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

[ X ]
Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2010
   
[    ]
Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____ to _____
 
Commission file number: 000-27545
 
QUICK-MED TECHNOLOGIES, INC.
 
(Name of issuer in its charter)
 

         Nevada         
     65-0797243    
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
    902 NW 4 Street, Gainesville, Florida    
    32601     
(Address of principal executive offices)
(Zip code)
 
Registrant's telephone number: (888) 835-2211
 
Securities registered under Section 12(b) of the Exchange Act:

Title of each class
Name of each exchange on which registered
   
Common Stock, $.0001 par value
 
 
Securities registered under Section 12(g) of the Exchange Act:
 
Title of Class
 
Common Stock, $.0001 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
         Yes               No     X      
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
         Yes               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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
         Yes     X          No           
 
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 than the registrant was required to submit and post such files).  
 
   Yes                No          
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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. [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

       
 
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.
 
         Yes               No     X      
 
     The aggregate market value of the common equity stock held by non-affiliates, computed by reference to the average bid and asked prices of such stock as of  December 31, 2009, was approximately $6,434,205.
 
        The number of shares outstanding of the issuer's common equity as of  September 23, 2010 was 31,357,297.
 
Documents Incorporated by Reference
 
None

 
 
 
 

 
 

 
QUICK-MED TECHNOLOGIES, INC.

 ANNUAL REPORT
ON FORM 10-K
For the Year Ended June 30, 2010

 INDEX

 
 
PART I
                                                                                          Page
Item 1.
Business
1
Item 1A.
Risk Factors
13
Item 2.
Properties
 15
Item 3.
Legal Proceedings
15
Item 4.      Removed    15

PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
16
Item 7.
Management’s Discussion & Analysis of Financial Condition and Results of Operations
17
Item 8.
Financial Statements and Supplementary Data
23
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
41
Item 9A.
Controls and Procedures
41

PART III

Item 10.
Directors, Executive Officers, and Corporate Governance
42
Item 11.
Executive Compensation
45
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
49
Item 13.
Certain Relationships and Related Transactions, and Director Independence
50
Item 14.
Principal Accounting Fees and Services
51

PART IV

Item 15.
Exhibits, Financial Statement Schedules
52
     
Signatures    



 
 

 


PART I
 
ITEM 1.  
BUSINESS
 
 
This Form 10-K contains forward-looking statements based on our current expectations, assumptions and estimates and that involve risks and uncertainties.  Any statements contained in this Form 10-K (including, without limitation, statements to the effect that we “estimate,” “expect,” “anticipate,” “plan,” believe,” “may” or “will” or statements concerning potential or opportunity or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements.  Actual results could differ materially and adversely from those projected or anticipated in the forward-looking statements as a result of a number of risks and uncertainties pertaining to our business, including, without limitation, those risks and uncertainties described in the section entitled “Risk Factors” in this Form 10-K.  We undertake no obligation to revise or update any such forward-looking statements. Unless specified otherwise, as used in this Form 10-K, the terms “we,” “us,” “our,” the “Company” or “Quick-Med” refer to Quick-Med Technologies, Inc.
 
 
Corporate History

 
We were incorporated in the State of Nevada on April 21, 1997 with the name " Above Average Investments, Ltd." to engage in any lawful corporate purpose. Other than issuing shares to  stockholders, Above Average Investments, Ltd. never commenced operations. In September 2000, Above Average Investments, Ltd. became a public reporting company 60 days following the voluntary filing of our Form 10-SB Registration Statement with the Securities and Exchange Commission. In March 2001, we acquired all of Quick-Med Technology, Inc.'s issued and outstanding shares of capital stock in exchange for 10,260,000 shares of our common stock. Upon completion of the merger in February 2002, we changed our nam to "Quick-Med Technologies, Inc."

We have never been the subject of a bankruptcy, receivership or similar proceeding.

Our principal executive offices are located at 902 NW 4th Street, Gainesville, Florida 32601.  Our telephone number is (888) 835-2211.

Technologies

We are a life sciences company that develops proprietary technologies for the medical and consumer healthcare markets. Our four core technologies under development are:

(1)  
NIMBUS®
(2)  
Stay Fresh™
(3)  
NimbuDerm™
(4)  
MultiStat®

NIMBUS®
NIMBUS is a family of organic molecules or “polymers” that are bio-engineered to have antimicrobial, hemostatic, and other properties that can be used in a wide range of medical device applications. For example, NIMBUS is capable of being used to add a second, slowly releasable ingredient to a substrate to permit more than one mode of action or property (e.g., protease inhibitor or antibiotic).

Initially, we are seeking to use our NIMBUS technology in traditional and advanced wound care products. We believe that the size and growth characteristics of the medical device antimicrobial market represent an attractive opportunity for the NIMBUS technology.  Additionally, we believe there are no competing technologies on the market today that offer the unique combination of safety, efficacy and cost-effectiveness offered by NIMBUS.

We have developed “proofs-of-principle” in several applications and are seeking to move these products to the commercialization stage. On September 18, 2006 we received a Phase II SBIR grant for continued work on an advanced wound dressing using the NIMBUS technology.

In April, 2007, we entered into a license agreement with Derma Sciences Inc. for NIMBUS treatment of select substrates used in traditional wound care. In February 2009, we received FDA market clearance for the NIMBUS gauze wound dressing licensed to Derma Sciences, and, in June 2009, Derma Sciences reported first commercial sale of a product, BIOGUARD®, employing our NIMBUS technology.   Derma Sciences is marketing and selling the BIOGUARD product to the home health, nursing homes, and wound care centers.  In March 2010, Derma Sciences entered into an agreement with Medline Industries to market and distribute BIOGUARD dressings in larger acute care (hospital) market  via multiple Group Purchasing Organizations (GPO).  We received approximately $240,000 royalty fees, before $75,000 credit previously received under the license agreement, from the sales of  BIOGUARD® product for the fiscal year 2010 which was launched in late June 2009.
 
In July 2010,  we and Viridis BioPharma Pvt. Ltd., an India corporation ("Viridis"), entered into an exclusive Patent and Technology License Agreement  as stipulated in the binding term sheet ) on March 16, 2010 as filed on Form 8-K dated March 22, 2010.  Under the agreement, we grant rights under its proprietary NIMBUS antimicrobial technology to Viridis to make, use, sell and offer for sale certain wound treatment products  to  the institutional market, pharmaceutical companies, distributors, hospitals, clinics, licensed chemists, pharmacists and medical wings of organizations in the Republic of India and its territories and possessions.  Viridis agreed it would only manufacture the products in India, unless otherwise agreed to by us.  In September 2010, Viridis obtained India FDA clearance to manufacture and market their product in India.
 
In March 2010, we and Johnson & Johnson Consumer and Personal Products Worldwide, a division of Johnson & Johnson Consumer Companies, Inc. ("JJCPWW") entered into a License Agreement  on an exclusive basis.  Under the agreement, we grant certain rights under its proprietary intellectual property related to bactericidal absorbent wound dressings to JJCPWW to make, have made, use, sell, offer to sell, import or otherwise dispose of the consumer healthcare products and combination products in the over-the-counter market in the United States and Canada.
 
 
 
-1-

 

 
In August 2010, we and Biosara Corporation ("Biosara"), entered into a Development and Option Agreement.   The agreement remains in effect until December 31, 2010 or until superseded by the earlier of a license agreement or another product development agreement.  Under the agreement, we will use commercially reasonable efforts to develop certain wound care products incorporating its proprietary NIMBUS® antimicrobial technology to be manufactured by or for Biosara.
 
In April 2010, we and KCI USA, Inc. (“Kinetic”), a medical technology company, entered into a Development Agreement  effective as of March 18, 2010 (the "Effective Date").  The term of the agreement commenced on the Effective Date and ends at  the earlier of completion of development services, as defined in the agreement, provided by us or a period of twelve months.  Under the agreement, the parties agreed to use commercially reasonable efforts during the term to develop technology utilizing the Company's proprietary NIMBUS® (Novel Intrinsically Micro Bonded Utility Substrate) antimicrobial intellectual property in an advanced wound care substrate.

In April 2009, we entered into a Joint Development and Exclusive Option Agreement with Avery Dennison Corporation to apply NIMBUS technology to adhesives for medical device and industrial applications.
 
Other important considerations of our flagship NIMBUS technology include:

·  
The raw material cost of NIMBUS is more economical than many other active ingredients, such as silver or PHMB (polyhexamethylene biguanide), used in healthcare today.  Additionally, in wound care materials and other roll goods-based substrates, NIMBUS requires no more than standard textile or paper finishing equipment.

·  
The most deeply studied potential commercial application of NIMBUS is in medical devices where permanent bonding to various substrates can be performed using broad  spectrum microbicides that are highly effective, as verified by independent laboratories.  In certain prototype wound dressings, NIMBUS begins to eradicate bacteria immediately and is effective for seven days or more.  Tested in a typical potential commercial application, NIMBUS killed 99.9999% of the bacteria or other microbes present in the environment.

·  
Third party testing and our research show that NIMBUS-treated articles are effective against MRSA (Methicillin-Resistant Staphylococcus Aureus) and VRE (Vancomycin-Resistant Enterococcus), two antibiotic-resistant organisms responsible for a significant and growing number of hospital and community-related infections.  Other high bacterial kill levels have been demonstrated for contact lenses against Pseudomonas; in food preservation against bacteria that cause Listeria monocytogenes and Salmonella typhimurium; and in footwear protection against a wide range of other germs including Trichophyton mentagrophytes, a fungus that causes athlete’s foot.

·  
While lethal to most bacteria, studies performed by us and third-party laboratories show that NIMBUS is not harmful to human cells.  Independent laboratory tests have shown that NIMBUS is non-toxic, non-sensitizing and non-irritating to humans, using standard ISO or ASTM test methodologies.

·  
The NIMBUS technology permanently bonds the active agent to the substrate.  This attribute is a source of differentiation from many competing technologies and gives NIMBUS potential advantages, including lower cost and the possible use in devices such as contact lenses, wound dressings, incontinence products, or disposable gloves where leaching chemicals into the body may pose unacceptable medical risk.

·  
A characteristic of NIMBUS medical devices relates to the reduced likelihood of bacteria to develop resistance to the microbicide employed – a growing concern in healthcare facilities.  This characteristic results from the combined effect of (a) the mechanism by which bacteria are killed – by cell wall disruption; (b) the bonding of the microbicide to the substrate, which prevents concentrations of the active molecule from falling below minimum inhibitory levels and (c) the large size of the molecule which does not permit its entry into the bacteria cell where resistance can develop.  A confirmatory in-vitro test of ten consecutive generations of E. coli, a particularly difficult to kill microorganism, showed no reduction in efficacy.
 
 
 
-2-

 
 
Stay FreshTM
Stay Fresh is a unique chemical formulation for textiles that provides a durable antimicrobial agent which can be bonded to fibers or fabrics so as to retain the biocidal property through numerous launderings.  This chemical treatment for textiles has been shown to kill a particularly difficult array of bacteria even after numerous laundering cycles.  The gentle formula brightens the colors and helps to preserve fabric integrity by aiding in the cleaning process.

Stay Fresh is ideally suited to the broad range of potential applications including clothing such as essential apparel, sportswear, active wear, and work wear as well as furnishings such as linens, drapes, and towels.  It acts against the bacteria and fungi that are responsible for odor and staining even after numerous hot or cold laundry cycles for the life of the product. It is compatible with colored or white fabrics including cotton, polyesters, rayon, wool, and blends and may be laundered in the presence of softeners, chlorine or color-safe bleaches.

The unique formulation that comprises Stay Fresh is eco-friendly as well as non-irritating and non-sensitizing.  It can be bonded to fibers or fabrics using conventional textile finishing equipment at a very low cost with chemicals used in many treating processes.

NimbuDermTM
NimbuDerm is a novel copolymer developed by us for application as a persistent hand sanitizer that provides six or more hours of continuous protection and we believe will have significant benefit in the interruption of the transfer of germs by contact.  The copolymer is a film former which can be deposited on skin or any hard surface until it is removed by washing with soap and water.  For use on skin a foraminous film is deployed that acts as a barrier to microorganisms yet allows breathability and is comfortable and pleasing to the skin.  For other applications the copolymer can be deposited as a non-porous film on hard surfaces or mixed with other polymers to form an adhesive or an extrudable or moldable thermoplastic which can be converted to solid medical devices such as catheters, tubing,  films and coatings.

MultiStat®
MultiStat is a family of patented organic compounds known as matrix metalloproteinase inhibitors (“MMPIs”) that have been shown to have significant benefit in promoting the maintenance, healing and repair of skin and eyes. Both third party and Quick-Med research show that MultiStat is effective in certain medical (wound care) and consumer (cosmetic) applications.

Matrix Metalloproteinases, or “MMPs”, are naturally occurring compounds in skin tissue. External or internal stimuli can trigger an overproduction of certain MMPs, which can produce chemical reactions within skin cells that induce adverse outcomes such as blistering, inflammation or accelerated collagen degradation. External triggers include prolonged sun exposure, as well as chemical burns from warfare agents such as mustard gas. Internal triggers include natural aging in which declining estrogen levels naturally result in the loss of the inhibition of MMPs and lead to accelerated skin wrinkling.

There are natural or synthetic compounds that safely inhibit MMP overproduction in the skin (MMP-inhibitors, or “MMPIs”). These MMPIs can be topically applied to mitigate the effects of triggering mechanisms. The bioscience of MMPI research includes the identification of safe compounds that individually or in combination yield a specific beneficial outcome. MultiStat represents our portfolio of patented compounds and techniques relating to MMP inhibition. Our MultiStat compounds are approximately 1,000 times more potent than the natural MMPIs that are present in human blood and in some plant extracts.  Therefore, only small amounts of MultiStat compounds are needed to reduce the elevated levels in MMP activities that cause skin wrinkling or tissue destruction in chronic wounds.   MultiStat’s array of uses has been documented in a series of clinical findings by our scientists, third-party scientific laboratories, and in works published by other academic researchers.
 
External and internal stimuli that cause the overproduction of enzymes known as matrix metalloproteinase can adversely affect the skin and eyes.  MultiStat works by inhibiting the activity of the matrix metalloproteinase enzymes. Independent laboratories as well as our research show that MultiStat is effective in medical (wound care) and consumer (cosmetic) applications.  MultiStat is currently being sold as a performance ingredient to several cosmetics companies via an agreement with BASF, which was renegotiated and signed on May 16, 2008.  Under this agreement, we appointed BASF as an exclusive manufacturer and distributor of our MultiStat Compound, Ilomastat, (“QMT Compound”) in the over-the-counter retail cosmetic consumer products in the worldwide territory with the exclusive and non-exclusive licenses of certain patent rights.
 
 
 
-3-

 
 
Pharmaceutical Applications.
 
Scientific studies have shown that MMP activity plays a major role in the deterioration of human tissue when exposed to chemical agents such as mustard gas.  Ilomastat, a member of the MultiStat family of patented compounds and techniques relating to MMP-inhibition, has been demonstrated to be safe and highly effective in treating mustard gas exposures based on efficacy studies conducted in Israel and the Netherlands by third-party scientific laboratories. We are seeking to develop Ilomastat as a post-injury agent for mustard gas exposure.

In November 2000, we entered into a Cooperative Research and Development Agreement  with the U.S. Army Medical Research Institute for Chemical Defense at Edgewood, Maryland, to develop a post-injury treatment for mustard gas exposures to the eye and skin.

Other potential pharmaceutical applications for Ilomastat include psoriasis, acne and chronic wounds.

Cosmetics.
 
Based on clinical studies performed by us and by the Engelhard Corporation (now a unit of BASF), MultiStat has shown success in improving the appearance of fine facial lines and wrinkles associated with skin deterioration resulting from natural aging or sun damage.  Additionally, MultiStat has been shown in the same clinical studies to have applications for other conditions, such as skin roughness or redness.

On May 16, 2008, we and BASF Beauty Care Solutions, L.L.C., a member of BASF Group (“BASF”), signed a Manufacturing and Distribution Agreement with an effective date of August 1, 2007.  This agreement supersedes The Master Agreement for Product Development, Manufacturing and Distribution and the Product Development and Distribution Agreement for Ilomastat dated August 15, 2002, the Tolling Agreement dated October 20, 2005, as amended, and the Letter of Intent with the effective date of February 1, 2006, as amended, (“Prior Agreements”) between us and BASF.
 
Under this agreement, we appointed BASF as an exclusive manufacturer and distributor of our MultiStat Compound, Ilomastat, (“QMT Compound”) in the over-the-counter retail cosmetic consumer products in the worldwide territory with the exclusive and non-exclusive licenses of certain patent rights.  In consideration of the rights and appointments, we are entitled to receive distribution fees on a quarterly basis of the contract year minimum sales of products containing QMT Compound in each of the three contract years under the renegotiated terms of the distribution fees as set forth in the Agreement.  For the period from the effective date of August 1 to December 31, 2007, the terms of the distribution fees under the Prior Agreements remained in effect.   The contract year began January 1, 2008, and each consecutive 12-month period thereafter during the term of the Agreement.  The term of the agreement expires on December 31, 2010.  We may terminate this agreement prior to such expiration upon a material breach by BASF, or BASF’s failure to meet minimum sales requirements.  We are currently in negotiation with BASF to extend this agreement.
 
The license under the agreement may be sublicensed to BASF’s affiliates or third parties solely for the right to manufacture and to sell the licensed products for the purpose set forth in the agreement.

Business Strategy

Our business strategy is built around the twin pillars to technology development and out-licensing. Our near-term focus is to further develop and execute commercialization strategies for each of our broad technologies.  We seek to generate revenue through four sources:

 
(1)
Licenses of proprietary technology to industry partners;
 
(2)
Contracts with government agencies;
 
(3)
Sales of product (compounds); and;
 
(4)
Research and development support agreements.

We expect that the majority of future revenue from NIMBUS, Stay Fresh, NimbuDerm, and MultiStat will be generated via licenses, royalties and profit-sharing agreements.    We believe that our intellectual property is the value driver and, as such, manufacturing, sales and distribution are and will be conducted either through client partners or outsourced.

 
 
-4-

 

Competition

Quick-Med's NIMBUS and Stay Fresh antimicrobial technologies compete against the current advanced antimicrobial technologies including several marketers of antimicrobial silver technology (e.g.,  Milliken, Agion, Nano Horizons, and many others). NIMBUS also competes against earlier generation antimicrobial technologies marketed by Microban, Dow Chemical, Arch Chemicals, Thompson Research, and many other companies.

Relative to all of these competitors, we believe that Quick-Med's NIMBUS technology offers medical device companies high efficacy, low cost, and the best safety profile.  It provides no danger of bacteria developing resistance to the agent.  NIMBUS’ extremely low cost will enable bringing antimicrobial protection to many wound care and other situations where cost requirements currently discourage or prohibit such protection.

We believe that Quick-Med’s Stay Fresh technology offers apparel manufacturers and other textile companies with a new level of highly durable, sustained antimicrobial efficacy over the course of numerous laundering cycles.
 
When commercialized, our NimbuDerm technology will compete with alcohol-based skin sanitizers (such as Purell® from Johnson & Johnson) that are widely used in both the worldwide institutional and consumer markets. We believe that NimbuDerm has the important advantage that it not only offers the same or better initial activity against bacteria but it also continues to protect the skin surface against bacterial colonization for a period of 8 hours, thus preventing the immediate re-infection that can occur after the active in alcohol-based sanitizers quickly evaporates.
 
Quick-Med's cosmeceutical formulations compete against alternate protease inhibiting technologies such as isoflavone compositions and other anti-aging products. Competitors include Neutrogena (from Johnson & Johnson), Clinique (Clinique Laboratories LLC) and many others.

Competing antimicrobial technologies include such biocides as silver, PHMB, triclosan and the silane monoquaternary known as Microbe Shield and sold by Aegis Environments. These biocides are antimicrobial treatment agents for textiles that are claimed to have protective effects on the fabric such as against mold and mildew, staining and perspiration odor.

Silver is an expensive agent that depends upon a slow release mechanism that gradually metes out the biocide until depleted during repeated launderings. Silver has the potential to discolor skin or the treated textile or other material. Silver can be continuously neutralized by chloride ions contained in body fluids. It is known to be toxic to fish and aquatic organisms.  A study conducted in 2008 showed that washing socks containing nano-silver released substantial amounts into the effluent, a potential cause of toxicity in water entering natural waterways. The International Center for Technology Assessment (CTA) has filed a petition with EPA demanding that the agency stop the sale of several consumer products using nano-silver.

PHMB is also expensive and depends upon a slow release over the life of the product during repeated launderings.  It is in the family of chemicals known as quaternaries and is quite effective against Gram positive species such as Staphylococcus aureus. However, the effective use of PHMB does require about ten to twenty-five times as much compared to the amount used for Staphylococcus aureus to kill Gram negative species such as E. coli and Klebsiella pneumoniae and 100 times as much to kill Pseudomonas aeruginosa.

The cost of silver is about one hundred times greater while PHMB is about ten times greater – than the costs of either our NIMBUS or Stay Fresh technologies.

Exposure to microbicidal chemicals in concentrations below their minimal inhibitory concentrations (MIC) can lead to the development of bacterial resistance when the depleted chemical agent enters the body through a cut or scrape or orally.

Microban Corporation’s triclosan is used broadly in many consumer applications and costs about fifteen times per pound as much as Stay Fresh or NIMBUS.  Lab in-vitro testing of triclosan in some products especially those in which the chemical is distributed within the bulk, has revealed low effectiveness. It is structurally in the family of chlorophenols, compounds that are suspected carcinogens which are ecologically problematic when entering effluent streams. Triclosan, which forms dioxins in sunlight, can cause skin irritation and is known to increase allergies and asthma. Currently triclosan is included in many voluntary restrictive substances lists. We will seek to overcome the competitive advantages of our competitors by entering into co-development agreements with industry leaders in the potential markets with exclusivity clauses for future license agreements.  Excessive use of triclosan and its evidence in the environment and harmful long term endocrine effects are being investigated by the government.

The research and development pertaining to our technologies, which underlie our antimicrobial technologies (NIMBUS, Stay Fresh and NimbuDerm), MMP-inhibitors (MultiStat), and potential future products, is extremely competitive and is characterized by rapid technological change. Many of our competitors have substantially greater financial, scientific, and human resources, and greater research and product development capabilities. In addition, many of our competitors have greater experience in marketing such technologies and products and greater potential to develop revenue streams.  As a result, our competitors may be able to develop and expand their competing product offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, devote greater resources to marketing and sales of their products and adopt more aggressive pricing policies than we can.
 

 
-5-

 
 
 
Intellectual Property: Patents, and Exclusive Patent Licenses
 
Our strategy is to research and obtain original patents or, to the extent reasonably available, to license exclusive composition and relevant use patents related to our core technology. We believe that a comparatively strong intellectual property position can be a source of differentiation from competing products.

NIMBUS technology is covered by four issued U.S. patents,  eight issued foreign patents (Australia, Canada, China, Korea, Mexico, Russia, and South Africa),  eight pending U.S. patent applications,  international patent applications filed under the Patent Cooperation Treaty (PCT, a treaty adopted by 142 countries), and a number of foreign patent applications.

NimbuDerm technology is covered by a South African patent, two pending U.S. patent applications, and fourteen pending foreign patent applications.

MultiStat technology is covered by eight issued U.S. patents, five issued foreign patents (Germany, Spain, France, Great Britain, Italy), one pending U.S. patent application and two pending international patent applications.

StayFresh technology is covered by two pending U.S. patent applications and two international patent applications.  Several disclosures are in preparation for filing.
 

Agreements with Employees and Consultants

With the exception of Dr. Gregory Schultz and Dr. Christopher Batich discussed below, all of our employees and scientific consultants have signed agreements that assign to us all intellectual property rights to any inventions or other proprietary information in any area in which that person is working with us. These agreements do not provide for the payment of any royalties. Drs. Schultz and Batich, who are on the faculty of the University of Florida at Gainesville, are the only consultants who currently have any rights in any intellectual property that may be shared with us. Under the University of Florida policy, any rights obtained by Drs. Schultz and Batich are assigned to the University of Florida Research Foundation (UFRF). Drs. Schultz and Batich may be paid a royalty by the UFRF out of royalties paid by us to UFRF.


Issued and Pending - U.S. & Foreign Patents/Applications

We have filed or own joint rights to patents and applications for:


U.S. ISSUED PATENTS

Number
Issued Date
Expiry Date
Description
5,183,900
February 1993
November 21, 2010
Matrix Metalloprotease Inhibitors (MMPIs)
5,189,178
February 1993
November 21, 2010
Matrix Metalloprotease Inhibitors (MMPIs)
5,239,078
August 1993
November 21, 2010
Matrix Metalloprotease Inhibitors (MMPIs)
5,270,326
December 1993
November 21, 2007
(November 21, 2010)
Treatment of Tissue Ulceration
5,773,438
June 1998
June 30, 2015
Synthetic Matrix Metalloprotease Inhibitors (MMPIs) and Use Thereof
5,892,112
April 1999
April 6, 2016
Process for Preparing Synthetic Matrix Metalloprotease Inhibitors (MMPIs)
 
6,713,074
March 2004
June 29, 2021
Cosmetic Composition and Method
 
7,045,673
 
May 16, 2006
 
December 8, 2019
 
Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication
 
7,473,474
January 6, 2009
February 24, 2024
Improved Antifungal Gypsum Board
 
7,709,694
May 4, 2010
December 8, 2019
Absorbent Materials with Covalently Bonded, Nonleachable Polymeric Antimicrobial Surfaces, and Methods for Preparation
 
7,790,217
September 7, 2010
April 25, 2028
Method of Attaching an Antimicrobial Cationic Electrolyte to the Surface of a Substrate

The above table includes patents which are jointly owned by us and UFRF as well as patents that are licensed to us by Dr. Galardy and Dr. Grobelny. Maintenance of patent protection through the expiration date is contingent upon payment of fees at certain intervals. All are active as of September 14, 2010.
 
 
 
-6-

 

INTERNATIONAL ISSUED PATENTS

Number
Jurisdiction
Expiry Date(2)
EPO 558681(1)
Europe (Germany, Spain, France, United Kingdom, Italy)
November 21, 2011
EPO 558648(1)
Europe (Germany, France, United Kingdom, Italy)
November 21, 2011
1971367
Japan
November 21, 2011
  2001273115
Australia
June 29, 2021
773532
Australia
December 8, 2019
004160
Russia
December 8, 2019
2096223
Canada
November 21, 2011
99814229.8
China
December 8, 2019
10-0689020
Korea
December 8, 2019
248078
Mexico
December 8, 2019
2353436
Canada
December 8, 2019
2008/01601
South Africa
 
2008/01557
South Africa
 

Notes:
 
(1)
Issued by the European Patent Office. Registered in Germany, France, United Kingdom, and Italy.
 
(2)
Maintenance of patent protection through the expiration date is contingent upon payment of yearly fees. All are active as of September  14, 2010.

U.S. PENDING PATENT APPLICATIONS

Composition  and Method for Minimizing or Avoiding The Adverse Effects of Vesicants
Method of Attaching an Antimicrobial Compound to the Surface of a Substrate
Disinfectant with  Quaternary Ammonium Polymer and Copolymers
System and Method for Enhancing the Efficacy of Antimicrobial Contact Lenses
Absorbent Substrate with a Non-Leaching Antimicrobial Activity and a Controlled-Release Bioactive Agent
Disinfectant with Durable Activity Based on Alcohol-Soluble Quaternary Ammonium Polymers and Copolymers
Superabsorbent Materials Comprising Peroxide
Antimicrobial Textiles Comprising Peroxide
Antimicrobial Bandage Material Comprising Superabsorbent and Non-Superabsorbent Layers
Polyelectrolyte Complex for Imparting Antimicrobial Properties to a Substrate
Gypsum Board Containing Antimicrobial and Antibacterial Compounds

 
 
-7-

 

 
INTERNATIONAL PENDING PATENT APPLICATIONS

Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication
Cosmetic Composition and Method
Composition and Method for Minimizing or Avoiding the Adverse Effect of Vesicants
Method of Attaching an Antimicrobial Compound to the Surface of a Substrate.
Disinfectant with Quaternary Ammonium Polymers and Copolymers
Polyelectrolyte Complex for Imparting Antimicrobial Properties to a Substrate
Disinfectant Alcohol-Soluble Quaternary Ammonium Polymers
System and Method for Enhancing the Efficacy of Antimicrobial Contact Lenses and Other Surfaces
Superabsorbent materials Comprising Peroxide
Antimicrobial Textiles Comprising Peroxide

Our business and competitive position are dependent upon our ability to protect our proprietary technologies. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain and use information that we regard as proprietary. We will rely on patent, trade secret and copyright law and nondisclosure and other contractual arrangements to protect such proprietary information. We will file patent applications for our proprietary methods and devices which we believe are patentable.

There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our proprietary information, that such information will not be disclosed or that we can effectively protect our rights to unpatented trade secrets or other proprietary information.

There can be no assurance that others will not obtain patents or other legal rights that would prevent us from commercializing our technologies in the United States or other jurisdictions.
 
There can be no assurance that our technologies will not be subject to environmental or other regulation that would impede their adoption and commercialization in the United States or other jurisdictions.

Our strategy is to obtain original patents or, to the extent reasonably available, exclusive composition and use licenses to patents relating to core technologies and their use in targeted applications.

 
Patent Related Agreements
 
University of Florida
 
On December 3, 2002, we entered into a licensing agreement with University of Florida that gave us exclusive worldwide rights for the manufacturing, marketing, and distribution of our NIMBUS and topical Ilomastat technologies. The license, which covers both awarded patents and patent applications, builds on intellectual property already owned by us, that includes, non-exclusive rights to these same technologies or other rights obtained through prior agreements. The agreement was amended to extend the date of the commercialization of products to the retail customer for the group of licensed patents to December 31, 2010, unless the delay is caused by governmental regulatory agency, including but not limited to the Food and Drug Administration, in which case we shall be afforded the opportunity to toll the December 31, 2010 date for a period equal to the period during which such regulatory review is diligently prosecuted by us.  To date, we have commercialized through our licensee all of the products covered under these license agreements except one.

We have executed a license agreement with University of Florida at Gainesville, DermaCo, Inc., Dr. Richard Galardy and Dr. Damina Grobelny granting us certain rights under patents relating to a family of MMPIs. We are using these rights to develop both the cosmetic anti-aging products and vesicant skin treatment products. U.S. and foreign patent rights, including but not limited to Germany, Spain, France, United Kingdom, and Italy have been licensed to us for these applications.
 
 
 
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University of Michigan
 
In June 2007, we entered into a patent license agreement with the University of Michigan (“U-M”) that significantly expands our MultiStat™ technology – its patented family of compounds for the cosmetic treatment of skin conditions, including chronological aging and photo-aging. The license grants us the exclusive right to commercialize important U-M patents in the field of cosmetic products.

We own exclusive rights for topical use of the MultiStat compounds for cosmetic and military applications, but previously had non-exclusive patent rights for use of U-M patents in the anti-aging cosmetic arena. The agreement covers the exclusive rights to seven (7) U.S. and numerous foreign patents  as well as three (3) US patents and corresponding foreign patents on a non exclusive rights basis in cosmetics applications.

Exclusive-Licensed U-M Patents/Applications

Number
Issue Date
Expiry Date
Description
US 7,268,148
9/11/2007
5/20/2019
Compositions and methods for Use Against Acne-Induced Inflammation and Dermal Matrix-Degrading Enzymes
US 6,919,072
7/19/2005
2/25/2017
Methods and Compositions for Reducing Collagen Loss Due to Chronological Aging in Human Skin
US 6,630,516
10/7/2003
2/25/2017
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
AU 737376
   
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
EP 0883398
   
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
US 5,837,224
11/17/1998
1/19/2016
Method of Inhibiting Photoaging of Skin
AU 701132
1/21/1999
 
Method of Inhibiting Photoaging of Skin
CA 2241981
3/19/2002
 
Method of Inhibiting Photoaging of Skin
NZ 330860
   
Method of Inhibiting Photoaging of Skin
US 6,683,069
1/27/2004
4/2/2018
Methods and Compositions for Reducing UV-Induced Inhibition of collagen synthesis in Human Skin
US 7,141,238
11/28/2006
10/17/2018
Methods and Compositions for Reducing UV-Induced Inhibition of collagen synthesis in Human Skin
AU 740569
11/8/2001
 
Methods and Compositions for Reducing UV-Induced Inhibition of collagen synthesis in Human Skin
US 7,078,048
7/18/2006
10/28/2022
Method and Compositions for Treating Rosacea
US 7,795,302
9/14/2010
12/22/2024
Method and Compositions for Treating Rosacea
CA 2446356
   
Method and Compositions for Treating Rosacea
MX PA03009995
   
Use of Compositions for Treating Rosacea
EP 1343470
   
Methods and Compositions for Protecting and Restoring Skin Using Selective MMP Inhibitors


Non-Exclusive U-M Patents/Applications

Number
Issue Date
Expiry Date
Description
US 6,130,254
10/10/2000
6/4/2017
Composition and Method of Inhibiting Photoaging of Skin
US 6,365,630
4/2/2002
4/2/2019
Composition and Method of Inhibiting Photoaging of Skin
US 6,942,870
9/13/2005
6/4/2017
Compositions and Methods Using Direct MMP inhibitors for Inhibiting Photoaging of Skin
 
NZ 50163498
2/1/2002
 
Compositions Comprising a UVA Blocker and a MMP Inhibitor and methods for Inhibiting Photoaging of Skin and Degradation of Collagen
ZA 98/4791
6/1/1999
 
Compositions and Methods for Inhibiting Photoaging of Skin
CA 2,601,462
8/4/2010 (Notice of Allowance)
 
Compositions and Methods for Inhibiting Photoaging of Skin

 
 
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Badische Anilin & Soda Fabrik (BASF)

We have an agreement with BASF that grants BASF Beauty Care Solutions, L.L.C., exclusive and non exclusive worldwide right to develop and market certain products relating to skin care that employ our Multistat® family of MMPIs.

Johnson & Johnson Consumer and Personal Products Worldwide

In March 2010, we and Johnson & Johnson Consumer and Personal Products Worldwide, a division of Johnson & Johnson Consumer Companies, Inc. ("JJCPWW") entered into a License Agreement  on an exclusive basis.  Under the agreement, we grant certain rights under our proprietary intellectual property related to bactericidal absorbent wound dressings to JJCPWW to make, have made, use, sell, offer to sell, import or otherwise dispose of the consumer healthcare products and combination products in the over-the-counter market in the United States and Canada.

Derma Sciences, Inc.

In April 2007, we entered into a license agreement with Derma Sciences Inc. for NIMBUS treatment of select substrates used in traditional wound care. In February 2009, we received FDA market clearance for the NIMBUS gauze wound dressing licensed to Derma Sciences and in June 2009, Derma Sciences reported first commercial sale of a product, BIOGUARD®, employing our NIMBUS technology.   Derma Sciences is marketing and selling the BIOGUARD product to the home health, nursing homes, and wound care centers.  In March 2010, Derma Sciences entered into an agreement with Medline Industries to market and distribute BIOGUARD dressings larger acute care (hospital) market via multiple Group Purchasing Organizations (GPO).
 
 
Viridis BioPharma Pvt. Ltd.
 
In July, 2010,  we and Viridis BioPharma Pvt. Ltd., an India corporation, ("Viridis") entered into an exclusive Patent and Technology License Agreement as stipulated in the binding term sheet on March 16, 2010 as filed on Form 8-K dated March 22, 2010.  Under the agreement, we grant rights under its proprietary NIMBUS antimicrobial technology to Viridis to make, use, sell and offer for sale certain wound treatment products  to  the institutional market, pharmaceutical companies, distributors, hospitals, clinics, licensed chemists, pharmacists and medical wings of organizations in the Republic of India and its territories and possessions.  Viridis agreed it would only manufacture the products in India, unless otherwise agreed to by us.  In September 2010, Viridis obtained India FDA clearance to manufacture and market their product in India.
 
 
Government  Regulation
 
The research and development, manufacture, and marketing of human pharmaceutical and diagnostic products and devices are subject to regulation, in the United States primarily by the Food and Drug Administration, and by comparable authorities in other countries. These national agencies and other federal, state, and local entities regulate, among other matters, research and development and the testing, manufacturing, safety, handling, effectiveness, labeling, storage, record keeping, approval, advertising, and promotion of the products like those we are developing.
 
Failure to comply with applicable regulatory requirements can result in the refusal by regulatory agencies to approve product licensing or the revocation of approvals previously granted. Non-compliance can also result in fines, criminal prosecution, recall or seizure of products, total or partial suspension of production, or refusal to enter into additional contracts.
 
Any regulatory clearances that are received for a product may be subject to limitations on approved uses for the product. After obtaining marketing clearance for any product, the manufacturer and the manufacturing facilities for that product will be subject to continual review and periodic inspections by the Food and Drug Administration and other regulatory authorities. If previously unknown problems with the product or with the manufacturer or facility are discovered, restrictions may be imposed on the product or manufacturer, including an order to withdraw the product from the market. If we, and any contract manufacturers we choose to engage, fail to comply with applicable regulatory requirements, we may be fined, suspended or subject to withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
 
We work with a firm specializing in regulatory affairs with respect to the pharmaceutical, cosmetic, and medical device industries. In addition, we utilize the services of FDA and EPA consulting firms with experience in antimicrobial medical device regulatory filings and EPA filings.  These firms will be able to assist us with the following regulatory activities when required:
 
·  
Regulatory Strategy and Liaison with the Food and Drug Administration;
·  
Regulatory Strategy and Liaison with the Environmental Protection Agency;
·  
Non-clinical and clinical program assessment/development;
·  
Non-clinical and clinical protocol review/monitoring of studies;
·  
Regulatory affairs management/guidance;
·  
Product development and launch strategy;
·  
Validation of methods/processes;
·  
Product development strategies/assessment;
·  
Product compliance; and
·  
Label and labeling compliance.
 

 
 
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Food and Drug Administration
 
Many of the end-user applications for our technology are regulated in the U.S. as medical devices by the FDA.  The Agency’s regulations govern, among other things: pre-clinical testing; product design and development; pre-market clearance or approval; advertising and promotion; labeling; manufacturing; product import/export; storage; record keeping; reporting of adverse events; corrective actions and removals; recalls; and distribution.

Unless an exemption applies, each medical device to be commercially distributed in the United States required either a prior 510(k) clearance or prior pre-market approval (“PMA”) from the FDA.  The FDA classifies medical devices into one of three classes, depending on the degree of risk associated with the device and the extent of controls that are needed to ensure safety and effectiveness.  Devices deemed to pose the least risk are placed in Class I.  Intermediate risk devices, or Class II devices, in most instances require the manufacturer to submit to the FDA a pre-market notification, requesting authorization for commercial distribution, known as 510(k) clearance, and may subject the device to special controls, such as performance standards, guidance documents specific to the device, or post-market surveillance.  Most Class I and some low-risk Class II devices are exempted from this 510(k) requirement.  Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or a device deemed to be not substantially equivalent to a previously cleared 510(k) deice, are placed in Class III.  In general, a Class III device cannot be marketed in the U.S. unless the FDA approves the device after submission of a PMA.  The FDA can also impose restrictions on the sale, distribution, or use of devices at the time of their clearance or approval, or subsequent to marketing.
 
 
510(k) Clearance Pathway

A 510(k) pre-market notification is submitted to the FDA to demonstrate that the new device is “substantially equivalent” to a previously cleared 510(k) device or a device that was in commercial distribution before May 29, 1976 (or to a pre-1976 Class II device for which the FDA has not yet called for the submission of PMAs).  Such devices are deemed to be “predicate devices” for future applications.  The FDA attempts to respond to a 510(k) within 90 days of submission, but the response may be a request for additional information or data, sometimes including clinical data.  As a practical matter, 510(k) clearance can take significantly longer than 90 days, potentially up to a year or more.  If the FDA determines that the device, or its intended use, is not substantially equivalent to a previously cleared device or use, the FDA will place the device, or the particular use of the device, into Class III.

After a device receives 510(k) clearance for a specific intended use, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design, or manufacture, will require a new 510(k) clearance or could require a PMA.  The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination.  If the FDA disagrees with a manufacturer’s determination that a new clearance or approval is not required for a particular modification, the FDA can insist that the manufacturer cease marketing and/or recall the modified device until 510(k) clearance or pre-market approval is obtained.
 
 
Pre-Market Approval Pathway
 
A PMA must be submitted if the device cannot be cleared through the 510(k) process.  The PMA process is much more demanding than the 510(k) pre-market notification process.  A PMA must be supported by extensive data and information including, but not limited to, technical, pre-clinical, clinical, manufacturing and labeling to establish the safety and effectiveness of the device to the FDA’s satisfaction.  A PMA usually also requires a substantial application fee, which is over $100,000 for a small business entity.
 
After the FDA determines that a PMA is complete, the agency accepts the application and begins an in-depth review of the submitted information.  The FDA, by statute and regulation, has 180 days to review an accepted PMA, although the review generally occurs over a significantly longer period of time, and can take up to several years.  During this review period, the FDA may request additional information or clarification of information already provided.  Also, during the review period, an advisory panel of experts from outside FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device.   In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with the Quality System Regulations.  New PMA applications or supplemental PMAs are required for significant modifications to the manufacturing process, labeling, use and design of a device that is approved through the PMA process.   PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel.

De Novo: Alternative Pathway to PMA

If a medical device is found NSE (not substantially equivalent) by the FDA, an alternative pathway to the lengthy and costly PMA is available for low risk devices. The FDA Modernization Act of 1997 amended Section 513 (f) (2) of the Federal Food, Drug and Cosmetic Act (the Act) to provide this mechanism to reclassify statutorily classified class III products. This is considered a fairly unique pathway for clearance and typically is only allowed for new technologies of low risk. The FDA allows unlimited responses when on this pathway, different than the three allowed responses under a normal 510(k). A device placed into class I or II in this written order can then be commercially distributed, subject to other applicable provisions of the Act. A device classified into class I or II under this new provision becomes a predicate device for future premarket notification submissions, which means that a manufacturer may show that a new device is substantially equivalent to this predicate. This route to clearance is referred to as de novo because it establishes a new alternative for a new technology.

On February 26, 2009, we received clearance from the FDA for our De Novo application of our patented NIMBUS barrier gauze wound care dressings. This represents the first FDA clearance for NIMBUS – an innovative technology that was put through FDA’s De Novo process, a special clearance program for medical devices that are found to be “not substantially equivalent” to any predicate device.

In October, 2009, the FDA issued a guidance document specific to one of the NIMBUS active agents, pDACMAC.  The guidance protects the future applications and submissions for pDADMAC to our patented claims and uses.
 
 
 
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Environmental Protection Agency
 
The EPA regulates, among other things, antimicrobial products that are intended to destroy, prevent, repel, or mitigate any microorganism declared by EPA to be a “pest” pursuant to its authority under the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”).  Microorganisms declared to be pests by EPA are “any fungus, bacterium, virus, or other microorganisms, except for those on or in living man or other living animals and those on or in processed food or processed animal feed, beverages, drugs (as defined in sec. 201(g)(1) of the Federal Food, Drug, and Cosmetic Act (“FFDCA”)) and cosmetics (as defined in FFDCA sec. 201(i)). 40 C.F.R.§ 152.5(d).   The principal EPA requirement is that antimicrobial products subject to EPA’s jurisdiction under FIFRA be “registered” for the intended use under Section 3 of FIFRA.  States also require registration of such products under state law.  EPA registration requires among things the submission of data and information sufficient to allow EPA to make a determination that the product will perform its function without unreasonable adverse effects on health or the environment.

A number of the NIMBUS and Stay Fresh applications may require FIFRA registration for the specific end-use application. We are in the process of registering Stay Fresh with EPA as an antimicrobial textile treatment. The major component of NIMBUS is currently registered with EPA by a third-party for certain unrelated uses, and Quick-Med intends, in collaboration with strategic corporate partners, to obtain its own EPA and state registrations for NIMBUS for antimicrobial use.  After the registrations are secured, articles treated with the NIMBUS or Stay Fresh technologies will not be required to be registered separately with EPA or the states, provided the antimicrobial claims made for such articles are limited to the control of odor-causing bacteria or  "treated article” claims .  The intended use of NIMBUS or Stay Fresh-treated articles for the control of pathogenic organisms will require that the article itself be registered with EPA in those cases where the treated article falls under EPA jurisdiction.

Distribution of Technologies /Future Products
 
Because we plan for industry partners in the medical and consumer healthcare markets to market and distribute co-developed products or products that incorporate our technologies, we will not directly distribute such products.  Instead, we will rely upon our industry partners to utilize their advertising, name recognition, and other marketing techniques to promote such products or products that incorporate our technologies.
 
Customers
 
Our customers are companies interested in licensing our technologies or otherwise partnering with us.  Because our technologies are intended to be used in potentially widely used products that are used by the general public, such as cosmetic anti-aging products, wound care products, apparel and personal care, we do not anticipate becoming dependent upon a few customers; however, to the extent that we enter into agreements with industry partners upon which we will become dependent for the marketing and distribution of such products, should any such agreements be terminated for any reason, our potential revenues and operations will be negatively impacted.
 
 
Employees
 
We have a total ten employees who are full time employees.  We also utilize several consulting scientists with PhDs in their fields and several part time employees to provide the necessary expertise in performing testing and participating in certain of our development projects

 
Cost of Compliance with Environmental Laws
 
Because our potential products will be manufactured and sold by third parties, we are not directly subject to environmental laws other than the requirements applicable to the operation of our Research and Development Center.
 
 
Research and Development
 
During our fiscal year ended June 30, 2010, we spent $1,223,527 on research and development.  During our 2009 fiscal year, we spent $1,063,450 on research and development.  We intend to continue and expect our research and development efforts at similar level during the current 2011 fiscal year.
 
 
 
 
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ITEM 1A.                      RISK FACTORS
 
 
An investment in the shares of our common stock involves a substantial risk of loss.  You should carefully read this entire report and should give particular attention to the following risk factors.  You should recognize that other significant risks may arise in the future, which we cannot foresee at this time.  Also, the risks that we now foresee might affect us to a greater or different degree than expected.  There are a number of important factors that could cause our actual results to differ materially from those indicated by any forward-looking statements in this document.  These factors include, without limitation, the risk factors listed below and other factors presented throughout this document and any other documents filed by us with the Securities and Exchange Commission.

 
Our independent registered public accounting firm has issued a going concern opinion on our audited financial statements for the fiscal years ended June 30, 2010 and 2009 because, during those periods, the Company experienced recurring losses and negative cash flows from operations as well as a net capital deficiency at June 30, 2010.  These matters raise substantial doubt about our ability to continue as a going concern.

We have been dependent primarily on private placements of our equity securities and stockholder loans to fund our operations, including research and development and efforts to license our products.  Such funding may not be available to us when needed, on commercially reasonable terms, or at all. If we are unable to obtain additional financing if needed, we will likely be required to curtail our operating plans and possibly cease our operations.  In addition, any additional equity financing may involve substantial dilution to our then-existing stockholders.  If we do not become profitable, we may have difficulty meeting our business goals.

We have a history of significant losses, and we may never achieve or sustain profitability. If we are unable to become profitable, our operations will be adversely effected.
 
We have incurred annual operating losses since our inception and our operations have never been profitable.  At June 30, 2010, we had an accumulated deficit of $23,658,751.  Our gross revenues for the years ended June 30, 2010 and 2009, were $993,943 and $1,004,734, respectively,  with losses from operations of $2,084,969 and $1,765,040, respectively,  and net losses of $3,550,165 and $2,022,621,  respectively.  There can be no assurance that we will ever become profitable.
 
We have risks associated with our dependence on third party developers to commercialize our technology.  If we are unable to attract such developers to exploit our technologies, our business will fail. Alternatively, if such developers fail to commercialize our technology, it would have a material adverse effect on our business, financial condition and results of operations.

We depend upon third parties to develop our products. We must attract such third parties to develop and commercialize our technologies into end-user applications. If we are unable to do so our business model will fail.

The inability of a developer to make our products in a timely manner, including as a result of local financial market disruption which could impair the ability of such developers to finance their operations, or to meet quality standards, could cause us to miss the delivery date requirements of to their customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on our financial condition and results of operations.

For instance, BASF Beauty Care Solutions, L.L.C. (a unit of BASF)  develops and commercializes our MultiStat technology pursuant to a product development and distribution agreement, whereby it formulates our proprietary compound to specifications as ordered by cosmetic companies. BASF makes these formulations (“actives”) in kilograms containing our proprietary compound and ships them to cosmetic customers.  They, in turn, will mix the actives in their formulations and sell the products to the end users.  Any event that materially and adversely affects BASF’s ability or willingness to develop such technology will affect our revenues.
 
Our intellectual properties may become obsolete if we are unable to stay abreast of technological developments.

The biomedical industry is characterized by rapid and continuous scientific and technological development. If we are unable to stay abreast of such developments, our technologies may become obsolete.  We lack the substantial research and development resources of some of our competitors.  This may limit our ability to remain technologically competitive.

Other companies could create a technology that competes effectively with our NIMBUS, Stay Fresh, NimbuDerm and MultiStat technologies, and we may be unable to maintain our existing, or capture additional, market share in our markets.  Based upon our review of the industry, we are unaware of any company today that markets a technology that is similar to our technologies.  Nonetheless, our intended markets generally are dominated by very large corporations (or their subsidiaries), which have greater access to capital, manpower, technical expertise, distribution channels and other elements which would give them a competitive advantage over us were they to begin to compete directly against us. It is possible that these and other competitors may implement new, advanced technologies before we are able to, thus affecting our ability to license our intellectual properties at profitable rates.

We cannot assure investors that we will be able to achieve the technological advances to remain competitive and become profitable, that new intellectual properties will be researched, tested and developed, that anticipated markets will exist or develop for our technologies, or that any product or services incorporating our intellectual properties will not become technologically obsolete.
 
We are dependent on our patents and other intellectual property right protections.  The failure to obtain patent protection could have a material adverse effect on our business, financial condition and results of operations.

We have employed proprietary technologies to license our intellectual properties.  We seek to protect our intellectual property rights through a combination of patent filings, trademark registrations, confidentiality agreements and inventions agreements.  However, no assurance can be given that such measures will be sufficient to protect our intellectual property rights.  If we cannot protect our rights, we may lose our competitive advantage.  Moreover, if it is determined that our products infringe on the intellectual property rights of third parties, we may be prevented from marketing or licensing our intellectual properties to others.

The failure to protect our patents, trademarks and trade names, may have a material adverse effect on our business, financial condition and operating results.  Litigation may be required to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others.  Any action we take to protect our intellectual property rights could be costly and could absorb significant amounts of our management’s time and attention.  In addition, as a result of any such litigation, we could lose any proprietary rights we have.  If any of the foregoing occurs, we may be unable to execute our business plan and you could lose your investment.
 
 
 
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Government regulation plays a significant role in our ability to market our technologies in the medical and consumer markets.

Certain of applications of our technologies are required to meet the government regulations by the FDA and or EPA.  Failure to meet or to obtain the approvals from these government agencies will limit our ability to market our technologies to prospective clients.

We depend on key personnel in a competitive market for skilled employees, and failure to retain and attract qualified personnel could substantially harm our business.

We believe that our future success will depend in large part on our ability to attract and retain highly skilled scientific, technical and management personnel. We obtained loans from our Chairman and a major shareholder to pay for one year salary of our Chief Executive Officer and Director beginning in June 2007.   If we are unable to hire the necessary personnel, the development of our business will likely be delayed or prevented.  Competition for these highly skilled employees is intense.  As a result, we cannot assure you that we will be successful in retaining our key personnel or in attracting and retaining the personnel we require for expansion.
 
We may be liable for products liability claims for which we have no insurance.

Although we do not manufacture our products and the partners that we license our technologies to have their own products liability insurance coverage (under which we are covered or indemnified against such liabilities), we may be sued for products liability if products incorporating our patented technologies injure the end user.  In the event that we are sued on this basis, liability claims could require us to spend significant time and money in litigation and pay significant damages that are not covered by insurance.  As a result, any of these claims, whether or not valid or successfully prosecuted, could have a material adverse effect on our business and financial results.
 
Failure to repay our loan obligations may severely impair our business operations, assets and your investment in the Company.

We have several loans outstanding, including loans from our Chairman of the Board and a major shareholder. If we are unable to successfully repay or restructure loans from our Chairman and a major shareholder, or our other outstanding liabilities as they become due, we may have to liquidate our business and undertake any or all the steps outlined below:

·  
Significantly reduce, eliminate or curtail our business, operating and research and development activities so as to reduce operating costs;

·  
Sell, assign or otherwise dispose of our assets, if any, to raise cash or to settle claims by creditors, including our Chairman of the Board;

·  
Pay our liabilities in order of priority, if we have available cash to pay such liabilities;

·  
If any cash remains after we satisfy amounts due to our creditors, distribute any remaining cash to our stockholders in an amount equal to the net market value of our net assets;

·  
File a Certificate of Dissolution with the State of Nevada to dissolve our corporation and close our business;

·  
Make the appropriate filings with the Securities and Exchange Commission so that we will no longer be required to file periodic and other required reports with the Securities and Exchange Commission, if, in fact, we are a reporting company at that time; and

·  
Make the appropriate filings with the Financial Industry Regulatory Authority to affect a delisting of our stock.
 
 
We have not paid cash dividends and it is unlikely that we will pay cash dividends in the foreseeable future.  Investing in our securities will not provide you with income.

We plan to use all of our earnings, to the extent we have earnings, to fund our operations.  We do not plan to pay any cash dividends in the foreseeable future.  We cannot guarantee that we will, at any time, generate sufficient surplus cash that would be available for distribution as a dividend to the holders of our common stock.  You should not expect to receive cash dividends on our common stock.
 
 
We have the ability to issue additional shares of our common stock, without asking for stockholder approval, which could cause your investment to be diluted.

Our Articles of Incorporation currently authorize the Board of Directors to issue up to 100,000,000 shares of common stock.  The authority of the Board of Directors to issue shares of common stock, or warrants or options to purchase shares of common stock, is generally not subject to stockholder approval.  Accordingly, any additional issuance of our common stock may have the effect of further diluting your investment.
 
 
We may raise additional capital through a securities offering that could dilute your ownership interest.

We require substantial working capital to fund our business.  If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, these securities may have rights, preferences or privileges senior to those of the holders of our common stock.  The issuance of additional common stock by our management will also have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock.
 
 
 
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The market for our common stock is volatile.  This affects both the ability of our investors to sell their shares, as well as the price at which they are able to sell their shares.

The market price for our common stock is extremely volatile and is significantly affected by factors such as reports written by third parties, over whom we have no control, about our business and sales of large amounts of our common stock relative to our average volume.  Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are unrelated to the operating performance of the affected companies.  These volatile conditions may make it difficult for you to sell our common stock at a price that is acceptable to you.

There is a limited public market for our common stock and our stockholders may be unable to liquidate their shares.

Our common stock is quoted on the Over-the-Counter Bulletin Board, and there is a limited volume of sales, thus providing limited liquidity for our shares.  As a result, stockholders may be unable to sell their shares in a timely manner.
 
Our executive officers and directors control a large percentage of our common stock, which allows them to control matters submitted to stockholders for approval.

Our executive officers and directors (and their affiliates), in the aggregate, own approximately 53% of our outstanding common stock, and a  majority of our outstanding voting stock.  Therefore, our officers and directors have the ability to decide the outcome of matters submitted to our stockholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets) and to control our management and affairs.  This concentration of ownership may have the effect of entrenching management and delaying, deferring or preventing a change in control, impede a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control, which in turn could have an adverse effect on the market price of our common stock.
 
 
ITEM 2.  
PROPERTIES
 
Our corporate headquarters are located at 902 NW 4 Street, Gainesville, Florida.  This 3,200 square foot premises is composed of offices and an equipped laboratory.  We pay monthly lease payment of $2,000 and our lease expires on February 1, 2011.
 
 
Our office and laboratory facilities are in good condition and are sufficient to conduct our operations.
 
 
We do not own real estate at this time and we have no agreements to acquire any properties.
 
 
ITEM 3.  
LEGAL PROCEEDINGS
 
 
In September 23, 2010, the Company filed a civil complaint in the United States District Court for the Northern District of Florida to demand for jury trial against several companies for infringing on our MultiStat technology  in the field of cosmetics under the United States Patent Nos. 5,773,438, 5,837,224, and 6,630,516.
 
 
The Company is not currently involved in any other material legal proceeding, and we are not aware of any material legal proceedings pending or threatened against us.  We are also not aware of any material legal proceedings involving any of our directors, officers, or affiliates or any owner of record or beneficially of more than 5% of any class of our voting securities.
 
ITEM 4.  
REMOVED AND RESERVED
 

 
-15-

 
 
 

 
PART II

 
ITEM 5.  
MARKET FOR REGISTRANT'S EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
Market Information
 
Our common stock began to be quoted on September 4, 2002 on the OTC Bulletin Board under the symbol QMDT. The following table sets forth the range of high and low bid price per share of our common stock for the fiscal quarters indicated. The OTC Bulletin Board quotations represent quotations between dealers without adjustment for retail mark-up, markdowns or commissions and may not represent actual transactions.
 
 
 
Year Ended June 30, 2010
 
High
Low
Fourth Quarter
$1.25
$0.80
Third Quarter
$1.25
$0.55
Second Quarter
$0.90
$0.58
First Quarter
$1.00
$0.41


 
Year Ended June 30, 2009
 
High
Low
Fourth Quarter
$0.62
$0.39
Third Quarter
$0.55
$0.09
Second Quarter
$0.32
$0.06
First Quarter
$0.40
$0.18

 
Holders
 
As of June 30, 2010, there were 69 holders of record of our common stock.  We have one class of common stock, $0.0001 par value, outstanding.
 
Dividends
 
We have not declared or paid any cash dividends on our common stock since inception. We intend to retain our future earnings, if any, in order to finance the expansion of our business and we do not anticipate that any cash dividends will be paid in the foreseeable future. Our future dividend policy will depend on our earnings, capital requirements, expansion plans, financial condition and other relevant factors.
 
Penny Stock Considerations
 
Our shares are "penny stocks" which term is generally defined in the Securities Exchange Act of 1934 as equity securities with a price of less than $5.00. Our shares may be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.
 
Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or "accredited investor" must make a special suitability determination regarding the purchaser and must receive the purchaser's written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with his or her spouse is considered an accredited investor. In addition, under the penny stock regulations the broker-dealer is required to:
 
§  
Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt;
 
§  
Disclose commissions payable to the broker-dealer and its registered representatives and current bid and offer quotations for the securities;
 
§  
Send monthly statements disclosing recent price information pertaining to the penny stock held in a customer's account, the account's value, and information regarding the limited market in penny stocks; and
 
§  
Make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction, prior to conducting any penny stock transaction in the customer's account.
 
Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling stockholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practices and disclosure requirements could impede the sale of our securities. In addition, the liquidity for our securities may be adversely affected, with a corresponding decrease in the price of our securities. Our shares are currently subject to such penny stock rules and our stockholders will, in all likelihood, find it difficult to sell their securities.
 
 
 
Recent Sales of Unregistered Securities
 
None
 
 
 
-16-

 
 
Securities Authorized for Issuance Under Equity Incentive Plans
 
The following table sets forth information regarding awards made through compensation plans or arrangements through June 30, 2010, our most recently completed fiscal year.

 
 
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding outstanding securities shown herein)
Equity compensation plans approved by security holders
5,389,270
$0.55
121,318
Equity compensation plans not approved by security holders
1,228,803
$0.40
N/A
 
Total
6,618,073
$0.52
121,318

 
Our 2001 Equity Incentive Plan (the “ 2001 Plan”) authorizes the issuance of options, right to purchase Common Stock and stock bonuses to officers, employees, directors and consultants. The 2001 Plan was amended and restated to increase the total number of shares available to 6,000,000 shares.  We reserved 6,000,000 shares of our common stock for awards to be made under the 2001 Plan. The 2001 Plan is administered by a committee comprised of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The 2001 Plan allows for the issuance of incentive stock options (which can only be granted to employees), non-qualified stock options, stock awards, or stock bonuses. The committee, or the Board of Directors if there is no committee, determines the type of award granted, the exercise price, the option term, which may be no more than ten years, terms and conditions of 2001 and methods of exercise. Options must vest within ten years. The 2001 Plan description and its activities up to the fiscal year ended are disclosed in our financial statements for the fiscal year ended contained herein. The number of options under the 2001 Plan available for grant at June 30, 2010 was 121,318.
 
The equity compensation plan not approved by security holders has similar features as the 2001 Plan with the exercise price, term and the vesting schedule.  This plan is used to pay consultants and service providers in warrants in lieu of cash payment.
 
 
 
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with our audited financial statements and related notes included therein. The terms "the Company," "we," "our" or "us" refer to Quick-Med Technologies, Inc.  This discussion contains forward-looking statements based on our current expectations, assumptions, and estimates. The words or phrases "believe," "expect," "may," "anticipates," or similar expressions are intended to identify "forward-looking statements." Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties pertaining to our business, including: (a) because we have a limited operating history and our technologies are still evolving, we may not be able to successfully manage our business or achieve profitability; (b) our technology and product development processes, which include substantial regulatory approvals, are lengthy and expensive and there is no assurance that we will have sufficient resources to complete development related to these processes; (c) our history of losses make it difficult for you to evaluate our current and future business and prospects and future financial results; (d) we have negative cash flow from operations and an accumulated deficit that raises substantial doubt about our ability to continue as a going concern; (e) our future business is dependent upon third parties to market, manufacture, and distribute our technologies and/or products or jointly developed products; (f) there is no assurance that our technologies or products that employ our technologies will be accepted in the marketplace; (g) we do not currently carry product liability insurance and should we be subject to  product liability claims, our financial condition may be adversely affected;  (h) our operations are currently funded by the revenues and our debt and equity financings, however, there are no assurances that such financings will be sufficient to ensure our  future financial performance and viability;  (i) we have substantial debt obligations due to our Chairman of the Board and a major shareholder, who have funded our operations, debt obligations that are secured by our assets and revenues and are senior obligations; and (j) there is no assurance that we will be able to attract and retain highly skilled scientific, technical and management personnel, who are critical to our success.  Statements made herein are as of the date of the filing of this Form 10K with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
 
Overview
 
Quick-Med is a life sciences company focused on developing proprietary, broad-based technologies in the   consumer and healthcare markets. Our  four core technologies are: (1) Novel Intrinsically Micro-Bonded Utility Substrate (NIMBUS®), a family of advanced polymers bio-engineered to have antimicrobial, hemostatic, and other properties that can be used in a wide range of applications; (2) Stay FreshTM, a unique chemical formulation for textiles with a durable antimicrobial agent effective against an array of bacteria even after numerous laundering cycles; (3) NimbuDermTM , a novel copolymer for application as a persistent hand sanitizer with long lasting protection against germs. Other applications include medical devices such as catheters, tubing, films and coatings; and (4) MultiStat®, a family of advanced patented methods and compounds shown to be effective in skin therapy applications. Currently, NIMBUS technology has been commercialized in an advanced wound care product by our licensee in the institutional  market in late June 2009.  The Company targets NIMBUS technology for additional advanced wound care products, catheters, incontinence products, and other medical devices. MultiStat has been developed in a cosmetic product line with the anti-aging products.  Stay Fresh is currently under development with a broad range of potential applications including consumer textile market.  NimbuDerm is also a technology currently being developed.
 
Our strategy is to further develop our core technologies as well as develop future technologies. We will attempt to commercialize these technologies through strategic licensing partnership agreements, joint ventures, or co-development agreements. We do not intend to manufacture or distribute final products; instead, we will seek partnership arrangements and/or license agreements with third parties to develop products that use our technologies and who will perform the manufacturing, marketing, and distribution functions associated with our technologies.
 
Our business model has been to attempt to develop the following revenue segments:
 
·  
Royalty and license fees;
·  
Profit sharing revenues;
·  
Research and development fees paid to us in connection with joint development agreements; and
·  
Government research and development grants.
 
Our potential revenues will be derived from government agencies and the following types of companies in connection with our NIMBUS®, Stay FreshTM ,  NimbuDermTM and MultiStat® technologies:
 
·  
Healthcare and medical;
·  
Apparel and textile; and
·  
Personal care companies.

Uncertainties and Trends
 
Our revenues are dependent now and in the future upon the following factors:
 
·  
Acceptance of our technologies or future technologies in the marketplace;
·  
Our partners' ability to develop, market and distribute our technologies under a  strategic   partnership agreement;
·  
Demand for products or future products that utilize our technologies;
·  
Our ability to secure license or profit sharing related agreements and secure government research and development grants;
·  
Our ability to market our technologies to health care, apparel, cosmetic, and personal care companies;
·  
Our ability to successfully conduct laboratory and clinical testing of our potential products; and
·  
Our ability to obtain regulatory approval of our future products.
 
Uncertainties or trends that may affect our business also include the possibility (i) that known or unknown competitors may develop products with similar applications to our proposed products, which may prove to be superior in performance and/or price to our products and (ii) that proposed applications involving our products have collateral effects which render the application undesirable or unmarketable.
 
 
 
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Recent Developments
 
In  September 2010, the United States Patent and Trademark Office  granted the U.S. Patent No. 7,795,302 entitled "Use of Compositions for Treating Rosacea." The patent is part of a portfolio that we have licensed from the University of Michigan and extend our intellectual property coverage of our family of compounds. The patent issued covers methods for treating rosacea with an antimicrobial, a retinoid, and an inhibitor of toll-like receptors in both topical and oral applications. The broad range of antimicrobials to be utilized in combination with the MultiStat family includes tetracycline, erythromycin, azithromycin, clarithromycin, milbemycin, aminoglycoside, penicillin, cephalosporin, fluoroquinolone, streptogramin and sulfanomide.  MultiStat is shown to promote the maintenance, healing and repair of the inflamed skin, and may be combined with existing medications to deliver more effective, better tolerated treatments.
 
In September 2010, the United States Patent and Trademark Office granted us the U.S. Patent No. 7,790,217  entitled "Method of Attaching an Antimicrobial Cationic Polyelectrolyte to the Surface of a Substrate." This is the fourth patent on our NIMBUS technology.  This key patent protects the process used to permanently bind a broad-spectrum, highly effective microbicide to specific substrates, as well as a very broad selection of substrate types and product applications. Post-polymerization bonding is a unique process in which the resulting material has a non-leachable microbicide firmly retained. The allowed claims of this application cover two polyelectrolyte antimicrobials: polydiallyldimethyl ammonium chloride and polyvinylbenzyltrimethyl ammonium chloride. The claims grant protection to the antimicrobial agents cleared by the FDA under de novo evaluation, also distinguishing the novelty of the technology.

In August 2010, we entered into a Development and Option Agreement with Biosara. The Agreement remains in effect until December 31, 2010 or until superseded by the earlier of a license agreement or another product development agreement.  Under the agreement, we will use commercially reasonable efforts to develop certain wound care products incorporating our proprietary NIMBUS antimicrobial technology to be manufactured by or for the licensee.  The parties agree to perform in accordance with the terms as set forth in the statement of work including the initial and subsequent monthly development fees paid or to be paid to us.

In July 2010, we entered into an exclusive Patent and Technology license agreement with Viridis BioPharma Pvt. Ltd., an India corporation ("Viridis").  Under the agreement, Viridis will incorporate our proprietary NIMBUS antimicrobial technology into certain wound treatment products. Viridis will manufacture, market and sell these wound treatment products in the institutional market in the Republic of India.  We will receive royalty payments on the product sales at an agreed royalty rate in addition to certain payment received.  The term of the agreement is for a four year period with certain automatic extension.
 
 
Capital Expenditures and Requirements

From 2000 to June 2010, we spent approximately $847,000 on the acquisition of patents and exclusive license agreements.  We owe an additional $160,000 to Dr. Richard Galardy which is due when certain milestones are met in connection with a September 2000 license agreement we have with Dr. Galardy and Dr. Damian Grobeny. This license agreement provides that we compensate Dr. Galardy and Dr. Grobeny with our common stock and cash for the exclusive license of the Ilomastat technology invented by them.

We do not expect any significant additions to property, plant and equipment.

Critical Accounting Policies and Estimates
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts. The estimates and assumptions are evaluated on an on-going basis and are based on historical experience and on various other factors that are believed to be reasonable. Estimates and assumptions include, but are not limited to economic useful lives of fixed and intangible assets, income taxes, valuation of options and warrants granted and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements. Our accounting for stock-based compensation requires us to estimate the value of the shares issued and the value of intangible assets require us to continually assess whether such assets are impaired.
 
 
 
-18-

 
 
 
Results of Operations

Comparison of Years Ended June 30, 2010 and 2009

Revenues. During the year ended June 30, 2010 we had $993,943 of revenues, compared to $1,004,734 of revenues for the year ended June 30, 2009, representing a slight decrease of 1% in our revenues.  Our revenues during the year ended June 30, 2010 consisted of: (a) $517,027, which represented our royalties in the form of revenue share from the MultiStat product sales by  BASF Beauty Care Solutions, L.L.C., a cosmetic and personal care division of BASF Catalysts, LLC, a wholly-owned subsidiary of BASF (“BASF”),  in connection with a manufacturing and distribution agreement we have with BASF  for product development, manufacturing and distribution (the “BASF Agreement”); (b) $174,416 in royalty and license  fees consisting of $164,121 in royalty fees from the sales of BIOGUARD® advanced wound care product by Derma Sciences, Inc., our licensee, and $10,295 in license fees representing the earned portion of the license fees from our licenses.  This BIOGUARD® product was launched in late June 2009 and the royalty fees related to the sales of this product were $239,121 from June 2009 to the  year ended June 30, 2010.  However, $75,000 was credited against the advance royalty fees we had previously received in accordance with the terms of the license agreement.  There are no further credits against future royalty fees; and (c) $302,500, which represented the revenue earned from the small business innovation research program and the revenue earned from the joint development projects.   While we noted that the MultiStat product sales by BASF has improved in the recent quarters,  however, given the current state of the economy,  in particular in the retail cosmetic industry, we cannot anticipate the MultiStat product sales by BASF for the subsequent quarters given market uncertainties.

Our revenues during the year ended June 30, 2009 consisted of: (a) $804,241, which represented our royalties from the product sales by BASF Beauty Care Solutions, L.L.C.; (b) $193,350, which represented the revenue earned from the small business innovation research program and the joint development projects; and (c) $7,143 which represented the earned portion of the license fee from Derma Sciences, Inc.

Effective August 1, 2007, we entered into the manufacturing and distribution agreement with BASF Beauty Care Solutions, L.L.C., a member of the BASF Group (the “BASF Agreement”).  This agreement grants BASF exclusive and non-exclusive licenses to develop and market our Ilomastat product for the field of over-the-counter anti-aging (chronological aging or photoaging) cosmetics. Under the terms of this agreement, we and BASF share the net revenues in each contract calendar year beginning January 1, 2008 until December 31, 2010 in accordance with certain sharing percentages as defined in the agreement.  The BASF Agreement has an expiration date of December 31, 2010.  This Agreement supersedes the Master Agreement for Product Development, Manufacturing and Distribution dated August 15, 2002, the Product Development and Distribution Agreement for Ilomastat dated August 15, 2002, the Tolling Agreement dated October 20, 2005, as amended, and the Letter of Intent with the effective date of February 1, 2006, as amended.  We are currently working with BASF on an extension of the Agreement.

Operating Loss. Operating loss for the year ended June 30, 2010 was $2,084,969 as compared to $1,765,040 in operating loss for the year ended June 30, 2009, representing an increase of 18% or $319,929 in operating loss. The increase in operating loss was primarily attributable to an increase in expenses of $309,138 coupled with a slight decrease in revenues of $10,791 for the fiscal year ended June 30, 2010.   The increase in expenses was primarily due to  (a) an increase in research and development expenses of $160,077 or 15%; (b) an increase of $124,798 or 9% in general and administrative expenses; and (c) an increase of $39,397 or 18% in licensing and patent expenses; and offset by a decrease of $13,842 or 37% in cost of revenues, as described in more detail below.

Research and Development Expense.  Research and development expense increased by $160,077 or 15% to $1,223,527 for the year ended June 30, 2010, from $1,063,450 for the year ended June 30, 2009.  The increase in research and development expense is primarily attributable to the subcontractor expenses related to the SBIR phrase II program, which was completed in April 2010.

General and Administrative Expense.  General and administrative expense increased by $124,798 or 9% to $1,499,866 for the year  ended June 30, 2010, from $1,375,068 for the year ended June 30, 2009.  This increase in our general and administrative expenses is mainly due to the implementation of our investor relations programs and financing expenses.

Licensing and Patent Expense.  Licensing and patent expense increased by $39,397 or 18% to $261,536 for the year ended June 30, 2010 from $222,139 for the year ended June 30, 2009.  This increase was primarily due to higher consulting patent legal fees, annual annuity fees for our patents and patent applications, and more annuity fees for more patent applications than those of prior comparable period.

Interest Income.  During the year ended June 30, 2010, we had $2,016 in interest income, compared to $2,290 for the year ended June 30, 2009. The amounts represented interest earned on our certificate of deposits and money market account during the periods.

Interest Expense.  In the year ended June 30, 2010, we had an approximately $1,100,000 non-cash charge to interest expense as a result of a beneficial conversion feature of  long-term convertible note payables with a related party, the Chairman of our Board of Directors, and third parties.  There was no non-cash charge to interest for the comparable period in 2009.
 
Interest expense on notes payable for the year ended June 30, 2010 increased $104,474 or 40% to $364,345 compared to $259,871  the  year ended June 30, 2009.  The increase was due to  approximately $2,200,000 or 51% increase in the outstanding loan balance due to our Chairman of the Board, a major shareholder, and third parties to approximately $6,500,000, compared to approximately $4,300,000  outstanding balance for the comparable 2009 period.

Net Loss.   Net loss for the year ended June 30, 2010  was $3,550,165 or $0.11 per share compared to $2,022,621 or $0.07 per share for the year ended June 30, 2009.   This increase is primarily attributable to  approximately $1,100,000 non-cash charge to interest expense from a beneficial conversion feature of  long-term convertible note payables and  approximately $425,000 from increases in interest expense in notes payable,  research and development expenses, general and administrative expenses, and licensing and patent expenses, offset by decreases in revenues, and cost of revenues.
 
 
 
-19-

 
 
Liquidity and Capital Resources
 
Our auditors have issued a going concern opinion on our audited financial statements for the fiscal years ended June 30, 2010 and 2009 as we have experienced recurring losses and negative cash flows from operations in these periods.  In addition, we have a net capital deficiency.  These matters raise substantial doubt about our ability to continue as a going concern.

Total cash on hand at June 30, 2010 was $628,026 as compared with $41,216 at June 30, 2009.    Subsequent to the fiscal year ended, we collected approximately $200,000 of the outstanding receivable balance as of  September 23, 2010.  We also collected approximately $180,000 from our July and August business activities.

In August 2010, we entered into a Development and Option Agreement with Biosara. The agreement remains in effect until December 31, 2010 or until superseded by the earlier of a license agreement or another product development agreement.    The parties agree to perform in accordance with the terms as set forth in the statement of work including the initial and subsequent monthly development fees paid or to be paid to the Company.  We anticipate that the development fees are adequate to cover our expenses.  We received the initial payment and performed the work.  We are unable to determine when and if the subsequent monthly development fees will arrive and whether Biosara has the ability to continue funding the project, at this time.  We will continue the work as long as the development fees are received.

In July 2010, we entered into an exclusive Patent and Technology license agreement with Viridis BioPharma Pvt. Ltd., an India corporation("Viridis") .  Under the agreement, Viridis will manufacture, market and sell these wound treatment products in the institutional market in the Republic of India.  The Company will receive royalty payments on the product sales at an agreed royalty rate in addition to certain payment received in March 2010.  We will receive additional payment at the earlier of the first commercial sale or six months from July 26, 2010, the effective date of the agreement.  We are unable to determine when the first commercial sale will occur and how much, if any, of the royalty fee we will receive in the future at this time.  We expect nominal direct expenses in relation to this license agreement.
 
In June 2009, our licensee, Derma Sciences, Inc. launched the commercial sale of BIOGUARD® an advance wound care product employing our NIMBUS technology.  From the launch date to June 30, 2010, our royalty fees related to this product were approximately $239,121.  In accordance with the terms of the license agreement, the first $75,000 royalty fees from Derma Sciences were offset against the advance payments we received in 2007, the subsequent royalty fees will be at 20% of the net sales as defined in the license agreement.  We are unable to determine how much, if any, of the royalty fee we will receive in the future at this time.  We expect minimal direct expenses in relation to this license agreement.

In May 2010, we entered into a service agreement with a division of a major consumer products company for a certain fee over four months period.  We anticipated the direct expenses related to this project of approximately $10,000 that would be covered by the fee arrangement. We have  invoiced for the first payment under the project.

In April 2010, we and KCI USA, Inc. ("KCI") entered into a Development Agreement for a certain fee over seven months period.  We anticipated the direct expenses related to this project of approximately $15,000 that would be covered by the fee arrangement. We have collected the first payment under the project.

On April 17, 2009, we and Avery Dennison Corporation (“Avery”) entered into a Joint Development and Exclusive Option Agreement (the “Agreement”)  with total value of approximately $100,000 between six to twelve months period with six month extension.  We anticipated the direct expenses related to this project of approximately $20,000. In April 30, 2009, we collected $30,000 initial payment under the Agreement.

In September 2006, we received the SBIR Phase II grant, which included the option of SBIR Phase I, totaling approximately $840,000 over the next four years and we expect the cash outflows related to this grant of approximately $390,000 to subcontractors and other direct expenses.  To date, we received approximately $725,000 and incurred approximately $242,000 in expenses to subcontractors and other direct expenses.  While we expect to receive royalties in the next twelve to twenty four months from the license agreement subject to certain contractual terms, we need cash in order to maintain and grow our businesses.  See the section below for further discussion of our cash requirements and related strategies to meet these needs.

Beginning in 2009, we took a number of steps to conserve cash and control expenses including a elimination of a $75,000 salary position, a deferred payment on a certain consulting fee of $20,000, and  voluntary  reduction and waiver of salaries and fees of approximately $390,000.  The voluntary salary and fee waiver is scheduled to end effective October 1, 2010.
 
 
 
-20-

 
 
Equity Financing and our Cash Requirements
 
On February 8, 2010, we signed a placement agent agreement with an investment banker on a non exclusive basis to raise up to $5,000,000 in order to meet our current operating cash needs and  to execute our business plan.  We cannot assure you that we will raise a sufficient amount of capital, if any, through this investment banker.
 
Based on our cash position at June 30, 2010, we cannot continue to satisfy our current cash requirements for a period of twelve (12) months through our existing capital. We anticipate total estimated, operating and research and development expenditures, and patent related legal fees of approximately $182,500 per month or an aggregate of approximately $2,190,000 over the next twelve (12) months, in the following areas:

 
·
Research and development expenditures of approximately $83,000 per month or an aggregate $996,000 over the next twelve (12) months, which will consist of the following estimated monthly expenditures: (a) $61,000 in payroll for scientists; (b) $5,000 for outside research and development expenditures; and (c) $17,000 for chemical supplies and laboratory operating expenses, including rent expense;
 
 
·
Patent related legal fees of approximately $23,334 per month or an aggregate $280,000 annually; and

 
·
Operating expenses of approximately $76,167 per month or an aggregate $914,000 over the next twelve (12) months, including business developments, personnel costs, director and officer insurance, general liability insurance, investors relations, rent, consulting fees, utilities, legal and accounting fees, and travel.
 

Our current cash balance of $628,026 as of  June 30, 2010, coupled with accounts receivable of  $336,077,  of  which approximately $200,000 have been subsequently collected after June 30, 2010,  will satisfy our cash requirements for approximately more than five (5) months assuming no further receipt of revenues and additional debt or equity financing.  If we are unable to satisfy the remainder of our obligations by equity and/or debt financings, we will be unable to satisfy our cash requirements beyond approximately more than five (5) months assuming no further receipts of revenues and additional debt or equity financing.

We are attempting to raise additional cash by means of equity and or debt financing. Additionally, we are implementing a cash conservation strategy by extinguishing obligations through share-based payments and reducing our use of consulting services. However, our ability to raise cash through equity or debt financing with third parties will be difficult in the current credit environment.  There are no assurances that any planned equity offering and/or debt financing will be successful or sufficient to meet our cash requirements or that our cash conservation strategy will be successful.  Even if we were able to obtain debt or equity financing, the terms of such financing may be very unfavorable to us.  Further, any sale of newly issued debt or equity securities could result in additional dilution to our current stockholders.

As of June 30, 2010, we have eleven senior convertible notes payable outstanding to our Chairman totaling approximately $5,000,000 including accrued interest with interest rates ranging from 6% to 8% per annum and maturity dates of December 2013.  These notes are convertible at conversion prices ranging from $0.18 to $0.74 per share and are secured by our revenues and assets.  We also have a note payable with our Chairman of $221,617 including accrued interest with a maturity date of July 1, 2011 and an annual interest rate of 8%.  We also have a $1,053,000 senior convertible note payable to a major stockholder.  The senior convertible note has an 8% interest rate per annum with a conversion price of $0.60 per share, a maturity date of  December 31, 2013, and is secured by our revenues and assets.  Further, we have two senior convertible notes totaling $250,000 with third parties.  These notes have an 8% interest rate per annum with a conversion price of $1.00 per share, a maturity date of June 30, 2014.   In addition, we have four convertible notes payable totaling $109,474 including accrued interest with an interest rate of 8% per annum and a maturity date in December 2010.
 
 
 
-21-

 
 
If we are unable to successfully repay our loans to our Chairman and a major stockholder, we may have to liquidate our business and undertake any or all the steps outlined below.
 
·  
Significantly reduce, eliminate or curtail our business, operating and research and development activities so as to reduce operating costs;
·  
Sell, assign or otherwise dispose of our assets, if any, to raise cash or to settle claims by creditors, including our Chairman of the Board;
·  
Pay our liabilities in order of priority, if we have available cash to pay such liabilities;
·  
If any cash remains after we satisfy amounts due to our creditors, distribute any remaining cash to our shareholders in an amount equal to the net market value of our net assets;
·  
File a Certificate of Dissolution with the State of Nevada to dissolve our corporation and close our business;
·  
Make the appropriate filings with the Securities and Exchange Commission so that we will no longer be required to file periodic and other required reports with the Securities and Exchange Commission, if, in fact, we are a reporting company at that time; and
·  
Make the appropriate filings with the National Association of Security Dealers to affect a delisting of our stock.
 
Based upon our cash requirements for our Plan of Operations and our current dividend policy of investing any available cash to our operations, however, we do not plan to distribute any cash to our stockholders.
 
At June 30, 2010, we had a net positive working capital of $53,037 that primarily consists of: (a) cash of $628,026; (b) accounts receivable of $336,077; (c) accounts payable of $611,018; (d) accrued expenses of $73,191; (e) unearned revenue of $117,383; and (d) convertible note payable with a related party of $109,474 including accrued interest.  At June 30, 2010, we had a stockholders’ deficit of $6,293,142, a portion of which is due to non-cash share based compensation expense and non-cash charge to interest expense from the beneficial conversion feature of the convertible notes.

Cash used in operating activities was $1,377,803 for the year ended June 30, 2010. Net cash used in investing activities was $20,837.  Net cash provided by financing activities was $1,985,450, of which     $1,015,000 was from senior convertible notes with our Chairman, $678,000 was from a senior convertible note with a major shareholder, $250,000 was from senior convertible notes with third parties, and the proceeds of $42,450 in cash from the exercise of stock options.
   
 During the year ended June 30, 2009, we received (a) $700,000 from the  senior  convertible notes with our Chairman, (b) the $100,000 convertible notes with one of our officers, and (c) $15,250 from the exercise of stock options. 

Contractual Obligations
 
The following table summarizes our long-term contractual obligations as of June 30, 2010:
 
 
 
Total
Less than 1 Year
 
1-3 Years
 
3-5 Years
More than 5 Years
Long-term debt obligations (a)
$6,569,122
   $     -
$ 221,617
$6,347,505
$          -
Operating lease obligations (b)
$14,000
$14,000
$      -
$          -
$          -

(a)  
The principal and accrued interest on the notes payable owed to the Chairman’s Senior Convertible Notes, to third parties' convertible note payable, and to a major shareholder’s senior note payable as fully discussed in note 4 of the accompanying condensed footnotes to the   financial statements.
 
(b)  
We have an operating lease for our laboratory in Gainesville, Florida with an expiration date in 2011.
 
Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangement that have, or are reasonably likely to have, a current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 
 
 
-22-

 
 
ITEM 8.                      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 

 
TABLE OF CONTENTS



Report of Independent Registered Public Accounting Firm                      24                     

Financial Statements:

   Balance Sheets as of June 30, 2010 and 2009                            25

   Statements of Operations for the years ended June 30, 2010 and 2009                   26
 
   Statement of Changes in Stockholders’ Equity for the years ended June 30, 2010                27

   Statements of Cash Flows for the years ended June 30, 2010 and 2009                 28

Notes to Condensed Financial Statements                              29-40

 

 

 

 
-23-

 



 
Report of Independent Registered Public Accounting Firm
 
 
 
 
 
To the Board of Directors and Stockholders Quick-Med Technologies, Inc.
 
 
We have audited the accompanying balance sheets of Quick-Med Technologies, Inc. (the “Company”) as of June 30, 2010 and 2009, and the related statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. The Company’s management is responsible for these financial statements. 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. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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, as well as 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 financial position of Quick-Med Technologies, Inc., as of June 30, 2010 and 2009, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced recurring losses and negative cash flows from operations for the years ended June 30, 2010 and 2009, and has a net capital deficiency. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are described in the footnotes accompanying the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
/s/ Daszkal Bolton LLP
Boca Raton, Florida
September 28, 2010

 
 
 
 
 
 
 
-24-

 
 
 
 
QUICK-MED TECHNOLOGIES, INC.
BALANCE SHEETS
AS OF JUNE 30, 2010 AND 2009

 
 
2010
 
2009
 
         
Current assets:
       
Cash and cash equivalents
$ 628,026   $ 41,216  
Accounts receivable
  336,077     18,562  
Total current assets
  964,103     59,778  
             
Property and equipment, net
  7,004     14,969  
             
Other assets:
           
Prepaid expenses
  9,657     9,706  
Intangible asset, net
  366,282     408,095  
Total other assets
  375,939     417,801  
Total assets
$ 1,347,046   $ 492,548  
             
LIABILITIES AND STOCKHOLDERS' DEFICIT
           
             
Current liabilities:
           
Accounts payable
$ 611,018   $ 562,611  
Unearned revenue
  117,383     51,428  
Accrued expenses
  73,191     233,631  
Convertible note payable - officer
  109,474     102,482  
Total current liabilities
  911,066     950,152  
             
License payable
  160,000     160,000  
Long-term liability - note payable - director
  221,617     -  
Long-term liability - convertible note payable
  255,041     -  
Long-term liability - convertible note payable - related party
  1,074,133     430,315  
Long-term liability - convertible note payable - director
  5,018,331     3,916,290  
Total liabilities
  7,640,188     5,456,757  
             
Commitments and contingencies
           
             
Stockholders' deficit:
           
Common stock, $0.0001 par value; 100,000,000
           
      authorized shares; 31,357,297 and 31,039,707 shares issued and
       
  outstanding at June 30, 2010 and June 30, 2009, respectively
  3,136     3,104  
Additional paid-in capital
  13,576,122     11,927,286  
Outstanding stock options
  3,786,351     3,213,987  
Accumulated deficit
  (23,658,751 )   (20,108,586 )
Total stockholders' deficit
  (6,293,142 )   (4,964,209 )
Total liabilities and stockholders' deficit
$ 1,347,046   $ 492,548  

 

See accompanying notes to financial statements.
 
-25-

 
 

 
QUICK-MED TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2010 AND 2009
 

 
2010
 
2009
 
         
Revenues
       
Product sales
$ 517,027   $ 804,241  
Royalty and license fees
  174,416     7,143  
Research and development service
  302,500     193,350  
    993,943     1,004,734  
             
Expenses:
           
Cost of sales
  23,370     37,212  
Research and development
  1,223,527     1,063,450  
General and administrative expenses
  1,499,866     1,375,068  
Licensing and patent expenses
  261,536     222,139  
Depreciation and amortization
  70,613     71,905  
Total expenses
  3,078,912     2,769,774  
             
Income (loss) from operations
  (2,084,969 )   (1,765,040 )
             
Other income (expense):
           
Interest income
  2,016     2,290  
Interest expense:
           
  Notes payable
  (364,345 )   (259,871 )
  Convertible debt beneficial conversion feature
  (1,102,867 )   -  
             
Loss before income taxes
  (3,550,165 )   (2,022,621 )
             
Provision (benefit) for income taxes
  -     -  
             
Net loss
$ (3,550,165 ) $ (2,022,621 )
             
             
Net loss per share (basic and diluted)
$ (0.11 ) $ (0.07 )
             
Weighted average common
           
  shares outstanding (basic and diluted)
  31,260,738     30,935,633  



  
See accompanying notes to financial statements.
 
-26-

 
 


QUICK-MED TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED JUNE 30, 2010 AND 2009
 

 
Common Stock
 
 Additional Paid-In
 
Accumulated
 
Outstanding
   
 
 Shares
 
 Amount
 
 Capital
 
Deficit
 
 Stock Options
 Total
                       
Balance, June 30, 2008
  30,874,196
 
 $  3,087
 
 $  11,882,403
 
 $      (18,085,965)
 
 $   2,602,344
 
 $   (3,598,131)
                       
Stock-based compensation
                 -
 
            -
 
                    -
 
                         -
 
623,293
 
623,293
Stock issuance for services
        81,099
 
           8
 
           17,992
 
                         -
 
                   -
 
18,000
Exercise of stock options
        54,412
 
           6
 
           15,494
 
                         -
 
           (6,250)
 
9,250
Exercise of stock warrants
        30,000
 
           3
 
           11,397
 
                         -
 
           (5,400)
 
6,000
Net loss, July 1, 2008  to June 30, 2009
                 -
 
            -
 
                    -
 
(2,022,621)
 
                   -
 
     (2,022,621)
                       
Balance, June 30, 2009
  31,039,707
 
 $  3,104
 
 $  11,927,286
 
 $      (20,108,586)
 
 $   3,213,987
 
 $   (4,964,209)
                       
Stock-based compensation
                 -
 
            -
 
                    -
 
                         -
 
608,914
 
608,914
Stock issuance for services
      107,590
 
          11
 
           74,989
 
                         -
 
                   -
 
75,000
Exercise of stock options
      210,000
 
          21
 
           78,979
 
                         -
 
         (36,550)
 
42,450
Debt forgiveness by shareholders
                 -
 
            -
 
         392,001
 
                         -
 
                   -
 
392,001
Convertible debt beneficial conversion feature
                 -
 
            -
 
      1,102,867
 
                         -
 
                   -
 
1,102,867
Net loss, July 1, 2009  to June 30, 2010
                 -
 
            -
 
                    -
 
(3,550,165)
 
                   -
 
     (3,550,165)
                       
Balance, June 30, 2010
  31,357,297
 
 $  3,136
 
 $  13,576,122
 
 $      (23,658,751)
 
 $   3,786,351
 
 $   (6,293,142)




See accompanying notes to financial statements.
 
-27-

 
 


QUICK-MED TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2010 AND 2009
 

 
2010
 
2009
 
Cash flows from operating activities:
       
Net loss
$ (3,550,165 ) $ (2,022,621 )
Adjustments to reconcile net loss to net
           
  cash used in operating activities:
           
Depreciation and amortization
  70,613     71,905  
Stock granted for services
  75,000     18,000  
Stock-based compensation
  608,914     623,293  
Interest expense on convertible debt beneficial conversion
  1,102,867     -  
Issuance of indebteness for services
  272,362     -  
(Increase) decrease in:
           
Accounts receivable
  (317,515 )   328,147  
Prepaid expenses
  50     (4,394 )
Increase (decrease) in:
           
Accounts payable
  48,407     (308,463 )
Accrued interest
  286,509     259,871  
Other current liabilities
  25,155     197,953  
Net cash used in operating activities
  (1,377,803 )   (836,309 )
             
Cash flows from investing activities:
           
Property and equipment
  (758 )   -  
Intangible assets
  (20,079 )   (10,542 )
Net cash used in investing activities
  (20,837 )   (10,542 )
             
Cash flows from financing activities:
           
Proceeds from exercise of stock options
  42,450     15,250  
Increase in notes payable
  250,000     -  
Increase in notes payable - related party
  678,000     -  
Increase in notes payable - officer
  -     100,000  
Increase in notes payable - director
  1,015,000     700,000  
Net cash provided by financing activities
  1,985,450     815,250  
             
Net increase (decrease) in cash and cash equivalents
  586,810     (31,601 )
Cash and cash equivalents at beginning of period
  41,216     72,817  
Cash and cash equivalents at end of period
$ 628,026   $ 41,216  
             
Supplementary Information:
           
             
Cash paid for:
           
Interest
$ -   $ -  
Income taxes
$ -   $ -  
             
Non-cash disclosures of investing and
           
  financing activities:
           
Debt forgiveness by shareholders
$ 392,001   $ -  
Stock-based compensation
$ 683,914   $ 641,293  
Interest expense on beneficial conversion
$ 1,102,867   $ -  

 

See accompanying notes to financial statements.
 
-28-

 
 
 
 
QUICK-MED TECHNOLOGIES, INC.
NOTES TO  FINANCIAL STATEMENTS
 
NOTE 1 - DESCRIPTION OF BUSINESS

Founded in April 1997, Quick-Med Technologies Inc. (the ”Company”) is a life sciences company focused on developing proprietary, broad-based technologies in medical and consumer healthcare markets. The Company’s four core technologies are: (1) Novel Intrinsically Micro-Bonded Utility Substrate (NIMBUS®), a family of advanced polymers bio-engineered to have antimicrobial, hemostatic, and other properties that can be used in a wide range of applications; (2) Stay FreshTM is a unique chemical formulation for textiles with a durable antimicrobial agent effective against an array of bacteria even after numerous laundering cycles; (3) NimbuDermTM is a novel copolymer for application as a persistent hand sanitizer with long lasting protection against germs; and (4) MultiStatTM, a family of advanced patented methods and compounds shown to be effective in skin therapy applications. Currently, NIMBUS technology has been commercialized in an advanced wound care product by our licensee in the institutional  market in late June 2009.  The Company targets NIMBUS technology for additional advanced wound care products, catheters, incontinence products, and other medical devices. MultiStat™ has been developed in a cosmetic product line with the anti-aging products.  Stay Fresh is currently under development with a broad range of potential applications including consumer textile market.  NimbuDerm is also a technology currently being developed.  In each instance, the Company intends to form joint ventures or joint development partnerships with leading firms in the respective industry to co-develop and commercialize its products.

The Company specializes in the research and development of biomedical products and devices for antibacterial applications. The Company conducts research efforts or collaborates with third parties as necessary to develop products and administer the patent process.  The Company does not expect to produce nor directly market its products.  Instead, the Company intends to partner with clients for those activities

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has continuing losses from operations, negative working capital and an accumulated deficit that raises substantial doubt about its ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In May 2009, the Financial Accounting Standards Board (“FASB”) established general accounting standards and disclosure for subsequent events. The Company adopted FASB Accounting Standards Codification (“ASC”) 855, Subsequent Events (formerly referenced as Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events), on June 30, 2009. The Company has evaluated subsequent events through the date and time the financial statements were issued.

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

All highly liquid investments purchased with maturity of three months or less from the time of purchase are considered to be cash equivalents.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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.
 
Intangible Assets

The costs of obtaining license agreements along with the costs to defend the patents underlying the license agreements are capitalized and amortized using the straight-line method over the estimated useful lives of the underlying license agreements.  The costs of obtaining and maintaining new patents are capitalized and amortized using the straight-line method over the estimated useful lives of the patents. The cost of patents in process is not amortized until the patent is issued.

Property and Equipment

Property and equipment are stated at cost.  Depreciation on property and equipment is computed using the straight-line method over the expected useful lives of the assets.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable represents amounts due from its customers and is reported on the balance sheet reduced by an allowance for doubtful accounts for estimated losses resulting from receivables not considered to be collectible.
 
 
 
-29-

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
Research and Development Costs

Research and development costs are expensed as incurred.

Earnings Per Share

Basic net loss per common share is computed by dividing net loss applicable to common shareholders by the weighted-average number of common shares outstanding during the period.  Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. For the periods ended June 30, 2010 and 2009, 14,442,928 and 11,297,510  diluted common stock equivalents, respectively, have been excluded from the calculation of diluted earnings per share, as their inclusion would have been anti-dilutive.

Fair Value Measurements

During the first quarter of fiscal year 2009, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (formerly referenced as SFAS No. 157, Fair Value Measurements),   which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. This new accounting standard does not require any new fair value measurements, but rather eliminates inconsistencies in guidance found in various other accounting pronouncements.

This accounting standard establishes a hierarchy for information and valuations used in measuring fair value, which is broken down into three levels. Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities. Level 2 valuations are based on inputs, other than quoted prices included within Level 1, that are observable, either directly or indirectly. Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.

The Company also adopted FASB ASC 825, Financial Instruments (formerly referenced as SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115), which allows companies to choose to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. The Company has not elected the fair value option for any eligible financial instruments. 
 
Revenue Recognition

The Company’s revenues consist of the following sources: product sales, royalty fees, research and development service and license fees.

Under the master agreement for product development, manufacturing and distribution (the “Master Agreement”) and the new agreement (“Agreement”) with BASF effective August 1, 2007, which supersedes the Master Agreement, the Company shares proportionately on the net sales and related expenses in accordance with the terms of the Agreement.  The Company recognizes revenue of its royalties from the sale of products by BASF when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable.

The Company recognizes royalty fee income based on the net sales of Bioguard® product by our licensee, Derma Sciences Inc. in accordance with the specified terms of the license agreement.

The Company recognizes revenue of its research and development service including the small business innovation research program and the US Army medical research program based on the research work
performed in accordance with the program requirements or statements of work for the joint development agreements.

The Company also recognizes revenue from the non-refundable exclusivity license fee derived from Derma Sciences Inc. on a pro rata basis over the term of the related exclusive license agreement.  Further, the Company recognizes the exclusive option fee as revenue on a pro rata basis over the term of the related exclusive option agreement.

Unearned Revenue

The amount of unearned revenue represents the exclusive option fee, the license fee, and advance royalty fee yet to be earned on a pro rata basis over the exclusive option period of the related option and license agreements.

Stock Compensation

The Company adopted FASB  ASC 718, Compensation - Stock Compensation (formerly referenced as SFAS No. 123R, Share-Based Payment), which requires companies to expense the value of employee stock options and similar awards. Under this standard, share-based payment awards result in a cost that are measured at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest. Compensation cost for awards that vest would not be reversed if the  awards expire without being exercised. The Company adopted this standard beginning in the first quarter of the fiscal year 2006 via application of the modified prospective approach to all outstanding and unvested share-based payment awards at the adoption date. The fair value of stock options was determined using the Black-Scholes option-pricing model. The fair value of the restricted stock awards was based on the closing price of the Company's common stock on the date of grant.
 
 
 
-30-

 
 
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Concentration of credit risk of financial instruments

Financial instruments that potentially subject the Company to credit risk consist of cash equivalents and accounts receivable.  As of June 30, 2010, the Company’s cash levels did exceed the federally
insured limit by approximately $410,000. As of June 30, 2010, most of the Company’s accounts receivable was derived from two customers.

The credit risk of the accounts receivable is considered limited given the customers’ credit rating. There were no write-offs of uncollectible receivables during the year ended June 30, 2010.

Income Taxes

The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

The Company accounts for income taxes under the provisions of FASB Accounting Standards Codification (“ASC”) 740, Income Taxes (formerly referenced as FASB Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an   interpretation of FASB Statement No. 109), which changed the framework for accounting for uncertainty in income taxes. The adoption of this standard does not have an impact on the Company's results of operations or financial position.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued an amendment to accounting standards addressing fair value measurements and disclosures which requires reporting entities to make new disclosures about recurring and nonrecurring fair-value measurements, including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The revised accounting standard also clarifies existing fair-value measurement disclosure guidance about the level of disaggregation, inputs and valuation techniques. The adoption of this new standard in 2010 did not impact the Company's financial position or results of operations as it is disclosure-only in nature.

In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of the federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the Codification in the third quarter of 2009, and the adoption did not have any impact on its results of operations or financial position.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following at June 30, 2010 and 2009:

 
 
2010
 
2009
 
         
Computer equipment
$ 26,675   $ 25,917  
Equipment
  32,403     32,403  
Less: accumulated depreciation
  (52,074 )   (43,351 )
Net property and equipment
$ 7,004   $ 14,969  

Depreciation expense for the years ended June 30, 2010 and 2009 was $8,723 and $10,014, respectively.
 
 
NOTE 4 – INTANGIBLE ASSETS

License Agreement

The Company has a license agreement with two inventors (“Licensors”) for the worldwide rights to the MMP inhibitors and uses thereof.  The license agreement transfers to the Company the technology that is the subject of issued patents as well as pending patent applications, which were filed by the original inventors. The licenses are amortized on a straight-line basis over the estimated useful lives of the underlying patents or the license agreement. The U.S. patents expire beginning November 2007 through December 2019 and the international patents expire beginning on November 21, 2011 through December 8, 2019.  Accumulated amortization for the years ended June 30, 2010 and 2009 was $481,029 and $419,139, respectively.

The Company assesses whether its intangible assets are impaired as required by FASB ASC 360 Property, Plant and Equipment (formerly referenced as SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” based on an evaluation of undiscounted projected cash flows through the remaining useful lives. If impairment exists, the amount of such impairment is calculated as the estimated fair value of the assets.
 
 
 
-31-

 

NOTE 4 – INTANGIBLE ASSETS, continued
 
Under the terms of the license agreement, the Company paid $200,000 and granted 160,000 shares of common stock valued at $0.05 per share and granted 160,000 stock options.  The stock options are valued at the estimated minimum value in accordance with FASB  ASC 718, Compensation - Stock Compensation (formerly referenced as SFAS No. 123R, Share-Based Payment,) of $8,000.   In order to maintain the Company’s exclusive rights to the licenses, the agreements require total payments of $260,000 if certain milestones regarding the proof-of-concept and development of a prototype are reached.

If a milestone on the “Civilian Chemical Burn” and “Other topical Medical Uses” categories is not met by the third anniversary of the agreement, the licenses granted within these categories become nonexclusive. The Company elected not to pay each inventor $25,000 per year until all such milestones are met.  At June 30, 2010 and 2009, the balance due under the license agreement is $160,000.

As additional compensation to the Licensors, the Company will pay a royalty based on the Company’s net sales of licensed products.  The royalty rate is 2% on the first $1,500,000 of applicable quarterly revenue and 1.5% of sales above $1,500,000 on applications of products other than applications for military and
cosmetic products.  For each sublicense granted by the Company, the Licensors will be paid 3% of the up-front licensing fee, limited to $100,000.

In November 2002, the Company and the University of Florida Research Foundation (the “University”) entered into an agreement whereby the University gave the Company exclusive sub-license rights to the use of its patents and patent applications from the effective date of the agreement until the earlier of the date that no licensed patents remain enforceable patents or the payment of earned royalties ceases more than three calendar quarters.  The royalty rate is 3% of the first $10 million of cumulative realized revenues and 1.8% of all subsequent realized revenues.

In June 2007, the Company and the Regents of the University of Michigan (“Michigan”) entered into an agreement whereby Michigan gave the Company worldwide exclusive rights including sub-license rights to the use of its patents and patent applications of the uses of MMP inhibitors from the effective date of the agreement until the earlier of the date that no licensed patents remain enforceable patents or the default event.  In addition to the initial license fee of $80,000, the Company will pay a 4% royalty rate of the net sales, 20% of the sublicense income, the annual fee of $50,000 for 2008 and 2009, $75,000 for 2010 and $100,000 in 2011 and in each year thereafter during the term of the agreement.

During the fiscal year 2006, the Company was issued both US and international patents for its NIMBUS technology on “Intrinsically Bactericidal Absorbent Dressing And Method Of Fabrication”.  These patents expire on December 8, 2019.  The total capitalized costs for this issued patent were $35,470 and are being amortized over the life of the patents.

During the fiscal years 2010 and 2009, the Company filed a number of US and international patent applications for its NIMBUS,  Stay FreshTM , and NimbuDermTM  technologies and applied for certain trademarks. As of June 30, 2010 and 2009, the total capitalized costs for the patent applications and trademarks were $199,188 and $168,572, respectively.
 

 
June 30, 2010
 
June 30, 2009
 
 
Gross
 
Accumulated
 
Gross
   
Accumulated
 
 
Amount
 
Amortization
 
Amount
   
Amortization
 
Amortized Intangible Assets
                 
                   
License agreement
$ 648,123   $ (481,029 ) $ 648,123     $ (419,139 )
Patents in process
  199,188     -     168,572       -  
Total
$ 847,311   $ (481,029 ) $ 816,695     $ (419,139 )

Amortization of patents in process commences when the patents are issued.

 
 
June 30, 2010
 
June 30, 2009
   
 
Gross
 
Accumulated
 
Gross
 
Accumulated
 
 
Amount
 
Amortization
 
Amount
 
Amortization
 
Aggregate Amortization Expense
               
 
               
For the years ended
$ 61,890   $ 481,029   $ 61,890   $ 419,139  
                         
Estimated Amortization Expense
Amount
                   
                         
For the year ended June 30, 2011
$ 61,890                    
For the year ended June 30, 2012
$ 61,890                    
For the year ended June 30, 2013
$ 43,314                    
For the year ended June 30, 2015
$ -                    
For the year ended June 30, 2016
$ -                    


 
-32-

 

NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT)

Fiscal 2010

In July 2009, the Company issued 145,000 shares of common stock for an aggregate exercise price of $24,650 or $0.17 per share resulting from the exercise of stock options.

During the period from July to November 2009, the Company issued a total of 7,590 shares of restricted common stock for payment of consulting services.  The amount charged to operations was $5,000, the value of the shares on the dates issued.
 
In December 2009, the Company issued 50,000 shares of common stock for an aggregate exercise price of $10,000 or $0.20 per share resulting from the exercise of stock options.

In January 2010, the Company issued 5,000 shares of common stock for an aggregate exercise price of $1,000 or $0.20 per share resulting from the exercise of stock options.

In February 2010, the Company issued 100,000 shares of restricted common stock for payment of services.  The amount charged to operations was $75,000, the value of the shares on the date issued.

In February 2010, the Company issued 10,000 shares of common stock for an aggregate exercise price of $6,800 or $0.68 per share resulting from the exercise of stock options.

Fiscal 2009

In October 2008, the Company issued 60,000 shares of restricted common stock for payment of consulting services.  The amount charged to operations was $12,000, the value of the shares on the date issued.

During the period from January to March 2009, the Company issued a total of 14,732 shares of restricted common stock for payment of consulting services.  The amount charged to operations was $3,000, the value of the shares on the dates issued.

In March 2009, the Company issued 29,412 shares of common stock for an aggregate exercise price of $5,000 or $0.17 per share resulting from the exercise of stock options.

In April 2009, the Company issued 30,000 shares of common stock for an aggregate exercise price of $6,000 or $0.20 per share resulting from the exercise of a warrant.

During the period from April to June 2009, the Company issued a total of 6,367 shares of restricted common stock for payment of consulting services.  The amount charged to operations was $3,000, the value of the shares on the dates issued.

In June 2009, the Company issued 25,000 shares of common stock for an aggregate exercise price of $6,000 or $0.20 per share resulting from the exercise of stock options.

NOTE 6 - COMMITMENTS

The Company leases a laboratory facility in Gainesville, Florida. The lease expires in February 1, 2011. Rent expense for the years ended June 30, 2010 and 2009 was approximately $25,680 and $25,560, respectively.

The following is a schedule of minimum future payments on the operating lease as of June 30, 2010:

 
For The Years Ending June 30,
 
     
2011
  14,000  
Thereafter
  -  
Total
$ 14,000  
       
 
 
 
 
 
-33-

 

 
NOTE 7 – STOCK OPTIONS AND WARRANTS

The Company adopted a qualified equity incentive plan (the “Plan”) on March 4, 2001. Under the Plan the Company is authorized to grant up to 3,000,000 shares of common stock. On December 13, 2004, the shareholders approved the Plan and ratified the amendment to increase the total number of shares to be granted under the Plan from 3,000,000 to 4,000,000 effective November 1, 2004.  On November 13, 2007
the shareholders ratified the amendment to increase the total number of shares to be granted under the Plan from 4,000,000 to 6,000,000.

On November 17, 2009, the Board of Directors (the "Board') granted 681,785 stock options to the board members, employees, consultants as payments for their services and in recognition of individual performance for the year ended June 30, 2009. In addition, the Board granted 248,564 warrants payments to consultants for payments of their services and incentive performance awards.  Of 681,785 stock options grant, approximately 115,428 were awarded to the board members for their services and were vested on the date of grant. Of 248,564 warrants issued, 99,977 warrants were vested immediately on the grant date. The remainder 566,357 stock options and 148,587 warrants were vested one-third immediately, one-third will be vested on November 17, 2010 and the remaining one-third will be vested on November 17, 2011, assuming the person receiving the equity awards is employed or being utilized by the Company at the time of vesting.   The exercise price of those stock options and warrants is $0.77 per share.  The weighted average grant date fair value of options and warrants was $0.48 per share based on the Black-Scholes option-pricing model.  The options and warrants expire five years from the date of grant.  On March 31, 2010, approximately 23,631 options were forfeited.

On October 27, 2008, the Board of Directors (the “Board”) granted 1,335,102 stock options to the board members, employees, consultants as payments for their services and in recognition of individual performance for the year ended June 30, 2008. In addition, the Board granted 705,302 warrants payments to consultants for payments of their services and incentive performance awards.  Further, 60,000 shares of restricted common stock were issued to a consultant as payment for services.  Of
1,335,102 stock options grant, approximately 464,102 were awarded to the board members for their services and were vested on the date of grant. Of 705,302 warrants issued, 240,302 warrants were vested immediately on the grant date. The remainder 871,000 stock options and 465,000 warrants were vested one-third immediately, one-third were vested on October 27, 2009 and the remaining one-third will be vested on October 27, 2010, assuming the person receiving the equity awards is employed or being utilized by the Company at the time of vesting.  The exercise price of those stock options and warrants is $0.20 per share, which was the closing price of the common stock on the date of grant.  The weighted average grant date fair value of options and warrants was $0.19 per share based on the Black-Scholes option-pricing model.  The options and warrants expire five years from the date of grant.

On April 18, 2008, the Board of Directors (the “Board”) granted 148,571 shares of restricted common stock as payment for the services rendered by the board members for the year ended June 30, 2007 for those elected to receive common stocks and all shares were immediately vested.  In addition, the Board granted 1,074,666 stock options to the board members, employees, consultants as payments for their services and in recognition of individual performance for the year ended June 30, 2007.  The stock options were vested one-third immediately, one-third was vested on April 17, 2009 and the remaining one-third was vested on April 17, 2010, assuming the person receiving the equity awards is employed by the Company at the time of vesting.  The exercise price of those stock options is $0.42 per share, which was the closing price of the common stock on the date of grant.  The weighted average grant date fair value of options was $0.32 per share based on the Black-Scholes option-pricing model.  The options and warrants expire five years from the date of grant.

On August 6, 2007, the Board of Directors (the “Board”) granted 484,056 non-qualified stock options to the Chief Executive Officer (“CEO”) at an exercise price of $0.75 per share. These options were fully vested and immediately exercisable at the date of grant.  In addition, the Board granted 1,452,167 non-qualified stock options at an exercise price of $0.74 per share on September 25, 2007, as part of the CEO’s employment agreement. The second stock options are vested and become exercisable 1/16th of the total 1,452,167 options on each three-month anniversary beginning on June 11, 2007.  The average grant date fair value of the options was $0.46 per share based on the Black-Scholes option-pricing model.  These options expire five years from the date of grant.

On December 20, 2006, the Company issued 790,770 stock options to board members, management, employees, and consultants for their services.  These options have an exercise price of $1.05 per share. The stock options were vested one-third immediately, one-third was vested on December 20, 2007 and the remaining one-third was vested on December 20, 2008, assuming the person receiving the equity awards is employed by the Company at the time of vesting.  The weighted average grant date fair value of options was $0.69 per share based on the Black-Scholes option-pricing model.  The options expire five years from the date of grant.

On September 9, 2005, the Board granted 130,000 shares of restricted common stock as payment for the services rendered by the board members for the year ended June 30, 2005, and all shares were immediately vested.  In addition, the Board granted 710,000 stock options and 175,000 warrants to the employees and directors and consultants, respectively, in recognition of individual performance for the year ended June 30, 2005.  The stock options and warrants were vested one-third immediately, one-third was vested on July 1, 2006 and the remaining one-third was vested on July 1, 2007.  The exercise price of those stock options and warrants is $0.80 per share, which was the closing price of the common stock on the date of grant.  The weighted average grant date fair value of options was $0.72 per share based on the Black-Scholes option-pricing model.  The options and warrants expire five years from the date of grant.

During the period ended June 30, 2010, 145,000 options were exercised at $0.17 per share or an aggregate price of approximately $24,650 under the July 2004 stock options agreement.  In addition, 55,000 options were exercised at $0.20 per share or an aggregate price of approximately $11,000 under the October 27, 2008 stock options agreement, and 10,000 options were exercised at $0.68 per share or an aggregate price of $6,800.

During the year ended June 30, 2009, 54,412 stock options were exercised for the aggregate price of approximately $9,250 or $0.17 per share under the July stock options agreement.  In addition, 30,000 warrants were exercised for approximately $6,000 or $0.20 per share.

The weighted average grant date fair value of options and warrants granted during the fiscal years ended June 30, 2010 and 2009 were estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions noted in the following table. Expected volatilities are based on historical volatility of common stock.  The expected term of the options and warrants represents the period of time that options and warrants granted are expected to be outstanding and is derived from historical terms.

 
 
June 30,
 
 
2010
 
2009
 
Risk free interest rate
3 %   3 %
Expected life (years)
5     5  
Expected volatility
91 %
50% to 161%
 
Expected dividends
None
 
None
 

 
-34-

 


 
NOTE 7 – STOCK OPTIONS AND WARRANTS, continued

A summary of options for the years ended June 30, 2010 and 2009 is shown below:

 
 
June 30, 2010
 
June 30, 2009
 
 
Number
 
Weighted-Average
 
Number
 
Weighted-Average
 
 
of Shares
 
Exercise Price
 
of Shares
 
Exercise Price
 
                 
Outstanding at beginning of period
4,966,116   $ 0.53   5,683,544   $ 0.61  
Granted
681,785     0.77   1,335,102     0.20  
Exercised
(210,000 )   0.20   (54,412 )   0.17  
Forfeited
(38,631 )   0.88   (1,126,618 )   0.51  
Expired
(10,000 )   0.17   (871,500 )   0.55  
Outstanding at end of period
5,389,270   $ 0.55   4,966,116   $ 0.53  
Exercisable at end of period
4,429,337         3,103,079        
Available for issuance at end of period
121,318         754,472        

The following is a summary of warrants granted, exercised, canceled and outstanding involving the grants in the years ended June 30, 2010 and 2009:
 

 
June 30, 2010
 
June 30, 2009
 
 
Number
 
Weighted-Average
 
Number
 
Weighted-Average
 
 
of Shares
 
Exercise Price
 
of Shares
 
Exercise Price
 
                 
Outstanding at beginning of period
980,239   $ 0.31   744,937   $ 0.48  
Granted
248,564     0.77   705,302     0.20  
Exercised
-     -   (30,000 )   0.20  
Expired
-     -   (440,000 )   0.20  
Outstanding at end of period
1,228,803   $ 0.40   980,239   $ 0.31  
Exercisable at end of period
1,109,034         773,572        

[NOTE 8 - INCOME TAXES

For federal income tax purposes, the Company elected to capitalize start-up costs incurred during 1999 and 2000 totaling $357,989.  The start-up costs are being amortized over sixty (60) months beginning in 2001.  An analysis of the components of the (loss) before income taxes and the related income tax (benefit) is presented in the following tables.  The tax amounts have been calculated using the 34% federal and 5.5% state income tax rates.

The (provision) benefit for income taxes consists of the following:
 

 
2010
 
2009
 
Current
$ -   $ -  
Deferred
  -     -  
 
$ -   $ -  

 
-35-

 
 

NOTE 8 - INCOME TAXES, continued

Deferred tax assets for June 30, 2010 and 2009 consist of the following:
 

 
2010
 
2009
 
Deferred tax asset:
       
Depreciation and amortization
$ 7,986   $ 7,986  
Stock based compensation
  3,115,411     2,858,054  
Net operating loss carry forward
  4,866,996     4,351,067  
Interest accrual
  11,044     11,044  
Research tax credit
  7,203     7,203  
Less:  valuation allowance
  (8,008,640 )   (7,235,354 )
Deferred tax asset
$ -   $ -  
 
 
A reconciliation of income tax at the statutory rate to the Company’s effective tax rates for the periods ended June 30, 2010 and 2009 is as follows:

 
 
2010
 
2009
 
         
Federal income tax at statutory rate of 34%
$ (698,690 ) $ (687,691 )
State tax, net of federal benefit
  (74,596 )   (73,364 )
Other
  -     539  
Valuation allowance
  773,286     760,516  
 
$ -   $ -  
 
As of June 30, 2010, the Company had a net operating loss carry forward of approximately $12,933,819 which will begin to expire in 2017.


NOTE 9 – NOTES PAYABLE

Short-Term Note

 
   
Interest
   
Conversion
 
June
 
June
 
Officer
Maturity
Rate
   
Price
    30, 2010     30, 2009  
2008 Convertible Notes
2010
8 %   $ 0.20   $ 100,000   $ 100,000  
Accrued interest
                9,474     2,482  
   Total
              $ 109,474   $ 102,482  
 
 
 
Long-Term Note


 
   
Interest
   
Conversion
 
June
 
June
 
Related Party
Maturity
Rate
   
Price
    30, 2010     30, 2009  
Senior Convertible Note
2013
8 %   $ 0.60   $ 1,053,000   $ 375,000  
Accrued interest
                21,133     55,315  
   Total
              $ 1,074,133   $ 430,315  
                           
Others
                         
Senior Convertible Notes
2014
8 %   $ 1.00     250,000     -  
Accrued interest
                5,041     -  
   Total
              $ 255,041   $ -  

On March 31, 2010, the Company issued a senior convertible promissory note to a major shareholder for the principal amount of $1,053,000, which consisted of $600,164 in cash, $375,000 principal balance of a prior senior convertible note together with unpaid accrued interest thereon of $77,836.  This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2009 Note 3 to the Chairman and the senior convertible notes totaling $250,000 as described below.  This note has an annual interest rate of 8%, and matures on December 31, 2013.  This note has the conversion price of $0.60 per share of common stock.  The Company has recorded approximately $859,950 as an interest expense as a result of the beneficial conversion feature.

On March 31, 2010, the Company issued two senior convertible promissory notes totaling $250,000 to third parties.  These senior convertible notes are secured by the Company’s revenues and assets with the same priority as the 2009 Note 3 to the Chairman and the senior convertible note to a major shareholder. These notes have an annual interest rate of 8% with a maturity date of June 30, 2014.  These notes have the convertible price of $1.00 per share of common stock.  The Company has recorded approximately $22,500 as an interest expense as a result of the beneficial conversion feature.
 
 
 
-36-

 
 
NOTE 9  – NOTES PAYABLE, continued
 

   
Interest
   
Conversion
                        June
 
Maturity
Rate
   
Price
    30, 2010     30, 2009  
Director
                       
Note Payable
                       
  Note Payable
2011
8 %     N/A   $ 215,000     -  
  Accrued interest
                6,617     -  
   Total
              $ 221,617   $ -  
                           
Convertible Notes
                         
2003 Senior Convertible Note
2013
6 %   $ 0.38   $ 1,268,625   $ 1,268,625  
Senior Convertible Note
2013
8 %   $ 0.74     208,955     208,955  
2007 Senior Convertible Note
2013
8 %   $ 0.74     375,000     375,000  
2007 Senior Convertible Note 2
2013
8 %   $ 0.55     50,000     50,000  
2007 Senior Convertible Note 2
2013
8 %   $ 0.51     50,000     50,000  
2007 Senior Convertible Note 2
2013
8 %   $ 0.40     50,000     50,000  
2007 Senior Convertible Note 2
2013
8 %   $ 0.40     50,000     50,000  
2007 Senior Convertible Note 2
2013
8 %   $ 0.34     50,000     50,000  
2007 Senior Convertible Note 2
2013
8 %   $ 0.32     50,000     50,000  
2008 Senior Convertible Note 1
2013
8 %   $ 0.32     50,000     50,000  
2008 Senior Convertible Note 1
2013
8 %   $ 0.45     70,000     70,000  
2008 Senior Convertible Note 1
2013
8 %   $ 0.40     75,000     75,000  
2008 Senior Convertible Note 1
2013
8 %   $ 0.33     50,000     50,000  
2008 Senior Convertible Note 1
2013
8 %   $ 0.42     75,000     75,000  
2008 Senior Convertible Note 1
2013
8 %   $ 0.40     50,000     50,000  
2008 Senior Convertible Note 2
2013
8 %   $ 0.29     50,000     50,000  
2008 Senior Convertible Note 2
2013
8 %   $ 0.20     50,000     50,000  
2008 Senior Convertible Note 2
2013
8 %   $ 0.38     50,000     50,000  
2008 Senior Convertible Note 2
2013
8 %   $ 0.35     135,000     135,000  
2008 Senior Convertible Note 2
2013
8 %   $ 0.25     100,000     100,000  
2008 Senior Convertible Note 2
2013
8 %   $ 0.35     50,000     50,000  
2008 Senior Convertible Note 2
2013
8 %   $ 0.25     50,000     50,000  
2008 Senior Convertible Note 3
2013
8 %   $ 0.36     50,000     50,000  
2008 Senior Convertible Note 3
2013
8 %   $ 0.19     50,000     50,000  
2008 Senior Convertible Note 3
2013
8 %   $ 0.31     50,000     50,000  
2009 Senior Convertible Note 1
2013
8 %   $ 0.18     35,000     35,000  
2009 Senior Convertible Note 1
2013
8 %   $ 0.37     35,000     35,000  
2009 Senior Convertible Note 1
2013
8 %   $ 0.43     35,000     35,000  
2009 Senior Convertible Note 1
2013
8 %   $ 0.43     35,000     35,000  
2009 Senior Convertible Note 1
2013
8 %   $ 0.45     35,000     35,000  
2009 Senior Convertible Note 2
2013
8 %   $ 0.48     35,000     35,000  
2009 Senior Convertible Note 2
2013
8 %   $ 0.47     35,000     35,000  
2009 Senior Convertible Note 2
2013
8 %   $ 0.42     35,000     35,000  
2009 Senior Convertible Note 2
2013
8 %   $ 0.53     35,000     35,000  
2009 Senior Convertible Note 2
2013
8 %   $ 0.58     35,000     35,000  
2009 Senior Convertible Note 2
2013
8 %   $ 0.52     35,000     -  
2009 Senior Convertible Note 2
2013
8 %   $ 0.46     35,000     -  
2009 Senior Convertible Note 2
2013
8 %   $ 0.55     35,000     -  
2009 Senior Convertible Note 2
2013
8 %   $ 0.63     50,000     -  
2009 Senior Convertible Note 2
2013
8 %   $ 0.60     45,000     -  
2009 Senior Convertible Note 3
2013
8 %   $ 0.60     600,000     -  
Accrued interest
                710,751     408,710  
   Total
              $ 5,018,331   $ 3,916,290  
                           
   Total long term note payable
            $ 6,569,122   $ 4,346,605  
                           
Total debt
              $ 6,678,596   $ 4,449,087  
 
 
 
-37-

 
 
NOTE 9 – NOTES PAYABLE, continued

Effective March 15, 2010, the Company issued a $215,000 promissory note payable to its Chairman.  The Company received the borrowings (the "Advances") in a series of $50,000 on January 29, February 12 and March 15, 2010, $34,000 on January 13, 2010, $11,000 on January 14, 2010, and $20,000 on February 26, 2010 totaling $215,000. This note is secured by the Company’s revenues and assets.  In addition, the note has a 8% interest rate per annum and has a maturity date of March 12, 2011, which was extended to July 1, 2011.

In November 2009, the Company finalized and issued a $600,000 2009 senior convertible note payable (“2009 Note 3”) to its Chairman.  The Company received the borrowings (the "Advances") in a series of $45,000 on September 8, 2009, $25,000 on September 11, 2009, $125,000 on September 23, 2009, $100,000 on October 14, 2009, $50,000 on October 28, 2009, $175,000 on November 12, 2009,   $50,000 on December 14, 2009, and $30,000 on February 26, 2010 totaling $600,000.   This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2009 and 2008 senior convertible notes described below with a 8% annual interest rate and has a maturity date of December 31, 2013.  This note has the conversion price of $0.60 per share of common stock.  The Company has recorded approximately $215,500 as an interest expense to date for the Advances received as a result of the beneficial conversion feature.  As part of the terms of this note, the maturity dates of all other outstanding senior convertible notes owed to its Chairman are extended to December 31, 2013.

Effective May 12, 2009, the Company issued a 2009 senior convertible note payable (“2009 Note 2”) to its Chairman to combine the borrowings (the “Advances”) in a series of $35,000 each from May 12, 2009 through August 12, 2009, $50,000 and $45,000 on August 14 and 27, 2009, respectively totaling $375,000.  As of June 30, 2009, the Company received $175,000.  This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2009 and 2008 senior convertible notes described below and has a maturity date of December 31, 2013.  This note has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.

Effective February 26, 2009, the Company issued a 2009 senior convertible note payable (“2009 Note 1”) to its Chairman to combine the borrowings (the “Advances”) in a series of $35,000 each from February 26, 2009 through April 30, 2009 totaling $175,000.  This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2008 senior convertible notes described below and has a maturity date of December 31, 2013.  This note has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.

Effective November 1, 2008, the Company issued four convertible note payables totaling $100,000 to an officer as part of the terms of the employment contract. These notes have the same conversion price of$0.20, which was the closing trading price of the Company’s common stock on the effective date of the notes.  These notes have the same maturity date of December 31, 2013.

Effective September 15, 2008, the Company issued a 2008 senior convertible note payable (“Note 3”) to its Chairman to combine the borrowings (the “Advances”) in a series of $50,000 each from September 15, 2008 through October 15, 2008 totaling $150,000. This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2007 senior convertible notes described below and has a maturity date of December 31, 2013.  This note has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.

Effective May 17, 2008, the Company issued a 2008 senior convertible note payable (“Note 2”) to its Chairman to combine the borrowings (the “Advances”) ranging from $50,000 to $135,000 each from May 17, 2008 through August 28, 2008 totaling $485,000.  This Note 2 is secured by the Company’s revenues and assets with the same priority as the 2007 senior convertible notes described below and has a maturity date of December 31, 2013.  This Note 2 has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.

Effective February 11, 2008, the Company issued a 2008 senior convertible note payable (“Note 1”) to its Chairman to combine the borrowings (the “Advances”) ranging from $50,000 to $75,000 each from February 11, 2008 through April 29, 2008 totaling $370,000.  This Note 1 is secured by the Company’s revenues and assets with the same priority as the 2007 senior convertible notes described below and has a maturity date of December 31, 2013.  This Note 1 has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.

Effective October 30, 2007, the Company issued another 2007 senior convertible note payable to its Chairman to combine the borrowings (the “Advances”) in a series of $50,000 each from October 30, 2007 through January 30, 2008 totaling $300,000.  This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2007 senior convertible notes described below and has a maturity date of December 31, 2013.  This note has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.

In June 2007, the Company issued two other 2007 senior convertible note payables to its Chairman and a major stockholder for $375,000 each.  These two senior convertible note payables are secured by the Company’s revenues and assets.  The Company may prepay the principal and interest upon meeting certain cash flow requirements and the approval of the board.  As described above, on March 31, 2010, the $375,000 senior convertible note to a major shareholder together with the unpaid accrued interest thereon was combined as part of the new senior convertible note of $1,053,000 principal balance and new terms including a new maturity date of December 31, 2013.

In addition, the Company combined its other outstanding note payables to its Chairman totaling $208,955 into a single note with the same annual interest rate and extended the maturity date to 2010.  This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2007 senior convertible notes.  Further, the 2003 senior convertible note maturity date was extended until July 13, 2010.  The maturity date is further extended to December 31, 2013.

In September 2003, the Company negotiated a successor agreement with its Chairman regarding the line of credit, which became a single convertible note for up to $1,500,000 excluding accrued interest, at an interest rate of 6% and due July 1, 2004.  The convertible note is secured by the assets and revenues of the Company, which has the same priority as other senior convertible note payables.   The note plus accrued interest will be convertible at a conversion rate of $0.38 per share.  The conversion rate was determined as 15% above the average share price over the prior 20 trading days ($0.33 per share). The note has an anti-dilution provision in the event that the Company sells stock to other investors at less than $0.20 per share.  During the year ended June 30, 2006, the maturity date of the note was extended until October 1, 2007. In January 2007, the Chairman agreed to extend the maturity date of the note until April 1, 2008.  In June 2007, the maturity date of this note was extended to July 2010. The maturity date is further extended to December 31, 2013.

At June 30, 2010, the Company accrued interests of $710,751 and $6,617, $21,133, $9,474, 5,041 and $6,869 on the convertible notes and the note payable with the director, the convertible note with a related party, the convertible note with the officer, the convertible notes with third parties, and the convertible notes to the officers, respectively.
 
 
 
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NOTE 10  – FAIR VALUE MEASUREMENTS

As discussed in Note 2, “Summary of Significant Accounting Policies,” the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (formerly referenced as SFAS No. 157, Fair Value Measurements), for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. FASB ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  FASB ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and credit risk.

FASB ASC 820 also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement. FASB ASC 820 establishes and prioritizes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of  June 30, 2010:

 
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Financial Assets
               
   Cash equivalents (1)
$ 632,887   $ 632,887   -     -  
      Total financial assets
$ 632,887   $ 632,887   -     -  
                       
                       
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Financial Liabilities
                     
   Convertible notes payable (2)
$ 6,569,122     -   -   $ 6,285,289  
      Total financial liabilities
$ 6,569,122     -   -   $ 6,285,289  

(1) Cash Equivalents
 
        The Company's cash equivalents include short-term investments, which are money market funds. Since these are short-term highly liquid investments with original maturities of three months or less at the date of purchase, they present negligible risk of changes in value due to changes in interest rates. These short-term investments are recorded at fair value on the Company's balance sheet based on quoted market prices and observable market inputs.
 
 (2) Convertible Notes Payable
 
         As fully described in Note 9, the Company’s convertible notes payable are long-term debts with fixed interest rates and the conversion rates at market at the time the funds were received.  In addition, most of these notes are collateralized by the Company’s assets and revenues.  Further, the debt holders are major shareholders and an officer. The Company is in a start up phase. The Company estimates the fair value of the convertible notes for disclosure purposes by discounting the future cash flows using rates of debts that management believes are similar in terms and maturity.  The Company's short-term convertible note payable is approximate market value.
 
 
 
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NOTE 11  – RELATED PARTY TRANSACTIONS

As fully described in Note 9, the Company has several senior convertible note payables with its Chairman and a major stockholder during the periods ended June 30, 2010 and 2009.  In June 2010, the Company recorded approximately $392,001 in additional paid-in capital reflecting waivers by the officers of their unpaid salaries and fee during the period from January 1, 2009 through June 30, 2010.

NOTE 12  – SUBSEQUENT EVENTS

In July 2010, the Company entered into an exclusive Patent and Technology license agreement (the "Agreement") as stipulated in the binding term sheet in March 2010 with an India corporation.  Under the Agreement, the Company grants rights under its proprietary NIMBUS antimicrobial technology to the licensee to manufacture, market and sell certain wound treatment products in the institutional market in the Republic of India.  The Company will receive royalty payments on the product sales at an agreed royalty rate in addition to certain payment received.  The term of the Agreement is for a four year period with certain automatic extension.

In August 2010, the Company entered into a Development and Option Agreement (the “Agreement”). The Agreement remains in effect until December 31, 2010 or until superseded by the earlier of a license agreement or another product development agreement.  Under the Agreement, the Company will use commercially reasonable efforts to develop certain wound care products incorporating its proprietary NIMBUS antimicrobial technology to be manufactured by or for the licensee.  The parties agree to perform in accordance with the terms as set forth in the statement of work including the initial and subsequent monthly development fees paid or to be paid to the Company.

In September 2010, the Company filed a civil complaint in the United States District Court for the Northern District of Florida  against several companies for infringement of certain of the Company's patents.
 

 


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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE