UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)





x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended March 31, 2010.





or





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





For the transition period from to.





Commission File Number: 0-27545





QUICK-MED TECHNOLOGIES, INC.


(Exact Name of Registrant as Specified in its Charter)





Nevada

65-0797243(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer Identification No.)





902 N.W. 4th Street


GAINESVILLE, FLORIDA 32601


(Address of Principal Executive Offices) (Zip Code)





(888) 835-2211


(Registrant’s Telephone Number, Including Area Code)





N/A


(Former Name, Former Address and Former Fiscal Year, If Changes Since Last Report)





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 that the registrant was required to submit and post such files). Yes  ̈ No  x





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).





Large accelerated filer   ̈                                                                                                   Accelerated filer   ̈


Non-accelerated filer   ̈  (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   ̈





As of May14, 2010, there were 31,357,298 shares of common stock, par value $0.0001 per share, outstanding.

















QUICK-MED TECHNOLOGIES, INC.



INDEX TO FORM 10-QPART I
FINANCIAL INFORMATIONItem 1.             Financial StatementsCondensed Balance Sheets as of  March 31, 2010 and June 30, 2009 (unaudited)
1Condensed Statements of Operations for thethree and nine months ended March 31, 2010  and 2009 (unaudited)
2Condensed Statement of Changes in Stockholders’ Deficit for the three monthsended March 31, 2010 (unaudited)
3Condensed Statements of Cash Flows for the nine months ended March 31, 2010 and 2009 (unaudited)
4Notes to Condensed Financial Statements (unaudited)
5-13Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
14-20Item 3. Quantitative and Qualitative Disclosure About Market Risk
21Item 4T.          Controls and Procedures
21PART II
OTHER INFORMATIONItem 1.
Legal Proceedings
21Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
21Item 3.
Defaults Upon Senior Securities
21Item 4.
Removed and Reserved
21Item 5.
Other Information
21Item 6.
Exhibits
22SIGNATURES
23


Index


PART I
FINANCIAL INFORMATION





ITEM 1.
FINANCIAL STATEMENTS





QUICK-MED TECHNOLOGIES, INC.
 CONDENSED BALANCE SHEETS
 (UNAUDITED)







ASSETSMarch 31,

June 30,2010

2009Current assets:Cash and cash equivalents
$
846,182

$
41,216Accounts receivable

353,128


18,562Total current assets

1,199,310


59,778Property and equipment, net

8,157


14,969Other assets:Prepaid expenses

11,020


9,706Intangible asset, net

373,120


408,095Total other assets

384,140


417,801Total assets
$
1,591,607

$
492,548LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilities:Accounts payable
$
616,438

$
562,611Unearned revenue

103,143


51,428Accrued expenses

57,807


99,931Accrued liability to officers

345,125


133,700Note payable - director

217,329


-Convertible note payable - officer

107,479


102,482Total current liabilities

1,447,321


950,152License payable

160,000


160,000Long-term liability - convertible note payable

250,055


-Long-term liability - convertible note payable - related party

1,053,131


430,315Long-term liability - convertible note payable - director

4,938,741


3,916,290Total liabilities

7,849,248


5,456,757Commitments and contingenciesStockholders' deficit:Common stock, $0.0001 par value; 100,000,000authorized shares; 31,357,298 and 31,039,707 shares issued andoutstanding at March 31, 2010 and June 30, 2009, respectively

3,136


3,104Additional paid-in capital

13,184,121


11,927,286Outstanding stock options

3,686,911


3,213,987Accumulated deficit

(23,131,809
)

(20,108,586
)Total stockholders' deficit

(6,257,641
)

(4,964,209
)Total liabilities and stockholders' deficit
$
1,591,607

$
492,548










See accompanying notes to unaudited condensed financial statements.
 -1-
 Index





QUICK-MED TECHNOLOGIES, INC.
 CONDENSED STATEMENTS OF OPERATIONS
 (UNAUDITED)





Three Months Ended


Nine Months EndedMarch 31,


March 31,2010

2009


2010


2009RevenuesProduct sales
$
186,398

$
11,646


$
310,706


$
782,626Royalty fees

61,106


-



113,073



-Research and development service

115,000


113,750



162,500



180,850License fees

2,213


1,786



5,785



5,357364,717


127,182



592,064



968,833Expenses:Cost of sales

7,899


1,085



14,243



33,565Research and development

278,216


244,627



921,034



807,317General and administrative expenses

395,221


276,221



1,068,951



1,085,045Licensing and patent expenses

70,975


50,938



202,511



168,474Depreciation and amortization

17,627


17,976



53,230



53,928Total expenses

769,938


590,847



2,259,969



2,148,329Income (loss) from operations

(405,221
)

(463,665
)


(1,667,905
)


(1,179,496
)Other income (expense):Interest income

9


497



33



2,277Interest expense

(994,348
)

(64,674
)


(1,355,350
)


(190,287
)Loss before income taxes

(1,399,560
)

(527,842
)


(3,023,222
)


(1,367,506
)Provision (benefit) for income taxes

-


-



-



-Net loss
$
(1,399,560
)
$
(527,842
)

$
(3,023,222
)

$
(1,367,506
)Net loss per share (basic and diluted)
$
(0.04
)
$
(0.02
)

$
(0.10
)

$
(0.04
)Weighted average commonshares outstanding (basic and diluted)

31,309,130


30,941,182



31,228,688



30,897,907








See accompanying notes to unaudited condensed financial statements.
 -2-
 
 Index







QUICK-MED TECHNOLOGIES, INC.
 CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
 FOR THREE MONTHS ENDED MARCH 31, 2010
 (UNAUDITED)





AdditionalCommon Stock

Paid-In

Accumulated

OutstandingShares

Amount

Capital

Deficit

Stock Options


TotalBalance, December 31, 2009
31,242,298

$
3,124

$
12,201,266

$
(21,732,249
)
$
3,575,848


$
(5,952,011
)Stock-based compensation
-


-


-


-


112,013



112,013Exercise of stock options
15,000


2


8,748


-


(950
)


7,800Stock issuance for services
100,000


10


69,990


-


-



70,000Convertible debt beneficial conversion feature
-


-


904,117


-


-



904,117Net loss, January 1  to March 31, 2010
-


-


-


(1,399,560
)

-



(1,399,560
)Balance, March 31, 2010
31,357,298

$
3,136

$
13,184,121

$
(23,131,809
)
$
3,686,911


$
(6,257,641
)














See accompanying notes to unaudited condensed financial statements.
 -3-
 Index





QUICK-MED TECHNOLOGIES, INC.
 CONDENSED STATEMENTS OF CASH FLOWS
 FOR THE NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (UNAUDITED)





2010

2009Cash flows from operating activities:Net loss
$
(3,023,222
)
$
(1,367,506
)Adjustments to reconcile net loss to netcash used in operating activities:Depreciation and amortization

53,230


53,928Stock granted for services

75,000


15,000Stock-based compensation

509,474


537,710Interest expense on convertible debt beneficial conversion

1,102,867


-(Increase) decrease in:Accounts receivable

(334,566
)

336,215Prepaid expenses

(1,315
)

(5,733
)Increase (decrease) in:Accounts payable

53,826


(419,466
)Accrued interest

174,648


190,287Other current liabilities

221,017


58,797Net cash used in operating activities

(1,169,041
)

(600,768
)Cash flows from investing activities:Patents

(11,443
)

(9,631
)Net cash used in investing activities

(11,443
)

(9,631
)Cash flows from financing activities:Proceeds from exercise of stock options

42,450


5,000Increase in notes payable

250,000


-Increase in notes payable - related party

678,000


-Increase in notes payable - officer

-


100,000Increase in notes payable - director

1,015,000


455,000Net cash provided by financing activities

1,985,450


560,000Net increase (decrease) in cash and cash equivalents

804,966


(50,399
)Cash and cash equivalents at beginning of period

41,216


72,817Cash and cash equivalents at end of period
$
846,182

$
22,418Supplementary Information:Cash paid for:Interest
$
-

$
-Income taxes
$
-

$
-Non-cash disclosures of investing andfinancing activities:Stock-based compensation
$
509,474

$
537,710Interest expense on beneficial conversion
$
1,102,867

$
-


See accompanying notes to unaudited condensed financial statements.
 -4-
 Index







QUICK-MED TECHNOLOGIES, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (UNAUDITED)





NOTE 1 - DESCRIPTION OF BUSINESS





The accompanying unaudited condensed financial statements of Quick-Med Technologies, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of the management of the Company, the accompanying unaudited financial statements contain all the adjustments (which are of a normal recurring nature) necessary for a fair presentation.  Operating results for the six months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending June 30, 2010. For further information, refer to the financial statements and the footnotes thereto contained in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009, as filed with the Securities and Exchange Commission.





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





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





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








Cash and Cash Equivalents





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





Use of Estimates





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





Intangible Assets





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






-5-
 Index








NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued




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 March 31, 2010 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.





Research and Development Costs





Research and development costs are expensed as incurred.





Earnings Per Share





Basic net loss per common share is computed by dividing net loss applicable to common shareholders by the weighted-average number of common shares outstanding during the period.  Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. For the periods ended March 31, 2010 and 2009, 14,770,135 and 10,840,329 diluted common stock equivalents, respectively, have been excluded from the calculation of diluted earnings per share, as their inclusion would have been anti-dilutive.





Fair Value Measurements





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





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





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




Revenue Recognition




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





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




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





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





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






-6-
 Index




NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued




Unearned Revenue





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





Stock Compensation





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





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 March 31, 2010, the Company’s cash levels did exceed the federally insured limit by approximately $627,000. As of March 31, 2010, most of the Company’s accounts receivable was derived from BASF and US Army.





The credit risk of the accounts receivable is considered limited given the customers’ credit rating. There were no write-offs of uncollectible receivables during the year ended June 30, 2009.





Income Taxes





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




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





Recently Issued Accounting Pronouncements





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





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






-7-
 Index






NOTE 3 – STOCK OPTIONS AND WARRANTS





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





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





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





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





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





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





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





During the period ended March 31, 2010, 145,000 options were exercised at $0.17 per share or an aggregate price of approximately $24,650 under the July 2004 stock options agreement.  In addition, 55,000 options were exercised at $0.20 per share or an aggregate price of approximately $11,000 under the October 27, 2008 stock options agreement, and 10,000 options were exercised at $0.68 per share or an aggregate price of $6,800.  During the period ended March 31, 2009, 29,412 options were exercised at $0.17 per share or an aggregate price of $5,000.






-8-
 Index





NOTE 3 – STOCK OPTIONS AND WARRANTS, continued





The weighted average grant date fair value of options and warrants granted during the three and nine months ended March 31, 2010 and 2009 were estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions noted in the following table. Expected volatilities are based on historical volatility of common stock.  The expected term of the options and warrants represents the period of time that options and warrants granted are expected to be outstanding and is derived from historical terms.


Three Months Ended March 31,


Nine Months Ended March 31,2,010


2,009


2,010


2,009Risk free interest rate
3
%

3
%

3
%

3
%Expected life (years)
5


5


5


5Expected volatility
91
%

50% to 161%


91% to 161%


101% to 161%Expected dividends
None


None


None


None







A summary of options for the periods ended March 31, 2010 and 2009 is shown below:





March 31, 2010

March 31, 2009Number

Weighted-Average

Number

Weighted-Averageof Shares

Exercise Price

of Shares

Exercise PriceOutstanding at beginning of period
4,966,116

$
0.53

5,683,544

$
0.61Granted
681,785


0.77

1,335,102


0.20Exercised
(210,000
)

0.20

29,412


0.17Forfeited
(23,631
)

0.77

(230,343
)

0.47Expired
(10,000
)

0.17

(871,500
)

0.55Outstanding at end of period
5,404,270

$
0.55

5,946,215

$
0.53Exercisable at end of period
3,803,034




4,148,523Available for issuance at end of period
106,318




53,785







The following is a summary of warrants granted, exercised, canceled and outstanding involving the grants in the periods ended March 31, 2010 and 2009:





March 31, 2010

March 31, 2009Number

Weighted-Average

Number

Weighted-Averageof Shares

Exercise Price

of Shares

Exercise PriceOutstanding at beginning of period
980,239

$
0.31

744,937

$
0.48Granted
248,564


0.77

705,302


0.20Exercised
-


-

-


-Expired
-


-

-


-Outstanding at end of period
1,228,803

$
0.40

1,450,239

$
0.48Exercisable at end of period
1,057,902




1,204,822










-9-
 Index




NOTE 4 – NOTES PAYABLE





Short-Term Note





Interest

Conversion

March

JuneDirector
Maturity

Rate

Price


31, 2010


30, 2009Note Payable
2011

8
%
None

$
215,000

$
-Accrued interest







2,329


-Total






$
217,329

$
-Officer2008 Convertible Notes
2010

8
%
$
0.20


100,000


100,000Accrued interest








7,479


2,482Total







$
107,479

$
102,482






Long-Term Note







Interest


Conversion

March

JuneRelated Party
Maturity

Rate


Price


31, 2010


30, 2009Senior Convertible Note
2013

8
%

$
0.60

$
1,053,000

$
375,000Accrued interest









131


55,315Total








$
1,053,131

$
430,315OthersSenior Convertible Notes
2014

8
%

$
1.00


250,000


-Accrued interest









55


-Total








$
250,055

$
-









-10-
 Index


NOTE 4 – NOTES PAYABLE, continued




Long-Term Note





Interest


Conversion

March

JuneMaturity

Rate


Price


31, 2010


30, 2009Director2003 Senior Convertible Note
2013

6
%

$
0.38

$
1,268,625

$
1,268,625Senior Convertible Note
2013

8
%

$
0.74


208,955


208,9552007 Senior Convertible Note
2013

8
%

$
0.74


375,000


375,0002007 Senior Convertible Note 2
2013

8
%

$
0.55


50,000


50,0002007 Senior Convertible Note 2
2013

8
%

$
0.51


50,000


50,0002007 Senior Convertible Note 2
2013

8
%

$
0.40


50,000


50,0002007 Senior Convertible Note 2
2013

8
%

$
0.40


50,000


50,0002007 Senior Convertible Note 2
2013

8
%

$
0.34


50,000


50,0002007 Senior Convertible Note 2
2013

8
%

$
0.32


50,000


50,0002008 Senior Convertible Note 1
2013

8
%

$
0.32


50,000


50,0002008 Senior Convertible Note 1
2013

8
%

$
0.45


70,000


70,0002008 Senior Convertible Note 1
2013

8
%

$
0.40


75,000


75,0002008 Senior Convertible Note 1
2013

8
%

$
0.33


50,000


50,0002008 Senior Convertible Note 1
2013

8
%

$
0.42


75,000


75,0002008 Senior Convertible Note 1
2013

8
%

$
0.40


50,000


50,0002008 Senior Convertible Note 2
2013

8
%

$
0.29


50,000


50,0002008 Senior Convertible Note 2
2013

8
%

$
0.20


50,000


50,0002008 Senior Convertible Note 2
2013

8
%

$
0.38


50,000


50,0002008 Senior Convertible Note 2
2013

8
%

$
0.35


135,000


135,0002008 Senior Convertible Note 2
2013

8
%

$
0.25


100,000


100,0002008 Senior Convertible Note 2
2013

8
%

$
0.35


50,000


50,0002008 Senior Convertible Note 2
2013

8
%

$
0.25


50,000


50,0002008 Senior Convertible Note 3
2013

8
%

$
0.36


50,000


50,0002008 Senior Convertible Note 3
2013

8
%

$
0.19


50,000


50,0002008 Senior Convertible Note 3
2013

8
%

$
0.31


50,000


50,0002009 Senior Convertible Note 1
2013

8
%

$
0.18


35,000


35,0002009 Senior Convertible Note 1
2013

8
%

$
0.37


35,000


35,0002009 Senior Convertible Note 1
2013

8
%

$
0.43


35,000


35,0002009 Senior Convertible Note 1
2013

8
%

$
0.43


35,000


35,0002009 Senior Convertible Note 1
2013

8
%

$
0.45


35,000


35,0002009 Senior Convertible Note 2
2013

8
%

$
0.48


35,000


35,0002009 Senior Convertible Note 2
2013

8
%

$
0.47


35,000


35,0002009 Senior Convertible Note 2
2013

8
%

$
0.42


35,000


35,0002009 Senior Convertible Note 2
2013

8
%

$
0.53


35,000


35,0002009 Senior Convertible Note 2
2013

8
%

$
0.58


35,000


35,0002009 Senior Convertible Note 2
2013

8
%

$
0.52


35,000


-2009 Senior Convertible Note 2
2013

8
%

$
0.46


35,000


-2009 Senior Convertible Note 2
2013

8
%

$
0.55


35,000


-2009 Senior Convertible Note 2
2013

8
%

$
0.63


50,000


-2009 Senior Convertible Note 2
2013

8
%

$
0.60


45,000


-2009 Senior Convertible Note 3
2013

8
%

$
0.60


600,000


-Accrued interest









631,161


408,710Total








$
4,938,741

$
3,916,290Total long term note payable







$
6,241,927

$
4,346,605Total debt








$
6,566,735

$
4,449,087


-11-
 Index





NOTE 4 – NOTES PAYABLE, continued





On March 31, 2010, the Company issued a senior convertible promissory note to a major shareholder for the principal amount of $1,053,000, which consisted of $600,164 in cash, $375,000 principal balance of a prior senior convertible note together with unpaid accrued interest thereon of $77,836.  This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2009 Note 3 to the Chairman and the senior convertible notes totaling $250,000 as described below.  This note has an annual interest rate of 8%, 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 Chairman and the senior convertible note to a major shareholder. These notes have an annual interest rate of 8% with a maturity date of June 30, 2014.  These notes have the convertible price of $1.00 per share of common stock.  The Company has recorded approximately $22,500 as an interest expense as a result of the beneficial conversion feature.





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





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





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





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





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





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





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





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





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





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





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





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





At March 31, 2010, the Company accrued interests of $631,161, $131, $7,479, and $55 on the convertible notes with the director, the convertible note with a related party, the convertible note with the officer, and the convertible notes with third parties, respectively




-12-
 Index





NOTE 5  – FAIR VALUE MEASUREMENTS





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




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





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





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





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





The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2010:





Carrying Value

Level 1

Level 2

Level 3Financial AssetsCash equivalents (1)
$
230,916

$
230,916

-


-Total financial assets
$
230,916

$
230,916

-


-Carrying Value

Level 1

Level 2

Level 3Financial LiabilitiesConvertible notes payable (2)
$
6,349,406


-

-

$
6,413,779Total financial liabilities
$
6,349,406


-

-

$
6,413,779


(1) Cash Equivalents




The Company's cash equivalents include short-term investments, which are money market funds. Since these are short-term highly liquid investments with original maturities of three months or less at the date of purchase, they present negligible risk of changes in value due to changes in interest rates. These short-term investments are recorded at fair value on the Company's balance sheet based on quoted market prices and observable market inputs.




(2) Convertible Notes Payable




As fully described in Note 4, the Company’s convertible notes payable are long-term debts with fixed interest rates and the conversion rates at market at the time the funds were received.  In addition, most of these notes are collateralized by the Company’s assets and revenues.  Further, the debt holders are major shareholders and third parties. The Company is in a start up phase. The Company estimates the fair value of the convertible notes for disclosure purposes by discounting the future cash flows using rates of debts that management believes are similar in terms and maturity.  The Company's short-term convertible note payable is approximate market value.








NOTE 6  – RELATED PARTY TRANSACTIONS





As fully described in Note 4, the Company has several senior convertible note payables with its Chairman, a major stockholder, and an officer during the periods ended March 31, 2010 and June 30, 2009.  As of March 31, 2010, the Company owed its officers of approximately $345,125 for deferral of salaries and fees.  In May 2010, the Company agreed to accrue interest on the outstanding balances at the 8% interest rate per annum effective April 1, 2010 with the payment and other terms to be determined.








-13-
 Index










ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS







The following discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this Form 10-Q and our Annual Report on Form 10-K for our fiscal year ended June 30, 2009.   The terms “Quick-Med”, "the Company," "we," "our" or "us" refer to Quick-Med Technologies, Inc., a Nevada corporation.  This discussion contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are 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."  In addition, any statements that refer to trends in our businesses, future financial results, and our liquidity and business plans are 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 without limitation: (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 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 makes 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  will be accepted in the marketplace; (g) we do not currently carry product liability insurance and, therefore,  should we be subject to a product liability claim, our financial condition may be adversely affected; (h) our operations are currently funded by our revenues and our debt or equity financings, but there are no assurances that these revenues and  financings will be sufficient to ensure our  future financial performance and viability;  (i) we have substantial debt obligations due to our Chairman of the Board and a major shareholder, who have  funded our operations, debt obligations that  are secured by our assets and revenues and  are senior obligations; and (j) there is no assurance that we will be able to attract and retain highly skilled scientific, technical and management personnel, who are critical to our success; and (k) other risk factors discussed in our annual report  for the fiscal year ended June 30, 2009 and other periodic filings, which may be accessed at http://www.sec.gov.  Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.






Overview





Quick-Med is a life sciences company focused on developing proprietary, broad-based technologies in the   consumer and healthcare markets. Our  four core technologies are: (1) Novel Intrinsically Micro-Bonded Utility Substrate (NIMBUS®), a family of advanced polymers bio-engineered to have antimicrobial, hemostatic, and other properties that can be used in a wide range of applications; (2)Stay FreshTM, a unique chemical formulation for textiles with a durable antimicrobial agent effective against an array of bacteria even after numerous laundering cycles; (3) NimbuDermTM, a novel copolymer for application as a persistent hand sanitizer with long lasting protection against germs, and for applications involving 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 the 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:




·
License fees;


·
Profit sharing revenues;


·
Research and development fees paid to us in connection with joint development agreements; and


·
Government research and development grants.




Our potential revenues will be derived from government agencies and the following types of companies in connection with our NIMBUS, Stay FreshTM,  NimbuDermTM and MultiStat®technologies:




·
Healthcare and medical;


·
Apparel and textile; and


·
Personal care companies.






-14-
 Index





Overview of Our Third Quarter 2010





·
Revenues increased $237,535 to $364,717 during the third quarter of 2010 compared to the same period in 2009. The increase was primarily due to an increase in royalties in the form of revenue share from product sales by BASF and new royalty fees from the sales of BIOGUARDTM. However, revenues decreased by 39% to $592,064 during the nine months ended March 31, 2010 compared to the same period in 2009. The decrease was primarily due to the current state of the economy, in particular in the retail cosmetic industry.





·
Interest expense, research and development, general and administrative and licensing and patent expenses increased 1,437% to $994,348, 14% to $278,216, 43% to $395,221 and 39% to $70,975, respectively, during the third quarter of 2010 compared to the same period in 2009 primarily due to a $900,000 non-cash charge to interest expense as a result of a beneficial conversion feature of long term convertible notes payable to a major shareholder, our Chairman and third parties, higher expenses related to the SBIR phase II program, higher financing and regulatory expenses, higher patent related expenses, additional share-based compensation expenses, increased travel expenses related to business development and expenses related to product sales.





·
Net loss was $1,399,560 or $0.04 per share for the third quarter of 2010 compared to $527,842 or $0.02 per share for the same period in 2009. This increase is primarily due to an increase in interest expense, increases in research and development expenses, general and administrative expenses, licensing and patent expenses and cost of revenues, offset by an increase in revenues.





·
As of the  end of the third quarter of 2010, our cash balance of $846, 182, coupled with accounts receivable of approximately $353,128, of which approximately $175,000 has been subsequently collected after March 31, 2010, will satisfy our cash requirements for seven (7) months assuming no further receipt of revenues and additional debt or equity financing.





Uncertainties and Trends




Our revenues are dependent now and in the future upon the following factors:




·
Acceptance of our products or future products 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  May 2010, the United States Patent and Trademark Office ('USPTO") granted us the U.S. Patent No. 7,709,694 for our proprietary NIMBUS polymeric antimicrobial technology, which is the third patent on our NIMBUS technology.   The broad range of materials covered under the provisions of the patent include those that are composed of natural fibers, such as cotton and wool, as well as synthetics such as polyurethane, polyester, nylon and polypropylene.  The applications included in the allowed claims are for a full spectrum of products such as medical devices including wound and burn dressings and blood transfer and storage products, surgical drapes and gowns, bedding, industrial and military protective wear and consumer apparel plus hygienic products such as wipes, diapers and feminine care.  The patent is to expire on December 8, 2019.




Government  Regulation




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





One of the exemptions to the requirement of pre-market clearance is 510(k) pre-market notification, which is submitted to the FDA to demonstrate that the new device is “substantially equivalent” to a previously cleared 510(k) device or a device that was in commercial distribution before May 29, 1976 (or to a pre-1976 Class II device for which the FDA has not yet called for the submission of pre-market approval (“PMA”).  Such devices are deemed to be “predicate devices” for future applications.  A PMA must be submitted if the device cannot be cleared through the 510(k) process.   The PMA process is much more demanding than the 510(k) pre-market notification process.





If a medical device is found NSE (not substantially equivalent) by the FDA and therefore a 510(k) pathway is not available, a second alternative pathway to the lengthy and costly PMA is available for low risk devices. This is called the De Novo application. The FDA Modernization Act of 1997 amended Section 513 (f)(2) of the Federal Food, Drug and Cosmetic Act (the “FFDC 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 FFDC Act. A device classified into class I or II under this new provision becomes a predicate device for future pre-market notification submissions, which means that a manufacturer may show that a new device is substantially equivalent to this predicate. This route to clearance is referred to as De Novo because it establishes a new alternative for a new technology.





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





This section should be read in conjunction with  our annual report on Form 10-K for fiscal year ended June 30, 2009 filed with the SEC for further discussions in the sections entitled, “Government Regulation,”  “510(k) Clearance Pathway” and “De Novo: Alternative Pathway to PMA.”





-15-
 Index





Capital Expenditures and Requirements





From 2000 to March 2010, we have spent approximately $839,000 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 Grobelny. This license agreement provides that we compensate Dr. Galardy and Dr. Grobelny with our common stock and cash for the exclusive license of the Ilomastat technology, which they invented.





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 Condensed Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The estimates and assumptions are evaluated on an on-going basis and are based on historical experience and on various other factors that management believes to be reasonable under the circumstances. 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. 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  stock-based compensation, deferred costs, research and development, and impairment of intangible assets  have the greatest potential impact on our condensed financial statements, so we consider these to be our critical accounting policies. Management believes that there have been no significant changes during the three months ended March 31, 2010 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended June 30, 2009.


Recent Accounting Pronouncements





For a description of the new accounting standards that affect us, see Note 2 of notes to our condensed financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.





Results of Operations





Comparison of Nine Months Ended March 31, 2010 and 2009





Revenues.     During the nine months ended March 31, 2010 we had $592,064 of revenues, compared to $968,833 of revenues for the nine months ended March 31, 2009, representing a 39% decrease in our revenues.  Our revenues during the nine months ended March 31, 2010 consisted of: (a) $310,706, which represented our royalties in the form of revenue share from the product sales by  BASF Beauty Care Solutions, L.L.C., a cosmetic and personal care division of BASF Catalysts, LLC, a wholly-owned subsidiary of BASF (“BASF”),  in connection with a manufacturing and distribution agreement we have with BASF  for product development, manufacturing and distribution (the “BASF Agreement”); (b) $113,073 royalty fees from the sales of BIOGUARDTM advanced wound care product by Derma Sciences, Inc., our licensee.  This product was launched in late June 2009 and the royalty fees related to the sales of this product were $188,073 from the period from June to March 31, 2010.  However, $75,000 was credited against the advance royalty fees we had previously received in accordance with the terms of the license agreement.  There are no further credits against future royalty fees; (c) $162,500, which represented the revenueearned from the small business innovation research program and the revenueearned from the joint development program with Avery Dennison; and (d) $5,785, which represented the earned portion of the license  fees from our licensees.





The economic uncertainty that we are operating in today could adversely impact our business.  Given the current state of the economy,  in particular in the retail cosmetic industry, we cannot anticipate  our share of the product sales by BASF for the subsequent quarters given market uncertainties.





Our revenues during the nine months ended March 31, 2009 consisted of (a) $782,626 which represented our royalties from the product sales by BASF Beauty Care Solutions, L.L.C.; (b) $180,850, which represented the revenueearned from the small business innovation research program and the revenueearned from the joint development program with Mölnlycke Health Care AB; and (c) $5,357, which represented the earned portion of the license  fee from our licensee.





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





Operating Loss.  Operating loss for the nine months ended March 31, 2010 was $1,667,905 as compared to $1,179,496 in operating loss for the nine months ended March 31, 2009, representing an increase of 41% or $488,409 in operating loss. The increase in operating loss was primarily attributable to a decrease in revenues of $376,769 coupled with an increase in expenses of $111,640 for the nine months ended March 31, 2010.   The increase in expenses was primarily due to the following:  (a) an increase in research and development expenses of $113,717 or 14%; (b) an increase of $34,037 or 20% in licensing and patent expenses; offset by (c) a decrease of $16,094 or 1% in general and administrative expenses; and (d) a decrease of $19,322 or 58% in cost of revenues, as described in more detail below.





Research and Development Expense.  Research and development expense increased by $113,717 or 14% to $921,034 for the nine months ended March 31, 2010, from $807,317 for the nine months ended March 31, 2009.  The increase in research and development expense is primarily attributable to the subcontractor expenses related to the SBIR phrase II program, which was completed in April 2010, and more utilization of outside lab services than in prior year comparable period.





General and Administrative Expense.  General and administrative expense decreased by $16,094 or 1% to $1,068,951 for the nine months  ended March 31, 2010, from $1,085,045 for the nine months ended March 31, 2009.  This decrease in our general and administrative expenses is primarily attributed to a reduction of personnel, lower expenses directly related to a decline in product sales, and expenses control offset by an increase in financing expenses.






-16-
 Index





Licensing and Patent Expense.  Licensing and patent expense increased by $34,037 or 20% to $202,511 for the nine months ended March 31, 2010 from $168,474  for the nine months ended March 31, 2009.  This increase was primarily due to higher consulting patent legal fees, annual annuity fees for our patents and patent applications and more annuity fees for more patent applications than those of prior comparable period.





Interest Expense.  Interest expense for the nine months ended March 31, 2010 increased $1,165,063 or 612% to $1,355,350 compared to $190,287 the nine months ended March 31, 2009.  This increase was mainly due to approximately $1,100,000 non-cash charge to interest expense as a result of a beneficial conversion feature of  long-term convertible note payables with a related party, the Chairman of our Board of Directors, and third parties.  Absent the non-cash charge to interest expense of approximately $1,100,000, the interest expense for the nine months ended March 31, 2010 was approximately $255,000.  The increase was due to  approximately $2,200,000 or 51% in the outstanding loan balance due to our Chairman of the Board and a major shareholder to approximately $6,500,000, compared to approximately $4,300,000  outstanding balance for the comparable 2009 period.





Net Loss.   Net loss for the nine months ended March 31, 2010  was $3,023,222 or $0.10 per share compared to $1,367,506 or $0.04 per share for the nine months ended March 31, 2009.   This increase is primarily attributable to  increases in interest expense,  research and development, and licensing and patent expenses, offset by decreases in revenues, general and administrative expenses, and cost of revenues.





Comparison of Three Months Ended March 31, 2010 and 2009





Revenues.     During the three months ended March 31, 2010 we had $364,717 of revenues, compared to $127,182 of revenues for the three months ended March 31, 2009, representing a 187% or $237,535  increase in our revenues.  Our revenues during the three months ended March 31, 2010 consisted of: (a) $186,398, which represented our royalties in the form of revenue share from the product sales by  BASF Beauty Care Solutions, L.L.C., a cosmetic and personal care division of BASF Catalysts, LLC, a wholly-owned subsidiary of BASF (“BASF”),  in connection with a manufacturing and distribution agreement we have with BASF  for product development, manufacturing and distribution (the “BASF Agreement”); (b) $61,106 royalty fees from the sales of BIOGUARDTM advanced wound care product by Derma Sciences, Inc., our licensee; (c)$115,000, which represented mainly the revenueearned from the small business innovation research program; and (c) $2,213, which represented the earned portion of the license  fees from our licensees.





Our revenues during the three months ended March 31, 2009 consisted of (a) $11,646, which represented our royalties in the form of revenue share from the product sales by  BASF Beauty Care Solutions, L.L.C.; (b) $113,750, which represented  the revenueearned from the small business innovation research program; and (c) $1,786, which represented the earned portion of the license  fee from our licensee.





Operating Loss.  Operating loss for the three months ended March 31, 2010 was $405,221 as compared to $463,665 in operating loss for the three months ended March 31, 2009, representing a decrease of $58,444 or 13% in operating loss. The decrease in operating loss was primarily attributable to an increase in revenues of $237,535 offset by with an increase in expenses of $179,091 for the three months ended March 31, 2010.   The increase in expenses was primarily due to the following:  (a) an increase of $33,589 or 14% in research and development expenses; (b) an increase of $119,000 or 43% in general and administrative expenses;  (c) an increase of $20,037 or 39% in licensing and patent expenses; and (d) an increase of $6,814 or 628% in cost of revenues, as described in more detail below.





Research and Development Expense.  Research and development expense increased by $33,589 or 14% to $278,216 for the three months ended March 31, 2010, from $244,627 for the three months ended March 31, 2009.  The increase in research and development expenses is primarily attributable to increased research and development activities and the subcontractor expenses related to the SBIR phrase II program incurred in this quarter.





General and Administrative Expense.  General and administrative expense increased by $119,000 or 43% to $395,221 for the three months  ended March 31, 2010, from $276,221 for the three months ended March 31, 2009.  This increase in our general and administrative expenses is primarily attributed to financing expenses, higher regulatory expenses, additional share-based compensation expense, increased travel expenses related to business development activities, and expenses related to increased product sales.





Licensing and Patent Expense.  Licensing and patent expense increased by $20,037 or 39% to $70,975 for the three months ended March 31, 2010 from $50,938 for the three months ended March 31, 2009. This increase was primarily due to higher annual annuity fees for our patents, consulting patent legal fees,   and more annuity fees for more patent applications than those of prior comparable period.





Interest Expense.  Interest expense for the three months ended March 31, 2010 increased $929,674 or 1437% to $994,348 compared to $64,674 the three months ended March 31, 2009.  This increase was mainly due to approximately $900,000 non-cash charge to interest expense as a result of a beneficial conversion feature of  long term convertible notes payable with a related party, with our Chairman, and third parties.  Absent the non-cash charge to interest expense of approximately $900,000, the interest expense for this quarter was approximately $90,232. The increase was due to  approximately $2,200,000 or 51% in the outstanding loan balance due to our Chairman of the Board, a related party and third parties to approximately $6,500,000, compared to approximately $4,300,000  outstanding balance for the comparable prior period.





Net Loss.   Net loss for the three months ended March 31, 2010 was $1,399,560 or $0.04 per share compared to $527,842 or $0.02 per share for the three months ended March 31, 2009.   This increase is primarily attributable to an increase in interest expense, increases in research and development expenses, general and administrative expenses, licensing and patent expenses and cost of revenues, offset by an increase in revenues.






-17-
 Index








Liquidity and Capital Resources





Our auditors have issued a going concern opinion on our audited financial statements for the fiscal years ended June 30, 2009 and 2008 as we have experienced recurring losses and negative cash flows from operations in these periods.  We expect to continue to incur losses in 2010.  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 March 31, 2010 was $846,182 as compared with $41,216 at June 30, 2009.    Subsequent to the quarter ended, we have collected approximately $174,856 of the outstanding receivable balance as of  May 12, 2010.





In June 2009, our licensee, Derma Sciences, Inc. launched the commercial sale of BIOGUARDTM an advance wound care product employing our NIMBUS technology.  From the launch date to March 31, 2010, our royalty fees related to this product were approximately $188,073.  In accordance with the terms of the license agreement, the first $75,000 royalty fees from Derma Sciences were offset against the advance payments we received in 2007, the subsequent royalty fees will be at 20% of the net sales as defined in the license agreement.  We are unable to determine how much, if any, of the royalty fee we will receive in the future at this time.  We expect minimal direct expenses in relation to this license agreement.





On April 17, 2009, we and Avery Dennison Corporation (“Avery”) entered into a Joint Development and Exclusive Option Agreement (the “Agreement”) effective as of April 17, 2009 with total value of approximately $100,000 between six to twelve months period.  We anticipated the direct expenses related to this project of approximately $20,000. As of  March 31, 2010, we have collected payments of $60,000  under the Agreement.





In September 2006, we received the SBIR Phase II grant, which included  the option of SBIR Phase I, totaling approximately $840,000 over the next two years and we expect the cash outflows related to this grant of approximately $390,000 to subcontractors and other direct expenses.  To date, we received approximately $616,000 and incurred approximately $242,000 in expenses to subcontractors and other direct expenses.





While we expect to receive royalties in the next twelve to twenty four months from the license agreement subject to certain contractual terms, we need cash in order to maintain and grow our businesses.  See the section below for further discussion of our cash requirements and related strategies to meet these needs.





Effective January 1, 2009, our board approved our management team’s action plan to conserve cash and control expenses as follows;





·
Voluntary deferral of $100,000 or 40% of our Chief Executive Officer’s annual salary;


·
Voluntary deferral of totaling $71,250 or 25% of our Vice President of Research and Development and Chief Financial Officer’s annual salary or consulting fee;


·
Reduction of a $75,000 salary position; and


·
Deferral of $20,000 or 20% in patent consulting fee.  Effective January 1, 2010, the patent consulting fee was fully restored.





Effective February 16, 2009, our board also approved our management team’s additional steps to further conserve cash as follows:





·
Additional voluntary deferral of $25,000 or $125,000 in total or 50% of our Chief Executive Officer’s annual salary;


·
Additional voluntary deferral of totaling $71,250 or $142,500 in total or 50% of our Vice President of Research and Development's annual salary and Chief Financial Officer’s annual  consulting fee;


·
Voluntary deferral of totaling $10,000 or 8% of our Director of Business Development.  Effective October 1, 2009, the salary of our Director of Business Development was fully restored.





This action plan went into effect beginning January 1, 2009 and subsequent furthering of voluntary deferral of salaries and consulting fees and has conserved approximately $428,000 in cash for the period from January 1, 2009 to March 31, 2010.





Equity Financing and our Cash Requirements





On February 8,  2010, we signed a placement agent agreement with an investment banker on a non exclusive basis to raise up to $5,000,000 in order to meet our current operating cash needs and  to execute our business plan. As part the payment arrangement, we issued 100,000 shares of restricted common stock and expensed approximately $70,000 in this quarter.  We cannot assure you that we will raise a sufficient amount of capital, if any, through this investment banker.





On November 30, 2004, we completed an agreement to sell 5,000,000 shares of our restricted common stock to Phronesis Partners, L.P. (“Phronesis”), a Delaware limited partnership, for $1,000,000 before commission and expenses (the ”Stock Purchase Agreement”). On November 30, 2004, we received $880,000 net of commission and expenses of $120,000. In connection with the Stock Purchase Agreement, our Chairman of the Board, Mr. Granito, converted $500,000 of the convertible debt we owed to him into 1,315,790 shares of our restricted common stock at a conversion price applicable to the convertible debt of $0.38 per share. In connection with the Stock Purchase Agreement, we entered into a Warrant Agreement with Phronesis, in which we granted Phronesis certain warrants to purchase shares of our restricted common stock at an exercise price as defined in the Warrant Agreement. The Warrant Agreement expired on February 5, 2005 and provided for a maximum investment of $1,000,000 by Phronesis through the exercise of warrants. On December 31, 2004, we mutually agreed to amend the exercise price for the warrant price to $0.46 per share. All other terms of the Stock Purchase Agreement and the Warrant Agreement remained the same. On the same date, Phronesis exercised its warrant to purchase 2,173,913 shares of our restricted common stock at a per share price of $0.46, or an aggregate purchase price of $1,000,000 before commission of $70,000.





In connection with the exercise of the warrant and in accordance with the terms of the Stock Purchase Agreement, Mr. Granito, our Chairman of the Board, immediately converted $826,087 of his convertible debt owed by us into 2,173,913 shares of our restricted common stock (equal to the number of shares acquired by Phronesis) at a conversion price applicable to the convertible debt of $0.38 per share.




-18-
 Index





In February 2005, we issued 150,000 shares of restricted common stock for an aggregate purchase price of $87,000 in cash.





In June 2005, we issued 16,666 shares of restricted common stock for aggregate exercise price of $2,500 in cash from an exercise of an employee stock option.





In July 2005, we issued 40,322 shares of restricted common stock for an aggregate purchase price of $25,000 in cash.





In August 2005, we issued 13,795 shares of restricted common stock for an aggregate purchase price of $8,553 in cash.





In August 2005, we issued 175,000 shares of restricted common stock for an aggregate exercise price of $29,750 in cash from an exercise of a stock option.





In February 2006, we issued 100,000 shares of restricted common stock for an aggregate purchase price of $80,000 in cash.





In September 2006, we issued 33,334 shares of common stock for aggregate exercise price of $5,000 in cash from an exercise of an employee stock option.





In February 2007, we issued 30,000 shares of common stock for an aggregate exercise price of $6,000 in cash from an exercise of a warrant by an officer.





In May 2007, we issued 100,000 shares of restricted common stock for an aggregate purchase price of $79,000 in cash.





In June 2007, we issued 67,500 shares of common stock for an aggregate exercise price of $12,150 in cash and in lieu of payment of an outstanding payable from an exercise of a warrant.





In September 2007, we issued 15,000 shares of common stock for an aggregate exercise price of $2,250 in cash from an exercise of a warrant.





In October 2007, we issued 5,000 shares of common stock for an aggregate exercise price of $1,000 in cash from an exercise of warrants.





In November 2007, we issued 62,500 shares of common stock for an aggregate exercise price of $8,900 or $0.14 per share for 60,000 shares and $0.20 per share for 2,500 shares resulting from the exercise of warrants.





In November 2007, approximately $21,046 of accounts payable was settled through the issuance of 34,501 shares of restricted common stock.





In March 2009, we issued 29,412 shares of common stock for an aggregate exercise price of $5,000  in cash from an exercise of stock options.





In April 2009, we issued 30,000 shares of common stock for an aggregate exercise price of $6,000 in cash from an exercise of warrants.





In June 2009, we issued 25,000 shares of common stock for an aggregate exercise price of $4,250 in cash from an exercise of options.





In July 2009, we issued 145,000 shares of common stock for an aggregate exercise price of $24,650 in cash from the exercises of options.





In December 2009, we issued 50,000 shares of common stock for an aggregate exercise price of $10,000 in cash from the exercise of options.





In January 2010, we issued 5,000 shares of common stock for an aggregate exercise price of $1,000 in cash from the exercises of options.





In February 2010, we issued 10,000 shares of common stock for an aggregate exercise price of $6,800 in cash from the exercises of warrants.





Based on our cash position at March 31, 2010, we cannot continue to satisfy our current cash requirements for a period of twelve (12) months through our existing capital. We anticipate total estimated, operating and research and development expenditures, and patent related legal fees of approximately $165,000 per month or an aggregate of approximately $1,980,000 over the next twelve (12) months, in the following areas:





·
Research and development expenditures of approximately $77,000 per month or an aggregate $924,000 over the next twelve (12) months, which will consist of the following estimated monthly expenditures: (a) $53,000 in payroll for scientists; (b) $7,000 for outside research and development expenditures; and (c) $17,000 for chemical supplies and laboratory operating expenses, including rent expense;




·
Patent related legal fees of approximately $23,334 per month or an aggregate $280,000 annually; and





·
Operating expenses of approximately $64,667 per month or an aggregate $776,000 over the next twelve (12) months, including personnel costs, director and officer insurance, general liability insurance, rent, consulting fees, utilities, legal and accounting fees, and payroll.





Our current cash balance of $846,182 as of  March 31, 2010, coupled with accounts receivable of approximately $353,128,  of which approximately $175,000 has been subsequently collected after March 31, 2010, will satisfy our cash requirements for approximately  seven (7) months assuming no further receipt of revenues and additional debt or equity financing.  If we are unable to satisfy the remainder of our obligations by equity and/or debt financings, we will be unable to satisfy our cash requirements beyond approximately  seven (7) months assuming no further receipts of revenues and additional debt or equity financing.





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






-19-
 Index





As of March 31, 2010, we have eleven senior convertible notes payable outstanding to our Chairman totaling approximately $4,900,000 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 short term note payable with our Chairman of $217,329 including accrued interest with a maturity date of March 12, 2011 and an annual interest rate of 8%.  We also have a $1,053,000 senior convertible note payable to a major stockholder.  The senior convertible note has an 8% interest rate per annum with a conversion price of $0.60 per share, a maturity date of  December 31, 2013, and is secured by our revenues and assets.  Further, we have two senior convertible notes totaling $250,000 with third parties.  These notes have an 8% interest rate per annum with a conversion price of $1.00 per share, a maturity date of June 30, 2014.   In addition, we have four convertible notes payable totaling $107,479 including accrued interest with an interest rate of 8% per annum and a maturity date in December 2010.  As of March 31, 2010, we have approximately $345,000 balance due to our officers.  Effective April 1, 2010, we will accrue interest on the amounts due to officers at an interest rate of 8% per annum with the payment and other terms to be determined.




If we are unable to successfully repay our loans to our Chairman and a major stockholder, we may have to liquidate our business and undertake any or all the steps outlined below.




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


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


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


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


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


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


·
Make the appropriate filings with the National Association of Security Dealers to affect a delisting of our stock.




Based upon our cash requirements for our Plan of Operations and our current dividend policy of investing any available cash to our operations, however, we do not plan to distribute any cash to our stockholders.




At March 31, 2010, we had a negative working capital of $248,010 that primarily consists of: (a) cash of $846,182; (b) accounts receivable of $353,128; (c) accounts payable of $616,438; (d) accrued expenses of $57,807; (e) unearned revenue of $103,143; (d) accrued liability to officers of $345,125; (f) note payable to director of $217,329 including accrued interest; and (g) convertible note payable with an officer  of $107,479 including accrued interest.  At March 31, 2010, we had a stockholders’ deficit of $6,257,641, a portion of which is due to non-cash share based compensation expense and non-cash interest expense from the notes payable conversions and the beneficial conversion feature of certain convertible notes.





Cash used in operating activities was $1,169,041 for the nine months ended March 31, 2010. Net cash used in investing activities was $11,443.  Net cash provided by financing activities was $1,985,450, of which   $1,015,000 was from senior convertible notes with our Chairman, $678,000 was from a senior convertible note with a major shareholder, $250,000 was from senior convertible notes with third parties, and the proceeds of $42,450 in cash from the exercise of stock options.





During the nine months ended March 31, 2009, we received $560,000, of which $455,000 was from   senior  convertible notes with our Chairman, the $100,000 convertible notes with one of our officers, and $5,000 from the exercise of stock options.





Contractual Obligations




The following table summarizes our long-term contractual obligations as of  March 31, 2010:




Total

Less than 1 Year

1-3 Years

3-5 Years


More than 5 YearsLong-term debt obligations (a)
$
6,241,927

$
-

$
-

$
6,241,927


$
-Operating lease obligations (b)
$
20,000

$
20,000

$
-

$
-


$
-





(a)
The principal and accrued interest on the notes payable owed to the Chairman’s Senior Convertible Notes, to third parties' convertible note payable, and to a major shareholder’s senior note payable as fully discussed in note 4 of the accompanying condensed footnotes to the   financial statements.




(b)
We have an operating lease for our laboratory in Gainesville, Florida with an expiration date in 2011.







Off-balance Sheet Arrangements





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








-20-
 Index








ITEM 3.       Quantitative and Qualitative Disclosure About Market Risk





Not applicable.







ITEM 4T.   Controls and Procedures





Evaluation of Disclosure Controls and Procedures




We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.







Based on our management’s evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), our Chief Executive Officer and our Chief Financial Officer have concluded that as of  March 31, 2010, the end of the period covered by this Quarterly Report on Form 10-Q, such disclosure controls and procedures are effective at a reasonable level.







Changes in Internal Controls over Financial Reporting




As of the end of our quarter ended March 31, 2010, there was no change in the our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.










PART II


OTHER INFORMATION





Item 1.   Legal Proceedings





None.





Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds





None





Item 3.   Defaults Upon Senior Securities





None.





Item 4.   (Removed and Reserved)





None.





Item 5.   Other Information.





None






-21-
 Index





Item 6.  Exhibits





Exhibit Number

Description2.1

Merger Agreement dated March 19, 2001 between Above Average Investments Ltd. and Quick-Med Technologies, Inc. (1)2.2

Amendment to Merger Agreement (1)3.1

Articles of Incorporation (1)3.2

Bylaws (1)10.1

Joint Development and Exclusive Option Agreement by and between Avery Dennison and the Registrant dated as of April 17, 2009(2)10.2

Amendment No. 2 to Patent and Technology License Agreement by and between Quick Med Technologies, Inc. and Derma Sciences, Inc. dated March 23, 2007.  (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.)(3)10.3

License Agreement by and between Quick Med Technologies, Inc. and Johnson & Johnson Consumer and Personal Products Worldwide, a division of Johnson & Johnson Consumer Companies, Inc. effective as of March 5, 2010.  (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.)(4)10.4

Senior Convertible Promissory Note by and between Quick-Med Technologies, Inc. and  Phronesis Partners, L.P. dated March 31, 2010.(5)10.5

Senior Convertible Promissory Note by and between Quick-Med Technologies, Inc. and  2849232 CANADA INC dated March 31, 2010.(5)10.6

Senior Convertible Promissory Note by and between Quick-Med Technologies, Inc. and  Peter L. Berry Holdings, Inc. dated March 31, 2010.(5)10.7

Development Agreement by and between Quick Med Technologies, Inc. and KCI USA, Inc. dated April 2, 2010.  (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.)(6)31.1

Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a), filed herewith.31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a), filed herewith.32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.








(1)           Incorporated by reference to the Company's registration statement on Form SB-2 (file no. 333-41672)





(2)           Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 23, 2009.





(3)           Incorporated by reference to the Company’s Current Report on Form 8-K filed on February  19, 2010.





(4)           Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 11, 2010.





(5)           Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 6, 2010.





(6)           Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 8, 2010.










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 Index











SIGNATURES








In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Quick-Med Technologies, Inc.___________________________(Registrant)





Date
May 17, 2010
By: /s/ J. Ladd GreenoJ. Ladd GreenoChief Executive Officer (Principal Executive Officer)





Date
May 17, 2010
By: /s/ Nam H. NguyenNam H. NguyenChief Financial Officer







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