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 December 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   ̈





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  January 24, 2011, there were 31,432,297 shares of common stock, par value $0.0001 per share, outstanding.















QUICK-MED TECHNOLOGIES, INC.





INDEX TO FORM 10-Q





PART I
FINANCIAL INFORMATIONItem 1.
Financial StatementsCondensed Balance Sheets as of  December 31, 2010 and June 30, 2010  (unaudited)
1Condensed Statements of Operations for thethree and six months ended December 31, 2010  and 2009 (unaudited)
2Condensed Statement of Changes in Stockholders’ Deficit for the three monthsended December 31, 2010 (unaudited)
3Condensed Statements of Cash Flows for the six months ended December 31, 2010 and 2009 (unaudited)
4Notes to Condensed Financial Statements (unaudited)
5 -14Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15-20Item 3.
Quantitative and Qualitative Disclosure About Market Risk
20Item 4.
Controls and Procedures
20PART 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)
 ASSETSDecember 31,

June 30,2010

2010Current assets:Cash and cash equivalents
$
343,787

$
628,026Accounts receivable

254,606


336,077Total current assets

598,393


964,103Property and equipment, net

3,482


7,004Other assets:Prepaid expenses

12,019


9,657Intangible asset, net

365,011


366,282Total other assets

377,030


375,939Total assets
$
978,905

$
1,347,046LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilities:Accounts payable
$
628,994

$
611,018Unearned revenue

89,613


117,383Accrued expenses

66,882


73,191Note payable - director

230,287


221,617Convertible note payable - officer

-


109,474Current maturity of note payable - officer

12,000


-Total current liabilities

1,027,776


1,132,683License payable

160,000


160,000Long-term liability - note payable - officer

101,578


-Long-term liability - convertible note payable

255,041


255,041Long-term liability - convertible note payable - related party

1,116,600


1,074,133Long-term liability - convertible note payable - director

5,179,260


5,018,331Total liabilities

7,840,255


7,640,188Commitments and contingenciesStockholders' deficit:Common stock, $0.0001 par value; 100,000,000authorized shares; 31,432,297 and 31,357,297 shares issuedand outstanding at December 31, 2010 and June 30, 2010

3,144


3,136Additional paid-in capital

13,664,364


13,576,122Outstanding stock options

3,945,114


3,786,351Accumulated deficit

(24,473,972


(23,658,751
)Total stockholders' deficit

(6,861,350


(6,293,142
)Total liabilities and stockholders' deficit
$
978,905

$
1,347,046
  
   See accompanying notes to unaudited condensed financial statements.
 -1-
 
 QUICK-MED TECHNOLOGIES, INC.
 CONDENSED STATEMENTS OF OPERATIONS
 (UNAUDITED)
     Three Months Ended

Six Months EndedDecember 31,

December 31,2010

2009

2010

2009RevenuesProduct sales
$
37,216

$
116,337

$
294,483

$
124,308Royalty and license fees

86,333


49,178


154,301


55,538Research and development service

97,500


32,500


183,750


47,500221,049


198,015


632,534


227,346Expenses:Cost of sales

2,636


5,185


17,390


6,344Research and development

232,749


397,127


506,915


642,817General and administrative expenses

323,786


392,444


693,980


671,935Licensing and patent expenses

100,446


89,518


165,320


133,332Depreciation and amortization

17,113


17,627


34,467


35,603Total operating expenses

676,730


901,901


1,418,072


1,490,031Operation loss

(455,681
)

(703,886
)

(785,538
)

(1,262,685
)Other income (expense):Other income, net

195,583


-


195,583


-Interest income

429


17


986


24Interest expense:Note payable

(113,161
)

(85,953
)

(226,252
)

(162,252
)Convertible debt beneficial conversion feature

-


(95,417
)

-


(198,750
)Total other income (expense)

82,851


(181,353
)

(29,683
)

(360,978
)Loss before provision (benefit) for income taxes

(372,830
)

(885,239
)

(815,221
)

(1,623,663
)Provision (benefit) for income taxes

-


-


-


-Net loss
$
(372,830
)
$
(885,239
)
$
(815,221
)
$
(1,623,663
)Net loss per share - basic and diluted
$
(0.01
)
$
(0.03
)
$
(0.03
)
$
(0.05
)Weighted average commonshares outstanding - basic and diluted

31,384,471


31,192,068


31,370,884


31,189,561
    See accompanying notes to unaudited condensed financial statements.
 -2-
   QUICK-MED TECHNOLOGIES, INC.
 CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
 FOR THREE MONTHS ENDED DECEMBER 31, 2010
 (UNAUDITED)
    AdditionalCommon Stock

Paid-In

Accumulated

OutstandingShares

Amount

Capital

Deficit

Stock Options


TotalBalance, September 30, 2010
31,357,297

$
3,136

$
13,626,122

$
(24,101,142
)
$
3,877,377


$
(6,594,507
)Stock-based compensation
-


-


-


-


77,237



77,237Stock issuance for services
25,000


3


18,747


-


-



18,750Exercise of stock options
50,000


5


19,495


-


(9,500
)


10,000Net loss, October 1, 2010 to December 31, 2010
-


-


-


(372,830
)

-



(372,830
)Balance, December 31, 2010
31,432,297

$
3,144

$
13,664,364

$
(24,473,972
)
$
3,945,114


$
(6,861,350
)
  
 
 
 
 
  See accompanying notes to unaudited condensed financial statements.
 -3-
  QUICK-MED TECHNOLOGIES, INC.
 CONDENSED STATEMENTS OF CASH FLOWS
 FOR THE SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009
 (UNAUDITED)
    2010

2009Cash flows from operating activities:Net loss
$
(815,221
)
$
(1,623,663
)Adjustments to reconcile net loss to netcash used in operating activities:Depreciation and amortization

34,467


35,603Stock granted for services

18,750


5,000Stock-based compensation

168,263


397,461Interest expense on convertible debt beneficial conversion

-


198,750Contribution of services

50,000


-(Increase) decrease in:Accounts receivable

81,471


(51,651
)Prepaid expenses

(2,362
)

(2,678
)Increase (decrease) in:Accounts payable

17,976


99,888Accrued interest

203,015


162,252Other current liabilities

(34,080
)

(21,072
)Net cash used in operating activities

(277,721
)

(800,110
)Cash flows from investing activities:Increase in intangible assets

(29,673
)

(8,546
)Net cash used in investing activities

(29,673
)

(8,546
)Cash flows from financing activities:Proceeds from exercise of stock options

10,000


34,650Increase in notes payable - officer

13,155


-Increase in notes payable - director

-


770,000Net cash provided by financing activities

23,155


804,650Net decrease in cash and cash equivalents

(284,239
)

(4,006
)Cash and cash equivalents at beginning of period

628,026


41,216Cash and cash equivalents at end of period
$
343,787

$
37,210Supplementary Information:Cash paid for:Interest
$
-

$
-Income taxes
$
-

$
-Non-cash disclosures of investing andfinancing activities:Debt forgiveness by shareholders
$
50,000

$
-Stock-based compensation
$
187,013

$
402,461Interest expense on beneficial conversion
$
-

$
198,750
 
  See accompanying notes to unaudited condensed financial statements.
 -4-
  
 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 neither the six months and three months ended December 31, 2010 are  necessarily indicative of the results that may be expected for the year ending June 30, 2011. 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, 2010, 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.
 
 
 NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
 Cash and Cash Equivalents
 
 All highly liquid investments purchased with maturity of three months or less from the time of purchase are considered to be cash equivalents.
 
 Use of Estimates
 
 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and
 liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
 Intangible Assets
 
 The costs of obtaining license agreements along with the costs to defend the patents underlying the license agreements are capitalized and amortized using the straight-line method over the estimated useful lives of the underlying license agreements.  The costs of obtaining and maintaining new patents are capitalized and amortized using the straight-line method over the estimated useful lives of the patents. The cost of patents in process is not amortized until the patent is issued.
 
 Property and Equipment
 
 Property and equipment are stated at cost.  Depreciation on property and equipment is computed using the straight-line method over the expected useful lives of the assets.
 
 Accounts Receivable and Allowance for Doubtful Accounts
 
 Accounts receivable as of December 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.
   -5-
 Index
  
 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
 
 Research and Development Costs
 
 Research and development costs are expensed as incurred.
 
 Earnings Per Share
 
 Basic net loss per common share is computed by dividing net loss applicable to common shareholders by the weighted-average number of common shares outstanding during the period.  Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. For the periods ended December 31, 2010 and 2009, 14,817,013 and 12,487,311 diluted common stock equivalents, respectively, have been excluded from the calculation of diluted earnings per share, as their inclusion would have been anti-dilutive.
 
 Fair Value Measurements
 
 During the first quarter of fiscal year 2009, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures(formerly referenced as SFAS No. 157,Fair Value Measurements),   which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. This new accounting standard does not require any new fair value measurements, but rather eliminates inconsistencies in guidance found in various other accounting pronouncements.
 
 This accounting standard establishes a hierarchy for information and valuations used in measuring fair value, which is broken down into three levels. Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities. Level 2 valuations are based on inputs, other than quoted prices included within Level 1, that are observable, either directly or indirectly. Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.
 
 The Company also adopted FASB ASC 825, Financial Instruments(formerly referenced as SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115),which allows companies to choose to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. The Company has not elected the fair value option for any eligible financial instruments.
  Revenue Recognition
 The Company’s revenues consist of the following sources: product sales, royalty and license fees, research and development service.
 
 Under the agreement for product development, manufacturing and distribution  (the “Agreement”) with BASF, the Company shares proportionately on the net sales and related expenses in accordance with the terms of the Agreement.  The Company recognizes revenue of its royalties from the sale of products by BASF when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable.
 
 The Company recognizes royalty fee income based on the net sales of Bioguard® product by our licensee, Derma Sciences Inc. in accordance with the specified terms of the license agreement.
 
 The Company recognizes revenue of its research and development service including the small business innovation research program and the US Army medical research program based on the research work
 performed in accordance with the program requirements or statements of work for the joint development agreements.
 
 The Company also recognizes revenue from the non-refundable exclusivity license fee derived from its licensees on a pro rata basis over the term of the related exclusive license agreements.  Further, the Company recognizes the exclusive option fee as revenue on a pro rata basis over the term of the related exclusive option agreement.
 
 Unearned Revenue
 
 The amount of unearned revenue represents the exclusive option fee, the license fee, and advance royalty fee yet to be earned on a pro rata basis over the exclusive option period of the related option and license agreements.
 
 Other Income
 
 The Company recognizes its Qualifying Therapeutic Discovery Project (QTDP) grant from the U.S. government in connection with the advancement of the development of the NIMBUS technology for wound dressings and wound drains net of the expenses associated with the grant application in other income.
   -6-
 Index
 
  NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
  Stock Compensation
 
 The Company records share-based payment awards at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest. The fair value of stock options was determined using the Black-Scholes option-pricing model. The fair value of the restricted stock awards was based on the closing price of the Company's common stock on the date of grant.
 
 Concentration of credit risk of financial instruments
 
 Financial instruments that potentially subject the Company to credit risk consist of cash equivalents and accounts receivable.  As of December 31, 2010, the Company’s cash levels did exceed the federally insured limit by approximately $129,905. As of December 31, 2010, most of the Company’s accounts receivable were collected other than the receivable derived from the U.S. 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, 2010.
 
 Income Taxes
 
 The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
 Recently Issued Accounting Pronouncements
 
 In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29, “Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations”. The objective of this ASU is to address diversity in practice about the presentation of pro forma revenue and earnings disclosure requirements for business combinations, and specifies that a public entity that presents comparative financial statements should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This ASU is effective prospectively for business combinations on or after January 1, 2011. As this ASU is limited to supplemental disclosures, its adoption will not have an impact on the Company’s financial condition or results of operations.
 
 In December, 2010, the FASB issued ASU 2010-28, “Intangibles—Goodwill and Other (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. The objective of this ASU is to address diversity in practice in the application of goodwill impairment testing by entities with reporting units with zero or negative carrying amounts, eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. This ASU is effective for interim periods after January 1, 2010. The adoption of this ASU may require the Company to report goodwill impairment charges sooner than under current practice.
  -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 were 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 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 the 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 the 705,302 warrants issued, 240,302 warrants were vested immediately on the grant date.
 
 The remainder 871,000 stock options and 465,000 warrants were vested one-third immediately, one-third were vested on October 27, 2009 and the remaining one-third were vested on October 27, 2010, assuming the person receiving the equity awards is employed or being utilized by the Company at the time of vesting.  The exercise price of those stock options and warrants is $0.20 per share, which was the closing price of the common stock on the date of grant.  The weighted average grant date fair value of options and warrants was $0.19 per share based on the Black-Scholes option-pricing model.  The options and warrants expire five years from the date of grant.
 
 On April 18, 2008, 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 were vested on April 17, 2009 and the remaining one-third were 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  granted 484,056 non-qualified stock options to the Chief Executive Officer (“CEO”) at an exercise price of $0.75 per share. These options were fully vested and immediately exercisable at the date of grant.  In addition, the Board granted 1,452,167 non-qualified stock options at an exercise price of $0.74 per share on September 25, 2007, as part of the CEO’s employment agreement. The second stock options are vested and become exercisable 1/16th of the total 1,452,167 options on each three-month anniversary beginning on June 11, 2007.  The average grant date fair value of the options was $0.46 per share based on the Black-Scholes option-pricing model.  These options expire five years from the date of grant.
 
 On December 20, 2006, the Company issued 790,770 stock options to board members, management, employees, and consultants for their services.  These options have an exercise price of $1.05 per share. The stock options were vested one-third immediately, one-third were vested on December 20, 2007 and
 the remaining one-third were vested on December 20, 2008, assuming the person receiving the equity awards is employed by the Company at the time of vesting.  The weighted average grant date fair value of options was $0.69 per share based on the Black-Scholes option-pricing model.  The options expire five years from the date of grant.
 
 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 were vested on July 1, 2006 and the remaining one-third were 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. On September 9, 2010, approximately 545,000 options and 175,000  had expired.
 
 During the period ended December 31, 2009, 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, 50,000 options were exercised at $0.20 per share or an aggregate price of approximately $10,000 under the October 2008 stock options agreement.
 
 During the period ended December 31, 2010, 50,000 options were exercised at $0.20 per share or an aggregate price of approximately $10,000 under the October 2008 stock options agreement
   -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 six months ended December 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

December 31,

Six Months Ended

December 31,2010

2009

2010

2009Risk free interest rate
3
%
3
%
3
%
3
%Expected life (years)
5

5

5

5Expected volatility
91
%
91
%
91
%
91% to 161%Expected dividends
None

None

None

None
 A summary of options for the periods ended December 31, 2010 and 2009 is shown below:
   December 31, 2010

December 31, 2009Number

Weighted-Average

Number

Weighted-Averageof Shares

Exercise Price

of Shares

Exercise PriceOutstanding at beginning of period
5,389,270

$
0.55

4,966,116

$
0.53Granted
-


-

681,785


0.77Exercised
(50,000
)

0.20

(195,000
)

0.18Forfeited
-


-

-


-Expired
(545,000
)

0.80

(10,000
)

0.17Outstanding at end of period
4,794,270

$
0.57

5,442,901

$
0.55Exercisable at end of period
4,447,562




3,542,452Available for issuance at end of period
666,318




82,687
 The following is a summary of warrants granted, exercised, canceled and outstanding involving the grants in the periods ended December 31, 2010 and 2009:
   December 31, 2010

December 31, 2009Number

Weighted-Average

Number

Weighted-Averageof Shares

Exercise Price

of Shares

Exercise PriceOutstanding at beginning of period
1,228,803

$
0.40

980,239

$
0.31Granted
-


-

248,564


0.77Exercised
-


-

-


-Expired
(240,161
)

0.80

-


-Outstanding at end of period
988,642

$
0.46

1,228,803

$
0.40Exercisable at end of period
945,304




1,006,769
 
 -9-
 Index
  
 NOTE 4 – NOTES PAYABLE
 
 Short-Term Note
   Interest

ConversionDirector
Maturity

Rate

Price

December 31, 2010


June 30, 2010Note Payable
2011

8
%
N/A

$
215,000


215,000Accrued interest







15,287


6,617Total






$
230,287

$
221,617
 Long-Term Note
   Interest


ConversionRelated Party
Maturity

Rate


Price

December31, 2010

June 30, 2010Senior Convertible Note
2013

8
%

$
0.60

$
1,053,000

$
1,053,000Accrued interest









63,600


21,133Total








$
1,116,600

$
1,074,133OthersSenior Convertible Notes
2014

8
%

$
1.00


250,000


250,000Accrued interest









5,041


5,041Total








$
255,041

$
255,041OfficerNote Payable
2013

8
%


N/A

$
101,155

$
100,000Accrued interest









423


9,474Total








$
101,578

$
109,474


-10-
 Index
  NOTE 4 – NOTES PAYABLE, continued
  Long-Term Note
  Interest


ConversionMaturity

Rate


Price

December31, 2010

June30, 2010Director2003 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


35,0002009 Senior Convertible Note 2
2013

8
%

$
0.46


35,000


35,0002009 Senior Convertible Note 2
2013

8
%

$
0.55


35,000


35,0002009 Senior Convertible Note 2
2013

8
%

$
0.63


50,000


50,0002009 Senior Convertible Note 2
2013

8
%

$
0.60


45,000


45,0002009 Senior Convertible Note 3
2013

8
%

$
0.60


600,000


600,000Accrued interest









871,680


710,751Total








$
5,179,260

$
5,018,331Total long term note payable







$
6,652,479

$
6,456,979Total debt








$
6,882,766

$
6,678,596
 -11-
 Index
 
 NOTE 4 – NOTES PAYABLE, continued
 
 On December 16, 2010, the Company issued a promissory note to an officer for the principal amount of $113,155, which consisted of a total 100,000 principal balance of four prior convertible notes together with unpaid accrued interest thereon of $13,155.  This note has  an annual interest rate of 8%, a maturity date of December 31, 2013.  The outstanding principal amount will be paid at a rate of $1,000, $2,000 and $3,000 each month for the first 12 months, the second 12 months and the third 12 months, respectively.  The remaining outstanding principal balance and accrued interest will be paid on the maturity date.
 
 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.  The interest is due semi-annually in cash or the Company's common shares at the debt holders discretion with proper notice.  As of September 30, 2010 the Company paid approximately $10,000 in semi-annual interest payment.   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, which was extended to July 1, 2011.
 
 In November 2009, the Company finalized and issued a $600,000 2009 senior convertible note payable (“2009 Note 3”) to its Chairman.  The Company received the borrowings (the "Advances") in a series of $45,000 on September 8, 2009, $25,000 on September 11, 2009, $125,000 on September 23, 2009, $100,000 on October 14, 2009, $50,000 on October 28, 2009, $175,000 on November 12, 2009,   $50,000 on December 14, 2009, and $30,000 on February 26, 2010 totaling $600,000.   This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2009 and 2008 senior convertible notes described below with a 8% annual interest rate and has a maturity date of December 31, 2013.  This note has the conversion price of $0.60 per share of common stock.  The Company has recorded approximately $215,500 as an interest expense to date for the Advances received as a result of the beneficial conversion feature.  As part of the terms of this note, the maturity dates of all other outstanding senior convertible notes owed to its Chairman are extended to December 31, 2013.
 
 Effective May 12, 2009, the Company issued a 2009 senior convertible note payable (“2009 Note 2”) to its Chairman to combine the borrowings (the “Advances”) in a series of $35,000 each from May 12, 2009 through August 12, 2009, $50,000 and $45,000 on August 14 and 27, 2009, respectively totaling $375,000.  As of June 30, 2009, the Company received $175,000.  This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2009 and 2008 senior convertible notes described below and has a maturity date of December 31, 2013.  This note has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.
 
 Effective February 26, 2009, the Company issued a 2009 senior convertible note payable (“2009 Note 1”) to its Chairman to combine the borrowings (the “Advances”) in a series of $35,000 each from February 26, 2009 through April 30, 2009 totaling $175,000.  This senior convertible note is secured by the Company’s revenues and assets with the same priority as the 2008 senior convertible notes described below and has a maturity date of December 31, 2013.  This note has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.
 
 Effective 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.
   -12-
 Index
 NOTE 4 – NOTES PAYABLE, continued
   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 December 31, 2010, the Company accrued interests of $871,680, $63,600, $423, and $5,041 on the convertible notes with the director, the convertible note with a related party, the promissory note with the officer, and the convertible notes with third parties, respectively
 
 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 December 31, 2010:
   Carrying Value

Level 1

Level 2

Level 3Financial AssetsCash equivalents (1)
$
363,873

$
363,873

-


-Total financial assets
$
363,873

$
363,873

-


-Carrying Value

Level 1

Level 2

Level 3Financial LiabilitiesConvertible notes payable (2)
$
6,652,479


-

-

$
6,388,725Total financial liabilities
$
6,652,479


-

-

$
6,388,725
 (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 an officer. The Company is in a start up phase. The Company estimates the fair value of the convertible notes for disclosure purposes by discounting the future cash flows using rates of debts that management believes are similar in terms and maturity.  The Company's short-term convertible note payable is approximate market value.
 
  -13-
 Index
 
 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 third parties and a promissory note with  an officer during the periods ended December 30, 2010 and June 30, 2010.
  
 NOTE 7  – SUBSEQUENT EVENTS
 
 In January 2011, the U.S. Environmental Protection Agency has granted registration (EPA registration number 87358-1) of the Company's patent-pending Stay Fresh Antimicrobial Technology for use in a wide range of textile applications including apparel, interior furnishings, automotive upholstery and carpeting.
 
 As of February 11, 2011, the Company raised approximately $710,000 in a private equity financing through the issuance of its restricted common shares of approximately 2,500,000 shares to a number of investors at a price of $0.28 per share.  We may pay a consultant up to approximately 250,000 shares of   the Company's restricted common shares as fees associated with this equity financing.






-14-
 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, 2010.   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, including those 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, 2010 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, including wound care, catheters, tubing, films, and coatings; (2)Stay Fresh®, 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 (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 i.e. hospitals, acute care facilities 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 Freshis 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:




·
Royalty and license fees;


·
Profit sharing revenues;


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


·
Government research and development grants.




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




·
Healthcare and medical;


·
Apparel and textile; and


·
Personal care companies.







-15-
 Index






Recent Developments




In January 2011, the U.S. Environmental Protection Agency has granted registration (EPA registration number 87358-1) of our patent-pending Stay Fresh Antimicrobial Technology for use in a wide range of textile applications including apparel, interior furnishings, automotive upholstery and carpeting.





Overview of Our  Fiscal Quarter 2011 ended December 31, 2010





·
Revenues increased $23,034 to $221,049 during the fiscal quarter ended December 31, 2010 compared to the same fiscal quarter ended December 31, 2009. The increase was primarily due to an increase in royalty and license fees from the sales of BIOGUARD, and research and development services offset by a decrease in royalties in the form of revenue share from product sales by BASF.





·
Research and development, and general and administrative expenses decreased 41% to $232,749, 17% to $323,786 respectively, during the second fiscal quarter of  2011 compared to the same period in 2010 primarily due to the absence of the expenses related to the SBIR phase II program, and lower stock-based compensation expenses offset by the investor relations program costs.  Licensing and patent expenses and interest expense on notes payable increased 12% to $100,446 and 32% to $113,161 respectively, due to higher legal patent fees and larger outstanding notes payable offset by the absence of the interest expense from the convertible debt beneficial conversion feature in the current fiscal quarter.





·
Other income increased 100% to $195,583 net of direct expenses from prior year comparable period because in October 2010, we were awarded a grant of approximately $244,000 before the direct expenses related to the grant application, by the U.S. government under the Qualifying Therapeutic Discovery Project ("QTDP") program to advance the development of the NIMBUS technology for wound dressings and wound drains.  There was no similar income in the prior comparable period





·
Net loss was $372,830 or $0.01 per share for the second fiscal quarter of 2011 compared to $885,239 or $0.03 per share for the same period in 2010. This decrease is primarily due to an increase in revenues and decreases in research and development expenses, general and administrative expenses, and  cost of sales, offset by an increase in interest expense on notes payable.





·
As of the  end of the second fiscal quarter of 2011, our cash balance of $343,787, accounts receivable of approximately $254,600, of which  approximately $140,900 has been subsequently collected after December 31, 2010,  and approximately $710,000 in cash from an equity financing subsequent to December 31, 2010 will satisfy our cash requirements for more than 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, among other things, 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;


·
Our ability to obtain regulatory approval of our future products; and


·
Other risk factors discussed in our annual report for the firscal year ended June 30,2010 and other periodic reports.





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.




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”) and/or as treated articles by the Environmental Protection Agency (“EPA”).
  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, 2010 filed with the SEC for further discussions in the sections entitled, “Government Regulation,”  “510(k) Clearance Pathway” and “De Novo: Alternative Pathway to PMA.”







-16-
 Index








EPA regulations govern the sale and distribution of pesticides in the United States.  EPA requires registration of a new pesticide or a “new use” of a previously registered pesticide. EPA regulations also govern the particular types of claims that manufacturers and marketers may make on products or articles that are treated with registered pesticides. To obtain a registration, EPA requires specific studies and tests to insure that the pesticide, when used according to label directions, does not pose unreasonable risks to human health or to the environment. After review by EPA, a Notice of Pesticide Registration is issued and the pesticide can be used legally in the U.S., provided that the use and claims are consistent with the EPA approved product label.
 On January 27, 2011 EPA granted registration for our patent pending Stay Fresh antimicrobial technology. Stay Fresh is the only antimicrobial technology containing hydrogen peroxide approved by EPA for antimicrobial preservation of textiles. Our EPA registration covers a range of textile applications including apparel, interior furnishings, automotive upholstery and carpeting.




Capital Expenditures and Requirements





From 2000 to December 2010, we have spent approximately $877,000 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 provided that we compensated approximately 80,000 common shares, 80,000 stock options and $50,000 in cash  each, to  Dr. Galardy and Dr. Grobelny 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 December 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, 2010.





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 Six Months Ended December 31, 2010 and 2009





Revenues.     During the six months ended December 31, 2010 we had $632,534 of revenues, compared to $227,346 of  revenues for the six months ended December 31, 2009, representing a 178% increase in our revenues.  Our revenues during the six months ended December 31, 2010 consisted of: (a) $294,483, 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) $154,301 royalty and license fees  consisting of $145,281 in royalty fees from the sales of BIOGUARD® advanced wound care product by Derma Sciences, Inc., our licensee, and $9,020 in license fees representing the earned portion of the license fees from our licenses; and (c) $183,750, which represented the revenueearned from the  development projects.  While we noted that the year-to-date  MultiStat product sales by BASF has improved,  however, given the current state of the economy,  in particular in the retail cosmetic industry, we cannot anticipate the MultiStat product sales by BASF for the subsequent quarters given economic market uncertainties.





Our revenues during the six months ended December 31, 2009 consisted of (a) $124,308 which represented our royalties from the product sales by BASF Beauty Care Solutions, L.L.C.; (b) $55,538, royalty and license fees consisting of $3,571 in license fees representing the earned portion of the license fees from our licenses and $51,967 from the sales of BIOGUARD® advanced wound care product by Derma Sciences, Inc.  This product was launched in late June 2009 and the royalty fees related to the sales of this product were $126,967 from the period from June to December 31, 2009.  However, $75,000 was credited against the advance royalty fees we had previously received in accordance with the terms of the license agreement.  There are no further credits against future royalty fees;  and (c) $47,500, which represented the revenue earned from the  development projects.





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 expired on December 31, 2010.  Both parties continue to operate under the same Agreement while finalizing the extension of the Agreement.   The final agreement may contain certain sharing percentages that could potentially affect negatively our proportionate share of the product sales in the future.





Operating Loss.  Operating loss for the six months ended December 31, 2010 was $785,538 as compared to $1,262,685 in operating loss for the six months ended December 31, 2009, representing a decrease of 38% or $477,147 in operating loss. The decrease in operating loss was primarily attributable to an increase in revenues of $405,188 coupled with a decrease in operating expenses of $71,959 for the six months ended December 31, 2010.   The decrease in operating expenses was primarily due to the following:  (a) a decrease in research and development expenses of $135,902 or 21%; offset by (b) an increase of $22,045 or 3% in  general and administrative expenses; (c) an increase of $31,988 or 24% in licensing and patent expenses; and (d) an increase of $11,046 or 174% in cost of revenues, as described in more detail below.





Research and Development Expense.  Research and development expense decreased by $135,902 or 21% to $506,915 for the six months ended December 31, 2010, from $642,817 for the six months ended December 31, 2009.  The decrease in research and development expense is primarily attributable to a reduction in the remaining subcontractor expenses related to the SBIR phase II program, and lower stock-based compensation expenses than in prior year comparable period.







-17-
 Index





General and Administrative Expense.  General and administrative expense increased by $22,045 or 3% to $693,980  for the six months  ended December 31, 2010, from $671,935 for the six months ended December 31, 2009.  This increase in our general and administrative expenses is mainly attributed to  the implementation of the investor relations programs and larger royalty fees incurred by us offset by lower stock-based compensation expenses than in prior year comparable period.





Licensing and Patent Expense.  Licensing and patent expense increased by $31,988 or 24% to $165,320 for the six months ended December 31, 2010 from $133,332  for the six months ended December 31, 2009.  This increase was primarily due to higher consulting patent legal fees than those of prior comparable period.





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





Interest Expense.  Interest expense on notes payable for the six months ended December 31, 2010 increased $64,000 or 39% to $226,252 compared to $162,252  the  six months ended December 31, 2009.  The increase was due to  approximately $1,100,000 or 23% increase in the outstanding principal loan balance due to our Chairman of the Board, a major shareholder, and third parties to approximately $5,800,000, compared to approximately $4,700,000  outstanding principal loan balance in the previous year.





For the six months ended December 31, 2009, we had an approximately $198,750 non-cash charge to interest expense as a result of a beneficial conversion feature of  a long-term convertible note payable with the Chairman.  We had no similar charge for the six months ended December 31, 2010.





Net Loss.   Net loss for the six months ended December 31, 2010  was $815,221 or $0.03 per share compared to $1,623,663 or $0.05 per share for the six months ended December 31, 2009.   This decrease is primarily attributable to increases in revenue, other income, a reduction in research and development expenses, offset by increases in interest expense,  general and administrative expenses, licensing and patent expenses, and cost of sales.





Comparison of Three Months Ended December 31, 2010 and 2009





Revenues.     During the three months ended December 31, 2010 we had $221,049 of revenues, compared to $198,015 of revenues for the three months ended December 31, 2009, representing a 12% increase in our revenues.  Our revenues during the three months ended December 31, 2010 consisted of: (a) $37,216, 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; (b) $86,333 royalty and license fees consisting of $81,823 in royalty fees from the sales of BIOGUARDTM advanced wound care product by Derma Sciences, Inc., and $4,510 in license fees representing the earned portion of the license fees from our licenses; and (c) $97,500, which represented the revenueearned from the development projects.





Our revenues during the three months ended December 31, 2009 consisted of (a) $116,337 which represented our royalties from the product sales by BASF Beauty Care Solutions, L.L.C.; (b) $49,178, royalty and license fees consisting of $47,392 from the sales of BIOGUARDTM advanced wound care product by Derma Sciences, Inc., and $1,786 in license fees representing the earned portion of the license fees from our licenses; and (c) $32,500, which represented the revenue earned from the development projects.





Operating Loss.  Operating loss for the three months ended December 31, 2010 was $455,681 as compared to $703,886 in operating loss for the three months ended December 31, 2009, representing a decrease of 35% or $248,205 in operating loss. The decrease in operating loss was primarily attributable to an increase in revenues of $23,034 coupled with a decrease in expenses of $225,171 for the three months ended December 31, 2010.   The decrease in expenses was primarily due to the following:  (a) a decrease in research and development expenses of $164,378 or 41%; (b) a decrease of $68,658 or 17% in  general and administrative expenses; (c) a decrease of $2,549 or 49% in cost of sales offset by (d) an increase of $10,928 or 12% in licensing and patent expenses, as described in more detail below.





Research and Development Expense.  Research and development expense decreased by $164,378 or 41% to $232,749 for the three months ended December 31, 2010, from $397,127 for the three months ended December 31, 2009.  The decrease in research and development expense is primarily attributable to the absence of the remaining subcontractor expenses related to the SBIR phase II program, which was completed in May 2010, and lower stock-based compensation expenses than in prior year comparable period.





General and Administrative Expense.  General and administrative expense decreased by $68,658 or 17% to $323,786  for the three months  ended December 31, 2010, from $392,444 for the three months ended December 31, 2009.  This decrease in our general and administrative expenses is mainly attributed to lower stock-based compensation expenses offset by the expenses related the implementation of the investor relations programs beginning in May 2010.





Licensing and Patent Expense.  Licensing and patent expense increased by $10,928 or 12% to $100,446 for the three months ended December 31, 2010 from $89,518  for the three months ended December 31, 2009.  This increase was primarily due to higher consulting patent legal fees than those of prior comparable period.





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





Interest Expense.  Interest expense on notes payable for the three months ended December 31, 2010 increased $27,208 or 32% to $113,161 compared to $85,953  the  three months ended December 31, 2009.  The increase was due to  approximately $1,100,000 or 23% increase in the outstanding principal loan balance due to our Chairman of the Board, a major shareholder, and third parties to approximately $5,800,000, compared to approximately $4,700,000  outstanding principal loan balance in the previous year.





For the three months ended December 31, 2009, we had an approximately $95,417 non-cash charge to interest expense as a result of a beneficial conversion feature of  a long-term convertible note payable with the Chairman.  We had no similar charge for the three months ended December 31, 2010.





Net Loss.   Net loss for the three months ended December 31, 2010  was $372,830 or $0.01 per share compared to $885,239 or $0.03 per share for the three months ended December 31, 2009.   This decrease is primarily attributable to increases in revenue, other income, decreases in general and administrative expenses, research and development expenses, and cost of sales offset by an increase in  licensing and patent expenses.








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 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, 2010 and 2009 as we have experienced recurring losses and negative cash flows from operations in these periods.  We expect to continue to incur losses in 2011.  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 December 31, 2010 was $343,787 as compared with $628,026 at June 30, 2010.    Subsequent to December 31, 2010, we collected $140,856 of the outstanding receivable balance as of February 7, 2011.





We raised approximately $710,000 subsequent to December 31, 2010, in a private equity financing through the sales of the shares of our common stock to a number of investors as of  February 10, 2011 at a price of $0.28 per share. We may pay a counsultant up to approximately 250,000 shares of our restricted common stock asfees associated with this equity financing.





In August 2010, we entered into a Development and Option Agreement (the “Agreement”) with Biosara. The expiration date of the Agreement was extended to June 30, 2011 or until superseded by the earlier of a license agreement or another product development agreement.    The parties agree to perform in accordance with the terms as set forth in the statement of work including the initial and subsequent monthly development fees paid or to be paid to the Company.  We anticipate that the development fees are adequate to cover our expenses.  We received the two installment payments and performed the work.   We are unable to determine if we will continue to receive the development fees in the future to complete the project at this time.  We will continue the work as long as the development fees are received.





In July 2010, we entered into an exclusive Patent and Technology license agreement (the "Agreement")  with Viridis BioPharma Pvt. Ltd., ("Viridis") an India corporation.  Under the Agreement, Viridis will manufacture, market and sell these wound treatment products in the institutional market in the Republic of India.  The Company will receive royalty payments on the product sales at an agreed royalty rate in addition to certain payment received in March 2010.  As of February 7, 2011, we received additional payment as  the  first commercial sale has not occurred in six months from July 26, 2010, the effective date of the Agreement.  We are unable to determine when the first commercial sale will occur and how much, if any, of the royalty fee we will receive in the future at this time.  We expect nominal direct expenses in relation to this license agreement.





In June 2009, our licensee, Derma Sciences, Inc. launched the commercial sale of BIOGUARD® an advance wound care product employing our NIMBUS technology.  From the launch date to December 30, 2010, our royalty fees related to this product were approximately $384,402.  In accordance with the terms of the license agreement, the first $75,000 royalty fees from Derma Sciences were offset against the advance payments we received in 2007, the subsequent royalty fees will be at 20% of the net sales as defined in the license agreement.  We are unable to determine how much, if any, of the royalty fee we will receive in the future at this time.  We expect minimal direct expenses in relation to this license agreement.





In May 2010, we entered into a service agreement with a division of a major consumer products company for a certain fee over four months period or when the milestones are completed.  We anticipated the direct expenses related to this project of approximately $10,000 that would be covered by the fee arrangement. We have invoiced and collected payments for the first two milestones under the project to date.  We have invoiced the final invoice as the project was completed.





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




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 $282,000 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 described above 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.




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.  This arrangement expired in February 2011.  We have engaged another investment banker on an non exclusive basis to raise up to $1,500,000 to fund our operations.  We cannot assure you that we will raise a sufficient amount of capital, if any, through this investment banker or through any other means.





Based on our cash position at December 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 $190,000 per month or an aggregate of approximately $2,280,000 over the next twelve (12) months, in the following areas:





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




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





·
Operating expenses of approximately $83,667 per month or an aggregate of $1,004,000 over the next twelve (12) months, including business developments, personnel costs, investors relations, director and officer insurance, general liability insurance, investors relations, rent, consulting fees, utilities, legal and accounting fees, and travel.




Our current cash balance of $343,787 as of  December 31, 2010, accounts receivable of approximately $254,600,  of which approximately $140,900 has been collected after December 31, 2010, and approximately $710,000 cash from the equity financing subsequent to December 31, 2010, will satisfy our cash requirements for approximately no more than 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 no more than seven (7) months assuming no further receipts of revenues and additional debt or equity financing.





We are raising 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.




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 Index





As of December 31, 2010, we have ten senior convertible notes payable outstanding to our Chairman totaling approximately $5,200,000 including accrued interest with interest rates ranging from 6% to 8% per annum and maturity dates of December 2013.  These notes are convertible at conversion prices ranging from $0.18 to $0.74 per share and are secured by our revenues and assets.  We also have a note payable with our Chairman of $230,287 including accrued interest with a maturity date of July 1, 2011 and an annual interest rate of 8%.  We also have a $1,053,000 senior convertible note payable to a major stockholder.  The senior convertible note has an 8% interest rate per annum with a conversion price of $0.60 per share, a maturity date of  December 31, 2013, and is secured by our revenues and assets.  Further, we have two senior convertible notes totaling $250,000 with third parties.  These notes have an 8% interest rate per annum with a conversion price of $1.00 per share, a maturity date of June 30, 2014.   In addition, we have a promissory note payable totaling $113,577 including accrued interest with an interest rate of 8% per annum and a maturity date in December 2013.




If we are unable to successfully repay our debt, 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 FINRA to affect a delisting of our stock.




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




At December 31, 2010, we had a negative working capital of $429,383 that primarily consists of: (a) cash of $343,787; (b) accounts receivable of $254,606; (c) accounts payable of $628,994; (d) accrued expenses of $66,882; (e) unearned revenue of $89,613; (d) note payable to director of $230,287 including accrued interest; (g) convertible note payable with an officer of $111,490 including accrued interest; and a current portion of long term note payable of $12,000.  At December 31, 2010, we had a stockholders’ deficit of $6,861,350, 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 $277,721 for the six months ended December 31, 2010. Net cash used in investing activities was $29,673.  Net cash provided by financing activities was $23,155.





During the three months ended December 31, 2009, we received $804,650, of which $770,000 was from   a senior  convertible note with our Chairman, and the proceeds of $34,650 in cash from the exercise of stock options.





Contractual Obligations




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




Total

Less than 1 Year

1-3 Years

3-5 Years


More than 5 YearsLong-term debt obligations (a)
$
6,652,479

$
-

$
6,397,438 -

$
255,041


$
-Operating lease obligations (b)
$
49,450

$
23,650

$
25,800 -

$
-


$
-





(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 2013.







Off-balance Sheet Arrangements





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








ITEM 3.       Quantitative and Qualitative Disclosure About Market Risk





Not applicable.







ITEM 4.   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  December 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 December 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.




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 Index








PART II


OTHER INFORMATION





Item 1.   Legal Proceedings




In January 2011, the Company withdrew without prejudice a civil complaint in the United States District Court for the Northern District of Florida to demand for jury trial against several companies for infringing on our MultiStat technology  in the field of cosmetics under the United States Patent Nos. 5,773,438, 5,837,224, and 6,630,516.




The Company is not a party to any other legal proceedings that it believes will have a material adverse effect upon of its business or its financial position.




Item 1A.   Risk Factors





Item 1A is not required to be disclosed by smaller reporting companies such as the Company.





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




On October 1, 2010,we issued 25,000 shares of common stock to a service provider in lieu of cash payment of approximately $18,750 or $0.75 per share in satisfaction of  an outstanding amount owed to the service provider.  We relied upon Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) for the offer and sale. We believed that Section 4(2) was available because the offer and sale did not involve a public offering and there was no general solicitation or general advertising involved in the offer or sale. We placed restrictive legends on the certificate representing these securities issued to the service provider stating that the securities were not registered under the Securities Act and are subject to restrictions on their transferability and resale




On February 11, 2011, we sold 2,546,000 shares of common stock to eleven purchasers for a price of $0.28 per share or in aggregate of $712,880 in cash.  We paid no cash fees in connection with this offering, however, we may issue up to approximately 250,000 shares of common stock to a consultant who provided assistance in connection with this transaction.  The issuance of the securities describe above were exempt from the registration requirements of the Securities Act under Rule 4(2) and Regulation D and the rules thereunder, including Rule 506 insofar as: (1) the purchasers were each accredited investors within the meaning of Rule 501(a); (2) the transfer of the securities were restricted by us in accordance with Rule 502(d); (3) there were no other non-accredited investors involved in the transaction within the meaning of Rule 506(b); and (4) the offer and sale of the securities was not effected through any general solicitation or general advertising within the meaning of Rule 502(c).We placed restrictive legends on the certificates representing these securities issued to the purchasers stating that the securities were not registered under the Securities Act and are subject to restrictions on their transferability and resale.







Item 3.   Defaults Upon Senior Securities





None.





Item 4.   (Removed and Reserved)





None.




Item 5.   Other Information.





None





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 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)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.







-22-
 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
February 14, 2011
By: /s/ J. Ladd GreenoJ. Ladd GreenoChief Executive Officer (Principal Executive Officer)





Date
February 14, 2011
By: /s/ Nam H. NguyenNam H. NguyenChief Financial Officer





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