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EX-32.1 - EXHIBIT 32.1 - CALYPTE BIOMEDICAL CORPex32-1.htm
EX-31.1 - EXHIBIT 31.1 - CALYPTE BIOMEDICAL CORPex31-1.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from _____________ to _____________

Commission file number:   000-20985

CALYPTE BIOMEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
06-1226727
(State or other jurisdiction of incorporation
(I.R.S. Employer
or organization)
Identification Number)

15875 SW 72nd Ave,
Portland, Oregon  97224
(Address of principal executive offices)      (Zip Code)

 (503) 726-2227
(Registrant’s telephone number, including area code)

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

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).  o Yes  x No   

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  (Do not check if a smaller reporting company)                 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).   o Yes  x No
 
The registrant had 677,501,491 shares of common stock outstanding as of January 24, 2011.

 
 

 

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES

FORM 10-Q
 
INDEX
 
       
Page No.
PART I.
Financial Information
   
         
         
 
Item 1.
Consolidated Financial Statements (unaudited):
   
         
   
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
 
3
         
   
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2010 and 2009
 
4
         
   
Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2010 and 2009
 
5
         
   
Notes to Condensed Consolidated Financial Statements
 
7
         
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
15
         
 
Item 4.
Controls and Procedures
 
20
         
PART II.
Other Information
   
         
 
Item 1A.
Risk Factors
 
21
         
 
Item 6.
Exhibits
 
21
         
SIGNATURES
   
22

 
2

 
 
PART I.  FINANCIAL INFORMATION
       
Item 1.  Financial Statements
       
 
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share data)
 
   
September 30,
 
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Note 1)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 31     $ 160  
Accounts receivable, net of allowance of $0 at September 30, 2010 and $34 at December 31, 2009
    36       40  
Inventory
    297       219  
Prepaid expenses
    83       5  
Current assets of discontinued operations
    -       122  
                 
Total current assets
    447       546  
                 
Property and equipment, net of accumulated depreciation of $391 and $388 at September 30, 2010 and December 31, 2009, respectively
    72       93  
Intangible assets, net of accumulated amortization of $1,036 and $872 at September 30, 2010 and December 31, 2009, respectively
    1,898       2,061  
Other assets
    19       19  
Non-current assets of discontinued operations
    -       2,702  
                 
Total assets
  $ 2,436     $ 5,421  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 1,975     $ 2,342  
Advances from shareholder
    550       388  
8% Convertible notes payable, including accrued interest of $365, at December 31, 2009
    -       6,333  
7% Notes payable to a related party, including accrued interest of $1,102, at December 31, 2009
    -       5,302  
4% Note payable, including accrued interest of $3 at September 30, 2010
    88       -  
12% Convertible debentures payable
    60       60  
Deferred revenue
    27       -  
Current liabilities of discontinued operations
    -       2,724  
                 
Total current liabilities
    2,700       17,149  
                 
           
Mandatorily redeemable Series A preferred stock, $0.001 par value; no shares authorized at September 30, 2010 and December 31, 2009; 100,000 shares issued and outstanding at September 30, 2010 and December 31, 2009; aggregate redemption and liquidation value of $1,000 plus cumulative dividends
    3,506       3,416  
                 
Total liabilities
    6,206       20,565  
                 
Commitments and contingencies
               
                 
Stockholders’ 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 September 30, 2010 and December 31, 2009;  677,501,491 and 461,355,457 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively
    15,483       13,841  
Additional paid–in capital
    159,745       159,738  
Other comprehensive income
    (1 )     125  
Accumulated deficit
    (178,997 )     (188,377 )
                 
Total Calypte Biomedical Corporation stockholders’ deficit
    (3,770 )     (14,673 )
                 
Noncontrolling interests in discontinued operations
    -       (471 )
                 
Total stockholders’ deficit
    (3,770 )     (15,144 )
                 
Total liabilities and stockholders’ deficit
  $ 2,436     $ 5,421  
 
See accompanying notes to condensed consolidated financial statements.

 
3

 
 
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 (Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
 Revenues:
                       
 Product sales
  $ 124     $ 25     $ 314     $ 402  
                                 
 Operating costs and expenses:
                               
 Cost of product sales
    77       35       162       218  
 Research and development expenses (non-cash of $2 and ($22)
                               
 for the three and nine months ended September 30, 2010, respectively,
                               
 and non-cash of $9 and ($12) for the three and nine months ended
                               
 September 30, 2009 respectively)
                               
 Selling, general and administrative expenses (non-cash of $1 and ($14)
    69       51       189       96  
 for the three and nine months ended September 30, 2010, respectively,
                               
 and non-cash of $104 and $281 for the three and nine months ended
                               
 September 30, 2009 respectively)
    253       545       739       1,682  
                                 
 Total operating expenses
    399       631       1,090       1,996  
                                 
 Loss from operations
    (275 )     (606 )     (776 )     (1,594 )
                                 
 Interest expense, net (non-cash expense of $31 and $325 for
                               
 the three and nine months ended September 30, 2010, respectively,
                               
 and non-cash expense of $325 and $1,076 for the three and nine
                               
 months ended September 30, 2009, respectively)
    (31 )     (227 )     (515 )     (1,306 )
                                 
 Gain on transfer of assets
    2,289       -       2,289       -  
 Gain on restructuring of notes
    8,500       -       8,500       -  
 Other income, net
    5       21       24       110  
                                 
 Net income(loss) before income taxes
    10,488       (812 )     9,522       (2,790 )
                                 
 Provision for income taxes
    -       -       -       -  
                                 
 Net income (loss) from continuing operations
    10,488       (812 )     9,522       (2,790 )
                                 
 Net loss attributable to Calypte from discontinued operations
    -       (49 )     (136 )     (141 )
                                 
 Net loss attributable to noncontrolling interest from discontinued operations
    -       (46 )     (131 )     (136 )
                                 
 Net income (loss)
  $ 10,488     $ (907 )   $ 9,255     $ (3,067 )
                                 
Gain on foreign currency translation
    -       -       -       1  
                                 
 Comprehensive income (loss)
    10,488       (907 )     9,255       (3,066 )
                                 
 Net income (loss) per share from continuing operations
  $ 0.021     $ (0.002 )   $ 0.020     $ (0.006 )
                                 
 Net income (loss) per share attributable to Calypte from discontinued operations
   
(0.000
)     (0.000 )     (0.001 )      (0.001 )
                                 
 Net income (loss) per share  (basic and diluted)
  $
0.021
    $
(0.002
)   $
0.019
    $
(0.007
)
                                 
 Weighted average shares used to compute net income (loss) per share
    492,573       455,649       478,870       446,494  
 (basic and diluted)
                               
 
See accompanying notes to condensed consolidated financial statements.

 
4

 

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
(Unaudited)

   
Nine months ended
 
   
September 30,
 
   
2010
   
2009
 
             
 Cash flows from operating activities:
           
Net income (loss)
  $ 9,522     $ (2,790 )
Adjustments to reconcile net loss to operating  activities:
               
 Depreciation and amortization
    190       338  
 Non-cash interest expense attributable to:
               
 Amortization and proportional write-off upon conversion of note discounts
               
 and deferred debt issuance and other offering costs
    -       626  
 Dividends on mandatorily redeemable Series A preferred stock
    90       90  
 Gains from note restructuring and asset transfer
    (10,789 )     -  
 Stock-based employee compensation expense
    (36 )     268  
 Fair market value of common stock, warrants, and options granted for services
    -       1  
 Loss on disposition of equipment
    26       -  
 Loss attributed to noncontrolling interest in disconnected operations
    (131 )     (141 )
 Changes in operating assets and liabilities:
               
 Accounts receivable
    4       26  
 Inventory
    (78 )     39  
 Prepaid expenses and other current assets
    (19 )     49  
 Accounts payable, accrued expenses and other current liabilities
    592       591  
                 
 Net cash used in operating activities
    (629 )     (903 )
                 
 Cash flows from investing activities:
               
 Investment in China
    -       -  
 Purchases of equipment
    (34 )     -  
                 
 Net cash used in investing activities
    (34 )     -  
                 
 Cash flows from financing activities:
               
 Proceeds from sale of stock, net of expenses
    -       660  
 Principal payments on notes payable
    (16 )     -  
 Proceeds from shareholder advances
    550       150  
                 
 Net cash provided by financing activities
    534       810  
                 
 Net decrease in cash and cash equivalents
    (129 )     (93 )
                 
 Effect of foreign currency exchange rates on cash
    -       (3 )
                 
 Cash and cash equivalents at beginning of period
    160       196  
                 
 Cash and cash equivalents at end of period
  $ 31     $ 100  

  See accompanying notes to condensed consolidated financial statements.

 
5

 

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (CONTINUED)
 (in thousands)
(Unaudited)
 
   
Nine months ended
 
   
September 30,
 
   
2010
   
2009
 
             
 Supplemental disclosure of cash flow activities:
           
 Cash paid for interest
  $ 190     $ 229  
                 
 Supplemental disclosure of noncash activities:
               
 Conversion of accrued interest into notes payable
    -       234  
 Conversion of notes payable into common stock
    1,291          

See accompanying notes to condensed consolidated financial statements.

 
6

 

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES
 
(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. 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. We have 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 Russia, India and China as well as a number of key countries in Africa, Southeast Asia and the Middle East,. 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”).

Until July 2010, we were the 51% owner of each of two joint ventures in China, Beijing Calypte Biomedical Technology Ltd. (“Beijing Calypte”) and Beijing Marr Bio-Pharmaceuticals Co., Ltd. (“Beijing Marr”).  As discussed in Notes 3 and 6, we have signed agreements to transfer our equity in these ventures to Kangplus (China) Holdings Ltd. (“Kangplus”) as part of the restructuring of our debt with the Marr Group.  The accompanying financial statements reflect our operations and ownership interests in Beijing Calypte and in Beijing Marr under discontinued operations.

As discussed in Note 9, “Subsequent Events”, in November, 2010, Calypte was awarded a grant of $244,479 under U.S. Government's Qualifying Therapeutic Discovery Project (QTDP) program. The QTDP grant is provided under section 48D of the Internal Revenue Code, enacted as part of the Patient Protection and Affordable Care Act of 2010. The grant is targeted to therapeutic discovery projects that show a reasonable potential to prevent, diagnose, and treat acute and chronic diseases. Allocation of the grant also takes into consideration which projects show the greatest potential to create and sustain high-quality, high-paying U.S. jobs and to advance U.S. competitiveness in life sciences. While these funds will help sustain current R&D activity for the AwareTM II product, we will need additional funding to finish development and bring the product to market.

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

During the third quarter of 2010, we recognized a net gain of $10.8 million as a result of restructuring our debt with the Marr Group and SF Capital Partners Limited.  At September 30, 2010, we had a working capital deficit of $2.3 million and our stockholders’ deficit was $3.8 million.  Our cash balance at September 30, 2010 was $0.03 million.  Following that date, we received additional advances from investors and the aforementioned QTDP Tax Credit after September 30, 2010; as a result, and our cash balance as of January 24, 2011 was approximately $63,900.  However, we do not believe that amount, by itself, is sufficient to enable us to fund our operations through the remainder of 2011.

As discussed in Note 6, in July 2010 we entered into a series of agreements providing for (i) the restructuring of our outstanding indebtedness to Marr and SF Capital Partners Limited (“SF Capital”), (ii) the transfer of our ownership interests in Beijing Marr to Kangplus and (iii) to transfer our ownership interests in Beijing Calypte to Marr or a designate of its choice. The transfer of our ownership interests in the Chinese ventures are awaiting approval by authorities in that country.
 
Since 2009, two investors, Carolina Lupascu and David Khidasheli, have been supporting the Company through periodic equity investments. From January 1 through September 30, 2010, Ms. Lupascu and Mr. Khidasheli advanced $50,000 and $500,000, respectively, in anticipation of entering into future subscription agreements.  We are using the proceeds of these investments for general working capital purposes.

Notwithstanding the debt restructuring described above, our significant working capital deficit and limited cash resources place a high degree of doubt on our ability to continue our operations.  In light of our existing operations and financial challenges, we are exploring strategic and financing options.  Failure to obtain additional financing will likely cause us to seek bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
7

 
 
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and they reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of our consolidated financial position as of September 30, 2010 and the consolidated results of our operations and our consolidated cash flows for the three and nine month period ended September 30, 2010.  The accompanying condensed consolidated balance sheet at December 31, 2009 has been derived from our audited financial statements at that date.  Interim results are not necessarily indicative of the results to be expected for the full year or any future interim period.  This information should be read in conjunction with our audited consolidated financial statements for each of the years in the two year period ended December 31, 2009 included in our Form 10-K filed with the SEC on March 31, 2010.

Certain information in footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) has been condensed or omitted pursuant to the rules and regulations of the SEC.  The data disclosed in these condensed consolidated financial statements and in the related notes is unaudited.


(2) 
Significant Accounting Policies

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.

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 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 all or a substantial portion of the order or a letter of credit before shipment.

Except in the event of verified product defect, we do not permit product returns.  Our products must be maintained under rigidly controlled conditions that we cannot control after the product has been shipped to the customer.
 
We provide no price protection.  Subject to the conditions noted above, we recognize revenue upon shipment of product.

Royalty Revenue

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

Segment and Geographic Information

Our operations are currently focused on the development and sale of HIV diagnostics.  The following table summarizes our product sales revenues by product for the three and nine months ended September 30, 2010 and 2009 (in thousands):
 
 
8

 
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
AwareTM BEDTM HIV-1 Incidence Test
  $ 78     $ 1     $ 201     $ 306  
AwareTM Rapid HIV diagnostic tests
    44       20       88       78  
All other
    3       1       27       10  
                                 
Revenue from product sales
  $ 125     $ 22     $ 316     $ 394  
 
Sales to international customers accounted for approximately 58% and 93% of our revenues in the third quarter of 2010 and 2009, respectively.  Four customers accounted for approximately 69% of our third quarter 2010 revenue.  Three customers accounted for approximately 97% of our third quarter 2009 revenue.

International sales accounted for approximately 60% and 64% of our revenues for the nine months ended September 30 of 2010 and 2009, respectively. Five customers accounted for approximately 58% of our revenue for the nine months ended September 30, 2010. Five customers accounted for approximately 47% of our revenue for the nine months ended September 30, 2009.  

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 number of shares used in computing basic and diluted net loss per share are the same for the periods presented in these unaudited condensed consolidated financial statements.  Outstanding options and warrants for 6,175,002 shares and 62,925,000 shares were excluded from the computations of net income and loss per share for the three and nine month periods ended September 30, 2010 and 2009, respectively, as their effects are anti-dilutive.  The computation of loss per share for the three and nine month periods ended September 30, 2009 also excludes 19,894,291 shares issuable upon the conversion of 8% Convertible Notes, including 8% Convertible Notes issued in payment of interest, and 7% Notes issued under the 2005 Marr Credit Facility, between us and Marr Technologies BV (“Marr”), our largest stockholder, as their effect is also anti-dilutive.
 
Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management 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.

Reclassifications

We made certain reclassifications to prior-period amounts to conform to the third quarter 2010 presentation.
 
Stock-Based Compensation Expense 
 
We measure stock-based compensation at the grant date based on the award’s fair value and recognize the expense ratably over the requisite vesting period, net of estimated forfeitures, for all stock-based awards granted after January 1, 2006 and all stock based awards granted prior to, but not vested as of, January 1, 2006.

We have elected to calculate the fair value of option awards based on the Black-Scholes option-pricing model. The Black-Scholes model requires various assumptions, including expected option life and volatility.  If we significantly change any of the assumptions used in the Black-Scholes model or the estimated forfeiture rate, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Adoption of New Accounting Pronouncements

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

 
9

 

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES

(3)
Discontinued Operations
 
As previously mentioned in Note 1, in July 2010 we entered into a series of agreements providing for (i) the restructuring of our outstanding indebtedness to Marr and SF Capital and (ii) the transfer of our ownership interests in the two Chinese joint ventures, Beijing Marr and Beijing Calypte, to Kangplus and to Marr or its designate, respectively.  As such, we have classified accounts related to the two consolidated Chinese joint ventures as discontinued operations for all periods presented.
 
Discontinued operations from the December 31, 2009 Condensed Consolidated Balance Sheet consisted of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
Cash and cash equivalents
  $ -     $ 16  
Accounts receivable
    -       2  
Inventory
    -       91  
Prepaid expenses
    -       3  
Other current assets
    -       10  
Current assets - of discontinued operations
  $ -     $ 122  
                 
Property and equipment
  $ -     $ 3,349  
     Accumulated depreciation
    -       (655 )
Other assets
    -       8  
Non-current assets - of discontinued operations
  $ -     $ 2,702  
                 
Accounts payable and accrued expenses
  $ -     $ 2,724  
Current liabilities - of discontinued operations
  $ -     $ 2,724  
 
Discontinued operations from the Consolidated Statement of Operations for the three and nine months ended September 30, 2010 and 2009 consisted of the following (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
 Revenues:
                       
 Product sales
  $ -     $ 4     $ 15     $ 5  
                                 
 Operating costs and expenses:
                               
 Cost of product sales
    -       1       4     $ 1  
 Research and development expenses
    -       -       -     $ -  
 Selling, general and administrative expenses
    -       71       147     $ 264  
                                 
 Total operating expenses
    -       72       151     $ 265  
                                 
 Loss from operations
    -       (68 )     (136 )   $ (260 )
                                 
 Interest expense, net
    -       -       -     $ 2  
 Other income, net
    -       20       -     $ 117  
                                 
 Net loss attributible to Calypte from discontinued operations
  $ -     $ (48 )   $ (136 )   $ (141 )
 
 
10

 

(4) 
Inventory
 
Inventory as of September 30, 2010 and December 31, 2009 consisted of the following (in thousands):

   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
 Raw materials
  $ 198     $ 157  
 Work-in-process
    21       19  
 Finished goods
    78       43  
                 
 Total inventory
  $ 297     $ 219  
 
(5)
Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses as September 30, 2010 and December 31, 2009 consisted of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
Trade accounts payable
  $ 1,329     $ 1,437  
Accrued royalties
    184       135  
Accrued salary and vacation pay
    44       37  
Accrued interest
    16       382  
Accrued audit, legal and consulting expenses
    115       90  
Accrued liabilities under intellectual property license agreements
    -       40  
Accrued liabilities of legacy business
    190       190  
Other
    97       31  
                 
Total accounts payable and accrued expenses
  $ 1,975     $ 2,342  
 
 
11

 
 
(6) 
Notes and Debentures Payable

The following table summarizes note and debenture activity for the nine months ended September 30, 2010 (in thousands):
 
   
Balance
12/31/09
   
Additions
   
Conversion
to Equity
   
Conversion to
4% Notes Payable
   
Asset
Transfer
   
Repayment
   
Balance
9/30/10
   
Discount at
9/30/10
   
Net
Balance at
9/30/10
 
                                                       
Current Notes and Debentures
                                                     
                                                       
8% Secured Convertible Notes –
                                                     
   April 4, 2005
  $ 4,399     $ -     $ (1,299 )   $ (100 )   $ (3,000 )   $ -     $ -              
   July 4, 2005 Interest
    66       -       (66 )     -       -       -       -              
   October 4, 2005 Interest
    68       -       (68 )     -       -       -       -              
   January 4, 2006 Interest
    69       -       (69 )     -       -       -       -              
   April 4, 2006 Interest
    68       -       (68 )     -       -       -       -              
   July 4 and 21, 2006 Interest
    122       -       (122 )     -       -       -       -              
   October 4, 2006 Interest
    91       -       (91 )     -       -       -       -              
   January 4, 2007 Interest
    100       -       (100 )     -       -       -       -              
   April 3, 2007 Interest
    99       -       (99 )     -       -       -       -              
   July 3, 2007 Interest
    102       -       (102 )     -       -       -       -              
   October 3, 2007 Interest
    106       -       (106 )     -       -       -       -              
   January 3, 2008 Interest
    108       -       (108 )     -       -       -       -              
   April 3, 2008 Interest
    110       -       (110 )     -       -       -       -              
   July 3, 2008 Interest
    111       -       (111 )     -       -       -       -              
  October 3, 2008 Interest
    115       -       (115 )     -       -       -       -              
  January 3, 2009 Interest
    117       -       (117 )     -       -       -       -              
  April 3, 2009 Interest
    117       -       (117 )     -       -       -       -              
                                                                     
Total 8% Secured Convertible Notes
  $ 5,968     $ -     $ (2,868 )   $ (100 )   $ (3,000 )   $ -     $ -     $ -     $ -  
                                                                         
7% Promissory Notes to related
                                                                       
   party -
                                                                       
     2005 Credit Facility with Marr
  $ 4,200     $ -     $ (4,200 )   $ -     $ -     $ -     $ -     $ -     $ -  
                                                                         
12% Convertible Debentures –
                                                                       
  Mercator assignees
  $ 60     $ -     $ -     $ -     $ -     $ -     $ 60     $ -     $ 60  
                                                                         
4% Note Payable –
                                                                       
  Morningtown
  $ -     $ 100     $ -     $ -     $ -     $ (16 )   $ 100     $ -     $ 100  
 
8% Secured Convertible Notes

On April 4, 2005, we concluded a private placement to five institutional investors of $8,000,000 of Secured 8% Convertible Notes originally due April 3, 2007 (the “Convertible Notes”) and subsequently extended to April 3, 2009.  The Convertible Notes provide for quarterly interest to be paid in cash, or subject to certain conditions, by issuing additional Convertible Notes maturing on April 3, 2009 (the “Interest Notes”).  From July 4, 2005 through April 3, 2009 we issued Interest Notes in an aggregate face amount of $1,962,000 in payment of quarterly interest.  
 
As discussed in Note 1, in July 2010 we entered into a series of agreements providing for (i) the restructuring of our outstanding indebtedness to Marr and SF Capital (the “Debt Agreement”) and (ii) the transfer of our interests in the two Chinese joint ventures, Beijing Marr and Beijing Calypte, to Kangplus (the “Equity Agreement”). Under the Debt Agreement, $6,393,353 in outstanding indebtedness was converted to 152,341,741 shares of our common stock, and our remaining indebtedness to Marr, totaling $3,000,000 as of December 31, 2009, was cancelled. In consideration for such debt restructuring, we transferred our equity interests in Beijing Marr to Kangplus pursuant to the Equity Transfer Agreement and transferred certain related technology to Beijing Marr.  We have also agreed to transfer our equity interests in Beijing Calypte to Marr or a designate of its choosing. The transactions contemplated by the Debt Agreement and the Equity Transfer Agreement are subject to Chinese government registration of the transfer of the equity interests. Under the debt agreement with SF Capital, $2,008,259.35 in outstanding indebtedness was converted to 47,815,698 shares of our common stock.
 
Notwithstanding this debt restructuring, our significant working capital deficit and limited cash resources place a high degree of doubt on our ability to continue our operations.  In light of our existing operations and financial challenges, we are exploring strategic and financing options.  Failure to obtain additional financing will likely cause us to seek bankruptcy protection.

 
12

 
Interest Expense

The table below summarizes the components of interest expense for the three and nine month periods ended September 30, 2010 and 2009 (in thousands):
 
   
Three Months ended September 30,
   
Nine Months ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Interest expense on debt instruments paid or payable in cash
  $ -     $ (75 )   $ (190 )   $ (230 )
Non-cash income (expense) composed of:
                               
Accrued interest on 8% Convertible Notes
    -       (122 )     (231 )     (360 )
Accrued interest on 4% Note Payable
    (1 )     -       (4 )     -  
Amortization of discounts associated with March 2007 extension
                               
    and December 2007 restuctructuring of 8% convertible notes and
                               
    Marr Credit Facility notes
    -       -       -       (626 )
Expense attributable to dividends on mandatorily redeemable Series
    (30 )     (30 )     (90 )     (90 )
    A preferred stock
                               
                                 
  Total non-cash items
    (31 )     (152 )     (325 )     (1,076 )
                                 
Total interest expense
  $ (31 )   $ (227 )     (515 )     (1,306 )
 
(7) 
Stockholders’ Deficit

2010 Private Placements

On March 3, 2010 we entered into a subscription agreement (the “Subscription Agreement”) with Carolina Lupascu pursuant to which Ms. Lupascu 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. Lupascu had advanced to us in 2009. The Shares were issued pursuant to Regulation S under the Securities Act. The Subscription Agreement contains customary representations and warranties by Ms. Lupascu regarding her status as a non-U.S. person, her investment intent and restrictions on transfer. Ms. Lupascu was granted certain piggy-back registration rights which require us to use our best efforts to register all or a portion of the Shares on the next registration statement we file with the SEC under the Securities Act.

From January 1 through September 30, 2010, Ms. Lupascu and David Khidasheli advanced $50,000 and $500,000, respectively, in anticipation of entering into future subscription agreements.  We have used the proceeds of these investments for general working capital purposes.

Warrants

At September 30, 2010, we had warrants outstanding to purchase an aggregate of 3,125,001 shares of our common stock at a weighted average price of $0.078 per share, as summarized in the following table:
 
         
Weighted
   
         
Average
   
   
Number of
   
Exercise price
   
   
Shares
   
per share
 
Expiration Date
               
Warrants issued in connection with February 2007 Private Placement
    2,500,001     $ 0.077  
March 27, 2012
Warrants issued to placement agents in connection with the February
                 
2007 Private Placement
    125,000     $ 0.062  
February 23, 2012 to March 27, 2012
Warrant issued for investment banking services
    500,000     $ 0.085  
October 31, 2011
                   
      3,125,001     $ 0.078    
  
(8)           Share Based Payments

We maintain stock compensation plans for our employees and directors, which are described in Note 10, Share Based Payments, in the Notes to Consolidated Financial Statements in our 2009 Annual Report on Form 10-K filed with the SEC on March 31, 2010.  We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, as codified in FASB ASC topic 718, Compensation — Stock Compensation (“ASC 718”), effective January 1, 2006.  ASC 718 requires that we recognize the fair value of stock compensation, including stock options, in our statement of operations.  We recognize the stock compensation expense over the requisite service period of the individual grantees, which is generally the same as the vesting period of the grant.  All of our stock compensation is accounted for as an equity instrument.

We did not grant any options to employees or members of our Board of Directors during the first three quarters of 2010.   Under the provisions of SFAS 123R, we have recorded approximately $(36,000) of stock based employee compensation expense in our condensed consolidated statement of operations for the nine months ended September 30, 2010.  Of the total expense, $(15,000) has been recorded as selling, general and administrative expense, and $(21,000) as research and development expense.  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.
 
 
13

 
 
The following table summarizes option activity for all of our stock option plans from December 31, 2009 through September 30, 2010:
 
         
Weighted
   
Weighted
   
Aggregate
 
         
Average
   
Average
   
Intrinsic
 
         
Exercise
   
Remaining
   
Value at
 
         
Price per
   
Contractual
   
Date
 
   
Options
   
Share
   
Term (years)
   
Indicated
 
                         
Options outstanding at December 31, 2009
    3,300,000     $ 0.127       7.27     $ 0  
Options granted
    -       -                  
Options exercised
    -       -                  
Options forfeited
    -       -                  
Options expired
    (250,000 )   $ 0.310                  
                                 
Options outstanding at September 30, 2010
    3,050,000     $ 0.112       7.12     $ 0  
                                 
Options vested and exercisable at December 31, 2009
    3,300,000     $ 0.127       7.27     $ 0  
                                 
Options vested and exercisable at September 30, 2010
    3,050,000     $ 0.112       7.12     $ 0  
 
The aggregate intrinsic value is the sum of the amounts by which the quoted market price of our common stock at the date indicated exceeded the exercise price of the options (“in-the-money-options”).  At September 30, 2010, the market price of our stock was $0.0075 per share, and none of our options were in-the-money.  No options were exercised in the nine month period ending September 30, 2010.
 
The following table summarizes information about stock options outstanding under all of our option plans at September 30, 2010:
 
   
Options Outstanding
   
Options Exercisable
 
         
Weighted
                   
         
Average
   
Weighted
         
Weighted
 
Range of
       
Remaining
   
Average
         
Average
 
Exercise
 
Number
   
Years to
   
Exercise
   
Number
   
Exercise
 
Prices
 
Outstanding
   
Expiration
   
Price
   
Exercisable
   
Price
 
                               
 $0.11
    3,000,000       7.16     $ 0.110       3,000,000     $ 0.110  
 $0.23
    50,000       4.57     $ 0.230       50,000     $ 0.230  
                                         
      3,050,000       7.12     $ 0.112       3,050,000     $ 0.112  
 
We did not record any income tax benefits for stock-based compensation arrangements for the nine month periods ended September 30, 2010 and 2009, as we have cumulative operating losses and have established full valuation allowances for our income tax benefits.

(9) 
Subsequent Events

Subsequent to September 30, 2010, we have received an aggregate of $160,000 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.

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

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.

 
14

 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements

This Management’s Discussion and Analysis contains forward-looking statements regarding our future plans, regulatory reviews and approvals, timing, strategies, expectations, anticipated expense levels, projected profitability, business prospects and positioning with respect to market, demographic and pricing trends, business outlook and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations) and expresses our current intentions, beliefs, expectations, strategies or predictions.  These forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and uncertainties.

Forward-looking statements are generally identifiable by the use of terms such as “anticipate,” “will,” “expect,” “believe,” “should” or similar expressions. Although we believe that the bases of the assumptions on which the forward-looking statements contained herein 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 the potential risks and uncertainties set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009 and Item 1A of Part II below and relate to our business plan, our business strategy, development of our proprietary technology and our products, timing of such development, timing of FDA and international regulatory reviews, market acceptance of our products by governmental and other public health agencies, health care providers and consumers, characteristics and growth of our market and customers, protection of our intellectual property, implementation of our strategic, operating and human resources initiatives, benefits to be derived from key personnel and directors, our ability to commercialize our products, our ability to obtain an increased market share in the diagnostic test market, our assumptions regarding cash flow from operations and cash on-hand, the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure, implementation of marketing and distribution channels, our distribution agreements and strategic alliances, our liquidity and capital resources, our ability to obtain additional capital as, and when, needed, and on acceptable terms, changes in health care policy in the United States or abroad and general economic conditions specific to our industry, any of which could impact sales, costs and expenses and/or planned strategies and timing.  If we are not able to generate sufficient liquidity from operations and current potential resources or are unable to raise sufficient additional capital, this could have a material adverse affect on our business, results of operations, liquidity and financial condition, and we may be required to discontinue operations altogether. We assume no obligation to, and do not currently intend to, update these forward-looking statements.

Overview
 
During the third quarter of 2010, we continued our focus on ramping our modest research and development operations and finalizing the restructuring of our debt.  We are continuing to make progress with our small research and development staff.  We continue to manufacture AwareTM HIV-1/2 OMT rapid tests and our AwareTM BED Incidence kits. Despite our limited resources, our research and development staff has continued our preliminary investigation into the Aware II platform, including a preliminary community trial in Portland, Oregon. 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.
 
Our ability to obtain a small stream of funding through private placements of common stock has enabled us to continue our operations. However, we do not have any definitive agreements for continued funding, and there is no assurance that any such continued funding will be available to us on acceptable terms, or at all.  If such additional funding is not available to us when required or is not available to us on acceptable terms, our liquidity and financial condition will be adversely affected and we will likely be unable to continue our operations.

Assuming we continue to receive funding, we will remain 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 minimizing our operating costs low.

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, and non-governmental organizations and charities have increased their funding for HIV testing too.  Although we believe that we will be able to increase market acceptance of our products and our market position, however, there are outside factors that could adversely affect demand for our products, including global economic conditions that affect funding for HIV testing and national policies regarding HIV testing adopted by foreign governments.

 
15

 
 
As discussed in Note 1, in July 2010 we entered into a series of agreements providing for (i) the restructuring of our outstanding indebtedness to Marr and SF Capital (the “Debt Agreement”) and (ii) the transfer of our interests in the two Chinese joint ventures, Beijing Marr and Beijing Calypte, to Kangplus (the “Equity Transfer Agreement”).  Under the Debt Agreement, $6,393,353 in outstanding indebtedness was converted to 152,341,741 shares of our common stock, and our remaining indebtedness to Marr, totaling $3,000,000 as of December 31, 2009, was cancelled. In consideration for such debt restructuring, pursuant to the Equity Transfer Agreement, we transferred our equity interests in Beijing Marr to Kangplus and transferred certain related technology to Beijing Marr.  We have also agreed to transfer our equity interests in Beijing Calypte to Marr or a designate of its choosing. The transactions contemplated by the Debt Agreement and the Equity Transfer Agreement are subject to Chinese government registration of the transfer of the equity interests. Under the debt agreement with SF Capital (“SF Capital Agreement”), $2,008,259.35 in outstanding indebtedness was converted to 47,815,698 shares of our common stock.

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

Outlook

We have historically incurred significant losses and cannot project when, if at all, our business will become cash-flow-positive.  During recent periods we have funded our operations through a series of equity investments by existing shareholders. Assuming these shareholders continue providing financial support, management believes that we have the ability to sustain our operations, at least for the near-term, through effective management. However, 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:

 
·
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.

Financial Considerations

Our consolidated operating cash burn for the first nine months of 2010 was approximately $139,000, compared to $903,000 in the first nine months of 2009.  Our focus in this quarter was on keeping a minimal level of operations and make incremental progress on new products as well as continuing to successfully produce new batches of our existing products. We relied primarily on funds from two investors.

During the first nine months of 2010, we incurred net income of $9,255,000 as a result of the gain from our debt restructuring.  At September 30, 2010, we had a working capital deficit of $2.25 million, and our stockholders’ deficit was $3.77 million.  Our cash balance at September 30, 2010 was approximately $31,000. We received additional advances from investors and a grant payment after September 30, 2010 and our cash balance as of January 24, 2011 was approximately $63,900. We do not believe this cash balance is sufficient to enable us to fund our operations through the remainder of 2011 and we will need to raise additional capital to fund our operations in the near term.
 
We currently have 800,000,000 shares of common stock authorized, of which approximately 752,986,797 shares are issued and outstanding or reserved for issuance under current financing arrangements and our incentive plans.  In October 2010, our Board of directors approved amendments to two of our equity incentive plans to reduce the number of shares of common stock reserved for issuance thereunder by 47,858,633 shares.  If additional financing is available to us, it will likely be in the form of one or more equity or convertible debt transactions.  At the current market price of our common stock, we do not have sufficient authorized common stock to raise more than a few hundred thousand dollars, which is not sufficient to permit us to execute our business plan and achieve self-sustaining cash flow.  The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these
 
 
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Critical Accounting Policies and Estimates
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).  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, impairment of long-lived assets, 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.

Consistent with our policy on impairment of long-lived assets, given the September 30, 2010 operating loss and negative cash flow, the carrying values of long-lived assets were compared against the undiscounted cash flows 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, as well as product in development phase.  We concluded that no impairment was required.
 
The critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2009 have not changed materially since year-end.

Adoption of New Accounting Pronouncements

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

Results of Operations
 
The following represents selected financial data (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
 Total revenues
  $ 124     $ 25     $ 314     $ 402  
 Cost of product sales
    77       35       162       218  
                                 
 Gross Margin
    47       (10 )     152       184  
                                 
 Operating expenses:
                               
 Research and development
    69       51       189       96  
 Selling, general and administrative
    253       545       739       1,682  
                                 
 Total operating expenses
    322       596       928       1,778  
                                 
 Loss from operations
    (275 )     (606 )     (776 )     (1,594 )
                                 
 Interest expense, net
    (31 )     (227 )     (515 )     (1,306 )
 Other income, net
    10,794       21       10,813       110  
                                 
 Net income (loss) from continuing operations
  $ 10,488     $ (812 )   $ 9,522     $ (2,790 )
                                 
 Net loss from discontinued operations
    -       (49 )     (136 )     (141 )
                                 
 Net income (loss)
  $ 10,488     $ (861 )   $ 9,386     $ (2,931 )
 
Quarter ended September 30, 2010 and 2009

Continuing Operations

Our revenue from continuing operations for the third quarter of 2010 totaled $124,000 compared with $25,000 for the third quarter of 2009, an increase of $99,000.  In Q3’09 our revenue was low given our inability to ship AwareTMBED. Sales of our AwareTMBED Incidence Test accounted for 62% of our sales in the third quarter of 2010, compared with 5% in the third quarter of 2009.  Sales of our AwareTMBED Incidence Test 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 OMT HIV-1/2 rapid tests accounted for 35% and 89% of our sales in the third quarter of 2010 and 2009, respectively.  Third quarter 2010 revenues from the sale of our rapid tests increased by 120% compared with rapid test revenues in the third quarter of 2009.  

 
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We reported gross margins of 38% in the third quarter of 2010 and (40)% in the third quarter of 2009. The margins we reported in both 2010 and 2009, however, are not typical of our expected future results because of the relatively small amounts of revenues and product quantities over which certain fixed expenses, like annual royalty minimum payments, have been allocated.

Research and development costs increased by $18,000, from $51,000 in the third quarter of 2009 to $69,000 in the third quarter of 2010, as we continue to ramp our R&D department back up.  Research and development costs consist of salary and benefits as well as consulting and legal expenses.
 
Selling, general and administrative costs of our continuing operations decreased by $292,000, or 54%, from $545,000 in the third quarter of 2009 to $253,000 in the third quarter of 2010.  The primary components of the net decrease include the following:

 
·
$70,000 attributable to the 51% ownership of the discontinued operations in China;
 
·
$77,000 in salary and benefits expenses attributable to the reduction in employee stock option expenses;
 
·
approximately $88,000 in legal fees driven by legal settlement with a competitor;
 
·
approximately $25,000 in overhead due to reduced rent costs as a result of the renegotiation of our lease in Portland, Oregon;
 
·
approximately $10,000 in consulting fees; and
 
·
approximately $2,000 in other various areas

Our loss from continuing operations for the third quarter of 2010 of $275,000, reflects a reduction of 55% compared with the loss of $606,000 reported for the third quarter of 2009.

The following table summarizes the components of interest expense (in thousands):
 
   
Three Months ended September 30,
 
   
2010
   
2009
 
             
Interest expense on debt instruments paid or payable in cash
  $ -     $ (75 )
Non-cash income (expense) composed of:
               
Accrued interest on 8% Convertible Notes
    -       (122 )
Accrued interest on 4% Note Payable
    (1 )     -  
Amortization of discounts associated with March 2007 extension
               
    and December 2007 restuctructuring of 8% convertible notes and
               
    Marr Credit Facility notes
    -       -  
Expense attributable to dividends on mandatorily redeemable Series
    (30 )     (30 )
    A preferred stock
               
                 
  Total non-cash items
    (31 )     (152 )
                 
Total interest expense
  $ (31 )   $ (227 )
 
As described above, we have signed agreements to convert most of the 8% Convertible Notes and the 7% Marr Credit Facility Notes to equity and terminate the remaining notes. We recorded net interest expense of $31,000 for the third quarter of 2010 compared with $227,000 of net interest expense in the third quarter of 2009.  The decreased expense in 2010 is due to the conversion of these notes into common stock

Discontinued Operations

There was no revenue or expense from our discontinued operations in China for the third quarter of 2010.  The revenue from the discontinued operations for the third quarter of 2009 was approximately $4,000 and the loss was approximately $141,000.

 
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Nine Months Ended September 30, 2010 and 2009
Continuing Operations

Our revenue for the nine month period ended September 30, 2010 totaled $314,000 compared with $402,000 for the nine month period ended September 30, 2009, a decrease of $88,000, or 22%. This decrease was due to the loss of a U.S. customer of AwareTMBED Incidence Test to a competitor but was partially offset by an increase in sales of our AwareTM OMT HIV-1/2 product in Africa.  Sales of our AwareTMBED Incidence Test accounted for 63% of our sales in the nine month period ended September 30, 2010, compared with 77% in the nine month period ended September 30, 2009. Sales of our AwareTM HIV-1/2 rapid tests accounted for the majority of the balance of the revenue for the nine months period ended September 30, 2010.

We reported gross margins of 48% and 46% of sales in the nine month periods ended September 30, 2010 and 2009, respectively. The margins we reported in both 2010 and 2009, however, are not typical of our expected future results because of the relatively small amounts of revenues and product quantities over which certain fixed expenses, like annual royalty minimum payments, have been allocated.  Product costs in both periods are based on resource-constrained purchasing patterns and pilot-plant-sized production lots, and do not reflect the economies of scale that we anticipate when we achieve true commercial scale operations.

As we have restarted our research and development in late 2009 and continued to ramp up in 2010, such costs have increased by $93,000, or 135%, from $96,000 in the nine month period ended September 30, 2009 to $189,000 in the nine month period ended September 30, 2010. 

Selling, general and administrative costs of our continuing operations decreased by $943,000, or 56%, from $1,682,000 in the nine month period ended September 30, 2009 to $739,000 in the nine month period ended September 30, 2010.  The primary components of the net decrease include the following:

 
·
$260,000 attributable to the 51% ownership of the discontinued operations in China;
 
·
approximately $350,000 in salary and benefits expenses mainly attributable to the reduction in employee stock option expenses;
 
·
approximately $175,000 in legal fees
 
·
approximately $46,000 in facility expenses due to renegotiation of our lease in Portland, Oregon;
 
·
approximately $44,000 in insurance expense; 
 
·
approximately $33,000 bad debt expense; 
 
·
approximately $25,000 in tax and audit fees; and
 
·
approximately $10,000 in travel.
 
Our loss from continuing operations for the nine month period ended September 30, 2010, at $776,000, reflects a reduction of 51% compared with the loss of $1,594,000 for the nine month period ended September 30, 2009.

The following table summarizes the components of interest expense (in thousands):
 
   
Nine Months ended September 30,
 
   
2010
   
2009
 
             
Interest expense on debt instruments paid or payable in cash
  $ (190 )   $ (230 )
Non-cash income (expense) composed of:
               
Accrued interest on 8% Convertible Notes
    (231 )     (360 )
Accrued interest on 4% Note Payable
    (4 )     -  
Amortization of discounts associated with March 2007 extension
               
    and December 2007 restuctructuring of 8% convertible notes and
               
    Marr Credit Facility notes
    -       (626 )
Expense attributable to dividends on mandatorily redeemable Series
    (90 )     (90 )
    A preferred stock
               
                 
  Total non-cash items
    (325 )     (1,076 )
                 
Total interest expense
  $ (515 )   $ (1,306 )
 
We recorded net interest expense of $515,000 for the nine month period ended September 30, 2010 compared with $1,306,000 of net interest expense in the nine month period ended September 30, 2009.  The decrease is primarily attributed to the amortization of discounts and derivative obligations associated with the March 2007 extension of the maturity of the 8% Convertible Notes and the 7% Marr Credit Facility Notes until April 3, 2009, which were amortized over the period from March 2007 through April 2009.  As described above, we have signed agreements to convert most of these notes to equity and terminate the remaining notes.

Discontinued Operations
 
The revenue from the discontinued operations for the nine months ended September 30, 2010 was $15,000 and $5,000 for the nine months ended September 30, 2009.  The net loss from the discontinued operations for the nine month ended September 30, 2010 was $136,000 and $141,000 for the nine months ended September 30, 2009.
 
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Liquidity and Capital Resources
 
Our cash requirements depend on many factors, including the execution of our business plan.  We expect to need to continue to devote substantial capital resources to running our business, reduction or restructuring of our trade payables and implementing our business plan.  Based on our current forecasts and assumptions, we believe that our existing cash and cash equivalents are insufficient to meet our anticipated cash needs for working capital and capital expenditures for the next twelve months or to pay our trade payables.  Given the state of the company, we have not made any plans for capital expenditures related to manufacturing and operations.

Operating Activities

During the nine months ended September 30, 2010 and 2009 we used cash of $0.14 million and $0.9 million, respectively, in our operating activities.  In the period ended September 30, 2010, the cash was used primarily for our selling, general and administrative expenses as we restructured the operations.  In the period ended September 30, 2009, the cash was used primarily to ramp up our research and development, as well as for our selling, general and administrative expenses.

Financing Activities

During the nine months ended September 30, 2010, we generated $534,000 from financing activities compared to $810,000 generated from financing activities during the nine months ended September 30, 2009. The funds generated from financing activities in the nine months ended September 30, 2009 and in the nine months ended September 30, 2010 were primarily the result of advances from two shareholders.

In 2010, to date, we have been able to generate financing from these two investors.  We are working to get a longer term commitment from these investors but we do not have definitive agreements with either of them for continued financing.

If we are unable to obtain additional financing, we will be in significant financial jeopardy and we will be unable to continue as a going concern.  Moreover, any financing we are able to secure could be on terms that are highly dilutive to our existing stockholders. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.  The condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.
 
Recent Accounting Pronouncements

We have described the recent accounting pronouncements to which we will be subject in future periods in Note 2 to the Condensed Consolidated Financial Statements included in Part I of this Report on Form 10-Q.


Item 4T.  Controls and Procedures

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 former 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 former Chinese subsidiaries and we are unable to adequately disclose financial and other material information or to do so in a timely manner. There were no personnel at our former 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 former 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 former Chinese subsidiaries financial statements, closing processes relating to reconciliations, journal entries, spreadsheets, reporting packages and review and preparation of monthly expenditure reports ineffective.  The absence of an adequately trained financial staff at Beijing Marr could result in a material misstatement of annual or interim financial statements that would not be prevented or detected.

 
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As described above we have signed an agreement that provides for our divestiture of our interests in these joint ventures, after which those ventures will no longer be subsidiaries whose results will be consolidated with our own.  Notwithstanding the foregoing, to the extent we report any financial results in the future that cover periods prior to the completion of this divestiture, such results will continue to be effected by the material weakness described above.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION

Item 1A. Risk Factors

The risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 have not materially changed.

Item 6.  Exhibits
 
  (a)   Exhibits  
 
31.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
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SIGNATURES
 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
CALYPTE BIOMEDICAL CORPORATION
(Registrant)
 
     
       
Date:  January 26, 2011 
By:
/s/ Adel Karas
 
   
Adel Karas
President, Chief Executive Officer, Chief Financial Officer
and Secretary (Principal Financial and Accounting Officer)
 
 
 
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