XOTC:QMDT Quick-Med Technologies Inc Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012
   
[    ]
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  September 11, 2012, was approximately $1,529,297.
 
        The number of shares outstanding of the issuer's common equity as of  September 11, 2012 was 37,346,154.
 
Documents Incorporated by Reference
 
None

 
 

 


 
 
QUICK-MED TECHNOLOGIES, INC.

 ANNUAL REPORT
ON FORM 10-K
For the Year Ended June 30, 2012

 INDEX

 
PART I

Item 1.
1
Item 1A.
16
Item 2.
 18
Item 3.
18
Item 4.
18

PART II


PART III


PART IV


 
 



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.
 

Overview

Quick-Med Technologies Inc. ("we," "Quick-Med," or the ”Company”) is a life sciences company focused on developing proprietary, broad-based technologies in medical and consumer healthcare markets. Quick-Med’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) NimbuDerm® is a novel copolymer for application as a persistent hand sanitizer with long lasting protection against germs; and (4) MultiStat®, a family of advanced patented methods and compounds shown to be effective in skin therapy applications.

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 its 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'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 name  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 and completed our work in June 2010.

In July 2012, we and Derma Sciences, Inc. ("Derma") entered into a Patent and Technology License Agreement (the "Agreement") to license our proprietary NIMBUS  intellectual property exclusively on a worldwide basis other than India.  The Agreement supersedes a Patent and Technology License Agreement, as amended, dated March 23, 2007 to Derma on an exclusive basis within the United States and Canada.   Under the Agreement, we grant Derma certain rights under our proprietary NIMBUS intellectual property basis to make, use, sell and offer for sale the traditional wound care products, as defined, to the institutional market and the veterinary and dental institutional market, as defined.

In consideration for the execution of the Agreement, Derma paid $1.3 million to us shortly after signing and future payments based on the sales of the licensed products reaching certain milestones.  In addition, the royalty rate on the licensed products will be a sliding scale starting at 8.5% and declining as the sales volume increases as stipulated in the Agreement.  Further, Derma agreed to commercialize products utilizing our intellectual property in certain geographic regions within certain time periods measured from the effective date in order to maintain the exclusivity of the intellectual property rights granted in these regions under the Agreement.  The Agreement shall continue to be in effect until the expiration of the last to expire of the Company's proprietary intellectual property.  The Company may revoke the exclusive nature of the license or terminate this agreement early if Derma fails to reach certain revenue milestones.  Derma may terminate this agreement at any time upon 60 days notice.

 
-1-

 
In October 2011, we entered into a Patent and Technology License Agreement with Biosara Corporation. Under the Agreement, we grant Biosara an exclusive license to our NIMBUS technology for use on 100% rayon sponge gauze for the institutional market in the United States and Canada. Biosara is required to achieve certain agreed minimum royalty fees in order to maintain the exclusivity provisions of the license.

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 our 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. Viridis has obtained all the appropriate production equipment and has produced and packaged NIMBUS treated gauze dressings that satisfy efficacy requirements.  Viridis plans to roll out the NIMBUS treated gauze dressings in late fourth calendar quarter 2012.
 
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 such term to develop technology utilizing our proprietary NIMBUS 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.  Upon the successful completion of this JDA, we entered into a license agreement with Avery Dennison Corporation in April, 2011.
 
Other important considerations of our flagship NIMBUS technology include:

·  
The raw material cost of NIMBUS is more economical than many other competitive 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 Fresh
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.

In May 2012, we entered into a license agreement  with Doris Hosiery Mills, Limited (“Doris”).  Under the agreement, we grant Doris exclusive right and license in Canada and non-exclusive rights and license in the United States to use our proprietary Stay Fresh™ Technology in the field of hosiery products, including dress socks, casual socks, work socks, sport/athletic socks, and diabetic socks.   The agreement remains effective for five years from the effective date.  Doris has indicated to us that it plans to commercialize the licensed product in the third calendar quarter of 2012.
 

NimbuDerm
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 effective on March 31, 2011.  Under this agreement, we appointed BASF as an exclusive manufacturer and distributor of our MultiStat Compound, Ilomastat, 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.  This agreement was extended through March 31, 2011 and we and BASF entered into a new agreement effective April 1, 2011 through December 31, 2014.
 
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, Sciessent, 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 Mircoban International.  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 our comparatively strong intellectual property position differentiates us from competing products.

NIMBUS technology and NimbuDerm technology are covered by eight (8) issued U.S. patents,  twelve (12) issued foreign patents (Australia, Canada, China, India, Korea,  Mexico, Russia, and South Africa), and four (4) pending U.S. patent applications, as well as twenty (25) international patent applications filed under the Patent Cooperation Treaty (PCT, a treaty adopted by 142 countries), and a number of foreign patent applications.

MultiStat technology is covered by two issued U.S. patents, one issued foreign patent and five pending international patent applications.

StayFresh technology is covered by one issued U.S. patent, two (2) pending U.S. patent applications and fifteen (15) international patent applications.  Several disclosures are in preparation for filing.

 
Agreements with Employees and Consultants

With the exception of Drs. Gregory S. Schultz and 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 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:

NIMBUS Technology and NimbuDerm Technology

 United States Patents
U.S. Patent No.
Date Granted/
Date Expires
*Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication
7,045,673
16 May 2006/
8 December 2019
€Improved Antifungal Gypsum Board
7,473,474
6 January 2009/
25 February 2024
* Materials With Covalently Bonded, Nonleachable Polymeric Antimicrobial Surfaces
7,709,694
4 May 2010/
8 December 2019
* Method Of Attaching An Antimicrobial Cationic Electrolyte To The Surface Of A Substrate
7,790,217
7 September 2010/
25 April 2028
€ Gypsum Board Containing Antimicrobial And Antibacterial Compounds
8,007,921
30 August 2011/
25 February 2024
 
€ Disinfectant With Quaternary Ammonium Polymers And Copolymers
8,088,400
3 January 2012/
14 April 2028
 
*  Method Of Attaching An Antimicrobial Cationic Electrolyte To The Surface Of A Substrate
 
8,092,854
 
10 January 2012/
18 September 2026
* System and Method for Enhancing the Efficacy of Antimicrobial Contact Lenses and Other Surfaces
8,227,017
24 July 2012/
10 February 2029
 
 
 
 
-6-

 
 
 
Granted Foreign Patents
Patent No.
Date Granted/
Date Expires
*Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication
Australia
773,532
9 Sept. 2004/
8 December 2019
*Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication
Canada
2,353,436
8 January 2008/
8 December 2019
*Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication
China
ZL 99814229.8
12 January 2005/
8 December 2019
*  Method Of Attaching An Antimicrobial Compound To The Surface Of A Substrate
India
253984
11 September 2012/
22 August 2026
*Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication
Korea
100689020
23 February 2007/
8 December 2019
*Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication
Mexico
248078
15 August 2007/
8 December 2019
*Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication
Russia
004160
26 February 2004/
8 December 2019
*Antimicrobial Cationic Electrolyte Coating
South Africa
2008/01601
27 May 2009/
22 August 2026
* Antimicrobial Cationic Polyelectrolyte Coatings
Australia
2006283043
16 June 2011/
22 August 2026
* Method Of Attaching An Antimicrobial Cationic Polyelectrolyte To The Surface Of A Substrate
Mexico
297242
20 March 2012/
22 August 2026
€ Disinfectant with Quaternary Ammonium Polymers & Copolymers
Australia
2006283042
28 June 2012/
22 August 2026
Disinfectant With Quaternary Ammonium Polymers And Copolymers
South Africa
2008/01557
24 June 2009/
22 August 2026


 Pending United States
Patent Applications
U.S. Application No.
Date Filed
€ Disinfectant with Durable Activity Based on Alcohol-Soluble Quaternary Ammonium Polymers and Copolymers
12/350,784
8 January 2009
* Antimicrobial Bandage Material Comprising Superabsorbent and Non-Superabsorbent Layers
12/772,686
3 May 2010
*  Polyelectrolyte Complex for Imparting Antimicrobial Properties to a Substrate
12/830,062
2 July 2010
Disinfectant With Quaternary Ammonium Polymers And Copolymers
13/341,470
30 December 2011

 
Pending Foreign
Patent Applications
 
Application No.
 
Date Filed
* Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication
Europe
1156766
8 December 1999
* Method Of Attaching An Antimicrobial Cationic Electrolyte To The Surface Of A Substrate
Brazil
PI0617099-4
22 August 2006
* Method Of Attaching An Antimicrobial Cationic Electrolyte To The Surface Of A Substrate
Canada
CA 2620203
 
22 August 2006
* Antimicrobial Cationic Polyelectrolyte Coating
China
CN 101291743
 
22 August 2006
* Method Of Attaching An Antimicrobial Cationic Polyelectrolyte To The Surface Of A Substrate
 
Europe
1937418
 
22 August 2006
* Method Of Attaching An Antimicrobial Cationic Polyelectrolyte To The Surface Of A Substrate
Japan
2008-528126
 
22 August 2006
€ Polyelectrolyte Complex For Imparting Antimicrobial Properties To A Substrate
Australia
2009270715
 
20 July 2009
€ Polyelectrolyte Complex For Imparting Antimicrobial Properties To A Substrate
Brazil
P10911004-6
 
18 January 2011
€ Polyelectrolyte Complex For Imparting Antimicrobial Properties To A Substrate
Canada
2731072
 
18 January 2011
€ Polyelectrolyte Complex For Imparting Antimicrobial Properties To A Substrate
China
200980132939.0
 
23 February 2011
€ Polyelectrolyte Complex For Imparting Antimicrobial Properties To A Substrate
Europe
EP 20090798855
 
20 July 2009
€ Polyelectrolyte Complex For Imparting Antimicrobial Properties To A Substrate
India
709/DELNP/2011
 
31 January 2011


 
-7-


 Pending Foreign
Patent Applications
 
Application No.
 
Date Filed
€  Disinfectant with Quaternary Ammonium Polymers & Copolymers
Brazil
PI0617092-7
22 August 2006
€ Disinfectant with Quaternary Ammonium Polymers & Copolymers
Canada
2620175
22 August 2006
€ Disinfectant with Quaternary Ammonium Polymers & Copolymers
China
200680039366.3
22 August 2006
€ Disinfectant with Quaternary Ammonium Polymers & Copolymers
Europe
06813679.5
22 August 2006
€ Disinfectant with Quaternary Ammonium Polymers & Copolymers
India
1395/CHENP/2008
20 August 2009
€ Disinfectant with Quaternary Ammonium Polymers & Copolymers
Japan
2008-528125
22 August 2006
€ Disinfectant with Quaternary Ammonium Polymers & Copolymers
Mexico
MX/a/2008/002346
22 August 2006
€ Disinfectant Alcohol-Soluble Quaternary Ammonium Polymers
Australia
2009204189
8 January 2009
€ Disinfectant Alcohol-Soluble Quaternary Ammonium Polymers
Brazil
PI0905679-3
8 January 2009
€ Disinfectant Alcohol-Soluble Quaternary Ammonium Polymers
China
200980107500.2
8 January 2009
€ Disinfectant Alcohol-Soluble Quaternary Ammonium Polymers
Europe
09701395.7
8 January 2009
€ Disinfectant Alcohol-Soluble Quaternary Ammonium Polymers
India
710/DELNP/2011
31 January 2011
€ Disinfectant Alcohol-Soluble Quaternary Ammonium Polymers
Japan
2010-542339
8 January 2009


StayFresh Technology

United States Patents
U.S. Patent No.
Date Granted/
Date Expires
€  Antimicrobial Textiles Comprising Peroxide
8,277,827
( Est. 2 October 2012)/
8 June 2030

Pending United States
Patent Applications
U.S. Application No.
Date Filed
€ Superabsorbent Materials Comprising Peroxide
12/796,708
9 June 2010
€  Antimicrobial Textiles Comprising Peroxide
13/616,209
 

 
 
-8-


 
Pending Foreign
Patent Applications
Application No.
Date Filed
€ Superabsorbent Materials Comprising Peroxide
Australia
2010215966
29 July 2011
€ Superabsorbent Materials Comprising Peroxide
Brazil
P11006008-1
17 August 2011
€ Superabsorbent Materials Comprising Peroxide
Canada
2,751,852
8 August 2011
€ Superabsorbent Materials Comprising Peroxide
China
2010080017268.6
18 October 2011
€ Superabsorbent Materials Comprising Peroxide
Europe
10744319.4
9 September 2011
€ Superabsorbent Materials Comprising Peroxide
India
6115/DELNP/2011
11 August 2011
€ Superabsorbent Materials Comprising Peroxide
Japan
2011-550328
15 August 2011
€  Antimicrobial Textiles Comprising Peroxide
Australia
2010258863
14 November 2011
€  Antimicrobial Textiles Comprising Peroxide
Brazil
SPO18110047902
8 December 2011
€  Antimicrobial Textiles Comprising Peroxide
Canada
2,763,073
22 November 2011
€  Antimicrobial Textiles Comprising Peroxide
China
201080017268.6
18 October 2011
€  Antimicrobial Textiles Comprising Peroxide
Europe
10786726.9
9 December 2011
€  Antimicrobial Textiles Comprising Peroxide
India
9534/DELNP/2011
5 December 2011
€  Antimicrobial Textiles Comprising Peroxide
Japan
2012-514237
30 November 2011
€  Antimicrobial Textiles Comprising Peroxide
Malaysia
PI 2011005923
25 November 2011

MultiStat Technology

United States Patent
U.S. Patent No.
Date Granted/ Date Expires
Synthetic Matrix Metalloprotease Inhibitors and use Thereof
5,773,438
3 June 1998/
30 June 2015
*Cosmetic Composition and Method
6,713,074
30 March 2004/
29 June 2021


Granted Foreign Patents
Patent No.
Date Issued
*Cosmetic Composition and Method
Australia
2001273115
30 September 2005


Pending Foreign
Patent Applications
Application No.
Date Filed
* Cosmetic Composition and Method
Canada
2,414,247
29 June 2001
* Cosmetic Composition and Method
Europe
01952355.4
29 June 2001
* Cosmetic Composition and Method
Japan
2002-5224467
29 June 2001
* Composition and Method for Minimizing or Avoiding the Adverse Effects of Vesicants
Europe
02807390.6
25 September 2002
* Composition and Method for Minimizing or Avoiding the Adverse Effects of Vesicants
Israel
161057
25 September 2002

€  Owned by Quick-Med Technologies, Inc. (QMT, Inc.)
*  Exclusive to QMT, Inc. (joint ownership with the Univ. of Florida Research Foundation, Inc. exclusive license back from Foundation).
QMT also is licensed under patents from the University of Michigan and certain individuals relating to Ilomastat and associated MMPIs.
 
 
-9-

 
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. R. Galardy and Dr. D. 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.
 
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 eight (8) 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/Application Technology
 
Jurisdiction &
Patent/Application Number
Issue Date
Expiry Date
Description
Australia
AU 701132
1/21/1999
1/17/2017
Method of Inhibiting Photoaging of Skin
Canada
CA 2241981
3/19/2002
1/17/2017
Method of Inhibiting Photoaging of Skin
Japan
JP 3705820
10/12/2005
1/17/2017
Method of Inhibiting Photoaging of Skin
Mexico
MX 208066
5/31/2002
1/17/2017
Method of Inhibiting Photoaging of Skin
New Zealand
NZ 330860
3/27/2000
1/17/2017
Method of Inhibiting Photoaging of Skin
United States
US 5,837,224
11/17/1998
1/19/2016
Method of Inhibiting Photoaging of Skin
Australia
AU 737376
8/16/2001
2/23/2018
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
Canada
CA 2,281,944
5/15/2007
2/23/2018
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
China
CN 1251989
1/9/2008
2/23/2018
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
 
 
-10-


Exclusive-Licensed U-M Patents/Application Technology, continued
 
Germany
DE 69828620
2/17/2005
2/23/2018
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
Europe Pat Off.
EP 1005333
3/14/2005
2/23/2018
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
France
FR
(EP1005333)
1/12/2005
2/23/2018
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
United Kingdom
GB
(EP1005333)
1/12/2005
2/23/2018
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
Israel
IL 131543
8/31/2005
2/23/2018
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
Japan
JP 2002515898
(unexamined)
   
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
Japan
JP 2010195817
pending
 
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
Mexico
MX 245349
4/25/3007
8/24/2019
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
United States
US 6,630,516
10/7/2003
2/25/2017
Methods and Compositions for Preventing and Treating Chronological Aging in Human Skin
United States
US 6,919,072
7/19/2005
2/25/2017
Methods and Compositions for Reducing Collagen Loss Due to Chronological Aging in Human Skin
Mexico
MX 283269
1/24/2011/
4/2/2019
Methods and Compositions for Reducing Collagen Loss Due to Chronological Aging in Human Skin
United States
US 6,683,069
1/27/2004
4/2/2018
Compositions for Reducing UV-Induced Inhibition of collagen synthesis in Human Skin
United States
US 7,141,238
11/28/2006
10/17/2018
Methods and Compositions for Reducing UV-Induced Inhibition of collagen synthesis in Human Skin

Japan
JP 2002510621
pending
 
Methods and Compositions for Reducing Collagen Loss Due to Chronological Aging in Human Skin
Mexico
MX 283269
1/24/2011
4/2/2019
Methods and Compositions for Reducing Collagen Loss Due to Chronological Aging in Human Skin
United States
US 6,683,069
1/27/2004
4/2/2018
Compositions for Reducing UV-Induced Inhibition of collagen synthesis in Human Skin
United States
US 7,141,238
11/28/2006
10/17/2018
Methods and Compositions for Reducing UV-Induced Inhibition of collagen synthesis in Human Skin
United States
US 7,268,148
9/11/2007
5/20/2019
Compositions and methods for Use Against Acne-Induced Inflammation and Dermal Matrix-Degrading Enzymes
Japan
JP 2004536781
pending
 
Methods and Compositions for Protecting and Restoring Skin Using Selective MMP Inhibitors
Mexico
MX 282908
1/14/2011
12/18/2021
Methods and Compositions for Protecting and Restoring Skin Using Selective MMP Inhibitors
Mexico
MX 244071
11/9/2003
5/9/2022
Use of Compositions for Treating Rosacea
United States
US 7,078,048
7/18/2006
10/28/2022
Method and Compositions for Treating Rosacea
United States
US 7,795,302
9/14/2010
12/22/2024
Method and Compositions for Treating Rosacea
Canada
CA 2,446,356
7/10/2012
5/9/2022
Use of Compositions for Treating Rosacea


 
-11-

 
Non-Exclusive U-M Patents/Applications


Jurisdiction &
Number
Issue Date
Expiry Date
Description
Australia
AU 2002301116
8/31/2006
6/3/2018
Compositions and Methods for Inhibiting Photoaging of Skin
Canada
CA 2,292,600
11/27/2007
6/3/2018
Compositions and Methods for Inhibiting Photoaging of Skin
Canada
CA 2,601,462
3/15/2011
6/3/2018
Compositions and Methods for Inhibiting Photoaging of Skin

Israel
IL 133194
5/4/2009
6/3/2018
Compositions and Methods for Inhibiting Photoaging of Skin
Japan
JP 3554339
8/18/2004
6/3/2018
Compositions and Methods for Inhibiting Photoaging of Skin
New Zealand
NZ 501634
2/1/2002
6/3/2018
Compositions and Methods for Inhibiting Photoaging of Skin
New Zealand
NZ 513045
2/3/2003
6/3/2018
Protection of Vehicle Passengers from UV Radiation
Taiwan
TW 234467
6/21/2005
6/4/2017
Compositions and Methods for Inhibiting Photoaging of Skin
United States
US 6,130,254
10/10/2000
6/4/2017
Composition and Method of Inhibiting Photoaging of Skin
United States
US 6,365,630
4/2/2002
4/2/2019
Composition and Method of Inhibiting Photoaging of Skin
United States
US 6,942,870
9/13/2005
6/4/2017
Compositions and Methods Using Direct MMP inhibitors for Inhibiting Photoaging of Skin
South Africa
ZA 98/4791
6/1/1999
6/4/2017
Compositions and Methods for Inhibiting Photoaging of Skin


BASF Corporation

We have an agreement with BASF that grants BASF Corporation, exclusive and non exclusive worldwide right to develop and market certain products relating to skin care that employ our MultiStat® family of MMPIs.
 
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® wound dressings, employing our NIMBUS technology.   Derma Sciences is marketing and selling the BIOGUARD product to the professional health care market including acute care hospitals, extended care hospitals, nursing homes, and wound care centers.  In July 2012, we entered into a new license agreement with Derma Sciences that grants Derma a worldwide (except for India) exclusive license to our NIMBUS treatment of traditional wound dressings in return for $1.3 million in upfront payment, additional milestone payments and ongoing royalty payments.
 
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.  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 December 2011, we amended the agreement to include NIMBUS-treated foam wound dressings. In March 2012, we  extended the term of the agreement.
 

 
-12-

 
 
Avery Dennison Corporation
 
In April, 2011, we entered into a license agreement (the "Agreement") with Avery Dennison Corporation (“Avery”).  Under the Agreement, we grant Avery a worldwide exclusive right and license to use our proprietary NIMBUS® antimicrobial technology in antimicrobial adhesives for medical devices. In addition, we grant Avery a three-year exclusive single right of first option to negotiate with us for exclusive licenses of a Next Generation Antimicrobial Adhesives Technology and our Stay FreshTM Technology within the adhesives market both of which are our proprietary technologies. As consideration, Avery will pay us lockout fees over a three to four year period and royalties for products to which our technologies are incorporated. Avery will lose the exclusivity of license unless it pays the lockout fees and minimum royalty at agreed times and makes commercially reasonable efforts to generate sales of its products. The Agreement will remain effective until the expiration of the last to expire of our proprietary intellectual property.

Biosara Corporation

In October 2011, we entered into a Patent and Technology License Agreement with Biosara Corporation. Under the agreement, we grant Biosara an exclusive license to our NIMBUS technology for use on 100% rayon sponge gauze for the institutional market in the United States and Canada. Biosara will lose the exclusivity of license unless it pays agreed minimum royalty fees.
 
Doris Hosiery Mills, Limited
 
In May 2012, we entered into a license agreement  with Doris Hosiery Mills, Limited (“Doris”).  Under the agreement, we grant Doris exclusive right and license in Canada and non-exclusive rights and license in the United States to use our proprietary Stay Fresh™ Technology in the field of hosiery products, including dress socks, casual socks, work socks, sport/athletic socks, and diabetic socks.   The agreement remains effective for five years from the effective date.  Doris indicated to us that it plans to commercialize the licensed product in the fourth calendar quarter of 2012.

 
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 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.
 

 
-13-

 
 
Food and Drug Administration
 
Many of the end-user applications for our technology are regulated in the U.S. as medical devices by the United States Food and Drug Administration ("FDA").  The FDA is responsible for enforcement of the Federal Food, Drug and Cosmetic Act, as amended, (“FDC Act”) which regulates drugs and devices manufactured and distributed in interstate commerce.
 
The FDC Act requires that all devices for human use marketed in the United States prior to May 28, 1976 (“Pre-amendment Devices”) be classified by the FDA, based on recommendations of expert panels, into one of three regulatory classes. Class I products are subject only to the general controls which apply to all devices, irrespective of class. General controls include the registration of manufacturers, record-keeping requirements, labeling requirements, and Good Manufacturing Practice (“GMP”) regulations.
 
Class II devices are those for which general controls are not sufficient to ensure safety and effectiveness, and for which enough information exists to develop a standard. These devices are required to meet performance standards established by the FDA. Performance standards may specify materials, construction components, ingredients, labeling and other properties of the device. A standard may also provide for the testing of devices to ensure that different lots of individual products conform to the requirements.
 
The most restrictive controls are applied to devices placed in Class III. Class III devices are required to have FDA approval for safety and effectiveness before they can be marketed unless the FDA determines that pre-market approval is not necessary. Pre-market approval necessitates the compilation of extensive safety and effectiveness data which is normally expensive to compile. Approval of Class III devices may require several years.
 
Devices marketed after May 28, 1976 are considered to be one of two kinds: those that are and those that are not substantially the same as a Pre-amendment Device. Those that are substantially equivalent to a Pre-amendment Device are given the same classification as the equivalent Pre-amendment Device. New devices which are not substantially equivalent to Pre-amendment Devices are automatically placed in Class III thereby requiring pre-market approval.
 
 All manufacturers are required to give the FDA ninety days’ notice before they can introduce a device on the market. During the ninety-day period, the FDA will determine whether the device is or is not substantially equivalent to a Pre-amendment Device.
 
 
Pre-Market Approval Pathway
 
If the FDA determines that the device is not substantially equivalent to a Pre-amendment Device, it is automatically placed in Class III and the manufacturer will have to provide the FDA with a Premarket Approval Application (“PMA”) containing evidence that the device is safe and effective before the device may be commercially distributed to the public. However, the manufacturer may request that the FDA reclassify the device by filing a reclassification petition. 

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.
 
 
 
-14-

 
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.

FDA Status

In February, 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, pDADMAC.  The guidance protects the future applications and submissions for pDADMAC to our patented claims and uses.

In September, 2011, we submitted a 510(k) application for NIMBUS Adhesive Dressings, a medical device incorporating our novel NIMBUS Polyurethane Quat (PUQ) technology. This submission represents our first application for the NIMBUS PUQ technology.  We are in communication with the FDA regarding the classification of the medical device.

In June 2012, we submitted a 510(k) application for the Stay Fresh Skin Fold Management Textile, a medical device incorporating our novel Stay Fresh technology. This represents our first FDA submission involving our Stay Fresh antimicrobial technology. Our application is currently under review by FDA.
 
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 successfully registered Stay Fresh with EPA as an antimicrobial textile treatment in January 2011 and we are in the process of applying for selected state registrations.   Stay Fresh is the only antimicrobial technology containing hydrogen peroxide approved by the U.S. Environmental Protection Agency for imparting antimicrobial preservation of textiles.  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 of eight (8) employees, six (6) of whom are full time and two (2) are part time.

Our non full-time employees include several consulting scientists with PhDs in their fields and part time employees to provide the necessary expertise in performing testing and participating in certain of our development projects.

 
 
-15-


 
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, 2012, we spent $847,350 on research and development.  During our 2011 fiscal year, we spent $1,023,068 on research and development.  We intend to continue and expect our research and development efforts to even more focus in the current 2013 fiscal year.
 
 
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, 2012 and 2011 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, 2012.  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.

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, 2012, we had an accumulated deficit of $27,648,871.  Our gross revenues for the years ended June 30, 2012 and 2011, were $997,496 and $1,039,578, respectively,  with losses from operations of $1,238,322 and $2,051,789, respectively,  and net losses of $1,686,903 and $2,303,217 respectively.  There can be no assurance that we will ever become profitable. If we do not become profitable, we may have difficulty meeting our business goals.
 
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 products that utilize our technologies. 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  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 Corporation develops and commercializes our MultiStat technology pursuant to a manufacturing 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.
 
 
 
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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.

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. In 2007, we obtained loans from our largest shareholder 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  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 largest shareholder and a major shareholder. If we are unable to successfully repay or restructure loans from our largest shareholder 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 largest shareholder and our other major shareholder;

·  
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.
 

 
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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.

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 Quote Board (OTCQB), 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 allow them to control matters submitted to stockholders for approval.

Our executive officers and directors (and their affiliates), in the aggregate, own approximately 34.9% of our outstanding common stock, and a  significant portion of our outstanding voting stock.  Therefore, our officers and directors and the affiliates have the ability to significantly influence 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 $2,150 and our lease expires on February 1, 2013.
 
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
 
The Company is not currently involved in any 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.    RESERVED

 
 
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PART II
 
ITEM 5.  
MARKET FOR REGISTRANT'S EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our common stock is currently trading on the Inter-dealer Quotation/Trading Systems of the OTC Markets Group for the U.S. reporting company marketplace under the symbol QMDT.QB.  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 Market quotations represent quotations between dealers without adjustment for retail mark-up, markdowns or commissions and may not represent actual transactions.
 
 

 
 
Year Ended June 30, 2012
 
High
Low
Fourth Quarter
$0.16
$0.05
Third Quarter
$0.18
$0.02
Second Quarter
$0.30
$0.01
First Quarter
$0.90
$0.25


 
Year Ended June 30, 2011
 
High
Low
Fourth Quarter
$0.90
$0.25
Third Quarter
$0.75
$0.30
Second Quarter
$0.72
$0.45
First Quarter
$1.18
$0.55
 
Holders
 
As of June 30, 2012, there were 86 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.
 
 
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Recent Sales of Unregistered Securities
 
None.
 
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, 2012, 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
4,083,970
$0.58
1,376,618
Equity compensation plans not approved by security holders
947,994
$0.48
N/A
 
Total
5,034,964
$0.56
1,373,618
 
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 Board of Directors also authorizes the issuance of warrants, rights to purchase Common Stock, to award or pay for services provided by consultants or non-employees.  These warrants have the same terms as those of the stock options in all material respects. The Plan 2001 description, the warrants program 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, 2012 was 1,376,618.
 
 
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 a largest shareholder and a major shareholder, who had 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.
 
 
 
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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 Fresh is a unique chemical formulation for textiles with a durable antimicrobial agent effective against an array of bacteria even after numerous laundering cycles; (3) NimbuDerm is 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 Fresh ,  NimbuDerm 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.
 
Recent Developments
 
In July 2012, we and Derma Sciences, Inc. ("Derma") entered into a Patent and Technology License Agreement (the "Agreement") to license our proprietary NIMBUS  intellectual property exclusively on a worldwide basis other than India.  The Agreement supersedes a Patent and Technology License Agreement, as amended, dated March 23, 2007 to Derma on an exclusive basis within the United States and Canada.   Under the Agreement, we grant Derma certain rights under our proprietary NIMBUS intellectual property basis to make, use, sell and offer for sale the traditional wound care products, as defined, to the institutional market and the veterinary and dental institutional market, as defined.

In consideration for the execution of the Agreement, Derma paid $1.3 million to us shortly after signing and future payments based on the sales of the licensed products reaching certain milestones.  In addition, the royalty rate on the licensed products will be a sliding scale starting at 8.5% and declining as the sales volume increases as stipulated in the Agreement.  Further, Derma agreed to commercialize products utilizing our intellectual property in certain geographic regions within certain time periods measured from the effective date in order to maintain the exclusivity of the intellectual property rights granted in these regions under the Agreement.  The Agreement shall continue to be in effect until the expiration of the last to expire of the Company's proprietary intellectual property.  The Company may revoke the exclusive nature of the license or terminate this agreement early if Derma fails to reach certain revenue milestones.  Derma may terminate this agreement at any time upon 60 days notice.

 
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In July 2012, Mexico granted us the Mexican Patent No. 297,242 is entitled “Method of Attaching an Antimicrobial Cationic Polyelectrolyte to the Surface of a Substrate.” It remains in effect until August 22, 2026.  Similar patents have been granted in the United States, Australia, and South Africa.

In July 2012, the United States Patent and Trademark Office granted the U.S. Patent No. 8,227,017 entitled, “System and Method for Enhancing the Efficacy of Antimicrobial Contact Lenses and Other Surfaces.” The new patent covers the method of post-treating NIMBUS® contact lens and other NIMBUS surfaces to enhance antimicrobial efficacy and increase biofilm resistance.  By introducing a citrate solution to a surface to which a NIMBUS polymer has been non-leachably bound, the bactericidal performance is improved significantly.

In August 2012, Canadian Intellectual Property Office  granted Canadian Patent No. 2,446,356 entitled “Use of Compositions for Treating Rosacea.” MultiStat is a family of groundbreaking compounds designed to prevent and repair skin damage.  The patent covers methods that supplement traditional treatment of rosacea by addressing the inflammatory and collagen-degrading components of the skin condition.  It covers patent claims that address 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 (optimally in combination with a beta-lactamase inhibitor), cephalosporin, fluoroquinolone, streptogramin and sulfanomide.
 
In August 2012, the Australian Patent Office and the patent office of Mexico, Instituto Mexicano de la Propiedad Industrial, granted our pending patent entitled “Disinfectant with Quaternary Ammonium Polymer and Copolymers” in their respective jurisdictions. Additionally, the State Intellectual Property of the People’s Republic of China issued a “Notification to Grant an Invention Patent” for this pending patent in China.  The three new patents are similar to U.S. Patent No. 8,088,400, also entitled “Disinfectant with Quaternary Ammonium Polymer and Copolymers.” They cover our novel polyurethane-modified polycation, the newest member of the NIMBUS technology family of antimicrobials.  NIMBUS technology encompasses the chemistry of antimicrobials that comprise a high charge density polycation built into the backbone of various polymers, in this case, polyurethane.

In August 2012, the United States Patent and Trademark Office issued a notice of allowance for a patent protecting Stay Fresh®, our revolutionary new antimicrobial technology.  Stay Fresh Antimicrobial technology is eco-friendly, safe, non-toxic, and cost effective.  Textiles treated with Stay Fresh have been proven to retain potent antimicrobial activity for as many as 100 wash cycles, with reduction of bacterial levels by up to 99.9999%.  The active antimicrobial agent utilized in Stay Fresh is hydrogen peroxide, which is non-toxic, and degrades to eco-friendly water and oxygen.

 
Capital Expenditures and Requirements

From 2000 to June 2012, we spent approximately $1,021,000 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 that the estimates, assumptions and judgments involved in revenue recognition, receivables and allowances for doubtful accounts, accruals including  share-based compensation, deferred costs, research and development, and impairment of intangible assets  have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies.
 
 
 
-22-


 
Results of Operations

 
Comparison of Years Ended June 30, 2012 and 2011

Revenues.  During the year ended June 30, 2012 we had $997,496 of revenues, compared to $1,039,578  of revenues for the year ended June 30, 2011, representing a slight decrease of 4% in our revenues.  Our revenues during the year ended June 30, 2012 consisted of: (a) $450,654 royalty and license fees  consisting of $371,120 in royalty fees from the sales of BIOGUARD® advanced wound care product by Derma Sciences, Inc., our licensee, and $79,534  in license and other related fees representing the earned portion of the license fees from our licenses; (b) $425,842  which represented our royalties in the form of revenue share from the MultiStat product sales by BASF Corporation (“BASF”),  in connection with a manufacturing and distribution agreement we have with BASF  for product development, manufacturing and distribution (the “BASF Agreement”); and (c) $121,000  which represented the revenue earned  from the joint development projects.   Our royalty fees from Derma will be lower in the near future with a lower royalty rate of 8.5% from the 20% under the new license agreement effective in July 2012.  Derma  paid us $1.3 million under the terms of the license agreement.  Our royalties in the form of a revenue share from MultiStat product sales declined  approximately $67,000 or 14%, reflecting a lower revenue share under the current BASF Agreement for the period ended June 30, 2012 and a slightly lower total sales of MultiStat product from comparable prior period.  We cannot anticipate MultiStat product sales by BASF for subsequent quarters given current economic market uncertainties in general and the retail cosmetic industry in particular.

Our revenues during the year ended June 30, 2011 consisted of: (a) $303,256 in royalty and license  fees consisting of $279,264 in royalty fees from the sales of BIOGUARD® advanced wound care product by Derma Sciences, Inc., our licensee, and $23,992 in license fees representing the earned portion of the license fees from our licensees; (b) $492,572, which represented our royalties from the product sales by BASF; and (c) $243,750 which represented the revenue earned from the small business innovation research program and the revenue earned from the joint development projects.

We grant BASF the 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.  Both parties extended the BASF agreement until December 31, 2014.

Operating Loss.  Operating loss for the year ended June 30, 2012 was $1,238,322 as compared to $2,051,789 in operating loss for the year ended June 30, 2011, representing a  decrease of  40% or $813,467  in operating loss. The decrease in operating loss was primarily attributable to a decrease in expenses of $855,549 coupled with a slight decrease in revenues of $42,082 for the fiscal year ended June 30, 2012.   The decrease in expenses was primarily due to:  (a) a decrease in general and administrative expenses of $654,177 or 40%; (b) a decrease of $175,718 or 17% in research and development  expenses; (c) a decrease of $24,277 or 8% in licensing and patent expenses; and  (d) a slight increase of $2,782 or 12% in cost of revenues.

Research and Development Expense.  Research and development expense decreased by $175,718 or 17% to $847,350 for the year ended June 30, 2012, from $1,023,068  for the year ended June 30, 2011.  The decrease in research and development expense is primarily attributable to a reduction in the compensation expense, and lower stock-based compensation expense than in prior year comparable period.

General and Administrative Expense.  General and administrative expense decreased by $654,177 or 40% to $998,393 for the year  ended June 30, 2012, from $1,652,570  for the year ended June 30, 2011.  This decrease in our general and administrative expenses mainly attributed to lower compensation costs, lower expenses related to the investor relations programs, other expenses and smaller stock-based compensation expenses than in the prior year's comparable period.

Licensing and Patent Expense.  Licensing and patent expense decreased by $24,277 or 8% to $299,163 for the year ended June 30, 2012 from $323,440 for the year ended June 30, 2011.  This decrease was primarily due to lower consulting patent legal fees and annual annuity fees for our patents and patent applications offset by higher regulatory expenses related to licenses than those of prior comparable period.

Other Income.  In October 2010, we were awarded a grant of approximately $244,000 before the direct expenses related to the grant application, by the U.S. government under the Qualifying Therapeutic Discovery Project ("QTDP") program to advance the development of the NIMBUS technology for wound dressings and wound drains.  There was no similar income received in the period ended June 30, 2012.

Interest Expense.  Interest expense on notes payable for the year ended June 30, 2012 was approximately the same for the years ended June 2012 and 2011, $449,956 and  $449,141, respectively, as there was no new notes payable issued during the year ended June 30, 2012.

Net Loss.   Net loss for the year ended June 30, 2012 was $1,686,903 or $0.05 per share compared to $2,303,217 or $0.07 per share for the year ended June 30, 2011.  This decrease is primarily attributable to  a reduction in general and administrative expenses, a decrease in research and development expenses,   a decrease in licensing and patent expenses, and a reduction in revenues offset by the absence of other  income.
 
 
 
-23-

 
Liquidity and Capital Resources
 
Our auditors have issued a going concern opinion on our audited financial statements for the fiscal years ended June 30, 2012 and 2011 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, 2012 was $80,502 as compared with $949,367 at June 30, 2011.   In July 2012, we received approximately $1,300,000 as part of the new license agreement with our licensee, Derma Sciences, Inc. ("Derma")  As of September 5, 2012, we  collected  approximately $105,000 of the outstanding receivable balance.

In July 2012, we and Derma entered into a Patent and Technology License Agreement (the "Agreement") to license our proprietary NIMBUS  intellectual property exclusively on a worldwide basis other than India.  The Agreement supersedes a Patent and Technology License Agreement, as amended, dated March 23, 2007 to Derma on an exclusive basis within the United States and Canada.   Under the Agreement, we grant Derma certain rights under our proprietary NIMBUS intellectual property basis to make, use, sell and offer for sale the traditional wound care products, as defined, to the institutional market and the veterinary and dental institutional market, as defined.

In consideration for the execution of the Agreement, Derma paid $1.3 million to us shortly after signing and future payments based on the sales of the licensed products reaching certain milestones.  In addition, the royalty rate on the licensed products will be a sliding scale starting at 8.5% and declining as the sales volume increases as stipulated in the Agreement.  Further, Derma agreed to commercialize products utilizing our intellectual property in certain geographic regions within certain time periods measured from the effective date in order to maintain the exclusivity of the intellectual property rights granted in these regions under the Agreement.  The Agreement shall continue to be in effect until the expiration of the last to expire of the Company's proprietary intellectual property.  The Company may revoke the exclusive nature of the license or terminate this agreement early if Derma fails to reach certain revenue milestones.  Derma may terminate this agreement at any time upon 60 days notice.  We anticipate that our royalty fees from Derma will be lower in the near future with a lower royalty rate of 8.5% from the 20% under the Agreement.  We are unable to determine how much of the royalty fees we will receive in the future at this time.  We expect minimal direct expenses in relation to this Agreement.
In November 2011, we entered into a License Agreement (the “Agreement”) with Biosara Corporation ("Biosara") effective as of October 1sr, 2011(the "Effective Date") on an exclusive basis.  In consideration for the execution of the Agreement and for the exclusive license, Biosara shall pay the Company a non-refundable and non-creditable payment upon signing the Agreement.  The Company will receive another non-refundable and non-creditable payment upon the first commercial product sale or twelve (12) months from the Effective Date.  Further, the Company will receive royalty payments on the product sales at different royalty rates pursuant to the sales volumes stipulated in the Agreement.  Biosara must pay a certain minimum royalty amount to the Company each quarter, otherwise the Company may at its option, cancel Biosara’s exclusivity arrangement or terminate the license altogether.

In March 2010,  we entered into License Agreement (the “Agreement”) on an exclusive basis  with a division of a major consumer products company (the "Licensing Party").   In consideration for the execution of the Agreement and for the exclusivity, the Licensing Party shall pay the Company a non-refundable and non-creditable payment.  The Company will receive another non-refundable and non-creditable payment upon meeting a certain condition.  In addition, the Licensing Party shall pay the Company the non-refundable payment that will be creditable towards future earned royalties upon the first commercial product sale.  If the first commercial product sale does not occur by certain future dates, the Licensing Party shall pay the Company additional non-refundable payments that will be creditable against future earned royalties.  Further, the Company will receive royalty payments on the product sales at different royalty rates pursuant to the sales volumes stipulated in the Agreement.  The Licensing Party did not meet the first commercial sale by the agreed date which requires a milestone payment to the Company.  In addition, the Company has met a condition subsequent to December 31, 2011, which requires another milestone payment from the Licensing Party to the Company.  We have served a termination notice to the Licensing Party in accordance with the terms of the Agreement subsequent to being informed of the Licensing Party of its intent to discontinue the Agreement and receipt of a proposed termination with terms and conditions that we deem unreasonable.
 
Equity Financing and our Cash Requirements
 
Based on our cash position at June 30, 2012, 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 $136,000 per month or an aggregate of approximately $1,632,000 over the next twelve (12) months, in the following areas:

 
·
Research and development expenditures of approximately $51,000 per month or an aggregate $612,000 over the next twelve (12) months, which will consist of the following estimated monthly expenditures: (a) $35,000 in payroll for scientists; (b) $4,000 for outside research and development expenditures; and (c) $12,000 for chemical supplies and laboratory operating expenses, including rent expense;
 
 
·
Patent related legal fees of approximately $20,000 per month or an aggregate $240,000 annually; and

 
·
Operating expenses of approximately $65,000 per month or an aggregate $780,000 over the next twelve (12) months, including business development, regulatory fees, personnel costs, outbound royalty fees, director and officer insurance, general liability insurance, interest payments, investors relations, consulting fees, utilities, legal and accounting fees, and travel.
 
Our current cash balance of $80,502 as of  June 30, 2012, the receipt of approximately $1,300,000 from our licensee and the collection of accounts receivable of  $105,123 after June 30, 2012, less disbursements of the existing obligations of approximately $450,000, will satisfy our cash requirements for approximately more than seven (7) months assuming no further receipts of revenues from our licensees and additional debt or equity financing, other licensing alternative, and further reduction in expenses.  If we are unable to satisfy the remainder of our obligations by equity and/or debt financings and other licensing alternative, we will be unable to satisfy our cash requirements beyond approximately more than seven (7) months assuming no further receipts of revenues and additional debt or equity financing.
 
 
-24-


We are attempting to raise additional cash by means of equity and or debt financing as well as exploring other strategic and licensing alternatives. Effective August 15, 2012, we made certain management changes including the voluntary resignations of our CEO and our VP of Research and Development.  These responsibilities were assumed by our current employees.  These changes will result in a net cash savings of approximately $350,000 per year.

Further, 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, 2012, we have ten senior convertible notes payable outstanding to our largest shareholder totaling approximately $5,660,000 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 largest shareholder of $256,064 including accrued interest with a maturity date of December 31, 2013 and an annual interest rate of 8%.    We also have a senior convertible note payable to a major stockholder with a balance $1,242,834 including accrued interest.  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 $254,986 with third parties.  These notes have an 8% interest rate per annum with a conversion prices ranging from $0.50 per share, a maturity date of June 30, 2014.   In addition, we have a promissory note payable with a related party totaling $102,025 including accrued interest with an interest rate of 8% per annum and a maturity date in December 2013.
 
If we are unable to successfully repay our debt and or meet our current operating expenses, 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 largest shareholder;
·  
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 FINRA 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, 2012, we had a net negative working capital of $847,717 that primarily consists of: (a) cash of $80,502; (b) accounts receivable of $105,123; (c) accounts payable of $714,110; (d) accrued expenses of $188,275; (e) unearned revenue of $100,957; and (f) current portion of note payable to an officer of $30,000.  At June 30, 2012, we had a stockholders’ deficit of $8,065,074, 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 $774,737 for the year ended June 30, 2012. Net cash used in investing activities was $104,128.  Net cash provided by financing activities was $10,000.
   
During the year ended June 30, 2011, we received (a) $1,522,680 from the sale of approximately 5,400,000 shares of our restricted common stock;  (b) $10,000 in cash from the exercise of stock options; (c) 13,155 from a note payable to an officer; and (d) the principal payment of $6,000 to a note payable of an officer. 
 
Contractual Obligations
 
The following table summarizes our long-term contractual obligations as of June 30, 2012:
 
 
Total
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
   
More than 5 Years
 
Long-term debt obligations (a)
$ 7,483,582   $ -   $ 7,483,582   $ -     $ -  
Operating lease obligations (b)
$ 15,050   $ 15,050   $ -   $ -     $ -  

(a)  
The principal and accrued interest on the notes payable owed to the largest shareholder's Senior Convertible Notes, to third parties' convertible note payable, and to a major shareholder’s senior note payable as fully discussed in note 9 of the accompanying footnotes to the   financial statements.
 
(b)  
We have an operating lease for our laboratory in Gainesville, Florida with an expiration date in 2013.
 
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.
 

 
-25-

 
 
ITEM 8.                      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 

 

TABLE OF CONTENTS

 
Report of Independent Registered Public Accounting Firm
 
27
Financial Statements:
 
 
      Balance Sheets as of June 30, 2012 and 2011
 
28
      Statements of Operations for the years ended June 30, 2012 and 2011
 
29
      Statement of Changes in Stockholders’ Equity for the years ended June 30, 2012
 
30
      Statements of Cash Flows for the years ended June 30, 2012 and 2011
 
31
Notes to Financial Statements
32-43
 
 
 
 

 
-26-


 
 
 
 
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, 2012 and 2011, and the related statements of operations, changes in stockholders’ deficit, and cash flows for each of 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, 2012 and 2011, 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, 2012 and 2011, 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, 2012

 
 

 
 
-27-

 
 
QUICK-MED TECHNOLOGIES, INC.
BALANCE SHEETS
AS OF JUNE 30, 2012 AND 2011
 
ASSETS
       
 
2012
 
2011
 
         
Current assets:
       
Cash and cash equivalents
$ 80,502   $ 949,367  
Accounts receivable
  105,123     305,320  
Total current assets
  185,625     1,254,687  
             
Property and equipment, net
  1,084     1,077  
             
Other assets:
           
Prepaid expenses
  8,472     8,030  
Intangible asset, net
  416,669     376,746  
Total other assets
  425,141     384,776  
Total assets
$ 611,850   $ 1,640,540  
             
LIABILITIES AND STOCKHOLDERS' DEFICIT
           
             
Current liabilities:
           
Accounts payable
$ 714,110   $ 615,393  
Unearned revenue
  100,957     124,640  
Accrued expenses
  188,275     90,897  
Current maturity of note payable - related party
  30,000     18,000  
Total current liabilities
  1,033,342     848,930  
             
License payable
  160,000     160,000  
Long-term liability - note payable - related party
  72,025     93,941  
Long-term liability - note payable - related party
  256,064     238,817  
Long-term liability - convertible note payable
  254,986     254,986  
Long-term liability - convertible note payable - related party
  1,242,834     1,158,373  
Long-term liability - convertible note payable - related party
  5,657,673     5,337,565  
Total liabilities
  8,676,924     8,092,612  
             
Commitments and contingencies
           
             
Stockholders' deficit:
           
Common stock, $0.0001 par value; 100,000,000
           
    authorized shares; 37,346,154 and 37,246,154 shares issued
       
  and outstanding at June 30, 2012 and June 30, 2011
  3,735     3,725  
Additional paid-in capital
  15,448,353     15,420,363  
Outstanding stock options
  4,131,709     4,085,808  
Accumulated deficit
  (27,648,871 )   (25,961,968 )
Total stockholders' deficit
  (8,065,074 )   (6,452,072 )
Total liabilities and stockholders' deficit
$ 611,850   $ 1,640,540  

 
 


See accompanying notes to financial statements.
 
-28-

 

QUICK-MED TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2012 AND 2011
 
 
 
 
2012
 
2011
 
         
Revenues
       
Royalty and license fees
$ 450,654   $ 303,256  
Product sales
  425,842     492,572  
Research and development service
  121,000     243,750  
       Total revenues
  997,496     1,039,578  
             
Expenses:
           
Cost of sales
  26,714     23,932  
Research and development
  847,350     1,023,068  
General and administrative expenses
  998,393     1,652,570  
Licensing and patent expenses
  299,163     323,440  
Depreciation and amortization
  64,198     68,357  
       Total operating expenses
  2,235,818     3,091,367  
             
Operating loss
  (1,238,322 )   (2,051,789 )
             
Other income (expense):
           
Other income, net
  -     195,583  
Interest income
  1,375     2,130  
Interest expense
  (449,956 )   (449,141 )
  Total other expense
  (448,581 )   (251,428 )
             
Loss before provision for income taxes
  (1,686,903 )   (2,303,217 )
             
Provision for income taxes
  -     -  
             
Net loss
$ (1,686,903 ) $ (2,303,217 )
             
Net loss per share - basic and diluted
$ (0.05 ) $ (0.07 )
             
Weighted average common
           
  shares outstanding - basic and diluted
  37,346,154     32,951,263  

 
 

 
See accompanying notes to financial statements.
 
-29-


QUICK-MED TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED JUNE 30, 2012 AND 2011
 
 
 
 
 
 
     
Additional
               
 
Common Stock
 
Paid-In
 
Accumulated
 
Outstanding
       
 
Shares
 
Amount
 
Capital
 
Deficit
 
Stock Options
   
Total
 
                           
Balance, June 30, 2010
31,357,297   $ 3,136   $ 13,576,122   $ (23,658,751 ) $ 3,786,351     $ (6,293,142 )
                                     
Stock issuance for cash
5,438,143     543     1,522,137     -     -       1,522,680  
Stock-based compensation
-     -     -     -     308,957       308,957  
Stock issuance for services
400,714     41     123,909     -     -       123,950  
Exercise of stock options
50,000     5     19,495     -     (9,500 )     10,000  
Debt forgiveness by shareholders
-     -     50,000     -     -       50,000  
Reduction of conversion price on convertible debt
-     -     128,700     -     -       128,700  
Net loss, July 1, 2010  to June 30, 2011
-     -     -     (2,303,217 )   -       (2,303,217 )
                                     
Balance, June 30, 2011
37,246,154     3,725     15,420,363     (25,961,968 )   4,085,808       (6,452,072 )
                                     
Stock-based compensation
-     -     -     -     45,901       45,901  
Stock issuance for cash
100,000     10     27,990     -     -       28,000  
Net loss, July 1, 2011 to June 30, 2012
-     -     -     (1,686,903 )   -       (1,686,903 )
                                     
Balance, June 30, 2012
37,346,154   $ 3,735   $ 15,448,353   $ (27,648,871 ) $ 4,131,709     $ (8,065,074 )
                                     

 

 




See accompanying notes to financial statements.
 
-30-


QUICK-MED TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2012 AND 2011
 
 
 
 
2012
 
2011
 
Cash flows from operating activities:
       
Net loss
$ (1,686,903 ) $ (2,303,217 )
Adjustments to reconcile net loss to net
           
  cash used in operating activities:
           
Depreciation and amortization
  64,198     68,357  
Allowance for doubtful accounts
  200,000     -  
Stock granted for services
  -     123,950  
Stock-based compensation
  45,901     308,957  
Reduction in conversion price on convertible debt
  -     128,700  
Contribution of services
  -     50,000  
(Increase) decrease in:
           
Accounts receivable
  197     30,757  
Prepaid expenses
  (442 )   1,627  
Increase in:
           
Accounts payable
  98,718     4,374  
Accrued interest
  429,900     415,931  
Other current liabilities
  73,694     24,963  
Net cash used in operating activities
  (774,737 )   (1,145,601 )
             
Cash flows from investing activities:
           
Property and equipment
  (2,315 )   (540 )
Intangible assets
  (101,813 )   (72,354 )
Net cash used in investing activities
  (104,128 )   (72,894 )
             
Cash flows from financing activities:
           
Proceeds from stock issuance
  28,000     1,522,680  
Proceeds from exercise of stock options
  -     10,000  
Increase in notes payable - related party
  -     13,155  
Decrease in notes payable - related party
  (18,000 )   (6,000 )
Net cash provided by financing activities
  10,000     1,539,835  
             
Net (decrease) increase in cash and cash equivalents
  (868,865 )   321,340  
Cash and cash equivalents at beginning of period
  949,367     628,026  
Cash and cash equivalents at end of period
$ 80,502   $ 949,366  
             
Supplementary Information:
           
             
Cash paid for:
           
Interest
$ 20,054   $ 20,054  
Income taxes
$ -   $ -  
             
Non-cash disclosures of investing and
           
  financing activities:
           
Debt forgiveness by shareholders
$ -   $ 50,000  
Stock-based compensation
$ 45,901   $ 432,907  



See accompanying notes to financial statements.
 
-31-



 
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 Fresh® is a unique chemical formulation for textiles with a durable antimicrobial agent effective against an array of bacteria even after numerous laundering cycles; (3) NimbuDerm® is a novel copolymer for application as a persistent hand sanitizer with long lasting protection against germs; 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 June 2009.  The Company targets NIMBUS technology for additional advanced wound care products, catheters, incontinence products, and other medical devices. MultiStat has been commercialized in a cosmetic product line with the anti-aging products.  Stay Fresh is currently being commercialized 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.


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 as of June 30, 2012 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. The allowance for doubtful accounts at June 30, 2012 was $200,000.

Research and Development Costs

Research and development costs are expensed as incurred.
 

 
 
-32-

 
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
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, 2012 and 2011, 15,874,774 and 15,346,539  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

The Company adopted FASB ASC 820, Fair Value Measurements and Disclosures,   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, 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 and license fees, and research and development service.

Under the agreement for product development, manufacturing and distribution  (the “Agreement”) with BASF, 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 its licensees on a pro rata basis over the term of the related exclusive license agreements.  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.

Other Income

The Company recognizes its Qualifying Therapeutic Discovery Project (QTDP) grant from the U.S. government in connection with the advancement of the development of the NIMBUS technology for wound dressings and wound drains net of the expenses associated with the grant application in other income.
 
 
 
-33-

 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
Share-Based Compensation

The Company records share-based payment awards at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest. 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.
 
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, 2012 and 2011, the Company’s cash levels did  exceed the federally insured limit by approximately $0 and $674,000, respectively.  Beginning December 31, 2010 through December 31, 2012, the Company's bank accounts are fully insured, regardless of the balance of the account at the FDIC-insured institutions as the noninterest-bearing transaction accounts as provided by the section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The credit risk of the accounts receivable is considered limited given the customers’ credit rating.
 
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.

Recently Issued Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04. The amendments in this ASU generally represent clarifications of fair value measurement, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements. The Company will adopt these amendments on a prospective basis and does not expect any impact on its financial condition or results of operations.

 
In September 2011, the FASB issued authoritative guidance on testing goodwill for impairment that became effective beginning in January 2012 for the Company. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The adoption of this guidance did not impact the Company's  financial condition or results of operations.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This standard, which amends the guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment, provides companies with the option to first perform a qualitative assessment before performing the two-step quantitative impairment test. If the company determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not to exceed its carrying amount, then the company would not need to perform the two-step quantitative impairment test. This standard does not revise the requirement to test indefinite-lived intangible assets annually for impairment. This standard becomes effective for annual and interim impairment tests performance for fiscal years beginning after September 15, 2012, with early adoption allowed. The Company does not expect the adoption of this standard will have a material effect on its financial condition or results of operations.

 
 
-34-

 
NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following at June 30, 2012 and 2011:
 
 
2012
 
2011
 
         
Computer equipment
$ 28,990   $ 26,675  
Equipment
  32,942     32,942  
Less: accumulated depreciation
  (60,848 )   (58,540 )
Net property and equipment
$ 1,084   $ 1,077  

Depreciation expense for the years ended June 30, 2012 and 2011 was $2,308 and $6,466, 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, 2012 and 2011 was $604,811 and $542,921, respectively.

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 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, 2012 and 2011, 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.
 

 
 
-35-


 
NOTE 4 – INTANGIBLE ASSETS, continued
 
During the fiscal years 2012 and 2011, the Company was granted certain US and international patents and  filed a number of US and international patent applications for its NIMBUS,  Stay Fresh , and NimbuDerm  technologies and applied for certain trademarks. As of June 30, 2012 and 2011, the total capitalized costs for the patent applications and trademarks were $373,357 and $271,544, respectively.
 
 
 
June 30, 2012
 
June 30, 2011
 
 
Gross
 
Accumulated
 
Gross
   
Accumulated
 
 
Amount
 
Amortization
 
Amount
   
Amortization
 
Amortized Intangible Assets
                 
                   
License agreement
$ 648,123   $ (604,811 ) $ 648,123     $ (542,921 )
Patents in process
  373,357     -     271,544       -  
Total
$ 1,021,480   $ (604,811 ) $ 919,667     $ (542,921 )

Amortization of patents in process commences when the patents are issued.
 
 
June 30, 2012
 
June 30, 2011
 
 
Gross
 
Accumulated
 
Gross
   
Accumulated
 
 
Amount
 
Amortization
 
Amount
   
Amortization
 
Aggregate Amortization Expense
                 
 
                 
For the years ended
$ 61,890   $ 604,811   $ 61,890     $ 542,921  
                           
Estimated Amortization Expense
Amount
                     
                           
For the year ended June 30, 2013
$ 43,312                      
For the year ended June 30, 2014
$ -                      
For the year ended June 30, 2015
$ -                      
For the year ended June 30, 2016
$ -                      
For the year ended June 30, 2017
$ -                      

NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT)

Fiscal 2012

In July 2011, the Company issued 100,000 shares of restricted common stock for an aggregate price of approximately $28,000 or $0.28 per share.


Fiscal 2011

In December 2010, the Company issued 25,000 shares of restricted common stock for payment of consulting services.  The amount charged to operations was $18,750, the value of the shares on the date issued.
 
In December 2010, 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.

During the period from January to June 2011, the Company issued 5,438,143 shares of restricted common stock for an aggregate price of approximately $1,522,000 or $0.28 per share.

In June 2011, the Company issued 375,714 shares of restricted common stock for payment of consulting services of approximately $105,000, which was charged to operations.
 

NOTE 6 - COMMITMENTS

The Company leases a laboratory facility in Gainesville, Florida. The lease expires in February 1, 2013. Rent expense for the years ended June 30, 2012 and 2011 was  $27,380 and $26,367, respectively.

The following is a schedule of minimum future payments on the operating lease as of June 30, 2012:
 
For The Years Ending June 30,
 
     
2013
  15,050  
2014
  -  
Thereafter
  -  
Total
$ 15,050  

 
-36-

 

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 were vested on November 17, 2010 and the remaining one-third were 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.  During the year ended June 30, 2012, 35,500 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 were 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.   During the year ended June 30, 2012, 72,000 options were forfeited.

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.  During the year ended June 30, 2012, 146,645 options were forfeited.

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 were vested on December 20, 2007 and
the remaining one-third were 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.  During the year ended June 30, 2010, 15,000 options were forfeited.
 
 
 
-37-

 
NOTE 7 – STOCK OPTIONS AND WARRANTS, continued
 
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 year ended June 30, 2011, 545,000 stock options were expired.

During the year ended June 30, 2011, 50,000 stock options were exercised for the aggregate price of approximately $10,000 or $0.20 per share under the October 27, 2008 stock options agreement.

The weighted average grant date fair value of options and warrants granted during the fiscal years ended June 30, 2012 and 2011 were estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions used; risk-free interest rate of 3%; dividend yield of 0%; expected volatility of 91%; and estimated life of 5 years. Expected volatility is 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.
 
A summary of options for the years ended June 30, 2012 and 2011 is shown below:

 
June 30, 2012
 
June 30, 2011
 
 
Number
 
Weighted-Average
 
Number
 
Weighted-Average
 
 
of Shares
 
Exercise Price
 
of Shares
 
Exercise Price
 
                 
Outstanding at beginning of period
4,794,270   $ 0.57   5,389,270   $ 0.55  
Granted
-     -   -     -  
Exercised
-     -   (50,000 )   0.20  
Forfeited
-     -   -     -  
Expired
(710,300 )   0.82   (545,000 )   0.80  
Outstanding at end of period
4,083,970   $ 0.58   4,794,270   $ 0.57  
Exercisable at end of period
4,083,970         4,723,475        
Available for issuance at end of period
1,376,618         666,318        


The following is a summary of warrants granted, exercised, canceled and outstanding involving the grants in the years ended June 30, 2012 and 2011:
 
 
June 30, 2012
 
June 30, 2011
 
 
Number
 
Weighted-Average
 
 
Number
 
Weighted-Average
 
of Shares
 
Exercise Price
 
of Shares
 
Exercise Price
               
Outstanding at beginning of period
        974,920
 
 $              0.47
 
    1,228,803
 
 $                0.40
Granted
          10,714
 
                 0.02
 
                 -
 
                      -
Exercised
                   -
 
                    -
 
                 -
 
                      -
Expired
         (37,640)
 
                 0.96
 
     (253,883)
 
                  0.83
Outstanding at end of period
        947,994
 
 $              0.48
 
      974,920
 
 $                0.47
Exercisable at end of period
        947,994
     
      956,347
   

 
 
-38-


 
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 Company adopted the provisions of ASC 740: Income Taxes.  The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated.  As of June 30, 2012 and 2011, the Company has no liabilities for uncertain tax positions.  The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.  In general, the Company is no longer subject to examinations by taxing authorities for tax years prior to 2007.

The provision for income taxes consists of the following:
 
 
2012
 
2011
 
Current
$ -   $ -  
Deferred
  -     -  
 
$ -   $ -  

Deferred tax assets for June 30, 2012 and 2011 consist of the following:

 
2012
 
2011
 
Deferred tax asset:
       
Depreciation and amortization
$ 7,985   $ 955  
Stock based compensation
  3,134,667     3,129,731  
Net operating loss carry forward
  5,709,372     5,288,882  
Interest accrual
  339,934     180,056  
Research tax credit
  7,203     7,203  
Less:  valuation allowance
  (9,199,161 )   (8,606,827 )
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, 2012 and 2011 is as follows:

 
2012
 
2011
 
         
Federal income tax at statutory rate of 34%
$ (573,547 ) $ (630,135 )
State tax, net of federal benefit
  (52,636 )   (67,276 )
Other
  33,349     99,224  
Valuation allowance
  592,834     598,187  
 
$ -   $ -  

As of June 30, 2012, the Company had a net operating loss carry forward of approximately $15,200,000 which will begin to expire in 2017.


 
-39-

 
NOTE 9 – NOTES PAYABLE

Long-Term Note

   
Interest
   
Conversion
         
Related Party
Maturity
Rate
   
Price
   June 30, 2012    June 30, 2011  
Senior Convertible Note
2013
8 %   $ 0.60   $ 1,053,000   $ 1,053,000  
Accrued interest
                189,834     105,373  
   Total
              $ 1,242,834   $ 1,158,373  
                           
Others
                         
Senior Convertible Note
2014
8 %   $ 0.50     150,000     150,000  
Senior Convertible Note
2014
8 %   $ 0.50     100,000     56,000  
Senior Convertible Note
2014
8 %   $ 1.00     -     44,000  
Accrued interest
                4,986     4,986  
   Total
              $ 254,986   $ 254,986  

   
Interest
 
Conversion
         
 
Maturity
Rate
 
Price
   June 30, 2012    June 30, 2011  
Related Party
                     
Note Payable
2013
8 %   N/A   $ 89,155   $ 107,156  
Accrued interest
            12,870     4,785  
   Total
            102,025     111,941  
    Less current portion
          30,000     18,000  
   Total
          $ 72,025   $ 93,941  
                       
Related Party
                     
Note Payable
2013
8 %   N/A   $ 215,000   $ 215,000  
Accrued interest
            41,064     23,817  
   Total
          $ 256,064   $ 238,817  
                       

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 largest shareholder ("Shareholder") and the senior convertible notes totaling $250,000 as described below.  This note has an annual interest rate of 8%, 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 $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 Shareholder 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.  During the year ended June 30, 2011, the conversion price of the $150,000 senior convertible promissory note was reduced to $0.50 per share of common stock as part of the arrangement of the additional investment in the Company's restricted common stock by the note holder. In addition, the conversion price on  the $100,000 senior convertible promissory note was also reduced to $0.50 per share of common stock as a result of the additional investment in the Company's restricted common stock.

On December 16, 2010, the Company issued a promissory note to a related party for the principal amount of $113,155, which consisted of a total 100,000 principal balance of four prior convertible notes together with unpaid accrued interest thereon of $13,155.  This note has  an annual interest rate of 8%, a maturity date of December 31, 2013.  The outstanding principal amount will be paid at a rate of $1,000, $2,000 and $3,000 each month for the first 12 months, the second 12 months and the third 12 months, respectively. As of June 30, 2012 and 2011, the Company paid an aggregate principal amounts of $18,000 and $6,000, respectively. The remaining outstanding principal balance and accrued interest will be paid on the maturity date.

Effective March 15, 2010, the Company issued a $215,000 promissory note payable to the largest shareholder.  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 October 31, 2011 and subsequently extended to December 31, 2013.

 
-40-


NOTE 9 – NOTES PAYABLE, continued
 
     
Interest
   
Conversion
 
 
 
 
 
 
Maturity
 
Rate
   
Price
   June 30, 2012    June 30, 2011  
Related Party
                         
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