NATIONAL QUALITY CARE INC - FORM 10-Q

Attached files

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EX-31.2 - EXHIBIT 31.2 - NATIONAL QUALITY CARE INC	v307940_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - NATIONAL QUALITY CARE INC	v307940_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - NATIONAL QUALITY CARE INC	v307940_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

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

FOR THE TRANSITION PERIOD FROM __________________ TO _______________________

Commission file number 000-19031

NATIONAL QUALITY CARE, INC.

(Exact name of Registrant as Specified in its Charter)

Delaware	84-1215959
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification Number)

2431 Hill Drive

Los Angeles, California 90041

(Address of Principal Executive Offices including Zip Code)

(310) 254-2014

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former address and telephone number, if changed since last report)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ¨ No x

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company x
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 80,221,807 shares of common stock as of June 30, 2010.

Documents incorporated by reference: None

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

TABLE OF CONTENTS

	Page Number
PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements	2

Condensed Consolidated Balance Sheets -
June 30, 2010 (Unaudited) and December 31, 2009	2

Condensed Consolidated Statements of Operations (Unaudited) -
Three Months and Six Months Ended June 30, 2010 and 2009	3

Condensed Consolidated Statement of Stockholders’ Equity (Deficiency) -	4
Year ended December 31, 2009 and Six Months Ended June 30, 2010 (Unaudited)

Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 2010 and 2009	5

Notes to Condensed Consolidated Financial Statements (Unaudited) -
Three Months and Six Months ended June 30, 2010 and 2009	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3. Quantitative and Qualitative Disclosures About Market Risk	23

Item 4. Controls and Procedures	23

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	24

Item 1A. Risk Factors	24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3. Defaults Upon Senior Securities	24

Item 4. Reserved	24

Item 5. Other Information	24

Item 6. Exhibits	24

SIGNATURES	25

Forward-Looking Statements

Certain statements in this Quarterly Report constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These include statements about anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance and similar matters. The words “budgeted,” “anticipate,” “project,” “estimate,” “expect,” “may,” “believe,” “potential” and similar statements are intended to be among the statements that are forward-looking statements. Because such statements reflect the risk and uncertainty that is inherent in our business, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of these risks and uncertainties are related to our current business situation and include, but are not limited to, our lack of revenues, our history of operating losses, our need for additional financing, the uncertainty of our pending arbitration with our former legal counsel, and the uncertainty about our ability to continue as a going concern, as well as those set forth in this Quarterly Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of June 30, 2010. We undertake no obligation to release publicly any revisions to the forward-looking statements to reflect events or circumstances after the date hereof or to reflect unanticipated events or developments.

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Current assets:
Cash	$	294,302		$	22,281
Money market funds		1,416,784			—
Receivable from sale of technology rights		1,675,000			—
Prepaid expenses and other current assets		81,441			—
Technology rights held for sale, net of accumulated amortization of $40,162 – discontinued operations		—			59,838
Deferred income taxes		—			1,500,000
Total current assets		3,467,527			1,582,119
Total assets	$	3,467,527		$	1,582,119

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses	$	2,704,604		$	3,009,379
Accounts payable and accrued expenses – discontinued operations		15,214			176,528
Income taxes payable		250,000			—
Deferred income taxes		248,000			—
Notes payable to related party, including accrued interest of $37,497, net of discount of $188,025		—			964,083
Note payable to consultant – discontinued operations		—			120,000
Total current liabilities		3,217,818			4,269,990
Total liabilities		3,217,818			4,269,990

Commitments and contingencies

Stockholders’ equity (deficiency):
Preferred stock, $0.01 par value; authorized - 5,000,000 shares; issued – none		—			—
Common stock, $0.01 par value; authorized - 125,000,000 shares; issued and outstanding – 80,221,807 shares		802,219			802,219
Additional paid-in capital		12,776,132			12,764,246
Accumulated deficit		(13,328,642	)		(16,254,336	)
Total stockholders’ equity (deficiency)		249,709			(2,687,871	)
Total liabilities and stockholders’ equity (deficiency)	$	3,467,527		$	1,582,119

See accompanying notes to condensed consolidated financial statements.

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenues	$	—		$	—		$	—		$	—

General and administrative, including $5,943 and $19,224 of stock-based compensation costs for the three months ended June 30, 2010 and 2009, respectively, and $11,886 and $25,926 of stock-based compensation costs for the six months ended June 30, 2010 and 2009, respectively		118,654			252,842			250,004			626,035
Loss from operations		(118,654	)		(252,842	)		(250,004	)		(626,035	)
Interest expense – related party		—			(71,640	)		(197,030	)		(84,215	)
Gain from legal settlement		—			—			1,871,430			—
Interest income		35			—			35			—
Other income		—			—			156,145			32,084
Income (loss) before income taxes		(118,619	)		(324,482	)		1,580,576			(678,166	)
Income tax benefit (expense)		48,000			—			(635,000	)		—
Income (loss) from continuing operations		(70,619	)		(324,482	)		945,576			(678,166	)
Income (loss) from discontinued operations, including gain from sale of assets of $3,318,732, and net of income taxes of $1,363,000, for the six months ended June 30, 2010		—			(15,463	)		1,980,118			(18,019	)
Net income (loss)	$	(70,619	)	$	(339,945	)	$	2,925,694		$	(696,185	)

Income (loss) per common share - basic and diluted
Continuing operations	$	(0.00	)	$	(0.00	)	$	0.01		$	(0.01	)
Discontinued operations		—			(0.00	)		0.03			(0.00	)
Total net income (loss) per common share	$	(0.00	)	$	(0.00	)	$	0.04		$	(0.01	)

Weighted average common shares outstanding – basic and diluted		80,221,807			77,355,812			80,221,807			75,645,534

See accompanying notes to condensed consolidated financial statements.

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

Year Ended December 31, 2009

And Six Months Ended June 30, 2010

	Common Stock				Additional Paid-in		Accumulated			Total Stockholders’ Equity
	Shares		Amount		Capital		Deficit			(Deficiency)
Balance at December 31, 2008		73,916,252	$	739,163	$	12,186,413	$	(16,410,185	)	$	(3,484,609	)
Stock-based compensation costs		750,000		7,500		48,813		—			56,313
Exercise of stock warrants		5,555,555		55,556		59,444		—			115,000
Fair value of warrants issued in connection with debt		—		—		469,576		—			469,576
Net income		—		—		—		155,849			155,849
Balance at December 31, 2009		80,221,807		802,219		12,764,246		(16,254,336	)		(2,687,871	)
Stock-based compensation costs		—		—		11,886		—			11,886
Net income		—		—		—		2,925,694			2,925,694
Balance at June 30, 2010 (Unaudited)		80,221,807	$	802,219	$	12,776,132	$	(13,328,642	)	$	249,709

See accompanying notes to condensed consolidated financial statements.

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended June 30,
	2010			2009
Cash flows from operating activities:
Continuing operations:
Income (loss) from continuing operations	$	945,576		$	(678,166	)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) continuing operating activities:
Amortization of discount on notes payable		188,025			59,012
Stock-based compensation costs		11,886			25,926
Forgiveness of payables		(156,145	)		(32,859	)
Deferred income taxes		534,000			—
Changes in operating assets and liabilities:
Increase in -
Prepaid expenses and other current assets		(81,441	)		(11,858	)
Increase (decrease) in -
Accounts payable and accrued expenses		(148,630	)		439,215
Income taxes payable		101,000			—
Accrued interest due to related party		9,004			25,203
Net cash provided by (used in) continuing operating activities		1,403,275			(173,527	)
Discontinued operations:
Income (loss) from discontinued operations		1,980,118			(18,019	)
Adjustments to reconcile income (loss) from discontinued operations to net cash used in discontinued operating activities:
Stock-based compensation costs		—			13,500
Amortization of technology rights		—			2,430
Forgiveness of payables		(25,101	)		—
Deferred income taxes		1,214,000			—
Gain from sale of assets		(3,318,732	)		—
Changes in discontinued operating assets and liabilities:
Increase (decrease) in -
Accounts payable and accrued expenses		(136,213	)		(56,973	)
Income taxes payable		149,000			—
Net cash used in discontinued operating activities		(136,928	)		(59,062	)
Net cash provided by (used in) operating activities		1,266,347			(232,589	)

Cash flows from investing activities:
Proceeds from sale of assets		1,703,570			—
Increase in money market funds		(1,416,784	)		—
Net cash provided by investing activities		286,786			—

Cash flows from financing activities:
Proceeds from notes payable to related party		45,000			20,000
Payment of note payable issued for services		(120,000	)		—
Exercise of stock warrants		—			100,000
Increase in cash overdraft		—			15,789
Repayment of note payable to related party		(1,206,112	)		(20,000	)
Net cash provided by (used in) financing activities		(1,281,112	)		115,789

Net increase (decrease) in cash		272,021			(116,800	)
Cash balance at beginning of period		22,281			116,800
Cash balance at end of period	$	294,302		$	—

Supplemental disclosures of cash flow information:
Cash paid for -
Interest	$	116,043		$	—
Income taxes	$	1,600		$	1,600

Non-cash investing activities:
Notes payable to related party, including related accrued interest, rolled-over into a new note payable	$	—		$	914,611
Discount recorded for issuance of warrants in connection with a convertible notes payable to related party	$	—		$	385,979
During the six months ended June 30, 2010, the Company sold technology rights summarized as follows:
Total sales price	$	3,378,570
Less amount receivable as of June 30, 2010		(1,675,000	)
Cash received	$	1,703,570

See accompanying notes to condensed consolidated financial statements.

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Three Months and Six Months Ended June 30, 2010 and 2009

1. Basis of Presentation

The condensed consolidated financial statements of National Quality Care, Inc. (“NQCI”) and its wholly-owned subsidiary, Los Angeles Community Dialysis, Inc. (“LACDI”) (collectively, the “Company”) at June 30, 2010, and for the three months and six months ended June 30, 2010 and 2009, are unaudited. In the opinion of management, all adjustments (including normal recurring adjustments) have been made that are necessary to present fairly the financial position of the Company as of June 30, 2010, the results of its operations for the three months and six months ended June 30, 2010 and 2009, and its cash flows for the six months ended June 30, 2010 and 2009. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full fiscal year. The condensed balance sheet at December 31, 2009 has been derived from the Company’s audited financial statements.

The statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and other information included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed with the SEC.

2. Organization and Business Operations

Organization and Nature of Business

National Quality Care, Inc., a publicly-traded Delaware corporation, was incorporated on January 1, 1996. Prior to March 19, 2010, NQCI was a research and development company in the business of developing a wearable artificial kidney for dialysis and other medical applications. On that date NQCI consummated a sale of its technology rights with respect to its developing wearable artificial kidney (see Note 11). Subsequent to March 19, 2010, NQCI has had no operations other than the maintenance of its corporate shell. Unless the context indicates otherwise, NQCI and LACDI are hereinafter referred to as the “Company”.

The Company’s common stock is presently traded on the OTC Market (also referred to as the “Pink Sheets”) under the symbol “NQCI.PK”.

Going Concern

The Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Prior to March 19, 2010, the Company was a research and development company in the business of developing a wearable artificial kidney for dialysis and other medical applications. On that date, the Company consummated a sale of its technology rights with respect to its developing wearable artificial kidney (see Note 11) and, consequently, those activities have been accounted for as discontinued operations in the Company’s condensed consolidated financial statements. Since June 15, 2006, the Company has not generated any revenues from operations, and does not expect to do so in the foreseeable future, except for the revenue generated from the sale of its technology rights during 2010.

For the past several years, except for the six months ended June 30, 2010, the Company has experienced net operating losses and negative operating cash flows. As of June 30, 2010, the Company had an accumulated deficit of $13,328,642, had no revenues from operating activities, and did not have sufficient internal and external working capital resources to meet current and expected future obligations. Such deficiencies indicate the Company will be unable to continue to fund its operations and meet its obligations as they come due. In recent years, the Company has financed its working capital requirements through the sale of technology rights, loans and the recurring sales of its securities to related parties; however, there can be no assurances that such related party funding will be available to the Company in future periods on commercially reasonable terms or at all. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s 2009 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional debt and/or equity capital and to acquire sufficient operating capital through the development of business activities, or otherwise. The Company’s condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

3. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying condensed consolidated financial statements include the financial statements of NQCI and its wholly-owned subsidiary, LACDI. All intercompany balances and transactions have been eliminated in consolidation.

Concentrations

The Company’s cash and money market fund balances may periodically exceed federally insured limits and the limits of the Securities Investor Protection Corporation. The Company has not experienced a loss in such accounts to date. The Company maintains its accounts with financial institutions with high credit ratings.

Convertible Instruments

The Company issued convertible debt with non-detachable conversion features and detachable warrants. The non-detachable conversion feature and detachable warrants are recorded as a discount to the related debt either as additional paid-in capital or a derivative liability, depending on the guidance, using the intrinsic value method or relative fair value method, respectively. The debt discount associated with the warrants and embedded beneficial conversion feature, if any, is amortized to interest expense over the life of the debenture or upon earlier conversion of the debenture using either the effective yield method or the straight-line method, as appropriate.

Research and Development

Research and development costs were expensed as incurred. Research and development expenses consist primarily of costs incurred with respect to the development of the Company’s wearable artificial kidney for dialysis and other medical applications, and are included in discontinued operations in the condensed consolidated statement of operations.

Income Taxes

The Company accounts for income taxes under an asset and liability approach for financial accounting and reporting purposes. Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial statements and the tax basis of assets and liabilities.

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of June 30, 2010, no liability for unrecognized tax benefits was required to be recorded.

The Company files income tax returns in the U.S. federal jurisdiction and is subject to income tax examinations by federal tax authorities for the year 2008 and thereafter. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of June 30, 2010, the Company had no accrued interest or penalties related to uncertain tax positions.

Contingencies

The Company’s management assesses contingent liabilities, and such assessment inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s condensed consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.

Stock-Based Compensation

The Company periodically issues stock options and warrants to officers, directors and consultants for services rendered. Options vest and expire according to terms established at the grant date. The Company accounts for share-based payments to officers and directors by measuring the cost of services received in exchange for equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense in the Company’s condensed consolidated financial statements over the vesting period of the awards. The Company accounts for share-based payments to consultants by determining the value of the stock compensation based upon the measurement date at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.

Earnings Per Share

The Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., warrants and options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted income (loss) per common share is the same for all periods presented because all warrants, stock options and convertible notes payable outstanding were anti-dilutive.

At June 30, 2010 and 2009, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.

	2010		2009

Warrants		4,465,625		22,361,198
Stock options		8,070,000		8,120,000
Total		12,535,625		30,481,198

Fair Value of Financial Instruments

The carrying amounts of cash, money market funds, receivable from sale of technology rights, prepaid expenses and other current assets, accounts payable and accrued expenses, and income taxes payable approximate their respective fair values due to the short-term nature of these items. The amounts shown for notes payable also approximate fair value because current interest rates offered to the Company for debt of similar maturities are substantially the same.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The Company evaluates its estimates on an on-going basis, including those related to valuation of warrants and options, analysis of deferred taxes and provision for income taxes, contingencies and litigation.

Segment Information

Prior to the discontinued operations discussed in Note 11, the Company’s reportable operating segments included dialysis services and development of a wearable artificial kidney.

Technology Rights

Technology rights for a wearable artificial kidney were being amortized over an estimated useful life of approximately 20 years. On December 14, 2009, the Company entered into an Asset Purchase Agreement for the sale of these rights, which was consummated on March 19, 2010 (see Note 11). Amortization is included in discontinued operations and amounted to $-0- and $1,215 for the three months ended June 30, 2010 and 2009, and $-0- and $2,430 for the six months ended June 30, 2010 and 2009.

Reclassifications

Certain items in the 2009 condensed consolidated financial statements have been reclassified to conform to the current year’s presentation.

Recent Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company's financial statement presentation or disclosures.

4. Notes Payable

Note Payable to Consultant

The Company was party to a contract dispute with a consultant claiming additional compensation relating to an agreement dated January 6, 2002, as amended. In August 2008, the Company and consultant reached an agreement whereby the Company executed and delivered a promissory note in the amount of $120,000, bearing interest at 2.54% per annum, and payable on August 7, 2010. In connection therewith, the Company and the consultant entered into a mutual general release agreement. As a result, compensation in the amount of $120,000 was charged to discontinued operations in August 2008. Additionally, on June 21, 2008, the Company granted the consultant options to purchase 1,500,000 shares of the Company’s common stock. In August 2008, the consultant was elected as a Director of the Company and was also appointed to serve as the Company’s Chief Scientific Officer. In connection with such election and appointment, the consultant received an additional 1,000,000 options to purchase shares of common stock. In March 2010, the note principal and related accrued interest were paid.

Notes Payable to Related Party

On December 26, 2007, the Company entered into a $700,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and chief executive officer, bearing interest at 6% per annum, and payable on December 31, 2008. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.07 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note. In connection with this note, the Company issued warrants to purchase 5,000,000 shares of the Company’s common stock at an exercise price of $0.07 per share. The warrants were exercised in March 2008. The relative fair value of the warrants at the time of issuance was determined to be $179,163, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. The discount was fully amortized as of December 31, 2008.

On August 12, 2008, the Company entered into a $150,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and chief executive officer, bearing interest at 6% per annum, payable on December 31, 2008. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.12 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note. In connection with this note, the Company issued warrants to purchase 625,000 shares of the Company’s common stock at an exercise price of $0.12 per share. The warrants expire on the earlier of (i) August 12, 2015 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $45,478, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. The discount was fully amortized as of December 31, 2008. On March 19, 2010, the above described warrants to acquire 625,000 shares expired unexercised as a result of the Company’s sale of substantially all of its assets (see Note 11).

On May 13, 2009, the $700,000 promissory note payable to related party and the $150,000 promissory note payable to related party, plus accrued interest of $64,611, were rolled-over into a new uncollateralized non-convertible promissory note in the amount of $914,611, due on May 13, 2010, with interest at 6% per annum. In connection with this note, the Company issued warrants to purchase 16,937,240 shares of the Company’s common stock at an exercise price of $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note. The warrants expire on the earlier of (i) May 13, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $377,667, using the Black-Scholes option-pricing model, and was recorded as discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. For the three months and six months ended June 30, 2010, the Company recorded interest expense of $-0- and $136,581, respectively, relative to the amortized discount. The discount was fully amortized as of June 30, 2010. In March 2010, the $914,611 note, with accrued interest of $42,398, was paid in full. On July 7, 2009, warrants to acquire 555,555 shares were exercised. On March 19, 2010, warrants to acquire the remaining 16,381,685 shares expired unexercised as a result of the Company’s sale of substantially all of its assets (see Note 11).

On April 21, 2009, the Company entered into a $20,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and chief executive officer, bearing interest at 6% per annum, and payable on August 31, 2009. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.03 per share, which was the approximate closing price of the Company’s common stock on the date of the note, at any time. In connection with this note, the Company issued warrants to purchase 333,333 shares of the Company’s common stock at an exercise price of $0.03 per share. The warrants expire on the earlier of (i) April 21, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $8,312, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was charged to interest expense over the period that the note was outstanding. The discount was fully amortized as of December 31, 2009. On April 28, 2009, the $20,000 note was paid in full. On March 19, 2010, the above described warrants to acquire 333,333 shares expired unexercised as a result of the Company’s sale of substantially all of its assets (see Note 11).

On October 18, 2009, the Company entered into a $200,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and chief executive officer, bearing interest at 6% per annum, and payable on April 30, 2010. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.022 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note, at any time. In connection with this note, the Company issued warrants to purchase 4,545,455 shares of the Company’s common stock at an exercise price of $0.022 per share. The warrants expire on the earlier of (i) October 18, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $83,597, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. For the three months and six months ended June 30, 2010, the Company recorded interest expense of $-0- and $51,444, respectively, relative to the amortized discount. The discount was fully amortized as of June 30, 2010. In March 2010, the $200,000 note, with accrued interest of $4,077, was paid in full. On March 19, 2010, the above described warrants to acquire 4,545,455 shares expired unexercised as a result of the Company’s sale of substantially all of its assets (see Note 11).

On February 23, 2010, the Company entered into a $45,000 uncollateralized promissory note agreement with an officer and director, bearing interest at 5% per annum, and payable on February 23, 2011. In March 2010, the $45,000 note, with accrued interest of $26, was paid in full.

During the three months ended June 30, 2010 and 2009, the Company recorded total interest expense of $-0- and $59,012, respectively, relative to the amortization of discounts. During the six months ended June 30, 2010 and 2009, the Company recorded total interest expense of $188,025 and $59,012, respectively, relative to the amortization of discounts.

5. Common Stock and Preferred Stock

The Company’s Certificate of Incorporation provides for authorized capital of 130,000,000 shares, of which 125,000,000 shares consist of common stock with a par value of $0.01 per share and 5,000,000 shares consist of preferred stock with a par value of $0.01 per share.

The Company is authorized to issue 5,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors.

Exercise of Options and Warrants

On April 29, 2009, the Company issued 3,000,000 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise of warrants at $0.02 per share. The Company received $60,000 of proceeds.

On May 11, 2009, the Company issued 2,000,000 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise of warrants at $0.02 per share. The Company received $40,000 of proceeds.

On July 7, 2009, the Company issued 555,555 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise of warrants at $0.027 per share. The Company received $15,000 of proceeds.

6. Related Party Transactions

During August and September of 2009, Robert M. Snukal, a director and chief executive officer, advanced $87,500 to the Company on a non-interest bearing basis for working capital purposes. On October 17, 2009, the advances were repaid in full.

7. Money Market Funds — Fair Value

Money market funds at June 30, 2010 consisted of an investment in shares of the UBS RMA Money Fund Inc – Money Market Portfolio with a market value of $1,416,784. The Money Market Portfolio is an open-end fund incorporated in the USA whose stated objective is to provide maximum current income consistent with liquidity and conservation of capital. The Fund invests in a diversified portfolio of high quality money market instruments of governmental and private issuers.

The authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity in Level 3 fair value measurements, is also required.

Level 1: quoted prices (unadjusted) in active markets for an identical asset or liability that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded securities and exchange-based derivatives.

Level 2: inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.

Level 3: unobservable inputs for the asset or liability are only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.

The Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels, the Company performs an analysis of the assets and liabilities at each reporting period end.

Money market funds are the only financial instrument that is measured and recorded at fair value on the Company’s balance sheet on a recurring basis. The following table presents money market funds at their level within the fair value hierarchy at June 30, 2010.

	Total		Level 1		Level 2		Level 3

June 30, 2010:
Money market funds	$	1,416,784	$	1,416,784	$	—	$	—

8. Stock Options and Warrants

A summary of the Company’s stock option activity and related information for the six months ended June 30, 2010 and 2009 is as follows:

	2010				2009
			Weighted Average				Weighted Average
			Exercise				Exercise
	Options		Price		Options		Price
Outstanding — beginning of period		8,070,000	$	0.37		7,570,000	$	0.39
Granted		—	$	—		550,000	$	0.03
Exercised		—	$	—		—	$	—
Expired		—	$	—		—	$	—

Outstanding — end of period		8,070,000	$	0.37		8,120,000	$	0.37

The following table summarizes the number of option shares, the weighted average exercise price, and weighted average life (by years) by price range for both total outstanding options and total exercisable options as of June 30, 2010:

	Total Outstanding						Total Exercisable
	Number		Weighted Average				Number		Weighted Average
Price Range	of Shares		Exercise Price		Life (Years)		of Shares		Exercise Price		Life (Years)
$ 0.03 - $0.35		4,090,000	$	0.12		7.89		3,465,000	$	0.12		7.84
$ 0.36 - $0.99		3,980,000	$	0.63		5.80		3,980,000	$	0.63		5.80

		8,070,000	$	0.37		6.86		7,445,000	$	0.39		6.75

See Note 9 for a description of the Company’s share-based compensation including the stock option activity during the six months ended June 30, 2010 and 2009.

Stock Warrants

A summary of the Company’s stock warrant activity and related information for the six months ended June 30, 2010 and 2009 is as follows:

	2010					2009
				Weighted Average					Weighted Average
	Warrant			Exercise Price		Warrant			Exercise Price
Outstanding — beginning of period		26,351,098		$	0.05		10,090,625		$	0.10
Granted		—		$	—		17,270,573		$	0.03
Exercised		—		$	—		(5,000,000	)	$	0.02
Expired		(21,885,473	)	$	0.03		—		$	—

Outstanding — end of period		4,465,625		$	0.18		22,361,198		$	0.06

The following table summarizes the number of warrants, the weighted average exercise price, and weighted average life (by years) by price range for both total outstanding warrants and total exercisable warrants as of June 30, 2010:

	Total Outstanding						Total Exercisable
	Number		Weighted Average				Number		Weighted Average
Price Range	of Shares		Exercise Price		Life (Years)		of Shares		Exercise Price		Life (Years)
$ 0.02 - $0.35		4,315,625	$	0.15		3.65		4,315,625	$	0.15		3.65
$ 0.36 - $0.99		100,000	$	0.60		0.55		100,000	$	0.60		0.55
$ 1.00 - $1.25		50,000	$	1.25		0.55		50,000	$	1.25		0.55

		4,465,625	$	0.18		3.55		4,465,625	$	0.18		3.55

9. Share-Based Compensation

As of June 30, 2010, the Company had adopted three stock option plans for the benefit of officers, directors, employees, independent contractors and consultants of the Company. These plans include: (i) the 1998 Stock Option Plan, (ii) the 1996 Stock Option Plan, and (iii) the 1996 Employee Compensatory Stock Option Plan. The 1998 Stock Option Plan was terminated with respect to future grants on April 8, 2008, the 1996 Stock Option Plan was terminated with respect to future grants on May 11, 2006 and the 1996 Employee Compensatory Stock Option Plan was terminated with respect to future grants on February 7, 2000. In addition to these plans, from time to time, the Company grants various other stock options and warrants directly to certain parties. The Company grants all such awards as incentive compensation to officers, directors, and employees, and as compensation for the services of independent contractors and consultants of the Company.

The fair value of each option and warrant awarded is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options and warrants have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options and warrants. The expected dividend yield assumption is based on the Company’s expectation of dividend payouts. Expected volatilities are based on historical volatility of the Company’s stock. The average risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date. Expected life of the options and warrants is the average of the vesting term and the full contractual term of the options and warrants.

There were no transactions during the six months ended June 30, 2010 requiring an assessment of value pursuant to the Black-Scholes option-pricing model. For the six months ended June 30, 2009 the Black-Scholes option-pricing model has utilized the following assumptions: expected dividend yield – 0.00%; expected volatility – 142.57%; average risk-free interest rate – 1.98%; expected life – 5 years.

On August 5, 2009, the Board approved the issuance of 250,000 shares of the Company’s common stock to Dr. Rambod as payment for additional services in connection with the patent application. The common stock issued was valued at $0.02 per share, which was the approximate closing price of the Company’s common stock on the date of the issuance, for a total of $5,000, and was charged to discontinued operations on August 5, 2009.

On May 13, 2009, the Company issued options to purchase 250,000 shares of common stock to a consultant for past services. The options became fully vested on May 13, 2009, the date of grant. The options have an exercise price of $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the issuance, and expire in ten years. The fair value of these options on the date of grant was $6,037, and was charged to operations on May 13, 2009.

On May 13, 2009, the Company issued options to purchase a total of 300,000 shares of common stock to two outside directors for past services. The options became fully vested on May 13, 2009, the date of grant. The options have an exercise price of $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the issuance, and expire in ten years. The fair value of these options on the date of grant was $7,244, and was charged to operations on May 13, 2009.

On August 8, 2008, the Company issued options to purchase 1,000,000 shares of common stock to a director pursuant to the 1998 Stock Option Plan. The options vest in eight equal semi-annual installments commencing on February 8, 2009 and continuing on each August 8 and February 8 thereafter until the becoming fully vested on the fourth anniversary of the date of grant, and expire in ten years. The fair value of these options on the date of grant was $83,621 and will be charged to operations on a straight-line basis over the requisite service period. During the three months ended June 30, 2010 and 2009, the Company charged continuing operations for share-based compensation expense of $5,205 and $5,205, respectively, relating to these options. During the six months ended June 30, 2010 and 2009, the Company charged continuing operations for share-based compensation expense of $10,410 and $10,408, respectively, relating to these options.

On June 21, 2008, the Company issued options to purchase 100,000 shares of common stock to a consultant. The options vest over two years, have an exercise price of $0.08 per share, and expire in ten years. The fair value of these options on the date of grant was to $5,901 and is being charged to operations on a straight-line basis over the requisite service period. During the three months ended June 30, 2010 and 2009, the Company charged continuing operations for share-based compensation expense of $738 relating to these options. During the six months ended June 30, 2010 and 2009, the Company charged continuing operations for share-based compensation expense of $1,476 relating to these options.

On February 12, 2007, the Company issued options to purchase 50,000 shares of common stock to a consultant pursuant to the 1998 Stock Option Plan. The options vest over two years, have an exercise price of $0.36 per share, and expire in ten years. The fair value of these options on the date of grant was $12,163 and is being charged to operations on a straight-line basis over the requisite service period. During the three months and six months ended June 30, 2009, the Company recorded consultant compensation expense of $-0- and $761, respectively, relating to these options.

During the three months ended June 30, 2010 and 2009, a total of $5,943 and $32,724, respectively, was charged to continuing and discontinued operations for share-based compensation costs relating to common stock, stock options and warrants. During the six months ended June 30, 2010 and 2009, a total of $11,886 and $39,426, respectively, was charged to continuing and discontinued operations for share-based compensation costs relating to common stock, stock options and warrants.

As of June 30, 2010, there was approximately $41,800 of total unrecognized compensation cost related to share-based compensation arrangements, which is expected to be recognized over the ensuing 25 months.

There were no unexercised in-the-money stock options and warrants at June 30, 2010. Accordingly, they had no intrinsic value on that date, based on a fair market value of $0.015 per share on June 30, 2010. The intrinsic value of exercisable but unexercised in-the-money stock options and warrants at June 30, 2009 was approximately $52,500, based on a fair market value of $0.03 per share on June 30, 2009.

10. Commitments and Contingencies

Arbitration Proceeding with Xcorporeal

On September 1, 2006, the Company entered into a merger agreement (the “Merger Agreement”) with Xcorporeal, Inc. (“Xcorporeal”) which contemplated that either (i) the Company would enter into a triangular merger in which the Company would become a wholly-owned subsidiary of Xcorporeal, or (ii) Xcorporeal would issue to the Company shares of its common stock in consideration of the assignment of the technology relating to the Company’s wearable artificial kidney and other medical devices (collectively sometimes referred to as the “Technology Transactions”). In connection with the Merger Agreement, also on September 1, 2006, the Company entered into a license agreement (the “License Agreement”) with Xcorporeal granting an exclusive license for ninety-nine years (or until the expiration of the Company’s proprietary rights in the technology, if earlier), to all technology relating to the Company’s wearable artificial kidney and other medical devices for a minimum royalty of $250,000.

Following execution of the Merger Agreement and the License Agreement, the parties attempted to close the transactions contemplated by the Merger Agreement, but disputes arose regarding satisfaction of the conditions to closing and with respect to certain provisions of the Merger Agreement. In addition, a dispute arose as to whether the License Agreement would survive a failure to consummate either of the two transactions contemplated by the Merger Agreement.

Effective as of December 29, 2006, the Company terminated the Merger Agreement and License Agreement and all transactions contemplated thereby due to Xcorporeal’s continuing, uncured and incurable breaches of the Merger Agreement, the License Agreement and certain related matters. Xcorporeal did not dispute the termination of the Merger Agreement, but had disputed the Company’s termination of the License Agreement, which Xcorporeal alleged to be in full force and effect.

On December 1, 2006, Xcorporeal filed a demand for arbitration against the Company, alleging an unspecified anticipatory breach of the License Agreement. On December 29, 2006, at the same time that the Company terminated the Merger Agreement and the License Agreement, the Company filed a lawsuit against Xcorporeal and against Victor Gura, former Chief Financial Officer and Chief Scientific Officer and a director of the Company.

The arbitration was held in February 2008. On June 9, 2008, the arbitrator issued an interim award. The arbitrator concluded that the License Agreement was not to survive the failure of the transactions contemplated by the Merger Agreement, that Xcorporeal had waived and excused the Company’s obligations to perform under the Merger Agreement and that the appropriate remedy under the circumstances was to award the Company specific performance of the Technology Transaction. The arbitrator rejected the Company’s fraud, misappropriation and other claims, and rejected Gura’s claims against the Company and the Company’s claims against Gura. In addition, the arbitrator stated that the Company was the prevailing party in the arbitration and therefore entitled to recover its fees and costs. Because the Company had prevailed on some, but not all, of its claims, the arbitrator awarded the Company approximately $1,870,000 in fees and costs.

On April 13, 2009, the arbitrator in the arbitration proceeding issued a partial final award (“Partial Final Award”), which resolved the remaining issues that were pending for decision in the arbitration proceeding. The Partial Final Award reflected the arbitrator’s conclusions based on arguments by Xcorporeal that the 9,230,000 shares could not be issued to the Company in compliance with the federal securities laws because of the financial condition of the Company. The Partial Final Award provided that Xcorporeal would have a perpetual exclusive license (the “Perpetual License”) to the technology. Under the terms of the Partial Final Award, in consideration of the award of the Perpetual License to Xcorporeal, the Company was awarded a royalty of 39% of all net income, ordinary or extraordinary, to be received by Xcorporeal and the Company was to receive 39% of any shares received in any merger transaction to which Xcorporeal may become a party. In addition, the Partial Final Award provided that Xcorporeal was obligated to pay the Company $1,871,430 for its attorneys’ fees and costs previously awarded by the arbitrator in an order issued on August 13, 2008, that the Company’s application for interim royalties and expenses was denied and that the Company was not entitled to recover any additional attorneys’ fees.

On August 7, 2009, to clarify, resolve and settle disputes that had arisen between the Company and Xcorporeal with respect to the Partial Final Award, including with respect to the rights of the parties regarding certain technology and the application of the Partial Final Award in the case of a sale of the Technology, the Company and Xcorporeal entered into a Memorandum of Understanding (“Memorandum”).

In connection with the issuance of the Partial Final Award and the Memorandum, on August 7, 2009, the Company entered into a stipulation (the “Stipulation”) with Xcorporeal. Pursuant to the terms of the Stipulation, the Company and Xcorporeal agreed (i) not to challenge the terms of the Partial Final Award or any portion of such award, (ii) that any of the parties may, at any time, seek to confirm all but not part of the Partial Final Award through the filing of an appropriate petition or motion with the appropriate court and in response to such action to confirm the Partial Final Award, no party would oppose, object to or in any way seek to hinder or delay the court’s confirmation of the Partial Final Award, but would in fact support and stipulate to such confirmation, and (iii) to waive any and all right to appeal from, seek appellate review of, file or prosecute any lawsuit, action, motion or proceeding, in law, equity, or otherwise, challenging, opposing, seeking to modify or otherwise attacking the confirmed Partial Final Award or the judgment thereon.

In late March 2009, Xcorporeal began a preliminary dialogue with Fresenius Medical Care Holdings, Inc. (“Fresenius”), to determine the interest of Fresenius to acquire certain or all of Xcorporeal assets. These discussions continued through June 2009. In June 2009, Fresenius commenced its due diligence review of Xcorporeal.

In September 2009, the Company and Xcorporeal reviewed the terms of a transaction proposed by Fresenius USA, Inc. (“FUSA”), a wholly-owned subsidiary of Fresenius, in a draft non-binding term sheet for the acquisition of all of the Xcorporeal assets and the Company’s assets.

The Company, Xcorporeal and FUSA executed an Asset Purchase Agreement on December 14, 2009 (“Asset Purchase Agreement”) and the Company publicly announced this transaction on December 18, 2009. The arbitration was terminated with the closing of the Asset Sale in March 2010 (see Note 11).

Arbitration Proceeding with Former Legal Counsel

On February 17, 2011, the Company commenced a binding arbitration proceeding with its former law firm regarding a fee dispute that arose as a result of claimed attorneys' fees incurred by the former law firm in connection with an arbitration proceeding between the Company and Xcorporeal, and certain transactional matters handled by the law firm for the Company. The former law firm has asserted that approximately $2,729,000 in fees and costs are owed to it by the Company for services rendered during 2008, 2009 and 2010, plus interest. The arbitrators have heard all of the testimony presented by the parties, and the parties submitted their final closing briefs on November 10, 2011. As of April 2, 2012, the arbitrators had not rendered their decision on this matter. Management reviews available information and determines the need for recording an estimate of the potential expense when the amount is probable, reasonable and estimable. The Company believes that it has adequately and appropriately provided for the fees incurred through June 30, 2010 in the accompanying condensed consolidated financial statements. Given the Company’s limited liquidity and working capital resources, it is uncertain whether the Company would be able to satisfy such obligation should a decision adverse to the Company be rendered.

11. Discontinued Operations

Asset Purchase Agreement

On December 14, 2009, the Company, Xcorporeal and FUSA executed an Asset Purchase Agreement that provided for the sale of substantially all of each of the Company’s and Xcorporeal’s assets (the “Asset Sale”) to FUSA for an aggregate cash purchase price of $8,000,000 (the “Cash Purchase Price”) and certain other royalty payment rights. Subject to the terms and conditions of the Asset Purchase Agreement, the Cash Purchase Price was to be paid to the Company and Xcorporeal as follows: (a) an exclusivity fee in the amount of $200,000 previously paid by FUSA to Xcorporeal, (b) $3,800,000 on the date of closing (the “Closing Date”) of the transactions contemplated under the Asset Purchase Agreement (the “Closing”), of which the Company and Xcorporeal received $2,150,000 and $1,650,000, respectively, (c) $2,000,000 on April 1, 2010, of which the Company and Xcorporeal received $1,625,000 and $375,000, respectively, and (d) $2,000,000 on April 1, 2011, of which the Company and Xcorporeal received $1,925,000 and $75,000, respectively.

In addition, during the life of the patents referred to as the HD WAK Technology, which expire between November 11, 2021 and September 9, 2024, the Company is entitled to certain royalty payments from the sale of wearable hemodialysis devices and the attendant disposables that incorporate the HD WAK Technology. The Company is entitled to 40% of the HD WAK royalty and Xcorporeal is entitled to the remaining 60%.

Additionally, during the life of any patents referred to as the Supersorbent Technology, the Company is entitled to certain royalty payments on each supersorbent cartridge sold less any and all royalties payable to The Technion Research and Development Foundation Ltd. (“TRDF”) pursuant to a Research Agreement and Option for License, dated June 16, 2005, or any subsequently executed license agreement between TRDF and FUSA. The Company is entitled to 60% of the Supersorbent royalty payments and Xcorporeal is entitled to the remaining 40%. While several applications for patents are pending, no patent incorporating the Supersorbent Technology has yet been issued.

FUSA also granted to the Company and Xcorporeal an option to obtain a perpetual, worldwide license to the Supersorbent Technology for use in healthcare fields other than renal (the “Option”). The Option is exercisable during the twelve-month period following FUSA’s receipt of regulatory approval for the sale of a supersorbent product in the United States or European Union, which the Company expects will require further development of the supersorbent technology with TRDF and successful completion of clinical trials by FUSA. The consideration payable to FUSA by the Company or Xcorporeal for the exercise of the Option consists of a payment in the amount of $7,500,000, payable in immediately available funds, and a payment of an ongoing royalty in an amount equal to the lesser of $0.75 per supersorbent cartridge and $1.50 per patient per week in each country where such sales infringe valid and issued claims of the Supersorbent Patents issued in such country.

The Asset Purchase Agreement closed on March 19, 2010, with payments made to the Company by FUSA of $1,950,000, $1,625,000 and $1,675,000 on March 19, 2010, April 1, 2010 and April 1, 2011, respectively, for a total of $5,250,000. FUSA held back $200,000 and $250,000 from the March 19, 2010 and April 1, 2011 payments, respectively, for purposes of resolving a dispute between the Company and TRDF. The closing of the Asset Sale in March 2010 also terminated the arbitration proceeding with Xcorporeal (see Note 10).

As a result of the Asset Sale, the Company has accounted for its previous research and development activities as a discontinued operation for all periods presented. During the three months ended June 30, 2010 and 2009, the Company had a loss from its discontinued research and development activities of $-0- and $15,463, respectively. During the six months ended June 30, 2010 and 2009, the Company had income (loss) from its discontinued research and development operation of $24,386 and $(18,019), respectively.

Additionally, upon the closing of the Asset Sale on March 19, 2010, the Company recorded a gain from debt settlement of $1,871,430 (see Note 10), which is included in continuing operations, and a gain from the Asset Sale of $3,318,732, before income taxes of approximately $1,363,000, which is included in discontinued operations, in the accompanying condensed consolidated statement of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Prior to March 19, 2010, the Company’s platform technology was a wearable artificial kidney for dialysis and other medical applications. This device was being developed to treat the blood of patients through a pulsating, dual-chambered pump.

Until that date, the Company’s plan of operation was to complete the clinical studies in humans with the Wearable Artificial Kidney in order to apply to the FDA for permission to market the device. Pending resolution of the arbitration with Xcorporeal, Peizer and Gura, the Company suspended its research and development efforts with respect to the wearable artificial kidney and had no active business operations.

Sale of Assets

On December 14, 2009, the Company, Xcorporeal and FUSA executed an Asset Purchase Agreement that provided for the sale of substantially all of the Company’s and Xcorporeal’s assets (the “Asset Sale”) to FUSA for an aggregate cash purchase price of $8,000,000 (the “Cash Purchase Price”) and certain other royalty payment rights. Subject to the terms and conditions of the Asset Purchase Agreement, the Cash Purchase Price was to be paid to the Company and Xcorporeal as follows: (a) an exclusivity fee in the amount of $200,000 previously paid by FUSA to Xcorporeal, (b) $3,800,000 on the date of closing (the “Closing Date”) of the transactions contemplated under the Asset Purchase Agreement (the “Closing”), of which the Company and Xcorporeal received $2,150,000 and $1,650,000, respectively, (c) $2,000,000 on April 1, 2010, of which the Company and Xcorporeal received $1,625,000 and $375,000, respectively, and (d) $2,000,000 on April 1, 2011, of which the Company and Xcorporeal received $1,925,000 and $75,000, respectively.

Arbitration Proceedings

On February 17, 2011, the Company commenced a binding arbitration proceeding with its former law firm regarding a fee dispute that arose as a result of claimed attorneys’ fees incurred by the former law firm in connection with an arbitration proceeding between the Company and Xcorporeal, and certain transactional matters handled by the law firm for the Company. The former law firm has asserted that approximately $2,729,000 in fees and costs are owed to it by the Company for services rendered during 2008, 2009 and 2010, plus interest. The arbitrators have heard all of the testimony presented by the parties, and the parties submitted their final closing briefs on November 10, 2011. As of April 2, 2012, the arbitrators had not rendered their decision on this matter. The Company believes that it has adequately and appropriately provided for the fees incurred through June 30, 2010 in its condensed consolidated financial statements. Given the Company’s limited liquidity and working capital resources, the Company may be unable to satisfy such obligation should a decision adverse to the Company be rendered.

Going Concern

The Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Prior to March 19, 2010, the Company was a research and development company in the business of developing a wearable artificial kidney for dialysis and other medical applications. On that date, the Company consummated a sale of its technology rights with respect to its developing wearable artificial kidney and, consequently, those activities have been accounted for as discontinued operations in the Company’s condensed consolidated financial statements. Since June 15, 2006, the Company has not generated any revenues from operations, and does not expect to do so in the foreseeable future; however, the Company generated revenue from the sale of the Company’s technology rights during 2010.

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional debt and/or equity capital, and to acquire sufficient operating capital through the development of business activities, or otherwise. The Company’s condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Recent Accounting Pronouncements

Significant Accounting Policies

The Company prepared its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.

Research and Development

Research and development costs are expensed as incurred. Research and development expenses consist primarily of costs incurred with respect to the development of the Company’s wearable artificial kidney for dialysis and other medical applications, and are included in discontinued operations in the condensed consolidated statement of operations.

Technology Rights

Technology rights relate to the Company’s wearable artificial kidney and were being amortized over an estimated useful life of approximately 20 years. Amortization is included in discontinued operations in the condensed consolidated statement of operations.

Stock-Based Compensation

Income Taxes

Contingencies

Results of Operations for the Three Months Ended June 30, 2010 and 2009

The Company had no revenues from operations for the three months ended June 30, 2010 and 2009.

General and administrative expenses for the three months ended June 30, 2010 were $118,654, as compared to $252,842 for the three months ended June 30, 2009, a decrease of $134,188 or 53%. Included in such costs was stock-based compensation of $5,943 and $19,224 in 2010 and 2009, respectively. The decrease in general and administrative expenses in 2010 as compared to 2009 was primarily a result of a decrease in legal fees of $130,132. Significant legal fees were incurred in 2009 as compared to 2010 due primarily to the arbitration with Xcorporeal.

Interest expense (all to a related party) was $-0- for the three months ended June 30, 2010, as compared to $71,640 for the three months ended June 30, 2009. The decrease in 2010, as compared to 2009, was the result of the underlying debt being repaid in 2010 from the proceeds received in 2010 relating to the sale of the Company’s technology rights.

An income tax benefit of $48,000 was recorded for the three months ended June 30, 2010 as a result of losses incurred during the three months ended June 30, 2010. No tax provision had been made for the three months ended June 30, 2009 due to losses incurred during 2009.

Loss from continuing operations was $70,619 for the three months ended June 30, 2010, as compared to a loss from continuing operations of $324,482 for the three months ended June 30, 2009, due to a decrease in legal fees of $130,132, a decrease in interest expense of $71,640 and an income tax benefit of $48,000.

Loss from discontinued operations was $-0- for the three months ended June 30, 2010, as compared $15,463 for the three months ended June 30, 2009, due primarily to the absence of research and development activities in 2010.

Net loss was $70,619 for the three months ended June 30, 2010, as compared to $339,945 for the three months ended June 30, 2009.

Results of Operations for the Six Months Ended June 30, 2010 and 2009

The Company had no revenues from operations for the six months ended June 30, 2010 and 2009; however, the Company generated revenue from the sale of the Company’s technology rights during 2010.

General and administrative expenses for the six months ended June 30, 2010 were $250,004, as compared to $626,035 for the six months ended June 30, 2009, a decrease of $376,031 or 60%. Included in such costs was stock-based compensation of $11,886 and $25,926 in 2010 and 2009, respectively. The decrease in general and administrative expenses in 2010 as compared to 2009 was primarily a result of a decrease in legal fees of $392,353. Significant legal fees were incurred in 2009 as compared to 2010 due primarily to the arbitration with Xcorporeal.

Interest expense (all to a related party) was $197,030 for the six months ended June 30, 2010, as compared to $84,215 for the six months ended June 30, 2009. The increase in 2010, as compared to 2009, was the result of amortization in 2010 of discounts on notes payable that were borrowed in prior years to fund the company’s working capital needs. Such notes payable were repaid in 2010 from the proceeds received in 2010 relating to the sale of the Company’s technology rights.

Other income was $156,145 for the six months ended June 30, 2010, as compared to $32,084 for the six months ended June 30, 2009. The increase was due primarily to forgiveness of payables by vendors in 2010.

Income tax expense related to continuing operations of $635,000 was recorded for the six months ended June 30, 2010, and related primarily to the gain from legal settlement of $1,871,430 recognized in 2010. No tax provision had been made for the six months ended June 30, 2009 due to losses incurred during 2009.

Income from continuing operations was $945,576 for the six months ended June 30, 2010, as compared to a loss from continuing operations of $678,166 for the six months ended June 30, 2009, due primarily to the gain from legal settlement, net of income taxes, in 2010.

Income from discontinued operations was $1,980,118 for the six months ended June 30, 2010, as compared to a loss from discontinued operations of $18,019 for the six months ended June 30, 2009, due primarily to the gain from the sale of assets, net of income taxes, in 2010.

Net income was $2,925,694 for the six months ended June 30, 2010, as compared to a net loss of $696,185 for the six months ended June 30, 2009.

The Company expects to report continuing losses from operations and negative operating cash flows for the remainder of 2010 and subsequently, as the Company has no on-going revenue-generating activities, except for any ancillary revenues that may be derived in future periods from the sale of the Company’s technology rights.

Liquidity and Capital Resources

The Company had cash and money market funds of $1,711,086 at June 30, 2010, as compared to $22,281 at December 31, 2009, an increase of $1,688,805. However, the Company does not have sufficient working capital assets and resources to meet its continuing obligations. In recent years, the Company has financed its working capital requirements through the sale of technology rights, loans and the recurring sales of its securities to related parties; however, there can be no assurances that such related party funding will be available to the Company in future periods on commercially reasonable terms or at all. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s 2009 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

The Company had a working capital surplus of $249,709 at June 30, 2010 as compared to a working capital deficit of $2,687,871 at December 31, 2009.

As of June 30, 2010, the Company had no note payable obligations. As of December 31, 2009, the Company had notes payable to related parties of $964,083, net of discount and including accrued interest, and a note payable to a consultant of $120,000.

Operating Activities

During the six months ended June 30, 2010, the Company generated cash of $1,403,275 from continuing operating activities, as compared to using cash of $173,527 in continuing operating activities during the six months ended June 30, 2009, a net increase of $1,576,802. Cash provided from continuing operations increased in 2010, as compared to 2009, due primarily to the proceeds received from the legal settlement, net of income taxes, during the six months ended June 30, 2010.

During the six months ended June 30, 2010, the Company used cash of $136,928 in discontinued operating activities, as compared to using cash of $59,062 in discontinued operating activities during the six months ended June 30, 2009, a net increase of $77,866.

Investing Activities

During the six months ended June 30, 2010, the Company generated $286,786 in cash in investing activities, consisting of the proceeds received from sale of assets of $1,703,570, less $1,416,784 transferred to the Company’s money market funds.

During the six months ended June 30, 2009, there were no investing activities.

Financing Activities

During the six months ended June 30, 2010, the Company used cash of $1,281,112 in financing activities, consisting primarily of principal and interest payments made on debt incurred in prior periods to finance the Company’s activities.

During the six months ended June 30, 2009, the Company generated $115,789 of cash from financing activities, consisting of $100,000 from the exercise of stock warrants, $20,000 in proceeds from a note payable to a related party, less the repayment of advances and notes in the amount of $20,000, and an increase in a cash overdraft of $15,789.

The following significant financing transactions, primarily equity related, were completed in 2009 and 2010:

On May 13, 2009, a $700,000 promissory note dated December 26, 2007 payable to Robert M. Snukal, director and chief executive officer, and a $150,000 promissory note dated August 12, 2008 payable to Robert M. Snukal, plus accrued interest of $64,611, were rolled-over into a new uncollateralized non-convertible promissory note in the amount of $914,611, due on May 13, 2010, with interest at 6% per annum. In connection with this note, the Company issued warrants to purchase 16,937,240 shares of the Company’s common stock at an exercise price of $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note. The warrants expire on the earlier of (i) May 13, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $377,667, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. In March 2010, the $914,611 note, with accrued interest of $42,398, was paid in full.

On April 21, 2009, the Company entered into a $20,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, director and chief executive officer, with interest at 6% per annum, payable on August 31, 2009. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted at any time into shares of the Company’s common stock at a conversion price of $0.03 per share, which was the approximate closing price of the Company’s common stock on the date the note was issued. In connection with this note, the Company issued warrants to purchase 333,333 shares of the Company’s common stock at an exercise price of $0.03 per share, which was the approximate closing price of the Company’s common stock on the date the warrants were issued. The warrants expire on the earlier of (i) April 21, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets, or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $8,312, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. On April 28, 2009, the $20,000 note was paid in full.

On April 29, 2009, the Company issued 3,000,000 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise of warrants at $0.02 per share. The Company received $60,000 of proceeds.

On May 11, 2009, the Company issued 2,000,000 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise of warrants at $0.02 per share. The Company received $40,000 of proceeds.

On May 13, 2009, the Board approved the issuance of 500,000 shares of the Company’s common stock to Dr. Rambod, a consultant and former officer of the Company, as payment for services in connection with the completion and filing of a patent application regarding the Company’s rights in and to the polymer technology developed by the Company. The 500,000 shares of common stock were valued at $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the issuance, for a total of $13,500, which was charged to discontinued operations on May 13, 2009. On August 5, 2009, the Board approved an additional issuance of 250,000 shares of the Company’s common stock to Dr. Rambod as payment for additional services in connection with the patent application. The 250,000 shares of common stock were valued at $0.02 per share, which was the approximate closing price of the Company’s common stock on the date of the issuance, for a total of $5,000, which was charged to discontinued operations on August 5, 2009.

On May 13, 2009, the Company issued options to purchase 250,000 shares of common stock to a consultant for past services, which were fully vested on the date of grant. The options are exercisable at $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the issuance, and expire in ten years. The fair value of these options on the date of grant was $6,037, which was charged to operations on May 13, 2009.

On May 13, 2009, the Company issued options to purchase a total of 300,000 shares of common stock to two outside directors for past services, which were fully vested on the date of grant. The options are exercisable at $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the issuance, and expire in ten years. The fair value of these options on the date of grant was $7,244, which was charged to operations on May 13, 2009.

On July 7, 2009, the Company issued 555,555 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise of warrants at $0.027 per share. The Company received $15,000 of proceeds.

During August and September 2009, Robert M. Snukal, director and chief executive officer, advanced $87,500 to the Company on a non-interest bearing basis for working capital purposes. On October 17, 2009, the advances were repaid in full.

On October 18, 2009, the Company entered into a $200,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, director and chief executive officer, with interest at 6% per annum, and payable on April 30, 2010. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted at any time into shares of the Company’s common stock at a conversion price of $0.022 per share, which was the approximate closing price of the Company’s common stock on or about the date the note was issued. In connection with this note, the Company issued warrants to purchase 4,545,455 shares of the Company’s common stock at an exercise price of $0.022 per share, which was the approximate closing price of the Company’s common stock on or about the date the warrants were issued. The warrants expire on the earlier of (i) October 18, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets, or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $83,597, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. In March 2010, the $200,000 note, including accrued interest of $4,077, was paid in full.

On February 23, 2010, the Company entered into a $45,000 uncollateralized promissory note agreement with Robert M. Snukal, director and chief executive officer, with interest at 5% per annum, and payable on February 23, 2011. In March 2010, the $45,000 note, with accrued interest of $26, was paid in full.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

We conducted an evaluation, with the participation of our Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the period covered by this Report. Based on that evaluation, our Chief Executive Officer has concluded that as of June 30, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses.

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following three material weaknesses in our disclosure controls and procedures:

1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

3. We do not have review and supervision procedures for financial reporting functions. The review and supervision function of internal control relates to the accuracy of financial information reported. The failure to review and supervise could allow the reporting of inaccurate or incomplete financial information. Due to our size and nature, review and supervision may not always be possible or economically possible. Management evaluated the impact of our significant number of audit adjustments and has concluded that the control deficiency that resulted represented a material weakness.

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Management also retained outside consultants to assist it in the preparation of consolidated financial statements and footnotes.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

On December 1, 2006, Xcorporeal filed a demand for arbitration at JAMS in Santa Monica, California against the Company, alleging an unspecified anticipatory breach of the License Agreement that the Company entered into with Xcorporeal on September 1, 2006. At the same time that the Company entered into the License Agreement, the Company entered into an interrelated and inter-dependent Merger Agreement with Xcorporeal. Effective as of December 29, 2006, the Company terminated the Merger Agreement and the License Agreement due to Xcorporeal’s continuing, uncured and incurable breaches of the Merger Agreement and its other wrongful conduct related to the merger and license agreements and certain related matters. At the same time that the Company terminated the Merger Agreement and the License Agreement, the Company filed a lawsuit against Xcorporeal and against Victor Gura, a former officer and director of the Company. Xcorporeal and Gura stipulated to the filing of the Company’s claims against them as part of the arbitration proceedings related to the License Agreement, and the Company dismissed its lawsuit without prejudice. The arbitration was terminated with the closing of the Asset Sale in March 2010. A description of the Asset Sale is set forth at “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Sale of Assets”.

On February 17, 2011, the Company commenced a binding arbitration proceeding with its former law firm regarding a fee dispute that arose as a result of claimed attorneys' fees incurred by the former law firm in connection with an arbitration proceeding between the Company and Xcorporeal, and certain transactional matters handled by the law firm for the Company. The former law firm has asserted that approximately $2,729,000 in fees and costs are owed to it by the Company for services rendered during 2008, 2009 and 2010, plus interest. The arbitrators have heard all of the testimony presented by the parties, and the parties submitted their final closing briefs on November 10, 2011. As of April 2, 2012, the arbitrators had not rendered their decision on this matter. The Company believes that it has adequately and appropriately provided for the fees incurred through June 30, 2010 in the accompanying condensed consolidated financial statements. Given the Company’s limited liquidity and working capital resources, it is uncertain whether the Company would be able to satisfy such obligation should a decision adverse to the Company be rendered.

Item 1A – Risk Factors

Not applicable.

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

Information with respect to the sales of unregistered equity securities can be found at Note 5 to the June 30, 2010 condensed consolidated financial statements. The proceeds from such sales were used to fund the Company’s operating activities.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Reserved

Item 5 – Other Information

None.

Item 6 – Exhibits

A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which is presented elsewhere in this document, and is incorporated herein by reference.

SIGNATURES

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

	NATIONAL QUALITY CARE, INC.

Date: April 2, 2012	By:	/s/Robert M. Snukal
		Robert M. Snukal
		Chief Operating Officer and President
		(Principal Executive Officer)

Date: April 2, 2012	By:	/s/Leonardo Berezovsky
		Leonardo Berezovsky
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

INDEX TO EXHIBITS

Exhibit No.		Description

2.1		Agreement for Exchange of Stock dated May 11, 1996, by and among the Company, Los Angeles Community Dialysis, Inc., Victor Gura, M.D., Avraham H. Uncyk, M.D. and Ronald P. Lang, M.D. (1)

3.1		Restated Certificate of Incorporation (2)

3.2		Bylaws (2)

31.1		Certification of CEO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

31.1		Certification of CEO and CFO pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of CEO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

1.	Incorporated by reference herein to its Current Report on Form 8-K dated May 24, 1996.

2.	Incorporated by reference herein to its Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1996.

Attached files

NATIONAL QUALITY CARE INC Reports

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