SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| [ X ] | Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 2009 |
| | |
| [ ] | Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____ |
Commission file number: 000-27545
QUICK-MED TECHNOLOGIES, INC.
(Name of issuer in its charter)
| Nevada | 65-0797243 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
| 902 NW 4 Street, Gainesville, Florida | 32601 |
| (Address of principal executive offices) | (Zip code) |
Registrant's telephone number: (888) 835-2211
Securities registered under Section 12(b) of the Exchange Act:
| Title of each class | Name of each exchange on which registered |
| | |
| Common Stock, $.0001 par value | |
Securities registered under Section 12(g) of the Exchange Act:
Title of Class
Common Stock, $.0001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | |
| | Large accelerated filer o | | Accelerated filer o |
| |
| | Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
Yes No X
The aggregate market value of the common equity stock held by non-affiliates, computed by reference to the average bid and asked prices of such stock as of September 18, 2009, was approximately $4,995,299.
The number of shares outstanding of the issuer's common equity as of September 18, 2009 was 31,039,707.
Documents Incorporated by Reference
None
QUICK-MED TECHNOLOGIES, INC.
ANNUAL REPORT
ON FORM 10-K
For the Year Ended June 30, 2009
Page
PART I
| Item 1. | | 1 |
| Item 1A. | | 13 |
| Item 2. | | 16 |
| Item 3. | | 16 |
| Item 4. | | 16 |
PART II
| Item 5. | | 17 |
| Item 7. | | 20 |
| Item 8. | | 26 |
| Item 9. | | 26 |
| Item 9A. | | 26 |
PART III
| Item 10. | | 27 |
| Item 11. | | 29 |
| Item 12. | | 34 |
| Item 13. | | 35 |
| Item 14. | | 36 |
PART IV
PART I
This Form 10-K contains forward-looking statements based on our current expectations, assumptions and estimates and that involve risks and uncertainties. Any statements contained in this Form 10-K (including, without limitation, statements to the effect that we “estimate,” “expect,” “anticipate,” “plan,” believe,” “may” or “will” or statements concerning potential or opportunity or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. Actual results could differ materially and adversely from those projected or anticipated in the forward-looking statements as a result of a number of risks and uncertainties pertaining to our business, including, without limitation, those risks and uncertainties described in the section entitled “Risk Factors” in this Form 10-K. We undertake no obligation to revise or update any such forward-looking statements. Unless specified otherwise, as used in this Form 10-K, the terms “we,” “us,” “our,” the “Company” or “Quick-Med” refer to Quick-Med Technologies, Inc.
Corporate History
Quick-Med Technology, Inc. was founded in 1997 and incorporated in the State of Delaware to research, develop, and commercialize biomedical products.
We were incorporated in the State of Nevada on April 21, 1997 in the name of Above Average Investments, Ltd. to engage in any lawful corporate purpose. Other than issuing shares to its stockholders, Above Average Investments, Ltd. never commenced operations. In September 2000, Above Average Investments, Ltd. became a public reporting company 60 days following the voluntary filing of its Form 10-SB Registration Statement with the Securities and Exchange Commission. In March 2001, we acquired all of Quick-Med Technology, Inc.'s issued and outstanding shares of capital stock in exchange for 10,260,000 shares of our common stock. Upon completion of the merger in February 2002, our name was changed to Quick-Med Technologies, Inc.
We have never been the subject of a bankruptcy, receivership or similar proceeding.
Our principal executive offices are located at 902 NW 4th Street, Gainesville, Florida 32601. Our telephone number is (888) 835-2211.
Technologies
We are a life sciences company that is developing proprietary technologies for the medical and consumer healthcare markets. Our four core technologies under development are:
NIMBUS®
NIMBUS, which refers to "Novel Instrinsically Micro-Bonded Utility Substrate," is a family of organic molecules or “polymers” that are bio-engineered to have antimicrobial, hemostatic and other properties that can be used in a wide range of medical device applications. For example, NIMBUS is capable of being used to add a second, slowly releasable ingredient to a substrate to permit more than one mode of action or property (e.g., protease inhibitor or antibiotic).
Initially, we are seeking to use our NIMBUS technology in advanced wound care products. We believe that the size and growth characteristics of the medical device antimicrobial market represent an attractive opportunity for the NIMBUS technology. Additionally, we believe there are no competing technologies on the market today that offer the unique combination of safety, efficacy and cost-effectiveness offered by NIMBUS.
We have developed “proofs-of-principle” in several applications and are seeking to move these products to the commercialization stage. On September 18, 2006 we received a Phase II SBIR grant for continued work on an advanced wound dressing using the NIMBUS technology. In April, 2007, we entered into a license agreement with Derma Sciences Inc. for NIMBUS treatment of select substrates used in traditional wound care. In February, 2009, we received FDA market clearance for the NIMBUS gauze wound dressing licensed to Derma Sciences and in June, 2009. Derma Sciences reported first commercial sale of a product employing our NIMBUS technology. In November, 2008, we entered into a Joint Development Agreement with Foster Corporation to apply NIMBUS to catheters and other medical thermoplastic applications. In April, 2009, we entered into a Joint Development and Exclusive Option Agreement with Avery Dennison Corporation to apply NIMBUS technology to adhesives for medical device and industrial applications.
Other important considerations of our flagship NIMBUS technology include:
| · | The raw material cost of NIMBUS is more economical than many other active ingredients, such as silver or PHMB (polyhexamethylene biguanide), used in healthcare today. Additionally, in wound care materials and other roll goods-based substrates, NIMBUS requires no more than standard textile or paper finishing equipment. |
| · | The most deeply studied potential commercial application of NIMBUS is in medical devices where permanent bonding to various substrates can be performed using broad spectrum microbicides that are highly effective, as verified by independent laboratories. In certain prototype wound dressings, NIMBUS begins to eradicate bacteria immediately and is effective for seven days or more. Tested in a typical potential commercial application, NIMBUS killed 99.9999% of the bacteria or other microbes present in the environment. |
| · | Third party testing and our research show that NIMBUS-treated articles are effective against MRSA (Methicillin-Resistant Staphylococcus Aureus) and VRE (Vancomycin-Resistant Enterococcus), two antibiotic-resistant organisms responsible for a significant and growing number of hospital and community-related infections. Other high bacterial kill levels have been demonstrated for contact lenses against Pseudomonas; in food preservation against bacteria that cause Listeria monocytogenes and Salmonella typhimurium; and in footwear protection against a wide range of other germs including Trichophyton mentagrophytes, a fungus that causes athlete’s foot. |
| · | While lethal to most bacteria, studies performed by us and third-party laboratories show that NIMBUS is not harmful to human cells. Independent laboratory tests have shown that NIMBUS is non-toxic, non-sensitizing and non-irritating to humans, using standard ISO or ASTM test methodologies. |
| · | The NIMBUS technology permanently bonds the active agent to the substrate. This attribute is a source of differentiation from many competing technologies and gives NIMBUS potential advantages, including lower cost and the possible use in devices such as contact lenses, wound dressings, incontinence products, or disposable gloves where leaching chemicals into the body may pose unacceptable medical risk. |
| · | A characteristic of NIMBUS medical devices relates to the reduced likelihood of bacteria to develop resistance to the microbicide employed – a growing concern in healthcare facilities. This characteristic results from the combined effect of (a) the mechanism by which bacteria are killed – by cell wall disruption; (b) the bonding of the microbicide to the substrate, which prevents concentrations of the active molecule from falling below minimum inhibitory levels and (c) the large size of the molecule which does not permit its entry into the bacteria cell where resistance can develop. A confirmatory in-vitro test of ten consecutive generations of E. coli, a particularly difficult to kill microorganism, showed no reduction in efficacy. |
Stay FreshTM
Stay Fresh is a unique chemical formulation for textiles that provides a durable antimicrobial agent which can be bonded to fibers or fabrics so as to retain the biocidal property through numerous launderings. This chemical treatment for textiles has been shown to kill a particularly difficult array of bacteria even after repeated laundering cycles. The formula brightens colors and helps to preserve fabric integrity by aiding in the cleaning process.
Stay Fresh is ideally suited to the broad range of potential applications including clothing such as essential apparel, sportswear, active wear, and work wear as well as furnishings such as linens, drapes, and towels. It acts against the bacteria and fungi that are responsible for odor and staining even after numerous hot or cold laundry cycles for the life of the product. It is compatible with colored or white fabrics including cotton, polyesters, rayon, wool, polyurethane and blends and may be laundered in the presence of softeners, chlorine or color-safe bleaches.
Stay Fresh utilizes an eco-friendly active ingredient. The unique formulation that comprises Stay Fresh has been found to benon-irritating based on Company testing. It can be bonded to fibers or fabrics using conventional textile finishing equipment at a very low cost with chemicals used in many treating processes.
NimbuDermTM
NimbuDerm is a novel copolymer developed by Quick-Med for application as a persistent hand sanitizer that provides six or more hours of continuous protection, which we believe will have significant benefit in the interruption of the transfer of germs by contact. The copolymer is a film former which can be deposited on skin until it is removed by washing with soap and water. For use on skin, a foraminous film is deployed that acts as a barrier to microorganisms yet allows breathability to the skin.
NimbuDerm can also be used in applications other than for use on the skin. For example, it can be deposited as a non-porous film on hard surfaces or mixed with other polymers to form an adhesive or an extrudable or moldable thermoplastic which can be converted to solid medical devices such as catheters, tubing, films and coatings.
MultiStat®
MultiStat is a family of patented organic compounds known as matrix metalloproteinase inhibitors that have been shown to have significant benefit in promoting the maintenance, healing and repair of skin and eyes. Both third party and Quick-Med research shows that MultiStat is effective in certain medical (wound care) and consumer (cosmetic) applications.
Matrix Metalloproteinases, or “MMPs”, are naturally occurring compounds in skin tissue. External or internal stimuli can trigger an overproduction of certain MMPs, which can produce chemical reactions within skin cells that induce adverse outcomes such as blistering, inflammation or accelerated collagen degradation. External triggers include prolonged sun exposure, as well as chemical burns from warfare agents such as mustard gas. Internal triggers include natural aging in which declining estrogen levels naturally inhibit MMPs and lead to accelerated skin wrinkling.
There are natural or synthetic compounds that safely inhibit MMP overproduction in the skin (MMP-inhibitors, or “MMPIs”). These MMPIs can be topically applied to mitigate the effects of triggering mechanisms. The bioscience of MMPI research includes the identification of safe compounds that individually or in combination yield a specific beneficial outcome. MultiStat represents our portfolio of patented compounds and techniques relating to MMP inhibition. Our MultiStat compounds are approximately 1,000 times more potent than the natural MMPIs that are present in human blood and in some plant extracts. Therefore, only small amounts of MultiStat compounds are needed to reduce the elevated levels in MMP activities that cause skin wrinkling or tissue destruction in chronic wounds. MultiStat’s array of uses has been documented in a series of clinical findings by our scientists, third-party scientific laboratories, and in works published by other academic researchers.
Pharmaceutical Applications. Scientific studies have shown that MMP activity plays a major role in the deterioration of human tissue when exposed to chemical agents such as mustard gas. Ilomastat, a member of the MultiStat family of patented compounds and techniques relating to MMP-inhibition, has been demonstrated to be safe and highly effective in treating mustard gas exposures based on efficacy studies conducted in Israel and the Netherlands by third-party scientific laboratories. We are seeking to develop Ilomastat as a post-injury agent for mustard gas exposure.
In November 2000, we entered into a Cooperative Research and Development Agreement with the U.S. Army Medical Research Institute for Chemical Defense at Edgewood, Maryland, to develop a post-injury treatment for mustard gas exposures to the eye and skin.
Other potential pharmaceutical applications for Ilomastat include psoriasis, acne and chronic wounds.
Cosmetics. Based on clinical studies performed by us and by the Engelhard Corporation (now a unit of BASF), MultiStat has shown success in improving the appearance of fine facial lines and wrinkles associated with skin deterioration resulting from natural aging or sun damage. Additionally, MultiStat has been shown in the same clinical studies to have applications for other conditions, such as skin roughness or redness.
On May 16, 2008, we and BASF Beauty Care Solutions, L.L.C., a member of BASF Group (“BASF”), signed a Manufacturing and Distribution Agreement (“Agreement”) with an effective date of August 1, 2007. This Agreement supersedes The Master Agreement for Product Development, Manufacturing and Distribution and the Product Development and Distribution Agreement for Ilomastat dated August 15, 2002, the Tolling Agreement dated October 20, 2005, as amended, and the Letter of Intent with the effective date of February 1, 2006, as amended, (“Prior Agreements”) between us and BASF.
Under this Agreement, we appointed BASF as an exclusive manufacturer and distributor of our MultiStat Compound, Ilomastat, (“QMT Compound”) in the over-the-counter retail cosmetic consumer products in the worldwide territory with the exclusive and non-exclusive licenses of certain patent rights. In consideration of the rights and appointments, we are entitled to receive distribution fees on a quarterly basis of the contract year minimum sales of products containing QMT Compound in each of the three contract years (calendar years 2008, 2009 and 2010) under the renegotiated terms of the distribution fees as set forth in the Agreement. For the period from the effective date of August 1 to December 31, 2007, the terms of the distribution fees under the Prior Agreements remained unchanged. In addition, BASF agrees that, to the extent required by applicable law, all products used, sold or distributed by BASF will be manufactured substantially in the U.S. The term of the Agreement expires on December 31, 2010. We may terminate this Agreement prior to such expiration upon a material breach by BASF, or BASF’s failure to meet minimum sales requirements.
The license under the Agreement may be sublicensed to BASF’s affiliates or third parties solely for the right to manufacture and to sell the licensed products for the purpose set forth in the Agreement.
Business Strategy
Our business strategy is built around technology development and out-licensing. Our near-term focus is to further develop and execute commercialization strategies for each of our broad technologies. We seek to generate revenue through four sources:
| | (1) | Licenses of proprietary technology to industry partners; |
| | (2) | Contracts with government agencies; |
| | (3) | Sales of product (compounds); and, |
| | (4) | Research and development support agreements. |
We expect that the majority of future revenue from NIMBUS, Stay Fresh, NimbuDerm, and MultiStat will be generated via licenses, royalties and profit-sharing agreements. We believe that our intellectual property is the value driver and, as such, manufacturing, sales and distribution are and will be conducted either through client partners or outsourced.
Competition
Quick-Med's NIMBUS and Stay Fresh antimicrobial technologies compete against the current advanced antimicrobial technologies including several marketers of antimicrobial silver technology (e.g., CIBA Specialty Chemicals, Milliken, Nucryst Pharmaceuticals, Agion, Nano Horizons, and many others). NIMBUS also competes against earlier generation antimicrobial technologies marketed by Microban, Dow Chemical, Arch Chemicals, Thompson Research, and many other companies.
Relative to all of these competitors, we believe that Quick-Med's NIMBUS technology offers medical device companies high efficacy, low cost, and the best safety profile. The mechcanism of bacterial control differs from known methods by which bacteria develop resistance to biocides. NIMBUS technology has been laboratory proven to elicit no bacteria resistance. We believe that NIMBUS’ extremely low cost will enable bringing antimicrobial protection to many wound care and other situations where cost requirements currently discourage or prohibit such protection.
We believe that Quick-Med’s Stay Fresh technology offers apparel manufacturers and other textile companies with a new level of highly durable, sustained antimicrobial efficacy over the course of numerous laundering cycles.
When commercialized, our NimbuDerm technology will compete with alcohol-based skin sanitizers (such as Purell® from Johnson & Johnson) that are widely used in both the worldwide institutional and consumer markets. We believe that an advantage of NimbuDerm is that it not only offers the same or better initial activity against bacteria, but that it also continues to protect the skin surface against bacterial colonization for a period of 8 hours, thus preventing the immediate re-infection that can occur after the active ingredients in alcohol-based sanitizers quickly evaporate.
Quick-Med's cosmeceutical formulations of MultiStat compete against alternate protease inhibiting technologies such as isoflavone compositions and other anti-aging products. Competitors include Neutrogena (from Johnson & Johnson), Clinique (Clinique Laboratories LLC) and many others.
Competing antimicrobial technologies include such biocides as silver, PHMB, triclosan, and the silane monoquaternary known as Microbe Shield sold by Aegis Environments. These biocides are antimicrobial treatment agents for textiles that are claimed to have protective effects on the fabric such as against mold and mildew, staining and perspiration odor. However, we believe that some of these competing antimicrobials have drawbacks that offer our technologies a competitive advantage.
Silver, for example, depends upon a release mechanism that gradually metes out the biocide until its efficacy is depleted. Silver has the potential to discolor skin or the treated textile or other material. It is known to be toxic to fish and aquatic organisms. A study conducted in 2008 showed that washing socks containing nano-silver released substantial amounts into the effluent, a potential cause of toxicity in water entering natural waterways. The International Center for Technology Assessment (CTA) has filed a petition with EPA demanding that the agency stop the sale of several consumer products using nano-silver.
PHMB is a considerably smaller molecule (approximately 100 times smaller) than the active polymer in our NIMBUS technology. PHMB has a significantly smaller number of charge sites (which provide antimicrobial activity) per molecule and diffuses away from the treated surface more easily. Diffusion of antimicrobials into the wound bed can inhibit tissue regeneration. For example, a study published in 2003 found PHMB material appears to enhance or prolong the inflammatory response of the wound.
There are also significant limitations for PHMB applications that require laundering. As a cationic biocide, PHMB can be blinded when the treated fabric is laundered in anionic detergents, the type most widely used in consumer and commercial laundering, significantly reducing antimicrobial efficacy. PHMB also can cause discoloration when treated materials are laundered. Our Stay Fresh technology was developed to specifically overcome these limitations.
Microban Corporation’s triclosan is used broadly in many consumer applications. There are widely publicized public health concerns about triclosan, which is structurally in the family of chlorophenols. These compounds are suspected carcinogens which are ecologically problematic when entering effluent streams. Triclosan, which forms dioxins in sunlight, can cause skin irritation and is known to increase allergies and asthma. Currently triclosan is included in many manufacturers’ voluntary restrictive substances lists.
Silver, PHMB and triclosan also have far greater costs than our technologies.
The research and development pertaining to our technologies, which underlie our antimicrobial technologies (NIMBUS, Stay Fresh and NimbuDerm), MMP-inhibitors (MultiStat), and potential future products, is extremely competitive and is characterized by rapid technological change. Many of our competitors have substantially greater financial, scientific, and human resources, and greater research and product development capabilities. In addition, many of our competitors have greater experience in marketing such technologies and products and greater potential to develop revenue streams. As a result, our competitors may be able to develop and expand their competing product offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, devote greater resources to marketing and sales of their products and adopt more aggressive pricing policies than we can.
We will seek to overcome the competitive advantages of our competitors by entering into co-development agreements with industry leaders in potential markets with exclusivity clauses for future license agreements.
Intellectual Property: Patents, and Exclusive Patent Licenses
Our strategy is to research and obtain original patents or, to the extent reasonably available, to license exclusive composition and relevant use patents related to our core technology. We believe that a comparatively strong intellectual property position can be a source of differentiation from competing products.
NIMBUS technology is covered by two issued U.S. patents, eight issued foreign patents (Australia, China, Russia, Indonesia, India, Korea, Mexico, and Canada), and ten pending U.S. patents, as well as a number of international patent applications filed under the Patent Cooperation Treaty (PCT), a treaty that covers up to 139 countries and a number of foreign patent applications.
Stay Fresh is covered by one U.S patent pending. There are six other applications in preparation.
NimbuDerm is covered by two U.S and eight Foreign patents pending
MultiStat™ technology is covered by seven issued U.S. patents, five issued foreign patents (Germany, Spain, France, Great Britain, Italy), two pending U.S. patents and two pending international patents.
Several of these patent applications are now under examination in the United States Patent and Trademark Office.
On January 6, 2009, our application number 10/546,850 for our invention of Antifungal Gypsum Board issued as U.S. 7,473,474.
Agreements with Employees and Consultants
With the exception of Drs. Schultz and Batich discussed below, all of our employees and scientific consultants have signed agreements that assign to us all intellectual property rights to any inventions or other proprietary information in any area in which that person is working with us. These agreements do not provide for the payment of any royalties. Drs. Schultz and Batich, who are on the faculty of University of Florida at Gainesville, are the only consultants who currently have any rights in any intellectual property that may be shared with us. Under the University of Florida policy, any rights obtained by Drs. Schultz and Batich are assigned to the University. Drs. Schultz and Batich may be paid a royalty by the University out of royalties that may be paid by us to University of Florida.
Issued and Pending - U.S. & Foreign Patents
We have filed or own joint rights to patent applications for:
U.S. ISSUED PATENTS
| Number | Issued Date | Expiry Date | Description |
| 5,183,900 | February 1993 | November 21, 2010 | Matrix Metalloprotease Inhibitors (MMPIs) |
| 5,189,178 | February 1993 | November 21, 2010 | Matrix Metalloprotease Inhibitors (MMPIs) |
| 5,239,078 | August 1993 | November 21, 2010 | Matrix Metalloprotease Inhibitors (MMPIs) |
| 5,270,326 | December 1993 | November 21, 2007 (November 21, 2010) | Treatment of Tissue Ulceration |
| 5,773,438 | June 1998 | June 30, 2015 | Synthetic Matrix Metalloprotease Inhibitors (MMPIs) and Use Thereof |
| 5,892,112 | April 1999 | April 6, 2016 | Process for Preparing Synthetic Matrix Metalloprotease Inhibitors (MMPIs) |
| 6,713,074 | March 2004 | June 29, 2021 | Cosmetic Composition and Method |
| 7,045,673 B1 | May 16, 2006 | December 8, 2019 | Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication |
| 7,473,474 | January 6, 2009 | February 24, 2024 | Improved Antifungal Gypsum Board |
The above table includes patents, which are jointly owned by us and an arm of The University of Florida, as well as patents that are licensed to us by Drs. Galardy and Grobelny. Maintenance of patent protection through the expiration date is contingent upon payment of fees at certain intervals. All are active as of September 1, 2009.
INTERNATIONAL ISSUED PATENTS
| Number | Jurisdiction | Expiry Date(2) |
EPO 558681(1) | Europe (Germany, Spain, France, Great Britain, Italy) | November 21, 2011 |
EPO 558648(1) | Europe (Germany, France, Great Britain, Italy) | November 21, 2011 |
| 1971367 | Japan | November 21, 2011 |
2001273115 773532 | Australia Australia | June 29, 2021 December 8, 2019 |
| 004160 | Russia | December 8, 2019 |
| 2096223 | Canada | November 21, 2011 |
| 99814229.8 | China | December 8, 2019 |
10-0689020 | Korea | December 8, 2019 |
| 248078 | Mexico | December 8, 2019 |
| 2353436 | Canada | December 8, 2019 |
| WOO 2001 01469 | Indonesia | December 8, 2019 |
Notes:
| | (1) | Issued by the European Patent Office. Registered in Germany, France, Great Britain, and Italy. |
| | (2) | Maintenance of patent protection through the expiration date is contingent upon payment of yearly fees. All are active as of September 1, 2009. |
PENDING PATENT APPLICATIONS - UNITED STATES
| Absorbent Materials Covalently Bonded, Non-Leachable Polymeric Antimicrobial Surfaces and Methods for Preparation. |
| Composition and Method for Minimizing or Avoiding The Adverse Effects of Vesicants |
| Improved Antifungal Gypsum Board |
| Silicates and Other Oxides with Bonded Antimicrobials Polymers |
| Controlled Release of Biologically Active Substances From Select Substrates |
| Method of Attaching an Antimicrobial Compound to the Surface of a Substrate |
| Disinfectant with Quaternary Ammonium Polymer and Copolymers |
| Non-Leaching Absorbent Wound Dressing |
| System and Method for Enhancing the Efficacy of Antimicrobial Contact Lenses |
| Absorbent Substrate with a Non-Leaching Antimicrobial Activity and a Controlled-Release Bioactive Agent |
| Gypsum Board with a Fluorine-Containing Antifungal Agent |
| Disinfectant with Durable Activity Based on Alcohol-Soluble Quaternary Ammonium Polymers and Copolymers |
| Superabsorbent Materials Comprising Peroxide |
| Antimicrobial Textiles Comprising Peroxide |
PENDING PATENT APPLICATIONS - INTERNATIONAL
Intrinsically Bactericidal Absorbent Dressing and Method of Fabrication Absorbent Materials Covalently-Bonded, Non-Leachable Polymeric Antimicrobial Surfaces and Methods for Preparation. |
Cosmetic Composition and Method Composition and Method for Minimizing or Avoiding the Adverse Effect of Vesticants |
| Method of Attaching an Antimicrobial Compound to the Surface of a Substrate |
| Disinfectant with Quaternary Ammonium Polymers and Coploymers |
| Polyelectrolyte Complex for Imparting Antimicrobial Properties to a Substrate |
| Disinfectant Alcohol-Soluble Quaternary Ammonium Polymers |
| System and Method for Enhancing the Efficacy of Antimicrobial Contact Lenses and Other Surfaces |
For all U.S. patents, the Inventor(s) is/are automatically the Applicant(s). For all foreign patents pertinent here, the Assignee(s), if any, is/are automatically the Applicant(s). Where both we and the University of Florida are mentioned, it is because both own the invention jointly as Assignees.
Our business and competitive position are dependent upon our ability to protect our proprietary technologies. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain and use information that we regard as proprietary. We will rely on patent, trade secret and copyright law and nondisclosure and other contractual arrangements to protect such proprietary information. We will file patent applications for our proprietary methods and devices which we believe are patentable.
There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our proprietary information, that such information will not be disclosed or that we can effectively protect our rights to unpatented trade secrets or other proprietary information.
There can be no assurance that others will not obtain patents or other legal rights that would prevent us from commercializing our technologies in the United States or other jurisdictions.
There can be no assurance that our technologies will not be subject to environmental or other regulation that would impede their adoption and commercialization in the United States or other jurisdictions.
Our strategy is to obtain original patents or, to the extent reasonably available, exclusive composition and use licenses to patents relating to core technologies and their use in targeted applications.
Patent Related Agreements
University of Florida
On December 3, 2002, we entered into a licensing agreement with University of Florida that gave us exclusive worldwide rights for the manufacturing, marketing, and distribution of our NIMBUS and topical Ilomastat technologies. The license, which covers both awarded patents and patent applications, builds on intellectual property already owned by us, that includes, non-exclusive rights to these same technologies or other rights obtained through prior agreements. The agreement was amended to extend the date of the commercialization of products to the retail customer for the group of licensed patents to December 31, 2010, unless the delay is caused by governmental regulatory agency, including but not limited to the Food and Drug Administration, in which case we shall be afforded the opportunity to toll the December 31, 2010 date for a period equal to the period during which such regulatory review is diligently prosecuted by us. To date, we have commercialized through our licensee all of the products covered under these license agreements except one.
We have executed a license agreement with University of Florida at Gainesville, DermaCo, Inc., Dr. R. Galardy and Dr. D. Grobelny granting us certain rights under patents relating to a family of MMPIs. We are using these rights to develop both the cosmetic anti-aging products and vesicant skin treatment products. U.S. and foreign patent rights, including but not limited to Germany, Spain, France, United Kingdom, and Italy have been licensed to us for these applications.
University of Michigan
In June 2007, we entered into a patent license agreement with the University of Michigan (“U-M”) that significantly expands our MultiStat™ technology – its patented family of compounds for the cosmetic treatment of skin conditions, including chronological aging and photo-aging. The license grants us the exclusive right to commercialize important U-M patents in the field of cosmetic products.
We own exclusive rights for topical use of the MultiStat compounds for cosmetic and military applications, but previously had non-exclusive patent rights for use of U-M patents in the anti-aging cosmetic arena. The agreement covers the exclusive rights to seven (7) U.S. and numerous foreign patents in cosmetics applications.
Other Patent Related Agreements
We also have an agreement with BASF that provides BASF Beauty Care Solutions, L.L.C., exclusive and non exclusive worldwide right to develop and market certain products relating to skin care that employ our Multistat™ family of MMPIs.
Government Regulation
The research and development, manufacture, and marketing of human pharmaceutical and diagnostic products and devices are subject to regulation, in the United States primarily by the Food and Drug Administration, and by comparable authorities in other countries. These national agencies and other federal, state, and local entities regulate, among other matters, research and development and the testing, manufacturing, safety, handling, effectiveness, labeling, storage, record keeping, approval, advertising, and promotion of the products like those we are developing.
Failure to comply with applicable regulatory requirements can result in the refusal by regulatory agencies to approve product licensing or the revocation of approvals previously granted. Non-compliance can also result in fines, criminal prosecution, recall or seizure of products, total or partial suspension of production, or refusal to enter into additional contracts.
Any regulatory clearances that are received for a product may be subject to limitations on approved uses for the product. After obtaining marketing clearance for any product, the manufacturer and the manufacturing facilities for that product will be subject to continual review and periodic inspections by the Food and Drug Administration and other regulatory authorities. If previously unknown problems with the product or with the manufacturer or facility are discovered, restrictions may be imposed on the product or manufacturer, including an order to withdraw the product from the market. If we, and any contract manufacturers we choose to engage, fail to comply with applicable regulatory requirements, we may be fined, suspended or subject to withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
We work with a law firm specializing in regulatory affairs with respect to the pharmaceutical, cosmetic, and medical device industries. In addition, we utilize the services of FDA and EPA consulting firms with experience in antimicrobial medical device regulatory filings and EPA filings. These firms will be able to assist us with the following regulatory activities when required:
| · | Regulatory Strategy and Liaison with the Food and Drug Administration; |
| · | Regulatory Strategy and Liaison with the Environmental Protection Agency; |
| · | Non-clinical and clinical program assessment/development; |
| · | Non-clinical and clinical protocol review/monitoring of studies; |
| · | Regulatory affairs management/guidance; |
| · | Product development and launch strategy; |
| · | Validation of methods/processes; |
| · | Product development strategies/assessment; |
| · | Product compliance; and |
| · | Label and labeling compliance. |
Food and Drug Administration
Many of the end-user applications for our technology are regulated in the U.S. as medical devices by the FDA. The Agency’s regulations govern, among other things: pre-clinical testing; product design and development; pre-market clearance or approval; advertising and promotion; labeling; manufacturing; product import/export; storage; record keeping; reporting of adverse events; corrective actions and removals; recalls; and distribution.
Unless an exemption applies, each medical device to be commercially distributed in the United States required either a prior 510(k) clearance or prior pre-market approval (“PMA”) from the FDA. The FDA classifies medical devices into one of three classes, depending on the degree of risk associated with the device and the extent of controls that are needed to ensure safety and effectiveness. Devices deemed to pose the least risk are placed in Class I. Intermediate risk devices, or Class II devices, in most instances require the manufacturer to submit to the FDA a pre-market notification, requesting authorization for commercial distribution, known as 510(k) clearance, and may subject the device to special controls, such as performance standards, guidance documents specific to the device, or post-market surveillance. Most Class I and some low-risk Class II devices are exempted from this 510(k) requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or a device deemed to be not substantially equivalent to a previously cleared 510(k) deice, are placed in Class III. In general, a Class III device cannot be marketed in the U.S. unless the FDA approves the device after submission of a PMA. The FDA can also impose restrictions on the sale, distribution, or use of devices at the time of their clearance or approval, or subsequent to marketing.
510(k) Clearance Pathway
A 510(k) pre-market notification is submitted to the FDA to demonstrate that the new device is “substantially equivalent” to a previously cleared 510(k) device or a device that was in commercial distribution before May 29, 1976 (or to a pre-1976 Class II device for which the FDA has not yet called for the submission of PMAs). Such devices are deemed to be “predicate devices” for future applications. The FDA attempts to respond to a 510(k) within 90 days of submission, but the response may be a request for additional information or data, sometimes including clinical data. As a practical matter, 510(k) clearance can take significantly longer than 90 days, potentially up to a year or more. If the FDA determines that the device, or its intended use, is not substantially equivalent to a previously cleared device or use, the FDA will place the device, or the particular use of the device, into Class III.
After a device receives 510(k) clearance for a specific intended use, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design, or manufacture, will require a new 510(k) clearance or could require a PMA. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination that a new clearance or approval is not required for a particular modification, the FDA can insist that the manufacturer cease marketing and/or recall the modified device until 510(k) clearance or pre-market approval is obtained.
Pre_Market Approval Pathway
A PMA must be submitted if the device cannot be cleared through the 510(k) process. The PMA process is much more demanding than the 510(k) pre-market notification process. A PMA must be supported by extensive data and information including, but not limited to, technical, pre-clinical, clinical, manufacturing and labeling to establish the safety and effectiveness of the device to the FDA’s satisfaction. A PMA usually also requires a substantial application fee, which is over $100,000 for a small business entity.
After the FDA determines that a PMA is complete, the agency accepts the application and begins an in-depth review of the submitted information. The FDA, by statute and regulation, has 180 days to review an accepted PMA, although the review generally occurs over a significantly longer period of time, and can take up to several years. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with the Quality System Regulations. New PMA applications or supplemental PMAs are required for significant modifications to the manufacturing process, labeling, use and design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel.
De Novo: Alternative Pathway to PMA
If a medical device is found NSE (not substantially equivalent) by the FDA, an alternative pathway to the lengthy and costly PMA is available for low risk devices. The FDA Modernization Act of 1997 amended Section 513 (f) (2) of the Federal Food, Drug and Cosmetic Act (the Act) to provide this mechanism to reclassify statutorily classified class III products. This is considered a fairly unique pathway for clearance and typically is only allowed for new technologies of low risk. The FDA allows unlimited responses when on this pathway, different than the three allowed responses under a normal 510(k). A device placed into class I or II in this written order can then be commercially distributed, subject to other applicable provisions of the Act. A device classified into class I or II under this new provision becomes a predicate device for future premarket notification submissions, which means that a manufacturer may show that a new device is substantially equivalent to this predicate. This route to clearance is referred to as de novo because it establishes a new alternative for a new technology.
In November 2007, we submitted a De NoVo application to the FDA for our patented NIMBUS barrier gauze wound care dressings. On February 26, 2009, we received clearance from the FDA for our De Novo application of such technology. This represents the first FDA clearance for NIMBUS.
Environmental Protection Agency
The EPA regulates, among other things, antimicrobial products that are intended to destroy, prevent, repel, or mitigate any microorganism declared by EPA to be a “pest” pursuant to its authority under the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”). Microorganisms declared to be pests by EPA are “any fungus, bacterium, virus, or other microorganisms, except for those on or in living man or other living animals and those on or in processed food or processed animal feed, beverages, drugs (as defined in sec. 201(g)(1) of the Federal Food, Drug, and Cosmetic Act (“FFDCA”)) and cosmetics (as defined in FFDCA sec. 201(i)). 40 C.F.R.§ 152.5(d). The principal EPA requirement is that antimicrobial products subject to EPA’s jurisdiction under FIFRA be “registered” for the intended use under Section 3 of FIFRA. States also require registration of such products under state law. EPA registration requires among things the submission of data and information sufficient to allow EPA to make a determination that the product will perform its function without unreasonable adverse effects on health or the environment.
A number of the NIMBUS and Stay Fresh applications may require FIFRA registration for the specific end-use application. We are in the process of registering Stay Fresh with EPA as an antimicrobial textile treatment. The major component of NIMBUS is currently registered with EPA by a third-party for certain unrelated uses, and Quick-Med intends, in collaboration with strategic corporate partners, to obtain its own EPA and state registrations for NIMBUS for antimicrobial use. After the registrations are secured, articles treated with the NIMBUS or Stay Fresh technologies will not be required to be registered separately with EPA or the states, provided the antimicrobial claims made for such articles are limited to the control of odor-causing bacteria or "treated article” claims . The intended use of NIMBUS or Stay Fresh-treated articles for the control of pathogenic organisms will require that the article itself be registered with EPA in those cases where the treated article falls under EPA jurisdiction.
Distribution of Technologies /Future Products
Because we plan for industry partners in the medical and consumer healthcare markets to market and distribute co-developed products or products that incorporate our technologies, we will not directly distribute such products. Instead, we will rely upon our industry partners to utilize their advertising, name recognition, and other marketing techniques to promote such products or products that incorporate our technologies.
Customers
Our customers are companies interested in licensing our technologies or otherwise partnering with us. Because our technologies are intended to be used in potentially widely used products that are used by the general public, such as cosmetic anti-aging products, wound care products, apparel and personal care, we do not anticipate becoming dependent upon a few customers; however, to the extent that we enter into agreements with industry partners upon which we will become dependent for the marketing and distribution of such products, should any such agreements be terminated for any reason, our potential revenues and operations will be negatively impacted.
Employees
We have ten (10) full time employees consisting of:
| | · | Our Chief Executive Officer, who directs our operations and our business development projects and executes our business strategy; |
| · | Our Vice President of Research & Development who leads our scientific programs |
| | · | Three Senior Research Scientists, who are responsible for product development and testing projects; |
| | · | A Director of Research and Business Development in Medical Devices, who is responsible for business development in the medical device industry; |
| | · | A Research Scientist, who is responsible in assisting the senior research scientist with testing and product development projects; |
| | · | A Product Development Engineer, who assists the research scientists with the product development projects; |
| | · | Two Microbiologists, who conduct the microbiological testing and assist in developing the applications of our technologies; and |
We also utilize several consulting scientists with PhDs in their fields and several part time employees to provide the necessary expertise in performing testing and participating in certain of our development projects.
Additionally, we utilize a consulting Chief Financial Officer, who is a certified public accountant.
Cost of Compliance with Environmental Laws
Because our potential products will be manufactured and sold by third parties, we are not directly impacted by environmental laws other than the requirements applicable to the operation of our Research and Development Center.
Research and Development
During our fiscal year ended June 30, 2009, we spent $1,063,450 on research and development. During our 2008 fiscal year, we spent $1,555,287 on research and development. We expect to continue our research and development efforts at a similar level during the current 2009 fiscal year.
Reports to Security Holders
We are subject to the informational requirements of the Securities Exchange Act of 1934. Accordingly, we file annual, quarterly, and other reports and information with the Securities and Exchange Commission. Our filings are available to the public from commercial document retrieval services and the Internet website maintained by the Securities and Exchange Commission at http://www.sec.gov.
An investment in the shares of our common stock involves a substantial risk of loss. You should carefully read this entire report and should give particular attention to the following risk factors. You should recognize that other significant risks may arise in the future, which we cannot foresee at this time. Also, the risks that we now foresee might affect us to a greater or different degree than expected. There are a number of important factors that could cause our actual results to differ materially from those indicated by any forward-looking statements in this document. These factors include, without limitation, the risk factors listed below and other factors presented throughout this document and any other documents filed by us with the Securities and Exchange Commission.
Our independent registered public accounting firm has issued a going concern opinion on our audited financial statements for the fiscal years ended June 30, 2009 and 2008 because, during those periods, the Company experienced recurring losses and negative cash flows from operations as well as a net capital deficiency at June 30, 2009. These matters raise substantial doubt about our ability to continue as a going concern.
We have been dependent primarily on private placements of our equity securities and stockholder loans to fund our operations, including research and development and efforts to license our products. Such funding may not be available to us when needed, on commercially reasonable terms, or at all. If we are unable to obtain additional financing if needed, we will likely be required to curtail our operating plans and possibly cease our operations. In addition, any additional equity financing may involve substantial dilution to our then-existing stockholders.
We have a history of significant losses and we may never achieve or sustain profitability. If we are unable to become profitable, our operations will be adversely effected.
We have incurred annual operating losses since our inception and our operations have never been profitable. At June 30, 2009, we had an accumulated deficit of $20,108,586. Our gross revenues for the years ended June 30, 2009 and 2008, were $1,004,734 and $1,360,924 with losses from operations of $1,765,040 and $2,224,716 and net losses of $2,022,621 and $2,389,942 respectively. There can be no assurance that we will ever become profitable.
We have risks associated with our dependence on third party developers to commercialize our technology. If we are unable to attract such developers to exploit our technologies, our business will fail. Alternatively, if such developers fail to commercialize our technology, it would have a material adverse effect on our business, financial condition and results of operations.
We depend upon third parties to develop our products. We must attract such third parties to develop and commercialize our technologies into end-user applications. If we are unable to do so our business model will fail.
The inability of a developer to make our products in a timely manner, including as a result of local financial market disruption which could impair the ability of such developers to finance their operations, or to meet quality standards, could cause us to miss the delivery date requirements of to their customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on our financial condition and results of operations.
For instance, BASF Beauty Care Solutions, L.L.C. (a unit of BASF) develops and commercializes our MultiStat technology pursuant to a product development and distribution agreement, whereby it formulates our proprietary compound to specifications as ordered by cosmetic companies. BASF makes these formulations (“actives”) in kilograms containing our proprietary compound and ships them to cosmetic customers. They, in turn, will mix the actives in their formulations and sell the products to the end users. Any event that materially and adversely affects BASF’s ability or willingness to develop such technology will affect our revenues.
Our intellectual properties may become obsolete if we are unable to stay abreast of technological developments.
The biomedical industry is characterized by rapid and continuous scientific and technological development. If we are unable to stay abreast of such developments, our technologies may become obsolete. We lack the substantial research and development resources of some of our competitors. This may limit our ability to remain technologically competitive.
Other companies could create a technology that competes effectively with our NIMBUS, Stay Fresh, NimbuDerm and MultiStat technologies, and we may be unable to maintain our existing, or capture additional, market share in our markets. Based upon our review of the industry, we are unaware of any company today that markets a technology that is similar to our technologies. Nonetheless, our intended markets generally are dominated by very large corporations (or their subsidiaries), which have greater access to capital, manpower, technical expertise, distribution channels and other elements which would give them a competitive advantage over us were they to begin to compete directly against us. It is possible that these and other competitors may implement new, advanced technologies before we are able to, thus affecting our ability to license our intellectual properties at profitable rates.
We cannot assure investors that we will be able to achieve the technological advances to remain competitive and become profitable, that new intellectual properties will be researched, tested and developed, that anticipated markets will exist or develop for our technologies, or that any product or services incorporating our intellectual properties will not become technologically obsolete.
We are dependent on our patents and other intellectual property right protections. The failure to obtain patent protection could have a material adverse effect on our business, financial condition and results of operations.
We have employed proprietary technologies to license our intellectual properties. We seek to protect our intellectual property rights through a combination of patent filings, trademark registrations, confidentiality agreements and inventions agreements. However, no assurance can be given that such measures will be sufficient to protect our intellectual property rights. If we cannot protect our rights, we may lose our competitive advantage. Moreover, if it is determined that our products infringe on the intellectual property rights of third parties, we may be prevented from marketing or licensing our intellectual properties to others.
The failure to protect our patents, trademarks and trade names, may have a material adverse effect on our business, financial condition and operating results. Litigation may be required to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others. Any action we take to protect our intellectual property rights could be costly and could absorb significant amounts of our management’s time and attention. In addition, as a result of any such litigation, we could lose any proprietary rights we have. If any of the foregoing occurs, we may be unable to execute our business plan and you could lose your investment.
Government regulation plays a significant role in our ability to market our technologies in the medical and consumer markets.
Certain of applications of our technologies are required to meet the government regulations by the FDA and or EPA. Failure to meet or to obtain the approvals from these government agencies will limit our ability to market our technologies to prospective clients.
We depend on key personnel in a competitive market for skilled employees, and failure to retain and attract qualified personnel could substantially harm our business.
We believe that our future success will depend in large part on our ability to attract and retain highly skilled scientific, technical and management personnel. We obtained loans from our Chairman and a major shareholder to pay for one year salary of our Chief Executive Officer and Director beginning in June 2007. If we are unable to hire the necessary personnel, the development of our business will likely be delayed or prevented. Competition for these highly skilled employees is intense. As a result, we cannot assure you that we will be successful in retaining our key personnel or in attracting and retaining the personnel we require for expansion.
We may be liable for products liability claims for which we have no insurance.
Although we do not manufacture our products and the partners that we license our technologies to have their own products liability insurance coverage (under which we are covered or indemnified against such liabilities), we may be sued for products liability if products incorporating our patented technologies injure the end user. In the event that we are sued on this basis, liability claims could require us to spend significant time and money in litigation and pay significant damages that are not covered by insurance. As a result, any of these claims, whether or not valid or successfully prosecuted, could have a material adverse effect on our business and financial results.
Failure to repay our loan obligations may severely impair our business operations, assets and your investment in the Company.
We have several loans outstanding, including loans from our Chairman of the Board and a major shareholder. If we are unable to successfully repay or restructure loans from our Chairman and a major shareholder, or our other outstanding liabilities as they become due, we may have to liquidate our business and undertake any or all the steps outlined below:
| · | Significantly reduce, eliminate or curtail our business, operating and research and development activities so as to reduce operating costs; |
| · | Sell, assign or otherwise dispose of our assets, if any, to raise cash or to settle claims by creditors, including our Chairman of the Board; |
| · | Pay our liabilities in order of priority, if we have available cash to pay such liabilities; |
| · | If any cash remains after we satisfy amounts due to our creditors, distribute any remaining cash to our stockholders in an amount equal to the net market value of our net assets; |
| · | File a Certificate of Dissolution with the State of Nevada to dissolve our corporation and close our business; |
| · | Make the appropriate filings with the Securities and Exchange Commission so that we will no longer be required to file periodic and other required reports with the Securities and Exchange Commission, if, in fact, we are a reporting company at that time; and |
| · | Make the appropriate filings with the Financial Industry Regulatory Authority to affect a delisting of our stock. |
We have not paid cash dividends and it is unlikely that we will pay cash dividends in the foreseeable future. Investing in our securities will not provide you with income.
We plan to use all of our earnings, to the extent we have earnings, to fund our operations. We do not plan to pay any cash dividends in the foreseeable future. We cannot guarantee that we will, at any time, generate sufficient surplus cash that would be available for distribution as a dividend to the holders of our common stock. You should not expect to receive cash dividends on our common stock.
We have the ability to issue additional shares of our common stock, without asking for stockholder approval, which could cause your investment to be diluted.
Our Articles of Incorporation currently authorize the Board of Directors to issue up to 100,000,000 shares of common stock. The authority of the Board of Directors to issue shares of common stock, or warrants or options to purchase shares of common stock, is generally not subject to stockholder approval. Accordingly, any additional issuance of our common stock may have the effect of further diluting your investment.
We may raise additional capital through a securities offering that could dilute your ownership interest.
We require substantial working capital to fund our business. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, these securities may have rights, preferences or privileges senior to those of the holders of our common stock. The issuance of additional common stock by our management will also have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock.
The market for our common stock is volatile. This affects both the ability of our investors to sell their shares, as well as the price at which they are able to sell their shares.
The market price for our common stock is extremely volatile and is significantly affected by factors such as reports written by third parties, over whom we have no control, about our business and sales of large amounts of our common stock relative to our average volume. Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are unrelated to the operating performance of the affected companies. These volatile conditions may make it difficult for you to sell our common stock at a price that is acceptable to you.
There is a limited public market for our common stock and our stockholders may be unable to liquidate their shares.
Our common stock is listed on the Over-the-Counter Bulletin Board, and there is a limited volume of sales, thus providing limited liquidity for our shares. As a result, stockholders may be unable to sell their shares in a timely manner.
Our executive officers and directors control a large percentage of our common stock, which allow them to control matters submitted to stockholders for approval.
Our executive officers and directors (and their affiliates), in the aggregate, own approximately 53% of our outstanding common stock, and a majority of our outstanding voting stock. Therefore, our officers and directors have the ability to decide the outcome of matters submitted to our stockholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets) and to control our management and affairs. This concentration of ownership may have the effect of entrenching management and delaying, deferring or preventing a change in control, impede a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control, which in turn could have an adverse effect on the market price of our common stock.
Our corporate headquarters are located at 902 NW 4 Street, Gainesville, Florida. This 3,200 square foot premises is composed of offices and an equipped laboratory. We pay a monthly lease payment of $2,000 and our lease expires on February 1, 2011.
Our office and laboratory facilities are in good condition and are sufficient to conduct our operations.
We do not own real estate at this time and we have no agreements to acquire any properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings that it believes will have a material adverse effect upon of its business or its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year 2009.
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information
Our common stock began trading on September 4, 2002 on the OTC Bulletin Board under the symbol QMDT. The following table sets forth the range of high and low closing sale price per share our common stock for the fiscal quarters indicated. The OTC Bulletin Board quotations represent quotations between dealers without adjustment for retail mark-up, markdowns or commissions and may not represent actual transactions.
| | Year Ended June 30, 2009 |
| | High | Low |
| Fourth Quarter | $0.62 | $0.39 |
| Third Quarter | $0.55 | $0.09 |
| Second Quarter | $0.32 | $0.06 |
| First Quarter | $0.40 | $0.18 |
| | Year Ended June 30, 2008 |
| | High | Low |
| Fourth Quarter | $0.42 | $0.20 |
| Third Quarter | $0.45 | $0.29 |
| Second Quarter | $0.72 | $0.25 |
| First Quarter | $0.87 | $0.56 |
Holders
As of June 30, 2009, there were 65 holders of record of our common stock. We have one class of common stock, $0.0001 par value, outstanding.
Dividends
We have not declared or paid any cash dividends on our common stock since inception. We intend to retain our future earnings, if any, in order to finance the expansion of our business and we do not anticipate that any cash dividends will be paid in the foreseeable future. Our future dividend policy will depend on our earnings, capital requirements, expansion plans, financial condition and other relevant factors.
Penny Stock Considerations
Our shares are "penny stocks" which term is generally defined in the Securities Exchange Act of 1934 as equity securities with a price of less than $5.00. Our shares may be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.
Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or "accredited investor" must make a special suitability determination regarding the purchaser and must receive the purchaser's written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with his or her spouse is considered an accredited investor. In addition, under the penny stock regulations the broker-dealer is required to:
| § | Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt; |
| § | Disclose commissions payable to the broker-dealer and its registered representatives and current bid and offer quotations for the securities; |
| § | Send monthly statements disclosing recent price information pertaining to the penny stock held in a customer's account, the account's value, and information regarding the limited market in penny stocks; and |
| § | Make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction, prior to conducting any penny stock transaction in the customer's account. |
Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling stockholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practices and disclosure requirements could impede the sale of our securities. In addition, the liquidity for our securities may be adversely affected, with a corresponding decrease in the price of our securities. Our shares are currently subject to such penny stock rules and our stockholders will, in all likelihood, find it difficult to sell their securities.
Recent Sales of Unregistered Securities
On April 30, 2009, we issued 2,222 shares of our common stock to Mr. Nguyen, our Chief Financial Officer, in exchange for approximately $1,000, which we owed to Mr. Nguyen for services rendered to us. The shares granted to Mr. Nguyen were valued at price of $0.45 per share, for an aggregate price of approximately $1,000. 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 stock certificate representing the shares issued to Mr. Nguyen stating that the securities were not registered under the Securities Act and are subject to restrictions on their transferability and resale.
On May 31, 2009, we issued 2,222 shares of our common stock to Mr. Nguyen in exchange for approximately $1,000, which we owed to Mr. Nguyen for services rendered to us. The shares granted to Mr. Nguyen were valued at price of $0.45 per share, for an aggregate price of approximately $1,000. We relied upon Section 4(2) of 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 stock certificate representing the shares issued to Mr. Nguyen stating that the securities were not registered under the Securities Act and are subject to restrictions on their transferability and resale.
On June 30, 2009, we issued 1,923 shares of our common stock to Mr. Nguyen in exchange for approximately $1,000, which we owed to Mr. Nguyen for services rendered to us. The shares granted to Mr. Nguyen were valued at price of $0.52 per share, for an aggregate price of approximately $1,000. We relied upon Section 4(2) of 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 stock certificate representing the shares issued to Mr. Nguyen stating that the securities were not registered under the Securities Act and are subject to restrictions on their transferability and resale.
Securities Authorized for Issuance Under Equity Incentive Plans
The following table sets forth information regarding awards made through compensation plans or arrangements through June 30, 2009, our most recently completed fiscal year.
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding outstanding securities shown herein) |
| Equity compensation plans approved by security holders | 4,966,116 | $0.53 | 754,472 |
| Equity compensation plans not approved by security holders | 980,239 | $0.31 | N/A |
| Total | 5,946,355 | $0.49 | 754,472 |
Our 2001 Equity Incentive Plan (The “Plan”) authorizes the issuance of options, right to purchase Common Stock and stock bonuses to officers, employees, directors and consultants. The Plan was amended and restated to increase the total number of shares available to 6,000,000 shares. We reserved 6,000,000 shares of our common stock for awards to be made under the Plan. The Plan is administered by a committee comprised of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The Plan allows for the issuance of incentive stock options (which can only be granted to employees), non-qualified stock options, stock awards, or stock bonuses. The committee, or the Board of Directors if there is no committee, determines the type of award granted, the exercise price, the option term, which may be no more than ten years, terms and conditions of the award and methods of exercise. Options must vest within ten years. The Plan description and its activities up to the fiscal year ended are disclosed in our financial statements for the fiscal year ended contained herein. The number of shares of Common Stock under the Plan that are available for grant at June 30, 2009 was 754,472.
During the fiscal years ended, we also issued common stock warrants to the service providers including the consultants for their services rendered as part of their service agreements. The terms of the warrants are similar to those of the stock options in terms of the exercise price, the warrant term, which may be no more than ten years. Terms and conditions of these warrants are determined in the warrant agreements.
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with our audited financial statements and related notes included therein. The terms "the Company," "we," "our" or "us" refer to Quick-Med Technologies, Inc. This discussion contains forward-looking statements based on our current expectations, assumptions, and estimates. The words or phrases "believe," "expect," "may," "anticipates," or similar expressions are intended to identify "forward-looking statements." Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties pertaining to our business, including: (a) because we have a limited operating history and our technologies are still evolving, we may not be able to successfully manage our business or achieve profitability; (b) our technology and product development processes, which include substantial regulatory approvals, are lengthy and expensive and there is no assurance that we will have sufficient resources to complete development related to these processes; (c) our history of losses make it difficult for you to evaluate our current and future business and prospects and future financial results; (d) we have negative cash flow from operations and an accumulated deficit that raises substantial doubt about our ability to continue as a going concern; (e) our future business is dependent upon third parties to market, manufacture, and distribute our technologies and/or products or jointly developed products; (f) there is no assurance that our technologies or products that employ our technologies will be accepted in the marketplace; (g) we do not currently carry product liability insurance and should we be subject to product liability claims, our financial condition may be adversely affected; (h) our operations are currently funded by the revenues and our debt and equity financings, however, there are no assurances that such financings will be sufficient to ensure our future financial performance; (i) we have substantial debt obligations due to our Chairman of the Board and a major shareholder, who have funded our operations, debt obligations of which are secured by our assets and revenues and which are senior obligations; (k) 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 (l) other risk factors discussed in our 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 10K with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
Overview
Quick-Med is a life sciences company focused on developing proprietary, broad-based technologies in the medical, consumer, and healthcare markets. Our four core technologies are: (1) Novel Intrinsically Micro-Bonded Utility Substrate (NIMBUS®), a family of advanced polymers bio-engineered to have antimicrobial, hemostatic, and other properties that can be used in a wide range of applications; (2) Stay FreshTM, , a unique chemical formulation for textiles with a durable antimicrobial agent effective against an array of bacteria even after numerous laundering cycles; (3) NimbuDermTM , a novel copolymer having applications as a persistent hand sanitizer with long lasting protection against germs, as well as other potential applications as an adhesive and as a component used the construction of medical devices; and (4) MultiStat®, a family of advanced patented methods and compounds shown to be effective in skin therapy applications. Currently, NIMBUS technology has been commercialized in an advanced wound care product by our licensee in the institutional market in late June 2009. The Company targets NIMBUS technology for additional advanced wound care products, catheters, incontinence products, and other medical devices. MultiStat has been developed in a cosmetic product line with the anti-aging products. Stay Fresh is currently under development with a broad range of potential applications including consumer textile market. NimbuDerm is also a technology currently being developed.
Our strategy is to further develop our core technologies as well as develop future technologies. We will attempt to commercialize these technologies through strategic licensing partnership agreements, joint ventures, or co-development agreements. We do not intend to manufacture or distribute final products; instead, we will seek partnership arrangements and/or license agreements with third parties to develop products that use our technologies and who will perform the manufacturing, marketing, and distribution functions associated with our technologies.
Our business model has attempted and will continue to attempt to develop the following revenue segments:
| · | Profit sharing revenues; |
| · | Research and development fees paid to us in connection with joint development agreements; and |
| · | Government research and development grants. |
Our potential revenues will be derived from government agencies and the following types of companies in connection with our NIMBUS, Stay FreshTM , NimbuDermTM and MultiStat® technologies:
| · | Healthcare and medical; |
| · | Apparel and textile; and |
| · | Cosmetic and personal care companies. |
Uncertainties and Trends
Our revenues are dependent now and in the future upon the following factors:
| · | Acceptance of our technologies or future technologies in the marketplace ; |
| · | Our partner's 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 services to health care, apparel, cosmetic, and personal care companies; |
| · | Our ability to successfully conduct laboratory and clinical testing of our potential products; and |
| · | Our ability to obtain regulatory approval of our future products. |
Uncertainties or trends that may affect our business also include the possibility 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.
Capital Expenditures and Requirements
From 2000 to June 2009, we have spent approximately $827,000 on the acquisition of patents and exclusive license agreements. We owe an additional $160,000 to Dr. Richard Galardy which is due when certain milestones are met in connection with a September 2000 license agreement we have with Dr. Galardy and Dr. Damian Grobeny. This license agreement provides that we compensate Dr. Galardy and Dr. Grobeny with our common stock and cash for the exclusive license of the Ilomastat technology invented by them.
We do not expect any significant additions to property, plant and equipment.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts. The estimates and assumptions are evaluated on an on-going basis and are based on historical experience and on various other factors that are believed to be reasonable. Estimates and assumptions include, but are not limited to economic useful lives of fixed and intangible assets, income taxes, valuation of options and warrants granted and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the financial statements. Our accounting for stock compensation requires us to estimate the value of the shares issued and the value of intangible assets require us to continually assess whether such assets are impaired.
Results of Operations
Comparison of Years Ended June 30, 2009 and 2008
Revenues. During the year ended June 30, 2009 we had revenues of $1,004,734, compared to $1,360,924 for the year ended June 30, 2008, representing a 26% decrease in our revenues. Our revenues during the year ended June 30, 2009 consisted of: (a) $804,241 which represented our royalties from the product sales by BASF Beauty Care Solutions, L.L.C., 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) $193,350, which represented the revenue earned from the small business innovation research program and from the joint development programs with Avery Dennison and Mölnlycke Health Care AB; and (c) $7,143, which represented the earned portion of the license fee from Derma Sciences, Inc. As a result of our May 2008 manufacturing and distribution agreement with BASF, we have had a significant increase in product sales for the year ended June 30, 2009. However, we cannot anticipate that our share of the product sales by BASF for the next fiscal year will continue at this level given market uncertainties, in particular in the retail cosmetic industry.
Our revenues during the year ended June 30, 2008 consisted of: (a) $308,958, which represented our royalties from the product sales by BASF Beauty Care Solutions, L.L.C.; (b) $950,447, which represented the revenue earned from the small business innovation research program and the US Army research on the development of Ilomastat for treatment of sulfur mustard injuries on the eye and skin program (the “US Army research program”); and (c) $101,519 which represented the earned portion of the license fee from Derma Sciences, Inc. and the research and development fees from Hanesbrands Inc. (“HBI”).
Effective August 1, 2007, we entered into the manufacturing and distribution agreement with BASF Beauty Care Solutions, L.L.C., a member of the BASF Group (the “BASF Agreement”). This agreement grants BASF exclusive and non-exclusive licenses to develop and market our Ilomastat product for the field of over-the-counter anti-aging (chronological aging or photoaging) cosmetics. Under the terms of this agreement, we and BASF share the net revenues in each contract calendar year beginning January 1, 2008 until December 31, 2010 in accordance with certain sharing percentages as defined in the agreement. The BASF Agreement has an expiration date of December 31, 2010. This Agreement supersedes the Master Agreement for Product Development, Manufacturing and Distribution dated August 15, 2002, the Product Development and Distribution Agreement for Ilomastat dated August 15, 2002, the Tolling Agreement dated October 20, 2005, as amended, and the Letter of Intent with the effective date of February 1, 2006, as amended.
Operating Loss. Operating loss for the year ended June 30, 2009 was $1,765,040 as compared to $2,224,716 in operating loss for the year ended June 30, 2008, representing a decrease of 21% or $459,676 in operating loss. The decrease in operating loss was primarily due to a decrease in expenses of $815,866 offset by a decrease in revenues of $338,690 for the year ended June 30, 2009. The decrease in expenses was primarily due to the following: (a) a decrease of $491,837 or 32% in research and development expenses; (b) a decrease of $210,798 or 13% in general and administrative expenses; (c) a decrease of $93,645 or 30% in licensing and patent expenses; and (d) a decrease of $18,950 or 34% in cost of revenues, as described in more detail below.
Research and Development Expense. Research and development expense decreased by $491,837 or 32% to $1,063,450 for the year ended June 30, 2009, from $1,555,287 for the year ended June 30, 2008. The decrease in research and development expense is primarily attributable to (a) the absence of the expenses related to the U.S. Army Research Program, which was completed in June 2008, (b) the partial sign-on compensation expense to our head of research and development department, and (c) less utilization of outside lab services as compared to the prior fiscal year.
General and Administrative Expense. General and administrative expense decreased by $210,798 or 13% to $1,375,068 for the year ended June 30, 2009, from $1,585,866 for the year ended June 30, 2008. This decrease in our general and administrative expenses is primarily attributed to the decrease in total share based compensation as compared to the prior fiscal year, a significant component of which was the decrease of approximately $274,000 in share based compensation to our Chief Executive Officer from the prior fiscal year.
Licensing and Patent Expense. Licensing and patent expense decreased by $93,645 or 30% to $222,139 for the year ended June 30, 2009 from $315,784 for the year ended June 30, 2008. This decrease was primarily due to the reduced level of utilization of consulting legal patent services and legal licensing services including licensing and joint development agreement negotiations.
Interest Income. During the year ended June 30, 2009, we had $2,290 in interest income, compared to $2,195 for the year ended June 30, 2008. The amounts represented interest earned on our certificate of deposits and money market account during the periods.
Interest Expense. Interest expense for the year ended June 30, 2009 increased $92,450 or 55% to $259,871 compared to $167,421 the year ended June 30, 2008. This increase was due to an increase of approximately $800,000 or 33% in the average outstanding loan balance due to our Chairman of the Board and a major shareholder to approximately $3,200,000, compared to approximately $2,400,000 average outstanding balance for the comparable 2008 period.
Net Loss. Net loss for the year ended June 30, 2009 was $2,022,621 or $0.07 per share compared to $2,389,942 or $0.08 per share for the year ended June 30, 2008. This decrease is primarily attributable to the decreases in research and development expenses, general and administrative expenses, in cost of revenues, and licensing and patent expenses offset by a decrease in revenues .
Liquidity and Capital Resources
Our auditors have issued a going concern opinion on our audited financial statements for the fiscal years ended June 30, 2009 and 2008 as we have experienced recurring losses and negative cash flows from operations in these periods. In addition, we have a net capital deficiency. These matters raise substantial doubt about our ability to continue as a going concern.
Total cash on hand at June 30, 2009 was $41,216 as compared with $72,817 at June 30, 2008. Subsequent to the year ended, we have collected the entire outstanding receivable balance of approximately $18,500 at June 30, 2009. In addition, during July and August 2009, we received the approximately $200,000 of the remaining balance of the $375,000 senior convertible note with our Chairman. Further, as of September 23, 2009, we have received additional advances totaling $195,000 from our Chairman, the terms of which are to be determined.
In June 2009, our licensee, Derma Sciences, Inc. launched the commercial sale of a product employing our NIMBUS technology. The first $75,000 of royalty fees from Derma Sciences will be offset against the advance payments we received from them in 2007, snf the subsequent royalty fees will be at 20% of the net sales as defined in the license agreement. We are unable to determine how much, if any, of the royalty fee we will receive in the future at this time. We expect minimal direct expenses in relation to this license agreement.
On April 17, 2009, we and Avery Dennison Corporation (“Avery”) entered into a Joint Development and Exclusive Option Agreement (the “Agreement”) with expected revenues to us of approximately $100,000 over the next six to twelve months period. We anticipated the direct expenses related to this project to be approximately $20,000. In April 30, 2009, we collected $30,000 initial payment under the Agreement.
In September 2006, we received the SBIR Phase II grant, which included including 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 $429,000 and incurred approximately $115,000 in expenses to subcontractors and other direct expenses. Effective April 23, 2007, we were awarded a twelve month military contract of approximately $880,000, net of overhead charged by USAMRAA. The cash outflows during the term of this military award were approximately $610,000 for scientific experiments and other direct expenses. This research was completed in June 2008. While we expect to receive royalties in the next twelve to twenty four months from the license agreement subject to certain contractual terms, we need cash in order to maintain and grow our businesses. See the section below for further discussion of our cash requirements and related strategies to meet these needs.
Effective January 1, 2009, our board approved our management team’s action plan to conserve cash and control expenses as follows:
| · | Voluntary deferral of $100,000 or 40% of our Chief Executive Officer’s annual salary; |
| · | Voluntary deferral of totaling $71,250 or 25% of our Vice President of Research and Development and Chief Financial Officer’s annual salary or consulting fee; |
| · | Reduction of a $75,000 salary position; and |
| · | Deferral of $20,000 or 20% in patent consulting fee. |
Effective February 16, 2009, our board also approved our management team’s additional steps to further conserve cash as follows;
| · | Additional voluntary deferral of $25,000 or $125,000 in total or 50% of our Chief Executive Officer’s annual salary; |
| · | Additional voluntary deferral of totaling $71,250 or $142,500 in total or 50% of our Vice President of Research and Development's and Chief Financial Officer’s annual salary or consulting fee; and |
| · | Voluntary deferral of totaling $16,000 or 13% of our Director of Business Development. |
This action plan went into effect beginning January 1, 2009 and subsequent additional voluntary deferral of salaries and consulting fees and will conserve approximately $365,000 in cash for the calendar year 2009.
Equity Financing and our Cash Requirements
On November 30, 2004, we completed an agreement to sell 5,000,000 shares of our restricted common stock to Phronesis Partners, L.P. (“Phronesis”), a Delaware limited partnership, for $1,000,000 before commission and expenses (the ”Stock Purchase Agreement”). On November 30, 2004, we received $880,000 net of commission and expenses of $120,000. In connection with the Stock Purchase Agreement, our Chairman of the Board, Mr. Granito, converted $500,000 of the convertible debt we owed to him into 1,315,790 shares of our restricted common stock at a conversion price applicable to the convertible debt of $0.38 per share. In connection with the Stock Purchase Agreement, we entered into a Warrant Agreement with Phronesis, in which we granted Phronesis certain warrants to purchase shares of our restricted common stock at an exercise price as defined in the Warrant Agreement. The Warrant Agreement expired on February 5, 2005 and provided for a maximum investment of $1,000,000 by Phronesis through the exercise of warrants. On December 31, 2004, we mutually agreed to amend the exercise price for the warrant price to $0.46 per share. All other terms of the Stock Purchase Agreement and the Warrant Agreement remained the same. On the same date, Phronesis exercised its warrant to purchase 2,173,913 shares of our restricted common stock at a per share price of $0.46, or an aggregate purchase price of $1,000,000 before commission of $70,000.
In connection with the exercise of the warrant and in accordance with the terms of the Stock Purchase Agreement, Mr. Granito, our Chairman of the Board, immediately converted $826,087 of his convertible debt owed by us into 2,173,913 shares of our restricted common stock (equal to the number of shares acquired by Phronesis) at a conversion price applicable to the convertible debt of $0.38 per share.
In February 2005, we issued 150,000 shares of restricted common stock for an aggregate purchase price of $87,000 in cash.
In June 2005, we issued 16,666 shares of restricted common stock for aggregate exercise price of $2,500 in cash from an exercise of an employee stock option.
In July 2005, we issued 40,322 shares of restricted common stock for an aggregate purchase price of $25,000 in cash.
In August 2005, we issued 13,795 shares of restricted common stock for an aggregate purchase price of $8,553 in cash.
In August 2005, we issued 175,000 shares of restricted common stock for an aggregate exercise price of $29,750 in cash from an exercise of a stock option.
In February 2006, we issued 100,000 shares of restricted common stock for an aggregate purchase price of $80,000 in cash.
In September 2006, we issued 33,334 shares of common stock for aggregate exercise price of $5,000 in cash from an exercise of an employee stock option.
In February 2007, we issued 30,000 shares of common stock for an aggregate exercise price of $6,000 in cash from an exercise of a warrant by an officer.
In May 2007, we issued 100,000 shares of restricted common stock for an aggregate purchase price of $79,000 in cash.
In June 2007, we issued 67,500 shares of common stock for an aggregate exercise price of $12,150 in cash and in lieu of payment of an outstanding payable from an exercise of a warrant.
In September 2007, we issued 15,000 shares of common stock for an aggregate exercise price of $2,250 in cash from an exercise of a warrant.
In October 2007, we issued 5,000 shares of common stock for an aggregate exercise price of $1,000 in cash from an exercise of warrants.
In November 2007, we issued 62,500 shares of common stock for an aggregate exercise price of $8,900 or $0.14 per share for 60,000 shares and $0.20 per share for 2,500 shares resulting from an exercise of warrants.
In November 2007, approximately $21,046 of accounts payable was settled through the issuance of 34,501 shares of restricted common stock.
In March 2009, we issued 29,412 shares of common stock for an aggregate exercise price of $5,000 in cash from an exercise of stock options.
In April 2009, we issued 30,000 shares of common stock for an aggregate exercise price of $6,000 in cash from an exercise of warrants.
In June 2009, we issued 25,000 shares of common stock for an aggregate exercise price of $4,250 in cash from an exercise of options.
Based on our cash position at June 30, 2009, 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 $143,000 per month or an aggregate of approximately $1,716,000 over the next twelve (12) months, in the following areas:
| | · | Research and development expenditures of approximately $74,000 per month or an aggregate $888,000 over the next twelve (12) months, which will consist of the following estimated monthly expenditures: (a) $50,000 in payroll for scientists; (b) $7,000 for outside research and development expenditures; and (c) $17,000 for chemical supplies and laboratory operating expenses, including rent expense; |
| | · | Patent related legal fees of approximately $18,334 per month or an aggregate $220,000 annually; and |
| | · | Operating expenses of approximately $50,667 per month or an aggregate $608,000 over the next twelve (12) months, including personnel costs, director and officer insurance, general liability insurance, rent, consulting fees, utilities, legal and accounting fees, and payroll. |
Our current cash balance of $41,216 as of June 30, 2009, coupled with accounts receivable of approximately $18,500, which has been subsequently collected after June 30, 2009, the receipt of $200,000 remaining amount of the senior convertible note from our Chairman, and approximately $24,500 from the exercise of stock options in July 2009, will satisfy our cash requirements for approximately two (2) 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 two (2) months assuming no further receipts of revenues and additional debt or equity financing.
We intend to raise additional cash by means of equity and or debt financing. Additionally, we are implementing a cash conservation strategy by extinguishing obligations through share-based payments and reducing our use of consulting services. However, our ability to raise cash through equity or debt financing with third parties will be very 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.
As of June 30, 2009, we have ten senior convertible notes payable outstanding to our Chairman totaling approximately $3,900,000 including accrued interest with interest rates ranging from 6% to 8% per annum and maturity dates ranging from June to December 2010. 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 $375,000 senior convertible note payable to a major stockholder. The senior convertible note has an 8% interest rate per annum with a conversion price of $0.74 per share, a maturity date of June 2010, and is secured by our revenues and assets. In addition, we have four convertible notes payable totaling $102,482 including accrued interest with an interest rate of 8% per annum and a maturity date in December 2010.
If we are unable to successfully repay our loans to our Chairman and a major stockholder, we may have to liquidate our business and undertake any or all the steps outlined below.
| · | Significantly reduce, eliminate or curtail our business, operating and research and development activities so as to reduce operating costs; |
| · | Sell, assign or otherwise dispose of our assets, if any, to raise cash or to settle claims by creditors, including our Chairman of the Board; |
| · | Pay our liabilities in order of priority, if we have available cash to pay such liabilities; |
| · | If any cash remains after we satisfy amounts due to our creditors, distribute any remaining cash to our shareholders in an amount equal to the net market value of our net assets; |
| · | File a Certificate of Dissolution with the State of Nevada to dissolve our corporation and close our business; |
| · | Make the appropriate filings with the Securities and Exchange Commission so that we will no longer be required to file periodic and other required reports with the Securities and Exchange Commission, if, in fact, we are a reporting company at that time; and |
| · | Make the appropriate filings with the National Association of Security Dealers to affect a delisting of our stock. |
Based upon our cash requirements for our Plan of Operations and our current dividend policy of investing any available cash to our operations, however, we do not plan to distribute any cash to our stockholders.
At June 30, 2009, we had a negative working capital of $1,218,207 that primarily consists of: (a) cash of $41,216; (b) accounts receivable of $18,562; (c) accounts payable of $562,611; (d) accrued expenses of $233,631; (e) unearned revenue of $51,428; and (d) convertible note payable with a related party of $430,315 including accrued interest. At June 30, 2009, we had a stockholders’ deficit of $4,946,209, a portion of which is due to non-cash share based compensation expense and non-cash interest expense from the notes payable conversions.
Cash used in operating activities was $836,309 for the year ended June 30, 2009. Net cash used in investing activities was $10,542. Net cash provided by financing activities was $815,250, of which $700,000 was from a senior secured 2008 convertible note 3 and senior secured 2009 convertible notes 1 and 2 with our Chairman, the $100,000 convertible notes with one of our officers, and the proceeds of $15,250 in cash from the exercise of stock options and warrants.
During the year ended June 30, 2008, we received (a) $12,150 from the exercise of 82,500 stock warrants; (b) $250,000 from a major shareholder as the final funding from the $375,000 senior convertible note; and (c) $1,026,840 from our Chairman as part of several senior convertible notes.
In November 2007, approximately $21,046 of accounts payable was settled through the issuance of 34,501 shares of restricted common stock.
Contractual Obligations
The following table summarizes our long-term contractual obligations as of June 30, 2009:
| | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years |
| Long-term debt obligations (a) | $4,609,087 | $430,315 | $4,148,772 | $ - | $ - |
| Operating lease obligations (b) | $38,000 | $24,000 | $14,000 | $ - | $ - |
| (a) | The principal and accrued interest on the notes payable owed to the Chairman’s Senior Convertible Notes, to an officer’s convertible note payable, and to a major shareholder’s senior note payable as fully discussed in note 9 of the accompanying footnotes to the financial statements. |
| (b) | We have an operating lease for our laboratory in Gainesville, Florida with an expiration date in 2011. |
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangement that have, or are reasonably likely to have, a current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in pages F-1 to F-20 attached hereto and incorporated herein by reference. The index to our annual financial statements as of and for the years ended June 30, 2009 and 2008 can be found on pages F-1.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment management believes that, as of June 30, 2009, our internal control over financial reporting is effective.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to the temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The following table sets forth the names, ages and positions held for our directors, executive officers and significant employees.
Our executive officers, key employees and directors are as follows:
| Name | Age | Position |
| Michael R. Granito | 57 | Chairman of the Board |
| J Ladd Greeno | 60 | Chief Executive Officer and Director |
| George E. Friel | 66 | Director |
| Gerald M. Olderman | 76 | Vice President, Research & Development and Commercialization, and Director |
| Gregory S. Schultz | 58 | Vice President, Laboratory & Clinical Research, and Director |
| Richard F. Caffrey | 66 | Director |
| Nam H. Nguyen | 52 | Chief Financial Officer |
Mr. Granito has served as our Chairman since July 2000. In September 2003, Mr. Granito joined Federated Investors, Inc. as senior vice president and head of capital market research. From July 1979 to December 2002, Mr. Granito was the managing director and head of capital market research of J.P. Morgan Fleming Asset Investment Management located in New York City. From 1984 through 1996 he served as an adjunct Professor of Finance at Yale University and New York University. Mr. Granito has authored a book and 14 papers on finance and foreign exchange topics. In 1973, Mr. Granito earned a B.S. and a B.A. in Economics from the University of Pennsylvania.
Mr. Greeno has served as our Chief Executive Officer since August 2007 and as our Director since September 2007. From 2003 to 2006, Mr. Greeno was President and Chief Executive Officer of Agion Technologies, a leading provider of ionic silver antimicrobials. Before joining Agion, Mr. Greeno held a number of senior management positions at the global management and technology consulting firm, Arthur D. Little, Inc., (ADL) including Chief Operating Officer and senior vice president in charge of the firm’s North American Management Consulting business. Mr. Greeno began his consulting career in ADL’s Strategy & Organization practice and then moved into leadership roles successfully building ADL’s worldwide Environmental, Health, and Safety Consulting business. Mr. Greeno received an M.B.A. from Harvard Business School and a B.B.A from the University of Oklahoma.
Major General Friel (Ret.) has served as our director from July 2000. MG. Friel has been self-employed as a consultant to various organizations in the defense industry since September 1998. MG. Friel served in the U.S. Army from 1960 to 1998. He was the commanding general of the U.S. Army Chemical and Biological Defense Command, at the Aberdeen Proving Ground in Maryland from August 1992 to August 1998 and deputy chief of staff for Chemical and Biological Matters of the Army Material Command in Virginia, during the same time. MG. Friel was also responsible for a $600 million annual budget for the Nuclear, Biological, and Chemical Defense Command for six years and directed over 1,100 scientists and engineers. MG. Friel has also served as chairman of the boards of the Nuclear, Biological, and Chemical Defense Enterprise at the Edgewood Arsenal in Maryland and the U.S. Army Material Command, Acquisition and Procurement Enterprise. MG. Friel earned an M.B.A. from Northwest Missouri State University and a B.S. from the University of Nebraska. He is a graduate from the U.S. Army Chemical School, The Army Command and General Staff College and The Industrial College of the Armed Forces. He was a director for Engineer Support Systems, Inc from September 1998 until January 2006.
Mr. Olderman has served as our Vice President, Research & Development and Commercialization since July 1997, and as our Director since July 2000. Mr. Olderman brings 35 years of healthcare experience, 31 years of technical management experience, and 25 years serving as the head of research and development activities for fortune 500 companies. Since November 1996, Mr. Olderman was Vice President and Associate of R.F. Caffrey & Associates Inc., a management consultant to medical device companies and suppliers. Prior to joining R.F. Caffrey & Associates, Mr. Olderman served as Director and head of research and development for C.R. Bard, Inc.'s Cardiopulmonary Division, where he organized a new product development process in which 19 new medical devices were developed. Mr. Olderman also served as Vice President for domestic and international research and development for the Pharmaceutical Division of Baxter Healthcare Corp. and Vice President for research and development for the Converters, a division of American Hospital Supply Corporation prior to its acquisition by Baxter Healthcare Corporation, where he led product development and made material changes that helped increase market share from 30% to 45% within a $750 million market. Mr. Olderman has also served as Vice President for research and development and as a director for Surgikos, Inc. a subsidiary of Johnson & Johnson. Mr. Olderman received a B.S in Chemistry from Rensselaer Polytechnic Institute in New York. He also holds an M.S. in Physical Chemistry and a Ph.D. in Physical Chemistry from Seton Hall University in New Jersey.
Mr. Schultz has served as our Vice President, Laboratory and Clinical Research and Director since July 2000. From 1999 through 2001, Mr. Schultz served as the President of the Wound Healing Society, and has worked as a consultant for 12 major biotechnology companies. In 1989, he was appointed Professor of Obstetrics/Gynecology and Director of the Institute for Wound Research in the College of Medicine at the University of Florida at Gainesville, Florida. He has published over 250 research articles and book chapters that have been cited over 6,500 times. He has been continuously funded by major grants from the National Institutes of Health and supported by grants from the U.S. Army grant on treatment of burns with growth factors. Mr. Schultz earned a doctorate in biochemistry from Oklahoma State University and postdoctoral fellowship in cell biology at Yale University in Connecticut.
Mr. Nguyen has been our Chief Financial Officer since August 2004. Since January 2003, he has provided accounting services through his professional firm. From November 2003 until July 2004, Mr. Nguyen served as acting Secretary. Mr. Nguyen is currently president of his accounting firm, Nam H. Nguyen, CPA, P.A. Mr. Nguyen was a Manager of Financial Controls of W. R. Grace & Co., responsible for its risk-based global audit plan for its worldwide operations. He was Vice President of Financial Reporting of John Alden Financial Corporation with responsibilities for the SEC filings and state insurance filings in the United States. A certified public accountant, who has worked for PriceWaterhouse, as a senior manager, Mr. Nguyen specialized in the insurance and health care business in both the United States and Europe. Mr. Nguyen is also a Certified Internal Auditor.
The above listed officers and directors will serve until the next annual meeting of the stockholders or until their death, resignation, retirement, removal, or disqualification, or until their successors have been duly elected and qualified. Vacancies in the existing board are filled by majority vote of the remaining directors. Our officers serve at the will of the board. There are no family relationships between any of the executive officers and directors.
No officer, director, or persons nominated for such positions, promoter or significant employee has been involved in legal proceedings that would be material to an evaluation of our management.
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:
| 1. | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
| 2. | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| 3. | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or |
| 4. | being found by a court of competent jurisdiction (in a civil action),the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. |
Committees of the Board of Directors
Executive Committee. Our Executive Committee is composed of Michael R. Granito, our Chairman of the Board, Directors J. Ladd Greeno, and George E. Friel. This committee’s chairman is J. Ladd Greeno . This committee acts for our Board of Directors when a meeting of the full board is not practical.
Compensation Committee. The Compensation Committee is composed of George E. Friel and Gerald M. Olderman, is chaired by George E. Friel. This committee approves, administers and interprets our compensation and health benefits, including our executive incentive programs. Additionally, this committee reviews and makes recommendations to our Board of Directors to ensure that our compensation and benefit policies are consistent with our compensation philosophy and corporate governance principles. This committee is also responsible for establishing our Chief Executive Officer and senior executive officers’ compensation.
Audit Committee. The Audit Committee is composed of George E. Friel and Michael R. Granito, is chaired by George E. Friel. This committee has general responsibility for the oversight and surveillance of our accounting, reporting and financial control practices. Among other functions, the committee retains our independent public accountants.
Licensing Committee. The Licensing Committee is composed of J. Ladd Greeno, Michael R. Granito and Gregory S. Schultz, is chaired by J. Ladd Greeno. This committee has general responsibility for the review of the licensing terms and agreements with our business partners and to recommend them to the Board of Directors for approval as appropriate.
Audit Committee Financial Expert
Currently, we do not have an Audit Committee “financial expert”. No individual on our Board of Directors possesses all of the attributes of an audit committee financial expert and no one on our Board of Directors is deemed to be an audit committee financial expert. In forming our Board of Directors, we sought out individuals who would be able to guide our operations based on their business experience, both past and present, or their education. Our business model is not complex and our accounting issues are straightforward. Responsibility for our operations is centralized within management, which is comprised of four people. We rely on the assistance of others, such as our chief financial officer, who is a certified public accountant, to help us with the preparation of our financial information. We recognize that having a person who possesses all of the attributes of an audit committee financial expert would be a valuable addition to our Board of Directors, however, we are not, at this time, able to compensate such a person therefore, we may find it difficult to attract such a candidate.
Code of Ethics
We have adopted a Code of Ethics for our board members, our principal executive and senior financial officers, our other officers and our employees. A copy of this Code of Ethics is located on our website at www.quickmedtech.com. We intend to post any waivers of or amendments to our Code of Ethics on our website.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under United States securities laws, our directors, executive officers and any persons holding more than 10% of our issued and outstanding common stock are required to report their ownership of common stock (or securities convertible into common stock) to the Securities and Exchange Commission. Due dates for these reports have been set by the Commission and we are required to report any failure to file by those deadlines. To our knowledge, based solely on a review of the copies of such reports furnished to us by those persons and on representations from those persons that no other reports were required, all reports were timely filed as required under Section 16(a) of the Securities Exchange Act of 1934 by all such persons during the fiscal year ended June 30, 2009, with the following exceptions: Mr. Friel filed one late Form 4 for one transaction; Mr. Granito filed late five times for five transactions; Mr. Lerner filed late four times for four transactions; Mr. Olderman filed late one time for one transaction; Mr. Schultz filed late one time for one transaction; Mr. Nguyen filed late one time for one transaction;
ITEM 11. EXECUTIVE COMPENSATION
J. Ladd Greeno, Chief Executive Officer, currently receives an annual salary of $250,000. Gerald M. Olderman, Vice President of R&D and Commercialization, signed an employment agreement effective November 2006, with an annual salary of $150,000. Our other officers have agreed to act without cash compensation, except those with consulting agreements, until authorized by our Board of Directors, which is not expected to occur until we have generated sufficient revenues from operations or we have obtained sufficient financing. The officers or directors are not otherwise accruing any compensation under any agreement with us. The officers and directors have been granted stock options for past services, as set forth below.
Summary Compensation Table
| Name and principal position | | Year | | Salary ($)(2) | | Bonus ($) | | Stock Awards ($)(1) | | Option Awards($)(1) | | Non-Equity Incentive Plan Compen-sation ($) | | Nonquali-fied Deferred Compen-sation Earnings ($) | | All Other Compen-sation ($) | | Total ($) | |
| | | | | | | | | | | | | | | | | | | | |
J. Ladd Greeno, Chief Executive Officer | | | 2009 | | $ | 250,000 | | | — | | | — | | $23,750 | | | | — | | | — | | | | | $ | 273,750 | |
| | | | 2008 | | $ | 250,000 | | | — | | | — | | $399,347 | | | | — | | | — | | | | | $ | 649,347 | |
Gerard M. Olderman, Vice President of R & D and Commercialization | | | 2009 | | | 150,000 | | | — | | | — | | 15,305 | | | | — | | | — | | | | | | 165,305 | |
| | | | 2008 | | | 150,000 | | | — | | | $27,600 | | 12,133 | | | | — | | | — | | | | | | 189,733 | |
| Nam H. Nguyen, Chief Financial Officer | | | 2009 | | | 138,000 | | | — | | | 12,000 | | 13,195 | | | | — | | | — | | | | | | 163,195 | |
| | | | 2008 | | | 120,000 | | | — | | | — | | 5,778 | | | | — | | | — | | | | | | 125,778 | |
(1) Reflects dollar amount expensed by us during applicable fiscal years for financial statement reporting purposes pursuant to FAS 123R. FAS 123R requires us to determine the overall value of the options as of the date of grant based upon the Black-Scholes method of valuation, and to then expense that value over the service period over which the options become exercisable (vest). As a general rule, for time in service based options, we will immediately expense any option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. See the assumptions made in the valuation of the stock options in the footnotes of our financial statements on pages F-1 to F-22 attached hereto and incorporated by reference. During the year ended June 30, 2009, Mr. Greeno was granted 225,000 stock options, which were vested one-third at the grant date and one-third to be vested at every twelve months thereafter. We recognized $23,750 in share-based compensation expense for the fiscal year ended June 30, 2009. During the year ended June 30, 2008, Mr. Greeno was granted 484,056 stock options, which were vested immediately and 1,452,167 stock options, which are vested one-sixteenth (1/16) every three month beginning on June 17, 2007. These stock options were granted as part of Mr. Greeno’s employment agreement. We recognized approximately $399,347 of share-based compensation expenses for the fiscal year ended June 30, 2008 for Mr. Greeno services. During the year ended June 30, 2009, Mr. Olderman was granted 145,000 stock options, which were vested one-third at the grant date and one-third to be vested at every twelve months thereafter. We recognized $15,305 in share-based compensation expense for the fiscal year ended June 30, 2009. During the year end June 30, 2008, we granted 65,714 restricted common shares and 10,000 stock options to Mr. Olderman for his services as a director and 105,000 stock options as Vice President of R &D and Commercialization. These stock options were vested one-third at the grant date and one-third to be vested at every twelve months thereafter. We recognized $39,733 in share-based compensation expense for the fiscal year ended June 30, 2008. During the year ended June 30, 2009, Mr. Nguyen was granted 125,000 warrants which one-third was vested at the grant date and one-third to be vested at every twelve months thereafter. We recognized $13,195 in share-based compensation expense for the fiscal year ended June 30, 2009. During the fiscal year ended June 30, 2008, we granted Mr. Nguyen 50,000 stock options for his performance bonus, of which one-third was vested at the grant date and one-third to be vested at every twelve months thereafter. We recognized $5,778 in share-based compensation expense for the fiscal year ended June 30, 2008.
(2) As described further below, Mr. Nguyen has a consulting agreement with us since August 2004, as Chief Financial Officer. He also serves as the acting Secretary since February 2008. Beginning in July 2004, his compensation was set at $8,000 monthly base compensation with a monthly $2,500 minimum cash payment and the remainder may be paid in shares of restricted common stock. In addition, he has also received 400,000 shares of common stock plus warrants to acquire 300,000 shares of common stock at $0.20 per share in accordance with a vesting schedule. Effective July 1, 2005, his compensation increased to $10,000 monthly base compensation as approved by the Compensation Committee and the Board of Directors.
No retirement, pension or insurance programs or other similar programs have been adopted for our employees or consultants. A stock option plan has been approved by our board. On December 13, 2004, our shareholders approved our amended and restated 2001 equity incentive plan to increase the total number of shares of common stock from 3,000,000 from 4,000,000. On November 13, 2007, our 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. Options to purchase 1,140,000 shares of common stock have been granted to officers, directors, employees and consultants under the plan in 2002. All 2002 stock options have an exercise price equal to 75% of the closing bid price for the first 30 days of trading in the common stock, which commenced September 6, 2002, with the exception of Peter Barton Hutt, whose stock options are at 25% of such price. Options to purchase a total of 840,000 shares of common stock were issued in 1999, 2000 and 2001 to officers, directors, employees and consultants. On August 16, 2005, all 840,000 options were expired. In July 2003, the Board of Directors have authorized the issuance of options to acquire up to approximately 1,300,000 shares of common stock and the grant of 250,000 shares of restricted common stock to officers, directors, employees and consultants. In July 2004, the Board of Directors approved the issuance up to 500,000 shares of restricted common stock and options to acquire approximately 600,000 shares of common stock to be granted to officers, directors, employees and consultants. In September 2005, the Board of Directors approved the issuance of 130,000 shares of restricted common stock and options and warrants to acquire approximately 885,000 to employees, directors, officers and consultants. In December 2006, the Board of Directors approved the issuance of stock options to acquire approximately 790,770 to employees, directors, officers and consultants. In April 2008, the Board of Directors approved the issuance of the stock options to acquire approximately 1,074,666 to employees, directors and consultants. In December 2008, the Board of Directors approved the issuance of the stock options and warrants to acquire approximately 2,040,000 shares of restricted common stock to employees, directors and consultants.
Grants of Plan-Based Awards
There were no grants of plan-based awards to the named executive officers during the fiscal years 2009 and 2008.
The following table summarizes the amount of our executive officers’ equity-based compensation outstanding at the fiscal year ended June 30, 2009:
| OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END | |
| OPTION AWARDS | | STOCK AWARDS | |
| Name | | Number of securities underlying unexercised options (#) Exercisable | | Number of securities underlying unexercised options (#) Unexercis- able | | Equity Incentive Plan Awards: Number of Securities underlying unexercised unearned options (#) | | Option exercise price ($) | | Option expiration date | | Number of shares or units of stock that have not vested (#) | | Market value of shares or units of stock that have not vested ($) | | Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#) | | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested (#) | |
| | | | | | | | | | | | | | | | | | | | |
J. Ladd Greeno Chief Executive Officer | | 484,056 | (1) | | | | | | | | | 0.75 | | | 08/06/2012 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | 726,084 | (2) | | | 726,083 | | | 726,083 | | | 0.75 | | | 09/25/2012 | | | | | | | | | | | | | |
| | | 125,000 | (3) | | | 100,000 | | | 100,000 | | | 0.20 | | | 10/27/2013 | | | | | | | | | | | | | |
| Gerard M. Olderman | | 80,555 | (3) | | | 64,445 | | | 64,445 | | | 0.20 | | | 10/27/2013 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Vice President | | 75,834 | (4) | | | 29,166 | | | 29,166 | | | 0.42 | | | 04/18/2013 | | | | | | | | | | | | | |
R&D and Commercialization | | 75,385 | (5) | | | 0 | | | 0 | | | 1.05 | | | 12/19/2011 | | | | | | | | | | | | | |
| | | 150,000 | (6) | | | 0 | | | 0 | | | 0.80 | | | 09/09/2010 | | | | | | | | | | | | | |
| Nam H. Nguyen, Chief Financial Officer | | 69,445 | (7) | | | 55,555 | | | 55,555 | | | 0.20 | | | 10/27/2013 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | 36,113 | (4) | | | 13,887 | | | 13,887 | | | 0.42 | | | 04/18/2013 | | | | | | | | | | | | | |
| | | 15,000 | (5) | | | 0 | | | 0 | | | 1.05 | | | 12/19/2001 | | | | | | | | | | | | | |
| (1) | These stock options were granted under our amended and restated 2001 Equity Incentive Plan and were vested on the date of grant. |
| (2) | These stock options were granted under our amended and restated 2001 Equity Incentive Plan and are vested as follows one-sixteenth (1/16) every three month beginning on June 17, 2007. |
| (3) | These stock options were granted under our amended and restated 2001 Equity Incentive Plan with the vested dates as follows: One-third vested at the grant date of October 27, 2008; one-third vested at October 27, 2009; and the remaining vested at October 27, 2010. |
| (4) | These stock options were granted under our amended and restated 2001 Equity Incentive Plan with the vested dates as follows: One-third vested at the grant date of April 18, 2008; one-third vested at April 18, 2009; and the remaining vested at April 18, 2010. |
| (5) | These stock options were granted under our amended and restated 2001 Equity Incentive Plan with the vested dates as follows: One-third vested at the grant date of December 20, 2006; one-third vested at December 20, 2007; and the remaining vested at December 20, 2008. |
| (6) | These stock options were granted under our amended and restated 2001 Equity Incentive Plan with the vested dates as follows: One-third vested at the grant date of September 9, 2005; one-third vested at September 9, 2006; and the remaining vested at September 9, 2007. |
| (7) | These stock warrants were granted with the vested dates as follows: One-third vested at the grant date of October 27, 2008; one-third vested at October 27, 2009; and the remaining vested at October 27, 2010. |
Compensation of Directors
The following director compensation disclosure reflects all compensation awarded to, earned by or paid to the directors below for the fiscal year ended June 30, 2009.
DIRECTOR COMPENSATION
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Non- | | | | | | | | | | |
| | | Fees Earned | | | | | | | | | | | Equity Incentive | | | Nonqualified | | | | | | | |
| | | or Paid in | | | Stock | | | Option | | | Plan Compen- | | | Deferred Compensation | | | All Other | | | | |
| | | Cash | | | Awards | | | Awards | | | sation | | | Earnings | | | Compensation | | | Total | |
| Name | | ($) | | | ($)(1) | | | ($)(1) | | | ($) | | | ($) | | | ($)(5) | | | ($) | |
| |
Michael Granito | | | 0 | | | | 0 | | | | $0 | (2) | | | 0 | | | | 0 | | | | 0 | | | $0 | | |
George Friel | | | 0 | | | | 0 | | | | 30,789 | (3) | | | 0 | | | | 0 | | | | 0 | | | 30,789 | | |
Gregory Schultz | | | 0 | | | | 0 | | | | 24,355 | (4) | | | 0 | | | | 0 | | | | 33,778 | | | 58,133 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Reflects dollar amount expensed by the company during applicable fiscal year for financial statement reporting purposes pursuant to FAS 123R. FAS 123R requires the company to determine the overall value of the options as of the date of grant based upon the Black-Scholes method of valuation, and to then expense that value over the service period over which the options become exercisable (vest). As a general rule, for time in service based options, the company will immediately expense any option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. |
| (2) | At fiscal year ended June 30, 2009, Mr. Granito had a total of 261,260 stock options outstanding. |
| (3) | At fiscal year ended June 30, 2008, Mr. Friel had a total of 245,553 stock options outstanding. |
| (4) | At fiscal year ended June 30, 2008, Mr. Schultz had a total of 837,700 stock options and warrants outstanding. |
| (5) | Effective January 2007, we have a consulting agreement with Mr. Schultz for his scientific advisory services with a monthly fee of $2,500. Mr. Schultz agreed to receive stock options in lieu of cash payment for the amounts owed in the fiscal year ended June 30, 2008. |
Employment Contracts and Termination of Employment and Change in Control Arrangements
On August 6, 2007 (the “Effective Date”), we entered into an employment agreement with J. Ladd Greeno to serve as our Chief Executive Officer (the “Agreement”). Mr. Greeno began employment with us on June 11, 2007 (the “Start Date”). Mr. Greeno will report to our Board of Directors (the “Board”) and will render such business and professional services in the performance of his duties, consistent with his position as our Chief Executive Officer, as will reasonably be assigned to him by the Board.
We pay Mr. Greeno a base salary of $250,000 per year (the “Base Salary”), subject to review by the Board on an annual basis and subject to increase in the Registrant’s discretion. Mr. Greeno is eligible to receive an annual bonus (the “Annual Bonus”) of up to fifty percent (50%) of the Base Salary upon the achievement of performance objectives that were reasonably determined by the Board or the Board’s Compensation Committee in consultation with Mr. Greeno within forty-five (45) days after the Effective Date, and annually thereafter as part of our annual planning process. Mr. Greeno is also eligible to receive awards of stock options, restricted stock or other equity awards pursuant to any plans or arrangements we may have in effect from time to time.
Subject to the Board’s approval, we granted Mr. Greeno two options (each, an “Option,” and together, the “Options”) to purchase that number of shares of the Registrant’s common stock equal to five percent (5%) of the Registrant’s outstanding equity on the date of grant, calculated on a diluted basis and taking into account any equity commitments to other employees that were made as of the Start Date and which remain outstanding as of the grant date (the “Share Number”). The first Option was granted, subject to Board approval, on the Effective Date with respect to twenty-five percent (25%) of the Share Number at an exercise price of $0.75 per share and was fully vested and immediately exercisable on the date of grant. The second Option was granted, subject to Board approval, at a date determined by the Board, but no later than October 1, 2007, and was granted with respect to seventy-five percent (75%) of the Share Number. The second Option will vest and become exercisable as to 1/16th of the shares subject to the Option on each three (3)-month anniversary of the Start Date, subject to Mr. Greeno’s continued service with the Registrant through each such date. Each Option had a maximum term of five (5) years. The second Option had an exercise price equal to the fair market value of the underlying shares as of the date of grant of the relevant Option, calculated in a manner intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). Each Option was subject to the terms and conditions of the equity award grant agreements between us and Mr. Greeno. Notwithstanding the foregoing or anything in the Agreement to the contrary, except in the event of a “change of control” (as defined in the Agreement), if before the one (1) year anniversary of the Start Date (A) we terminate Mr. Greeno’s employment with the Registrant for “cause” (as defined in the Agreement) or (B) Mr. Greeno voluntarily resigns from his employment with us for any or no reason except “good reason” (as defined in the Agreement), the vested shares subject to the Options was held in escrow until the one (1) year anniversary of the Start Date.
Mr. Greeno is eligible to participate in accordance with the terms of all our employee benefit plans, policies and arrangements that are applicable to our other senior executive officers, as such plans, policies and arrangements may exist from time to time. Mr. Greeno is entitled to paid vacation of four (4) weeks per year in accordance with our vacation policy, prorated for calendar year 2007. The timing and duration of specific vacations is mutually and reasonably agreed to by us and Mr. Greeno. We reimburse Mr. Greeno for reasonable travel, entertainment and other expenses incurred by Mr. Greeno in the furtherance of the performance of his duties under the Agreement, in accordance with our expense reimbursement policy as in effect from time to time.
In the event Mr. Greeno’s employment with us terminates for any reason, Mr. Greeno is entitled to any (a) unpaid Base Salary accrued up to the effective date of the termination, (b) unpaid, but earned and accrued Annual Bonus for any completed fiscal year as of his termination of employment, provided Mr. Greeno was not terminated for “cause” (as defined in the Agreement) that was attributable to conduct during the performance period, (c) pay for accrued but unused vacation, (d) benefits or compensation as provided under the terms of any employee benefit and compensation agreements or plans applicable to Mr. Greeno, (e) unreimbursed expenses required to be reimbursed to Mr. Greeno, and (f) rights to indemnification Mr. Greeno may have under our Articles of Incorporation, Bylaws, the Agreement, or separate indemnification agreement, as applicable.
If (i) we terminate Mr. Greeno’s employment without “cause” (as defined in the Agreement), (ii) Mr. Greeno resigns from his employment with us for “good reason” (as defined in the Agreement), or (iii) Mr. Greeno resigns from his employment with us for any or no reason within one hundred eighty (180) days following a “change of control” (as defined in the Agreement), then subject to other provisions in the Agreement, Mr. Greeno will receive: (i) continuing payments of severance pay at a rate equal to his Base Salary as then in effect for twelve (12) months form the date of such termination, (ii) the Annual Bonus for the fiscal year in which Mr. Greeno’s employment under the Agreement terminated, which shall be prorated to reflect the number of days of the fiscal year during which Mr. Greeno was employed by us, and (iii) the same level of health (i.e. medical, vision and dental) coverage and other benefits as in effect for Mr. Greeno, and, if applicable, Mr. Greeno’s dependents, on the day immediately preceding Mr. Greeno’s termination at the same costs to him as was in effect on the day prior to his separation from service; provided, however, that (1) Mr. Greeno constitutes a qualified beneficiary, as defined in Section 4980B(g)(1) of the Code, and (2) Mr. Greeno elects continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), within the time period prescribed pursuant to COBRA. We will reimburse Mr. Greeno’s COBRA premiums until the earlier of (A) twelve (12) months from Mr. Greeno’s termination, or (B) until Mr. Greeno obtains substantially similar coverage under another employer’s group insurance plan.
If (i) we terminate Mr. Greeno’s employment for “cause”, (ii) Mr. Greeno’s employment terminates due to death or “disability” (as defined in the Agreement), or (iii) Mr. Greeno resigns his employment with us without “good reason” (other than a resignation that is within one hundred eighty (180) days following a “change of control”, then (1) all vesting will terminate immediately with respect to Mr. Greeno’s outstanding equity awards, (2) all payments of compensation by us to Mr. Greeno hereunder will terminate immediately (except as to amounts already earned, including unused and accrued vacation), and (3) Mr. Greeno will not be eligible for severance or other benefits, except in accordance with any generally applicable Registrant plans or policies as are then in effect.
If we undergo a “change of control” before the one (1) year anniversary of the Start Date, fifty percent (50%) of the unvested shares subject to Mr. Greeno’s outstanding equity awards are immediately vested and become exercisable or released from our repurchase or reacquisition right. If we undergo a “change of control” on or after the one (1) year anniversary of the Start Date, one hundred percent (100%) of the unvested shares subject to Mr. Greeno’s outstanding equity awards are immediately vested and become exercisable or released from our repurchase or reacquisition right.
If in the course of Mr. Greeno’s employment with us, he incorporates into any invention, improvement, development, product, copyrightable material or trade secret any invention, improvement, development, concept, discovery or other proprietary information owned by him or in which he has an interest, we are granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, have made, modify, use and sell such item as part of in connection with such product, process or machine. Mr. Greeno agrees that he will promptly make full written disclosure to us, will hold in trust for our sole right and benefit, and assign to us, or its designee, all his right, title, and interest in and to any and all inventions, original works of authorship, developments, concepts, improvements or trade secrets, whether or not patentable or registrable under copyright or similar laws, which Mr. Greeno may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time Mr. Greeno is in our employ.
Mr. Greeno agreed to the confidentiality, non-competition and non-solicitation provisions of the Agreement.
On November 1, 2006, we entered into an employment agreement with Gerald Olderman, its Vice President of R & D and Commercialization. Mr. Olderman has an annual salary of $132,000 per year, subject to adjustment by the Compensation Committee of the Board of Directors (“Board”) based on new revenue streams and increases in our shareholder value. Mr. Olderman received a signing bonus of $100,000 in cash. This signing bonus was vested as follows, $25,000 were vested immediately, $25,000 were vested upon service through February 1, 2007, $25,000 were vest upon service through May 1, 2007, and $25,000 were vested upon service through August 1, 2007. We have the option of paying the signing bonus any time up to the 24 months from the effective date of the agreement based on our cash flows. We also granted Mr. Olderman 45,000 shares of restricted common stock. Mr. Olderman is entitled to 4 weeks of paid vacation and three additional days for every additional year of employment. The Board of Directors may not approve any change of control unless the acquiring corporation assumes responsibility for this Agreement and all payments due hereunder. In addition, all options, warrants and common stock under this Agreement shall become immediately vested upon such change of control. The agreement has a term of one year and shall automatically renew unless the Board of Directors acts to terminate the Agreement. Mr. Olderman may terminate this agreement by giving us one month’s notice. We may terminate the Agreement without just cause provided that it pays Mr. Olderman a settlement payment of 12 months of monthly compensation plus immediate vesting of all stock options previously granted. Mr. Olderman will be deemed to be terminated without just cause if we unilaterally change his level of responsibility and compensation or if we appoint any individual other than Mr. Olderman to the position of Vice President of R & D and Commercialization. Mr. Olderman agrees to tender his resignation and release us from all obligations to pay any further amounts in consideration of the settlement payment. We are entitled to terminate the agreement and Mr. Olderman’s employment for just cause without any notice.
Prior to November 1, 2006, Mr. Olderman served in the same capacity as our Vice President of Research and Development and Commercialization under a consulting agreement with a monthly compensation of $10,000 since July 2005. Mr. Olderman has served this capacity since July 2000.
In January 2004, we entered into a formal consulting agreement with Nam H. Nguyen to serve as a consulting accounting advisor. In August 2004, Mr. Nguyen was appointed as our Chief Financial Officer under the same agreement. Beginning in July 2004, his compensation was set at $8,000 monthly base compensation with a monthly $2,500 minimum cash payment and the remainder may be paid in shares of restricted common stock. In addition, he has also received 400,000 shares of common stock plus warrants to acquire 300,000 shares of common stock at $0.20 per share in accordance with a vesting schedule. Effective July 1, 2005, his compensation increased to $10,000 monthly base compensation as approved by the Compensation Committee and the Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The following table sets forth, as of September 18, 2009, certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Information relating to beneficial ownership of common stock by our principal stockholders and management is based upon information furnished by each person using "beneficial ownership" concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. We are unaware of any contract or arrangement, which could result in a change in our control.
The following table assumes, based on our stock records, that there are 31,039,707 shares issued and outstanding as of September 18, 2009.
The following table sets forth the ownership of our common stock by:
| § | Each stockholder known by us to own beneficially more than 5% of our common stock; |
| § | Each executive officer; |
| § | Each director or nominee to become a director; and |
| § | All directors and executive officers as a group. |
Name and Address of Beneficial Owner(A) | Shares Beneficially Owned |
| | Number | Percent |
| Michael R. Granito, Chairman and Director | 19,917,935 (1) | 41.9% |
| Phronesis Partners, L.P. | 7,596,834 (2) | 16.0% |
| David S. Lerner, Founder | 3,945,201 (3) | 8.3% |
| J. Ladd Greeno, Chief Executive Officer and Director | 1,335,140 (4) | 2.8% |
| George E. Friel, Director | 757,410 (5) | 1.6% |
| Gerald M. Olderman, Director and Vice President | 946,488 (6) | 2.0% |
| Gregory S. Schultz, Director and Vice President | 1,352,862 (7) | 2.8% |
| Nam H. Nguyen, Chief Financial Officer | 936,213 (8) | 2.0% |
| | | |
All Quick-Med Directors and Officers as a Group (6 persons) | 25,246,048 | 53.1% |
| | NOTES: (A) The address for each of the above is c/o Quick-Med Technologies, Inc., 902 NW 4 Street, Gainesville, Florida 32601. |
| | (1) Includes 261,260 shares issuable upon the exercise of options exercisable and 9,930,472 shares issuable upon conversion of the convertible debts within 60 days. |
| | (2) Includes 590,392 shares issuable upon conversion of a convertible debt within 60 days. Phronesis Partners, L. P., Delaware Limited Partnership, is a hedge fund and has sole voting and sole dispositive power over 7,006,442 shares. Mr. James Wiggins is is the natural person with sole voting and dispositive power with respect to the shares. The address for Phronesis Partners, L.P. is 130 East Chestnut Street, Suite 403, Columbus, OH 43215. |
(3) Includes 0 shares issuable upon the exercise of options exercisable within 60 days.
(4) Includes 1,335,140 shares issuable upon the exercise of options exercisable within 60 days.
(5) Includes 223,053 shares issuable upon the exercise of options exercisable within 60 days.
(6) Includes 381,774 shares issuable upon the exercise of options exercisable within 60 days.
(7) Includes 474,362 shares issuable upon the exercise of options exercisable within 60 days.
(8) Includes 120,558 shares issuable upon the exercise of options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
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 2010. 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 2010. This note has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.
Effective November 1, 2008, the Company issued four convertible note payables totaling $100,000 to an officer, Vice President of Research and Development, as part of the terms of the employment contract. These notes have the same conversion price of $0.20, which was the closing trading price of the Company’s common stock on the effective date of the notes. These notes have the same maturity date of 2010.
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 2010. 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 2010. 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 2010. 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 2010. This note has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.
In June 2007, we issued two 2007 senior convertible note payables to our Chairman and a major stockholder for $375,000 each. As of September 30, 2007, we received $303,160 from our Chairman and the remaining $71,840 in July 2007 totaling $375,000. We also received $125,000 from a major stockholder and received the remainder in September 2007. These two senior convertible note payables are secured by our revenues and assets. These notes were fully funded, approximately $250,000 were allocated and restricted for payment of the chief executive officer’s salary for the next twelve months. We may prepay the principal and interest upon meeting certain cash flow requirements and the approval of our board.
In addition, we combined our other outstanding note payables to our 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 also secured by our revenues and assets with the same priority as the 2007 senior convertible notes.
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 the 2003 senior convertible note was extended to July 2010.
At June 30, 2009, the Company accrued interests of $408,806, $55,315 and $2,482 on the convertible notes with the director, the convertible note with a related party, and the convertible note with the officer respectively.
Messrs. Lerner and Granito are deemed to be our promoters. Mr. Lerner received 4,273,000 shares and Mr. Granito received 2,930,000 shares of common stock for founding us. There have not been any other transactions with promoters.
Other than the relationships with The University of Florida at Gainesville, no officer or director has any relationship with any company or entity that will be working on developing our family of technologies or patents.
Director Independence
Our board of directors has determined that it currently has one member who qualify as "independent" as the term is used in Item 407 of Regulation S-K as promulgated by the SEC and in the listing standards of The Nasdaq Stock Market, Inc. - Marketplace Rule 4200. The independent directors are Mr. George E. Friel.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth fees billed to us by our auditors during the fiscal years ended June 30, 2009 and June 30, 2008 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other fees for services rendered including a review of SEC registration statement filing. "Audit Related Fees" consists of consulting regarding accounting issues.
| | | | June 30, 2009 | June 30, 2008 |
| (i) | Audit Fees | $ 50,250 | $ 46,500 |
| (ii) | Audit Related Fees | $0 | $0 |
| (iii) | Tax Fees | $ 5,476 | $5,000 |
| (iv) | All Other Fees | $ 0 | $ 0 |
While we have established an audit committee of the Board of Directors, we have not established a pre-approval policy. All services provided by the auditors for fiscal year 2009 were accepted by the audit committee and approved by the full Board of Directors.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
| ExExhibit Number | Description |
| | |
| 2.1 | Merger Agreement dated March 19, 2001 between Above Average Investments Ltd. and Quick-Med Technologies, Inc. (1) |
| 2.2 | Amendment to Merger Agreement (1) |
| 3.1 | Articles of Incorporation (1) |
| 3.2 | Bylaws (1) |
| 10.1 | Quick-Med Technologies MMP License Agreement (1) |
| 10.2 | Quick-Med Technologies Stock Option Plan (1) |
| 10.3 | Cooperative Research and Development Agreement with the U.S. Army Medical Research Institute of Chemical Defense (1) |
| 10.4 | Financing Agreement with Euro Atlantic Capital Corporation (1) |
| 10.5 | Consulting Agreement - Gregory Schultz (1) |
| 10.5.1 | Consulting Agreement - Christopher Batich (1) |
| 10.5.2 | Consulting Agreement - Bruce Mast (1) |
| 10.5.3 | Consulting Agreement - William Toreki (1) |
| 10.6 | Note issued to Michael Granito by Quick-Med Technologies (1) |
| 10.6.1 | Senior Convertible Note issued to Michael Granito (4) |
| 10.6.2 | 2007 Senior Convertible Note issued to Michael Granito (4) |
| 10.6.3 | 2007 Senior Convertible Note 2 issued to Michael Granito (5) |
| 10.6.4 | 2008 Senior Convertible Note 1 issued to Michael Granito (7) |
| 10.6.5 | 2008 Senior Convertible Note 2 issued to Michael Granito (9) |
| 10.6.6 | 2008 Senior Convertible Note 3 issued to Michael Granito (10) |
| 10.6.7 | 2009 Senior Convertible Note 1 issued to Michael Granito (11) |
| 10.6.8 | 2009 Senior Convertible Note 2 issued to Michael Granito filed herewith |
| 10.7 | 2007 Senior Convertible Note issued to Phronesis Partners, L.P. (4) |
| 10.8 | License Agreement with University of Michigan (4) |
| 10.9 | Employment Agreement with Gerard Bencen (1) |
| 10.10 | Research and Development Agreement with The Collaborative Group, Ltd. (2) |
| 10.11 | Agreement Between Noville and Quick-Med Technologies, Inc. (3) |
| 10.12 | Joint Development Agreement by and between Quick Med Technologies, Inc. and Mölnlycke Health Care AB dated April 4, 2008. (6) |
| 10.13 | Manufacturing and Distribution Agreement by and between Quick-Med and BASF (8) |
| 10.14 | Joint Development and Exclusive Option Agreement by and between Avery Dennison and the Registrant dated as of April 17, 2009 (11) |
| 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. |
| 99.3 | Assignment of Patent for Wound Care (1) |
| 99.4 | Assignment of Patent for Mustard Gas (1) |
| 99.5 | Assignment of Patent for Anti-wrinkle cream (1) |
NOTES:
(1) Incorporated by reference to the Company's registration statement on Form SB-2 (file no. 333-41672)
| (2) | Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2002 |
| (3) | Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the three-month ended September 30, 2002. |
| (4) | Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2007. |
| (5) | Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the three-month ended December 31, 2007. |
| (6) | Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 9, 2008. |
| (7) | Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the three-month ended March 31, 2008. |
| (8) | Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 21, 2008. |
| (9) | Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2008. |
| (10) | Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the three-month ended September 30, 2008. |
| (11) | Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the three-month ended March 31, 2009. |
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QUICK-MED TECHNOLOGIES, INC.
Date: September 28, 2009 By: /s/ J Ladd Greeno
J Ladd Greeno
Chief Executive Officer and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated:
| Signature | Title | Date |
/s/ J. Ladd Greeno J. Ladd Greeno | Chief Executive Officer and Director | September 28, 2009 |
/s/ Michael R. Granito Michael R. Granito | Chairman of the Board | September 28, 2009 |
/s/ Gregory S. Schultz Gregory S. Schultz | Vice President, Laboratory & Clinical Research, and Director | September 28, 2009 |
/s/ George E. Friel George E. Friel | Director | September 28, 2009 |
/s/ Gerald M. Olderman Gerald M. Olderman | Vice President, Research & Development and Commercialization, and Director | September 28, 2009 |
/s/ Nam H. Nguyen Nam H. Nguyen | Chief Financial Officer | September 28, 2009 |
| Report of Independent Registered Public Accounting Firm | F-2 |
| | |
| Financial Statements: | |
| | |
| Balance Sheets as of June 30, 2009 and 2008 | F-3 |
| | |
| Statements of Operations for the years ended June 30, 2009 and 2008 | F-4 |
| | |
| Statements of Changes in Stockholders’ Equity for the years ended June 30, 2009 and 2008 | F-5 |
| | |
| Statements of Cash Flows for the years ended June 30, 2009 and 2008 | F-6 |
| | |
| Notes to Financial Statements | F-7- 20 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Quick-Med Technologies, Inc.
We have audited the accompanying balance sheets of Quick-Med Technologies, Inc. as of June 30, 2009 and 2008, and the related statements of operations, changes in stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quick-Med Technologies, Inc., as of June 30, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced recurring losses and negative cash flows from operations for the years ended June 30, 2009 and 2008, and has a net capital deficiency. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are described in the footnotes accompanying the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Daszkal Bolton LLP
Boca Raton, Florida
September 28, 2009
QUICK-MED TECHNOLOGIES, INC.
BALANCE SHEETS
AS OF JUNE 30, 2009 AND 2008
| ASSETS | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 41,216 | | | $ | 72,817 | |
| Accounts receivable | | | 18,562 | | | | 346,709 | |
| Total current assets | | | 59,778 | | | | 419,526 | |
| | | | | | | | | |
| Property and equipment, net | | | 14,969 | | | | 24,983 | |
| | | | | | | | | |
| Other assets: | | | | | | | | |
| Prepaid expenses | | | 9,706 | | | | 5,311 | |
| Intangible asset, net | | | 408,095 | | | | 459,445 | |
| Total other assets | | | 417,801 | | | | 464,756 | |
| Total assets | | $ | 492,548 | | | $ | 909,265 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 562,611 | | | $ | 871,074 | |
| Unearned revenue | | | 51,428 | | | | 41,071 | |
| Accrued expenses | | | 233,631 | | | | 46,034 | |
| Convertible note payable - related party | | | 430,315 | | | | - | |
| Total current liabilities | | | 1,277,985 | | | | 958,179 | |
| | | | | | | | | |
| License payable | | | 160,000 | | | | 160,000 | |
| Long-term liability - note payable - officer | | | 102,482 | | | | - | |
| Long-term liability - convertible note payable - related party | | | - | | | | 400,315 | |
| Long-term liability - convertible note payable - director | | | 3,916,290 | | | | 2,988,902 | |
| Total liabilities | | | 5,456,757 | | | | 4,507,396 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders' deficit: | | | | | | | | |
| Common stock, $0.0001 par value; 100,000,000 | | | | | | | | |
| authorized shares; 31,039,707 and 30,874,196 shares issued and | | | | | |
| outstanding at June 30, 2009 and 2008, respectively | | | 3,104 | | | | 3,087 | |
| Additional paid-in capital | | | 11,927,286 | | | | 11,882,403 | |
| Outstanding stock options | | | 3,213,987 | | | | 2,602,344 | |
| Accumulated deficit | | | (20,108,586 | ) | | | (18,085,965 | ) |
| Total stockholders' deficit | | | (4,964,209 | ) | | | (3,598,131 | ) |
| Total liabilities and stockholders' deficit | | $ | 492,548 | | | $ | 909,265 | |
| | | | | | | | | |
See accompanying notes to financial statements.
QUICK-MED TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
| | | 2009 | | | 2008 | |
| | | | | | | |
| Revenues | | | | | | |
| Product sales | | $ | 804,241 | | | $ | 308,958 | |
| Research and development service | | | 193,350 | | | | 950,447 | |
| License fees | | | 7,143 | | | | 101,519 | |
| | | | 1,004,734 | | | | 1,360,924 | |
| | | | | | | | | |
| Expenses: | | | | | | | | |
| Cost of sales | | | 37,212 | | | | 56,162 | |
| Research and development | | | 1,063,450 | | | | 1,555,287 | |
| General and administrative expenses | | | 1,375,068 | | | | 1,585,866 | |
| Licensing and patent expenses | | | 222,139 | | | | 315,784 | |
| Depreciation and amortization | | | 71,905 | | | | 72,541 | |
| Total expenses | | | 2,769,774 | | | | 3,585,640 | |
| | | | | | | | | |
| Loss from operations | | | (1,765,040 | ) | | | (2,224,716 | ) |
| | | | | | | | | |
| Other income (expense): | | | | | | | | |
| Interest income | | | 2,290 | | | | 2,195 | |
| Interest expense | | | (259,871 | ) | | | (167,421 | ) |
| | | | | | | | | |
| Loss before income taxes | | | (2,022,621 | ) | | | (2,389,942 | ) |
| | | | | | | | | |
| Provision (benefit) for income taxes | | | - | | | | - | |
| | | | | | | | | |
| Net loss | | $ | (2,022,621 | ) | | $ | (2,389,942 | ) |
| | | | | | | | | |
| | | | | | | | | |
| Net loss per share (basic and diluted) | | $ | (0.07 | ) | | $ | (0.08 | ) |
| | | | | | | | | |
| Weighted average common | | | | | | | | |
| shares outstanding (basic and diluted) | | | 30,935,633 | | | | 30,716,499 | |
| | | | | | | | | |
See accompanying notes to financial statements.
QUICK-MED TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
| | | | | | | | | Additional | | | | | | | | | | |
| | | Common Stock | | | Paid-In | | | Accumulated | | | Outstanding | | | | |
| | | Shares | | | Amount | | | Capital | | | Deficit | | | Stock Options | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2007 | | | 30,603,483 | | | $ | 3,060 | | | $ | 11,772,573 | | | $ | (15,696,023 | ) | | $ | 1,909,129 | | | $ | (2,011,261 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock issued for services | | | 153,712 | | | | 16 | | | | 65,520 | | | | - | | | | - | | | | 65,536 | |
| Stock options granted for services | | | - | | | | - | | | | - | | | | - | | | | 704,340 | | | | 704,340 | |
| Stock issued in settlement of a liability | | | 34,501 | | | | 3 | | | | 21,043 | | | | - | | | | - | | | | 21,046 | |
| Exercise of stock warrants | | | 82,500 | | | | 8 | | | | 23,267 | | | | - | | | | (11,125 | ) | | | 12,150 | |
| Net loss, July 1, 2007 to June 30, 2008 | | | - | | | | - | | | | - | | | | (2,389,942 | ) | | | - | | | | (2,389,942 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2008 | | | 30,874,196 | | | $ | 3,087 | | | $ | 11,882,403 | | | $ | (18,085,965 | ) | | $ | 2,602,344 | | | $ | (3,598,131 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 623,293 | | | | 623,293 | |
| Stock issuance for services | | | 81,099 | | | | 8 | | | | 17,992 | | | | - | | | | - | | | | 18,000 | |
| Exercise of stock options | | | 54,412 | | | | 6 | | | | 15,494 | | | | - | | | | (6,250 | ) | | | 9,250 | |
| Exercise of stock warrants | | | 30,000 | | | | 3 | | | | 11,397 | | | | - | | | | (5,400 | ) | | | 6,000 | |
| Net loss, July 1, 2008 to June 30, 2009 | | | - | | | | - | | | | - | | | | (2,022,621 | ) | | | - | | | | (2,022,621 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2009 | | | 31,039,707 | | | $ | 3,104 | | | $ | 11,927,286 | | | $ | (20,108,586 | ) | | $ | 3,213,987 | | | $ | (4,964,209 | ) |
See accompanying notes to financial statements.
-
QUICK-MED TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
| | | 2009 | | | 2008 | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (2,022,621 | ) | | $ | (2,389,942 | ) |
| Adjustments to reconcile net loss to net | | | | | | | | |
| cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 71,905 | | | | 72,541 | |
| Stock granted for services | | | 18,000 | | | | 86,581 | |
| Stock-based compensation | | | 623,293 | | | | 704,340 | |
| (Increase) decrease in: | | | | | | | | |
| Accounts receivable | | | 328,147 | | | | 38,887 | |
| Prepaid expenses | | | (4,394 | ) | | | (142 | ) |
| Increase (decrease) in: | | | | | | | | |
| Accounts payable | | | (308,463 | ) | | | 104,390 | |
| Accrued interest | | | 259,871 | | | | 167,421 | |
| Other current liabilities | | | 197,953 | | | | (17,406 | ) |
| Net cash used in operating activities | | | (836,309 | ) | | | (1,233,330 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Purchase of fixed assets | | | | | | | (4,922 | ) |
| Patents | | | (10,542 | ) | | | (93,640 | ) |
| Net cash used in investing activities | | | (10,542 | ) | | | (98,562 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from stock option or warrant exercise | | | 15,250 | | | | 12,150 | |
| Increase in notes payable - related party | | | - | | | | 250,000 | |
| Increase in notes payable - officer | | | 100,000 | | | | - | |
| Increase in notes payable - director | | | 700,000 | | | | 1,026,840 | |
| Net cash provided by financing activities | | | 815,250 | | | | 1,288,990 | |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (31,601 | ) | | | (42,902 | ) |
| Cash and cash equivalents at beginning of period | | | 72,817 | | | | 115,719 | |
| Cash and cash equivalents at end of period | | $ | 41,216 | | | $ | 72,817 | |
| | | | | | | | | |
| Supplementary Information: | | | | | | | | |
| | | | | | | | | |
| Cash paid for: | | | | | | | | |
| Interest | | $ | - | | | $ | - | |
| Income taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| Non-cash disclosures of investing and | | | | | | | | |
| financing activities: | | | | | | | | |
| Stock-based compensation | | $ | 641,293 | | | $ | 704,340 | |
| Stock issuance in settlement of a liability | | $ | - | | | $ | 21,046 | |
See accompanying notes to financial statements.
QUICK-MED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Founded in April 1997, Quick-Med Technologies Inc. (the ”Company”) is a life sciences company focused on developing proprietary, broad-based technologies in medical and consumer healthcare markets. The Company’s four core technologies are: (1) Novel Intrinsically Micro-Bonded Utility Substrate (NIMBUS®), a family of advanced polymers bio-engineered to have antimicrobial, hemostatic, and other properties that can be used in a wide range of applications; (2) Stay FreshTM is a unique chemical formulation for textiles with a durable antimicrobial agent effective against an array of bacteria even after numerous laundering cycles; (3) NimbuDermTM is a novel copolymer for application as a persistent hand sanitizer with long lasting protection against germs. Other applications include medical devices such as catheters, tubing, films and coatings; and (4) MultiStatTM, a family of advanced patented methods and compounds shown to be effective in skin therapy applications. Currently, NIMBUS technology has been commercialized in an advanced wound care product by our licensee in the institutional market in late June 2009. The Company targets NIMBUS technology for additional advanced wound care products, catheters, incontinence products, and other medical devices. MultiStat™ has been developed in a cosmetic product line with the anti-aging products. Stay Fresh is currently under development with a broad range of potential applications including consumer textile market. NimbuDerm is also a technology currently being developed. In each instance, the Company intends to form joint ventures or joint development partnerships with leading firms in the respective industry to co-develop and commercialize its products.
The Company specializes in the research and development of biomedical products and devices for antibacterial applications. The Company conducts research efforts or collaborates with third parties as necessary to develop products and administer the patent process. The Company does not expect to produce nor directly market its products. Instead, the Company intends to partner with clients for those activities.
Since its inception, the Company has been heavily dependent upon the receipt of capital investment or other financing and revenues to fund its continuing activities. In addition to the normal risks associated with a new business venture, there can be no assurance that the Company’s product development will be successfully completed or that it will be a commercial success. Further, the Company is dependent upon certain related parties to provide continued funding and capital resources.
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has negative cash flows from operations 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.
For the remainder of the year ending June 30, 2010, the Company will need additional cash infusions to meet its operating expenses. The Company’s common stock began trading on September 4, 2002 on the OTC Bulletin Board and the Company intends to raise additional equity or debt. The Company may also secure strategic partnerships or other joint ventures to either conduct its research or fund a portion of the expenses. No assurances can be made that we will be successful in these activities. Should the events not occur, the financial statements will be materially affected.
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Intangible Assets
The costs of obtaining license agreements along with the costs to defend the patents underlying the license agreements are capitalized and are amortized using the straight-line method over the estimated useful lives of the underlying license agreements. The costs of obtaining and maintaining new patents are capitalized and amortized using the straight-line method over the estimated useful lives of the patents. The cost of patents in process is not amortized until the patent is issued.
Property and Equipment
Property and equipment are stated at cost. Depreciation on property and equipment is computed using the straight-line method over the expected useful lives of the assets.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable as of June 30, 2009 represents amounts due from the customers and is reported in the balance sheet reduced by an allowance for doubtful accounts for estimated losses resulting from receivables not considered to be collectible.
Research and Development Costs
Research and development costs are expensed as incurred.
Earnings Per Share
Basic net loss per common share are 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 years ended June 30, 2009 and 2008, 11,297,510 and 7,923,687 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 Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements”, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements, but rather eliminates inconsistencies in guidance found in various other accounting pronouncements. The adoption of SFAS No. 157 did not have a material effect on the Company’s financial condition or operating results.
SFAS No. 157 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 SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115, during the first quarter of fiscal year 2009. SFAS No. 159 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. SFAS No. 159 requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each reporting date. The Company adopted SFAS No. 159 but has not elected the fair value option for any eligible financial instruments as of July 1, 2008.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue Recognition
The Company’s revenues consist of the following sources: product sales, research and development service and license fees.
Under the master agreement for product development, manufacturing and distribution (the “Master Agreement”) and the new agreement (“Agreement”) with BASF, which supersedes the Master Agreement, the Company shares proportionately on the net sales and related expenses in accordance with the terms of the Agreement. The Company recognizes revenue of its royalties from the sale of products by BASF when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable.
The Company recognizes revenue of its research and development service including the small business innovation research program and the US Army medical research program based on the research work performed in accordance with the program requirements or statements of work for the joint development agreements.
The Company also recognizes revenue from the non-refundable exclusivity license fee derived from Derma Sciences Inc. on a pro rata basis over the term of the related exclusive license agreement. Further, the Company recognizes the exclusive option fee as revenue on a pro rata basis over the term of the related exclusive option agreement.
Unearned Revenue
The amount of unearned revenue represents the exclusive option fee, the license fee, and advance royalty fee yet to be earned on a pro rata basis over the exclusive option period of the related option and license agreements.
Stock Compensation
In December 2004, the Financial Accounting Standards Board ("FASB") issued a final standard, SFAS No. 123R, "Share-Based Payment," ("SFAS 123R"), which requires companies to expense the value of employee stock options and similar awards. Under SFAS 123R, share-based payment awards result in a cost that will be measured at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest. Compensation cost for awards that vest would not be reversed if the awards expire without being exercised. The Company adopted SFAS 123R beginning in the first quarter of the fiscal year 2006 using the modified prospective approach. Under the modified prospective approach, SFAS 123R applies to all outstanding and unvested share-based payment awards at the adoption date. The fair value of stock options was determined using the Black-Scholes option-pricing model. The fair value of the restricted stock awards was based on the closing price of the Company's common stock on the date of grant.
Concentration of credit risk of financial instruments
Financial instruments that potentially subject the Company to credit risk consist of cash equivalents and accounts receivable. As of June 30, 2009, the Company’s cash levels did not exceed the federally insured limit. As of June 30, 2009, all of the Company’s accounts receivable was derived from BASF.
The credit risk of the accounts receivable is considered limited given the customers credit rating. There were no write-offs of uncollectible receivable during the year ended June 30, 2009.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” and FASB Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes.” This standard requires, among other things, recognition of future tax consequences, measured by enacted tax rates attributable to taxable and deductible temporary differences between financial statement and income tax bases of assets and liabilities. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in the deferred tax asset and liability.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Recent Accounting Pronouncements
In April 2009, the FASB, issued the following FASB Staff Positions, or FSPs, that provide additional application guidance and enhance disclosure requirements regarding fair value measurements and impairments of securities.
FSP No. FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," provides guidelines for making fair value measurements more consistent with the principles presented in Statement of Financial Accounting Standards No. 157, "Fair Value Measurements," (SFAS No. 157).
FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," enhances consistency in financial reporting by increasing the frequency of fair value disclosures.
The provisions of these FSPs were adopted by the Company as of June 30, 2009. The Company concluded that the adoption of these FSPs did not have an impact on the Company's financial position or results of operations.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events." SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the date the financial statements are issued or available to be issued. This statement requires companies to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date should be disclosed if the financial statements would otherwise be misleading. Disclosures should include the nature of the event and either an estimate of its financial effect or a statement that an estimate cannot be made. The Company adopted SFAS No. 165 on June 30, 2009 and has evaluated subsequent events (events occurring after June 30, 2009) for recognition or disclosure in these financial statements up to September 28, 2009.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events." SFAS No. 165 sets standards for the disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued. SFAS No. 165 set forth the following: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The Company adopted SFAS No. 165 effective April 1, 2009. The Company uses the date of the filing of its Form 10K with the Securities and Exchange Commission as the date through which subsequent events have been evaluated which is the same date as the date these financial statements were issued. The adoption of SFAS No. 165 did not have a material impact on the Company's financial statements.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162." While SFAS No. 168 is not intended to change accounting principles generally accepted in the United States, it will change the way the Company references these accounting principles in its financial statements and notes. SFAS No. 168 is effective for the Company beginning September 30, 2009. The adoption of SFAS No. 168 will not impact the Company's financial position or results of operations as its requirements are disclosure-only in nature.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2009 and 2008:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Computer equipment | | $ | 25,917 | | | $ | 25,917 | |
| Equipment | | | 32,403 | | | | 32,403 | |
| Less: accumulated depreciation | | | (43,351 | ) | | | (33,337 | ) |
| Net property and equipment | | $ | 14,969 | | | $ | 24,983 | |
Depreciation expense for the years ended June 30, 2009 and 2008 was $10,014 and $10,651, respectively.
NOTE 4 – INTANGIBLE ASSETS
License Agreement
The Company has a license agreement with two inventors (“Licensors”) for the worldwide rights to the MMP inhibitors and uses thereof. The license agreement transfers to the Company the technology that is the subject of issued patents as well as pending patent applications, which were filed by the original inventors. The licenses are amortized on a straight-line basis over the estimated useful lives of the underlying patents or the license agreement. The U.S. patents expire beginning November 2007 through December 2019 and the international patents expire beginning on November 21, 2011 through December 8, 2019. Accumulated amortization for the years ended June 30, 2009 and 2008 was $419,139 and $357,249, respectively.
The Company assesses whether its intangible assets are impaired as required by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” based on an evaluation of undiscounted projected cash flows through the remaining useful lives. If impairment exists, the amount of such impairment is calculated as the estimated fair value of the assets.
Under the terms of the license agreement, the Company paid $200,000 and granted 160,000 shares of common stock valued at $0.05 per share and granted 160,000 stock options. The stock options are valued at the estimated minimum value in accordance with SFAS 123 of $8,000. In order to maintain the Company’s exclusive rights to the licenses, the agreements require total payments of $260,000 if certain milestones regarding the proof-of-concept and development of a prototype are reached.
If a milestone on the “Civilian Chemical Burn” and “Other topical Medical Uses” categories is not met by the third anniversary of the agreement, the licenses granted within these categories become nonexclusive. The Company elected not to pay each inventor $25,000 per year until all such milestones are met. At June 30, 2009 and 2008, the balance due under the license agreement is $160,000.
As additional compensation to the Licensors, the Company will pay a royalty based on the Company’s net sales of licensed products. The royalty rate is 2% on the first $1,500,000 of applicable quarterly revenue and 1.5% of sales above $1,500,000 on applications of products other than applications for military and
cosmetic products. For each sublicense granted by the Company, the Licensors will be paid 3% of the up-front licensing fee, limited to $100,000.
In November 2002, the Company and the University of Florida Research Foundation (the “University”) entered into an agreement whereby the University gave the Company exclusive sub-license rights to the use of its patents and patent applications from the effective date of the agreement until the earlier of the date that no licensed patents remain enforceable patents or the payment of earned royalties ceases more than three calendar quarters. The royalty rate is 3% of the first $10 million of cumulative realized revenues and 1.8% of all subsequent realized revenues.
In June 2007, the Company and the Regents of the University of Michigan (“Michigan”) entered into an agreement whereby Michigan gave the Company worldwide exclusive rights including sub-license rights to the use of its patents and patent applications of the uses of MMP inhibitors from the effective date of the agreement until the earlier of the date that no licensed patents remain enforceable patents or the default event. In addition to the initial license fee of $80,000, the Company will pay a 4% royalty rate of the net sales, 20% of the sublicense income, the annual fee of $50,000 for 2008 and 2009, $75,000 for 2010 and $100,000 in 2011 and in each year thereafter during the term of the agreement.
During the fiscal year 2006, the Company was issued both US and international patents for its NIMBUS technology on “Intrinsically Bactericidal Absorbent Dressing And Method Of Fabrication”. These patents expire on December 8, 2019. The total capitalized costs for this issued patent were $35,470 and are being amortized over the life of the patents.
During the fiscal years 2009 and 2008, the Company filed a number of US and international patent applications for its NIMBUS technology and applied for certain trademarks. As of June 30, 2009, the total capitalized costs for the patent applications and trademarks were $178,962.
| | | June 30, 2009 | | | June 30, 2008 | |
| | | Gross | | | Accumulated | | | Gross | | | Accumulated | |
| | | Amount | | | Amortization | | | Amount | | | Amortization | |
| Amortized Intangible Assets | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| License agreement | | $ | 648,123 | | | $ | (419,139 | ) | | $ | 648,123 | | | $ | (357,249 | ) |
| Patents in process | | | 179,111 | | | | - | | | | 168,572 | | | | - | |
| Total | | $ | 827,234 | | | $ | (419,139 | ) | | $ | 816,695 | | | $ | (357,249 | ) |
NOTE 4 – INTANGIBLE ASSETS, continued
Amortization of patents in process commences when the patents are issued.
| | | June 30, 2009 | | | June 30, 2008 | |
| | | Gross | | | Accumulated | | | Gross | | | Accumulated | |
| | | Amount | | | Amortization | | | Amount | | | Amortization | |
| Aggregate Amortization Expense | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| For the years ended | | $ | 61,890 | | | $ | 419,139 | | | $ | 61,890 | | | $ | 357,249 | |
| | | | | | | | | | | | | | | | | |
| Estimated Amortization Expense | | Amount | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| For the year ended June 30, 2010 | | $ | 61,890 | | | | | | | | | | | | | |
| For the year ended June 30, 2011 | | $ | 61,890 | | | | | | | | | | | | | |
| For the year ended June 30, 2012 | | $ | 61,890 | | | | | | | | | | | | | |
| For the year ended June 30, 2014 | | $ | 43,314 | | | | | | | | | | | | | |
| For the year ended June 30, 2015 | | $ | - | | | | | | | | | | | | | |
NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT)
Fiscal 2009
In October 2008, the Company issued 60,000 shares of restricted common stock for payment of consulting services. The amount charged to operations was $12,000, the value of the shares on the date issued.
During the period from January to March 2009, the Company issued a total of 14,732 shares of restricted common stock for payment of consulting services. The amount charged to operations was $3,000, the value of the shares on the dates issued.
In March 2009, the Company issued 29,412 shares of common stock for an aggregate exercise price of $5,000 or $0.17 per share resulting from the exercise of stock options.
In April 2009, the Company issued 30,000 shares of common stock for an aggregate exercise price of $6,000 or $0.20 per share resulting from the exercise of a warrant.
During the period from April to June 2009, the Company issued a total of 6,367 shares of restricted common stock for payment of consulting services. The amount charged to operations was $3,000, the value of the shares on the dates issued.
In June 2009, the Company issued 25,000 shares of common stock for an aggregate exercise price of $4,250 or $0.17 per share resulting from the exercise of stock options.
Fiscal 2008
In July 2007, the Company issued a total of 5,141 shares of restricted common stock for payment of services provided by a consultant. The amount charged to operations was $3,136, the value of the shares on the dates issued.
In September 2007, the Company issued 15,000 shares of common stock for an aggregate exercise price of $2,250 or $0.15 per share resulting from the exercise of a warrant.
NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT), continued
In October 2007, the Company issued 5,000 shares of common stock for an aggregate exercise price of $1,000 or $0.20 per share resulting from the exercise of a warrant.
In November 2007, the Company issued 34,501 shares of restricted common stock as a settlement for a liability of $21,046.
In November 2007, the Company issued 62,500 shares of common stock for an aggregate exercise price of $8,900 or $0.14 per share for 60,000 shares and $0.20 per share for 2,500 shares resulting from the exercise of warrants.
In April 2008, the Company issued 148,571 shares of restricted common stock for the payment of services rendered by the members of the Board of Directors, who elected to receive common stocks. In addition, the Company granted stock options of 1,074,666 to board members, employees and consultants with exercise prices of $0.42 per share as payments of their services and performance bonus according to the vesting schedule.
NOTE 6 - COMMITMENTS
The Company leases an equipped laboratory in Gainesville, Florida. The lease expires in February 1, 2011. Rent expense for the years ended June 30, 2009 and 2008 was approximately $25,560 and $27,304, respectively.
The following is a schedule of minimum future payments on the operating lease as of June 30, 2009:
| For The Years Ending June 30, | | | |
| | | | |
| 2010 | | | 24,000 | |
| 2011 | | | 14,000 | |
| Thereafter | | | - | |
| Total | | $ | 38,000 | |
NOTE 7– STOCK OPTIONS AND WARRANTS
The Company adopted a qualified equity incentive plan (the “Plan”) on March 4, 2001. Under the Plan the Company is authorized to grant up to 3,000,000 shares of common stock. On December 13, 2004, the shareholders approved the Plan and ratified the amendment to increase the total number of shares to be granted under the Plan from 3,000,000 to 4,000,000 effective November 1, 2004. On November 13, 2007 the shareholders ratified the amendment to increase the total number of shares to be granted under the Plan from 4,000,000 to 6,000,000.
On October 27, 2008, the Board of Directors (the “Board”) granted 1,335,102 stock options to the board members, employees, consultants as payments for their services and in recognition of individual performance for the year ended June 30, 2008. In addition, the Board granted 705,302 warrants to consultants for payments of their services and incentive performance awards. Further, 60,000 shares of restricted common stock were issued to a consultant as payment for services. Of 1,335,102 stock options grant, approximately 464,102 were awarded to the board members for their services and were vested on the date of grant. Of 705,302 warrants issued, 240,302 warrants were vested immediately on the grant date. The remainder 871,000 stock options and 465,000 warrants were vested one-third immediately, one-third will be vested on October 27, 2009 and the remaining one-third will be vested on October 27, 2010, assuming the person receiving the equity awards is employed or otherwise is providing services to 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 based on the Black-Scholes option-pricing model. The options and warrants expire five years from the date of grant.
On April 18, 2008, the Board of Directors (the “Board”) granted 148,571 shares of restricted common stock as payment for the services rendered by the board members for the year ended June 30, 2007 for those elected to receive common stocks and all shares were immediately vested. In addition, the Board granted 1,074,666 stock options to the board members, employees, consultants as payments for their services and in recognition of individual performance for the year ended June 30, 2007. The stock options were vested one-third immediately, one-third were vested on April 17, 2009 and the remaining one-third will be vested on April 17, 2010, assuming the person receiving the equity awards is employed by the Company at the time of vesting. The exercise price of those stock options and warrants 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 based on the Black-Scholes option-pricing model. The options and warrants expire five years from the date of grant.
NOTE 7 – STOCK OPTIONS AND WARRANTS, continued
On August 6, 2007, the Board of Directors (the “Board”) granted 484,056 non-qualified stock options to the Chief Executive Officer (“CEO”) at an exercise price of $0.75 per share. These options were fully vested and immediately exercisable at the date of grant. In addition, the Board granted 1,452,167 non-qualified stock options at an exercise price of $0.74 per share on September 25, 2007, as part of the CEO’s employment agreement. The second stock options are vested and become exercisable 1/16th of the total 1,452,167 options on each three-month anniversary beginning on June 11, 2007. The average grant date fair value of the options was $0.46 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 the board members, the management, the employees, and the consultants for their services. These options have an exercise price of $1.05 per share. The stock options were vested one-third immediately, one-third was vested on December 20, 2007 and the remaining one-third was vested on December 20, 2008, assuming the person receiving the equity awards is employed by the Company at the time of vesting. The weighted average grant date fair value of options was $0.69 based on the Black-Scholes option-pricing model. The options expire five years from the date of grant.
On September 9, 2005, the Board of Directors (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 our employees and directors and consultants, respectively, in recognition of individual performance for the year ended June 30, 2005. The stock options and warrants were vested one-third immediately, one-third was vested on July 1, 2006 and the remaining one-third was vested on July 1, 2007, assuming the person receiving the equity awards is employed by the Company at the time of vesting. 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 based on the Black-Scholes option-pricing model. The options and warrants expire five years from the date of grant.
In July 2003, 1,231,500 unqualified options were granted under the Plan to employees, directors, and service providers. The options had an exercise price of $0.55, the average closing trading price at the grant date. The options vested immediately. All of the options were expired or forfeited by July 2008.
During the year ended June 30, 2009, 54,412 stock options were exercised for the aggregate price of approximately $9,250 or $0.17 per share under the July stock options agreement. In addition, 30,000 warrants were exercised for approximately $6,000 or $0.20 per share.
During the year ended June 30, 2008, approximately 82,500 warrants were exercised at exercise prices ranging from $0.14 to $0.20 per share or an approximate aggregate price of $12,000.
The weighted average grant date fair value of options and warrants granted during the fiscal year ended June 30, 2009 and 2008 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 represents the period of time that options granted are expected to be outstanding and is derived from historical terms.
Assumptions utilized to value options and warrants for fiscal years ended June 30, 2009 and 2008 are as follows:
| | | | 2,009 | | | | 2,008 | |
| Risk free interest rate | | | 3 | % | | | 3 | % |
| Expected life (years) | | | 5 | | | | 5 | |
| Expected volatility | | | 161 | % | | | 101 | % |
| Expected dividends | | None | | | None | |
NOTE 8 – STOCK OPTIONS AND WARRANTS, continued
A summary of options for the years ended June 30, 2009 and 2008 is shown below:
| | | June 30, 2009 | | | June 30, 2008 | |
| | | Number | | | Weighted-Average | | | Number | | | Weighted-Average | |
| | | of Shares | | | Exercise Price | | | of Shares | | | Exercise Price | |
| | | | | | | | | | | | | |
| Outstanding at beginning of period | | | 5,683,544 | | | $ | 0.61 | | | | 2,757,270 | | | $ | 0.61 | |
| Granted | | | 1,335,102 | | | | 0.20 | | | | 3,010,889 | | | | 0.63 | |
| Exercised | | | (54,412 | ) | | | 0.17 | | | | - | | | | - | |
| Forfeited | | | (1,126,618 | ) | | | 0.51 | | | | (84,615 | ) | | | 1.05 | |
| Expired | | | (871,500 | ) | | | 0.55 | | | | - | | | | - | |
| Outstanding at end of period | | | 4,966,116 | | | $ | 0.53 | | | | 5,683,544 | | | $ | 0.61 | |
| Exercisable at end of period | | | 3,103,079 | | | | | | | | 3,676,525 | | | | | |
| Available for issuance at end of period | | | 754,472 | | | | | | | | 316,456 | | | | | |
During the year ended June 30, 2009, the Company issued 705,302 common stock warrants to consultants as part of the payment for their services. These warrants were accounted for in accordance with the provisions of SFAS 123R. Approximately 240,302 of these warrants were vested immediately , the remaining 465,000 warrants were vested one-third immediately, one-third will be vested on October 27, 2009 and the remaining one-third will be vested on October 27, 2010, assuming the person receiving the equity awards is providing services by the Company at the time of vesting. The weighted average grant date fair value of warrants was $0.19 based on the Black-Scholes option-pricing model and the total cost of approximately $134,000. The warrants expire five years from the date of grant. In addition, there were 30,000 warrants were exercised for an aggregate price of approximately $6,000 or $0.20 per share and approximately 440,000 warrants expired during the fiscal year 2009.
During the year ended June 30, 2008, the Company issued 18,839 common stock warrants to consultants as part of the payment for their services. These warrants were accounted for in accordance with the fair value provisions of SFAS 123R. The warrants vested one-third immediately with fair market values ranging from $0.44 to $0.58 per warrant and the total cost of approximately $12,000. The warrants were valued on the date of grant using the Black-Scholes option-pricing model. In addition, approximately 82,500 warrants were exercised at exercise prices ranging from $0.14 to $0.20 per share or an approximate aggregate price of $12,000 and there were 45,000 warrants expired during the fiscal year 2008.
The following is a summary of warrants granted, exercised, canceled and outstanding involving the grants in the years ended June 30, 2009 and 2008:
| | | June 30, 2009 | | | June 30, 2008 | |
| | | Number | | | Weighted-Average | | | Number | | | Weighted-Average | |
| | | of Shares | | | Exercise Price | | | of Shares | | | Exercise Price | |
| | | | | | | | | | | | | |
| Outstanding at beginning of period | | | 744,937 | | | $ | 0.48 | | | | 854,108 | | | $ | 0.42 | |
| Granted | | | 705,302 | | | | 0.20 | | | | 18,329 | | | | 0.65 | |
| Exercised | | | (30,000 | ) | | | 0.20 | | | | (82,500 | ) | | | 0.15 | |
| Expired | | | (440,000 | ) | | | 0.20 | | | | (45,000 | ) | | | 0.74 | |
| Outstanding at end of period | | | 980,239 | | | $ | 0.31 | | | | 744,937 | | | $ | 0.48 | |
| Exercisable at end of period | | | 773,572 | | | | | | | | 744,937 | | | | | |
NOTE 8 - INCOME TAXES
For federal income tax purposes, the Company elected to capitalize start-up costs incurred during 1999 and 2000 totaling $357,989. The start-up costs are being amortized over sixty (60) months beginning in 2001. An analysis of the components of the (loss) before income taxes and the related income tax (benefit) is presented in the following tables. The tax amounts have been calculated using the 34% federal and 5.5% state income tax rates.
The (provision) benefit for income taxes consists of the following:
| | | 2009 | | | 2008 | |
| Current | | $ | - | | | $ | - | |
| Deferred | | | - | | | | - | |
| | | $ | - | | | $ | - | |
| | | 2009 | | | 2008 | |
| Deferred tax assets: | | | | | | |
| Depreciation and amortization | | $ | 7,986 | | | $ | 7,986 | |
| Stock based compensation | | | 2,858,054 | | | | 2,616,736 | |
| Net operating loss carry forward | | | 4,351,067 | | | | 3,831,869 | |
| Interest accrual | | | 11,044 | | | | 11,044 | |
| Research tax credit | | | 7,203 | | | | 7,203 | |
| Total deferred tax assets | | | 7,235,354 | | | | 6,474,838 | |
| | | | | | | | | |
| Valuation allowance: | | | | | | | | |
| Beginning of year | | | (6,474,838 | ) | | | (5,577,772 | ) |
| Decrease (increase) during the year | | | (760,516 | ) | | | (897,066 | ) |
| Ending balance | | | (7,235,354 | ) | | | (6,474,838 | ) |
| Net deferred taxes | | $ | - | | | $ | - | |
A reconciliation of income tax at the statutory rate to the Company’s effective tax rates for the periods ended June 30, 2009 and 2008 is as follows:
| | | 2009 | | | 2008 | |
| Federal income tax at statutory rate of 34% | | $ | (687,691 | ) | | $ | (812,580 | ) |
| State tax, net of federal benefit | | | (73,364 | ) | | | (86,697 | ) |
| Other | | | 539 | | | | 2,211 | |
| Valuation allowance | | | 760,516 | | | | 897,066 | |
| | | $ | - | | | $ | - | |
As of June 30, 2009, the Company had a net operating loss carry forward of approximately $11,614,309 which will begin to expire in 2017.
NOTE 9 – NOTES PAYABLE
| | | | Interest | | | Conversion | | | June | | | June | |
| Related Party | Maturity | | Rate | | | Price | | | | 30, 2009 | | | | 30, 2008 | |
| 2007 Senior Convertible Note | 2010 | | | 8 | % | | $ | 0.74 | | | $ | 375,000 | | | $ | - | |
| Accrued interest | | | | | | | | | | | | 55,315 | | | | - | |
| Total | | | | | | | | | | | $ | 430,315 | | | $ | - | |
NOTE 9 – NOTES PAYABLE, continued
| | | | Interest | | | Conversion | | | June | | | June | |
| Director | Maturity | | Rate | | | Price | | | | 30, 2009 | | | | 30, 2008 | |
| 2003 Senior Convertible Note | 2010 | | | 6 | % | | $ | 0.38 | | | $ | 1,268,625 | | | $ | 1,268,625 | |
| Senior Convertible Note | 2010 | | | 8 | % | | $ | 0.74 | | | | 208,955 | | | | 208,955 | |
| 2007 Senior Convertible Note | 2010 | | | 8 | % | | $ | 0.74 | | | | 375,000 | | | | 375,000 | |
| 2007 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.55 | | | | 50,000 | | | | 50,000 | |
| 2007 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.51 | | | | 50,000 | | | | 50,000 | |
| 2007 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.40 | | | | 50,000 | | | | 50,000 | |
| 2007 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.40 | | | | 50,000 | | | | 50,000 | |
| 2007 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.34 | | | | 50,000 | | | | 50,000 | |
| 2007 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.32 | | | | 50,000 | | | | 50,000 | |
| 2008 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.32 | | | | 50,000 | | | | 50,000 | |
| 2008 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.45 | | | | 70,000 | | | | 70,000 | |
| 2008 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.40 | | | | 75,000 | | | | 75,000 | |
| 2008 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.33 | | | | 50,000 | | | | 50,000 | |
| 2008 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.42 | | | | 75,000 | | | | 75,000 | |
| 2008 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.40 | | | | 50,000 | | | | 50,000 | |
| 2008 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.29 | | | | 50,000 | | | | 50,000 | |
| 2008 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.20 | | | | 50,000 | | | | 50,000 | |
| 2008 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.38 | | | | 50,000 | | | | 50,000 | |
| 2008 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.35 | | | | 135,000 | | | | 135,000 | |
| 2008 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.25 | | | | 100,000 | | | | - | |
| 2008 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.35 | | | | 50,000 | | | | - | |
| 2008 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.25 | | | | 50,000 | | | | - | |
| 2008 Senior Convertible Note 3 | 2010 | | | 8 | % | | $ | 0.36 | | | | 50,000 | | | | - | |
| 2008 Senior Convertible Note 3 | 2010 | | | 8 | % | | $ | 0.19 | | | | 50,000 | | | | - | |
| 2008 Senior Convertible Note 3 | 2010 | | | 8 | % | | $ | 0.31 | | | | 50,000 | | | | | |
| 2009 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.18 | | | | 35,000 | | | | | |
| 2009 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.37 | | | | 35,000 | | | | | |
| 2009 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.43 | | | | 35,000 | | | | | |
| 2009 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.43 | | | | 35,000 | | | | | |
| 2009 Senior Convertible Note 1 | 2010 | | | 8 | % | | $ | 0.45 | | | | 35,000 | | | | | |
| 2009 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.48 | | | | 35,000 | | | | | |
| 2009 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.47 | | | | 35,000 | | | | | |
| 2009 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.42 | | | | 35,000 | | | | | |
| 2009 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.53 | | | | 35,000 | | | | | |
| 2009 Senior Convertible Note 2 | 2010 | | | 8 | % | | $ | 0.58 | | | | 35,000 | | | | | |
| Accrued interest | | | | | | | | | | | | 408,710 | | | | 181,322 | |
| | | | | | | | | | | | | 3,916,290 | | | | 2,988,902 | |
| Related Party | | | | | | | | | | | | | | | | | |
| 2007 Senior Convertible Note | 2010 | | | 8 | % | | $ | 0.74 | | | | - | | | | 375,000 | |
| Accrued interest | | | | | | | | | | | | - | | | | 25,315 | |
| | | | | | | | | | | | | - | | | | 400,315 | |
| Officer | | | | | | | | | | | | | | | | | |
| 2008 Convertible Notes | 2010 | | | 8 | % | | $ | 0.20 | | | | 100,000 | | | | - | |
| Accrued interest | | | | | | | | | | | | 2,482 | | | | - | |
| | | | | | | | | | | | | 102,482 | | | | - | |
| | | | | | | | | | | | | | | | | | |
| Total long term note payable | | | | | | | | 4,018,772 | | | | 3,389,217 | |
| | | | | | | | | | | | | | | | | | |
| Total debt | | | | | | | | | | | $ | 4,449,087 | | | $ | 3,389,217 | |
NOTE 9 – NOTES PAYABLE, continued
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, 2010. 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, 2010. This note has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.
Effective November 1, 2008, the Company issued four convertible note payables totaling $100,000 to an officer as part of the terms of the employment contract. These notes have the same conversion price of $0.20, which was the closing trading price of the Company’s common stock on the effective date of the notes. These notes have the same maturity date of December 31, 2010.
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, 2010. 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, 2010. 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, 2010. 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 October 29, 2010. This note has the conversion prices determined by the closing trading prices of the Company’s common stock on the dates the Advances were received.
In June 2007, the Company issued two other 2007 senior convertible note payables to its Chairman and a major stockholder for $375,000 each. As of September 30, 2007, the Company received $303,160 from its Chairman and the remaining $71,840 in July 2007 totaling $375,000. The Company also received $125,000 from a major stockholder and the remainder in September 2007. These two senior convertible note payables are secured by the Company’s revenues and assets. These notes payable require the Company to allocate approximately $162,000 of these funds to be restricted for payment of the chief executive officer’s salary for the remainder of the twelve months from the date of hire. The Company may
prepay the principal and interest upon meeting certain cash flow requirements and the approval of the board.
NOTE 9 – NOTES PAYABLE, continued
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.
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.
At June 30, 2009, the Company accrued interests of $408,806, $55,315 and $2,482 on the convertible notes with the director, the convertible note with a related party, and the convertible note with the officer respectively.
NOTE 10 – FAIR VALUE MEASUREMENTS
As discussed in Note 2, “Summary of Significant Accounting Policies,” the Company adopted SFAS No. 157 for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS No. 157 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. SFAS No. 157 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.
SFAS No. 157 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. SFAS No. 157 establishes and prioritizes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2009:
| | | Carrying Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| Financial Assets | | | | | | | | | | | | |
| Cash equivalents (1) | | $ | 6,205 | | | $ | 6,205 | | | | - | | | | - | |
| Total financial assets | | $ | 6,205 | | | $ | 6,205 | | | | - | | | | - | |
The following table provides the assets and liabilities carried at fair value measured on a nonrecurring basis as of June 30, 2009:
| | | Carrying Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| Financial Liabilities | | | | | | | | | | | | |
| Convertible notes payable (2) | | $ | 4,316,981 | | | | - | | | | - | | | $ | 4,316,981 | |
| Total financial liabilities | | $ | 4,316,981 | | | | - | | | | - | | | $ | 4,316,981 | |
NOTE 10 – FAIR VALUE MEASUREMENTS, continued
(1) Cash Equivalents
The Company's cash equivalents include short-term investments, which are money market funds. Since these are short-term highly liquid investments with original maturities of three months or less at the date of purchase, they present negligible risk of changes in value due to changes in interest rates. These short-term investments are recorded at fair value on the Company's balance sheet based on quoted market prices and observable market inputs.
(2) Convertible Notes Payable
As fully described in Note 9, the Company’s convertible notes payable are long-term debts with fixed interest rates and the conversion rates at market at the time the funds were received. In addition, most of these notes are collateralized by the Company’s assets and revenues. Further, the debt holders are major shareholders and an officer. The Company is in a start up phase. The Company estimates the fair value of the convertible notes for disclosure purposes by discounting the future cash flows using rates of debts that management believes are similar in terms and maturity.
NOTE 11 – RELATED PARTY TRANSACTIONS
As fully described in Note 9, the Company has several senior convertible note payables with its Chairman and a major stockholder during the periods ended June 30, 2009 and 2008.
Subsequent to June 30, 2009, the Company received the additional Advances totaling $200,000 from its Chairman, which were combined with the $175,000 previous borrowings into a senior convertible note (2009 Note 2) as more fully described in Note 9 above. In addition, the Company received Advances totaling of $195,000 during September 2009, the terms of these Advances have yet to be determined.
