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, 2009

¨	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: 79,416,252 shares of common stock as of June 30, 2009.

Documents incorporated by reference: None

EXPLANATORY NOTE

Prior to the date of this filing, National Quality Care, Inc. has not filed any periodic reports since December 7, 2011 for the annual report on Form 10-K for the year ended December 31, 2008. This report is one of several reports being filed by National Quality Care, Inc. in order to bring its filing current as of the date hereof. Except as otherwise noted, the information in this report relates solely to the period covered thereby.

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, 2009 (Unaudited) and December 31, 2008	2

Condensed Consolidated Statements of Operations (Unaudited) -
Three Months and Six Months Ended June 30, 2009 and 2008	3

Condensed Consolidated Statement of Stockholders’ Deficiency -	4
Year ended December 31, 2008 and Six Months Ended June 30, 2009 (Unaudited)

Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 2009 and 2008	5

Notes to Condensed Consolidated Financial Statements (Unaudited) -
Three Months and Six Months ended June 30, 2009 and 2008	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3. Quantitative and Qualitative Disclosures About Market Risk	26

Item 4. Controls and Procedures	26

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	27

Item 1A. Risk Factors	27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3. Defaults Upon Senior Securities	27

Item 4. Reserved	27

Item 5. Other Information	27

Item 6. Exhibits	27

SIGNATURES	28

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, 2009. 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, 2009			December 31, 2008
	(Unaudited)
ASSETS
Current assets:
Cash	$	—		$	116,800
Prepaid expenses and other current assets		25,149			13,291
Total current assets		25,149			130,091
Technology rights, net of accumulated amortization of $37,732 at June 30, 2009 and $35,302 at December 31, 2008		62,268			64,698
Total assets	$	87,417		$	194,789

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
Cash overdraft	$	15,789		$	—
Accounts payable and accrued expenses		3,012,005			2,662,622
Notes payable to related party, including accrued interest of $7,367 at June 30, 2009 and $46,776 at December 31, 2008, net of discounts of $326,967 at June 30, 2009 and $-0- at December 31, 2008		595,012			896,776
Total current liabilities		3,622,806			3,559,398
Note payable to consultant		120,000			120,000
Total liabilities		3,742,806			3,679,398

Commitments and contingencies

Stockholders’ 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 – 79,416,252 shares at June 30, 2009 and 73,916,252 shares at December 31, 2008		794,163			739,163
Additional paid-in capital		12,656,818			12,186,413
Accumulated deficit		(17,106,370	)		(16,410,185	)
Total stockholders’ deficiency		(3,655,389	)		(3,484,609	)
Total liabilities and stockholders’ deficiency	$	87,417		$	194,789

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,
	2009			2008			2009			2008
Revenues	$	—		$	—		$	—		$	—

Operating expenses:
General and administrative, including $19,224 and $4,853 of stock-based compensation costs for the three months ended June 30, 2009 and 2008, respectively, and $25,926 and $9,706 of stock-based compensation costs for the six months ended June 30, 2009 and 2008, respectively		252,842			885,314			626,035			2,460,772
Research and development, including $13,500 and $84,279 of stock based compensation costs for the three months and six months ended June 30, 2009 and 2008, respectively		14,715			265,010			16,531			350,395
Total operating expenses		267,557			1,150,324			642,566			2,811,167
Loss from operations		(267,557	)		(1,150,324	)		(642,566	)		(2,811,167	)
Interest expense		(72,388	)		(54,528	)		(85,703	)		(108,809	)
Other income		—			—			32,084			—
Loss from continuing operations		(339,945	)		(1,204,852	)		(696,185	)		(2,919,976	)
Loss from discontinued operations		—			—			—			(19	)
Net loss	$	(339,945	)	$	(1,204,852	)	$	(696,185	)	$	(2,919,995	)

Net loss per common share - basic and diluted:
From continuing operations	$	(0.00	)	$	(0.02	)	$	(0.01	)	$	(0.05	)
From discontinued operations		—			—			—			(0.00	)
Total net loss per common share	$	(0.00	)	$	(0.02	)	$	(0.01	)	$	(0.05	)

Weighted average common shares outstanding – basic and diluted		77,355,812			58,187,085			75,645,534			58,187,085

See accompanying notes to condensed consolidated financial statements.

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

Year Ended December 31, 2008

And Six Months Ended June 30, 2009

	Common Stock				Additional Paid-in		Stock Subscriptions and Other Receivables from			Accumulated			Total Stockholders’
	Shares		Amount		Capital		Stockholders			Deficit			Deficiency
Balance at December 31, 2007		54,191,252	$	541,913	$	11,343,306	$	(49,815	)	$	(12,837,325	)	$	(1,001,921	)
Shares issued in private placement		13,650,000		136,500		297,500		(30,000	)		—			404,000
Reclassification of derivative liability		—		—		43,750		—			—			43,750
Payments received on stock subscription receivables		—		—		—		36,788			—			36,788
Stock-based compensation costs		—		—		112,629		—			—			112,629
Exercise of stock options		250,000		2,500		15,000		—			—			17,500
Exercise of stock warrants		5,825,000		58,250		328,750		—			—			387,000
Fair value of warrants issued in connection with convertible debt		—		—		45,478		—			—			45,478
Write-off of other receivable from stockholder		—		—		—		43,027			—			43,027
Net loss		—		—		—		—			(3,572,860	)		(3,572,860	)
Balance at December 31, 2008		73,916,252		739,163		12,186,413		—			(16,410,185	)		(3,484,609	)
Stock-based compensation costs		500,000		5,000		34,426		—			—			39,426
Exercise of stock warrants		5,000,000		50,000		50,000		—			—			100,000
Fair value of warrants issued in connection with debt		—		—		385,979		—			—			385,979
Net loss		—		—		—		—			(696,185	)		(696,185	)
Balance at June 30, 2009 (Unaudited)		79,416,252	$	794,163	$	12,656,818	$	—		$	(17,106,370	)	$	(3,655,389	)

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,
	2009			2008
Cash flows from operating activities:
Continuing operations:
Loss from continuing operations	$	(696,185	)	$	(2,919,976	)
Adjustments to reconcile loss from continuing operations to net cash used in continuing operating activities:
Amortization of technology rights		2,430			2,430
Amortization of discount on notes payable		59,012			87,655
Stock-based compensation costs		39,426			93,985
Note payable issued for services rendered					120,000
Forgiveness of payables		(32,859	)		—
Changes in operating assets and liabilities:
Increase in -
Prepaid expenses and other current assets		(11,858	)		(11,512	)
Increase in -
Accounts payable and accrued expenses		382,242			1,383,803
Accrued interest due to related party		25,203			20,943
Net cash used in continuing operating activities		(232,589	)		(1,222,672	)
Discontinued operations:
Loss from discontinued operations		—			(19	)
Net cash used in discontinued operating activities		—			(19	)
Net cash used in operating activities		(232,589	)		(1,222,691	)

Cash flows from financing activities:
Proceeds from the issuance of common stock		—			154,000
Increase in cash overdraft		15,789			—
Payments received on stock subscription receivables		—			26,790
Proceeds from exercise of stock options		—			17,500
Proceeds from exercise of stock warrants		100,000			375,000
Proceeds from note payable to related party		20,000			—
Repayment of note payable to related party		(20,000	)		—
Net cash provided by financing activities		115,789			573,290

Net decrease in cash		(116,800	)		(649,401	)
Cash balance at beginning of period		116,800			709,579
Cash balance at end of period	$	—		$	60,178

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

Non-cash financing 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		$	—
Derivative liability reclassified to additional paid-in capital	$	—		$	43,750
Common stock issued for stock subscription receivables	$	—		$	30,000

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, 2009 and 2008

1. Basis of Presentation

The condensed consolidated financial statements of National Quality Care, Inc. and its wholly-owned subsidiary, Los Angeles Community Dialysis, Inc. (the “Company”) at June 30, 2009, and for the three months and six months ended June 30, 2009 and 2008 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, 2009, the results of its operations for the three months and six months ended June 30, 2009 and 2008, and its cash flows for the six months ended June 30, 2009 and 2008. 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, 2008 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, 2008, as filed with the SEC.

2. Organization and Business Operations

Organization and Nature of Business

National Quality Care, Inc. (“NQCI”), a publicly-traded Delaware corporation, was incorporated on January 1, 1996. Prior to May 31, 2006, NQCI, through its wholly-owned subsidiary, Los Angeles Community Dialysis, Inc. (“LACDI”), operated a dialysis clinic located in Los Angeles, California. Additionally, prior to June 15, 2006, LACDI provided dialysis services for patients suffering from acute kidney failure through a visiting nursing program contracted to several Los Angeles County hospitals (see Note 10). Prior to March 19, 2010, NQCI was also 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 12). 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 June 15, 2006, the Company provided dialysis services for patients suffering from acute kidney failure through a clinic located in Los Angeles, California, and through a visiting nursing program contracted to several Los Angeles County hospitals. The assets of both the clinic and the nursing program were sold to third parties (see Note 10), and as a result such activities were accounted for as discontinued operations in the Company’s condensed consolidated financial statements. Prior to March 19, 2010, the Company was also 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 12). Since June 15, 2006, the Company has not generated any revenues from operations, and does not expect to do so in the foreseeable future.

For the past several years, the Company has experienced net operating losses and negative operating cash flows. As of June 30, 2009, the Company had an accumulated deficit of $17,106,370, a working capital deficiency of $3,597,657, and its total liabilities exceeded its total assets by $3,655,389. Such deficiencies indicate the Company will not be able to meet its current obligations as they come due. In recent years, the Company has financed its working capital requirements through loans and the recurring sale of its securities to related parties, which the Company cannot be assured of obtaining in the future. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s 2008 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 or equity capital and to acquire sufficient operating capital through the sale of assets, 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.

Cash Concentrations

The Company’s cash balances may periodically exceed federally insured limits. The Company has not experienced a loss in such accounts to date. The Company maintains its accounts with financial institutions with high credit ratings.

Derivative Liabilities

The Company has issued common stock with detachable warrants under a private placement offering. In 2005 and 2006, certain common stock and warrants sold by the Company granted the holders mandatory registration rights which were contained in the terms governing the private placement offering. The mandatory rights provision results in share settlement which is not controlled by the Company. Accordingly, they qualify as derivative instruments. At each balance sheet date, the Company adjusts the derivative financial instruments to their estimated fair value and analyzes the instruments to determine their classification as a liability or equity.

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 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.

Income Taxes

The Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes. 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.

For federal income tax purposes, net operating losses can be carried forward for a period of 20 years until they are either utilized or until they expire.

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. The accounting rules also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of June 30, 2009, 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, 2009, 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 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 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.

Impairment of Long-lived Assets

The Company periodically evaluates, at least annually, whether facts or circumstances indicate that the carrying value of its long-lived assets to be held and used, including intangible assets, may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated discounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

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.

Loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted loss per common share is the same for all periods presented because all warrants and stock options outstanding are anti-dilutive.

At June 30, 2009 and 2008, 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.

	2009		2008

Warrants		22,361,198		4,665,625
Stock options		8,120,000		6,770,000
Convertible notes payable		—		10,309,043
Total		30,481,198		21,744,668

Fair Value of Financial Instruments

The carrying amounts of cash, prepaid expenses and other current assets and accounts payable and accrued expenses 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 derivative instruments, valuation of warrants and options, analysis of deferred taxes and provision for income taxes, contingencies and litigation.

Segment Information

The Company operates in one segment, the development of a wearable artificial kidney. Prior to the discontinued operations discussed in Note 10, 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 are being amortized over an estimated useful life of approximately 20 years. Amortization is included in research and development expense and amounted to $1,215 for the three months ended June 30, 2009 and 2008, and $2,430 for the six months ended June 30, 2009 and 2008. 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 12).

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.

Reclassifications

Certain items in the 2008 condensed consolidated financial statements have been reclassified to conform to the current year’s presentation.

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 operations as research and development expense 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 (see Note 9). 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. For the three months and six months ended June 30, 2008, the Company recorded interest expense of $43,828 and $87,655, respectively, relative to the amortized discount. 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 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 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, 2009, the Company recorded interest expense of $50,700, relative to the amortized discount. In March 2010, the $914,611 note, with accrued interest of $42,424, was paid in full.

On April 21, 2009, the Company entered into a $20,000 uncollateralized convertible promissory note agreement 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. Accordingly, during the three months and six months ended June 30, 2009, the Company recorded interest expense of $8,312, relative to the amortized discount. On April 28, 2009, the $20,000 note was paid in full.

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. In March 2010, the $200,000 note, with accrued interest of $4,077, was paid in full.

During the three months ended June 30, 2009 and 2008, the Company recorded total interest expense of $59,012 and $43,827, respectively, relative to the amortization of discounts. During the six months ended June 30, 2009 and 2008, the Company recorded total interest expense of $59,012 and $87,655, 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.

Private Placements

On June 22, 2007, the Company completed a private placement of an aggregate of 5,756,250 units at a purchase price of $0.16 per unit, for a total purchase price of $921,000. Each unit consisted of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.16 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance, (ii) the closing of a firmly underwritten public offering or (iii) upon a sale of the Company. The purchase price for the units was paid $307,000 in cash at closing with the balance of $614,000 satisfied through delivery of promissory notes. One-half of the principal amounts of each such promissory note, together with accrued and unpaid interest there-under, was due and payable September 22, 2007, and the remaining principal balance, together with accrued and unpaid interest, was due and payable on December 22, 2007. The unpaid principal amount under each promissory note bore interest at the rate of 4.84% per annum. As of December 31, 2007, these notes receivable from stockholders amounted to $6,500 and were presented as stock subscription receivables, an offset to stockholders’ equity, on the condensed consolidated balance sheet. These notes receivable were paid during the first quarter of 2008. The purchasers of the units were: Robert M. Snukal, a director and chief executive officer, 5,625,000 units; Jose Spiwak, director, 37,500 units; The Leonardo Berezovsky Charitable Trust, 46,875 units; and The Karen and Sonia Berezovsky Charitable Trust, 46,875 units. Leonardo Berezovsky is the chief financial officer and a director of the Company and trustee of The Leonardo Berezovsky Charitable Trust and The Karen and Sonia Berezovsky Charitable Trust.

During March 2008, the Company completed a private placement of an aggregate of 1,375,000 units at a purchase price of $0.08 per unit, for a total purchase price of $110,000. Each unit consisted of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.08 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance, (ii) the closing of a firmly underwritten public offering or (iii) upon a sale of the Company. The purchase price for the units was paid $80,000 in cash at closing, with the balance of $30,000 satisfied through delivery of a promissory note. The principal amount of the promissory note, together with accrued and unpaid interest, was due and payable in three equal installments of $10,000 due April 30, 2008, May 30, 2008, and June 30, 2008. The unpaid principal amount under the promissory note bore interest at the rate of 1.85% per annum and was paid in full on July 1, 2008. The purchasers of the units were: Robert M. Snukal, a director and chief executive officer, 750,000 Units; and Jose Spiwak, director, 625,000 Units.

During May 2008, the Company completed a private placement of an aggregate of 400,000 units at a purchase price of $0.06 per unit, for a total cash purchase price of $24,000. Each unit consists of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.06 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance or (ii) upon a sale of the Company or substantially all of its assets. The purchaser of the units was Robert M. Snukal, a director and chief executive officer.

During June 2008, the Company completed a private placement of an aggregate of 1,250,000 units at a purchase price of $0.04 per unit, for a total cash purchase price of $50,000. Each unit consists of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.04 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance or (ii) upon a sale of the Company or substantially all of its assets. The purchaser of the units was Robert M. Snukal, a director and chief executive officer.

During July 2008, the Company completed a private placement to an existing shareholder of an aggregate of 625,000 shares of common stock at a purchase price of $0.08 per share, for a total cash purchase price of $50,000.

On October 16, 2008, the Company completed a private placement of an aggregate of 10,000,000 units at a purchase price of $0.02 per unit, for a total purchase price of $200,000. Each unit consists of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.02 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance, (ii) the closing of a firmly underwritten public offering or (iii) upon a sale of the Company. The purchase price for the units was paid in cash at the closing. The purchaser of the units was Robert M. Snukal, a director and chief executive officer.

Exercise of Options and Warrants

During March 2008, the Company issued 5,000,000 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise of warrants at $0.07 per share. The Company received $350,000 of proceeds.

On June 30, 2008, the Company issued 875,000 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise of 250,000 options at $0.07 per share and 625,000 warrants at $0.04 per share. Proceeds received by the Company were $17,500 and $25,000, respectively, for a total of $42,500.

In August 2008, the Company issued 200,000 shares of its common stock to Jeff Croucier upon the exercise of warrants at $0.06 per share. The Company received $12,000 of proceeds.

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.

6. Related Party Transactions

Stock Subscriptions and Other Receivables from Stockholders

As of December 31, 2007, the Company was owed $43,027 from an entity controlled by a shareholder of the Company. This note receivable is presented in the Company’s condensed consolidated balance sheet as an offset to shareholders’ equity. Interest accrued on this note receivable was $832 for the year ended December 31, 2007. During the quarter ended December 31, 2008, this note, including accrued interest of $832, was written-off.

As of December 31, 2007, the Company was owed $6,788, including accrued interest of $288, from three stockholders and directors who subscribed to units of the Company’s securities in connection with its June 22, 2007 private placement. These stock subscription receivables, including accrued interest, were paid in 2008.

Discontinued Operations

As of December 31, 2007, the Company owed $4,854 to one of its stockholders, which was due on demand. During the quarter ended December 31, 2008, this amount was written-off. Additionally, during the quarter ended December 31, 2008, the Company’s CEO forgave accrued interest payable to him in the amount of $28,450, and the Company also wrote-off a receivable due from an entity in which one of the Company’s shareholders was also a majority shareholder.

7. Derivative Liability

The Company has issued common stock with detachable warrants under private placement offerings. In 2005 and 2006, certain common stock and warrants sold by the Company granted the holders mandatory registration rights which were contained in the terms governing the private placement offerings. The mandatory rights provision results in share settlement not being controlled by the Company. Accordingly, the shares of common stock and warrants qualify as derivative instruments. At each balance sheet date, the Company adjusts the derivative financial instruments to their estimated fair value and analyzes the instruments to determine their classification as a liability or equity.

As of December 31, 2007, the derivative liability was $43,750 representing an aggregate amount of proceeds received from the issuance of common stock under private placement offerings. Of that amount, $18,750 related to the issuance of common stock under a private placement during the three months ending March 31, 2006 at date of issuance, and $25,000 related to the issuance of common stock under similar terms as the private placement during the three months ending June 30, 2006 at date of issuance. During 2007, the Company began reclassification of the derivative liability to equity as the underlying mandatory registration rights for each purchase expired on the date on which the shares may be resold pursuant to an exemption under Rule 144(k) promulgated under the Securities Act. In accordance with Rule 144(k), holders may resell their shares beginning two years after purchase regardless of whether a registration statement has been filed. During the six months ended June 30, 2008 the Company reclassified $43,750 from derivative liability to additional paid-in capital. There was no derivative liability at December 31, 2008, or thereafter.

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.

The derivative liability, as described above, is the only financial instrument that is measured and recorded at fair value on the Company’s balance sheets on a recurring basis. The following table presents the derivative liability at their level within the fair value hierarchy during the six months ended June 30, 2008, as well as a reconciliation of the changes to the beginning and ending balances of such financial instruments during such period. There was no derivative liability at December 31, 2008, or thereafter.

	Fair Value
	Level 1		Level 2			Level 3		Total
Balance, December 31, 2007	$	—	$	43,750		$	—	$	43,750
Reclassified to additional paid-in capital		—		(43,750	)		—		(43,750	)
Balance, June 30, 2008	$	—	$	—		$	—	$	—

Stock Options and Warrants

Stock Options

A summary of the Company’s stock option activity and related information for the six months ended June 30, 2009 and 2008, is as follows:

	2009				2008
			Weighted Average					Weighted Average
			Exercise					Exercise
	Options		Price		Options			Price
Outstanding — beginning of period		7,570,000	$	0.39		5,420,000		$	0.51
Granted		550,000	$	0.03		1,600,000		$	0.08
Exercised		—	$	—		(250,000	)	$	0.07
Forfeited		—	$	—		—		$	—

Outstanding — end of period		8,120,000	$	0.37		6,770,000		$	0.42

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, 2009:

	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		4,140,000	$	0.12		8.78		3,215,000	$	0.12		8.68
$0.36 - $0.99		3,980,000	$	0.63		6.80		3,980,000	$	0.63		6.80

		8,120,000	$	0.37		7.81		7,195,000	$	0.40		7.64

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, 2009 and 2008.

Stock Warrants

A summary of the Company’s stock warrant activity and related information for the six months ended June 30, 2009 and 2008, is as follows:

	2009					2008
				Weighted					Weighted
				Average					Average
				Exercise					Exercise
	Warrant			Price		Warrant			Price
Outstanding — beginning of period		10,090,625		$	0.10		8,778,125		$	0.12
Granted		17,270,573		$	0.03		1,512,500		$	0.06
Exercised		(5,000,000	)	$	0.02		(5,625,000	)	$	0.07

Outstanding — end of period		22,361,198		$	0.06		4,665,625		$	0.16

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, 2009:

	Total Outstanding						Total Exercisable
			Weighted						Weighted
	Number		Average				Number		Average
	of		Exercise		Life		of		Exercise		Life
Price Range	Shares		Price		(Years)		Shares		Price		(Years)
$0.02 - $0.35		22,211,198	$	0.05		6.42		22,211,198	$	0.05		6.42
$0.36 - $0.99		100,000	$	0.60		1.55		100,000	$	0.60		1.55
$1.00 - $1.25		50,000	$	1.25		1.55		50,000	$	1.25		1.55

		22,361,198	$	0.06		6.39		22,361,198	$	0.06		6.39

During May 2008, the Company completed a private placement of an aggregate of 400,000 units at a purchase price of $0.06 per unit, for a total cash purchase price of $24,000. Each unit consisted of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company, a total of 200,000 warrants, at an exercise price of $0.06 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance or (ii) upon a sale of the Company or substantially all of its assets.

During June 2008, the Company completed a private placement of an aggregate of 1,250,000 units at a purchase price of $0.04 per unit, for a total cash purchase price of $50,000. Each unit consisted of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company, a total of 625,000 warrants, at an exercise price of $0.04 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance or (ii) upon a sale of the Company or substantially all of its assets.

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. 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 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.

On October 16, 2008, the Company completed a private placement of an aggregate of 10,000,000 units at a purchase price of $0.02 per unit, for a total purchase price of $200,000. Each unit consisted of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company, a total of 5,000,000 warrants, at an exercise price of $0.02 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance, (ii) the closing of a firmly underwritten public offering or (iii) upon a sale of the Company.

9. Share-Based Compensation

As of December 31, 2008, 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.

For the six months ended June 30, 2009 and 2008, the Black-Scholes option-pricing model has utilized the following assumptions.

	2009			2008
Expected dividend yield		0.00	%		0.00	%
Expected volatility		142.57	%		87.82	%
Average risk-free interest rate		1.98	%	3.6% to 3.7		%
Expected life (in years)		5		5 to 5.75

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 and six months ended to June 30, 2009, the Company recorded consultant compensation expense of $5,203 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 and six months ended June 30, 2009, the Company recorded consultant compensation expense of $738 and $1,476, respectively, relating to these options.

On June 21, 2008, the Company issued options to purchase 1,500,000 shares of common stock to a consultant, in connection with the settlement of a dispute. The options became fully vested on August 7, 2008, the date on which the Company and the consultant entered into a settlement and release with respect to the dispute. The options 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 $84,279 and was charged to operations on June 21, 2008. In August 2008, the consultant was also elected as a Director of the Company and appointed to serve as the Company’s Chief Scientific Officer.

On August 9, 2007, the Company issued options to purchase 30,000 shares of common stock to a consultant pursuant to the 1998 Stock Option Plan. The options vested over one year, have an exercise price of $0.12 per share, and expire in ten years. The fair value of these options on the date of grant was $2,359 and has been charged to operations on a straight-line basis over the requisite service period. The Company recorded consultant compensation expense of $-0- and $590 relating to these options during the three months ended June 30, 2009 and 2008, respectively. During the six months ended June 30, 2009 and 2008, the Company recorded consultant compensation expense of $-0- and $1,180, respectively, relating to these options.

On August 9, 2007, the Company issued options to purchase 60,000 shares of common stock to a consultant pursuant to the 1998 Stock Option Plan. The options vested over one year, have an exercise price of $0.12 per share, and expire in ten years. The fair value of these options on the date of grant was $4,719 and has been charged to operations on a straight-line basis over the requisite service period. The Company recorded consultant compensation expense of $-0- and $1,180 relating to these options during the three months ended June 30, 2009 and 2008, respectively. During the six months ended June 30, 2009 and 2008, the Company recorded consultant compensation expense of $-0- and $2,360, respectively, 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. The Company recorded consultant compensation expense of $-0- and $1,520 relating to these options during the three months ended June 30, 2009 and 2008, respectively. During the six months ended June 30, 2009 and 2008, the Company recorded consultant compensation expense of $761 and $3,040, respectively, relating to these options.

On February 12, 2003, the Company issued options to purchase 250,000 shares of common stock to a director and chief executive officer. The options vest over four years, have an exercise price of $0.07 per share, and expire in five years. The fair value of these options on the date of grant was $31,250 and is being charged to operations on a straight-line basis over the requisite service period. The Company recorded director and executive compensation expense of $-0- and $1,563 relating to these options during the three months ended June 30, 2009 and 2008, respectively. During the six months ended June 30, 2009 and 2008, the Company recorded consultant compensation expense of $-0- and $3,126, respectively, relating to these options.

During the three months ended June 30, 2009 and 2008, a total of $32,724 and $89,132, respectively, was charged to operations for share-based compensation costs relating to common stock, stock options and warrants. During the six months ended June 30, 2009 and 2008, a total of $39,426 and $93,985, respectively, was charged to operations for share-based compensation costs relating to common stock, stock options and warrants.

As of June 30, 2009, there was approximately $65,700 of total unrecognized compensation cost related to share-based compensation arrangements, which is expected to be recognized over the ensuing 37 months.

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. There were no unexercised in-the-money stock options and warrants at December 31, 2008. Accordingly, they had no intrinsic value on that date, based on a fair market value of $0.02 per share on December 31, 2008.

10. Discontinued Operations – Dialysis Clinic

On May 31, 2006, LACDI completed the sale of substantially all of its assets used in the chronic care dialysis clinic to Kidney Dialysis Center of West Los Angeles, LLC. On June 15, 2006, LACDI completed the sale of its acute care dialysis unit to stockholders Dr. Victor Gura and Dr. Ronald Lang. The decision to sell the dialysis units was based on the determination that it would be in the best interest of the Company to focus principally on completion of the development and eventual commercial marketing of the wearable artificial kidney for dialysis and other medical applications. As a result of the sale of LACDI’s assets, the Company has accounted for the business of LACDI as a discontinued operation for all periods presented. At December 31, 2008, the Company no longer had any balances related to its discontinued operations.

11. 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. On February 8, 2010, the Company, Xcorporeal and FUSA entered into an amendment, which extended from February 28, 2010 until March 31, 2010 the date upon which any party to the Asset Purchase Agreement could terminate the Asset Purchase Agreement if the closing of the transactions contemplated therein has not occurred. The arbitration was terminated with the closing of the Asset Sale in March 2010 (see Note 12).

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 January 13, 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, 2009 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.

Deferred Compensation Plan

Effective August 9, 2007, the Company established the National Quality Care, Inc. Deferred Compensation Plan (the “Plan”) in recognition of services currently being performed without cash compensation by Robert M. Snukal in his capacity as Chief Executive Officer, and Leonardo Berezovsky in his capacity as Chief Financial Officer (each, a “Participant”), and to encourage their continued performance of services. In accordance with the Plan, each Participant shall become entitled to payment of a benefit upon the occurrence of a change in control or a qualified financing. A change in control is defined in the Plan as any of the following:

(1)

The direct or indirect transfer of the legal or equitable ownership of more than 50% of the Company’s outstanding common stock or any other class of stock representing more than 50% of the aggregate voting power of all classes of stock to an individual or entity;

(2)

A merger or consolidation of the Company with any other company (other than a subsidiary of the Company) pursuant to which the resulting aggregate ownership of the Company (or of the parent or surviving company resulting from such merger or consolidation) held by or attributable to those persons who were stockholders of the Company immediately prior to such merger or consolidation is less than 50% of the common stock or any other class of stock representing less than 50% of the aggregate voting power of all classes of stock of the Company (or of the parent or surviving corporation resulting from such merger or consolidation) outstanding as a result of such merger or consolidation;

(3)

The sale, transfer or other disposition, in one or a series of related transactions, of all or substantially all of the Company’s assets; or

(4)

The grant of an exclusive long-term license of the intellectual property of the Company.

A qualified financing is defined in the Plan as a debt or equity financing that yields at least $5,000,000 in net proceeds to the Company, or the receipt of at least $2,500,000 as the result of a settlement or favorable judgment in a litigation or arbitration proceeding. A benefit is defined in the Plan as the dollar amount payable to a Participant equal to the sum of his base amount plus his monthly amount multiplied by the number of full calendar months ending after the effective date of the Plan, August 9, 2007, that the Participant continues to perform services for the Company as an executive officer. The base amount and monthly amount for Robert M. Snukal is $240,000 and $12,000, respectively. The base amount and monthly amount for Leonardo Berezovsky is $76,000 and $8,000, respectively. Prior to the occurrence of a change in control or a qualified financing, a Participant may irrevocably waive his right to a benefit. In the event neither a change in control nor a qualified financing occurs on or before December 31, 2009, each Participant’s benefit will be forfeited and no such change in control or qualified financing occurred before December 31, 2009.

The Company’s management performed an assessment of this contingent liability for the June 30, 2009 reporting period and determined that a change in control and/or a qualified financing had not occurred. Based on that determination, no accrual of benefits was made as of June 30, 2009.

12. Subsequent Events

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 (the “HD WAK Patents”), which expire between November 11, 2021 and September 9, 2024, the Company is entitled to certain royalty payments from the sale of wearable hemodialysis (“HD WAK”) devices in each country where such sales infringe valid and issued claims of the Company’s and Xcorporeal’s HD WAK Patents issued in such country (“HD WAK Devices Royalty”) and the attendant disposables that incorporate the HD WAK Technology (as defined below) (“Attendant Disposables”), not to exceed a certain maximum amount per patient per week in a country where such sales infringe valid and issued claims of the HD WAK Patents issued in such country (the “Attendant Disposables Royalty”, and together with the HD WAK Devices Royalty, the “HD WAK Royalty”). Such payment for Attendant Disposables are not to be payable with regard to Attendant Disposables that incorporate any technology for which a Supersorbent Royalty (as defined below) is paid by FUSA to the Company or Xcorporeal. 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 “Supersorbent Patents”), the Company is entitled to certain royalty payments on each supersorbent cartridge sold per patient in each country where such sales infringe valid and issued claims of the Supersorbent Patents issued in such country 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 (the “Research Agreement”), or any subsequently executed license agreement between TRDF and FUSA. Such payments for supersorbent cartridges are not payable with regard to supersorbent cartridges that incorporate any HD WAK Technology for which a HD WAK Royalty is paid by FUSA to the Company or Xcorporeal. During the life of any Supersorbent Patents, 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 will be 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. In the event that the Option becomes exercisable and the Company and/or Xcorporeal exercises the Option, the consideration payable to FUSA by the Company or Xcorporeal for the exercise of the Option will consist 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 11). The Company recognized a gain of approximately $5,200,000, including the Xcorporeal legal fee reimbursement, upon the consummation of the close of the asset purchase transaction on March 19, 2010.

Advances and Notes Payable to Related Party

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.

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. 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 will be amortized to interest expense over the term of the note using the straight-line method. In March 2010, the $200,000 note, with 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 an officer and director, bearing interest at 5% per annum, and payable on February 23, 2011. This note was paid in full in March 2010.

Exercise of Options and Warrants

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.

Issuance of Common Stock and Common Stock Options

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 will be charged to operations on August 5, 2009.

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

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.

The Company did not have sufficient working capital to meet its obligations. Therefore, the Company needed to obtain funding on an ongoing basis from outside sources, both related and unrelated. There can be no assurances that the Company will be successful now or in the future in obtaining any additional capital on terms favorable to it or at all. The failure to obtain such capital will have a material adverse effect on the Company’s financial condition and operations.

Sale of Assets

On December 14, 2009, the Company entered into an Asset Purchase Agreement (the “Agreement”) by and among Xcorporeal, Inc. (“Xcorporeal”) and Fresenius USA, Inc., a Massachusetts corporation and a wholly owned subsidiary of Fresenius Medical Care Holdings, Inc. (“Fresenius”), pursuant to which the Company and Xcorporeal sold, assigned and delivered to Fresenius all of their respective interests in and relating to: (i) the designs for portable hemodialysis devices; (ii) the designs for continuous renal replacement therapy devices; (iii) the designs for wearable hemodialysis devices (the “HD WAK technology”); (iv) the designs for wearable ultrafiltration devices; (v) the designs for wearable continuous renal replacement therapy devices; and (vi) the development of the supersorbent technology (subject to the option described below). The foregoing technology acquired by Fresenius constituted substantially all of the assets of the Company.

In exchange for the assets purchased, Fresenius agreed to pay the Company an aggregate $5,700,000 in cash as the Company’s portion of the purchase price. Fresenius assumed no previously existing liabilities of the Company. Fresenius also agreed to pay Xcorporeal an aggregate of $2,300,000 in cash. In addition, Fresenius agreed to pay royalties under the Agreement during the life of the patents included in the HD WAK Technology equal to 2% of net revenues received by Fresenius on sales of HD WAK devices in each country where such sales infringe valid and issued claims under such patents, plus $0.75 per treatment of attendant disposables, not to exceed a maximum of $1.50 per patient per week in such countries. Those royalties are to be shared 40% to the Company and 60% to Xcorporeal. Fresenius also agreed to pay royalties under the Agreement during the life of the patents included in the supersorbent technology (the “Supersorbent Patents”), in each country where sales infringe valid and issued claims under such patents, equal to the lesser of $0.75 per supersorbent cartridge or $1.50 per patient per week in such countries, less royalties payable to Technion Research and Development Foundation Ltd. (“TRDF”) under the existing license agreement pursuant to which the Company is a party and which is expected to be assigned to Fresenius. Those royalties will be shared 60% to the Company and 40% to Xcorporeal. While several applications for patents are pending, no patent incorporating the Supersorbent Technology has yet been issued.

Fresenius also granted to the Company and Xcorporeal an option to obtain a perpetual worldwide license to the supersorbent technology in the healthcare fields other than renal. The option is exercisable during the twelve-month period following Fresenius’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 Fresenius. The consideration for the exercise of the option was $7,500,000, payable in immediately available funds and an on-going royalty in an amount equal to the lesser of $0.75 per supersorbent cartridge or $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 Company recognized a gain of approximately $5,200,000, including the Xcorporeal legal fee reimbursement, upon the consummation of the close of the asset purchase transaction on March 19, 2010.

Arbitration Proceeding with Former Legal Counsel

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 June 15, 2006, the Company provided dialysis services for patients suffering from acute kidney failure through a clinic located in Los Angeles, California, and through a visiting nursing program contracted to several Los Angeles County hospitals. The assets of both the clinic and the nursing program were sold to third parties, and as a result such activities were accounted for as discontinued operations in the Company’s consolidated financial statements. Prior to March 19, 2010, the Company was also 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 assets, including its technology rights with respect to its developing wearable artificial kidney. Since June 15, 2006, the Company has not generated any revenues from operations, and does not expect to do so in the foreseeable future.

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional debt or equity capital and to acquire sufficient operating capital through the sale of assets, development of business activities, or otherwise. The Company’s 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 consolidated financial statements.

Research and Development

Technology Rights

Technology rights relate to the Company’s wearable artificial kidney and are being amortized over an estimated useful life of approximately 20 years. Amortization is included in research and development expense in the statement of operations. 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.

Stock-Based Compensation

The fair value of stock-based compensation is affected by several variables, the most significant of which are the life of the equity award, the exercise price of the security as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common stock over the term of the equity award.

The Company recognizes the fair value of stock-based compensation awards in general and administrative expense and in research and development expense, as appropriate, in the condensed consolidated statement of operations.

Income Taxes

Contingencies

The Company 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 is accrued in the Company’s 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, is disclosed. Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the nature of the guarantee is disclosed.

Results of Operations for the Three Months Ended June 30, 2009 and 2008

There were no revenues for the three months ended June 30, 2009 and 2008.

General and administrative expenses for the three months ended June 30, 2009 were $252,842, as compared to $885,314 for the three months ended June 30, 2008, a decrease of $632,472 or 71%. Included in such costs was stock-based compensation of $19,224 and $4,853 in 2009 and 2008, respectively. The decrease in general and administrative expenses in 2009, as compared to 2008, reflects the significant legal fees that were incurred in 2008 primarily in connection with the arbitration proceedings with Xcorporeal and increased needs in connection with financing and reporting activities.

Research and development expenses for the three months ended June 30, 2009 were $14,715 as compared to $265,010 for the three months ended June 30, 2008, a decrease of $250,295 or 94%. Such decrease reflects the suspension of research and development activities related to the development of the Company’s wearable artificial kidney pending resolution of the Company’s arbitration proceeding with Xcorporeal.

Interest expense was $72,388 for the three months ended June 30, 2009, as compared to $54,528 for the three months ended June 30, 2008, as a result of the additional borrowings being made in 2009.

The Company incurred a net loss from continuing operations for the three months ended June 30, 2009 and 2008 of $339,945 and $1,204,852, respectively.

The Company incurred a net loss for the three months ended June 30, 2009 and 2008 of $339,945 and $1,204,852, respectively.

Losses are expected to continue until such time of resolution of the arbitration with Xcorporeal, Peizer and Gura, resolution of the arbitration with the Company’s former counsel, and the commercial marketing or alternative economic exploitation of the wearable artificial kidney.

Results of Operations for the Six Months Ended June 30, 2009 and 2008

There were no revenues for the six months ended June 30, 2009 and 2008.

General and administrative expenses for the six months ended June 30, 2009 were $626,035, as compared to $2,460,772 for the six months ended June 30, 2008, a decrease of $1,834,737 or 75%. Included in such costs was stock-based compensation of $25,926 and $9,706 in 2009 and 2008, respectively. The decrease in general and administrative expenses in 2009, as compared to 2008, reflects the significant legal fees that were incurred in 2008 primarily in connection with the arbitration proceedings with Xcorporeal and increased needs in connection with financing and reporting activities.

Research and development expenses for the six months ended June 30, 2009 were $16,531 as compared to $350,395 for the six months ended June 30, 2008, a decrease of $333,864 or 95%. Such decrease reflects the suspension of research and development activities related to the development of the Company’s wearable artificial kidney pending resolution of the Company’s arbitration proceeding with Xcorporeal.

Interest expense was $85,703 for the six months ended June 30, 2009, as compared to $108,809 for the six months ended June 30, 2008, as a result of the additional borrowings being made in 2009.

Other income of $32,084 for the six months ended June 30, 2009 resulted primarily from the forgiveness of payables. There was no other income during the six months ended June 30, 2008.

The Company incurred a net loss from continuing operations for the six months ended June 30, 2009 and 2008 of $696,185 and $2,919,976, respectively.

The Company incurred a net loss for the six months ended June 30, 2009 and 2008 of $696,185 and $2,919,995, respectively.

Liquidity and Capital Resources

There was a cash overdraft of $15,789 as of June 30, 2009, as compared to a cash balance of $116,800 as of December 31, 2008, a net decrease of $132,589. The Company does not have sufficient working capital to meet its obligations. Therefore, the Company must obtain outside funding on an on-going basis. The Company cannot provide assurances that it will be successful now or in the future in obtaining any additional capital on terms favorable to it or at all. The failure to obtain such capital will have a material adverse effect on the Company’s financial condition and ability to conduct operations.

In recent years, the Company’s cash flow needs have been met primarily through the sales of common stock, the exercise of stock options and stock warrants, and the proceeds from notes payable to a related party. The Company had a working capital deficit of $3,597,657 and $3,429,307 at June 30, 2009 and December 31, 2008, respectively.

As of June 30, 2009, the Company had notes payable to related parties of $595,012, including accrued interest and net of discount, all of which was current at that date. As of December 31, 2008, the Company had notes payable to related parties of $896,776, including accrued interest and net of discounts, all of which was current at that date. Notes payable to related parties decreased by $301,764 at June 30, 2009, as compared to December 31, 2008, due primarily to the roll-over of notes payable into a new note payable with warrants attached thereto that were valued at $377,667, offset by the accrual of interest and the amortization of discounts.

Operating Activities

During the six months ended June 30, 2009, the Company used cash of $232,589 in continuing operating activities, as compared to using cash of $1,222,672 in continuing operating activities during the six months ended June 30, 2008, a decrease of $990,083, reflecting the decrease in professional fees that were incurred in 2008, primarily in connection with the arbitration proceedings with Xcorporeal and increased needs in connection with financing and reporting activities.

During the six months ended June 30, 2009, the Company did not use or generate any cash from discontinued operations. During the six months ended June 30, 2008, discontinued operations used $19 in cash.

During the six months ended June 30, 2009, the Company used cash of $232,589 in operations, as compared to using cash of $1,222,691 in operating activities during the six months ended June 30, 2008.

Financing Activities

During the six months ended June 30, 2009, the Company generated $115,789 of cash from financing activities consisting of $15,789 from a cash overdraft, $100,000 from the exercise of stock warrants, and $20,000 in proceeds from a note payable to a related party that was repaid before the end of the period. During the six months ended June 30, 2008, the Company generated $573,290 of cash from financing activities, consisting of the proceeds from the issuance of common stock of $154,000, payments received on stock subscription receivables of $26,790, proceeds from the exercise of stock options of $17,500 and $375,000 from the exercise of stock warrants.

The following significant financing transactions, primarily equity related, were completed during 2008, 2009 and 2010:

During March 2008, the Company completed a private placement of an aggregate of 1,375,000 Units (the “Units”) at a purchase price of $0.08 per Unit, for a total purchase price of $110,000. Each Unit consists of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.08 per share. The warrants are exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance, (ii) the closing of a firmly underwritten public offering or (iii) upon a sale of the Company. Robert M. Snukal, director and chief executive officer, purchased 750,000 Units for $60,000 paid in cash at closing. Jose Spiwak, a director, purchased 625,000 Units for $20,000 in cash at closing, with the balance thereof satisfied through delivery of a promissory note. The principal amount of the promissory note, together with accrued and unpaid interest thereunder, was due and payable in three equal installments of $10,000 due April 30, 2008, May 30, 2008, and June 30, 2008. The unpaid principal amount under the promissory note bears interest at the rate of 1.85% per annum and was paid in full on July 1, 2008.

During May 2008, the Company completed a private placement of an aggregate of 400,000 Units (the “Units”) issued to Robert M. Snukal, director and chief executive officer, at a purchase price of $0.06 per Unit, for a total purchase price of $24,000. Each Unit consists of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.06 per share. The warrants are exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance or (ii) upon a sale of the Company or substantially all of its assets.

On June 30, 2008, the Company issued 875,000 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise of 250,000 options at $0.07 per share and 625,000 warrants at $0.04 per share. The Company received $42,500 of proceeds.

During June 2008, the Company completed a private placement of an aggregate of 1,250,000 Units (the “Units”) to Robert M. Snukal, director and chief executive officer, at a purchase price of $0.04 per Unit, for a total purchase price of $50,000. Each Unit consists of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.04 per share. The warrants are exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance or (ii) upon a sale of the Company or substantially all of its assets.

During July 2008, the Company completed a private placement to an accredited investor (an existing shareholder) of an aggregate of 625,000 shares of common stock at a purchase price of $0.08 per share, for a total purchase price of $50,000.

In August 2008, the Company issued 200,000 shares of its common stock upon the exercise of warrants at $0.06 per share. The Company received $12,000 of proceeds.

During August 2008, the Company entered into a $150,000 uncollateralized convertible promissory note with Robert M. Snukal, director and chief executive officer, bearing interest at 6% per annum, and payable on December 31, 2008. The note becomes immediately payable upon the consummation of a change of control transaction, which is defined as (i) a reorganization, consolidation or merger (or similar transaction or series of related transactions) of the Company with or into any other entity, or a sale or exchange of outstanding shares, any of which results in the shareholders of the Company immediately prior to the transaction owning less than 50% of the surviving entity of such transaction or transactions, or (ii) a sale of all or substantially all of the assets of the Company. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon may be converted into shares of the Company’s common stock at a conversion price of $0.12 per share at any time. 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.

On October 16, 2008, Robert M. Snukal, director and chief executive officer, purchased 10,000,000 units (the “Units”) of the Company, at a purchase price equal to $0.02 per Unit, for a total purchase price of $200,000. Each Unit consisted of one share of the Company’s common stock and a warrant to purchase one-half of one share of the Company’s common stock at an exercise price of $0.02 per share. The warrants are exercisable immediately and expire on the earlier of (i) October 16, 2015 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or other transaction as a result of which stockholders of the Company immediately prior to such acquisition possess a minority of the voting power of the acquiring entity immediately following such acquisition.

On May 13, 2009, the $700,000 promissory note payable to Robert M. Snukal, director and chief executive officer, and the $150,000 promissory note 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. 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 is being 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 $42,424, 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, bearing 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 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 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 common stock issued was 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 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 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, which was charged to operations on August 5, 2009.

On May 13, 2009, the Company issued options to purchase 250,000 shares of common stock to an employee 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, 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 of 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, 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 will be amortized to interest expense over the term of the note using the straight-line method. In March 2010, the $200,000 note, with 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, bearing interest at 5% per annum, and payable on February 23, 2011. This note was paid in full in March 2010.

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, 2009, 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”.

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, 2009 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: January 13, 2012	By:	/s/Robert M. Snukal
		Robert M. Snukal
		Chief Operating Officer and President
		(Principal Executive Officer)

Date: January 13, 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.

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NATIONAL QUALITY CARE INC 10-Q