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, 2009

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)16290 S.W. Upper Boones Ferry Road,  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, 2009 was approximately $3,424,266 based on the $0.009 per share closing price reported for such date on the Over the Counter Bulletin Board.





The number of shares of the registrant’s common stock outstanding as of March 1, 2010 was 461,355,457.








CALYPTE BIOMEDICAL CORPORATION


FORM 10-K


INDEX





Page No.PART I.Item 1.
Business

1Item 1A.
RiskRisk Factors

10Item 2.
Properties

21Item 3.
Legal Proceedings

22Item 4.
Submission of Matters to a Vote of Security Holders

22PART II.Item 5.
Market for the Registrant’s Common Equity and Related Stockholder Matters

23Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

23Item 8.
Financial Statements and Supplementary Data

34Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

34Item 9A
Controls and Procedures

34PART III.Item 10.
Directors, Executive Officers and Corporate Governance

35Item 11.
Executive Compensation

37Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

37Item 13.
Certain Relationships and Related Transactions, and Director Independence

39Item 14.
Principal Accountant Fees and Services

39PART IV.Item 15.
Exhibits, Financial Statement Schedules

39Signatures

S-1Certifications

IV-1








PART I





Item 1. Business.





Recent Developments





We are in default under the 2005 Credit Facility, as amended (the “Credit Facility”), between us and Marr Technologies BV (“Marr”), our largest stockholder, holding approximately 16% of our outstanding capital stock as of December 31, 2009, 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.





We are currently negotiating an agreement with Marr and two affiliates of Marr (the “Debt Agreement”) providing for the restructuring of our indebtedness to Marr and the transfer of our interests in two Chinese joint ventures, Beijing Marr Bio-Pharmaceuticals Co., Ltd. (“Beijing Marr”) and Beijing Calypte Biomedical Technology Ltd. (“Beijing Calypte”), in which we hold a 51% equity and the Marr affiliates hold a 49% equity interest.





Calypte and Marr are currently negotiating an agreement with a third party investor (the “Investor”) pursuant to which the Investor would take over our equity interests in Beijing Marr and Beijing Calypte as well as a portion of Marr’s interests, and make further investments in Beijing Marr.  On March 21 2010 the parties signed a nonbinding agreement regarding the basic terms, subject to the negotiation of a definitive agreement.  The parties have agreed to a deadline of three months from the date of signing on the nonbinding agreement for entering into a definitive agreement, after which any party will have the right to discontinue negotiations.





There can be no assurance that Calypte,  Marr and the Investor will be able to successfully negotiate definitive agreements or that the Chinese government will approve the transfer of the equity interests in Beijing Marr and Beijing Calypte.  In the event either of these events does not occur prior to the agreed-upon deadline, the transactions contemplated by the Debt Agreement may not be completed, and we will remain obligated under the Credit Facility and Convertible Notes.





Not being able to reach such agreements, and being in default on the debt, will further hamper our ability to raise additional funds. 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.





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.





Business Development





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





1


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 blood-based Western Blot supplemental (sometimes called “confirmatory”) tests for use in high-volume laboratories, which we call 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.  Sales of our rapid test products have so far been primarily through the efforts of our distributors in South Africa and the United Arab Emirates (“U.A.E”).




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 Beijing Marr manufacturing facility has its ISO 13485:2003 qualification.  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.





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.





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 or 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 the funds in 2009, we were able to achieve the operational restructuring goals we set out for 2009.  Specifically:


1.
We have rebuilt a small R&D team focused on scaled down goals. This team has been successful in bringing the manufacturing of our existing products back on line.  We have also started early stage activities on our product development funnel that we expect will sustain revenue in future years


2.
We have made progress with a number of our vendors in reducing and/or restructuring our outstanding debt


3.
We successfully negotiated with our landlord and were able to sign a lease for a smaller facility with lower rent and minimal penalty


4.
We have narrowed down our focus to a smaller set of countries for Aware OMT. In each of those countries we have strengthened our existing distribution relationships or have appointed new distributors





2


We took steps to address our requirements for financial liquidity and developed a business plan that enabled us to sustain our business during 2009.  We have negotiated with our secured creditors to terminate or reduce their debt or convert it into equity.  While tentative agreements for these debt modifications have been reached their implementation will stretch into 2010.  While all parties are working in full faith to implement these agreements there is still risk that Calypte or one of the other parties will be unable to fulfill their obligations, which could have the effect of voiding these debt restructuring agreements.





We have developed a business plan for 2010 that has 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 adequate capital to continue operations.  Moreover, our stock price is 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.





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, a second type of HIV (“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 other sample media.  Evaluations suggest that the accuracy of our OMT test is only slightly less 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:





3


·
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.





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.  We believe that the Incidence Test can also provide policy makers and program managers with valuable insights regarding the success of their prevention programs and a scientific approach to both human and financial resource allocation.  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.





4


New Products





AwareTM II (The Ani Platform)





Our current AwareTM product line is a rapid testing solution that is well suited for developing countries.  However, in developed countries, including in the U.S., 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.





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.  Up until we ceased our research and development efforts in mid-2008, we were in the early stages of evaluating the feasibility of potential future products employing this technology.  The development of a rapid test for the detection of syphilis was potentially the first non-HIV project that we were considering undertaking.





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 drugs of 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, to pursue sales opportunities, follow up on leads we provide, to train and support local customers and to 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.





5


During 2009, we focused on the following primary markets:





India





According to the National Aids Control Organization (NACO) in India, number of persons tested for HIV increased from 175,000 in 2004 to 1,010,000 in 2008-09, which shows an increased commitment to testing by the Indian government. NACO’s estimates indicate that India has between 1.9 million to 2.8 million HIV infections, ranking third behind South Africa and Nigeria for the highest number of HIV/AIDS infected people. We expect the market for HIV diagnostic testing in India to continue to grow in the next few years.  Calypte’s goal is to work with NACO and other organizations to include oral fluid based testing as an important part of the testing strategy given its benefits in increasing penetration in resource poor areas as well as in groups where blood testing is impractical.  Early in the third quarter of 2007, we received registration and marketing approval for our AwareTM HIV-1/2 OMT (oral fluid) rapid test in India from the Central Drugs Standard Control Organisation, commonly referred to as the DCAI.  We are targeting three primary markets in India:  the private sector, the government sector, and the military.  In 2009 we started working with a new distributor in India.





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 during 2009 and have received favorable responses from the Kenyan government.  We have abandoned the registration efforts in African countries except Ethiopia. We hope to register our product in Ethiopia in 2010 and make our first sales into the country in the fourth quarter of 2010.





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. and 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.




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.




6


·
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 reduced cashflow in 2009 required us to drastically reduce our investment in research and development during that year.  Our goal is to gradually increase such spending in the future if and when we are financially able to do so.  Our product research and development spending decreased from $1.4 million in 2008 to $0.2 million in 2009.  Domestic R&D expense decreased by approximately $1.2 million in 2009 primarily because we had terminated all of our domestic research and development personnel by the end of 2008 and in 2009 hired new staff for minimal amount of R&D work.




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.




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.




7


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.





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




8


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.





Beijing Marr





Our joint venture, Beijing Marr, has a manufacturing facility in the Huairou district of Beijing. The site currently houses about 2,100 square meters of manufacturing space.  Beijing Marr renovated and upgraded the facility to meet the requirements for the production of our AwareTM rapid test product line.  Given funding issues at Calypte as well as Beijing Marr this facility has been mostly idle in 2009 and will need maintenance and repair work to be performed before it can resume production.





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.





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.





9


We have obtained regulatory approval for our AwareTM OMT product line in the following countries as of December 2009: 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, 2010, we have three full time and two part time employees and six 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.





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.





10


Risks Related to Our Financial Condition





We are in default under our secured debt obligations





While we have signed debt conversion agreements with our secured debt holders, until those agreements are consummated we are technically in default under our Credit Facility and Convertible Notes, both of which are secured by our assets. If we are unable to consummate these agreements with them, we may be forced to seek bankruptcy protection.  If we are forced to do so, because the value of our assets is less than our secured debt obligations, the holders of our common stock will likely not realize any remaining value in their shares and the holders of our debt securities will likely realize less than the principal amount of those securities.  Even if we are able to consummate the debt conversion agreements with each of our secured creditors, there can be no assurance that we will be able to continue our business because of our recurring operating losses, negative cash flow and limited cash reserves.  To the extent we cannot terminate our debt obligations, we will require additional capital to meet our debt obligations, even if they are reduced or restructured.





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, 2009 and 2008, we had working capital deficits of $16.6 million and $14.5 million, respectively. As of December 31, 2009, the $11.6 million outstanding under our Credit Facility and Convertible Notes is currently due. 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.





We plan to continue to seek additional financing, having reviewed other options in detail, including, but not limited to, the issuance of equity or debt securities or the entry into alliances or joint ventures with other biotechnology firms, pharmaceutical companies or medical diagnostic companies. It may be difficult, or impossible, for us to raise additional capital because of our existing secured debt obligations, because the trading price of our common stock is below its par value and because we may not have sufficient shares of authorized stock to issue to investors in the amounts necessary to raise the capital we need. 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. If we cannot obtain additional financing, we will likely not be able to continue our 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, 2009, our domestic trade accounts payable totaled $1.4 million, substantially all of which was over 60 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.





11


We have federal and state net operating losses and research and development credits that may expire before we can utilize them.





At December 31, 2009, we had federal net operating loss carryforwards of approximately $171.9 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 $94.6 million and $5.8 million of federal and state net operating loss carryforwards, respectively, are available at December 31, 2009.  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, 2009, we have incurred a cumulative loss of $188.4 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.




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.




12


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 and warrants outstanding.  The conversion of the Convertible Notes into common stock and the exercise and conversion of warrants into common stock could cause significant dilution to our stockholders




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 eligible for trading 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.




Our common stock is a "penny stock."




Our common stock is deemed to be a "penny stock" under Section 15(g) of the Exchange Act, due to the fact that our common stock trades at a price less than $5.00 per share and is not traded on a "recognized" national exchange or on NASDAQ, and that our net tangible assets are 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.




13


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, 2009.  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.





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.





14


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 but 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.





15


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 generally 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.





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.





16


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 Chinese FDA (the SFDA), 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.





Failure to comply with SFDA, FDA or similar international regulatory bodies or other requirements may require us to suspend production of our productswhich could result in a loss of revenues.




We can manufacture and sell products, both in China, the United States and elsewhere abroad, only if we comply with regulations of government agencies such as the SFDA and the FDA.  We have implemented quality assurance and other systems that are intended to comply with applicable government regulations with regard to both our planned manufacturing in China and our contract manufacturing operations.




The SFDA, the FDA, or another government or public health agency could force us to stop manufacturing our products if it concludes that we are out of compliance with applicable regulations.  They could also require us to recall products if we fail to comply with applicable regulations, which could force us to stop manufacturing such products.  Either of these events would result in a material adverse effect on our business.





We Engage Contract Manufacturers and Plan to Conduct International Manufacturing Operations to Produce Some of Our Products, Including Our Rapid Tests Currently Being Commercialized.





17


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 and we have  manufacturing operations in China through our affiliate. 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:




•
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 Good Manufacturing Practice (GMP) or other regulatory certifications;•
uncertain or unreliable production yields;•
quality control or quality 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 Calypte during 2008.  At present, we only have three full-time employees and two part-time employees, and our senior management team consists entirely of independent contractors.  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.





18


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.




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 sexually-transmitted diseases 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.





19


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.





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.





The Chinese Government Could Change Its Policies Toward Private Enterprises or Even Nationalize or Expropriate Them, Which Could Result in the Total Loss of Business in That Country.





We have established joint ventures in China with an entity related to our largest stockholder through which we expect to manufacture and sell our products.  Our business in China is subject to political or economic uncertainties and may be adversely affected by political, economic and social developments in China.  Over the past decade, the Chinese government has pursued economic reform policies, including the encouragement of private economic activity and greater economic decentralization.  The Chinese government may choose to end these policies or alter them significantly to our detriment with little, if any, notice.





20


Changes in policies, laws and regulations or in their interpretation or the imposition of taxation, restrictions on currency conversion, restrictions or devaluations of currency, nationalization or other expropriation of private enterprises could have a material adverse effect on our business in China.  Nationalization or expropriation could result in the total loss of business in China.





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.





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 sexually-transmitted diseases, 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 16290 S.W. Upper Boones Ferry Road, Portland, Oregon, 97224 and consist of approximately 11,000 square feet of leased office, laboratory, warehouse, assembly, test and manufacturing space.  On Oct 13, 2009 we signed a new lease for a smaller facility of approximately 7,000 square feet at 15875 SW 72nd Ave, Portland, OR 97224 with our existing landlord with an average cost of approximately $7,000 per month.  The new lease is for a period of 30 months and substantially reduces our monthly operating costs while providing adequate research and development infrastructure for our future business. We anticipate moving to the new premises in the second quarter of 2010.





21


Our joint venture, Beijing Marr, has land use rights in the Huairou district of Beijing, China to approximately 24,000 square meters that includes approximately 2,100 square meters of manufacturing facilities and other office and warehouse buildings.





We believe our properties are adequate for our current needs.





Item 3. Legal Proceedings




China





On September 28, 2008, David K. Harris, the former Chief Executive Officer of our subsidiary, Beijing Marr, filed a labor dispute claim against Beijing Marr with the Beijing Chaoyang District, China, Labor Dispute Arbitration Commission claiming that he was wrongfully terminated by Beijing Marr and seeking approximately $381,000 for unpaid salary, expense reimbursement, severance payment and penalties.  In January 2009, Beijing Marr filed a counterclaim against Mr. Harris for damages it suffered as a result of various instances of misconduct and failure to perform his duties as chief executive officer and seeking approximately RMB 493,346.





After multiple hearings, on August 12, 2009, the Beijing Chaoyang District, China, Labor Dispute Arbitration Commission (the “Beijing Labor Dispute Arbitration Commission”) awarded Mr. Harris, a judgment of RMB 1,591,529.6 ($233,704) for unpaid salary owed to him during the term of his employment and for severance under the terms of his terminated employment agreement. Both parties filed an appeal of the judgment with the Beijing Chaoyang District Court.A hearing of the appeal was held on October 29, 2009, and an additional hearing is being scheduled. Meanwhile, the parties are also engaged in negotiations to settle the case.





In late 2008, Xi Rong and Wang Yong, two former employees of Beijing Marr filed complaints against Beijing Marr with the Labor Arbitration Committee of Chaoyang District, Beijing, claiming that they were owed additional compensation as a result of noncompliance with certain provisions of the Labor Contract Law of China.  Each were claiming they were owed one month salary.  The total claimed was approximately RMB 311,122.





On August 25, 2009, the Beijing Labor Dispute Arbitration Commission awarded (1) Xi Rong 106,656.14 RMB ($15,661) and (2) Wang Yong RMB 106,800.29 ($15,683) for Beijing Marr’s failure to execute written employment agreements with the former employees as required under the Chinese employment law.  Beijing Marr has appealed this judgment.





United States





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.





In January 2006, a complaint was filed against us and certain of our current and former officers by Logisticorp, Inc. and Southwest Resource Preservation, Inc. (collectively, the “Complainants”) in the Superior Court of the State of California in and for the County of Los Angeles – Central District seeking damages in the amount of approximately $1,100,000, plus interest, trading penalties of $5,000 per day and other damages.  On April 17, 2007, the Superior Court entered a final judgment dismissing the complaint with prejudice for failure to state a cause of action and ordering the Complainants to pay us our costs and attorneys’ fees in the aggregate amount of $106,304.  On June 15, 2007, the Complainants filed a notice to appeal the judgment with the Court of Appeal of the State of California, Second Appellate District, but failed to file an opening brief by the statutory deadline date.  On November 13, 2008, the Court of Appeal issued an opinion affirming the trial court judgment.  Remittitur was issued on January 16, 2009. The plaintiff/appellant did not file a petition for review with the California Supreme Court.  As a result, the case has been finally determined in our favor.





22


PART II




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




Trading Market





Since September 8, 2006 our common stock, par value $0.03 per share, has traded on the OTC Bulletin Board (“OTCBB”) under the symbol “CBMC.”  High and low quotations reported by the OTCBB during the periods indicated 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


Low2009

4th

$
0.018


$
0.0052009

3rd


0.012



0.0042009

2nd


0.015



0.0022009

1st


0.013



0.0052008

4th

$
0.030


$
0.0042008

3rd


0.067



0.0202008

2nd


0.128



0.0402008

1st


0.175



0.063





On March 30, 2010, there were approximately 392 holders of record of our common stock.  The closing price of our common stock on March 30, 2010 was $0.008 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).





23


Overview of Critical Events in 2009





In 2009 we were able to secure modest funding from two investors which helped us embark on a restructuring of our operations.  While we were not successful in securing long term agreements, these two investors invested a total of $660,000 in equity and another $388,000 in advances pending subscription agreements.





With the limited funding available we focused on rebuilding our R&D and operations in the US as well as restarting the manufacturing of our core products.  Due to the substantial reduction in workforce in the fourth quarter of 2008, we were unable to produce any product during the first half of 2009.  A number of customers were impacted by the lack of product availability, especially the Aware BED Incidence Test. All currently marketed products are now back in production.





In the second half of 2009 we started re-engaging with our distributors, primarily in Africa.  The absence of marketing and production activities in the first half of 2009 led to our AwareTM HIV-1/2 OMT sales being down 47% from 2008. 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 2009 as our financial constraints limited the operations of our JV in China.





Given the healthy inventory of BED Incidence Test that we had at the beginning of 2009, we were able to continue selling that product even during the first half of 2009 when our production capabilities were down.  We experienced interruption of BED sales in the third quarter due to production problems, but were able to restore supply in the fourth quarter.  Sales of BED Incidence Test accounted for 79% of our sales in 2009 and increased by 45% compared with 2008.  Such sales tend to be irregular, however, 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, both introduced during early 2008, accounted for less than 1% of our 2009 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-government organizations to try our oral fluid tests, both for its ease of use, efficiency and lower-cost benefits.





24


We have directed considerable money and effort, including product donations to key user agencies and lobbying for changes in tender regulations, to encourage the consideration and inclusion of our oral fluid tests in purchase tenders. 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 influence a change in the standard of care, we expect to reach a point at which time our revenue growth will increase significantly. However we cannot forecast when or whether such change will occur as it is largely governed by factors that we can only partially influence.




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 countries like Kenya and Uganda.  For instance, according to the National Aids/STD Control Programme, Kenya will soon roll out a national campaign to increase the testing of Kenyans for HIV and will use our AwareTM HIV-1/2 OMTin this campaign. Although we believe that we will be able to increase market acceptance of our products and our market position, there are outside factors that could adversely affect demand for our products.




Outlook





We are currently in default under our Credit Facility and Convertible Notes. We are in negotiations to restructure this debt, and have reached tentative agreements, but there can be no assurance that these negotiations will succeed or that, if we do succeed in restructuring our debt, such restructuring will be on favorable terms. If we are unable to consummate such restructuring, it is unlikely that we will be able to raise capital. 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 the termination of our debt obligations, effective management of our operations and the ability to raise additional capital through private placements of equity.  However, if we are unable to terminate our debt obligations or if we are unable to raise sufficient additional capital, we will be unable to meet our operating and debt obligations and will likely be unable to continue our operations.





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:





-     Restructure the debt.


-     Raise additional capital to fund working capital requirements.


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


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


-     Develop new products for the US and other western markets





25


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 2010 begins, we have remained focused on our strategy of increasing marketing and sales in a subset of countries where our products are registered, seeking additional product registrations in countries where we have a high likelihood of making sales, developing new products for the western markets and keeping our operating costs low.





AwareTMBED Incidence Test





The BED Incidence Test accounted for approximately 79% and 56% of our sales in calendar years 2009 and 2008, respectively.  In absolute terms, revenue from the sale of the Incidence Test increased by approximately 45% between 2008 and 2009.





AwareTM HIV 1/2 OMT Rapid Tests





Sales of our HIV-1/2 OMT rapid diagnostic tests accounted for approximately 21% of our revenues in 2009 compared with 43% in 2008.  We expect that our future near- and medium-term revenues of this product will be derived primarily from selling our HIV-1/2 rapid tests in both the professional and over-the-counter (OTC) markets.  In the longer term we expect most of our revenue to come from the adaptation of this test for the western markets using the Ani platform.





AwareTMMessengerTM Sampling Device





Our AwareMessengerTM oral fluid sample collection device and our Life Sciences reagents, both introduced during early 2008, accounted for less than 1% of our 2009 sales. We do no expect significant revenue from this product in 2010.





Financial Condition and Results of Operations





During 2009 and 2008, we used cash of $1.1 million and $4.6 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, including those of our Chinese joint ventures.





The following summarizes the results of our operations for the years ended December 31, 2009 and 2008 (in thousands):





26


Years Ended December 31,2009


2008Product sales revenue

$
733


$
725Service revenue from related party


279



-Cost of product sales


(400
)


(685
)Gross margin


612



40Operating costs and expenses:Research and development expenses


193



1,405Selling, general and administrative expenses


2,114



5,862Total operating expenses


2,307



7,267Loss from operations


(1,695
)


(7,227
)Interest expense, net


(1,592
)


(2,520
)Other income (expense), net


(318
)


257Net loss before income taxes


(3,605
)


(9,490
)Less: Loss attributed to noncontrolling interests in consolidated entities


320



313Deemed dividend attributable to modifications of warrants


(1
)


(3,047
)Provision for income taxes


(2
)


-Net loss attributed to Calypte Biomedical Corporation

$
(3,288
)

$
(12,224
)





Years Ended December 31, 2009 and 2008





Our product sales revenue for 2009 totaled $733,000 compared with $725,000 for 2008, an increase of  $8,000 or 1%.  Sales of our BED Incidence Test accounted for 79% of our product revenue in 2009, compared with 56% in 2008.  Revenue from the sales of the BED Incidence Test increased by 45% in 2009 compared with 2008.  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 21% and 43% of our product sales revenues for 2009 and 2008, respectively. Revenues from the sale of our HIV-1/2 rapid tests decreased by 47% in 2009 compared with revenues in 2008, primarily due to the impact of lack of marketing and sales personnel in early 2009.  Our AwareMessengerTM oral fluid sample collection device and our Life Sciences reagents, both introduced during early 2008, accounted for less than 1% of our 2009 product sales.





Three customers accounted for approximately 49% of our product sales revenue in 2009.  Our South African distributor purchased BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 23% of our 2009 product sales revenue.   Our Chinese importer of BED Incidence Test accounted for 16% of our 2009 product sales revenue and the BED Incidence test purchases by the CDC’s contract testing labs in New York’s accounted for 10% of our product sales revenue for 2009.  Our South African distributor purchased both BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 24% of our 2008 revenue. A fourth quarter sale to our U.A.E. distributor accounted for 21% of 2008 revenue.  BED Incidence Test purchases by the CDC’s contract testing labs in New York accounted for 11% of our revenue for 2008.





Our product sales gross margin was 45% of product sales in 2009, compared with a gross margin of 5.5% in 2008. Our increased margin was primarily due to the increased mix of BED Incidence Tests which have a higher margin. The margins we reported in both 2009 and 2008, however, are not typical of our expected future results because of the relatively nominal amounts of revenues and product quantities as well as lower operating costs due to the downsizing in the last quarter of 2008.





27


In 2009, Marr Technology Asia Limited, a company of the Marr Group, signed a services agreement with our JV partner, Beijing Marr. Under this agreement Beijing Marr provided various marketing and technical advisory services to the Marr entity.  The revenue proceeds to Beijing Marr from providing these services was $279,000.





Research and development costs decreased by  $1,212,000 or 86% from $1,405,000 in 2008 to $193,000 in 2009.  The decrease was primarily due to the large reduction in R&D personnel in 2009.




Selling, general and administrative costs decreased by $3,748,000, or 64% from $5,862,000 in 2008 to $2,114,000 in 2009.  The primary components of the net decrease in 2009 include the following:




·
A decrease in salaries and benefits of  approximately $2.2 million and consulting costs of approximately $600,000 are attributable to the downsizing of the company in late 2008;  ·
A decrease of $700,000 in other administrative costs, such as SEC compliance expenses ($200,000), tax and audit expenses ($100,000), travel expenses ($100,000) and other expenses as a result of our downsizing and our focused expense reduction; and





·
A $200,000 decrease in Beijing Marr expense is due primarily to decreased supplies cost and consulting;




Our loss from operations of $3,288,000 for 2009 represents a reduction of $8,936,000, or 73%, from the $12,224,000 loss from operations reported for 2008.





We recorded net interest expense of $1,592,000 for 2009 compared with net interest expense of $2,520,000 in 2008.  The decrease in expense primarily results from completing the amortization of discounts associated with the March 2007 extension and December 2007 restructuring of 8% convertible notes and Marr Credit Facility notes.  Interest expense for 2008 also included $305,000 attributable to the write-off of the deferred offering costs related to our Equity Line arrangement with Fusion Capital as a result of the decline in the market price of our common stock and our expected inability to make further sales of our common stock to Fusion Capital under the arrangement.





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





28


Years ended December 31,2009


2008Interest expense on debt instruments paid or payable in cash

$
(365
)

$
(303
)Non-cash expense composed of:Accrued interest on 8% Convertible Notes


(482
)


(453
)Amortization of discounts associated with March 2007 extensionand December 2007 restructuring of 8% convertible notes andMarr Credit Facility notes


(626
)


(1,372
)Mark to market adjustment of and intrinsic value of shares issuedunder anti-dilution obligations arising from the February andMarch 2007 Private Placements


-



32Write-off of deferred offering costs related to equity line withFusion Capital


-



(305
)Expense attributable to dividends on mandatorily redeemable SeriesA preferred stock


(120
)


(120
)Total non-cash items


(1,228
)


(2,218
)Total interest expense


(1,593
)


(2,521
)Interest income


1



1Net interest expense

$
(1,592
)

$
(2,520
)




Liquidity and Capital Resources




For the year ended December 31, 2009, we incurred a net loss of $3.3 million and a negative cash flow of $1.1 million as a result of our operations.  At December 31, 2009, we had a working capital deficit of $16.6 million and our stockholders’ deficit was $14.7 million. Our cash balance at December 31, 2009 was $0.2 million.





Our consolidated operating cash burn rate for 2009 averaged approximately $88,000 per month compared to approximately $382,000 per month in 2008.  Our decreased burn rate for 2009 reflects the result of the significant reduction of our workforce in late 2008 as well as our efforts in 2009 to keep our operating expenses to a minimum.





During 2009, we sold 22,000,833 shares of our common stock and received cash proceeds of $660,000.  One of our existing investors advanced additional funds totaling $388,000 to us in anticipation of a financing agreement, which was executed during the first quarter of 2010.




Liquidity Needs and our Business Plan





We expect to need a significant amount of capital to finance our operations and meet our debt obligations. 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 2010.  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 or 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 and our ability to terminate, reduce or restructure our debt obligations. Moreover, it may be difficult, or impossible, for us to raise additional capital because of our existing secured debt obligations, because our stock price is 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, it could have a material adverse effect on our business, results of operations, liquidity and financial condition, or force us to shut down operations altogether.





29


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, in their report dated March 29, 2010, have stated that our recurring operating losses and negative cash flows from operations and substantial indebtedness raise substantial doubt about our ability to continue as a going concern.




Critical Accounting Policies and Estimates




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





·
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.




30


·
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.





31


·
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.  Consistent with our policy on impairment of long-lived assets, given the December 31, 2009 operating loss and negative cash flow, the carrying values of Calypte and Beijing-Marr long-lived assets were compared against the undiscounted cash flows of the two entities over the remaining useful life of the primary assets.  Cash flow projections were based on a combination of historical run-rates and future projections, depending on the markets where the products were registered and the related distribution channels.  We concluded that no impairment was required as of December 31, 2009.



We had a third party valuation of our Chinese property done in the fourth quarter of 2009.  The results confirmed that the fair value of those assets exceeded the carrying value, thus confirming the results of our impairment analysis.





Adoption of New Accounting Pronouncements





ASC 105


Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental GAAP in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate section of ASC.




ASC 815


In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (EITF) Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (EITF 07-05), as codified in FASB ASC topic 815, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock  (ASC 815). ASC 815 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, and was effective for financial statements issued for fiscal years beginning after December 15, 2008 (our fiscal year 2009). We adopted ASC 815 on the first day of our fiscal year 2009 and determined that no balance sheet  reclassifications were necessary.




ASC 810


On January 1, 2009, we adopted SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, as codified in FASB ASC topic 810, Consolidation (ASC 810), which introduces changes in the accounting and reporting for business acquisitions and non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.   In accordance with the requirements of SFAS 160, we have provided a new presentation on the face of the consolidated financial statements to separately classify non-controlling interests within the equity section of the consolidated balance sheets and to separately report the amounts attributable to controlling and non-controlling interests in the consolidated statements of operations and comprehensive loss for all periods presented. There were no changes in our ownership interests in previously existing subsidiaries or deconsolidation of subsidiaries for the year ended December 31, 2009.





32


Amendment to ASC 855


ASC 855, “Subsequent Events,” was amended and defines subsequent events as transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. The amendment defines two types of subsequent events: (i) events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events); and (ii) events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events). In addition, the amendment requires an entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The amendment was effective for periods ending after June 15, 2009. The adoption of the amendment, effective June 30, 2009, did not have any effect on our financial position, results of operations or cash flows. . The FASB issued ASU-2010-09 to amend guidance on subsequent events to remove the requirement for SEC filers (as defined in ASU 2010-09) to disclose the date through which an entity has evaluated subsequent events. This change alleviates potential conflicts with current SEC guidance. An SEC filer is still required to evaluate subsequent events through the date financial statements are issued, but disclosure of that date is no longer required. The amendments in ASU 2010-09 became effective upon issuance of the guidance.




Amendment to ASC 825


ASC 825, “Financial Instruments,” was amended to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This amendment also requires those disclosures in summarized financial information at interim reporting periods. The adoption of this amendment, effective June 30, 2009, did not have any effect on our financial position, results of operations or cash flows.





Amendment to ASC 820 and ASC 320


ASC 820, “Fair Value Measurements and Disclosures,” and ASC 320, “Investments – Debt and Equity Securities,” were amended to provide additional guidance for estimating fair value and emphasize that, even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The amendments also require disclosure in interim and annual periods regarding the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. It also requires that entities define major categories for equity and debt securities. The adoption of these amendments, effective June 30, 2009, did not have any effect on our financial position, results of operations or cash flows.





ASU 2009-05


Accounting Standards Update (“ASU”) 2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value,” amends ASC Topic 820, “Fair Value Measurements,” to allow companies determining the fair value of a liability to use the perspective of an investor that holds the related obligation as an asset. The new guidance is effective for interim and annual periods beginning after August 27, 2009, and applies to all fair-value measurements of liabilities required by GAAP. The adoption of this standard did not have any effect on our financial position, results of operations or cash flows.





Amendment to ASC 860


ASC 860, “Transfers and Servicing,” was amended to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. The amendments to ASC 860 are effective as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The amendments must be applied to transfers occurring on or after the effective date. The adoption of this standard did not have any effect on our financial position, results of operations or cash flows.





33


Item 8. Financial Statements and Supplementary Data




Our Consolidated Financial Statements as of and for the year ended December 31, 2009 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 financial reporting.





As a result of our evaluation, we determined that we do not have adequate controls and procedures with respect to our Chinese subsidiaries and we are unable to adequately disclose financial and other material information or to do so in a timely manner. There are no personnel at our Chinese subsidiaries 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.





As Beijing Marr commences anticipated manufacturing and sales activities, the absence of an adequately trained financial staff could result in a material misstatement of annual or interim financial statements that would not be prevented or detected.





We are evaluating how to remedy this situation, in consultation with our Chinese subsidiaries’ management and our joint venture partner.





(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, 2009:





34


A. Control Environment.  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 the following:





o
The Company did not have effective controls to ensure proper and timely valuation of other assets such that advances to suppliers and deposits that have no future benefit would be identified, reviewed and recognized as expense in the appropriate accounting period;


o
The Company did not have effective controls to ensure the proper accrual of expenses would be identified, reviewed and recognized in the appropriate accounting period; and


o
The Company did not have effective controls to ensure that inventories are properly priced and valued.




B. Chinese subsidiaries.  As discussed above, we did not maintain adequate controls and procedures with respect to our Chinese subsidiaries, resulting in our inability to adequately disclose financial and other material information or to report it 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 temporary rules of the SEC that permit us to provide only management’s report in this Annual Report.




(3)           Change in Internal Control Over Financial Reporting





There has been a change in our internal control over financial reporting during the fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As a result of the resignation of three directors from our Board of Directors on September 10, 2009, we do not have an audit committee. While we are not currently obligated to have an audit committee, including a member who is an "audit committee financial expert," as defined in Item 407 of Regulation S-K, under applicable regulations or listing standards, it is management's view that such a committee is an important internal control over financial reporting, the lack of which may result in ineffective oversight in the establishment and monitoring of internal controls and procedures.




PART III





Item 10.  Directors, Executive Officers and Corporate Governance





Following is a list of our directors and executive officers as of March 30, 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
65
President, Chief Executive Officer, Chief Financial Officer, Secretary and Director
2007Tareq Al Yousefi
47
Director
2009Kartlos Edilashvili
36
Director
2010





35


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.





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, 2009, all Section 16(a) filing requirements applicable to Reporting Persons were satisfied on a timely basis, except that two directors, Mr. Al Yousefi and Shuhrat Saidmuradov, did not file Form 3’s when they joined the Board.





36


Code of Business Conduct





We previously adopteded 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, 2009:





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 was 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.




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 March 1, 2010 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:





37


Beneficial Owner (1)
Shares Beneficially

Owned
Percent of

Total (2)Marr Technologies BV (3)

Strawinskylaan 1431

1077XX, Amsterdam

The Netherlands
86,699,381
18.3%David Khidasheli (4)

Sheikh Zayed Road

Fairmont Building, # 3104

Dubai, United Arab Emirates
44,000,833
9.5%Mohamed Yousif Ahmed Saleh Sulaiman (5)

P.O. Box 19533

Sharjah, United Arab Emirates
31,375,000
6.8%Mohamed Ahmed (6)

P.O. Box 33280

Dubai, United Arab Emirates
32,375,000
7.0%Ahmed Abdalla Deemas Alsuwaidi (7)

P.O. Box 681

Sharjah, United Arab Emirates
33,920,000
7.4%SF Capital Partners Ltd. (8)

3600 South Lake Drive

St. Francis, WI 53235
25,394,320
5.4%Adel Karas (9)
3,050,000
*Tareq Al Yousefi
--
*Kartlos Edilashvili
--
*All current directors and executive officers as a group (3 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, 16290 S.W. Upper Boones Ferry Road, Portland, Oregon 97224.(2)
Based on 461,355,457 shares outstanding as of March 1, 2010.(3)
Based on holdings reported in Amendment No. 6 to Schedule 13D dated December 6, 2007 filed with the Commission on March 20, 2008 plus shares of common stock underlying Convertible Notes issued as quarterly interest which are immediately convertible into shares of common stock at $0.30 per share.  Marat Safin has voting and investment control over shares held by Marr Technologies BV.(4)
Based on holdings reported in Schedule 13G dated March 28, 2007 filed with the Commission on October 31, 2007.  Includes 41,000,000 shares of common stock underlying warrants exercisable within 60 days of April 20, 2009.(5)
Based on holdings reported in Schedule 13G dated March 28, 2007 filed with the Commission on November 2, 2007.  Includes 38,625,000 shares of common stock underlying warrants exercisable within 60 days of April 30, 2009.(6)
Based on holdings reported in Schedule 13G dated March 28, 2007 filed with the Commission on October 30, 2007.  Includes 22,625,000 shares of common stock underlying warrants exercisable within 60 days of April 30, 2009.(7)
Based on holdings reported in Schedule 13G dated March 28, 2007 filed with the Commission on October 29, 2007.  Includes 16,080,000 shares of common stock underlying warrants exercisable within 60 days of April 30, 2009.(8)
Based on holdings reported in Amendment No. 8 to Schedule 13G dated December 31, 2009 filed with the Commission on February 16, 2010 plus shares of common stock underlying Convertible Notes issued as quarterly interest which are immediately convertible at $0.30 per share.   Those conversion caps are currently not applicable.  Michael A. Roth and Brian J. Stark possess voting and dispositive power over all of the shares owned by SF Capital Partners Ltd.(9)
Includes 3,000,000 shares issuable upon exercise of options that will be exercisable within 60 days after March 1, 2010.
  38


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, 2009 and 2008:




2009


2008Audit Fees

$
158,500


$
231,848Audit-Related Fees


--



--Tax Fees

$
7,000



--All Other Fees


--



--





“Audit fees” include fees paid in 2009 and 2008 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, 2009 and 2008, 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





Item 15.  Exhibits, Financial Statement Schedules.





(a)
Certain Documents Filed as Part of the Form 10-K1.     Our Consolidated Financial Statements are included on pages F-1 through F-48 of this Annual Report on Form 10-K.2.     Exhibits3.1
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)10.2**
1991 Incentive Stock Plan (6)10.3**
1995 Director Option Plan, as amended effective May 20, 2003 (7)10.4**
1995 Employee Stock Purchase Plan, amended as of May 20, 2003 (8)10.16
First Amendment to License Agreement between the Registrant and New York University, dated as of January 11, 1995 (9)  39
 10.17
Second Amendment to License Agreement between the Registrant and New York University, dated as of October 15, 1995 (9)10.18*
Third Amendment to License Agreement between the Registrant and New York University, dated as of January 31, 1996 (9)10.21*
Sublicense Agreement between the Registrant and Cambridge Biotech Corporation, dated as of March 31, 1992 (9)10.22*
Master Agreement between the Registrant and Cambridge Biotech Corporation, dated as of April 12, 1996 (9)10.23*
Sub–License Agreement between the Registrant and Cambridge Biotech Corporation, dated as of April 12, 1996 (9)10.24*
Agreement between the Registrant and Repligen Corporation, dated as of March 8, 1993 (9)10.25*
Non–Exclusive License Agreement between the Registrant and The Texas A&M University System, dated as of September 12, 1993 (9)10.51
Non–Exclusive Patent and License Agreement between the Registrant and Public Health Service, dated June 30, 1999 (10)10.73*
Fourth Amendment to the License Agreement between the Registrant and New York University, dated as of June 1, 2000 (11)10.74**
2000 Equity Incentive Plan, amended as of May 20, 2003 (12)10.114
Amendment to Non-Exclusive Patent and License Agreement between Registrant and Public Health Service, dated April 5, 2002 (13)10.121
Distribution Agreement between the Registrant and Zhong Yang Pute Co. dated as of October 10, 2002 (14)10.128**
2003 Non-Qualified Stock Option Plan (4)10.132
Subscription Agreement between Registrant and Marr Technologies B.V. dated as of August 1, 2003 (15)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 (16)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 (17)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 (18)10.143
Form of Warrant between the Registrant and the investors in the May 2004 PIPE financing (18)10.146**
2004 Incentive Plan (19)10.148
Form of Registration Rights Agreement between the Registrant and the investors in the July 2004 PIPE financing (20)10.149
Form of Warrant between the Registrant and the investors in the July 2004 PIPE financing (20)10.150
Sublicense Agreement between the Registrant and Abbott Laboratories dated June 28, 2004 (21)10.151
License Agreement and Technology Transfer Agreement between the Registrant and Ani Biotech Oy dated as of September 30, 2004 (21)10.152
License Agreement between the Registrant and Bio-Rad Laboratories, Inc. and Bio-Rad Pasteur dated September 28, 2004 (21)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 (22)10.157
Form of Secured 8% Convertible Promissory Note between the Registrant and the investors in the April 2005 financing dated April 4, 2005 (23)  40
 10.158
Form of Registration Rights Agreement between the Registrant and the investors in the April 2005 financing dated April 4, 2005 (23)10.159
Form of Series A Warrant between the Registrant and the investors in the April 2005 financing dated April 4, 2005 (23)10.160
Form of Series B Warrant between the Registrant and the investors in the April 2005 financing dated April 4, 2005 (23)10.161
Form of Security Agreement between the Registrant and the investors in the April 2005 financing dated April 4, 2005 (23)10.163
2005 Credit Facility Agreement between the Registrant and Marr Technologies BV dated April 4, 2005 (23)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 (24)10.165
Asset Purchase and License Agreement dated November 15, 2005 by and between the Registrant and Maxim Biomedical, Inc. (25)10.166
Amendment to 2005 Credit Facility between the Registrant and Marr Technologies BV effective November 30, 2005 (26)10.168
Equity Transfer Agreement between the Registrant and Marr Technologies Asia Limited dated December 21, 2005 (27)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. (27)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 (28).10.174
Form of Subscription Agreement between the Registrant and the investors in the March 2007 PIPE financing, dated March 28, 2007 (28)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 (28)10.177
Form of Series B Warrant between the Registrant and the investors in the March 2007 PIPE financing, dated March 28, 2007 (28)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 (28)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 (28)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 (28)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 (28)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 (29)10.183
Seventh Amendment to 2005 Credit Facility between the Registrant and Marr Technologies BV dated December 4, 2007 (30)10.184
Amendment No. 3 to Secured 8% Convertible Promissory Notes between the Registrant and Marr Technologies BV dated December 4, 2007 (30)10.186
Registration Rights Agreement, dated as of January 16, 2008, by and between the Registrant and Fusion Capital Fund II, LLC. (31)  41
 10.187**
Employment Agreement, dated as of June 12, 2008, between the Registrant and Donald N. Taylor (32)10.188
Subscription Agreement, dated August 15, 2008, between the Registrant and Tinja Limited (33)10.189
Form of Warrant issued to Tinja Limited (33)10.190
Form of Subscription Agreement between the Registrant and Almyn Limited, effective September 19, 2008 (34)10.191
Form of Warrant issued to Almyn Limited (34)10.192
Subscription Agreement between the Registrant and Carolina Lupascu, dated as of May 1, 2009 (35)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 (36)10.194
Subscription Agreement dated as of September 14, 2009, between the Registrant and Carolina Lupascu (37)10.195
Lease dated October 13, 2009 by and between Pacific Realty Associates, L.P. and the Registrant (38)21.1
Subsidiaries of the Registrant.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.




(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 Exhibit 4.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-106389) dated June 23, 2003.




(8)
Incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8 (File No. 333-106389) dated June 23, 2003.




42


(9)
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.




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




(11)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q dated August 10, 2000.




(12)
Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-106389) dated June 23, 2003.




(13)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q dated August 14, 2002.




(14)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q/A (No.3) dated February 4, 2003.




(15)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-QSB dated August 14, 2003.




(16)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K dated September 12, 2003.




(17)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-QSB dated November 14, 2003.




(18)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on June 1, 2004.




(19)
Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-116906)  dated June 25, 2004.




(20)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K filed on July 13, 2004.




(21)
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.




(22)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Annual Report on Form 10-KSB filed on March 31, 2005.




(23)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K filed on April 5, 2005.




(24)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-QSB dated November 14, 2005.




(25)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on November 21, 2005.




(26)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on December 6, 2005.




(27)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on March 30, 2006.




(28)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Annual Report on Form 10-KSB filed on March 30, 2007.




(29)
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).




(30)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on December 10, 2007.




43


(31)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on January 23, 2008.




(32)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q dated August 14, 2008.




(33)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Report on Form 8-K on August 21, 2008.




(34)
Incorporated by reference to identically-numbered exhibit to the Registrant’s. Current Report on Form 8-K on September 23, 2008.




(35)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q dated August 7, 2009.




(36)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Current Reort on Form 8-K dated September 16, 2009.




(37)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q dated October 8, 2009.




(38)
Incorporated by reference to identically-numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on December 4, 2009.





(b)
Reports on Form 8-K filed during the fourth quarter of 2008 and through March 19, 2009.





Form 8-K regarding Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers and Item 8.01 Other Events – filed November 25, 2008 – Announcing the resignation of Maxim A. Soulimov as a member of the Board of Directors effective November 19, 2008 and the November 14, 2008 reduction of the Company’s workforce.




Form 8-K regarding Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers – filed December 15, 2008 – Announcing the termination of the employment agreement with Donald N. Taylor and his employment as Chief Executive Officer and Chief Financial Officer effective December 5, 2008.





Form 8-K regarding 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers and Item 7.01 Regulation FD Disclosure – filed January 9, 2009 - Announcing the reappointment of Donald N. Taylor as President, Chief Executive Officer and Chief Financial Officer effective January 5, 2009 and reiterating the Company’s reduction in its workforce due to financial constraints.





Form 8-K regarding 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers and Item 7.01 Regulation FD Disclosure – filed February 27, 2009 - Announcing the appointment of Richard C. Dietz as the Company’s Chief Financial Officer effective February 23, 2009 and the concurrent relinquishment by Donald N. Taylor of that position.





Form 8-K regarding 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers – filed March 19, 2009 – Announcing the resignation of Richard C. Dietz as the Company’s Chief Financial Officer effective March 13, 2009, the termination of Donald N. Taylor as the Company’s President, Chief Executive Officer and Secretary effective March 16, 2009, and the appointment of Adel Karas, a member of the Company’s Board of Directors, as its President, interim Chief Executive Officer, Chief Financial Officer and Secretary effective March 16, 2009.





44


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-7Notes to Consolidated Financial Statements

F-9





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, 2009 and 2008, 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 referred to above present fairly, in all material respects, the consolidated financial position of Calypte Biomedical Corporation at December 31, 2009 and 2008, 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.





As discussed in Note 2 to the consolidated financial statements, on January 1, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 160, Non-controlling Interests in Consolidated Financial Statements(included in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, Consolidations).





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 defaulted on the $6.3 million of 8% Convertible Promissory Notes and related Interest Notes and $5.2 million of 7% Promissory Notes, 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 2010 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


March 29, 2010





F-2


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)





December 31,2009


2008ASSETSCurrent assets:Cash and cash equivalents

$
176


$
196Accounts receivable, net of allowance of $34 and $1 at December 31, 2009 and 2008, respectively


42



46Inventory


310



407Prepaid expenses


8



223Other current assets


10



-Total current assets


546



872Property and equipment, net of accumulated depreciation of $1,043 and $841 at December 31, 2009 and


2,787



3,0322008, respectivelyIntangible assets, net of accumulated amortization of $872 and $654 at December 31,2009 and 2008, respectively


2,061



2,280Other assets


27



213Total assets

$
5,421


$
6,397LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts payable and accrued expenses

$
2,810


$
2,995Advances from related parties


2,256



2,256Advances from shareholder


388



-8% Convertible notes payable, including accrued interest of $365 and $0, and net of discount of $0 and $401at December 31, 2009 and 2008, respectively


6,333



5,3337% Notes payable to a related party, including accrued interest of $1,102 and $740, and net of discount of$0 and $225 at December 31, 2009 and 2008, respectively


5,302



4,71512% Convertible debentures payable


60



60Total current liabilities


17,149



15,359Deferred rent obligation


-



29Mandatorily redeemable Series A preferred stock, $0.001 par value; no shares authorized atDecember 31, 2009 and 2008; 100,000 shares issued and outstanding at December 31, 2009and 2008; aggregate redemption and liquidation value of $1,000 plus cumulative dividends


3,416



3,296Total liabilities


20,565



18,684Commitments 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, 2009 and 2008;461,355,457 and 439,354,624 shares issued and outstanding as of December 31, 2009 and 2008, respectively


13,841



13,181Additional paid–in capital


159,738



159,654Other comprehensive income


125



119Accumulated deficit


(188,377
)


(185,090
)Total Calypte Biomedical Corporation stockholders’ deficit


(14,673
)


(12,136
)Noncontrolling interests in consolidated entities


(471
)


(151
)Total stockholders’ deficit


(15,144
)


(12,287
)Total liabilities and stockholders’ deficit

$
5,421


$
6,397





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 31,2009


2008Revenues:Product sales

$
733


$
725Service revenue from related party


279



-Total revenue


1,012



725Operating costs and expenses:Cost of product sales


400



685Research and development expenses


193



1,405Selling, general and administrative expenses (non-cash of $84 and $1,348in 2009 and 2008, respectively)


2,114



5,862Total operating expenses


2,707



7,952Loss from operations


(1,695
)


(7,227
)Interest expense, net (non-cash expense of ($1,228) and ($2,218) in 2009and 2008, respectively)


(1,592
)


(2,520
)Other income (expense), net


(318
)


257Loss before income taxes


(3,605
)


(9,490
)Provision for income taxes


(2
)


-Net loss


(3,607
)


(9,490
)Deemed dividend attributable to modification of warrants


(1
)


(3,047
)Net loss applicable to common stockholders


(3,608
)


(12,537
)Less: Loss attributed to noncontrolling interests in consolidated entities


320



313Net loss attributed to Calypte Biomedical Corporation

$
(3,288
)

$
(12,224
)Other comprehensive earnings:Net loss


(3,608
)


(12,537
)Gain on foreign currency translation


-



16Comprehensive loss

$
(3,608
)

$
(12,521
)Comprehensive Loss attributed to noncontrolling interests in consolidated entities


(320
)


(305
)Comprehensive loss attributed to Calypte Biomedical Corporation

$
(3,288
)

$
(12,216
)Net loss per share  applicable to common stockholders (basic and diluted)

$
(0.01
)

$
(0.02
)Weighted average shares used to compute net loss per share applicable tocommon stockholders (basic and diluted)


450,240



398,994





See accompanying notes to consolidated financial statements.


F-4


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT


YEARS ENDED DECEMBER 31, 2008 and 2009


(in thousands, except share data)




Number of Common Shares


Common Stock


Additional Paid-in Capital


Accumulated Other Comprehensive Income


Accumulated Deficit


Total Stockholders' DeficitBalances at December 31, 2007


357,241,802


$
10,717


$
156,202


$
103


$
(175,913
)

$
(8,891
)Shares issued upon exercise ofemployee options


24,038



1



(1
)


-



-



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


4,043,647



121



223



-



-



344Shares sold to Fusion Capital underPurchase Agreement


13,831,133



415



535



-



-



950Shares issued upon exercise of warrants


28,402,004



852



750



-



-



1,602Shares issued as compensation toemployees, consultants and serviceproviders


1,812,000



55



99



-



-



154Shares sold in August 2008 PrivatePlacement


14,000,000



420



280



-



-



700Shares sold in September 2008 PrivatePlacement


20,000,000



600



100



-



-



700Expenses related to sales of common stock


-



-



(74
)


-



-



(74
)Stock-based employee and directorcompensation


-



-



1,144



-



-



1,144Fair value of warrant modifications relatedto severance agreement


-



-



350



-



-



350Fair value of options issued as compensationto consultants and mark to marketadjustments


-



-



46



-



-



46Foreign currency translation


-



-



-



16



-



16Net loss


-



-



-



-



(9,177
)


(9,177
)Balances at December 31, 2008


439,354,624


$
13,181


$
159,654


$
119


$
(185,090
)

$
(12,136
)




(continued)




F-5


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT  (CONTINUED)


YEARS ENDED DECEMBER 31, 2008 and 2009


(in thousands, except share data)





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 of warrants


22,000,833



660



-



-



-



660Stock-based employee and directorcompensation


-



-



83



-



-



83Fair value of options issued as compensationto consultants and mark to marketadjustments


-



-



1



-



-



1Foreign currency translation


-



-



-



6



-



6Net loss


-



-



-



-



(3,287
)


(3,287
)Balances at December 31, 2009


461,355,457


$
13,841


$
159,738


$
125


$
(188,377
)

$
(14,672
)




See accompanying notes to consolidated financial statements.





F-6


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)




Years ended December 31,2009


2008Cash flows from operating activities:Net loss

$
(3,288
)

$
(9,177
)Adjustments to reconcile net loss to operating  activities:Depreciation and amortization


447



458Non-cash interest expense attributable to:Amortization and proportional write-off upon conversion of note discountsand deferred debt issuance and other offering costs


626



1,409Write-off of deferred offering costs related to Purchase Agreement with Fusion Capital


-



305Dividends on mandatorily redeemable Series A preferred stock


120



120Anti-dilution obligation and note derivative liability






(32
)Stock-based employee and director compensation expense


83



1,144Fair market value of common stock, warrants and options granted for services


1



202Non-cash severance expense related to modification of Series A Warrants and Series BWarrants issued in March 2007 Private Placement


-



350Loss on disposition of equipment


25



24Loss attributed to noncontrolling interest in consolidated entities


(320
)


(313
)Changes in operating assets and liabilities:Accounts receivable


5



(46
)Inventory


97



120Prepaid expenses and other current assets


233



103Other assets


173



-Accounts payable, accrued expenses and other current liabilities


772



747Other non-current liabilities


(28
)


1Net cash used in operating activities


(1,054
)


(4,585
)Cash flows from investing activities:Purchases of equipment and other fixed assets


(2
)


(15
)Net cash used in investing activities


(2
)


(15
)Cash flows from financing activities:Proceeds from sale of stock, net of expenses


660



3,927Proceeds from common stock subscriptions


-



(44
)Proceeds from notes issued to related parties


-



48Proceeds from shareholder advances


388



-Investment in consolidated entities by noncontrolling interest


-



93Net cash provided by financing activities


1,048



4,024Change in cash and cash equivalents


(8
)


(576
)Effect of foreign currency exchange rates on cash


(12
)


(4
)Cash and cash equivalents at beginning of period


196



776Cash and cash equivalents at end of period

$
176


$
196




(continued)


F-7


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS  (CONTINUED)


(in thousands)


Years ended December 31,2009


2008Supplemental disclosure of cash flow activities:Cash paid for interest

$
3


$
303Cash paid for income taxes


-



-Supplemental disclosure of noncash activities:Common stock issued for fees and expenses under Purchase Agreement with Fusion Capital


-



344Conversion of accrued interest into notes payable


234



444




See accompanying notes to consolidated financial statements.




F-8


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008




(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 NASD Over the Counter 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, a second type of HIV (“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.




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 Technologies BV (“Marr”), our largest stockholder, which currently holds approximately 17% of our outstanding stock.  Through 2009, the operations of Beijing Calypte have been primarily organizational and financially insignificant.





Effective in January 2006, we became the 51% owner of Beijing Marr Bio-Pharmaceutical 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 in Beijing Marr.  In 2008, Beijing Marr obtained the necessary governmental approvals to manufacture, market, distribute and sell our AwareTM HIV-1/2 OMT test.




F-9


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





The accompanying financial statements reflect our consolidated operations and ownership interests in Beijing Calypte and in Beijing Marr.





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.  In the second quarter of 2008, we launched a range of Life Sciences products, including AwareMessengerTM, as well as a number of recombinant proteins and specialty assay reagents, which we are marketing through a web-portal at www.calyptelifesciences.com and a printed catalogue.  Late in the fourth quarter of 2008, we suspended marketing and sales of our Life Sciences products.  Sales of these products were not material during 2009.





Our current revenues from international sales of our HIV-1/2 Rapid Tests and sales of the BED Incidence Test are not adequate to support our business operations, requiring that we also rely on external financing sources to pursue our business milestones and achieve profitability.





In March 2007, we received cash proceeds of $5.2 million from the March 2007 private placement that funded our operations through 2007.  As part of the March 2007 private placement, we issued to the investors in that private placement immediately exercisable Series A common stock purchase warrants (the “Series A Warrants”) expiring on June 28, 2008 to purchase an aggregate of 100 million shares of our common stock at $0.08 per share and immediately exercisable Series B common stock purchase warrants (the “Series B Warrants”) expiring on September 28, 2008 to purchase an aggregate of 50 million shares of our common stock at $0.11 per share.  We expected that the warrants would be exercised to potentially provide up to $13.5 million of additional near-term financing.  Through March 31, 2008, the investors in the March 2007 private placement had exercised an aggregate of 11,750,000 of the warrants exercisable at $0.08 per share and we had received $940,000 in cash proceeds.  As described more completely in Note 9, Stockholder’s Deficit, in June 2008, we reduced the exercise price of the Series A Warrants for the four primary investors in the March 2007 Private Placement from $0.08 per share to $0.05 per share and extended the term of their Series A Warrants for one year to June 28, 2009.  We also extended the term of their Series B Warrants for one year to September 28, 2009.  In exchange for these modifications, the investors in the March 2007 Private Placement agreed to exercise re-priced Series A Warrants to purchase an aggregate of 20,000,000 shares of our common stock by July 18, 2008.  By July 21, 2008, the four investors had exercised Series A Warrants to purchase an aggregate of 19,920,000 shares of our common stock and we had received cash proceeds of $996,000. Further we reduced the exercise price of the Series A Warrants held by one investor to $0.03 per share in January 2009.  In exchange for this modification this investor exercised 10,000,000 of the warrants which netted the company cash proceeds of $300,025.





As described more completely in Note 9, Stockholder’s Deficit, in August 2008 and September 2008, we entered into private placement transactions with two new investors.  We sold to the investor in the August 2008 transaction 14,000,000 shares of our common stock at a purchase price of $0.05 per share and issued a two-year warrant to purchase an additional 1,000,000 shares of our common stock at $0.08 per share and received cash proceeds of $700,000.  We sold to the investor in the September 2008 transaction 20,000,000 shares of our common stock at a purchase price of $0.035 per share and issued a two-year warrant to purchase an additional 1,000,000 shares of our common stock at $0.06 per share and received cash proceeds of $700,000.





As also described more completely in Note 9, Stockholder’s Deficit, in January 2008, we entered into a financing arrangement under which the investor, Fusion Capital Fund II, LLC (“Fusion Capital”) is obligated, under certain conditions, to purchase up to $8 million of our common stock over a 24 month period.  Through December 31, 2008, we have sold an aggregate of approximately 13,800,000 shares of our common stock and received cash proceeds of $950,000 under this arrangement.  The market price of our common stock has prevented us from selling additional shares under this arrangement since May 2008 and we do not currently expect to sell additional shares under this arrangement prior to its expiration.





In March 2007, we extended the maturity of our April 2005 Secured 8% Convertible Notes and related interest notes and the 7% Promissory Notes issued under the 2005 Marr Credit Facility from April 2007 until April 2009.  At December 31, 2009, we owed an aggregate of approximately $11.6 million under the April 2005 Secured 8% Convertible Notes and related interest notes and the 7% Promissory Notes issued under the 2005 Marr Credit Facility, including the related accrued interest, all of which matured in April 2009.  As of April 3, 2009 we are in default of the debts and our interest rate for the post default period is 9% under the terms of these debt agreements.




F-10


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008




The development of our business took a steep downturn in the fourth quarter of 2008, when our expected sources of financing failed to materialize.  Many of our previous investors and other funding sources declined to participate in funding the company.





During 2009, we focused on slowly growing the company’s operations in a way that was affordable given the level of investment we were able to obtain.  We grew our R&D operations to a total of three employees by end of 2009 and staffed our customer operations with one employee so that we could continue servicing our customers minimally.  Our international sales efforts continued to be managed by our sales director based in Italy.  We have restricted our sales efforts to a few countries in Africa and the Middle East and India.  We hired a senior consultant to help manage our overall operations of our company, including the legal actions against certain former officers and employees.  In 2009 we continued to discuss various options to restructure our debt and have reached tentative agreements with our debt holders to waive and/or convert the secured debt in return for certain considerations.  While these agreements are not definitive in nature we anticipate that the transactions will be concluded in 2010.





During 2009, we incurred a net loss of $3.3 million.  At December 31, 2009, we had a working capital deficit of $16.6 million and our stockholders’ deficit was $14.7 million.  Our cash balance at December 31, 2009 was $0.2 million, which is inadequate to fund our operations and meet our obligations through 2009.  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.   We are currently negotiating an agreement with Marr and two affiliates of Marr (the “Debt Agreement”) providing for the restructuring of our indebtedness to Marr and the transfer of our interests in two Chinese joint ventures, Beijing Marr Bio-Pharmaceuticals Co., Ltd. (“Beijing Marr”) and Beijing Calypte Biomedical Technology Ltd. (“Beijing Calypte”), in which we hold a 51% equity and the Marr affiliates hold a 49% equity interest.   In conjunction with this agreement, Calypte and Marr are also negotiating an agreement with a third party investor (the “Investor”) pursuant to which the Investor would take over our equity interests in Beijing Marr and Beijing Calypte as well as a portion of Marr’s interests, and make further investments in Beijing Marr.  As disclosed in Note 15, Subsequent Events, on March 21, 2010 the parties signed a nonbinding agreement regarding the basic terms, subject to the negotiation of a definitive agreement.  The parties have agreed to a deadline of three months from the date of signing on the nonbinding agreement for entering into a definitive agreement, after which any party will have the right to discontinue negotiations.   Also, on March 6, 2010 we signed an agreement with Morningtown, a holder of our 8% Convertible Promissory Notes, where Morningtown agreed to convert $128,321 of the $228,321 of their debt as of 31 December, 2009 to equity and transfer the remaining $100,000 into a unsecured two year note, part of which will be offset by royalty payments from a third party affiliated with Morningtown (See Note 15, Subsequent Events).





There can be no assurance that we will be able to reach acceptable terms or any terms with Marr or the Investor.  Not being able to reach such agreements, and being in default on the debt, will further hamper our ability to raise additional funds. 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. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.




(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% ownerhip 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-11


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008




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 amortize land use rights related to property in China occupied by our Chinese joint venture over the life of the rights.  We generally depreciate our assets as follows:




Computer equipment
3 yearsMachinery and equipment
5 yearsFurniture and fixtures
5 yearsBuildings
20-40 yearsLand use rights
Life of use rights, 43 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.  Consistent with our policy on impairment of long-lived assets, given the December 31, 2009 operating loss and negative cash flow, the carrying values of Calypte and Beijing-Marr long-lived assets were compared against the undiscounted cash flows of the two entities over the remaining useful life of the primary assets.  Cash flow projections were based on a combination of historical run-rates and future projections, depending on the markets where the products were registered and the related distribution channels.  We concluded that no impairment was required as of December 31, 2009.




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 occuring 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-12


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





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.





Income Taxes


We account for income taxes under Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, as codified by ASC 740, “Income Taxes.”  SFAS No. 109 requires an asset and liability approach for the financial reporting of income taxes.  Under SFAS No. 109, 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 SFAS No. 109, 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, 2009 and 2008.





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 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 date and may engage the services of valuation experts and other professionals to assist in our determination of the appropriate classification.




F-13


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008




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 718”) 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 2008 and 2007, 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 Loss Per Share


We compute basic net loss per share by dividing net 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 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 loss per share are the same for the periods presented in these consolidated financial statements.  Outstanding options and warrants to purchase 44,550,748 shares and 207,960,767 shares were excluded from the computation of loss per share for the years ended December 31, 2009 and 2008, respectively, as their effect is anti-dilutive.  The computation of loss per share also excludes 19,894,292 shares and 19,113,444 shares issuable upon the conversion of 8% Convertible Notes, including 8% Convertible Notes issued in payment of interest, and, in 2007, 7% Notes issued under the Marr Credit Facility for the years ended December 31, 2009 and 2008, respectively, as their effect is also anti-dilutive.




F-14


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008




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, 2009 and 2008 (in thousands).




2009


2008AwareTM BED HIV-1 Incidence tests

$
571


$
403AwareTM Rapid HIV diagnostic tests


160



313All other


2



9Revenue from product sales

$
733


$
725


F-15


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008




Sales to international customers accounted for approximately 74% and 77% of our product sales revenues in 2009 and 2008, respectively.  At December 31, 2009 approximately $207,000, or 67%, of our inventory and $2,694,000, or 96%, of our property and equipment, net, was held in international locations.




Three customers accounted for approximately 49% of our revenue for 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.    BED Incidence Test purchases by the CDC’s contract testing labs in New York accounted for 10% of our revenue for 2009.  Three customers accounted for approximately 56% of our revenue for 2008.  Our South African distributor purchased both BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 24% of our 2008 revenue.  A purchase of our AwareTM HIV-1/2 oral fluid rapid tests by our U.A.E.distributor accounted for 21% of our revenue for 2008.  BED Incidence Test purchases by the CDC’s contract testing labs in New York accounted for 11% of our revenue for 2008.





Reclassifications


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





Recent Accounting Pronouncements


ASC 105


Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental GAAP in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate section of ASC.




ASC 815


In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (EITF) Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (EITF 07-05), as codified in FASB ASC topic 815, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock  (ASC 815). ASC 815 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, and was effective for financial statements issued for fiscal years beginning after December 15, 2008 (our fiscal year 2009). We adopted ASC 815 on the first day of our fiscal year 2009 and determined that no balance sheet  reclassifications were necessary.




ASC 810


On January 1, 2009, we adopted SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, as codified in FASB ASC topic 810, Consolidation (ASC 810), which introduces changes in the accounting and reporting for business acquisitions and non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.   In accordance with the requirements of SFAS 160, we have provided a new presentation on the face of the consolidated financial statements to separately classify non-controlling interests within the equity section of the consolidated balance sheets and to separately report the amounts attributable to controlling and non-controlling interests in the consolidated statements of operations and comprehensive loss for all periods presented. There were no changes in our ownership interests in previously existing subsidiaries or deconsolidation of subsidiaries for the year ended December 31, 2009.





F-16


Amendment to ASC 855


ASC 855, “Subsequent Events,” was amended and defines subsequent events as transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. The amendment defines two types of subsequent events: (i) events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events); and (ii) events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events). In addition, the amendment requires an entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The amendment was effective for periods ending after June 15, 2009. The adoption of the amendment, effective June 30, 2009, did not have any effect on our financial position, results of operations or cash flows. The FASB issued ASU-2010-09 to amend guidance on subsequent events to remove the requirement for SEC filers (as defined in ASU 2010-09) to disclose the date through which an entity has evaluated subsequent events. This change alleviates potential conflicts with current SEC guidance. An SEC filer is still required to evaluate subsequent events through the date financial statements are issued, but disclosure of that date is no longer required. The amendments in ASU 2010-09 became effective upon issuance of the guidance.




Amendment to ASC 825


ASC 825, “Financial Instruments,” was amended to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This amendment also requires those disclosures in summarized financial information at interim reporting periods. The adoption of this amendment, effective June 30, 2009, did not have any effect on our financial position, results of operations or cash flows.





Amendment to ASC 820 and ASC 320


ASC 820, “Fair Value Measurements and Disclosures,” and ASC 320, “Investments – Debt and Equity Securities,” were amended to provide additional guidance for estimating fair value and emphasize that, even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The amendments also require disclosure in interim and annual periods regarding the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. It also requires that entities define major categories for equity and debt securities. The adoption of these amendments, effective June 30, 2009, did not have any effect on our financial position, results of operations or cash flows.





ASU 2009-05


Accounting Standards Update (“ASU”) 2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value,” amends ASC Topic 820, “Fair Value Measurements,” to allow companies determining the fair value of a liability to use the perspective of an investor that holds the related obligation as an asset. The new guidance is effective for interim and annual periods beginning after August 27, 2009, and applies to all fair-value measurements of liabilities required by GAAP. The adoption of this standard did not have any effect on our financial position, results of operations or cash flows.





Amendment to ASC 860


ASC 860, “Transfers and Servicing,” was amended to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. The amendments to ASC 860 are effective as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The amendments must be applied to transfers occurring on or after the effective date. The adoption of this standard did not have any effect on our financial position, results of operations or cash flows.





F-17


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





(3)    Inventory




Inventory as of December 31, 2009 and 2008 consisted of the following (in thousands):


December 31,2009


2008Raw Materials

$
248


$
240Work-in-process


19



14Finished goods


43



152Total inventory

$
310


$
407





(4)    Property and Equipment




Property and equipment as of December 31, 2009 and 2008 consisted of the following (in thousands):


December 31,2009


2008Computer equipment

$
199


$
208Machinery and equipment


785



783Furniture and fixtures


62



64Leasehold improvements


8



46Buildings


825



825Land use rights


1,829



1,825Construction in process


122



1223,830



3,873Accumulated depreciation


(1,043)



(841)$
2,787


$
3,032





We recognized depreciation and amortization of land use rights expenses of $174,000 and $240,000 for the years ended December 31, 2009 and 2008, respectively.




(5)    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, 2009 and 2008.  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.  We expect to recognize amortization expense of $218,000 in each of the next five years, for a total of $1.1 Million.




F-18


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008




(6)    Accounts payable and accrued expenses




Accounts payable and accrued expenses as of December 31, 2009 and, 2008 consisted of the following (in thousands):




December 31,2009


2008Trade accounts payable

$
1,437


$
1,499Accrued royalties


135



92Accrued salary, severance and vacation pay


37



34Customer prepayments on purchases


10



10Accrued interest


382



101Accrued audit, legal and consulting expenses


90



247Accrued liabilities under intellectual property license agreements


40



40Accounts payable and accrued expenses of consolidated joint ventures


119



206Accrued liabilities of legacy business


190



190Accrued liability for acquisition of Chinese manufacturing operation


349



349Other


21



227Total accounts payable and accrued expenses

$
2,810


$
2,995




(7)     Notes and Debentures Payable





We issued 7% promissory notes to finance our operations during 2005, which were subsequently extended in 2007, and also issued 8% secured convertible notes in payment of quarterly interest on previously outstanding 8% notes in both 2009 and 2008.  The following tables summarize the note and debenture activity for the years ended December 31, 2008 and 2009 (in thousands).




F-19


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008




NetBalance





Conversion





Balance


Discount at


Balance at12/31/07


Additions


to Equity


Repayments


12/31/08


12/31/08


12/31/08Current 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



-



-



115Total 8% Secured Convertible Notes

$
5,290


$
444


$
-


$
-


$
5,734


$
(401
)

$
5,3337% Promissory Notes to relatedparty -2005 Credit Facility with Marr

$
4,200


$
-


$
-


$
-


$
4,200


$
(225
)

$
3,97512% Convertible Debentures –Mercator assignees

$
60


$
-


$
-


$
-


$
60


$
-


$
60






Balance

12/31/08



Additions



Conversion

to Equity



Repayments



Balance

12/31/09


Discount at

12/31/09


Net Balance at

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-20


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





8% Secured Convertible Notes and Marr Credit Facility





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 of January 3, 2009, we issued additional Interest Notes aggregating approximately $117,000 in payment of quarterly interest on the then-outstanding $5.7 million principal balance of the Convertible Notes and Interest Notes. As of April 3, 2009, we issued additional Interest Notes aggregating approximately $117,000 in payment of quarterly interest on the then-outstanding $5.8 million outstanding principal balance of the Convertible Notes and the Interest Notes.





As of December 31, 2009, we have not repaid the aggregate $6,333,000, including $365,000 in accrued interest, due to the three remaining Convertible Note holders, one of which is Marr, under the terms of our Secured 8% Convertible Promissory Notes dated April 4, 2005.  Additionally, we have not repaid the aggregate of $5,302,000 of the 7% Promissory Notes due under the 2005 Marr Credit Facility, as amended, including $1,102,000 of accrued interest through December 31, 2009.  Consequently, we are in default under the Convertible Notes, and related Interest Notes, and the Marr Credit Facility. Our interest rate for the post default period is 9% under the terms of these debt agreements.





We are currently negotiating an agreement with Marr and two affiliates of Marr (the “Debt Agreement”) providing for the restructuring of our indebtedness to Marr and the transfer of our interests in two Chinese joint ventures, Beijing Marr Bio-Pharmaceuticals Co., Ltd. (“Beijing Marr”) and Beijing Calypte Biomedical Technology Ltd. (“Beijing Calypte”), in which we hold a 51% equity and the Marr affiliates hold a 49% equity interest.   In conjunction with this agreement, Calypte and Marr are also negotiating an agreement with a third party investor (the “Investor”) pursuant to which the Investor would take over our equity interests in Beijing Marr and Beijing Calypte as well as a portion of Marr’s interests, and make further investments in Beijing Marr.  As disclosed in Note 15, Subsequent Events, on March 21, 2010 the parties signed a nonbinding agreement regarding the basic terms, subject to the negotiation of a definitive agreement.  The parties have agreed to a deadline of three months from the date of signing on the nonbinding agreement for entering into a definitive agreement, after which any party will have the right to discontinue negotiations.  Also, on March 6, 2010 we signed an agreement with Morningtown, a holder of our 8% Convertible Promissory Notes, where Morningtown agreed to convert $128,321 of the $228,321 of their debt as of 31 December, 2009 to equity and transfer the remaining $100,000 into a unsecured two year note, part of which will be offset by royalty payments from a third party affiliated with Morningtown (See Note 15, Subsequent Events).





There can be no assurance that we will be able to reach acceptable terms or any terms with Marr or the Investor.  Not being able to reach such agreements, and being in default on the debt, will further hamper our ability to raise additional funds. 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.





Interest expense


The following table summarizes the components of net interest expense for the years ended December 31, 2009 and 2008 related to the notes and debentures described above and other financing instruments as reported in the Consolidated Statements of Operations (in thousands).





F-21


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008




Years ended December 31,2009


2008Interest expense on debt instruments paid or payable in cash

$
(365
)

$
(303
)Non-cash expense composed of:Accrued interest on 8% Convertible Notes


(482
)


(453
)Amortization of discounts associated with March 2007 extensionand December 2007 restructuring of 8% convertible notes andMarr Credit Facility notes


(626
)


(1,372
)Mark to market adjustment of and intrinsic value of shares issuedunder anti-dilution obligations arising from the February andMarch 2007 Private Placements


-



32Write-off of deferred offering costs related to equity line withFusion Capital


-



(305
)Expense attributable to dividends on mandatorily redeemable SeriesA preferred stock


(120
)


(120
)Total non-cash items


(1,228
)


(2,218
)Total interest expense


(1,593
)


(2,521
)Interest income


1



1Net interest expense

$
(1,592
)

$
(2,520
)




(8)    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, 2009, 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, 2009 and 2008, 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, 2009 it remains outstanding. The holders of such shares maintain the same rights as held before the reincorporation.




F-22


(9)    Stockholders’ Deficit





Modification of Warrants Issued in February 2007 Private Placement and Deemed Dividend


Effective February 15, 2008, when the market price of our common stock was $0.136 per share, we entered into an amendment agreement with an investor in the February 2007 Private Placement to reduce the exercise price of a warrant to purchase 1,041,668 shares of our common stock issued in the February 2007 Private Placement and a warrant to purchase 100,000 shares of our common stock issued in November 2007 pursuant to a consulting agreement from $0.104 and $0.15, respectively, to $0.05 per share, subject to the complete exercise of the warrants by February 19, 2008.  The investor exercised the re-priced warrants and we received cash proceeds of approximately $57,000.  We have recognized a deemed dividend of $98,000 in our Condensed Consolidated Statement of Operations attributable to the incremental fair value resulting from the modification of these warrants, calculated as of the date of the modification using the Black-Scholes option pricing model and the following assumptions: exercise price per share: $0.05; term in years: 0.011; volatility: 135.95%; risk-free interest rate: 2.40%; dividend rate: 0%.





F-23


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2008 and 2007




On July 3, 2008, when the market price of our common stock was $0.055 per share, we amended a common stock purchase warrant to purchase 1,666,667 shares of our common stock issued to the same investor in the February 2007 Private Placement to reduce the exercise price from $0.104 per share to $0.05 per share.  On August 1, 2008, the investor exercised warants to purchase 416,667 shares and we received cash proceeds of approximately $21,000.  We have recognized a deemed dividend of $8,000 in our Condensed Consolidated Statement of Operations attributable to the incremental fair value resulting from the modification of this warrant, calculated as of the date of the modification using the Black-Scholes option pricing model and the following assumptions:




Pre-modification


Post-modificationExercise price

$
0.1040


$
0.0500Term (years)


3.644



3.644Volatility


124.17%



124.17%Interest Rate


2.82%



2.82%Expected dividend rate


0%



0%Option value per share

$
0.0383


$
0.0433




March 2007 Private Placement


On March 28, 2007, when the market price of our common stock was $0.063 per share, we completed a private placement transaction with four accredited investors for the sale of an aggregate of 100 million shares of our common stock plus warrants and received an aggregate of $5.2 million in cash which we are using for general corporate purposes.  The investors received immediately exercisable warrants to purchase an aggregate of 150 million additional shares of our common stock.  The Series A stock purchase warrants (the “2007 Series A Warrants”) to purchase 100 million shares have an exercise price of $0.08 per share and are exercisable through June 28, 2008.  The Series B stock purchase warrants (the “2007 Series B Warrants”) to purchase 50 million shares have an exercise price of $0.11 per share and are exercisable through September 28, 2008.  The 2007 Series A Warrants and the 2007 Series B Warrants are hereafter collectively referred to as the “March 2007 Private Placement Warrants.” If fully exercised, we would have received cash proceeds of $13.5 million.  We agreed to file a registration statement for the resale of the shares purchased and the shares underlying the March 2007 Private Placement Warrants within 45 days of the closing and use our best efforts to obtain its effectiveness.  The registration rights agreement was subsequently amended to remove our obligation to register the shares underlying the March 2007 Private Placement Warrants.  A resale registration statement for the shares purchased is not yet effective; however, the shares are eligible for resale by the investors under the terms of Securities and Exchange Commission Rule 144.  Two of our officers also participated in this Private Placement by applying previously subscribed funds and canceling our obligation to repay notes and other amounts owed to them, aggregating $630,000, in return for issuance of stock and warrants under the same terms as those made available to the primary investors in the March 2007 Private Placement.





The subscription agreements in the March 2007 Private Placement contained an anti-dilution clause requiring that we issue additional shares of our common stock to the investors for no additional consideration if we issued shares of our common stock in a subsequent financing transaction at less than $0.052 per share in the year following the investors’ purchase of our common stock.  We determined that the anti-dilution provisions of the subscription agreements are, in effect, a net share settled written put option as contemplated by 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”), and that the valuation of the anti-dilution obligation should be classified as a liability and marked-to-market at each balance sheet date with the change in liability being recorded as interest expense.  We valued the anti-dilution obligation of the March 2007 Private placement at its inception using a binomial pricing model to estimate future stock prices and derived a value of $2,260,000 using the following assumptions:  current share price:  $0.06; historical stock price volatility:  129.29%; risk-free interest rate:  4.90%; term (years):  1.0; expected dividend rate:  0%; and a 100% probability of completing an additional round of financing during the remaining term of the obligation.  We marked the March 2007 Private Placement anti-dilution obligation to market at December 31, 2007, again using a binomial pricing model, and derived a value of $31,000 using the following assumptions:  current share price:  $0.11; historical stock price volatility:  104.45%; risk-free interest rate:  3.36%; term (years):  0.24; expected dividend rate:  0%; and a 10% probability of completing an additional round of financing during the remaining term of the obligation.  We recorded the reduction in the value of the obligation as a non-cash credit to interest expense.  The anti-dilution obligations related to the March 2007 Private Placement expired in March 2008 and we recognized approximately $32,000 in non-cash interest income during the first quarter of 2008 as a result of adjusting the fair value of this obligation at its expiration date.





F-24


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2008 and 2007




The March 2007 Private Placement Warrants have one-year anti-dilution provisions which potentially reduce the exercise price proportionally in relation to the adjusted purchase price of the shares, but do not increase the number of shares issuable to the warrant holders.  Accordingly, we determined that the March 2007 Private Placement Warrants do not require liability treatment under the provisions of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,as codified by ASC 480.Furthermore, we determined that the warrants should be treated as equity in accordance with the provisions of EITF 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”).





During the first quarter of 2008, two investors in the March 2007 Private Placement exercised 2007 Series A Warrants at $0.08 per share to purchase an aggregate of 5,750,000 shares of our common stock and we received cash proceeds of $460,000.





On April 1, 2008, an officer who participated in the March 2007 Private Placement exercised Series A Warrants at $0.08 per share to purchase 323,669 shares of our common stock.  On June 10, 2008, in connection with an expected management change, the Compensation Committee of our Board of Directors agreed to extend the expiration date of the unexercised Series A Warrants and the Series B Warrants issued to this officer by two additional years, to June 28, 2010 and September 28, 2010, respectively.  The officer, who remained a member of our Board of Directors until December 2008, resigned as an officer on June 16, 2008.  We recognized $350,000 of non-cash expense in selling, general and administrative expenses in our Condensed Consolidated Statement of Operations attributable to the incremental fair value resulting from extending the expiration of these warrants, calculated as of the date of the modification using the Black-Scholes option pricing model and the following assumptions:




Series A Warrants


Series B WarrantsPre-modification


Post-modification


Pre-modification


Post-modificationNumber of shares


7,948,201



7,948,201



4,135,935



4,135,935Exercise price

$
0.0800


$
0.0800


$
0.1100


$
0.1100Term (years)


0.049



2.049



0.301



2.301Volatility


96.25%



133.67%



127.80%



130.34%Interest Rate


2.00%



2.91%



2.02%



2.91%Expected dividend rate


0%



0%



0%



0%Option value per share

$
0.0001


$
0.0310


$
0.0038


$
0.0291





Modification of Series A Warrants and Series B Warrants Issued in the March 2007 Private Placement and Deemed Dividend


On June 11, 2008, we entered into agreements with the four primary investors in the March 2007 Private Placement to modify the Series A Warrants and the Series B Warrants issued in the March 2007 Private Placement.  We reduced the exercise price of the remaining unexercised Series A Warrants from $0.08 per share to $0.05 per share and extended their expiration date by one year to June 28, 2009.  We also extended the expiration date of the Series B Warrants by one year to September 28, 2009.  The investors agreed to exercise re-priced Series A Warrants to purchase an aggregate of 20,000,000 shares of our common stock by July 18, 2008.  By July 21, 2008 the four investors had exercised Series A Warrants to purchase an aggregate of 19,920,000 shares of our common stock and we had received cash proceeds of $996,000.  On June 25, 2008, we also agreed to reduce the exercise price to $0.05 per share and extend by one year the expiration date of the Series A Warrants and extend by one year the expiration date of the Series B Warrants issued to a former officer who participated in the March 2007 Private Placement.  On June 30, 2008, the former officer exercised Series A warrants to purchase 850,000 shares of our common stock and we received cash proceeds of $42,500.  We have recognized a deemed dividend of $2,941,000 in our Condensed Consolidated Statement of Operations attributable to the incremental fair value resulting from the modifications 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, 2008 and 2007




Series A Warrants


Series B WarrantsPre-modification


Post-modification


Pre-modification


Post-modificationNumber of shares


92,096,154



92,096,154



51,923,077



51,923,077Exercise price

$
0.0800


$
0.0500


$
0.1100


$
0.1100Term (years)


0.008 - 0.047



1.008 - 1.047



0.260 - 0.299



1.260 - 1.299Volatility


97.73% - 127.19%



124.94 % - 127.37%



128.69% - 140.82%



121.34% - 124.08%Interest Rate


1.49% - 1.91%



2.47% - 2.48%



1.81% - 1.96%



2.47% - 2.48%Expected dividend rate


0%



0%



0%



0%Option value per share

$
0.0000 to $0.0001


$
0.0242 - $0.0265


$
0.0033 - $0.0043


$
0.0170 - $0.0176




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:




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 had 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.





August 2008 Private Placement


On August 15, 2008, when the market price of our common stock was $0.044 per share, we entered into a subscription agreement with Tinja Limited (“Tinja”), an entity formed under the laws of Mauritius, pursuant to which Tinja agreed to purchase 14,000,000 shares of our common stock at a purchase price of $0.05 per share, for a total purchase price of $700,000, in a private placement transaction.  Under the terms of the subscription agreement, we also issued a two-year warrant to Tinja to purchase 1,000,000 shares of our common stock at an exercise price of $0.08 per share.  We also granted certain piggy-back registration rights which require us to use our best efforts to register all or a portion of the shares issued and the shares underlying the warrant on the next registration statement we file with the Securities and Exchange Commission under the Securities Act.  On August 20, 2008, we received the $700,000 cash purchase price for the shares from Tinja and issued the shares and the warrant.  We used the proceeds of the private placement for general working capital purposes.  We treated the shares and the warrant issued to Tinja in the August 2008 private placement as equity for accounting purposes.





F-26


CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2008 and 2007




September 2008 Private Placement


On September 19, 2008, when the market price of our common stock was $0.033 per share, we entered into a subscription agreement with Almyn Limited (“Almyn”), an entity registered under the laws of the British Virgin Islands, pursuant to which Almyn agreed to purchase 20,000,000 shares of our common stock at a purchase price of $0.035 per share, for a total purchase price of $700,000, in a private placement transaction.  Under the terms of the subscription agreement, we also issued a two-year warrant to Almyn to purchase 1,000,000 shares of our common stock at an exercise price of $0.06 per share.  We also granted certain piggy-back registration rights which require us to use our best efforts to register all or a portion of the shares issued and the shares underlying the warrant on the next registration statement we file with the Securities and Exchange Commission under the Securities Act.  On September 19, 2008, we received the $700,000 cash purchase price for the shares from Almyn and issued the shares and the warrant.  We expect to use the proceeds of the private placement for general working capital purposes.  We treated the shares and the warrant issued to Almyn in the September 2008 private placement as equity for accounting purposes.





2009 Private Placements





On September 14, 2009, we entered into a subscription agreement (the “Subscription Agreement”) with Carolina Lipascu pursuant to which Ms. Lipascu agreed to purchase 7,000,000 shares of our common stock (the “Shares”) at a purchase price of $0.03 per share, for a total purchase price of $210,000, which Ms. Lipascu had advanced to us in June and July 2009. The Shares were issued pursuant to Regulation S under the Securities Act of 1933. The Subscription Agreement contains customary representations and warranties by Ms. Lipascu regarding her status as a non-U.S. person, her investment intent and restrictions on transfer. Ms. Lipascu 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 placement for general working capital purposes.





On August 25, September 16, September 30, October 26, December 14 and December 31, 2009, Ms. Lipascu advanced $50,000, $50,000, $50,000, $90,000, $80,000 and $68,000, respectively, in anticipation of entering into a future subscription agreement. We used the proceeds of these investments for general working capital purposes.





On March 3, 2010 we entered into a subscription agreement (the “Subscription Agreement”) with Carolina Lipascu pursuant to which Ms. Lipascu agreed to purchase 12,933,333 shares of our common stock (the “Shares”) at a purchase price of $0.03 per share, for a total purchase price of $388,000, which Ms. Lipascu had advanced to us in June and July 2009. The Shares were issued pursuant to Regulation S under the Securities Act of 1933. The Subscription Agreement contains customary representations and warranties by Ms. Lipascu regarding her status as a non-U.S. person, her investment intent and restrictions on transfer. Ms. Lipascu 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.





Warrants, options and stock grants


During the first quarter of 2008, we issued stock grants for an aggregate of 200,000 shares of our common stock to certain employees under the terms of our 2000 Equity Incentive Plan and recorded non-cash research and development expense of $28,000. We also granted 562,000 shares of our unregistered common stock to a consultant under the terms of a consulting agreement pursuant to which we recognized approximately $86,000 of non-cash selling, general and administrative expense, net of prepayments.  During the second quarter of 2008, we granted 50,000 registered shares of our common stock to a consultant under the terms of our 2000 Equity Incentive Plan pursuant to a letter agreement and recognized approximately $3,000 of non-cash selling, general and administrative expense.  In the third quarter of 2008, we granted 1,000,000 shares of our common stock pursuant to the employment agreement with our new President and Chief Executive Officer (see Note 16, Employment and Consulting Agreements) under the terms of our 2004 Incentive Plan and recorded non-cash selling, general and administrative expense of $50,000.





F-27


On April 1, 2008, when the market price for our common stock was $0.065 per share, we granted stock options to purchase an aggregate of 1,500,000 shares of our common stock at $0.065 per share to two consultants.  The options have a term of 10 years from the date of grant.  Options to purchase 1,000,000 shares are immediately exercisable; options to purchase an additional 250,000 shares become exercisable on the first anniversary of the grant and options to purchase the remaining 250,000 shares become exercisable on the second anniversary of the grant.  We utilized the Black Scholes option pricing model with the following assumptions to determine the valuation of the options as of the date of grant:




Exercise Price per share

$
0.065Risk-free interest rate


3.68%Expected volatility


197.83%Contractual term (in years)


10.00Dividend yield


0%Valuation per share

$
0.0649




We have recognized approximately $34,000 and $2,000 of non-cash research and development and selling, general and administrative expenses, respectively, attributable to these options.  In conjunction with the grant of options to purchase 500,000 shares, one of the consultants agreed to modify the expiration of previously vested options to purchase 5,000,000 shares of our common stock exercisable at $0.585 per share from May 28, 2013 to May 28, 2008.  The modified options expired unexercised at May 28, 2008.




At December 31, 2009, we had warrants outstanding to purchase an aggregate of 41,250,747 shares of our common stock at a weighted average price of $0.105 per share, as summarized in the following table:





WeightedAverageNumber of


Exercise priceShares


per share

Expiration DateWarrant issued in connection with August 2008 Private Placement


1,000,000


$
0.080

August 20, 2010Warrant issued in connection with September 2008 Private Placement


1,000,000


$
0.060

September 19, 2010Series A warrants issued in connection with March 2007 Private Placement


7,948,201


$
0.080

June 28, 2010Series B warrants issued in connection with March 2007 Private Placement


4,135,935


$
0.110

September 28, 2010Warrants 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, 2012Series A and Series B warrants issued in connection with April 2005 PrivatePlacement, including warrants to placement agents


24,041,610


$
0.119

April 3, 2010Warrant issued for investment banking services


500,000


$
0.085

October 31, 201141,250,747


$
0.105




Shares reserved for future issuance


The following table summarizes shares reserved for future issuance at December 31, 2009:




F-28




Shares issuable pursuant to options outstanding under benefit plans


3,300,000Shares reserved for future issuance under benefit plans


57,790,713Shares issuable pursuant to warrants outstanding


41,250,747Shares issuable under equity line with Fusion Capital


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


12,933,333Shares issuable upon conversion of debt securities, including accrued interest through maturity


19,894,292173,054,689




(10)    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 2009.   Under the provisions of ASC 718, we have recorded approximately $83,000 of stock based employee compensation expense in our condensed consolidated statement of operations for the year ended December 31, 2009 attributable to the 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, 2007 through December 31, 2009.




F-29


Weighted


Weighted


AggregateAverage


Average


IntrinsicExercise


Remaining


Value atPrice per


Contractual


DateOptions


Share


Term (years)


IndicatedOptions outstanding at December 31, 2007

31,863,354Options granted - at market price

21,020,000Options exercised

(24,038
)Options forfeited

(8,415,387
)Options expired

(10,347,346
)Options outstanding at December 31, 2008

34,096,583


$
0.145



4.34


$
0Options granted - at market price

-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 vested and exercisable at December 31, 2008

30,596,583


$
0.145



3.81


$
0Options vested and exercisable at December 31, 2009

3,300,000


$
0.127



7.27


$
0




The following table summarizes information about stock options outstanding under all of our option plans at December 31, 2009.





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



7.91


$
0.110



3,000,000


$
0.110$0.23


50,000



5.32


$
0.230



50,000


$
0.230$0.31


250,000



0.02


$
0.310



250,000


$
0.3103,300,000



7.27


$
0.127



3,300,000


$
0.127




There was no intrinsic value associated with any of our outstanding options at December 31, 2009, as the exercise prices for all outstanding or exercisable options exceeded the $0.008 per share quoted market price of our common stock at that date.  The aggregate intrinsic value of options exercised on the dates the options were exercised was approximately $3,000 for the year ended December 31, 2008.




We did not record any income tax benefits for stock-based compensation arrangements for the years ended December 31, 2009 or 2008, as we have cumulative operating losses and have established full valuation allowances for our income tax benefits.




(11)    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 is intended to qualify under Section 401(k) of the Internal Revenue Code.  Under the terms of the 401(k) Plan, employees may 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 permits 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 2009 or 2008.





F-30


(12)    Income Taxes





The provision for income taxes is based upon our loss before provision for income taxes for the years ended December 31, 2009 and 2008, as follows (in thousands):




2009


2008Loss before income taxes:Domestic

$
(2,954
)

$
(8,852
)International


(333
)


(325
)Total loss before income taxes

$
(3,287
)

$
(9,177
)




For the years ended December 31, 2009 and 2008, 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:





2009


2008Computed expected tax expense

$
(1,118
)

$
(3,120
)Losses and credits for which no benefits have been recognized


864



2551Expense related to amortization of financing discounts in interest expense


213



467Expense related to warrant modification


0



119Other, net


41



(17
)$
-


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




2009


2008Deferred tax assets:Net operating loss carryovers

$
32,410


$
34,005Research and development credits

$
482


$
1,142Other

$
2,249


$
2,893Total gross deferred tax assets

$
35,141


$
38,040Valuation allowance

$
(35,141
)

$
(38,040
)Net deferred tax assets

$
-


$
-




The net change in the valuation allowance for the years ended December 31, 2009 and 2008 was a decrease of $2,899,000 and an increase of $2,981,000, respectively.  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, 2009 and 2008.  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, 2009, we had federal net operating loss carryforwards of $94.6 million and federal research and development credit carryforwards of $482,000, which will expire in the years 2010 through 2029. We also have state net operating loss carryforwards of $5.8 million. The state net operating loss carryforwards will expire in the years 2010 through 2019. The Company has determined that a` portion of its State NOL carryforwards are no longer available in the state that the Company does business in. The amount of NOL's written off was $33.5 million.




F-31


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 ownerhsip 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, 2009 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, 2009 and 2008, and have not recognized interest or penalties in our Consolidated Statements of Operations for the years ended December 31, 2009 and 2008.




(13)    Related Party Transactions




At December 31, 2009, Marr held an aggregate of $4,096,506 of our 8% Secured Convertible Notes plus $234,924 in accrued interest and $4,200,000 under the Marr Credit Facility, plus $1,102,000 of related accrued interest.  Additionally, Marr holds approximately 16% of our outstanding common stock.





In 2009, Marr Technology Asia Limited, a company of the Marr Group, signed a services agreement with our JV partner, Beijing Marr. Under this agreement Beijing Marr provided various marketing and technical advisory services to the Marr entity.  The revenue proceeds to Beijing Marr from providing these services was $279,000.











F-32


(14)    Commitments and Contingencies





On August 12, 2009, the Beijing Chaoyang District, China, Labor Dispute Arbitration Commission (the “Arbitration Commission”) awarded David K. Harris, former Chief Executive Officer of Beijing Marr, a judgment of RMB 1,591,529.6 (US$233,704) against Beijing Marr for unpaid salary owed to him during the term of his employment and for severance under the terms of his terminated employment agreement. On August 24, 2009, Mr. Harris filed an appeal of the judgment with the Beijing Chaoyang District Court. On August 27, 2009, Beijing Marr also filed an appeal of the judgment with the Beijing Chaoyang District Court.





On August 25, 2009, the Arbitration Commission awarded (1) Xi Rong RMB 106,656.14 (US$15,661) and (2) Wang Yong RMB 106,800.29 (US$15,683) for Beijing Marr’s failure to execute written employment agreements with the former employees as required under the Chinese employment law.





As to each of these matters, Beijing Marr has denied liability, except for certain amounts of back salary owed to Mr. Harris, and asserted substantive defenses, primarily based on Mr. Harris’ failure to carry out his duties as Chief Executive Officer of Beijing Marr.  For this reason, Beijing Marr has appealed all the judgments. A hearing of the appeal was held on October 29, 2009, and an additional hearing has been scheduled.  Meanwhile the parties are currently engaged in negotiations to settle.




On October 13, 2009, we entered into a 30-month lease (the “New Lease”) with Pacific Realty Associates, L.P. (the “Landlord”) for new headquarters in Portland, Oregon. The New Lease, which commences on December 1, 2009 and comprises approximately 4,741 square feet, has a base monthly rent of $7,000 plus operating expenses and taxes. The future minimal rent payments under the New Lease are $84,000 for 2010, $84,000 for 2011 and $35,000 for 2012.  Pursuant to the New Lease, we and the Landlord have agreed to terminate our existing lease that we entered into in September 2007 (the “Existing Lease”) effective upon such time as we begin occupancy of the new premises.  The Existing Lease comprises approximately 11,252 square feet, in Portland, including manufacturing space that we no longer need, and provides for base monthly rent of $12,152, escalating in stages to $13,165 over the following three years of the lease term.  The New Lease does not provide for a security deposit, and the Landlord has agreed to apply our security deposit under the Existing Lease, totaling $47,258, toward tenant improvements on the new premises.




(15)    Subsequent Events





During the first quarter of 2010, we have received an aggregate of $150,000 in advances from existing investors in anticipation of entering into subscription agreements. We are using the proceeds of these investments for general working capital purposes.




On March 6, 2010 we signed an agreement with Morningtown, a holder of our 8% Convertible Promissory Notes, where Morningtown agreed to convert $128,321 of the $228,321 of their debt as of 31 December, 2009 to equity and transfer the remaining $100,000 into a unsecured two year note, part of which will be offset by royalty payments from a third party affiliated with Morningtown.




On March 21, 2010 Beijing Marr, Calypte and a third party investor signed a nonbinding agreement regarding the basic terms, subject to the negotiation of a definitive agreement.  The parties have agreed to a deadline of three months from the date of signing on the nonbinding agreement for entering into a definitive agreement, after which any party will have the right to discontinue negotiations.





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-33


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.




Date: March 31, 2010
CALYPTE BIOMEDICAL CORPORATIONBy:
/s/ Adel KarasAdel KarasPresident, Chief Executive Officer, Chief Financial Officer and Secretary





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

President, Chief Executive Officer, Chief Financial Officer (Principal

March 31, 2010Adel Karas

Financial and Accounting Officer) and Secretary, Director/s/ Tareq Al Yousefi

Director

March 31, 2010Tareq Al Yousefi/s/ Kartlos Edilashvili

Director

March 31, 2010Kartlos Edilashvili





S-1