revenues we have projected.  As a result, we may have to seek additional financing beyond that which we have projected, which may not be available on the timetable required or on acceptable terms that are not substantially dilutive to our stockholders, or we may have to curtail our operations, or both.





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 $5,000,000 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.





Item 2. Properties





Our principal corporate offices, administrative, sales and marketing, research and development and support facilities are located at 15875 S.W. 72nd Avenue, Portland, Oregon, 97224 and consist of approximately 7,000 square feet of leased office and laboratory space.





We believe our properties are adequate for our current needs.





PART II





Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters





Trading Market





Our common stock, par value $0.03 per share, is traded on the OTC Bulletin Board (“OTCBB”) under the symbol “CBMC.”   High and low quotations reported by the OTCBB are shown below.  These quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not represent actual transactions.





Fiscal Year

Quarter

High


Low2010

4th

$
0.009


$
0.0052010

3rd


0.009



0.0052010

2nd


0.010



0.0052010

1st


0.012



0.0062009

4th

$
0.018


$
0.0052009

3rd


0.012



0.0042009

2nd


0.015



0.0022009

1st


0.013



0.005





20




On April 22, 2011, there were approximately 297 holders of record of our common stock.  The closing price of our common stock on April 22, 2011 was $0.03 per share.  We have never paid any cash dividends, and our Board does not anticipate paying cash dividends in the foreseeable future.  We intend to retain any future earnings to provide funds for the operation and expansion of our business.





Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations





The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K.  This MD&A should also be read in conjunction with Item 1.A. “Risk Factors.”




This MD&A contains forward-looking statements regarding our business development plans, the characteristics and growth of our markets and customers; our objectives and plans for future operations and products and our liquidity and capital resources. Forward-looking statements are generally identifiable by the use of terms such as “anticipate,” “will,” “expect,” “believe,” “should” or similar expressions. These forward-looking statements express our current intentions, beliefs, expectations, strategies or predictions and are based on a number of assumptions and currently available information.  Although we believe that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate given the inherent uncertainties as to the occurrence or nonoccurrence of future events. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.  Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including, without limitation, our ability to obtain an increased market share in the diagnostic test market; market acceptance of our products by governmental and other public health agencies, health care providers and consumers; the success of our future marketing and brand-building efforts; FDA and international regulatory actions; our ability to protect our proprietary technologies; the further development of our technologies and products; our ability to compete successfully against existing and new competitors; our future financial and operating results; our liquidity and capital resources; our ability to obtain additional financing as necessary to fund both our short- and long-term business plans; our ability to terminate or reduce our debt obligations; changes in domestic or international conditions beyond our control that may disrupt our or our customers’ or distributors’ ability to meet contractual obligations; changes in health care policy in the United States or abroad; fluctuations in market demand for and supply of our products; public concern as to the safety of products that we or others develop and public concern regarding HIV and AIDS; availability of reimbursement for use of our products from private health insurers; governmental health administration authorities and other third-party payors; our ability to attract or retain key personnel and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations).





Overview of Critical Events in 2010





In 2010 we were able to secure modest funding from two investors which enabled us to sustain our existing products as well as complete the prototype for Aware II, our new product for the US and western markets.  While we were not successful in securing long term agreements, these two investors invested a total of $680,000 in advances that were converted to stock purchases after our fiscal year-end upon completion of pending subscription agreements.





With the limited funding available we focused on sustaining our products and operations in the US as well as building a prototype rapid test for the US and western markets.  New competition in the BED product segment affected our ability to sell this product and resulted in reduced revenues.





In 2010 we continued our engagement with our distributors as well as initiating strategic projects in Russia and UAE.  Our AwareTM HIV-1/2 OMT sales were down 9% from 2009. Most of our AwareTM HIV-1/2 OMT Rapid Tests sales were in Africa, through our South African distributor.  Local sales of our rapid test in China were insignificant during 2010 as our financial constraints limited the operations of our JV in China.




21





In 2010 we experienced competition for our BED Incidence Test for the first time.  This led to a 55% decrease in our BED sales revenue from 2009.  Sales of BED Incidence Test accounted for 57% of our revenues in 2010 and posted a 55% revenue decrease compared with 2009.  Such sales tend to be irregular as public health and research institutions begin or conclude various studies to monitor the incidence of HIV infection within their subject populations.  Our AwareMessengerTM oral fluid sample collection device and our Life Sciences reagents, accounted for than 12% of our 2010 sales.





Business Environment





Although we have received regulatory approval in a number of countries, there is a long lag time between regulatory approval and sales.  In our target markets, government ministries of health or similar government and nongovernmental agencies are the primary purchasers of our products, typically through a “lowest-cost” tender process. These purchasers have historically purchased blood-based HIV tests.  We have had to overcome the obstacle of changing these purchasers’ mindsets from preferring tests that use the current blood standard of care.  We have expended much time, money and effort to try to convince government bodies and non-governmental organizations to try our oral fluid tests, both for its ease of use, efficiency and lower-cost benefits.





We consider these efforts to be part of a strategy in which the “standard of care” for HIV diagnosis evolves from the exclusive use of blood tests to more widespread use of non-invasive oral fluid-based tests.  If we can successfully change the standard of care, we expect to reach a point at which our revenue will increase significantly. We cannot forecast whether or when this point will occur, as it is largely governed by factors beyond our control.





We believe the demand for fast, easy-to-use HIV tests is strong and growing.  By many accounts, governments are requiring more testing for HIV and allocating more funds to such testing, non-governmental organizations and charities have increased their funding for HIV testing too.  Although we face barriers to market acceptance, we have started making inroads especially in a few African countries.  Although we are unable to predict future demand for our products, we believe that we will are well-positioned to increase market acceptance of our products and our market share.





Outlook





In July 2010 we entered into a series of agreements providing for (i) the restructuring of our outstanding indebtedness to Marr and SF Capital Partners Limited (“SF Capital”), (ii) the transfer of our ownership interests in one of our Chinese joint ventures, Beijing Marr, to Kangplus and (iii) the transfer of our ownership interests in or other Chinese joint venture, Beijing Calypte, to Marr or a designate of its choice. In October 2010, we issued common stock to SF Capital pursuant to our debt restructuring agreement.  The transfer of our ownership interests in the Chinese joint ventures are awaiting approval by Chinese governmental authorities.





We do not have any long term agreement for capital infusion at this point in time. As our cash flows from our operating and investing activities are currently not adequate to sustain our operations, if we are unable to raise capital, we will likely be unable to continue our operations.  Failure to obtain additional financing and to resolve the existing defaults with respect to the Credit Facility and the Convertible Notes will likely cause us to seek bankruptcy protection under Chapter 7 of Title 11 of the United States Code, 11 U.S.C. § 101 et seq., which would have a material adverse effect on our business, on our ability to continue our operations and on the value of our equity.





Management believes that we have the ability to sustain our operations, at least for the near-term, through effective management of our operations and the ability to raise additional capital through private placements of equity.  However, if we are unable to raise sufficient additional capital, we will be unable to meet our operating and trade debt obligations and will likely be unable to continue our operations.





We believe that certain factors are critical to our success, including having sufficient financial liquidity to fund our operations; raising additional funds through the private placement of equity; continuing to expand our marketing and increasing sales of our products; and developing a larger international market presence.




22





Since 2003 we have developed and brought to market our AwareTM Rapid Test Product Line and Aware MessengerTM Oral Fluid Sample Collection Device and have either developed or have the technology to develop next generation HIV test products and additional diagnostic test products based on our technology and test platform.  These critical additions to our product base over the past few years have positioned us to grow our business and to achieve better margins as we move into the market for HIV tests. These products are the core of our business and the key to our future success.





In order to accomplish our business plan and meet our financial obligations, we must:





-    Raise additional capital to fund working capital requirements.


-    Reduce accounts payable and other debt and associated fixed costs.


-    Increase marketing and sales of our products through our current and new distribution network.


-     Successfully conduct the clinical trial for our Aware II product





We have been actively pursuing potential opportunities to address the above matters, the ultimate resolution of which is beyond our control and will have a significant impact on our financial condition and ability to continue our operations. As a result, no assurances can be given that these transactions will be completed as contemplated or at all, which could have a detrimental effect on our ability to continue our operations. For more information regarding our business plan and these transactions, see "Item 1. Business - General, Requirements of Additional Capital and Business Plan" and for the related risks, see "Risk Factors" below.





As 2011 begins, we remain focused on our strategy of increasing marketing and sales in the countries where our products are registered, seeking additional product registrations in countries where we have a high likelihood of making sales, planning for the clinical trials of Aware II and keeping our operations costs low.





AwareTMBED Incidence Test





We began selling the BED Incidence Test in the fourth quarter of 2004.  It accounted for approximately 58% and 79% of our sales in calendar years 2010 and 2009, respectively.  In absolute terms, revenue from the sale of the Incidence Test decreased by approximately 55% between 2009 and 2010; this was primarily due to the new competition we now have for this product.





AwareTM HIV 1/2OMT Rapid Tests





Sales of our HIV-1/2 OMT rapid diagnostic tests accounted for approximately 30% of our revenues in 2010 compared with 21% in 2009.  We expect that our future near- and medium-term revenues will be derived primarily from selling our HIV-1/2 rapid tests in both the professional and over-the-counter (OTC) markets.





AwareTMMessengerTM Sampling Device





Our AwareMessengerTM oral fluid sample collection device and our Life Sciences reagents, both introduced during early 2008, accounted for approximately 12% of our 2010 sales.





Financial Condition and Results of Operations





During 2010 and 2009, we used cash of $0.7 million and $1.1 million, respectively, in our operations.  In both periods, the cash used in operations was primarily for development and commercialization of our rapid tests, as well as for our selling, general and administrative expenses.





The following summarizes the results of our operations for the years ended December 31, 2010 and 2009 (in thousands):





23




Years Ended December 31,2010


2009Total revenues

$
444


$
726Cost of product sales


260



390Gross Margin


184



336Operating expenses:Research and development


282



193Selling, general and administrative


999



1,397Total operating expenses


1,281



1,590Loss from operations


(1,097
)


(1,254
)Interest expense, net


(545
)


(1,592
)Other income (expense), net


10,931



(106
)Provision for income taxes


(181
)


(2
)Deemed dividend attributable to modification of warrants


-



(1
)Net income (loss) from continuing operations

$
9,108


$
(2,955
)Net loss from discontinued operations


(136
)


(333
)Net loss attributable to noncontrolling interest from discontinued operations


(131
)


(320
)Net income (loss)

$
8,841


$
(3,608
)





Years Ended December 31, 2010 and 2009




Our revenue for 2010 totaled $444,000 compared with $726,000 for 2009, a decrease of $282,000 or 39%.   Sales of our BED Incidence Test accounted for 57% of our sales in 2010, compared with 79% in 2009.  Revenue from the sales of the BED Incidence Test decreased by 55% in 2010 compared with 2009 primarily driven by newfound competition for this product line.  Such sales tend to be irregular as public health and research institutions begin or conclude various studies to monitor the incidence of HIV infection within their subject populations.  Sales of our AwareTM HIV-1/2 rapid tests accounted for 30% and 21% of our revenues for 2010 and 2009, respectively.  Revenues from the sale of our HIV-1/2 rapid tests decreased  by 7% in 2010 compared with revenues in 2009, primarily due to economic conditions.  Our AwareMessengerTM oral fluid sample collection device and our Life Sciences reagents, both introduced during early 2008, accounted for 12% of our 2010 sales.


Three customers accounted for approximately 53% of our revenue for 2010.  Our South African distributor purchased both BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 29% of our 2010 revenue. The two other US customers who purchased the BED Incidence Test purchases accounted for 14% and 10% of our 2010 revenue. In 2009, our South African distributor purchased both BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 23% of our 2009 revenue.  A Chinese customer and New York customer accounted for 16% and 10% of 2009 revenue.





We reported a gross margin of 41% of sales in 2010, compared with a gross margin 46% in 2009.   Margins are down due to reduced sales volumes and increased shipping costs and costs of goods sold.  The margins we reported in both 2010 and 2009, however, are not typical of our expected future results because of the relatively nominal amounts of revenues and product quantities over which the quality systems costs and certain fixed expenses, like annual royalty minimum payments, have been allocated.  Product costs in both periods are based on resource-constrained purchasing patterns and pilot-plant-sized production lots, and do not reflect the economies of scale that we anticipate when we achieve true commercial scale operations.





Research and development costs increased by $89,000 or 46%, from $193,000 in 2009 to $282,000 in 2010. R&D expense increase is primarily due to the ramping up the R&D spending as we work on a new product. Selling, general and administrative costs decreased by $398,000, or 31% from $1,397,000 in 2009 to $999,000 in 2010.  The primary components of the net decrease in 2010 include the following:




24




·
$208,000 in non-recurring legal fees incurred in 2009 in connection with litigation that was settled in March 2010


·
A $120,000  decrease in salary and benefit expense attributable to stock option forfeiture


·
A $40,000 decrease in overhead due to reduced rent costs as a result of  lease renegotiation and move to a new location


·
A $30,000  decrease in tax and audit fees




Our 2010 net income was $9.0 million, compared to a loss of $3.6 million in 2009.  This net income increase reflects restructuring of our outstanding indebtedness to Marr and SF Capital and the associated transfer of our Chinese joint ventures.





We recorded net interest expense of $545,000 in 2010 compared with net interest expense of $1,592,000 in 2009.  The decrease in interest expense primarily results from the restructuring of our outstanding indebtedness to Marr and SF Capital.





The following table summarizes the components of interest expense (in thousands):




Years ended December 31,2010


2009Interest expense on debt instruments paid or payable in cash

$
(190
)

$
(365
)Non-cash expense composed of:Accrued interest on 8% Convertible Notes


(231
)


(482
)Accrued interest on 4% Note Payable


(4
)


-Amortization of discounts associated with March 2007 extensionand December 2007 restructuring of 8% convertible notes andMarr Credit Facility notes


-



(626
)Expense attributable to dividends on mandatorily redeemable SeriesA preferred stock


(120
)


(120
)Total non-cash items


(355
)


(1,228
)Total interest expense


(545
)


(1,593
)Interest income


-



1Net interest expense

$
(545
)

$
(1,592
)





Liquidity and Capital Resources




For the year ended December 31, 2010, we incurred a net income of $9.0 million but a negative cash flow of $0.7 million.  At December 31, 2010, we had a working capital deficit of $3.5 million and our stockholders’ deficit was $5.1 million. Our cash balance at December 31, 2010 was $0.1 million.





Our consolidated operating cash burn rate for 2010 averaged approximately $57,000 per month compared to approximately $88,000 per month in 2009.  Our decreased burn rate for 2010 reflects our efforts to significantly reduce or eliminate the expenditures required to ramp up marketing and manufacturing initiatives to achieve our near-term milestones.





During 2010, two of our existing investors advanced funds aggregating $680,000 to us in anticipation of a financing agreement. As of the date of this filing, we do not have definitive agreements with these investors regarding the terms of these advances.




25





Liquidity Needs and our Business Plan





We are taking steps to address our capital requirements for financial liquidity and have developed a business plan that we believe will provide us with sufficient financial resources to continue to conduct our operations. See "Item 1. Business - General, Requirements of Additional Capital and Business Plan" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook " for more details on our plan. However, no assurances can be given that we will successfully accomplish the objectives of our plan.





We believe that we will continue to incur net losses and negative cash flow from operating activities through 2011.  We have financed our operations from our inception primarily through the private placements of preferred stock and common stock, our initial public offering and the issuance of convertible notes and debentures.  Due to our historical operating losses, our operations have not been a source of liquidity. We do not have sufficient capital resources to fund our operations beyond the very near-term.  We presently do not have any available credit, bank financing or other external sources of liquidity. Additional financing is required in order to meet our current and projected cash flow deficits from operations. In order to obtain financing, we may need to sell additional shares of our common stock, other equity or debt securities or borrow funds from private lenders. Our ability to raise additional capital will depend upon the status of capital markets and industry conditions. Moreover, it may be difficult, or impossible, for us to raise additional capital because our stock price has often traded at below its par value and because we may not have sufficient shares of authorized stock to issue to investors. If we issue additional equity or debt securities, stockholders may experience dilution or the new equity securities may have rights, preferences or privileges senior to those of existing stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.  If we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.





We may experience fluctuations in operating results in future periods due to a variety of factors, including our ability to obtain additional financing in a timely manner and on terms favorable to us, our ability to successfully implement our business plan and execute our business model, the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure and the implementation of marketing programs, key agreements, and strategic alliances, and general economic conditions as well as those specific to our industry.





Our independent accountants have stated in their report dated May 20,2011 that our recurring operating losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern.





Critical Accounting Policies and Estimates





This MD&A is based upon our consolidated financial statements, which have been prepared in accordance with U.S generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates and judgments, including those related to bad debts, inventories, intangible assets, income taxes, restructuring costs, derivative and anti-dilution liabilities and contingencies and litigation.  We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.





We believe the following critical accounting policies and estimates, among others, reflect our more significant judgments used in the preparation of our consolidated financial statements.





·
Revenue Recognition.  We recognize revenue from product sales upon shipment to customers and when all requirements related to the shipments have occurred.  Should changes in terms cause us to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.




26




·
Inventory Valuation.  We adjust the value of our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions and development of new products by our competitors.  Further, we also review our inventories for lower of cost or market valuation.





·
Deferred Tax Asset Realization.  We record a full valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.  While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.





·
Classification of Financial Instruments with Characteristics of both Liability and Equity.  We account for financial instruments that we have issued and that have characteristics of both liability and equity in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, as codified by FASB ASC topic 480, Distinguishing Liabilities from Equity(“ASC 480”).  SFAS No. 150 specifies that mandatorily redeemable financial instruments are to be recorded as liabilities unless the redemption is required to occur upon the liquidation or termination of the issuer.  SFAS No. 150 also specifies that a financial instrument that embodies a conditional obligation that an issuer may settle by issuing a variable number of its equity shares is to be classified as a liability if, at inception, the value of the obligation is based solely or predominantly on variations inversely related to changes in the fair value of the issuer’s equity shares.  Should a financial instrument not be classified as a liability under the provisions of SFAS No. 150, we further apply the criteria in Emerging Issues Task Force (EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,as codified by FASB ASC topic 815, Derivatives and Hedging(“ASC 815”),which enumerates additional criteria to determine the appropriate classification as liability or equity.  We also evaluate the anti-dilution and/or beneficial conversion features that may be included in our financial instruments in accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,as codified by ASC 815, which may classify the feature as an embedded derivative and require that the financial instrument be bifurcated and the feature accounted for separately.  We evaluate each financial instrument on its own merits at inception or other prescribed measurement or valuation dates and may engage the services of valuation experts and other professionals to assist us in our determination of the appropriate classification.. .  .  .  .  .





·
Stock based compensation.    We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”) as codified in FASB ASC topic 718, Compensation — Stock Compensation(“ASC 718”), effective January 1, 2006.  We adopted SFAS 123R using the modified prospective method, which requires that we apply the provisions of SFAS 123R to all awards granted or modified after the date of adoption.  We recognized the unrecognized expense attributable to awards not fully vested at our January 1, 2006 date of adoption in our net loss during 2006 and 2007 using the same valuation method (i.e. Black-Scholes) and assumptions determined under the original provisions of SFAS 123, “Accounting for Stock-Based Compensation,” as disclosed on a pro-forma basis in our previous financial statements.  Under the fair value recognition provisions of SFAS 123R, we recognize stock-based compensation, net of an estimated forfeiture rate which results in recognizing compensation expense for only those awards expected to vest, over the service period of the award.  Since our adoption of SFAS 123R, we have estimated the fair value of options granted to employees and directors, and we expect to estimate the fair value of future grants, using the Black-Scholes option pricing model.  This model requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and pre-vesting option forfeitures.  To date, we have generally estimated the expected life of options granted based on the simplified method provided in Staff Accounting Bulletin No. 107 for “plain vanilla” options.  Where appropriate, we will consider separately for valuation purposes groups of employees or directors that have similar historical exercise behavior.  We estimate the volatility of our common stock at the date of grant based on its historical volatility over a period generally equivalent to the expected term of the grant.  We estimate the expected pre-vesting forfeiture rate and recognize expense for only those shares expected to vest.  We have estimated our forfeiture rate based on our historical experience with stock-based awards that are granted and forfeited prior to vesting.  If the actual forfeiture rate is materially different from the estimate, the stock-based compensation expense could also differ from what we have recorded in the current period.  As required under ASC 718, we will review our valuation assumptions at each grant date and, as a result, may periodically change the valuation assumptions used to value employee stock-based awards granted in future periods.





27





Adoption of New Accounting Pronouncements




In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. The guidance became effective for the Company with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the Company with the reporting period beginning July 1, 2011. Adoption of this new guidance did not have a material impact on the Company’s financial statements.


In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition), or ASU 2009-13, and ASU 2009-14, Certain Arrangements That Include Software Elements, (amendments to FASB ASC Topic 985, Software), or ASU 2009-14, ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy, The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method.  ASU 2009-14 removed tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance.  ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of these statements effective January 1, 2011 did not have a material effect on our consolidated financial statements.
 
 Item 8. Financial Statements and Supplementary Data





The Company’s Consolidated Financial Statements as of and for the year ended December 31, 2010 are included on pages F-1 through F-33 of this Annual Report on Form 10-K.





Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





None.





Item 9A.  Controls and Procedures





(1)        Evaluation of Disclosure Controls and Procedures




As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive and financial officer (our “CEO”) of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  This evaluation identified a deficiency in our disclosure controls and procedures with respect to accounting procedures utilized by our Chinese subsidiaries, Beijing Calypte and Beijing Marr, and their reporting to us of financial and other material information.  Based on this evaluation, our CEO concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.  Moreover, our CEO has determined that this deficiency constitutes a material weakness in our internal control over financial reporting.





28





As a result of our evaluation, we determined that we did not have adequate controls and procedures with respect to our Chinese subsidiaries and we were unable to adequately disclose financial and other material information or to do so in a timely manner.  Beijing Marr and Beijing Calypte employed a single financial manager for both companies who resigned in the first quarter of 2008.  Because of financial constraints, this position has since remained vacant.  There are no personnel at Beijing Marr or Beijing Calypte with sufficient understanding and skills in the application of U.S. GAAP or in U.S. public company reporting obligations to prepare proper financial statements or provide us with other material information to enable us to properly account for and disclose both financial and other material information.  The absence of qualified financial personnel at our Chinese subsidiaries has precluded proper monitoring of the financial results of those operations and timely preparation of sufficient and accurate financial statements, rendering our efforts to apply controls over the completeness and accuracy of our Chinese subsidiaries financial statements, closing processes relating to reconciliations, journal entries, spreadsheets, reporting packages and review and preparation of monthly expenditure reports ineffective.


Because of the limited level of activity in which our Chinese subsidiaries were engaged during the year ended December 31, 2009, there were no material adjustments required to the financial information ultimately prepared by those subsidiaries.  After we entered into the Debt Agreement with Marr and the Equity Agreement with Marr and Kangplus in July 2010, we began reporting the results of Beijing Marr and Beijing Calypte as discontinued operations.  As we no longer consolidate our results with those of these entities, we no longer consider their internal controls to be relevant to Calypte’s operations going forward.





(2)        Management’s Report on Internal Control over Financial Reporting





Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a–15(f) and 15d-15(f).  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has identified the following material weaknesses in our internal control over financial reporting as of December 31, 2010:





We did not maintain an effective control environment, which is the foundation for the discipline and structure necessary for effective internal control over financial reporting, as evidenced by: (i) lack of segregation of duties over individuals responsible for certain key control activities; (ii) an insufficient number of personnel appropriately qualified to perform control monitoring activities, including the recognition of the risks and complexities of transactions; and (iii) an insufficient number of personnel, such as absence of permanent chief financial officer, with an appropriate level of GAAP knowledge and experience or training in the application of GAAP commensurate with our financial reporting requirements. This control environment material weakness contributed to the company not having effective controls to ensure an effective financial statement close process such that financial statements are completed and prepared in a timely manner.




Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements should they occur. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the control procedure may deteriorate.





This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.





29





PART III





Item 10.  Directors, Executive Officers and Corporate Governance





Following is a list of our directors and executive officers as of April 28, 2010. Directors serve until the next annual meeting stockholders and until their successors are elected or until their earlier death, retirement, resignation or removal.





Name
Age
Position
Director SinceAdel Karas
66
President, Chief Executive Officer, Chief Financial Officer, Secretary and Director
2007Tareq Al Yousefi
48
Director
2009Kartlos Edilashvili
37
Director
2010





Adel Karaswas appointed to our Board of Directors in May 2007.  In March 2009, the Board of Directors appointed Mr. Karas as our interim Chief Executive Officer, Chief Financial Officer and Secretary, to act our principal executive officer, president and principal financial officer.  In February 2010, Mr. Karas was formally elected as the our President, Chief Executive Officer, Chief Financial Officer and Secretary.  Since December 2005 Mr. Karas has worked as the Regional Director (Asia, Africa & Middle East) for the World Agency of Planetary Monitoring & Earthquake Risk Reduction (WAPMERR) based in Dubai, United Arab Emirates (UAE).  WAPMERR is involved with disaster management and risk assessments.  Prior to his involvement with WAPMERR, in 2003 Mr. Karas co-founded and served as Managing Director of Strategic Energy Investment Group in Dubai. He started this group following his retirement from Petroleum Geo-Services (PGS) in Houston, Texas where he served as Senior Vice President of Business Development for two years before moving to Dubai where he set up and, for the next eight years, served as President of PGS for the Middle East Region.  Mr. Karas served, as well, as the executive vice president for Grant Tensor Geophysical in Houston-Texas and as the president of Tensor Geophysical in Egypt. Mr. Karas attended AinShams University, University of Texas and University of Houston. He holds degrees in Geophysics and Operations Research as well as a Masters Degree in electrical engineering and an MBA.





Tareq Al Yousefi was appointed to our Board of Directors in September 2009.  He is the founder and chief executive officer of Gulf Access LLC, a consultancy company for petro chemical, real estate and industrial projects, where he has served since 2005.  In addition, since 2006, he has been a partner in Polymer Access Pvt. Ltd., which is also involved in petro chemical.  Since 1999, he has served as a market analyst to Borouge Pte. Ltd., a joint venture between ADNOC and Borealis, a leading international petro chemical company.   Mr. Al Yousefi earned a B.A., Bachelors in Aviation Maintenance Management from Embry Riddle Aeronautical University in Florida.  During his seven year stay in the United States he earned a degree in Business Administration, a degree in Aircraft Engineering and a private pilot’s license.  He started his career as an United Arab Emirates air force officer and was trained in the United Kingdom at RAF Cranwell.  Mr. Al Yousefi speaks English, Arabic and Urdu.





Kartlos Edilashvili was appointed to our Board of Directors in February 2010.  Mr. Edilashvili has served as a vice president of a subsidiary of ours in Geneva, Switzerland since August 2007.  From 2005 to 2007 he was a Senior Technical Advisor of WAPMERR in Geneva. Prior thereto, he served as First Secretary for the Embassy of Georgia in Geneva.  Mr. Edilashviliholds an MA in finances from Tbilisi State University.





The Board of Directors and Its Committees





In the past, the Board of Directors had established three standing committees, the Audit Committee, the Compensation Committee and the Nominating Committee.  However, in light of personnel changes on the Board during 2009, those committees are no longer active and do not have any members other than Mr. Karas, who is a member of the Nominating Committee.




30





Section 16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Exchange Act (“Section 16(a)”) requires our executive officers, directors, and persons who beneficially own more than 10% of our Common Stock (collectively, “Reporting Persons”) to file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC. Such Reporting Persons are also required by SEC rules to furnish us with copies of all Section 16(a) forms that they file. To our knowledge, based solely on our review of the copies of such reports furnished to us and written representations that no other reports were required, during the year ended December 31, 2010, all Section 16(a) filing requirements applicable to Reporting Persons were satisfied on a timely basis.





Code of Business Conduct





We previously adopted a Code of Business Conduct that applied to all of our employees, including our chief executive officer and principal financial and accounting officer, and to the members of our Board of Directors.  Given the nearly 100% turnover among our Board of Directors and management team and significant reduction in our staffing during the past two years, we have suspended implementation of our Code of Business Conduct while we consider changes to the code to reflect the needs of the organization and continue to focus on resolving more immediate issues affecting our cash flow and long-term viability.





Item 11.  Executive Compensation





Our only executive officer is Adel Karas, our President, Chief Executive Officer, Chief Financial Officer and Secretary.  Mr. Karas joined Calypte as a nonemployee director in 2007 and took on these executive officer roles in 2008 after the persons who previously held those positions left Calypte.  At present, Mr. Karas does not receive any compensation for  serving in those roles. Mr. Karas holds an option that was granted to him in his capacity as a director during 2007.  The following table sets forth information concerning Mr. Karas’s option as of December 31, 2019:





OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDName

Number of Securities Underlying Unexercised Options (#)

Exercisable


Number of Securities Underlying Unexercised Options (#)

Unexercisable


Option Exercise Price ($)

Option Expiration DateAdel Karas


3,000,000
(1)


-


$
0.11

11/28/17(1) The option vested and became exercisable with respect to (i) 1,500,000 shares on November 28, 2007 (the date of grant); (ii) 750,000 shares on November 28, 2008; and (iii) 750,000 shares on November 28, 2009.





DIRECTOR COMPENSATION





We have no compensation arrangements with our directors.  Directors are reimbursed for their out-of-pocket travel expenses associated with their attendance at Board of Directors and committee meetings.  Mr. Karas holds an outstanding option that was granted to him in his capacity as a director.  See “Outstanding Equity Awards at Fiscal Year-End” above.




31





Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters





The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of April 14, 2011 for (i) all persons known by us to own beneficially more than 5% of our outstanding common stock, (ii) each of our directors, (iii) our chief executive officer and (iv) all current directors and executive officers as a group:





Beneficial Owner (1)
Shares Beneficially Owned
Percent of Total (2)Marr Technologies BV (3)

Strawinskylaan 1431

1077XX, Amsterdam

The Netherlands
74,110,776
13.5%David Khidasheli (4)

Sheikh Zayed Road

Fairmont Building, # 3104

Dubai, United Arab Emirates
50,666,666
9.2%SF Capital Partners Ltd. (5)

3600 South Lake Drive

St. Francis, WI 53235
47,815,698
8.7%Ahmed Abdalla Deemas Alsuwaidi (6)

P.O. Box 681

Sharjah, United Arab Emirates
33,920,000
6.2%Mohamed Ahmed (7)

P.O. Box 33280

Dubai, United Arab Emirates
32,375,000
5.9%Mohamed Yousif Ahmed Saleh Sulaiman (8)

P.O. Box 19533

Sharjah, United Arab Emirates
28,000,000
5.1%Adel Karas (9)
3,050,000
*Tareq Al Yousefi
--
*Kartlos Edilashvili
--
*All current directors and executive officers as a group (4 persons) (9)
3,050,000
**           Represents beneficial ownership of less than 1%.

(1)   To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in this table has sole voting and investment power with respect to the shares set forth  opposite such person’s name.  Except as otherwise indicated, the address of each of the persons in this table is as follows: c/o Calypte Biomedical Corporation, 15875 SW 72nd Avenue, Portland, Oregon 97224.

(2)   Based on 700,168,161 shares outstanding as of April 14, 2011.

(3)   Based on holdings reported in Amendment No. 6 to Schedule 13D dated December 6, 2007 filed with the Commission on March 20, 2008.  Includes shares beneficially owned by Marat Safin. Mr. Safin has voting and investment control over shares held by Marr Technologies BV.

(4)   Based on holdings reported in Amendment No. 1 to Schedule 13D filed with the Commission on August 7, 2009 plus shares we subsequently issued directly to Mr. Khidasheli in a private placement.

(5)   Based on holdings reported in Amendment No. 9 to Schedule 13G filed with the Commission on February 14, 2011.  Michael A. Roth and Brian J. Stark possess voting and dispositive power over all of the shares owned by SF Capital Partners Ltd.

(6)   Based on holdings reported in Schedule 13G dated March 28, 2007 filed with the Commission on October 29, 2007.

(7)   Based on holdings reported in Schedule 13G dated March 28, 2007 filed with the Commission on October 30, 2007.

(8)   Based on holdings reported in Schedule 13G dated March 28, 2007 filed with the Commission on November 2, 2007.

(9)   Includes 3,000,000 shares issuable upon exercise of options that will be exercisable within 60 days after April 14, 2011.





32





Item 13.  Certain Relationships and Related Transactions, and Director Independence





Director Independence





The Board of Directors has determined that Mr. Al Yousefi is the only independent director under the rules of the Nasdaq Stock Market as applied to members of the board of directors and of the audit committee, compensation committee and nominating committee.





Item 14.  Principal Accountant Fees and Services





The following table sets forth the aggregate fees accrued and paid by us for Odenberg Ullakko Muranishi & Co. LLP (“OUM”), our independent registered public accounting firm for the years ended December 31, 2010 and 2009:




2010


2009Audit Fees

$
97,670


$
158,500Audit-Related Fees


--



--Tax Fees


--


$
7,000All Other Fees


--



--





“Audit fees” include fees paid in 2010 and 2009 for the audits of our annual financial statements for 2009 and 2008; fees for the quarterly review of our financial statements for the quarters ended March 31, June 30, and September 30, 2010 and 2009, as well as fees for consultation regarding accounting issues and their impact on or presentation in our financial statements; and fees for the review of registration statements and the issuance of related consents.





All of the audit and non-audit services described above were approved by our Board of Directors in accordance with the applicable rules of the SEC.


PART IV





Item15.  Exhibits, Financial Statement Schedules.





(a)
Certain Documents Filed as Part of the Form 10-K





1.
Our Consolidated Financial Statements are included on pages F-1 through F-48 of this Annual Report on Form 10-K.





2.
Exhibits





33




3.1
Bylaws of the Registrant, as amended on March 7, 2005 (1)3.2
Restated Certificate of Incorporation of Calypte Biomedical Corporation, a Delaware corporation, filed July 31, 1996 (2)3.3
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Calypte Biomedical Corporation effective as of February 14, 2003 (3)3.4
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Calypte Biomedical Corporation, effective as of May 27, 2003, as corrected by Certificate of Correction filed on May 28, 2003 (4)10.1
Form of Indemnification Agreement between the Registrant and each of its directors and officers, as amended January 19, 2004 (5)10.16
First Amendment to License Agreement between the Registrant and New York University, dated as of January 11, 1995 (6)10.17
Second Amendment to License Agreement between the Registrant and New York University, dated as of October 15, 1995 (6)10.18*
Third Amendment to License Agreement between the Registrant and New York University, dated as of January 31, 1996 (6)10.21*
Sublicense Agreement between the Registrant and Cambridge Biotech Corporation, dated as of March 31, 1992 (6)10.22*
Master Agreement between the Registrant and Cambridge Biotech Corporation, dated as of April 12, 1996 (6)10.23*
Sub–License Agreement between the Registrant and Cambridge Biotech Corporation, dated as of April 12, 1996 (6)10.24*
Agreement between the Registrant and Repligen Corporation, dated as of March 8, 1993 (6)10.25*
Non–Exclusive License Agreement between the Registrant and The Texas A&M University System, dated as of September 12, 1993 (6)10.51
Non–Exclusive Patent and License Agreement between the Registrant and Public Health Service, dated June 30, 1999 (7)10.73*
Fourth Amendment to the License Agreement between the Registrant and New York University, dated as of June 1, 2000 (8)10.114
Amendment to Non-Exclusive Patent and License Agreement between Registrant and Public Health Service, dated April 5, 2002 (9)10.121
Distribution Agreement between the Registrant and Zhong Yang Pute Co. dated as of October 10, 2002 (10)10.132
Subscription Agreement between Registrant and Marr Technologies B.V. dated as of August 1, 2003 (11)10.133
Subscription Agreement between the Registrant and Marr Technologies B.V. for 20,000,000 shares of Registrant’s Common Stock dated August 28, 2003 (12)10.134
Agreement for Commitment to Purchase Aggregate of $10,000,000 of 5% Promissory Notes between the Registrant and Marr Technologies B.V. dated November 13, 2003 (13)10.137
Lease Agreement between the Registrant and ARE-1500 East Gude LLC dated as of March 1, 2004 (5)10.142
Form of Registration Rights Agreement between the Registrant and the investors in the May 2004 PIPE financing (14)10.143
Form of Warrant between the Registrant and the investors in the May 2004 PIPE financing (18)10.146**
2004 Incentive Plan, as amended October 11, 201110.148
Form of Registration Rights Agreement between the Registrant and the investors in the July 2004 PIPE financing (15)10.149
Form of Warrant between the Registrant and the investors in the July 2004 PIPE financing (15)10.150
Sublicense Agreement between the Registrant and Abbott Laboratories dated June 28, 2004 (16)10.151
License Agreement and Technology Transfer Agreement between the Registrant and Ani Biotech Oy dated as of September 30, 2004 (16)10.152
License Agreement between the Registrant and Bio-Rad Laboratories, Inc. and Bio-Rad Pasteur dated September 28, 2004 (16)  34
  10.155
Form of $2,000,000 7% Promissory Note issued by the Registrant to Marr Technologies BV dated January 14, 2005 and form of Amendment thereto (17)10.157
Form of Secured 8% Convertible Promissory Note between the Registrant and the investors in the April 2005 financing dated April 4, 2005 (18)10.158
Form of Registration Rights Agreement between the Registrant and the investors in the April 2005 financing dated April 4, 2005 (18)10.159
Form of Series A Warrant between the Registrant and the investors in the April 2005 financing dated April 4, 2005 (18)10.160
Form of Series B Warrant between the Registrant and the investors in the April 2005 financing dated April 4, 2005 (18)10.161
Form of Security Agreement between the Registrant and the investors in the April 2005 financing dated April 4, 2005 (18)10.163
2005 Credit Facility Agreement between the Registrant and Marr Technologies BV dated April 4, 2005 (18)10.164
Agreement effective September 1, 2005 between the Registrant and Marr Technologies Asia Limited describing the rights, duties and obligations of the shareholders of Beijing Calypte Biomedical Technology Ltd., a corporation organized in the Peoples’ Republic of China (19)10.165
Asset Purchase and License Agreement dated November 15, 2005 by and between the Registrant and Maxim Biomedical, Inc. (20)10.166
Amendment to 2005 Credit Facility between the Registrant and Marr Technologies BV effective November 30, 2005 (21)10.168
Equity Transfer Agreement between the Registrant and Marr Technologies Asia Limited dated December 21, 2005 (22)10.169
Agreement dated December 21, 2005 between the Registrant and Marr Technologies Asia Limited describing the rights, duties and obligations of the shareholders of Beijing Marr Bio-Pharmaceutical Technology Ltd. (22)10.173
Form of Warrant between the Registrant and the investors in the February 2007 PIPE financings, effective February 23, 2007 through March 27, 2007 (23).10.174
Form of Subscription Agreement between the Registrant and the investors in the March 2007 PIPE financing, dated March 28, 2007 (23)10.175
Form of Registration Rights Agreement between the Registrant and the investors in the March 2007 PIPE financing, dated March 28, 2007 (28)10.176
Form of Series A Warrant between the Registrant and the investors in the March 2007 PIPE financing, dated March 28, 2007 (23)10.177
Form of Series B Warrant between the Registrant and the investors in the March 2007 PIPE financing, dated March 28, 2007 (23)10.178
Form of Amendment to 8% Secured Convertible Promissory Notes between the Registrant and SF Capital Partners Ltd. dated March 21, 2007, effective March 28, 2007 (23)10.179
Form of Sixth Amendment to 2005 Credit Facility between the Registrant and Marr Technologies BV dated March 21, 2007, effective March 28, 2007 (23)10.180
Form of Amendment to 8% Secured Convertible Promissory Notes between the Registrant and Marr Technologies BV dated March 21, 2007, effective March 28, 2007 (23)10.181
Form of Amendment to 8% Secured Convertible Promissory Notes between the Registrant and Morningtown Limited dated March 21, 2007, effective March 28, 2007 (23)10.182
Form of Amendment to Registration Right Agreement between the Registrant and the investors in the March 2007 private placement, effective July 7, 2007 (24)10.183
Seventh Amendment to 2005 Credit Facility between the Registrant and Marr Technologies BV dated December 4, 2007 (25)  35
  10.184
Amendment No. 3 to Secured 8% Convertible Promissory Notes between the Registrant and Marr Technologies BV dated December 4, 2007 (25)10.186
Registration Rights Agreement, dated as of January 16, 2008, by and between the Registrant and Fusion Capital Fund II, LLC. (26)10.188
Subscription Agreement, dated August 15, 2008, between the Registrant and Tinja Limited (27)10.189
Form of Warrant issued to Tinja Limited (27)10.190
Form of Subscription Agreement between the Registrant and Almyn Limited, effective September 19, 2008 (28)10.191
Form of Warrant issued to Almyn Limited (28)10.193
Resignation and Mutual Release , dated September 10, 2009, between the Registrant and  Julius R. Krevans, M.D., Paul E. Freiman and John J. DiPietro (28)10.194
Subscription Agreement dated as of September 14, 2009, between the Registrant and Carolina Lupascu (29)10.195
Lease dated October 13, 2009 by and between Pacific Realty Associates, L.P. and the Registrant (30)10.196
Subscription Agreement between the Company and Carolina Lupascu, dated as of March 3, 2010, between the Company and Carolina Lupascu (31)10.197
Debt Agreement dated July 2, 2010 among the Registrant, Marr Technologies B.V. (“Marr”), Marr Technologies Limited (“MTL”) and Marr Technologies Asia Limited (“MTL”) (32)10.198*
Equity Transfer Agreement dated July 2, 2010 among the Registrant, Kangplus (China) Holdings Ltd., Marr, MTL and MTAL (33)10.199
Debt Conversion Agreement dated July 9, 2010 between the Registrant and SF Capital Partners Limited (34)10.200**
2005 Director Incentive Plan, as amended October 11, 201021.1
Subsidiaries of the Registrant (42)23.1
Consent of Odenberg Ullakko Muranishi & Co. LLP, Independent Registered Public Accounting Firm.31.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002








*
Confidential treatment has been granted as to certain portions of this exhibit.




**
Represents a management contract or compensatory plan or arrangement.




(1)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Annual Report on Form 10-KSB filed on March 31, 2005.




(2)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Report on Form 10-K dated March 28, 1997.




(3)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Annual Report on Form 10-K dated March 26, 2003.




(4)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Registration Statement on Form S-2 (File No. 333-106862) filed on July 7, 2003.




36




(5)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Annual Report on Form 10-KSB filed on March 30, 2004.




(6)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996.




(7)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q dated November 15, 1999.




(8)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q dated August 10, 2000.




(9)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q dated August 14, 2002.




(10)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q/A (No.3) dated February 4, 2003.




(11)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-QSB dated August 14, 2003.




(12)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K dated September 12, 2003.




(13)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-QSB dated November 14, 2003.




(14)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on June 1, 2004.




(15)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K filed on July 13, 2004.




(16)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-QSB/A (Amendment No. 1) dated December 20, 2004.




(17)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Annual Report on Form 10-KSB filed on March 31, 2005.




(18)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K filed on April 5, 2005.




(19)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-QSB dated November 14, 2005.




(20)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on November 21, 2005.




(21)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on December 6, 2005.




(22)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on March 30, 2006.




(23)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Annual Report on Form 10-KSB filed on March 30, 2007.




(24)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Registration Statement on Form SB-2 on July 23, 2007 (File No. 333-144778).




(25)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on December 10, 2007.




(26)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on January 23, 2008.




37




(27)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on August 21, 2008.




(28)
Incorporated by reference to identically-numbered exhibit to the Registrant’s. Current Report on Form 8-K on September 23, 2008.




(28)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Reort on Form 8-K dated September 16, 2009.




(29)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q dated October 8, 2009.




(30)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on December 4, 2009.




(31)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on June 24, 2010.




(32)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on October 29, 2010.




(33)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Amendment to Quarterly Report on Form 10-Q/A filed on November 22, 2010.




(34)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010.




38





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





Report of Independent Registered Public Accounting Firm
F-2Consolidated Balance Sheets
F-3Consolidated Statements of Operations
F-4Consolidated Statements of Stockholders’ Deficit
F-5Consolidated Statements of Cash Flows
F-6Notes to Consolidated Financial Statements
F-7








F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Directors and Stockholders of


Calypte Biomedical Corporation





We have audited the accompanying consolidated balance sheets of Calypte Biomedical Corporation as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial statements audited by us present fairly, in all material respects, the consolidated financial position of Calypte Biomedical Corporation at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring operating losses and negative cash flows from operations, and management believes that the Company’s cash resources will not be sufficient to sustain its operations through 2011 without additional financing. This raises substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/ ODENBERG, ULLAKKO, MURANISHI & CO. LLP


San Francisco, California


May 20, 2011




F-2





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)





December 31,2010


2009ASSETSCurrent assets:Cash and cash equivalents

$
79


$
160Accounts receivable, net of allowance of $0 and $34 at December 31, 2010 and 2009, respectively


21



40Inventory


264



219Prepaid expenses


39



5Current assets of discontinued operations


-



122Total current assets


403



546Property and equipment, net of accumulated depreciation of $345 and $388 at December 31, 2010 and 2009, respectively


68



93Intangible assets, net of accumulated amortization of $940 and $872 at December 31, 2010 and 2009, respectively


1,843



2,061Other assets


17



19Non-current assets of discontinued operations


-



2,702Total assets

$
2,331


$
5,421LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts payable and accrued expenses

$
1,971


$
2,342Advances from shareholder


680



388Liability with Related Party


914



-Income Tax Liability


180



-8% Convertible notes payable, including accrued interest of $365, at December 31, 2009


-



6,3337% Notes payable to a related party, including accrued interest of $1,102, at December 31, 2009


-



5,3024% Note payable, including accrued interest of $4 at December 31, 2010


61



-12% Convertible debentures payable


60



60Deferred revenue


23



-Current liabilities of discontinued operations


-



2,724Total current liabilities


3,889



17,149Mandatorily redeemable Series A preferred stock, $0.001 par value; no shares authorized at December 31, 2010 and 2009; 100,000 shares issued and outstanding at December 31, 2010 and 2009; aggregate redemption and liquidation value of $1,000 plus cumulative dividends


3,536



3,416Total liabilities


7,425



20,565Commitments and contingenciesStockholders’ deficit:Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or outstanding


-



-Common stock, $0.03 par value; 800,000,000 shares authorized at December 31, 2010 and 2009; 525,159,750 and 461,355,457 shares issued and outstanding as of December 31, 2010 and 2009, respectively


14,569



13,841Additional paid–in capital


159,749



159,738Other comprehensive income (loss)


(1
)


125Accumulated deficit


(179,411
)


(188,378
)Total Calypte Biomedical Corporation stockholders’ deficit


(5,094
)


(14,674
)Noncontrolling interests in discontinued operations


-



(470
)Total stockholders’ deficit


(5,094
)


(15,144
)Total liabilities and stockholders’ deficit

$
2,331


$
5,421


See accompanying notes to consolidated financial statements.





F-3





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share data)





Years Ended December 31,2010


2009Revenues:Product sales

$
444


$
726Operating costs and expenses:Cost of product sales


260



390Research and development expenses (non-cash of ($19) and ($3)in 2010 and 2009, respectively)


282



193Selling, general and administrative expenses (non-cash of ($12) and $86in 2010 and 2009, respectively)


999



1,397Total operating expenses


1,541



1,980Loss from operations


(1,097
)


(1,254
)Interest expense, net (non-cash expense of ($355) and ($1,230)in 2010 and 2009, respectively)


(545
)


(1,592
)Gain on transfer of assets


2,289



-Gain on restructuring of notes


8,500



-Other income (loss), net


142



(106
)Net income (loss) before income taxes and deemed dividend


9,289



(2,952
)Provision for income taxes


(181
)


(2
)Deemed dividend attributable to modification of warrants


-



(1
)Net income (loss) from continuing operations


9,108



(2,955
)Net loss attributable to Calypte from discontinued operations


(136
)


(333
)Net loss attributable to noncontrolling interest from discontinued operations


(131
)


(320
)Net income (loss)

$
8,841


$
(3,608
)Gain on foreign currency translation


-



-Comprehensive income (loss)


8,841



(3,608
)Net income (loss) per share from continuing operations

$
0.019


$
(0.007
)Net income (loss) per share attributable to Calypte from discontinued operations


(0.001
)


(0.001
)Net income (loss) per share  (basic and diluted)

$
0.018


$
(0.008
)Weighted average shares used to compute net income (loss) per share(basic and diluted)


487,616



450,240


See accompanying notes to consolidated financial statements.





F-4





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


YEARS ENDED DECEMBER 31, 2010 and 2009




Number of Common Shares


Common Stock


Additional Paid-in Capital


Accumulated Other Comprehensive Income


Accumulated Deficit


Total Stockholders' DeficitBalances at December 31, 2008


439,354,624



13,181



159,654



119



(185,090
)


(12,136
)Shares issued upon exercise ofemployee options


-



-



-



-



-



-Shares issued for fees and expenses inconnection with Purchase Agreementwith Fusion Capital






-



-



-



-



-Shares sold to Fusion Capital underPurchase Agreement


-



-



-



-



-



-Shares issued upon exercise of warrants


22,000,833



660



-



-



-



660Shares issued as compensation toemployees, consultants and serviceproviders


-



-



-



-



-



-Shares sold in August 2008 PrivatePlacement


-



-



-



-



-



-Shares sold in September 2008 PrivatePlacement


-



-



-



-



-



-Expenses related to sales of common stock


-



-



-



-



-



-Stock-based employee and directorcompensation


-



-



83



-



-



83Fair value of warrant modifications relatedto severance agreement


-



-



-



-



-



-Fair value of options issued as compensationto consultants and mark to marketadjustments


-



-



1



-



-



1Foreign currency translation


-



-



-



6



-



6Net loss


-



-



-



-



(3,288
)


(3,288
)Balances at December 31, 2009


461,355,457


$
13,841


$
159,738


$
125


$
(188,378
)

$
(14,674
)Shares sold in March 2010 Private Placement


12,933,333



388



-



-



-



388Shares issued in March 2010 Morningtowndebt conversion


3,055,262



91



37



-



-



128Stock-based employee and directorcompensation


-



-



(33
)


-



-



(33
)Shares issued in September 2010 SF Capitaldebt conversion


47,815,698



249



-



-



-



249Foreign currency translation


-



-



7



1



(1
)


7Transfer of 51% interest in BJ-Marr


-



-



-



(127
)


127



-Net gain / (loss)


-



-



-



-



8,841



8,841Balances at December 31, 2010


525,159,750


$
14,569


$
159,749


$
(1
)

$
(179,411
)

$
(5,094
)
  See accompanying notes to consolidated financial statements.




F-5


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)




Years ended December 31,2010


2009Cash flows from operating activities:Net income (loss)

$
9,108


$
(2,955
)Adjustments to reconcile net loss to operating activities:Depreciation and amortization


255



274Non-cash interest expense attributable to:Amortization and proportional write-off upon conversion of note discountsand deferred debt issuance and other offering costs


-



626Dividends on mandatorily redeemable Series A preferred stock


120



120Gains from note restructuring and asset transfer


(10,789
)


-Stock-based employee compensation expense


(32
)


83Fair market value of common stock, warrants, and options granted for services


-



1Loss on disposition of equipment


24



22Loss attributed to noncontrolling interest in discontinued operations


(131
)


(333
)Changes in operating assets and liabilities:Accounts receivable


19



2Inventory


(45
)


66Prepaid expenses and other current assets


34



313Accounts payable, accrued expenses and other current liabilities


575



731State tax liability


180



-Net cash used in operating activities


(682
)


(1,050
)Cash flows from investing activities:Purchases of equipment


(36
)


(2
)Net cash used in investing activities


(36
)


(2
)Cash flows from financing activities:Proceeds from sale of stock, net of expenses


-



660Principal payments on notes payable


(43
)


-Proceeds from shareholder advances


680



388Net cash provided by financing activities


637



1,048Net decrease in cash and cash equivalents


(81
)


(4
)Effect of foreign currency exchange rates on cash


-



-Cash and cash equivalents at beginning of period


160



164Cash and cash equivalents at end of period

$
79


$
160Supplemental disclosure of cash flow activities:Cash paid for interest

$
190


$
229Supplemental disclosure of noncash activities:Conversion of accrued interest into notes payable

$
-


$
234Conversion of notes payable into common stock

$
377Conversion of shareholder advances into common stock

$
388





See accompanying notes to consolidated financial statements.





F-6





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009





(1)   The Company





Calypte Biomedical Corporation (the “Company”) develops, manufactures, and distributes in vitro diagnostic tests, primarily for the diagnosis of Human Immunodeficiency Virus (“HIV”) infection.  We were incorporated in California in 1989 and reincorporated in Delaware in 1996 at the time of our initial public offering.  Since September 8, 2006, our common stock has traded on the OTC Bulletin Board under the symbol “CBMC.”  We are located in Portland, Oregon where we have a facility that combines both our research and development as well as administrative operations.  We have a sales and marketing office in Dubai, United Arab Emirates (“U.A.E.”), which is where our CEO is based.  We have a Director of sales based in Milan, Italy.





Through late 2005, we manufactured and marketed urine-based HIV-1 diagnostic screening tests and urine and serum-based Western Blot supplemental (sometimes called “confirmatory”) tests for use in high-volume laboratories, which we refer to as our “Legacy Business.”  In November 2005, we sold the Legacy Business to Maxim Biomedical, Inc. to concentrate on the development of our rapid test platform products.





Our current emphasis is commercializing our HIV-1/2 Rapid Tests, test products for the rapid detection of antibodies to HIV-1 and HIV Type 2 (“HIV-2”) in oral fluid using a lateral flow dipstick design (the “HIV-1/2 Rapid Tests”).  Rapid tests provide diagnostic results in less than 20 minutes and are particularly suitable for point-of-care testing in both the professional sector, such as in developing countries that lack the medical infrastructure to support laboratory based testing, and, for the first time, in the over-the-counter or “OTC” market.  We have completed field trials or product evaluations of our AwareTM HIV-1/2 OMT (oral fluid) rapid test covering an aggregate of over 8,000 samples in China, India, South Africa and elsewhere and believe that the results of these studies and evaluations have validated the test.  In our studies, this test has averaged 99.7% accuracy.  We have obtained regulatory approvals in a number of key countries in Africa, Southeast Asia, the Middle East, Russia, India and China,.





In the fourth quarter of 2004, through an arrangement with the U.S. Centers for Disease Control and Prevention (the “CDC”), we introduced an HIV-1 BED Incidence EIA test (the “BED Incidence Test”) that detects HIV-1 infections that have occurred within approximately the prior 6 months and that can be used by public health agencies to identify those regions and the populations within them where HIV transmission is occurring most recently.




Until July 2010, we were the 51% owner of each of two joint ventures in China, Beijing Calypte Biomedical Technology Ltd. (“Beijing Calypte”) and Beijing Marr Bio-Pharmaceuticals Co., Ltd. (“Beijing Marr”). In July 2010 we entered into a series of agreements providing for (i) the restructuring of our outstanding indebtedness to Marr and SF Capital (the “Debt Agreement”) and (ii) the transfer of our interests in the two Chinese joint ventures, Beijing Marr and Beijing Calypte, to Kangplus (the “Equity Agreement”). Under the Debt Agreement, $6,393,353 in outstanding indebtedness was agreed to be converted to 152,341,741 shares of our common stock, and our remaining indebtedness to Marr, totaling $3,000,000 as of December 31, 2009, was cancelled. In consideration for such debt restructuring, we transferred our equity interests in Beijing Marr to Kangplus pursuant to the Equity Transfer Agreement and transferred certain related technology to Beijing Marr.  We have also agreed to transfer our equity interests in Beijing Calypte to Marr or a designate of its choosing. The transactions contemplated by the Debt Agreement and the Equity Transfer Agreement are subject to Chinese government registration of the transfer of the equity interests. Under the debt agreement with SF Capital, $2,008,259 in outstanding indebtedness was converted to 47,815,698 shares of our common stock.





(2)    Summary of Significant Accounting Policies





Principles of Consolidation


The accompanying consolidated financial statements include the results of operations of the Company, its wholly-owned subsidiary, Calypte, Inc., and its 51% ownership interests in both Beijing Calypte and Beijing Marr.  We have eliminated all significant intercompany accounts and transactions in consolidation.





Foreign Currency Translation


The functional currency of our consolidated Chinese joint ventures is the local currency, the Chinese Yuan Renminbi.  We translate the assets and liabilities of our foreign subsidiary to U.S. dollars at the rate of exchange in effect at the end of the reporting period.  We translate revenues and expenses at the average rates of exchange for the accounting period.  We have reported the effect of translation gains and losses as our only component of other comprehensive income in our Consolidated Statements of Operations.


Cash and Cash Equivalents


Cash equivalents consist of investments in money market accounts.




F-7


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009





Allowance for Doubtful Accounts


We provide an allowance for doubtful accounts on a specific identification basis when, due to passage of time or receipt of information, there is appropriate evidence of a customer’s inability to make the required payments.





Inventories


Our inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method.





Property and Equipment


Our property and equipment is stated at cost, net of accumulated depreciation.  We depreciate our buildings, machinery and equipment, furniture and fixtures, and computer equipment using the straight line method over the estimated useful lives of the assets.  .  We generally depreciate our assets as follows:





Computer equipment
3 yearsMachinery and equipment
5 yearsFurniture and fixtures
5 yearsLeasehold improvements
3-7 years





Leasehold improvements and equipment under capital leases are amortized or depreciated over the shorter of the remaining lease term or the useful life of the equipment or improvement.





Impairment of Long-Lived Assets


Long-lived assets are comprised of property and equipment and intangible assets.  We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  We compare an estimate of undiscounted future cash flows produced by the asset, or by the appropriate grouping of assets, to the carrying value to determine whether impairment exists.  If an asset is determined to be impaired, we measure the loss based on quoted market prices in active markets, if available.  If quoted market prices are not available, we estimate the fair value based on various valuation techniques, including a discounted value of estimated future cash flow and fundamental analysis.  We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.


Fair Value of Financial Instruments


Financial assets and short-term liabilities, with the exception of the convertible notes and debentures, have carrying values which approximate their fair values for all periods presented.  The carrying amounts of cash equivalents approximate fair value because of their short-term nature and because such amounts are invested in accounts earning market rates of interest.  The maturity amount of the convertible notes approximates fair value because of the relatively short period until the maturity of the notes.  The face amount of the convertible notes is offset by discounts related to the unamortized portion of beneficial conversion and/or anti-dilution features, if any, embedded in the notes or discounts occurring as a result of modification of the notes.  We record any related anti-dilution obligations and/or note derivative liabilities at their fair value at the end of each reporting period.




F-8





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009





Revenue Recognition


We record revenues only upon the occurrence of all of the following conditions:





•
We have received a binding purchase order or similar commitment from the customer or distributor authorized by a representative empowered to commit the purchaser (evidence of a sale).•
The purchase price has been fixed, based on the terms of the purchase order.•
We have delivered the product from our contract manufacturing plant to a common carrier acceptable to the purchaser.  Our customary shipping terms are FOB shipping point. Because of the need for controlled conditions during shipment, we suggest, but leave to the purchaser’s discretion, acquiring insurance for the value of the shipment.  If the purchaser elects to insure the shipment, the insurance is at the purchaser’s expense.•
We deem the collection of the amount invoiced probable.  To eliminate the credit risk associated with international distributors with whom we have had little or no experience, we require prepayment of the order or a letter of credit before shipment.





Except in the event of verified product defect, we do not permit product returns.  Our products must be maintained under rigidly controlled conditions that we cannot control after the product has been shipped to the customer.





We provide no price protection.  Subject to the conditions noted above, we recognize revenue upon shipment of product.





Royalty Revenue


Royalty Revenue is recognized upon receipt of the semi-annual royalty data from the licensee, as designated in the royalty agreement, and when collectability is reasonably assured.





Income Taxes


We account for income taxes under ASC 740, “Income Taxes.”  ASC 740 requires an asset and liability approach for the financial reporting of income taxes.  Under ASC 740, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  To date, we have no history of earnings.  Therefore, our deferred tax assets are reduced by a valuation allowance to the extent that realization of the deferred tax asset is not assured.  We have recorded a valuation allowance for the full amount of our calculated deferred tax asset as of December 31, 2010 and 2009.





We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109(“FIN 48”), as codified by ASC 740, on January 1, 2007.  FIN 48 provides clarification related to the process associated with accounting for uncertain tax positions recognized in financial statements. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Upon adoption of FIN 48, we determined that we did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48 (see Note 12, Income Taxes).




Classification of Financial Instruments with Characteristics of both Liability and Equity


We account for financial instruments that we have issued and that have characteristics of both liability and equity in accordance with FASB ASC topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”)  ASC 480 specifies that mandatorily redeemable financial instruments are to be recorded as liabilities unless the redemption is required to occur upon the liquidation or termination of the issuer.  ASC 480 also specifies that a financial instrument that embodies a conditional obligation that an issuer may settle by issuing a variable number of its equity shares is to be classified as a liability if, at inception, the value of the obligation is based solely or predominantly on variations inversely related to changes in the fair value of the issuer’s equity shares.  Should a financial instrument not be classified as a liability under the provisions of ASC 480, we further apply the criteria in Emerging Issues Task Force (EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,as codified by FASB ASC topic 815, “Derivatives and Hedging” (“ASC 815”), which enumerates additional criteria to determine the appropriate classification as liability or equity.  We also evaluate the anti-dilution and/or beneficial conversion features that may be included in our financial instruments in accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,as codified by ASC 815, which may classify the feature as an embedded derivative and require that the financial instrument be bifurcated and the feature accounted for separately.  We evaluate each financial instrument on its own merits at inception or other prescribed measurement or valuation date and may engage the services of valuation experts and other professionals to assist in our determination of the appropriate classification.




F-9





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009





Stock-Based Compensation Expense


We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), as codified in FASB ASC topic 718, “Compensation – Stock Compensation” (“ASC 817”) effective January 1, 2006, using the modified prospective method.  Under this method, we apply the provisions of SFAS 123R to all awards granted or modified after the date of adoption.  We recognized in our net loss for the periods after the date of adoption the unrecognized expense attributable to awards not yet vested at the January 1, 2006 date of adoption using the same valuation method (i.e. Black-Scholes option valuation model) and assumptions determined under the original provisions of SFAS 123, “Accounting for Stock-Based Compensation,” as disclosed on a pro-forma basis in our previous financial statements.  During 2007, we recorded stock compensation expense attributable to unvested options granted prior to our adoption of SFAS 123R of $59,000 in selling, general and administrative expenses in our Consolidated Statement of Operations. Under the fair value recognition provisions of SFAS 123R, we recognize stock-based compensation, net of an estimated forfeiture rate which results in recognizing compensation expense for only those awards expected to vest, over the service period of the award.





We estimate the fair value of stock option grants made to employees and directors during and expect to estimate the fair value of future grants, using the Black-Scholes option pricing model.  Calculating stock-based compensation expense under the provisions of SFAS 123R requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and pre-vesting option forfeitures.  Because of significant restructurings of our operations and reductions in our workforce in the past which have resulted in the termination of a significant number of our employees prior to the vesting of their options, to date, we have generally estimated the expected life of options granted in the future based on the simplified method provided in Staff Accounting Bulletin No. 107 for “plain vanilla” options.  Where appropriate, we will consider separately for valuation purposes groups of employees or directors that have similar historical exercise behavior.  We estimate the volatility of our common stock at the date of grant based on its historical volatility over a period generally equivalent to the expected term of the grant.  We estimate the expected pre-vesting forfeiture rate and recognize expense for only those shares expected to vest.  We have estimated our forfeiture rate based on our historical experience with stock-based awards that are granted and forfeited prior to vesting.  If the actual forfeiture rate is materially different from the estimate, the stock-based compensation expense could also differ from what we have recorded in the current period.  The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment.  As required under ASC 718, we review our valuation assumptions at each grant date and, as a result, may periodically change the valuation assumptions used to value employee and director stock-based awards granted in future periods.





Net Income (Loss)Per Share




We compute basic net income (loss) per share by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the periods presented.  The computation of diluted loss per common share is similar to the computation of basic net income (loss) per share, except that the denominator is increased for the assumed conversion of convertible securities and the exercise of options and warrants, to the extent they are dilutive, using the treasury stock method.  The weighted average shares used in computing basic and diluted net income (loss) per share are the same for the periods presented in these consolidated financial statements.  Outstanding options and warrants to purchase 6,175,002 shares and 44,550,748 shares were excluded from the computation of net income (loss) per share for the years ended December 31, 2010 and 2009, respectively, as their effect is anti-dilutive.  The computation of  net income (loss) per share also excludes 19,894,292 shares issuable upon the conversion of 8% Convertible Notes, including 8% Convertible Notes issued in payment of interest, and, 7% Notes issued under the Marr Credit Facility for the year ended December 31, 2009 as their effect is also anti-dilutive.




F-10





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009





Concentrations of Credit Risk


Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable.  We have investment policies that limit investments to short-term, low-risk investments.  Concentration of credit risk with respect to trade accounts receivable is limited due to the fact that we sell our products primarily to established distributors or require prepayment for certain orders where the relationship between the parties is not well-established.





Use of Estimates


The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





Risks and Uncertainties


We purchase certain raw materials and components used in manufacturing our products from a number of suppliers, but we rely on single sources for certain other components.  We cannot quickly establish additional or replacement suppliers for these components.  Any delay or interruption in the supply of these components could have a material adverse effect on us by significantly impairing our ability to manufacture products in sufficient quantities to meet commercial sales demand.  Additionally, if our financial condition impairs our ability to pay for critical components on a timely basis or to make royalty payments as required under our license agreements, suppliers may delay or cease selling critical components to us or our rights to use license agreements could be jeopardized, both of which could also impair our ability to manufacture and/or market our products.





Comprehensive Loss


We report the effect of translation gains and losses related to our consolidated Chinese joint ventures as our only component of other comprehensive income in our Consolidated Statements of Stockholders' Deficit.





Segment and Geographic Information


SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information requires that we report segment information based on how our management internally evaluates the operating performance of our business units (segments).  Our operations are currently confined to a single business segment, the development and sale of HIV diagnostics.





The following table summarizes our product sales revenues by product for the years ended December 31, 20010 and 2009 (in thousands).





2010


2009AwareTM BEDTM HIV-1 Incidence Test

$
257


$
571AwareTM Rapid HIV diagnostic tests


134



160All other


53



2Revenue from product sales

$
444


$
733





F-11





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009





Sales to international customers accounted for approximately 62% and 74% of our revenues in 2010 and 2009, respectively.  At December 31, 2010 approximately $111,300.21, or 43%, of our inventory and $0 of our property and equipment, net, was held in international locations.





Three customers accounted for approximately 53% of our revenue for 2010.  Our South African distributor purchased both BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 29% of our 2010 revenue. Two U.S. customers accounted for 14% and 10% respectively of our 2010 BED Incidence Tests revenue.  In 2009, our South African distributor purchased both BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 23% of our 2009 revenue.  A customer in China’s BED Incidence Test purchases accounted for 16% of our 2009 revenue and New York’s BED Incidence Test purchases accounted for 10% of our revenue for 2009.





Reclassifications


Certain amounts previously reported in the consolidated financial statements have been reclassified to conform to the current year presentation.





Recent Accounting Pronouncements





In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements Disclosures , which amends Subtopic 820-10 of the FASB Accounting Standards Codification to require new disclosures for fair value measurements and provides clarification for existing disclosures requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The adoption of this statement effective January 1, 2010 did not materially expand the Company's consolidated financial statement footnote disclosures.





F-12





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009




(3)
Discontinued Operations





As previously mentioned in Note 1, in July 2010 we entered into a series of agreements providing for (i) the restructuring of our outstanding indebtedness to Marr and SF Captial and (ii) the transfer of our ownership interests in the two Chinese joint ventures, Beijing Marr and Beijing Calypte, to Kangplus and to Marr or its designate, respectively.  As such, we have classified accounts related to the two consolidated Chinese joint ventures as discontinued operations for all periods presented.





Discontinued operations from the December 31, 2010 Consolidated Balance Sheet consisted of the following (in thousands):




December 31,2010


2009Cash and cash equivalents

$
-


$
16Accounts receivable


-



2Inventory


-



91Prepaid expenses


-



3Other current assets


-



10Current assets - of discontinued operations

$
-


$
122Property and equipment

$
-


$
3,349Accumulated depreciation


-



(655
)Other assets


-



8Non-current assets - of discontinued operations

$
-


$
2,702Accounts payable and accrued expenses

$
-


$
2,724Current liabilities - of discontinued operations

$
-


$
2,724





Discontinued operations from the Consolidated Statement of Operations for the twelve months ended December 31, 2010 and 2009 consisted of the following (in thousands):




Twelve Months EndedDecember 31,2010


2009Revenues:Product sales

$
15


$
146Operating costs and expenses:Cost of product sales


3



6Selling, general and administrative expenses


148



365Total operating expenses


151



371Loss from operations


(136
)


(225
)Interest expense, net


-



-Other income, net


-



(108
)Net loss attributible to Calypte from discontinued operations

$
(136
)

$
(333
)





F-13
 
  CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December 31, 2010 and 2009





(4)   Inventory





Inventory as of December 31, 2010 and 2009 consisted of the following (in thousands):




December 31,2010


2009Raw materials

$
188


$
157Work-in-process


16



19Finished goods


60



43Total inventory

$
264


$
219





(5)   Property and Equipment





Property and equipment as of December 31, 2010 and 2009 consisted of the following (in thousands):




December 31,2010


2009Computer equipment

$
143


$
187Machinery and equipment


209



234Furniture and fixtures


48



52Leasehold improvements


13



8413



481Accumulated depreciation


(345
)


(388
)$
68


$
93





We recognized depreciation and amortization of leasehold improvement expenses of $37,000 and $56,000 for the years ended December 31, 2010 and 2009, respectively.





(6)   Intangible assets





During 2004 and 2005, we entered into various license agreements and similar arrangements under which we invested approximately $2,934,000 to acquire the technology and materials necessary for the commercialization of our rapid tests.  These licenses provide us with access to the HIV-2 antigen, to certain lateral flow technologies and to certain HIV-1/2 peptides used in our rapid tests.  We recorded the license amount for each license agreement as an intangible asset.  We began amortizing these intangible assets in 2006, when we began commercial sales of the products employing the licensed technology or materials.  We recognized amortization expense of $218,000 in each of the years ended December 31, 2010 and 2009.  Each of the license agreements also contains a royalty on sales component that takes into consideration the different pricing realities of markets around the world.





F-14





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009








(7)   Accounts payable and accrued expenses





Accounts payable and accrued expenses as of December 31, 2010 and, 2009 consisted of the following (in thousands):




December 31,2010


2009Trade accounts payable

$
1,305


$
1,437Accrued royalties


202



135Accrued salary and vacation pay


42



37Accrued interest


16



382Accrued audit, legal and consulting expenses


160



90Accrued liabilities under intellectual property license agreements


-



40Accrued liabilities of legacy business


190



190Other


56



31Total accounts payable and accrued expenses

$
1,971


$
2,342




F-15





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009





(8)    Notes and Debentures Payable





The following tables summarize the note and debenture activity for the years ended December 31, 2009 and 2010 (in thousands).




NetBalance





Conversion





Balance


Discount at


Balance at12/31/08


Additions


to Equity


Repayments


12/31/09


12/31/09


12/31/09Current Notes and Debentures8% Secured Convertible Notes –April 4, 2005

$
4,399


$
-


$
-


$
-


$
4,399July 4, 2005 Interest


66



-



-



-



66October 4, 2005 Interest


68



-



-



-



68January 4, 2006 Interest


69



-



-



-



69April 4, 2006 Interest


68



-



-



-



68July 4 and 21, 2006 Interest


122



-



-



-



122October 4, 2006 Interest


91



-



-



-



91January 4, 2007 Interest


100



-



-



-



100April 3, 2007 Interest


99



-



-



-



99July 3, 2007 Interest


102



-



-



-



102October 3, 2007 Interest


106



-



-



-



106January 3, 2008 Interest


108



-



-



-



108April 3, 2008 Interest


110



-



-



-



110July 3, 2008 Interest


111



-











111October 3, 2008 Interest


115



-



-



-



115January 3, 2009 Interest


-



117



-



-



117April 3, 2009 Interest


-



117



-



-



117Total 8% Secured Convertible Notes

$
5,734


$
234


$
-


$
-


$
5,968


$
-


$
5,9687% Promissory Notes to relatedparty -2005 Credit Facility with Marr

$
4,200


$
-


$
-


$
-


$
4,200


$
-


$
4,20012% Convertible Debentures –Mercator assignees

$
60


$
-


$
-


$
-


$
60


$
-


$
60





F-16
 
  CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December 31, 2010 and 2009
  NetBalance





Conversion


Conversion to


Asset





Balance


Discount at


Balance at12/31/09


Additions


to Equity


4% Notes Payable


Transfer


Repayment


12/31/10


12/31/10


12/31/10Current Notes and Debentures8% Secured Convertible Notes –April 4, 2005

$
4,399


$
-


$
(1,299
)

$
(100
)

$
(3,000
)

$
-


$
-July 4, 2005 Interest


66



-



(66
)


-



-



-



-October 4, 2005 Interest


68



-



(68
)


-



-



-



-January 4, 2006 Interest


69



-



(69
)


-



-



-



-April 4, 2006 Interest


68



-



(68
)


-



-



-



-July 4 and 21, 2006 Interest


122



-



(122
)


-



-



-



-October 4, 2006 Interest


91



-



(91
)


-



-



-



-January 4, 2007 Interest


100



-



(100
)


-



-



-



-April 3, 2007 Interest


99



-



(99
)


-



-



-



-July 3, 2007 Interest


102



-



(102
)


-



-



-



-October 3, 2007 Interest


106



-



(106
)


-



-



-



-January 3, 2008 Interest


108



-



(108
)


-



-



-



-April 3, 2008 Interest


110



-



(110
)


-



-



-



-July 3, 2008 Interest


111



-



(111
)


-



-



-



-October 3, 2008 Interest


115



-



(115
)


-



-



-



-January 3, 2009 Interest


117



-



(117
)


-



-



-



-April 3, 2009 Interest


117



-



(117
)


-



-



-



-Total 8% Secured Convertible Notes

$
5,968


$
-


$
(2,868
)

$
(100
)

$
(3,000
)

$
-


$
-


$
-


$
-7% Promissory Notes to relatedparty -2005 Credit Facility with Marr

$
4,200


$
-


$
(4,200
)

$
-


$
-


$
-


$
-


$
-


$
-12% Convertible Debentures –Mercator assignees

$
60


$
-


$
-


$
-


$
-


$
-


$
60


$
-


$
604% Note Payable –Morningtown

$
-


$
100


$
-


$
-


$
-


$
(44
)

$
56


$
-


$
56
  F-17





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009





8% Secured Convertible Notes





On April 4, 2005, we concluded a private placement to five institutional investors of $8,000,000 of Secured 8% Convertible Notes originally due April 3, 2007 (the “Convertible Notes”) and subsequently extended to April 3, 2009.  The Convertible Notes provide for quarterly interest to be paid in cash, or subject to certain conditions, by issuing additional Convertible Notes maturing on April 3, 2009 (the “Interest Notes”).  From July 4, 2005 through April 3, 2009 we issued Interest Notes in an aggregate face amount of $1,962,000 in payment of quarterly interest.





As discussed in Note 3 in July 2010 we entered into a series of agreements providing for (i) the restructuring of our outstanding indebtedness to Marr and SF Capital (the “Debt Agreement”) and (ii) the transfer of our interests in the two Chinese joint ventures, Beijing Marr and Beijing Calypte, to Kangplus (the “Equity Agreement”). Under the Debt Agreement, $6,393,353 in outstanding indebtedness was agreed to be converted to 152,341,741 shares of our common stock, and our remaining indebtedness to Marr, totaling $3,000,000  was cancelled. In consideration for such debt restructuring, we transferred our equity interests in Beijing Marr to Kangplus pursuant to the Equity Transfer Agreement and transferred certain related technology to Beijing Marr.  We have also agreed to transfer our equity interests in Beijing Calypte to Marr or a designate of its choosing. The transactions contemplated by the Debt Agreement and the Equity Transfer Agreement are subject to Chinese government registration of the transfer of the equity interests. Under the debt agreement with SF Capital, $2,008,259 in outstanding indebtedness was converted to 47,815,698 shares of our common stock.





Notwithstanding this debt restructuring, our significant working capital deficit and limited cash resources place a high degree of doubt on our ability to continue our operations.  In light of our existing operations and financial challenges, we are exploring strategic and financing options.  Failure to obtain additional financing will likely cause us to seek bankruptcy protection.





Interest expense


The following table summarizes the components of net interest expense for the years ended December 31, 2010 and 2009 related to the notes and debentures described above and other financing instruments as reported in the Consolidated Statements of Operations (in thousands).





F-18


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009





Years ended December 31,2010


2009Interest expense on debt instruments paid or payable in cash

$
(190
)

$
(365
)Non-cash expense composed of:Accrued interest on 8% Convertible Notes


(231
)


(482
)Accrued interest on 4% Note Payable


(4
)


-Amortization of discounts associated with March 2007 extensionand December 2007 restructuring of 8% convertible notes andMarr Credit Facility notes


-



(626
)Expense attributable to dividends on mandatorily redeemable SeriesA preferred stock


(120
)


(120
)Total non-cash items


(355
)


(1,228
)Total interest expense


(545
)


(1,593
)Interest income


-



1Net interest expense

$
(545
)

$
(1,592
)
  (9)   Mandatorily Redeemable Preferred Stock





At the time of our original incorporation, we issued both common stock and $1,000,000 of mandatorily redeemable Series A preferred stock.  We are required to redeem all shares of mandatorily redeemable Series A preferred stock within 60 days of any fiscal year-end in which we attain $3,000,000 in retained earnings, and funds are legally available.  Based on losses accumulated through December 31, 2010, we must achieve approximately $191,000,000 in future earnings before any repayment is required.  The mandatorily redeemable Series A preferred stock is nonvoting and holders of these shares are entitled to receive cumulative dividends at the rate of $1.20 per share per annum.  Through June 30, 2003, we had charged cumulative preferred dividends totaling $1,636,000 to stockholders’ deficit to accrete for the mandatorily redeemable Series A preferred stock redemption value with a corresponding increase in the recorded amount of the mandatorily redeemable Series A preferred stock.  Since that date, we have charged the preferred dividends to interest expense to accrete for the mandatorily redeemable Series A preferred stock redemption value.  During each of the years ended December 31, 2010 and 2009, we charged preferred dividends totaling $120,000 to interest expense with a corresponding increase in the recorded amount of the mandatorily redeemable Series A preferred stock.





In anticipation of using a portion of the proceeds from its Initial Public Offering to redeem the Series A preferred stock, we eliminated the Series A preferred stock from our articles of incorporation upon our reincorporation in Delaware in June 1996. However, we subsequently chose not to redeem the Series A preferred stock and as of December 31, 2010 it remains outstanding. The holders of such shares maintain the same rights as held before the reincorporation.





(10)   Stockholders’ Deficit





Modification of Warrants Issued and Deemed Dividend





F-19


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





On or around May 15, 2009, we amended the warrant originally issued to David Khidasheli on March 27, 2007, and amended on June 11, 2008, to lower the exercise price from $0.05 per share to $0.03, as an inducement to Mr. Khidasheli to treat the $300,025 he advanced to us in the first quarter of 2009 as an exercise of the warrant.  As a result of this exercise, Mr. Khidasheli was issued 10,000,833 shares of our common stock. We have recognized a deemed dividend of $1,000 in our Consolidated Statement of Operations attributable to the incremental fair value resulting from reducing the exercise price and extending the term of these warrants, calculated as of the date of the modification using the Black-Scholes option pricing model and the following assumptions:




Pre-modification


Post-modificationNumber of Shares


10,000,833



10,000,833Exercise Price


0.05



0.03Terms (years)


0.12



0.12Volatility


227.77
%


227.77
%Interest Rate


0.11
%


0.11
%Expected Dividend Rate


0.00
%


0.00
%Option value per share


0.0001



0.0002





Equity Line with Fusion Capital


On January 16, 2008, we entered into an equity line transaction with Fusion Capital Fund II, LLC, an Illinois limited liability company (“Fusion Capital”), pursuant to which we may sell up to $8.0 million of our common stock to Fusion Capital in amounts between $100,000 and $1.0 million, depending on certain conditions, from time to time over a 24-month period beginning February 8, 2008, the date on which the Securities and Exchange Commission (“SEC”) declared effective the registration statement related to the transaction.  In January 2008, we issued 3,490,401 shares of our common stock to Fusion Capital as a commitment fee for entering into the equity line.  In December 2007, we issued 250,000 shares of our common stock to Fusion Capital for reimbursement of due diligence expenses related to the equity line.  We recorded the aggregate value of the commitment fee shares and due diligence fee shares issued to Fusion Capital, approximately $342,000, as a Deferred Offering Cost.  We had planned to recognize this cost as an expense of selling our stock under the equity line in an amount equivalent to the proportional amount of each sale in relation to the total commitment amount.  During 2008, we recognized $37,000 of such expense based on sales of our stock to Fusion Capital.  Through December 31, 2008, we have sold an aggregate of 13,831,133 shares of our common stock to Fusion Capital at an average price of $0.0687 per share and have received proceeds of $950,000.  The purchase price of the shares we sell to Fusion Capital is determined based upon the market price of our common stock, as defined, without any fixed discount.  We cannot sell shares to Fusion Capital if the market price of our common stock is below $0.052 per share; and accordingly, we have been precluded from selling additional shares under this arrangement since May 2008.  Based on the current market price of our common stock and our recent and expected future inability to sell stock to Fusion Capital under this arrangement prior to its expiration, we expensed the remaining unamortized balance of Deferred Offering Cost, $305,000, as a component of interest expense during the fourth quarter of 2008.





Under the terms of an investment banking agreement with Capstone Investments (“Capstone”), we are required to issue to Capstone as a fee for services the number of shares equal to 4% of the number of shares sold to Fusion Capital.  Through December 31, 2008, we have issued an aggregate of 553,246 unregistered shares of our common stock valued at $30,000 on the date of issuance to Capstone under this agreement.





F-20





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010 and 2009





2009-11 Private Placements





In September 2009 and March 2010, we entered into subscription agreements (the “Subscription Agreements”) with Carolina Lupascu pursuant to which Ms. Lupascu purchased 7,000,000 shares and 12,933,333 shares, respectively, of our common stock (the “Shares”) at a purchase price of $0.03 per share, for a total purchase price of $210,000, and $388,000, respectively, which Ms. Lupascu had advanced to us in several installments during 2009. The Shares were issued pursuant to Regulation S under the Securities Act of 1933. Each of the Subscription Agreements contains customary representations and warranties by Ms. Lupascu regarding her status as a non-U.S. person, her investment intent and restrictions on transfer. Ms. Lupascu was granted certain piggy-back registration rights which require us to use our best efforts to register all or a portion of the Shares on the next registration statement we file with the Securities and Exchange Commission under the Securities Act of 1933. We used the proceeds of the private placements for general working capital purposes.





During 2010, Ms. Lupascu made several advances totaling $180,000 in anticipation of entering into a future subscription agreement. We used the proceeds of these investments for general working capital purposes.  In January 2011, we entered into a subscription agreement with Ms. Lupascu having substantially the same terms and conditions as the Subscription Agreements, pursuant to which Ms. Lupascu purchased 6,000,000 shares of our Common Stock at a purchase price of $0.03. These shares were issued in reliance upon Regulation S.





Also during 2010, Mr. Khidasheli made several advances totaling $500,000 in anticipation of entering into a future subscription agreement. We used the proceeds of these investments for general working capital purposes.  In January 2011, we entered into a subscription agreement with Mr. Khidasheli having substantially the same terms and conditions as the Subscription Agreements, pursuant to which Mr. Khidasheli purchased 16,666,666 shares of our Common Stock at a purchase price of $0.03. These shares were issued in reliance upon Regulation S.





On January 4,  March 3 and May 9, 2011, Mr. Khidasheli made further advances of $30,000, $62,000 and $50,000 respectively, in anticipation of entering into a future subscription agreement. We used the proceeds of these investments for general working capital purposes.





At December 31, 2010, we had warrants outstanding to purchase an aggregate of 3,125,001 shares of our common stock at a weighted average price of $0.078 per share, as summarized in the following table:





WeightedAverageNumber of


Exercise priceShares


per share

Expiration DateWarrants issued in connection with February 2007 Private Placement


2,500,001


$
0.077

March 27, 2012Warrants issued to placement agents in connection with the February2007 Private Placement


125,000


$
0.062

February 23, 2012 to March 27, 2012Warrant issued for investment banking services


500,000


$
0.085

October 31, 20113,125,001


$
0.078





Shares reserved for future issuance


The following table summarizes shares reserved for future issuance at December 31, 2010:





F-21
 
  CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December 31, 2010 and 2009
  Shares issuable pursuant to options outstanding under benefit plans


3,050,000Shares reserved for future issuance under benefit plans


13,091,367Shares issuable pursuant to warrants outstanding


3,125,001Shares issuable under equity line with Fusion Capital


37,885,604Shares issuable under related party notes payable


22,666,66779,818,639





(11)   Share Based Payments





We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”)Share-Based Payment, as codified in FASB ASC topic 718, Compensation — Stock Compensation(“ASC 718”), effective January 1, 2006.  SFAS 123R requires the recognition of the fair value of stock compensation, including stock options, in net income (loss).  We recognize the stock compensation expense over the requisite service period of the individual grantees, which generally is the same as the vesting period of the grant.  All of our stock compensation is accounted for as an equity instrument.  We generally issue stock option grants to employees with an exercise price equal to the market price at the grant date.





We adopted SFAS 123R using the modified prospective method.  Under this method, the provisions of SFAS 123R are applied to all awards granted or modified after the date of adoption.  We recognized in our net loss the unrecognized expense attributable to awards not yet vested at our January 1, 2006 date of adoption in the periods after the date of adoption using the same valuation method (i.e. Black-Scholes) and assumptions determined under the original provisions of SFAS 123, Accounting for Stock-Based Compensation, as disclosed on a pro-forma basis in our previous filings.





We value option grants to non-employees at the date of grant using the Black-Scholes option-pricing model.  Option grants that do not include sufficient disincentive for non-performance are accounted for in accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods and Servicesand EITF 00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees.  In such instances, the deferred compensation is amortized over the term of the agreement on a straight-line basis.  Until the awards are fully vested or a measurement date is achieved, we record an adjustment to deferred compensation and consultant expense to reflect the impact of the fair value, as remeasured at quarter-end, of the options based on changes to our stock price.





We did not grant any options to employees or members of our Board of Directors during 2010.   Under the provisions of ASC 718, we have recorded approximately ($32,000) of stock based employee compensation expense in our condensed consolidated statement of operations for the year ended December 31, 2010 attributable to stock option forfeitures, offset by employee options granted during the second quarter of 2008 and to options granted to non-employee members of our Board of Directors in the fourth quarter of 2007.  We have assumed an annual pre-vesting forfeiture rate of 7.75% in determining our stock compensation expense. In determining the inputs to the Black-Scholes option valuation model, we have assumed a dividend yield of zero since we have never paid cash dividends and have no present intention to do so.  We estimate volatility based upon the historical volatility of our common stock over a period generally commensurate with the expected life of the options.  We determine the risk-free interest rate based on the quoted U.S. Treasury Constant Maturity Rate for a security having a comparable term at the time of the grant.  To date, we have calculated the expected term of option grants using the simplified method prescribed by SEC Staff Accounting Bulletin 107 for “plain vanilla” options.  We have historically granted options having a ten year contractual term to our employees and directors.





The following table presents a summary of option activity for all of our stock option plans from December 31, 2008 through December 31, 2010.





F-22





CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December 31, 2010 and 2009




Weighted


Weighted


AggregateAverage


Average


IntrinsicExercise


Remaining


Value atPrice per


Contractual


DateOptions


Share


Term (years)


IndicatedOptions outstanding at December 31, 2008


34,096,583


$
0.145



4.34


$
0Options granted


-Options exercised


-Options forfeited


(2,500,000
)Options expired


(28,296,583
)Options outstanding at December 31, 2009


3,300,000


$
0.127



7.27


$
0Options granted


-



-Options exercised


-



-Options forfeited


-



-Options expired


(250,000
)

$
0.310Options outstanding at December 31, 2010


3,050,000


$
0.112



6.87


$
0Options vested and exercisable at December 31, 2009


3,300,000


$
0.127



7.27


$
0Options vested and exercisable at December 31, 2010


3,050,000


$
0.112



6.87


$
0





The following table summarizes information about stock options outstanding under all of our option plans at December 31, 2010.




Options Outstanding


Options ExercisableWeightedAverage


Weighted





WeightedRange of




Remaining


Average





AverageExercise

Number


Years to


Exercise


Number


ExercisePrices

Outstanding


Expiration


Price


Exercisable


Price$0.11


3,000,000



6.91


$
0.110



3,000,000


$
0.110$0.23


50,000



4.32


$
0.230



50,000


$
0.2303,050,000



6.87


$
0.112



3,050,000


$
0.112
  There was no intrinsic value associated with any of our outstanding options at December 31, 2010, as the exercise prices for all outstanding or exercisable options exceeded the $0.005 per share quoted market price of our common stock at that date.





We did not record any income tax benefits for stock-based compensation arrangements for the years ended December 31, 2010 or 2009, as we have cumulative operating losses and have established full valuation allowances for our income tax benefits.





(12)   Section 401(k) Plan





Effective January 1, 1995, we adopted a Retirement Savings and Investment Plan (the “401(k) Plan”) covering our full-time employees located in the United States.  The 401(k) Plan was intended to qualify under Section 401(k) of the Internal Revenue Code.  Under the terms of the 401(k) Plan, employees could elect to reduce their current compensation by up to the statutorily prescribed annual limit and to have the amount of such reduction contributed to the 401(k) Plan.  The 401(k) Plan permitted us to make contributions which become vested to our employees over terms as described in the plan, but we made no such contributions in either 2010 or 2009.   We terminated the 401(k) Plan effective June 7, 2010 and have disbursed the funds to the plan participants on record.




F-23
 
  CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December 31, 2010 and 2009





(13)   Income Taxes





The provision for income taxes is based upon our loss before provision for income taxes for the years ended December 31, 2010 and 2009, as follows (in thousands):





2010


2009Gain / (Loss) before income taxes:Domestic

$
9,108


$
(2,954
)International


(136
)


(333
)Total gain / (loss) before income taxes

$
8,972


$
(3,287
)





For the years ended December 31, 2010 and 2009, income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to domestic pretax losses as a result of the following:





2010


2009Computed expected tax expense

$
3,067


$
(1,118
)Losses and credits for which no benefits have been recognized


0



864Expense related to amortization of financing discounts in interest expense


213



213State tax expense, net of federal income tax benefit


180



2Net Operating Loss Carryover


-3221Other, net operating losses not previously benefited


40



41$
181


$
2





The tax effect of temporary differences that give rise to significant portions of the deferred tax asset is presented below:




2010


2009Deferred tax assets:Net operating loss carryovers

$
27,054


$
32,410Research and development credits

$
482


$
482Other

$
2,242


$
2,249Total gross deferred tax assets

$
29,778


$
35,141Valuation allowance

$
(29,778
)

$
(35,141
)Net deferred tax assets

$
-


$
-





The net change in the valuation allowance for the years ended December 31, 2010 was a decrease of $5,363,000 and in 2009 was a decrease of 2,899,000.  Because there is uncertainty regarding our ability to realize our deferred tax assets, a 100% valuation allowance has been established.  In accordance with SFAS 123(R), we have excluded certain tax benefits resulting from employee stock option exercises from our deferred tax asset at December 31, 2010 and 2009.  In the future, if and when such tax benefits are ultimately realized, the amount of excess tax benefits will be credited to additional paid-in capital in our Consolidated Statements of Stockholders’ Deficit.





As of December 31, 2010, we had federal net operating loss carryforwards of $79 million and federal research and development credit carryforwards of $482,000, as it expired in 2010. We also have state net operating loss carryforwards of $5.8 million and state research and development credit carryforwards of $0 as of December 31, 2010. The state net operating loss carryforwards expired in 2010 and the state research and development credits will carryforward indefinitely.





F-24
 
  CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December 31, 2010 and 2009





Federal and state laws limit the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. We conducted a preliminary analysis of our stock ownership changes under Internal Revenue Code Section 382 from our inception through December 31, 2007 and have reported our deferred tax assets related to net operating loss and research credit carryforwards after recognizing change of control limitations that may have occurred in 2003 and 2004.  This limitation resulted in a reduction of deferred tax assets and a corresponding reduction in the valuation allowance. The Company has not updated its Section 382 analysis to assess whether any additional ownership changes have occurred due to costs associated with such analysis. If the Company has experienced any additional changes of control, utilization of its NOL or tax credit carryforwards would be subject to annual limitations under Section 382.  Such additional annual limitations could result in the expiration of our reported net operating loss and credit carryforwards available as of December 31, 2010 before their utilization.





We adopted the provisions of FIN 48 effective January 1, 2007 (see Note 2, Summary of Significant Accounting Policies).  Upon adoption of FIN 48, we determined that we did not have any unrecognized tax benefits and there was no effect on our consolidated financial condition or results of operations as a result of implementing FIN 48.





We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. We are subject to U.S. federal and state income tax examinations by tax authorities for tax years 1993 through 2009 due to net operating losses that are being carried forward for tax purposes.





Our policy is to recognize interest and penalties related to income tax matters in income tax expense. We had no accrual for interest or penalties on our Consolidated Balance Sheets at December 31, 2010 and 2009, and have not recognized interest or penalties in our Consolidated Statements of Operations for the years ended December 31, 2010 and 2009.


(14)   Related Party Transactions





Until July 2010, we were the 51% owner of each of two joint ventures in China, Beijing Calypte Biomedical Technology Ltd. (“Beijing Calypte”) and Beijing Marr Bio-Pharmaceuticals Co., Ltd. (“Beijing Marr”). In July 2010 we entered into a series of agreements providing for (i) the restructuring of our outstanding indebtedness to Marr and SF Capital (the “Debt Agreement”) and (ii) the transfer of our interests in the two Chinese joint ventures, Beijing Marr and Beijing Calypte, to Kangplus (the “Equity Agreement”). Under the Debt Agreement, $6,393,353 in outstanding indebtedness was agreed to be converted to 152,341,741 shares of our common stock, and our remaining indebtedness to Marr, totaling $3,000,000, was cancelled.  As of December 31, 2010, the common stock had not yet been issued and we have recorded a liability to related party on our balance sheet for $914,000. In consideration for such debt restructuring, we transferred our equity interests in Beijing Marr to Kangplus pursuant to the Equity Transfer Agreement and transferred certain related technology to Beijing Marr.  We have also agreed to transfer our equity interests in Beijing Calypte to Marr or a designate of its choosing. The transactions contemplated by the Debt Agreement and the Equity Transfer Agreement are subject to Chinese government registration of the transfer of the equity interests. Under the debt agreement with SF Capital, $2,008,259 in outstanding indebtedness was converted to 47,815,698 shares of our common stock.




In the agreement with Beijing Marr Bio-Pharmaceuticals Co., Ltd., we agreed to continue to buy raw materials for them and provide them with technical support.  We purchased raw materials for Beijing Marr three times in 2010, totaling $33,770, for which we were reimbursed.  In 2011 we sent one person to Beijing Marr to provide technical support for three weeks. During 2011, we recognized $3432 in revenue related to this technical support.




During 2010, two investors advanced a total of $680,000 to the Company. Through April 2011, these investors have further advanced us $142,000. These advances are intended for future subscription agreements.


On or around May 15, 2009, we amended the warrant originally issued to David Khidasheli on March 27, 2007, and amended on June 11, 2008, to lower the exercise price from $0.05 per share to $0.03, as an inducement to Mr. Khidasheli to treat the $300,025 he advanced to us in the first quarter of 2009 as an exercise of the warrant.  As a result of this exercise, Mr. Khidasheli was issued 10,000,833 shares of our common stock. We have recognized a deemed dividend of $1,000 in our Condensed Consolidated Statement of Operations attributable to the incremental fair value resulting from reducing the exercise price and extending the term of these warrants, calculated as of the date of the modification using the Black-Scholes option pricing model and the following assumptions:




F-25
 
  CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December 31, 2010 and 2009









(15)   Commitments and Contingencies





On August 31, 2009 we filed a complaint against Roger Gale, a former director and officer of Calypte, Ron Mink, a former Chief Scientific Officer of Calypte, three other former employees, and Sedia Bioscience Corporation, a company formed in 2009 with which these former employees are believed to be associated (collectively, the “Defendants”), in the Circuit Court of the County of Multnomah in Portland, Oregon. In this matter, we are seeking (i) to enjoin Defendants from using or disclosing any of our trade secrets related to diagnostic and population incidence testing, (ii) to recover property belonging to us, and (iii) monetary damages. On March 10, 2010 we entered into a settlement agreement with Sedia and the Defendants,the terms of which are confidential but are not material to the Company or its investors.





Lease





We lease an office facility with a remaining term that extends to May 31, 2012.  As of December 31, 2010, we have paid 13 months of rent.  Rent expense was $84,000 for 2010.





Future annual minimum payments under the lease are as follows:




Years Ending December 31,$
84,1802011

$
35,0752012

$
119,255




(16)   Subsequent Events





Subsequent to December 31, 2010, we have received an aggregate of $142,000 in advances from an existing investor in anticipation of entering into a subscription agreement. We are using the proceeds of these investments for general working capital purposes.




During 2010,  two investors advanced the Company a total of $680,000 in anticipation of future subscription agreements. In 2011, these advances were converted to stock purchases upon completion of pending subscription agreements.




In November, 2010, Calypte was awarded a grant of $244,479 under U.S. Government's Qualifying Therapeutic Discovery Project (QTDP) program. The QTDP grant is provided under section 48D of the Internal Revenue Code enacted as part of the Patient Protection and Affordable Care Act of 2010. Of this award, we received $77,331 in December 2010 and the remaining $171,148 in February 2011.




We have evaluated all other subsequent events through the date of this filing and determined there are no other material recognized or unrecognized subsequent events.




F-26





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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)By:
/s/ Adel KarasAdel Karas

President, Chief Executive Officer, Chief Financial Officer and Secretary





Date: May  25, 2011





Pursuant to the requirement of the Securities and Exchange Act of 1934, this report has been signed below, by the following persons on behalf of the registrant and in the capacities indicated.





Signature

Title

Date/s/ Adel Karas

Adel Karas

President, Chief Executive Officer, Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary, Director

May 25, 2011/s/ Tareq Al Yousefi

Tareq Al Yousefi

Director

May 25, 2011/s/ Kartlos Edilashvili

Kartlos Edilashvili

Director

May 25, 2011








S-1