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EX-32 - BIOMODA INC/NMex32.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

 
FORM 10-Q
 

 
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010

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

For the transition period from __________ to __________
 
Commission file No. 333-90738
 
BIOMODA, INC.
(Exact name of registrant as specified in its charter)
 
 New Mexico
85-0392345
(State of incorporation)
(IRS Employer Identification No.)

 
609 Broadway NE #215, Albuquerque, New Mexico 87102
 (Address of principal executive offices including zip code)

Registrant's telephone number:  (505) 821-0875

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x      No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o
Accelerated filer  o
 Non-accelerated filer     o
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

The number of issuer’s shares of Common Stock outstanding as of August 16, 2010 was 92,006,886
 
 
 
 
 
PART I: FINANCIAL INFORMATION
 
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
 
Forward - Looking Statements
 
This Form 10-Q contains forward-looking statements about the business, financial condition and prospects of the Company that reflect assumptions made by management and management's beliefs based on information currently available to it. We can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of management's assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, our actual results may differ materially from those indicated by the forward-looking statements.

The key factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to, the acceptance by customers of our products, our ability to develop new products cost-effectively, our ability to raise capital in the future, the development by competitors of products using improved or alternative technology, the retention of key employees and general economic conditions.

There may be other risks and circumstances that management is unable to predict. When used in this Form 10-Q, words such as "believes," "expects," "intends," "plans," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions. All forward-looking statements are intended to be covered by the safe harbor created by Section 21E of the Securities Exchange Act of 1934.
 
 
 
 
BIOMODA, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
   
June 30,
   
December 31,
 
 
 
2010
    2009  
ASSETS
           
   CURRENT ASSETS
           
   Cash
  $ 124,058     $ 20,041  
   Accounts receivable
    351       -  
   Prepaid expenses
    11,343       -  
   Deferred charges
    9,573       9,573  
   Total current assets
    145,325       29,614  
                 
   Deferred charges
    21,539       26,325  
   Patents and trademarks, net of accumulated amortization
               
   of $324,428 and $315,495
    119,324       113,645  
Total assets
  $ 286,188     $ 169,584  
                 
LIABILITIES & STOCKHOLDERS' DEFICIT
               
   CURRENT LIABILITIES
               
   Accounts payable and accrued liabilities
  $ 291,218     $ 506,068  
   Advances from stockholders
    221,891       215,142  
   Short-term debt
    112,597       114,978  
   Derivative liabilities - warrant instruments
    1,834,834       -  
   Deferred liability
    -       25,415  
                 
   Total current liabilities
    2,460,540       861,603  
   LONG-TERM DEBT
               
   Note payable
    96,970       120,477  
   Total liabilities
    2,557,510       982,080  
                 
STOCKHOLDERS' DEFICIT
               
   Class A redeemable preferred stock; no par value; 2,000,000
               
   shares authorized; cumulative and convertible;
               
   liquidation and redemption values of $1.50 and $1.80
               
   per share, respectively; no shares issued or outstanding
    -       -  
                 
   Undesignated preferred stock; 2,000,000 shares authorized; no
               
   shares issued and outstanding
    -       -  
                 
   Common stock, no par value, 150,000,000 share authorized;
               
   88,604,590 and 79,514,589 issued and 88,213,015 and
               
   78,923,014 outstanding, respectively
    6,580,489       7,626,166  
                 
   Treasury stock, at cost 391,575 and 591,575 shares, respectively
    (1,233 )     (2,502 )
                 
   Deficit accumulated during development stage
    (8,850,578 )     (8,436,160 )
                 
   Total stockholders' deficit
    (2,271,322 )     (812,496 )
                 
Total liabilities and stockholders' deficit
    286,188       169,584  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
BIOMODA, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
 
3 Months Ended June 30,
   
6 Months Ended June 30,
   
January 3, 1990 (Inception) to
 
 
 
2010
   
2009
   
2010
   
2009
   
June 30, 2010
 
                                 
Revenue
  $ -     $ -     $ -     $ -     23  
                                         
Operating Expenses
                                       
   Professional fees
    258,752       27,452       175,945       68,380       1,407,895  
   General and administrative
    64,597       52,394       523,119       95,006       5,493,629  
   Research and development, net of grants received
    111,622       16,389       159,572       11,330       2,880,575  
   Depreciation and amortization
    2,703       7,168       8,933       23,282       344,479  
                                         
    Total operating expenses
    437,674       103,403       867,569       197,998       10,126,578  
                                         
    Loss from operations
    (437,674 )     (103,403 )     (867,569 )     (197,998 )     (10,126,555 )
                                         
Other Income (Expense)
                                       
   Gain on extinguishment of debt
    -       -       -       -       1,326,028  
   Gain of sale of assets
    -       -       2,068       -       1,710  
   Unrealized gain on derivative liabilities-warrant instruments
    1,777,070       -       453,521       -       453,521  
   Unrealized gain on derivative liabilities-options
    12,336       -       5,253       -       5,253  
   Other income
    -       -       -       -       34,037  
   Interest income
    201       -       201       -       4,071  
   Interest expense
    (3,934 )     (3,967 )     (7,892 )     (7,366 )     (548,643 )
                                         
    Total other income (expense)
    1,785,673       (3,967 )     453,151       (7,366 )     1,275,977  
                                         
Loss before provision for income taxes
    1,347,999       (107,370 )     (414,418 )     (205,364 )     (8,850,578 )
                                         
Provision for income taxes
    -       -       -       -       -  
                                         
Net income (loss)
    1,347,999       (107,370 )     (414,418 )     (205,364 )     (8,850,578 )
                                         
Basic income (loss) per common share
    0.02       (0.00 )   $ (0.00 )     (0.00 )        
                                         
Diluted income (loss) per common share
    0.02       (0.00 )   $ (0.00 )     (0.00 )        
                                         
Basic weighted average number of common shares outstanding
    87,600,579       77,023,153       84,664,507       77,037,226          
                                         
Basic weighted average number of common shares outstanding
    89,161,486       77,023,153       84,664,507       77,037,226          
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
BIOMODA, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
     For the Six Months    
January 3, 1990
 
   
Ended June 30,
   
(inception) to
 
   
2010
   
2009
   
June 30, 2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
   Net loss
  $ (414,418 )   $ (205,364 )   $ (8,850,578 )
Adjustments to reconcile net earnings to net
                       
    cash used in operating activities
                       
    Stock based compensation
    277,099       2,400       3,517,875  
    Depreciation and amortization
    8,933       23,282       344,479  
    Unrealized gain on derivative liabilities - warrant instruments
    (453,521 )     -       (453,521 )
    Unrealized gain on derivative liabilities - options
    (5,253 )     -       (5,253 )
    Write off of license fee
    -       -       1,250  
    Gain/loss on sale of assets
    (2,068 )     -       (1,710 )
    Foreign currency translation adjustments
    -       -       3,247  
    Gain on extinguishment of debt
    -       -       (1,283,964 )
Changes in operating assets and liabilities
                       
    Accounts receivable
    (351 )     8,772       173,871  
    Other assets
    (6,557 )     2,393       8,242  
    Advances on research grants
    (25,415 )     213,234       -  
    Accounts payable and accrued liabilities
    (176,350 )     81,941       873,658  
                         
   Net cash provided by (used in) operating activities
    (797,901 )     126,658       (5,672,404 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
   Proceeds from sale of equipment
    2,068       -       3,207  
   Purchase of equipment
    -       -       (25,571 )
   Organizational costs
    -       -       (560 )
   Purchases of patents, trademarks and licenses
    (14,612 )     (7,537 )     (460,750 )
                         
   Net cash used in investing activities
    (12,544 )     (7,537 )     (483,674 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
    Issuance of common stock for cash
    933,601       -       3,936,484  
    Proceeds from stockholders' advances
    6,749       6,750       182,481  
    Repayment of line of credit from affiliated entity
    -       -       (341,107 )
    Proceeds/(repayments) of short-term debt
    1,184       592       (106,139 )
    Proceeds from line of credit from affiliated company
    -       -       2,680,882  
    Repayments of long-term debt
    (27,072 )     (16,276 )     (58,848 )
    Acquisition of treasury stock
    -       -       (13,617 )
                         
   Net cash provided by (used in) financing activities
    914,462       (8,934 )     6,280,136  
                         
NET INCREASE IN CASH
    104,017       110,187       124,058  
                         
Cash at beginning of year
    20,041       36,854       -  
                         
Cash at end of year
  $ 124,058     $ 147,041     $ 124,058  
                         
Supplemental cash flow information:
                       
    Interest expense paid in cash
  $ -     $ -      -  
    Income taxes paid in cash
  $ -     $ -      -  
                         
Non-cash investing and financing activities:
                       
    Accrued salaries converted to notes payable
  $ -     $ -       479,484  
    Derivative liability incurred through issuance of warrants
  $ 3,351,307     $ -     $ 3,351,307  
   Settlement of derivative liabilities
  $ 1,057,699     $ -     1,057,699  
    Interest converted to note payable
  $ -     $ -     159,462  
    Common stock issued to extinguish related party debt
  $ -     $ -     1,418,768  
    Common stock issued to extinguish stock payable
  $ 50,000     $ -     $ 50,000  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
BIOMODA, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE PERIOD FROM JANUARY 3, 1990 (INCEPTION) TO June 30, 2010
 
                       Accumulated     Total  
                     
Deficit During
   
Stockholders'
 
   
Common Stock
         
Treasury
   
Development
   
Equity
 
   
Shares
   
Amount
   
Stock
   
Stage
   
(Deficit)
 
Inception
  -     $ -     $ -     $ -     $ -  
Issuance of Common Stock, June 26, 1991
    2,997,000       18,433                       18,433  
Cumulative Net Loss for the period from January 3, 1990
  (date of inception) to December 31,1996
           
 
              (60,010 )     (60,010 )
Balance, December 31, 1996
    2,997,000       18,433       -       (60,010 )     (41,577 )
Issuance of Common Stock Warrants on December 31, 1997 
  (100,952 warrants at exercise price of $.20)
    -       -                       -  
Net loss
                            (32,914 )     (32,914 )
Balance, December 31, 1997
    2,997,000       18,433       -       (92,924 )     (74,491 )
Issuance of Common Stock, January 20, 1998
    59,940       10,000                       10,000  
Exercise of Common Stock Warrants on March 17, 1998
    100,952       20,190                       20,190  
Issuance of Common Stock, April 15, 1998, net of stock issuance costs
    631,578       276,350                       276,350  
Issuance of Common Stock Options, April 15, 1998
            23,650                       23,650  
Exercise of Common Stock Options, November 2, 1998
    62,237       23,670                       23,670  
Net loss
                            (295,948 )     (295,948 )
Balance, December 31, 1998
    3,851,707       372,293       -       (388,872 )     (16,579 )
Issuance of Common Stock, January 30, 1999
    180,000       87,300                       87,300  
Issuance of Common Stock, for the month of March, 1999
    310,000       150,300                       150,300  
Issuance of Common Stock, May 29, 1999
    51,546       25,000                       25,000  
Issuance of Common Stock, June 2, 1999
    95,092       50,000                       50,000  
Issuance of Common Stock, September 30, 1999
    51,546       25,000                       25,000  
Issuance of Common Stock, December 29, 1999
    92,005       50,143                       50,143  
Net loss
                            (303,956 )     (303,956 )
Balance, December 31, 1999
    4,631,896       760,036       -       (692,828 )     67,208  
Exercise of Common Stock Options, February 24, 2000
    166,535       80,770                       80,770  
Issuance of Common Stock, May 12, 2000
    253,609       56,000                       56,000  
Exercise of Common Stock Options, June 8, 2000
    62,497       30,312                       30,312  
Issuance of Common Stock, for the month of September, 2000
    96,745       21,086                       21,086  
Exercise of Common Stock Options, November 3, 2000
    66,000       7,491                       7,491  
Issuance of Common Stock for Services, December 8, 2000
    40,000       19,400                       19,400  
Net loss
                            (257,139 )     (257,139 )
Balance, December 31, 2000
    5,317,282       975,095       -       (949,967 )     25,128  
 
 
Issuance of Common Stock for Services, January 25, 2001
    5,000       2,425                       2,425  
Issuance of Common Stock, January 31, 2001
    160,000       24,000                       24,000  
Issuance of Common Stock for Services, April 6, 2001
    15,000       7,276                       7,276  
Issuance of Common Stock, for the month of April, 2001
    120,000       58,200                       58,200  
Issuance of Common Stock, June 28, 2001
    20,000       9,700                       9,700  
Issuance of Common Stock, for the month of August, 2001
    110,000       53,500                       53,500  
Issuance of Common Stock, November 7, 2001
    10,000       5,000                       5,000  
Net loss
                            (372,655 )     (372,655 )
Balance, December 31, 2001
    5,757,282       1,135,196       -       (1,322,622 )     (187,426 )
Net loss
                            (83,689 )     (83,689 )
Balance, December 31, 2002
    5,757,282       1,135,196       -       (1,406,311 )     (271,115 )
Exercise of stock options, July 11, 2003
    980,000       147,000                       147,000  
Net loss
                            (311,233 )     (311,233 )
Balance, December 31, 2003
    6,737,282       1,282,196       -       (1,717,544 )     (435,348 )
Issuance of Common Stock for Services, February 9, 2004
    35,000       5,250                       5,250  
Exercise of Common stock Options, February 9, 2004
    60,000       30,000                       30,000  
Issuance of Common Stock for Services, August 5, 2004
    85,000       12,750                       12,750  
Exercise of Common stock Options, September 27, 2004
    200,000       30,000                       30,000  
Net loss, December 31, 2004
                            (758,945 )     (758,945 )
Balance, December 31, 2004
    7,117,282       1,360,196       -       (2,476,489 )     (1,116,293 )
Issuance of Common Stock for Services, May 27, 2005
    30,000       4,500                       4,500  
Issuance of Common Stock for Services, October 12, 2005
    40,000       6,000                       6,000  
Net loss, December 31, 2005
                            (624,756 )     (624,756 )
Balance, December 31, 2005
    7,187,282       1,370,696       -       (3,101,245 )     (1,730,549 )
Issuance of Common Stock for Services, October 23, 2006
    690,000       544,500                       544,500  
Issuance of Common Stock in exchange for Debt, October 23, 2006
    1,176,471       1,000,000                       1,000,000  
Issuance of Common Stock for Services, November 30, 2006
    7,500       28,125                       28,125  
Issuance of Common Stock for Services, December 15, 2006
    10,000       29,000                       29,000  
Issuance of Common Stock for Services, December 26, 2006
    15,000       44,850                       44,850  
Acquisition of Treasury Stock, June 30, 2006
                    (9,000 )             (9,000 )
Stock-Based Compensation
            35,042                       35,042  
Net loss, December 31, 2006
                            (1,807,312 )     (1,807,312 )
Balance, December 31, 2006
    9,086,253       3,052,213       (9,000 )     (4,908,557 )     (1,865,344 )
 
 
Issuance of Common Stock for Services, January 2007
    131,000.0       259,500                       259,500  
Issuance of Common Stock, January 2007
    30,000.0       30,000                       30,000  
Issuance of Common Stock for Services, February 2007
    150,000.0       157,500                       157,500  
Issuance of Common Stock for Services, March 2007
    445,000.0       375,500                       375,500  
Issuance of Common Stock in exchange for Debt, March 2007
    86,786.0       73,768                       73,768  
Exercise of Options, March 2007
    2,000.0       1,000                       1,000  
Issuance of Common Stock for Services, April 2007
    724,062.0       455,559                       455,559  
Issuance of Common Stock in exchange for Debt, April 2007
    500,000.0       315,000                       315,000  
Issuance of Common Stock for Services, June 2007
    920,000.0       154,600                       154,600  
Issuance of Common Stock, June 2007
    343,000.0       41,667                       41,667  
Issuance of Common Stock for Services, July 2007
    141,000.0       15,700                       15,700  
Issuance of Common Stock, July 2007
    1,466,635.0       84,985                       84,985  
Issuance of Common Stock, August 2007
    1,636,166.0       53,943                       53,943  
Issuance of Common Stock for Services, September 2007
    160,000.0       12,800                       12,800  
Issuance of Common Stock, September 2007
    2,416,248.0       54,819                       54,819  
Issuance of Common Stock, October 2007
    1,557,730.0       36,457                       36,457  
Issuance of Common Stock in exchange for Debt, October 2007
    165,000.0       16,500                       16,500  
Issuance of Common Stock for Services, November 2007
    770,000.0       100,100                       100,100  
Issuance of Common Stock, November 2007
    16,190,967.0       445,674                       445,674  
Issuance of Common Stock for Services, December 2007
    90,140.0       21,634                       21,634  
Issuance of Common Stock, December 2007
    11,303,996.0       385,250                       385,250  
Stock-Based Compensation
            55,416                       55,416  
Net loss, December 31, 2007
                            (2,307,051 )     (2,307,051 )
Balance, December 31, 2007
    48,315,983       6,199,585       (9,000 )     (7,215,608 )     (1,025,023 )
Issuance of Common Stock, January 2008
    3,887,100       155,077                       155,077  
Issuance of Common Stock for Services, February 2008
    11,128,967       312,244                       312,244  
Issuance of Common Stock for Services, February 2008
    1,500,000       180,000                       180,000  
Issuance of Common Stock for Services, March 2008
    1,725,860       86,293                       86,293  
Issuance of Common Stock, March 2008
    8,410,112       209,897                       209,897  
Issuance of Common Stock, April 2008
    1,328,142       33,268                       33,268  
Issuance of Common Stock for Services, April 2008
    25,000       1,250                       1,250  
Issuance of Common Stock for Services, June 2008
    237,237       17,779                       17,779  
Issuance of Common Stock for Services, July 2008
    244,000       12,200                       12,200  
Issuance of Common Stock for Services, September 2008
    125,000       5,000                       5,000  
Issuance of Common Stock for Services, October 2008
    47,188       1,888                       1,888  
Issuance of Common Stock for Services, December 2008
    30,000       900                       900  
Net loss, December 31, 2008
                            (315,263 )     (315,263 )
Balance, December 31, 2008
    77,004,589       7,215,381       (9,000 )     (7,530,871 )     (324,490 )
 
 
Issuance of Common Stock for Services, January 2009
    30,000       1,200                       1,200  
Issuance of Common Stock for Services, June 2009
    30,000       1,200                       1,200  
Adjustment to Treasury Shares on June 30, 2009
            (9,000 )     9,000               -  
Addition to Treasury Shares September 30, 2009
                    (4,617 )             (4,617 )
Issuance of Common Stock for Services, July 2009
    250,000       12,500                       12,500  
Issuance of Common Stock for Cash, August 2009
    100,000       5,000                       5,000  
Issuance of Common Stock for Services, August 2009
    100,000       7,000                       7,000  
Issuance of Treasury Shares for Services August 2009
            220,000                       220,000  
Issuance of Common Stock for Cash, December 2009
    2,000,000       100,000                       100,000  
Issuance of Treasury Shares for Services October 2009
            72,885       2,115               75,000  
Net loss, December 31, 2009
                            (905,289 )     (905,289 )
Balance, December 31, 2009
    79,514,589       7,626,166       (2,502 )     (8,436,160 )     (812,496 )
Issuance of Common Stock for cash January 2010
    400,000       20,000                       20,000  
Issuance of Common Stock for cash February 2010
    800,000       40,000                       40,000  
Issuance of Common Stock for services February 2010
    480,000       105,600                       105,600  
Issuance of Treasury Shares for Services February 2010
            58,731       1,269               60,000  
Issuance of Common Stock and Warrants for Cash March 2010
    6,250,001       820,000                       820,000  
Derivative liabilities on Warrants and non-employee options
            (3,351,307 )                     (3,351,307 )
Issuance of Common Stock for cash June 2010
    335,000       53,600                       53,600  
Issuance of Common Stock for services June 2010
    625,000       100,000                       100,000  
Issuance of Common Stock for services to Directors June 2010
    200,000       50,000                       50,000  
Derivative liabilities on Warrants and non-employee options settled
            1,057,699                       1,057,699  
Net loss, June 30, 2010
                            (414,418 )     (414,418 )
Balance, June 30, 2010
    88,604,590     $ 6,580,489     $ (1,233 )   $ (8,850,578 )   $ (2,271,322 )
 
 
_____________________________________________
BIOMODA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________________________________________

1.  BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Biomoda, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with Management's Discussion and Analysis and the audited financial statements and notes thereto contained in our 2009 Annual Report filed with the Securities and Exchange Commission on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for 2009 as reported on Form 10-K have been omitted.
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures.  While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.
 
2.  DEVELOPMENT STAGE AND GOING CONCERN

We have been in the development stage since we began operations on January 3, 1990, and have not generated any significant revenues from operations, and there is no assurance of any future revenues. We had a continuing government research grant for the fiscal year ended June 30, 2009, of $1.3 million which was used to pay for research costs.  As of June 30, 2010, we had an accumulated deficit of $8,850,578 and a working capital deficit of $2,315,215. These factors create a substantial doubt as to our ability to continue as a going concern.

We will require additional funding for continuing research and development, obtaining regulatory approval and commercialization of our products. Management expects to be able to raise enough funds to meet our working capital requirements through the sale of our common stock or other means of financing.

There is no assurance that we will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to us. The consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

3.  CRITICAL ACCOUNTING POLICIES

Effective January 1, 2009, the Company adopted FASB ASC Topic No. 815-40, Derivatives and Hedging - Contracts in Entity’s Own Stock (formerly Emerging Issues Task Force Issue No. 07-5, Determining Whether an Instrument or Embedded Feature is Indexed to an Entity’s Own Stock). The adoption of ASC Topic No. 815-40’s requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions).  Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise or conversion price. The Company evaluates whether warrants or convertible instruments contain provisions that protect holders from declines in the Company’s stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective debt, warrant or preferred stock agreements based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815-40. Instruments with such provisions are now treated as a liability and recorded at fair value at each reporting date.  

Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material effect on our financial position or results from operations. 
 
 
_____________________________________________
BIOMODA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________________________________________

4.  EARNINGS PER SHARE
 
Basic earnings per share is computed by dividing net income (loss) by the weighted-average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.  As of June 30, 2010, the Company’s potentially dilutive securities consist of outstanding warrants and options. These potentially dilutive securities have been excluded from the net loss per common share calculation for all periods presented, except for the three months ended June 30, 2010, as their effect would be anti-dilutive.  For the three months ended June 30, 2010, outstanding options and warrants had the effect of increasing diluted weighted average shares outstanding by 1,560,907 shares.
  
5.  COMMON AND TREASURY STOCK

Common Stock

During the three months ended June 30, 2010, we issued 335,000 common shares pursuant to the exercise of Series III Warrants for total cash consideration of $53,600 or $0.16 per share.

During the three months ended June 30, 2010, we issued 625,000 restricted common shares to a consultant for services pursuant to a contract.  These shares were valued at $100,000 or $0.16 per share based upon the Company’s stock price on the date of grant.

During the three months ended June 30, 2010, we issued 200,000 restricted common shares to Directors.  These shares were valued at $50,000 based upon the Company’s stock price on the date of grant.

During the three months ended March 31, 2010, we issued 480,000 restricted common shares to employees as additional compensation.  These shares were valued at $105,600 based upon the Company’s stock price on the date of grant.

During the three months ended March 31, 2010, we issued 1,200,000 restricted common shares pursuant to an agreement with members of our board of directors for total cash consideration of $60,000.

On March 17, 2010, we entered into a securities purchase agreement (the “Purchase Agreement”) by and between the Company and each purchaser (collectively, the “Purchasers”), pursuant to which we agreed to sell in a private placement transaction (i) 6,250,001 shares of our common stock, at a purchase price of $0.16 per share (the  “Shares”), (ii) Series I warrants to purchase an additional 6,250,001 shares of common stock with an exercise price of $0.25 per share, subject to adjustment as further described below (the “Series I Warrants”), (iii) Series II warrants to purchase up to an additional 3,750,001 shares of common stock, subject to adjustment as further described below, on an automatic cashless exercise basis with an exercise price of $0.01 per share (the “Series II Warrants”), and (iv) Series III warrants to purchase an additional 6,250,001 shares of common stock with an exercise price of $0.16 per share (the “Series III Warrants” and together with the Series I Warrants and the Series II Warrants, the “Warrants”).

We received aggregate gross proceeds of $1,000,000 (net proceeds of $820,000 after the fees discussed below) from the sale of the Shares and the Warrants.  The Shares and the shares of common stock issuable upon exercise of the Warrants are registered pursuant to a registration statement filed with the Securities and Exchange Commission (the “Registration Statement”) on April 9, 2010.  For information on the Warrants, see Note 6.

 
_____________________________________________
BIOMODA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________________________________________

 5.  COMMON AND TREASURY STOCK (Continued)

Common Stock (Continued)
  
In connection with the private placement, we paid our placement agent, LifeTech Capital, a cash fee of $100,000 and issued it a five-year warrant to purchase 625,000 shares of our common stock with an exercise price of $0.16 per share. LifeTech will also receive 625,000 Series I Warrants, 375,000 Series II Warrants and 625,000 Series III Warrants. In addition, LifeTech will receive 10% of the exercise price of all Series III Warrants which are exercised.  We also paid legal fees of approximately $80,000 related to the private placement.

During the three months ended June 30, 2009, we issued 30,000 common shares for services valued at $1,200.

During the three months ended March 31, 2009, we issued 30,000 common shares to a consultant for services valued at $1,200.

Treasury Stock

We account for treasury stock as a reduction in capital stock based upon the cost of the shares acquired. Our treasury stock consists of shares returned pursuant to the settlement of a lawsuit, shares returned to the Company and shares purchased by the Company in the market.  
 
During the three months ended March 31, 2010, we issued 300,000 common shares from our treasury stock for services valued at $60,000 based upon the price of our common stock on the date of agreement.

During the three months ended March 31, 2010, we acquired 100,000 shares of common stock at zero cost as part of a settlement agreement with a vendor.

As of June 30, 2010, we had 391,575 treasury shares remaining, acquired at a cost of $1,233.

6.  STOCK OPTIONS AND WARRANTS

Options

No options were granted during the three months ended June 30, 2010 and 2009, respectively. All options outstanding are fully vested and exercisable, and there was no unrecognized stock-based compensation expense as of June 30, 2010 and 2009, respectively.

 
Number of Shares
 
Weighted Average Exercise Price
 
Outstanding at December 31, 2009
1,138,768
 
$
0.36
 
Issued
-
   
-
 
Exercised
-
   
-
 
Cancelled/Expired
1,030,000
 
$
0.15
 
Outstanding at June 30, 2010
108,768
 
$
2.34
 


Outstanding and exercisable options had a weighted average remaining life of 3.9 years and no intrinsic value as of June 30, 2010.
 
 
_____________________________________________
BIOMODA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________________________________________

6.  STOCK OPTIONS AND WARRANTS (Continued)

Warrants

A summary of the changes in warrants outstanding during the three months ended June 30, 2010, is as follows:

   
Number of Shares
   
Weighted Average Exercise Price
 
Outstanding at December 31, 2009
   
-
   
$
-
 
Issued
   
18,500,003
     
0.16
 
Exercised
   
335,000
     
0.16
 
Cancelled/Expired
   
-
   
$
-
 
Outstanding at June 30, 2010
   
18,165,003
   
$
0.16
 

As of June 30, 2010, outstanding warrants had an intrinsic value of $2,405,000 and a weighted average remaining contractual term of 1.75 years.

Pursuant to the Purchase Agreement described in Note 5 above, we issued Series I, II, and III Warrants.  The Series I Warrants are exercisable to purchase an aggregate of 6,875,001 shares of the Company’s common stock over a five-year term at an exercise price equal to 125% of the closing price on March 12, 2010 or $0.25 per share, subject to anti-dilution protection that could, in certain circumstances, reduce the exercise price and increase the number of shares issuable upon exercise of the Series I Warrant.  The Series I Warrants are not exercisable until six months following the closing of the Purchase Agreement and expire on the fifth anniversary of the closing of the Purchase Agreement.  If at any time after the Initial Exercise Date, as such term is defined in the warrant agreement, there is no effective Registration Statement registering the resale of the Warrant Shares by the Holders, then the Series I Warrant may also be exercised, in whole or in part, by means of a “cashless exercise.” A Registration Statement to register the Warrant Shares was filed and declared effective on May 6, 2010.

The Series II Warrants allow the holders to purchase up to an additional 4,125,001 shares of common stock by means of a “cashless exercise.”  The Series II Warrants were to be automatically exercised on the 45th trading day following the Effective Date, which is defined as the earlier of the date that (a) all of the Registerable Securities (as defined in the Registration Rights Agreement) have been registered for resale by the holders thereof pursuant to a Registration Statement(s) declared effective by the SEC or (b) the date Rule 144 under the Securities Act of 1933 becomes available for the unrestricted resale of the Shares.   The Series II Warrants were intended to provide the investors pricing protection for the Purchase Agreement with a floor price of $0.10 per share.  In the event the market price of the Company’s shares declined between the closing of the Purchase Agreement and Effective Date, the Series II warrants were to be automatically exercised on a cashless exercise basis and a number of additional shares would be issued to the investors who participated in the Financing in order to effectively reduce the per share purchase price paid in the Purchase Agreement to the greater of (i) 80% of the 45-day volume weighted average trading price per share of the Company’s common stock immediately following the Effective Date and (ii) $0.10 per share.  As such, the greatest number of shares that could be issued pursuant to the Series II Warrants would be 4,125,001 shares.  At the Effective Date, the Series II Warrants would either be automatically exercised on a cashless exercise basis if the Company’s stock price is lower at the Effective Date as described above, or they will expire unexercised.  
 
 
_____________________________________________
BIOMODA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________________________________________

6.  STOCK OPTIONS AND WARRANTS (Continued)

Subsequent to the three months ended June 30, 2010, we issued 589,712 non-restricted common shares pursuant to the provisions of the Series II warrants.  This exercise was automatic and cashless according to the warrant documents.  The remaining Series II warrants are now expired.

At the Effective Date, the Series III Warrants provide the investors a 90-day right, subject to extension by a number of days equivalent to the number of days the Registration Statement is not effective during the Series III Warrant term, if applicable, to purchase an additional 6,875,001 shares of common stock from the Company at $0.16 per share.  The Series III Warrants are not subject to any adjustments with respect to the exercise price or number of shares covered, except in limited circumstances.  The Registration Statement was filed and became effective on May 6, 2010.  Series III warrants expire August 6, 2010.

Subsequent to the three months ended June 30, 2010, we issued 1,137,584 non-restricted common shares pursuant to the provisions of the Series III warrants for total cash consideration of $182,013 or $0.16 per share.

In connection with the private placement, we paid our placement agent 625,000 warrants. These warrants provide the agent a five-year right to acquire shares of the company’s stock at $0.16 per share. These warrants are not subject to any adjustments with respect to the exercise price or number of shares covered, except in limited circumstances.
 
7.   DERIVATIVE LIABILITIES – WARRANTS AND OPTIONS

Series I Warrants

The Company determined that Series I Warrants to purchase a total of 6,875,004 shares of common stock issued pursuant to the March 2010 Securities Purchase Agreement contained provisions that protect holders from declines in the Company’s stock price that could result in modification of the exercise price under the warrant based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815-40.  As a result, these warrants were not indexed to the Company’s own stock.  The fair value of these warrants was recognized as derivative warrant instruments and will be measured at fair value at each reporting period.  Accordingly, during the period ended March 31, 2010, the Company charged the amount of $1,780,583 to stockholders' equity.

The Company measured the fair value of these instruments as of June 30, 2010, and recorded $536,876 unrealized gain for the three months ended June 30, 2010, and $54,251 unrealized loss for the six months ended June 30, 2010. The Company determined the fair values of these securities using a lattice valuation model.

The fair value of the derivative warrant instruments is estimated using the lattice valuation model with the following assumptions as of June 30, 2010:

Common stock issuable upon exercise of warrants
   
6,875,000
 
Estimated market value of common stock on measurement date
 
$
0.23
 
Exercise price
 
$
0.25
 
Risk-free interest rate (1)  
   
3.00
%
Warrant lives in years
   
5.0
 
Expected volatility (2)  
   
202.88
%
Expected dividend yield (3)  
 
None
 
Probability of reset to conversion price (4)
 
12.5%
 
 
 
_____________________________________________
BIOMODA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________________________________________

7.   DERIVATIVE LIABILITIES – WARRANTS AND OPTIONS (Continued)
 
(1)
The risk-free interest rate was determined by reference to the yield of US Treasury securities with a term of five years.
(2)
The volatility factor is based upon the historical volatility of the Company’s common stock.
(3)
Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends in the near term.
(4)
This represents management’s estimate of the probability that the Company will issue stock at a price lower than the warrants’ exercise price.

Insufficient Authorized but Unissued Shares of Common Stock

The issuance of the Warrants on March 17, 2010, pursuant to the Purchase Agreement described in Note 5 above, resulted in a total potential obligation to issue up to 18,165,002 shares of common stock upon the exercise of outstanding warrants and options held by non-employees. The Company had 87,053,015 shares of common stock outstanding at March 31, 2010, and, prior to the May 29, 2010, stockholder approval for an increase in the Company’s authorized shares, had only 100,000,000 shares of common stock authorized. If the warrants and options were to be fully exercised, the Company would have exceeded its authorized shares by 6,053,361 shares.

As we did not have sufficient shares authorized to settle all of our outstanding contracts, this triggered a change in the manner in which the Company accounted for the warrants and stock options held by non-employees. The Company began to account for these warrants and stock options utilizing the liability method.  Pursuant to ASC 815-40-05" If a contract is reclassified from permanent or temporary equity to an asset or a liability, the change in fair value of the contract during the period the contract was classified as equity should be accounted for as an adjustment to stockholders' equity."  Accordingly, during the period ended March 31, 2010, the Company charged the amount of $1,570,724 to stockholders' equity.

The accounting guidance states that warrants and stock options which are accounted for as a derivative liability should be revalued each reporting period until the circumstances which triggered liability accounting are resolved. The recorded value of such warrants and stock options can fluctuate significantly based on fluctuations in the market value of the issuer’s common stock, as well as in the volatility of the stock price during the term used for observation and the term remaining for warrants.

On May 29, 2010, the Company received stockholder approval for an increase in its authorized shares to 150,000,000.  Pursuant to the accounting guidance, the warrants and stock options which were a derivative liability were revalued as of May 29, 2010, and the Company recorded a gain for the three months ended June 30, 2010, of $1,240,194 for the change in the fair value of the liability associated with all warrants outstanding (other than the Series I Warrants described above) and $12,336 for stock options held by non-employees.

With the increase in the Company’s authorized shares to 150,000,000, the circumstances that triggered liability accounting for non-employee warrants and options were resolved.  Accordingly, on May 29, 2010, the Company credited the remaining derivative liability associated with these warrants and options to stockholders’ equity and these instruments are no longer accounted for utilizing the liability method.


Activity for derivative warrant and options instruments during the six months ended June 30, 2010, was as follows:
 
   
Balance at December 31, 2009
   
Initial Valuation of Derivative Liabilities during the Period
   
Increase
(Decrease) in
Fair Value of
Derivative
Liability
   Decrease Credited to Stockholders’ Equity Upon Increase in Authorized Shares
 
 
Balance at June 30, 2010
 
Derivative warrant instruments – Series I
  $     $ 1,780,583     $ 54,251    $     $ 1,834,834  
Derivative warrant instruments – All others
  $     $ 1,549,690     $ (507,772 )  $ (1,041,918 )   $ -  
Derivative option instruments
  $     $ 21,034     $ (5,253 )  $ (15,781 )   $ -  
  Total
  $     $ 3,351,307     $ (458,774 )  $ (1,057,699 )   $ 1,834,834  
 
Activity for derivative warrant and options instruments during the three months ended June 30, 2010, was as follows:
 
   
Balance at March 31, 2009
   
Increase
(Decrease) in
Fair Value of
Derivative
Liability
   
Decrease Credited to Stockholders’ Equity Upon Increase in Authorized Shares
   
Balance at June 30, 2010
 
Derivative warrant instruments – Series I
  $ 2,371,710     $ (536,876 )    $        $ 1,834,834  
Derivative warrant instruments – All others
  $ 2,282,112     $ (1,240,194  )    $ (1,041,918  )    $ -  
Derivative option instruments
  $ 28,117     $ (12,336  )    $ (15,781  )    $ -  
  Total
  $ 4,681,939     $ (1,789,406  )    $ (1,057,699  )    $ 1,834,834  

 
 
_____________________________________________
BIOMODA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________________________________________

7.   DERIVATIVE LIABILITIES – WARRANTS AND OPTIONS (Continued)

We valued the warrants using the Black-Scholes valuation model utilizing the following variables:
 
 
May 29, 2010
 
March 31, 2010
 
March 17, 2010
 
 
Market value of stock on grant date or measurement  date
$ 0.17      $ 0.29(1)      $ 0.22  
Risk-free interest rate (1)
  3.00  
%
    3.00  
%
    3.00 %
Dividend yield
  0.00  
%
    0.00  
%
    0.00 %
Volatility factor
  124.07-201.62  
%
    115.89-201.62  
%
    115.89-201.62 %
 
Weighted average expected life (2)
 
4.0 years
     
4.22 yrs
     
4.22 yrs
 
Expected forfeiture rate
  0  
%
    0  
%
    0 %

 
(1)
The risk-free interest rate was determined by management using the U.S. Treasury zero-coupon yield over the contractual term of the warrant on date of grant.

(2)
Due to a lack of stock option exercise history, the Company uses the simplified method under SAB 107 to estimate expected term.
 
 
_____________________________________________
BIOMODA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________________________________________

8.   FAIR VALUE MEASUREMENTS
 
As defined in FASB ASC Topic No. 820-10 (formerly SFAS 157), fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic No. 820-10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:

Level 1:
 
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. 
     
Level 2:
 
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that the Company values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.
     
Level 3:
  
Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). The Company’s valuation models are primarily industry standard models.  Level 3 instruments include derivative warrant instruments.  The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2.

As required by FASB ASC Topic No. 820-10 (formerly SFAS 157), financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of the derivative warrant instruments was calculated using the lattice valuation model (see Note 7 for the assumptions) for the Company’s Series I Warrants and the Black-Scholes valuation model for all other warrants and non-employee options.
 
 
_____________________________________________
BIOMODA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________________________________________

8.   FAIR VALUE MEASUREMENTS (Continued)

Fair Value on a Recurring Basis
 
The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2010:

   
Fair Value Measurements at June 30, 2010
 
Description
 
Quoted Prices In Active Markets for Identical Assets
(Level 1)
 
 
Significant Other Observable Inputs
(Level 2)
 
 
Significant Unobservable Inputs
(Level 3)
 
 
Total Carrying Value as of
June 30, 2010
 
Derivative warrant instruments
 
$
-
   
$
-
   
$
1,834,834
   
$
1,834,834
 

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:

   
Significant Unobservable Inputs
(Level 3)
Three Months Ended
June 30,
 
   
2010
   
2009
 
Beginning balance
  $ (2,371,710 )   $ -  
Total gains (losses)
    536,876       -  
Settlements
    -       -  
Additions
    -       -  
Transfers
    -       -  
Ending balance
  $ (1,834,834 )   $ -  
                 
Change in unrealized gains (losses) included in earnings
  relating to derivativesstill held as of June 30, 2010 and 2009
  $ 536,876     $ -  
 

_____________________________________________
BIOMODA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________________________________________

   
Significant Unobservable Inputs
(Level 3)
Six Months Ended
June 30,
 
   
2010
   
2009
 
Beginning balance
  $ -     $ -  
Total gains (losses)
    (54,251     -  
Settlements
    -       -  
Additions
    (1,780,583 )     -  
Transfers
    -       -  
Ending balance
  $ (1,834,834 )   $ -  
                 
Change in unrealized gains (losses) included in earnings
  relating to derivatives still held as of June 30, 2010 and 2009
  $ (54,251 )   $ -  
 
9. LEGAL UPDATE
 
As the result of a federal lawsuit entitled Advanced Optics Electronics, Inc., et al. v. Leslie S. Robins, et al. No. CIV-2007-00855, JB/DJS, U.S. District Court for the District of New Mexico and two related suits, Biomoda has won default judgments against two Defendants, Alvin Robins and John Kearns, on all counts alleged and in favor of Biomoda.  Biomoda submitted a final statement of damages to the Court in November, 2009.  At the hearing on Aug. 4, 2010, defendant Alvin Robins failed to appear.  The Court allowed Biomoda's counsel to proceed with oral argument on the motion for a damages amount to be awarded to Biomoda.  Subsequently, in an opinion and memoranda issued on August 4, 2010, the Court  allowed defendant Alvin Robins ten days to request further hearing on the matter before the Court and to answer the Biomoda argument for damages. Defendant John Kearns is deceased.  Biomoda has waived the right to pursue damages against Mr. Kearns' estate.

10. SUBSEQUENT EVENTS

Subsequent to the three months ended June 30, 2010, we issued 589,712 common shares pursuant to the provisions of the Series II Warrants.  This exercise was automatic and cashless according to the warrant documents.  The remaining Series II Warrants are now expired.

Subsequent to the three months ended June 30, 2010, we issued 1,137,584 common shares pursuant to the exercise of Series III Warrants for total cash consideration of $182,013 or $0.16 per share. The remaining Series III Warrants are now expired.
 
Subsequent to June 30, 2010, we issued 225,000 common shares to employees as additional compensation.  These shares were valued at $45,000 based upon the Company’s stock price on the date of grant.
 
Subsequent to June 30, 2010, we issued 150,000 common shares to consultants as additional compensation.  These shares were valued at $30,000 based upon the Company’s stock price on the date of grant.
 
Subsequent to June 30, 2010, we issued 1,300,000 common shares to a consultant pursuant to a contract.  These shares were valued at $247,000 based upon the Company’s stock price on the date of grant.
 
 
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
 
Company Overview

Biomoda has been in the development stage since it began operations on January 3, 1990, and has not generated any significant revenues from operations. There is no assurance of any future revenues. As of June 30, 2010, Biomoda had an accumulated deficit of $8,850,578 and a working capital deficit of $2,315,215, of which $1,834.834 was attributable to the non-cash derivative liability associated with our outstanding warrants and non-employee options. In addition, Biomoda did not generate any cash from operations and had no cash reserve dedicated to fund expenditures. These factors create an uncertainty as to Biomoda’s ability to continue as a going concern.

PLAN OF OPERATION

Our plan of operation for the next 18 months is to complete the pilot and pivotal clinical trials for our lung cancer assay and submit clinical study results to the U.S. Food and Drug Administration ("FDA") for a PMA Class III approval of our CyPathâ diagnostic assay for the early detection of lung cancer.  We are currently concluding our pilot clinical study.  The pilot clinical trial includes a cohort of patients who had a diagnosis of cancer but who had not begun treatment for the disease and a cohort of high-risk participants, including military veterans in New Mexico.  Biomoda has closed patient enrollment and sample collection for the pilot study.  The study team is completing data analysis and preparing its report for release.  The Company anticipates results sufficient to provide the foundation for a pivotal clinical study leading to submission to the FDA for approval of the commercial sale of Biomoda’s technology.

We are also developing strategies to enter the European market, including filing for approval of a CE mark.  The initial work includes an analysis of access to various European markets and regulatory approvals needed for commercial sales in Europe.  
 
Our initial product is an in-vitro diagnostic test for lung cancer that will be used to evaluate sputum samples obtained non-invasively from patients.   The samples will be sent to a clinical lab where they will be analyzed with the CyPath® assay labeling solution to determine the presence, or absence, of lung cancer or precancerous cells.  Our diagnostic test can be used for other tissue and body fluid samples, and we intend to create and market products to diagnose and screen for other prevalent cancers, including breast, cervical, bladder, oral and colorectal.  We have determined that our initial markets will build upon established relationships with prominent hospitals, laboratories and the U.S. Veterans Administration ("VA") hospitals.  Such relationships will ensure timely initial commercial sales.  This initial commercial acceptance within the VA system can be efficiently leveraged through the VA infrastructure.  The VA also is the product approval channel for the U.S. Agency for International Development ("AID"), conditional on FDA approval.  Ongoing published results of test data and clinical studies and presentations at appropriate medical symposia will help accelerate sales growth.
 
In addition to augmenting laboratory research and development, management plans to further strengthen our corporate infrastructure to adequately manage the future growth and success of our operations.  Management expects to hire additional personnel and enter into consulting and collaborative arrangements over the next 12 months as needed to continue to strengthen and enhance the growth of the Company.

CLINICAL STUDY UPDATE 
 
On March 5, 2009, we received approval from an independent Institutional Review Board ("IRB") to begin pilot clinical trials of our cytology-based screening technology for early detection of cancer. Biomoda’s proprietary technology had previously shown 100 percent sensitivity and 100 percent specificity during internal testing on a small sample of patients. 
 
Funded by the New Mexico State Legislature and administered by the New Mexico Department of Veterans Services and the New Mexico Institute of Mining and Technology, the screening program is the first large-scale study of Biomoda’s CyPath® investigational-use-only (not yet FDA-approved) diagnostic, which is based on a patented molecular marker that binds to cancer cells and fluoresces under specific frequencies of light.  
 
 
We have received full payment of a continuing government contract of $1.3 million for fiscal year ended June 30, 2009, related to this study.
 
Study volunteers provide deep-lung sputum samples to be screened for the presence or absence of cancer cells with Pap stain analysis performed by cytopathologists at the VA Medical Center in Denver and CT scans read by independent radiologists under the International Early Lung Cancer Action Program (I-ELCAP) Enrollment and Screening Protocol.  Results determined on the sputum samples with the investigational CyPath® assay in the Biomoda lab are then compared to these diagnostic results.  Results from this study will be used by Biomoda as the foundation for its large pivotal clinical study that will lead to FDA approval for commercialization of the CyPath® assay.
  
Dr. Thomas L. Bauer, Chief Thoracic Surgeon and cancer researcher with the Christiana Care Health System in Delaware, is the national Principal Investigator (PI) overseeing the pilot clinical study currently underway.  Dr. Bauer has led several lung and esophageal cancer studies.  Dr. Bauer is working with Dr. Lara Patriquin, a diagnostic radiologist in Albuquerque, who serves as the local PI for the pilot clinical study.
 
The pilot clinical study is focused on testing military veterans because they may be at least 25 percent more likely to develop lung cancer and die from the disease than the general population, according to a U.S. Department of Defense report. The pilot clinical trial also includes analysis of a cohort of patients who had been diagnosed with cancer but had not yet begun treatment for the disease.  Biomoda has closed patient enrollment and sample collection for the pilot study.  The study team is completing data analysis and preparing its report for release.   Results will be published at the end of the study period after data has been analyzed.  The Company anticipates results sufficient to provide the foundation for a pivotal clinical study leading to submission to the FDA for approval of the commercial sale of Biomoda’s technology.

Our pilot clinical trial to screen military veterans for early-stage lung cancer has been enhanced to include a longitudinal component, which will provide additional data on the efficacy of the Biomoda diagnostic. Study participants whose initial results indicated areas of concern – the presence of nodules on the lungs, a positive read by CyPathâ or a positive read for cancer cells with Pap analysis – have been asked to return for follow-up screening. We believe the ability to monitor study participants over the longer term will result in a better medical outcome for the patient as well as provide additional data for Biomoda in preparation for the pivotal trials and FDA approval.

It is expected that continued contact with study participants that allows for monitoring of their lung health will expand the use of the CyPath® assay beyond early diagnosis to measuring the success of treatment.

Biomoda has taken preliminary steps necessary to conduct the multi-site pivotal clinical study of our diagnostic for early-stage lung cancer, trademarked under the name CyPath®.

Biomoda is seeking FDA approval of its cytology-based screening technology as a Class III medical device under the Pre-Market Approval ("PMA") process.  When pilot clinical trial results are complete, the Company intends to file a report with the FDA informing the agency of study findings and submit a pre-IDE (Investigational Device Exemption) filing.
 
Increase in Authorized Common Stock
 
On May 20, 2010, we held a Special Meeting of Shareholders to increase the authorized shares of Common Stock to 150,000,000.  The meeting was adjourned until May 29, 2010, at 10 a.m. Mountain Time.  As of May 24, a majority of shareholders had approved the increase in authorized shares to 150,000,000.  This vote was ratified at the May 29, 2010, meeting.

Equity Transactions

On April 9, 2010, we filed a Form S-1 Registration Statement to cover 16,250,003 of the shares pursuant to a securities purchase agreement (the “Purchase Agreement”) by and between the Company and each purchaser identified on the signature pages thereto (collectively, the “Purchasers”), pursuant to which we agreed to sell in a private placement transaction (i) 6,250,001 shares of our common stock, at a purchase price of $0.16 per share (the “Shares”), (ii) Series II warrants to purchase up to an additional 3,750,001 shares of common stock, subject to adjustment as further described below, on an automatic cashless exercise basis with an exercise price of $0.01 per share (the “Series II Warrants”), and (iii) Series III warrants to purchase an additional 6,250,001 shares of common stock with an exercise price of $0.16 per share.  The Form S-1 Registration Statement became effective May 6, 2010.

 
On June 22, 2010, we filed an Amended Form S-1 Registration Statement to cover 7,500,001 of the shares pursuant to a securities purchase agreement (the “Purchase Agreement”) by and between the Company and each purchaser identified on the signature pages thereto (collectively, the “Purchasers”), pursuant to which we agreed to sell in a private placement transaction (i) 625,000 shares of our common stock, at a purchase price of $0.16 per share (the “Shares”), and (ii) Series I warrants to purchase an additional 6,875,001 shares of common stock with an exercise price of $0.25 per share, subject to adjustment as further described below (the “Series I Warrants”).  The Amended Form S-1 Registration Statement became effective June 30, 2010.

BOARD ELECTION AND APPOINTMENT OF CORPORATE SECRETARY

On July 27, 2010, the Board of Directors unanimously elected Maria Zannes as its Chairman.  Ms. Zannes stepped down as Corporate Secretary.  The Board of Directors also elected Timothy Zannes as Corporate Secretary.  Mr. Zannes remains in his capacity as Corporate Legal Counsel.
 
OTHER INITIATIVES

Government Contracts
In July 2009, Biomoda President John Cousins testified before the Nebraska State Legislature about legislation to fund a clinical study for the early detection of lung cancer in Nebraska veterans.  Management is continuing discussions to obtain funding for clinical study of CyPath by Nebraska institutions.

Online Networking

Biomoda provides public updates through both Twitter, Facebook and email updates.  Interested parties may also register on the Biomoda website at www.biomoda.com to receive email updates about the Company.

PATENTS AND TRADEMARKS

In January 2005, the U.S. Patent Office awarded a Patent to Biomoda entitled "Compositions and Methods for Detecting Precancerous Conditions in Cells and Tissue Samples using 5, 10, 15, 20 Tetrakis (Carboxyphenyl) Porphine." This Patent represented a significant addition to our patent portfolio and expanded our intellectual property to include cancer screening as a compliment to the existing technology. We filed for a continuation of this Patent based on research currently underway by researchers at Biomoda.
 
In April 2008, the U.S. Patent Office awarded a Divisional Patent to Biomoda entitled “Method of Prognosing Response to Cancer Therapy with 5, 10, 15, 20 - Tetrakis (Carboxyphenyl) Porphine,” patent number 7,382,764.

On October 22, 2009, Biomoda received a Notice of Allowance from the U.S. Patent and Trademark Office for the patent “Method for Making 5, 10, 15, 20- Tetrakis (Carboxyphenyl) Porphine (TCPP) Solution and Composition Comprising TCPP.”  The new patent is number 7,670,799.

Subsequent to June 30, 2010, Biomoda filed an additional patent application, “System and Method for Analyzing Samples Labeled with 5, 10, 15, 20 Tetrakis (4-Carboxyphenyl) Porphine (TCPP)” which provides a quantitative method for reading tissue samples for signs of malignant cells based on flow cytometry and dark-field microscopy.

On July 27, 2010, Biomoda received a Notice of Allowance from the Canadian Intellectual Property Office for "Compositions and Methods for Detecting Precancerous Conditions in Cells and Tissue Samples using 5, 10, 15, 20 Tetrakis (Carboxyphenyl) Porphine."  The new Canadian patent number is 2,429,526.

The U.S. Patent and Trademark Office has registered the marks CyPath® and CyDx®.
 
 
RESULTS OF CONTINUING OPERATIONS

We have recorded no significant revenue from inception through June 30, 2010.

Due to our limited operating history, we believe that period-to-period comparisons of our results of operations are not fully meaningful and should not be relied upon as an indication of future performance.

Comparison of the three months ended June 30, 2010 and 2009

REVENUE.  As of June 30, 2010, there have been no significant revenues since inception.
 
RESEARCH AND DEVELOPMENT.  Product development expenses consist primarily of personnel expenses and consulting fees. Research and development, including payroll costs and other technical costs, increased to $111,622 for the three months ended June 30, 2010, from $16,389 for the three months ended June 30, 2009. We believe that continued investment in product development is critical to attaining our strategic objectives and, as a result, we expect expenses such as clinical studies and collaborations to increase significantly in the next year. We expense product development costs as they are incurred.  During the quarter ended June 30, 2009, we accrued a reimbursement of allowable research and development expenses through a clinical study funded through the New Mexico Department of Veterans Services and administered by the New Mexico Institute of Mining and Technology to screen New Mexican veterans for lung cancer.  For the three months ended June 30, 2009, we recorded $248,193 as a reduction of research and development expenses related to this clinical study program. For the three months ended June 30, 2010, we recorded $0 as a reduction of operating expenses related to this clinical study program.
 
GENERAL AND ADMINISTRATIVE.  General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services, travel and general corporate activities.  General and administrative costs, taken together with professional fees, increased to $323,349 for the three months ended June 30, 2010, from $79,846 for the three months ended June 30, 2009.  The increase was primarily related to increased wages due to additional employees added in 2009 and 2010.  We expect general and administrative costs to increase in the future as our business prospects develop and we require more staff. The costs associated with being a publicly traded company and future strategic acquisitions will also be a contributing factor to increases in this expense.

OTHER INCOME (EXPENSE).  Other income (expense) in these periods is composed of interest expense, gain on sale of assets and unrealized losses related to the increase in the fair value of the derivative liabilities associated with our outstanding warrants and options.  Interest expense decreased for the three months ended June 30, 2010, to $3,934 from $3,967 for the three months ended June 30, 2009.   Also, during the three months ended June 30, 2010, we recognized an unrealized non-cash gain from the decrease in the fair value of the derivative liability related to our outstanding warrants and non-employee options of $1,777,070 and $12,336, respectively.

Comparison of the six months ended June 30, 2010 and 2009

REVENUE.  As of June 30, 2010, there have been no significant revenues since inception.
 
RESEARCH AND DEVELOPMENT.  Product development expenses consist primarily of personnel expenses and consulting fees. Research and development, including payroll costs and other technical costs, increased to $159,572 for the six months ended June 30, 2010, from $11,330 for the six months ended June 30, 2009. We believe that continued investment in product development is critical to attaining our strategic objectives and, as a result, we expect expenses such as clinical studies and collaborations to increase significantly in the next year. We expense product development costs as they are incurred.  During the six months ended June 30, 2010 and 2009, we accrued a reimbursement of allowable research and development expenses through a clinical study funded through the New Mexico Department of Veterans Services and administered by the New Mexico Institute of Mining and Technology to screen New Mexican veterans for lung cancer.  For the six months ended June 30, 2009, we recorded $456,046 as a reduction of research and development expenses related to this clinical study program. For the six months ended June 30, 2010, we recorded $44,892 as a reduction of operating expenses related to this clinical study program.
 
 
GENERAL AND ADMINISTRATIVE.  General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services, travel and general corporate activities.  General and administrative costs, taken together with professional fees, increased to $699,064 for the six months ended June 30, 2010, from $163,386 for the six months ended June 30, 2009.  The increase was primarily related to increased wages due to additional employees added in 2009 and 2010.  We expect general and administrative costs to increase in the future as our business prospects develop and we require more staff. The costs associated with being a publicly traded company and future strategic acquisitions will also be a contributing factor to increases in this expense.
 
OTHER INCOME (EXPENSE).  Other income (expense) in these periods is composed of interest expense, gain on sale of assets and unrealized losses related to the increase in the fair value of the derivative liabilities associated with our outstanding warrants and options.  Interest expense increased for the six months ended June 30, 2010, to $7,892 from $7,366 for the six months ended June 30, 2009.  We recognized a gain of $2,068 associated with the sale of equipment for the six months ended June 30, 2010.  Also, during the six months ended June 30, 2010, we recognized an unrealized non-cash gain from the decrease in the fair value of the derivative liability related to our outstanding warrants and non-employee options of $453,521 and 5,253, respectively.
 
LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations with sales of equity for cash, issuance of equity for services in lieu of cash and government funding.  In the next 18 months, it is our intent to generate revenues from product sales and to begin partially funding operations from revenues, which will be subject to the outcome of clinical studies and FDA approval.

On March 17, 2010, we entered into a securities purchase agreement (the “Purchase Agreement”) by and between the Company and each purchaser identified on the signature pages thereto (collectively, the “Purchasers”), pursuant to which we agreed to sell in a private placement transaction (i) 6,250,001 shares of our common stock, at a purchase price of $0.16 per share (the “Shares”), (ii) Series I warrants to purchase an additional 6,250,001 shares of common stock with an exercise price of $0.25 per share, subject to adjustment as described in the warrant agreement (the “Series I Warrants”), (iii) Series II warrants to purchase up to an additional 3,750,001 shares of common stock, subject to adjustment as described in the warrant agreement, on an automatic cashless exercise basis with an exercise price of $0.01 per share (the “Series II Warrants”), and (iv) Series III warrants to purchase an additional 6,250,001 shares of common stock with an exercise price of $0.16 per share (the “Series III Warrants” and together with the Series I Warrants and the Series II Warrants, the “Warrants”).
 
We received aggregate gross proceeds of $1,000,000 (net proceeds of $820,000 after placement agent and legal fees) from the sale of the Shares and the Warrants.  The Shares and the shares of common stock issuable upon exercise of the Warrants are registered pursuant to a registration statement filed with the Securities and Exchange Commission (the “Registration Statement”) on April 9, 2010, that became effective May 6, 2010.
 
In addition to funding normal operating expenses, the proceeds from the securities purchase transaction are targeted for four main objectives 

1.  
Completion of the pilot study. 
 
2.  
 Design of the pivotal study.

3.  
 Investigation of CyPath’s suitability as a diagnostic for additional cancers.

4.  
Develop strategies to enter the European market, including filing for approval of a CE mark.  
 
Product development expenditures, including personnel expense and general and administrative expense, was   $111,622 for the three months ended June 30, 2010.  Funds for operations, product development and capital expenditures were provided from the sale of restricted company stock and the reimbursement grant we received.  We will require substantial additional funding for continuing research and development, obtaining regulatory approval and the commercialization of our products.

 
Management believes that sales of securities and government contracts will provide adequate liquidity and capital resources to meet the anticipated development-stage requirements through the end of 2011.  In addition, it is anticipated that sales of our initial screening product will begin in 2012, pending FDA approval, and generate operating revenues.  It is anticipated that these sales will provide the additional capital resources to fund the proportionately higher working capital requirements of production and sales initiatives and continued product development for second-generation diagnostic and therapeutic products.

Subsequent to June 30, 2010, Biomoda submitted an application for a grant under the Qualifying Therapeutic Discovery Project provided under new section 48D of the Internal Revenue Code ("IRC"), enacted as part of the Patient Protection and Affordable Care Act of 2010 (P.L. 111-148).  We will be notified of the status of our application by October 29, 2010.

There is no assurance that we will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to us.  The consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

INFLATION

Management believes that inflation has not had a material effect on our results of operations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in our market risks since the end of fiscal year 2009.
 
Item 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report, June 30, 2010.  Based upon that evaluation, we concluded that our disclosure controls and procedures were not effective.

Management noted that there were no material weaknesses related to the policies and procedures that:

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
 
Provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
 
 
The Company's material weaknesses exist in its period-end closing procedures and specifically relate to the procedures designed to ensure that:

1.  
All expenses are properly accrued and reported in the proper period;
 
2.  
Deferred charges are properly amortized to expense in the proper accounting period; and
 
3.  
All required GAAP and SEC disclosures are made in its annual filings.
 
To remedy these material weaknesses, the Company intends to modify its monthly closing procedures to allow for additional levels of management review to ensure all expenses are recorded or amortized in the correct accounting period.  The Company will also implement additional procedures, including the use of disclosure checklists and possibly outside consultants, if cost effective, to ensure required GAAP and SEC disclosures are made in its annual and quarterly reports.

We are in the development stages of our business operations and have limited resources available to plan, develop, and implement disclosure and procedure controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure.  
 
We are re-evaluating and revising our existing control policies and procedures. As part of such plan and implementation, we are re-evaluating, re-designing and documenting policies and procedures, putting such procedures into operation and monitoring the effectiveness of the procedures.
  
CHANGES IN CONTROLS AND PROCEDURES

Significant changes have been made to improve our internal controls over financial reporting during the three months ended June 30, 2010.  We have implemented checklists for beginning-of-month, mid-month and end-of-month activities which are reviewed by Management.  Management continues to address the deficiencies in our control and procedures.  We have hired a CPA firm, Meyners and Company, to help oversee accounting, create financial statements and liaison with auditors.  We have completed an accounting manual and are implementing a review process over significant business transactions.

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROL

Management, including the CEO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material errors.  An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations on all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, and/or by management's override of the controls. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in circumstances, and/or the degree of compliance with the policies and procedures may deteriorate.  Because of the inherent limitations in a cost-effective internal control system, financial reporting misstatements due to error or fraud may occur and not be detected on a timely basis.
 
 
PART II. OTHER INFORMATION
 
  
As the result of a federal lawsuit entitled Advanced Optics Electronics, Inc., et al. v. Leslie S. Robins, et al. No. CIV-2007-00855, JB/DJS, U.S. District Court for the District of New Mexico and two related suits, Biomoda has won default judgments against two Defendants, Alvin Robins and John Kearns, on all counts alleged and in favor of Biomoda.  Biomoda submitted a final statement of damages to the Court in November 2009.  At the hearing on Aug. 4, 2010 defendant Alvin Robins failed to appear.  The Court allowed Biomoda's counsel to proceed with oral argument on the motion for a damages amount to be awarded to Biomoda.  Subsequently in an opinion and memoranda issued on August 4, 2010, the Court has allowed defendant Alvin Robins ten days to request further hearing on the matter before the Court and to answer the Biomoda argument for damages.  Defendant John Kearns is deceased.  Biomoda has waived the right to pursue damages against Mr. Kearns' estate.
 
Item 2.  CHANGES IN SECURITIES - None
 
Item 3.  DEFAULTS UPON SENIOR SECURITIES - None
 
Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

A Special Meeting of Shareholders was held on May 20, 2010, to increase the authorized shares of Common Stock from 100,000,000 to 150,000,000.  The meeting was adjourned until May 29, 2010, 10 a.m. Mountain Time.  As of May 24, a majority of shareholders had approved the increase in authorized shares to 150,000,000.  This vote was ratified at the May 29, 2010, meeting.
 
Item 5.  OTHER INFORMATION - None
 
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  BIOMODA, INC.  
       
Date: August 16, 2010
By:
/s/ John J. Cousins                                          
    John J. Cousins  
    President  
    (Principal Executive and Accounting Officer)