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EX-32.1 - EXHIBIT 32.1 - NATIONAL QUALITY CARE INCv242296_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - NATIONAL QUALITY CARE INCv242296_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - NATIONAL QUALITY CARE INCv242296_ex31-1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(MARK ONE)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
 
OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO _______________________
 
Commission file number 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)
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $0.01 par value per share
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨  No x
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes x  No ¨
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ¨
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ¨  No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. x
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company x
   
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨  No x
 
The aggregate market value of voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2008 was $1,457,716.
 
There were 73,916,252 shares of common stock outstanding as of December 31, 2008.
 
DOCUMENTS INCORPORATED BY REFERENCE:  NONE.
 
 
 

 

TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-K
YEAR ENDED DECEMBER 31, 2008
 
 
Page
   
EXPLANATORY NOTE
1
   
FORWARD-LOOKING STATEMENTS
1
   
PART I
1
   
Item 1.  Description of Business
1
   
Item 1A.  Risk Factors
9
   
Item1B.  Unresolved Staff Comments
9
   
Item 2.  Description of Property
9
   
Item 3.  Legal Proceedings
9
   
Item 4.  [Reserved]
10
   
PART II
10
   
Item 4. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
10
   
Item 5.  Selected Financial Data
11
   
Item 6.  Management’s Discussion and Analysis of Financial Condition and Results of Operation
11
   
Item 6A.  Quantitative and Qualitative Disclosures About Market Risk
19
   
Item 7.  Financial Statements and Supplementary Data
19
   
Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
19
   
Item 8A.  Controls and Procedures
19
   
Item 8B.  Other Information
21
   
PART III
21
   
Item 10.  Directors and Executive Officers
21
   
Item 11.  Executive Compensation
23
   
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
27
   
Item 13.  Certain Relationships, Related Transactions and Director Independence
28
   
Item 14.  Principal Accounting Fees and Services
29
   
PART IV
30
   
Item 15.  Exhibits and Financial Statement Schedules
30
 
 
i

 

EXPLANATORY NOTE
 
Prior to the date of this filing, National Quality Care, Inc. has not filed any periodic reports since December 9, 2008 for the quarterly report on Form 10-Q for the period ended September 30, 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.
 
FORWARD-LOOKING STATEMENTS
 
Certain statements in this Annual 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 outstanding litigation with Xcorporeal, Inc. and the uncertainty about our ability to continue as a going concern, as well as those set forth in this Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date of this Report. Readers are advised that 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.

 
1

 

PART I
 
Item 1.  Description of Business
 
Nature of Business
 
Prior to the sale of substantially all our assets as described later in this Report, we were a research and development company. Our platform technology was a wearable artificial kidney for dialysis and other medical applications (the “Wearable Kidney”). This device treats the blood of patients through a pulsating, dual-chambered pump. Continuous dialysis has always been possible for patients who are able to make several weekly visits to a dialysis clinic to be attached to a large machine for three to four hours at a time. With a wearable artificial kidney, patients would be able to have 24-hour dialysis, seven days a week, without having to spend long hours attached to a large machine at a clinic, allowing them to maintain a reasonable life style.
 
National Quality Care, Inc. was incorporated in Delaware in 1989 under the name “Emory Capital Corp.” The Company changed its name to Sargent, Inc. in 1991 and to National Quality Care, Inc. in 1996. Until May 31, 2006, the Company, through Los Angeles Community Dialysis, Inc., a California corporation (“LACD”), a wholly-owned subsidiary, the dialysis clinic located in Los Angeles, California, provided dialysis services for patients suffering from chronic kidney failure and for patients suffering acute kidney failure through a visiting nursing program contracted to several Los Angeles County hospitals. On May 31, 2006, LACD completed the sale of substantially all of its assets used in the chronic care dialysis clinic. On June 15, 2006, LACD completed the sale of the acute care dialysis unit. The Company decided to sell the dialysis units in order to focus principally on completion of the development and eventual commercial marketing of the Wearable Kidney.
 
The terms “NQCI,” “the Company,” “we,” “us” or “our” refer to National Quality Care, Inc, a Delaware corporation.
 
Pending resolution of the arbitration with Xcorporeal, Inc. as discussed later in this Report, we suspended our research and development efforts with respect to the wearable artificial kidney and have no active business operations.
 
Our Wearable Artificial Kidney
 
The Wearable Kidney Solution
 
We developed a prototype device that can provide dialysis 24 hours a day, seven days a week, without requiring the patient to spend long hours attached to a large machine. We believed that this device would drastically improve the effectiveness of treatment and reduce mortality in the ESRD population and significantly reduce the costs associated with providing care to these patients.
 
The Wearable Kidney was designed to be worn on a patient’s belt or carried in a small backpack. We anticipated that the final version would weigh less than five pounds. We believed that the design of the Wearable Kidney addressed the three key challenges that have historically impeded the viability of a wearable artificial kidney, namely:
 
 
·
an efficient blood and dialysate circulation circuit that minimizes the amount of power consumption, allowing the use of batteries to power the system;
 
 
·
a lightweight dialysate regeneration system that minimizes the amount of dialysate required to cleanse the blood efficiently; and
 
 
·
an ergonomic design of components that should enable patients to wear the device continuously without discomfort.
 
 
1

 
 
Background of the Wearable Kidney
 
We began filing patent applications covering aspects of the Wearable Kidney technology in 2001.  On November 15, 2004, we announced that we had developed a working prototype of the Wearable Kidney (the “Prototype”). The Prototype was designed to be powered by a battery and to operate substantially continuously 24 hours a day while in use. A version of the Prototype was successfully tested in bench studies and performed safely and effectively in animal testing studies conducted at the research facilities of Cedars Sinai Medical Center in Los Angles, California. The results of our testing and research were presented at the annual meeting of the American Society of Nephrology in November 2004. An abstract of the presentation was published in the Journal of the American Society of Nephrology. We demonstrated the feasibility of our Prototype by testing it on 12 pigs. We did not plan to do further animal studies because we believed that the testing and experiments performed constituted all the animal studies normally required prior to beginning clinical studies on human subjects.
 
In late 2006, we conducted research on new and enhanced techniques for removing blood impurities, such as urea and creatinine, using our Wearable Kidney technology. These enhanced techniques for removing blood impurities also provide an additional benefit of decreasing the power requirements of our Wearable Kidney without sacrificing its operational effectiveness. The findings from these lab studies were presented on November 18, 2006 at the annual meeting of the American Society of Nephrology. Small-scale, preliminary human studies under highly controlled circumstances were conducted with respect to the Wearable Kidney technology in Italy in 2006 and in England (carried out by Xcorporeal) in 2007.
 
We continued to evaluate our applications for initiating human clinical trials, which we began preparing in November 2005.
 
As of December 31, 2008, we had three issued U.S. patents covering various aspects of the Wearable Kidney. In addition we had ten pending U.S. patent applications directed to various aspects of both our Wearable Kidney and another device that we refer to as a Wearable Ultrafiltration Device. In April 2007, a Swedish patent was issued for the Wearable Kidney and in January 2008 a Mexican patent was issued for the Wearable Kidney. We also had nine additional patent applications pending in various countries including Japan, Mexico, the European Community, Brazil and China.
 
The Wearable Ultrafiltration Device removes excess fluid from patients with Congestive Heart Failure (CHF) and was intended to be worn as a belt and operated by batteries. The Wearable Ultrafiltration Device, like the Wearable Kidney, was intended to be substantially continuously operational 24 hours a day while in use. A prototype of our Wearable Ultrafiltration Device was successfully tested on animals in our research laboratory facility at Cedars Sinai Hospital in Los Angeles, California. The main benefit offered by this device was that it is intended to keep CHF patients free of salt and fluid overload, which is a major cause of hospitalizations and death for these patients. It was anticipated that the use of this device would result in significant improvements in patients’ quality of life and longevity while significantly reducing the enormous costs associated with treating the ever-growing CHF population.
 
During 2006, we researched and developed a protocol for installing, servicing and maintaining a Wearable Kidney. Such a protocol may replace the present day dialysis clinics as well as significantly decrease the medical and insurance costs associated with the care of patients with renal failure. The protocol eliminates the requirement for patients with renal failure to spend three to five hours every few days at a dialysis clinic. The protocol may enable a Wearable Kidney wearer to be more active in society and to maintain a higher quality of life and longevity meanwhile reducing the medical and insurance costs associated with such patients.
 
Market and Marketing
 
We had targeted chronic kidney failure or ESRD as the first application of our new technology. At its most basic level, once the Wearable Kidney is connected to a patient’s blood supply, it can remove certain chemicals or toxins and excess fluids from the blood before returning the blood to the body, thus replacing many of the essential functions of a damaged kidney. At the same time, it can also be used to infuse the blood stream with drugs, hormones or nutritional components, as the clinical circumstances may require. While there are other devices to accomplish these tasks, only our device was actually wearable. Accordingly, the Wearable Kidney was anticipated to be able to provide patients with continuous, 24-hours operation, which would not only increase significantly the amount of treatment time but was also anticipated to enable patients to achieve a quality of life much closer to that of a healthy individual.

 
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We intended to exploit the Wearable Kidney by generating revenue from sales and leases and from recurring sale of consumables associated with the Wearable Kidneys, such as pumps, sorbents, filters and rechargeable batteries. In the U.S., we intended to lease the Wearable Kidney mainly to existing dialysis centers.
 
Research and Development; Manufacturing
 
Pending resolution of the arbitration related to, among other things, the rights to use our Wearable Kidney technology, we suspended our research and development activities.
 
Patents and Proprietary Technology
 
We protected our proprietary rights from unauthorized use by third parties to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. Patents and other proprietary rights are an essential element of our business. Our policy was to file patent applications and to protect our technology, inventions and improvements to inventions that are commercially important to the development of our business. We also rely on trade secret, employee and third-party nondisclosure agreements and other protective measures to protect our intellectual property rights pertaining to our products and technology.
 
In November 2005, we were issued our first U.S. patent covering the general design of the Wearable Kidney. Since then and recently in October 2007, we were issued a U.S. patent covering a new and useful sorbent cartridge design for use in the Wearable Kidney. Then in December 2007, we were issued our third U.S. patent, which covers additional novel aspects of the Wearable Kidney. In addition to the issued U.S. patents, we filed additional U.S. patent applications bringing our total number of pending patent applications in the U.S. to ten. With respect to our foreign patent filings, we had two issued patents covering basic design aspects of the Wearable Kidney in both Sweden (issued April 2007) and Mexico (issued January 2008). In addition to the two issued foreign patents, we had pending patent applications in the countries of, China, Brazil, the European Community, Japan and Mexico bringing the total of pending foreign patent applications to nine. These nine pending foreign patent applications, as well as the ten pending U.S. patent applications are directed generally to various overall features of the Wearable Kidney and the Wearable Ultrafiltration devices and systems. These additional patent applications, for example, are directed to specific novel aspects of the Wearable Kidney and Wearable Ultrafiltration devices as well as methods of using and servicing the devices, including, but not limited to, device size, power consumption, microprocessor control, fluid and chemical requirements, alarm systems, fluid pumping features, fluid flow volume and pressures, molecule removal clearances, as well as methods of servicing and maintaining the Wearable Kidney and Ultrafiltration devices.
 
Government Regulation
 
Due to the relatively early nature of our development efforts, we did not confirm with the FDA its view of the regulatory status of the Wearable Kidney or which center of the FDA might have primary responsibility for review of the regulatory submissions we intended to make. Depending on the claims made and the FDA’s ruling regarding the regulatory status of the Wearable Kidney, it could have been designated as a device, a biologic or as a combination product. However, we anticipated that regardless of regulatory designation, we would need to conduct pre-clinical and clinical studies on humans before being able to market the Wearable Kidney.
 
To support a regulatory submission, the FDA commonly requires clinical studies to show safety and effectiveness. While we could not state the nature of any such studies that the FDA may have required due to our early stage of product development, it is likely any product we attempted to develop would require extensive and time-consuming clinical studies in order to secure approval.
 
Outside the U.S., the ability to market potential products is contingent upon receiving market application authorizations from the appropriate regulatory authorities. These foreign regulatory approval processes could involve differing requirements than those of the FDA, but also generally include many, if not all, of the risks associated with the FDA approval process described above, depending on the country involved.

 
3

 
 
U.S. Regulation of Products. In the U.S., medical devices are classified into three different classes, Class I, II and III, on the basis of controls deemed reasonably necessary to ensure the safety and effectiveness of the device. Class I devices are subject to general controls (i.e. labeling, pre-market notification and adherence to the FDA’s Good Manufacturing Practices or GMP), Class II devices are subject to general and special controls (i.e. performance standards, post-market surveillance, patient registries and FDA guidelines). Class III devices are those which must receive pre-market approval by the FDA to ensure their safety and effectiveness, that is, life-sustaining, life-supporting and implantable devices, or new devices, which have been found not to be substantially equivalent to legally marketed devices. We believed that the Wearable Kidney for the treatment of ESRD would likely to be classified as a Class III device.
 
Clearance Procedure. Before a new medical device can be marketed, such as the Wearable Kidney for the treatment of ESRD, marketing clearance must be obtained through either the pre-market approval (“PMA”) process, or a shorter process under Section 510(k) of the Federal Food, Drug, and Cosmetic Act (“FDC Act”). Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to authorize the marketing of new products or to allow us to enter into supply contracts and criminal prosecution. The PMA process is more formal and requires more panel time for trials, more information and a review period of 180 days (as compared to 90 days for 510(k)). The route required for a specific device depends on the class of the device and/or the similarity of the new decide to existing approved devices. The FDA has been requiring an increasingly rigorous demonstration of such similarity, which may include a requirement to submit human clinical trial data. Class III is the most stringent regulatory category for medical decides, since those devices support or sustain human life or prevent impairment to health. As such, these devices generally require PMA approval.
 
Human Clinical Trials. An investigational device exemption (“IDE”) allows an investigational device to be used in a clinical study in order to collect safety and effectiveness data required to support a PMA application to the FDA. Clinical studies are most often conducted to support a PMA. Investigational use also includes clinical evaluation of certain modifications or new intended uses of legally marketed devices. All clinical evaluations of investigational devices, unless exempt, must have an approved IDE before the study is initiated. An approved IDE permits a device to be shipped lawfully for the purpose of conducting investigations of the device without complying with other requirements of the FDC Act that would apply to devices in commercial distribution.
 
If human clinical trials of a device are required for a PMA application, or, in the opinion of the FDA, if the device presents a “significant risk,” the sponsor of the trial (usually the manufacturer or the distributor of the device) must file an IDE application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards (“IRBs”), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a “nonsignificant risk” to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more appropriate IRBs without the need for FDA approval.
 
International Product Regulation
 
International Organization for Standards (“ISO”) standards were developed by the European Community, or EC, as a tool for companies interested in increasing productivity, decreasing cost and increasing quality. The EC uses ISO standards to provide a universal framework for quality assurance and to ensure the good quality of products and services across borders. The ISO 9000 standards have facilitated trade throughout the EC, and businesses and governments throughout the world are recognizing the benefit of the globally accepted uniform standards. Any manufacturer utilized for purposes of manufacturing our products (including us, if we manufacture our own Wearable Kidney) will be required to obtain ISO certification to facilitate the highest quality products and the easiest market entry in cross-border marketing.
 
Any medical device that is legally in the U.S. may be exported anywhere in the world without prior FDA notification or approval. The export provisions of the FDC Act apply only to unapproved devices. While FDA does not place any restrictions on the export of these devices, certain countries may require written certification that a firm or its devices are in compliance with U.S. law. In such instances FDA will accommodate U.S. firms by providing a Certificate for Foreign Government. In cases where there are devices which the manufacturer wishes to export during the interim period while their 510(k) submission is under review, exporting may be allowed without prior FDA clearance under certain limited conditions.

 
4

 
 
Employees
 
The Company has no employees and several consultants in administration as of December 31, 2008.
 
Available Information
 
We are a reporting company and file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (the “Commission”). You may inspect and copy these materials at the Public Reference Room maintained by the Commission at 100 F Street, N.E., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for more information on the Public Reference Room. You can also find our Commission filings at the Commission’s website at www.sec.gov.
 
Events Prior to Sale of our Assets
 
On September 1, 2006, we entered into a merger agreement (the “Merger Agreement”) with Xcorporeal, Inc. (“Xcorporeal”) which contemplated that either (i) we would enter into a triangular merger in which we would become a wholly-owned subsidiary of Xcorporeal, or (ii) Xcorporeal would issue to us shares of its common stock in consideration of the assignment of the technology relating to our 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, we entered into a license agreement (the “License Agreement”) with Xcorporeal granting an exclusive license for ninety-nine years (or until the expiration of our proprietary rights in the technology, if earlier), to all technology relating to our 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. The Company took the position that the License Agreement was revocable if the Merger Agreement and the transactions contemplated therein were terminated.
 
Effective as of December 29, 2006, we had 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 and wrongful conduct related to the Merger Agreement, the License Agreement and certain related matters. Xcorporeal did not dispute the termination of the Merger Agreement, but disputed our 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 us, alleging an unspecified anticipatory breach of the License Agreement. On December 29, 2006, at the same time that we terminated the Merger Agreement and the License Agreement, we filed a lawsuit against Xcorporeal and against Victor Gura, former Chief Financial Officer and Chief Scientific Officer and a director of the Company. In the lawsuit, we alleged that Xcorporeal wrongfully induced Gura to become a member of Xcorporeal’s board of directors at the same time that he was an officer and director of the Company, and that both parties misappropriated our valuable rights and committed other wrongful acts in connection with the Merger Agreement, the License Agreement and transactions contemplated thereby.  Xcorporeal and Gura stipulated to our filing of our claims against them as part of the arbitration proceedings related to the License Agreement, and we dismissed the lawsuit without prejudice.
 
On January 22, 2007, Xcorporeal filed a statement of claims in the arbitration proceeding. In this statement, Xcorporeal alleged that we breached several provisions of the Merger Agreement and engaged in interference with Xcorporeal’s contractual relations and prospective economic business advantage. In addition, Xcorporeal alleged that we improperly terminated the License Agreement and that it has retained the exclusive right to use our technology. On February 5, 2007 we filed a response to Xcorporeal’s statement of claims denying that we breached the Merger Agreement and asserting, among other things, that we properly terminated the License Agreement and that the License Agreement did not by its own terms and the meaning of the agreements survive the success or failure of the transactions contemplated by the Merger Agreement. In this response, the Company also asserted counterclaims against Xcorporeal for fraud, rescission, reformation, breach of contract, unjust enrichment and defamation. The Company amended its response on March 9, 2007 and on April 4, 2007 to add its claims against Terren S. Peizer, Xcorporeal’s Chairman of the Board and Gura.  Xcorporeal, Peizer and Gura filed responses generally denying the Company’s allegations and asserting counter-claims.

 
5

 
 
The arbitration was held in February 2008. On June 9, 2008, the arbitrator issued an interim award in which he stated that “the core dispute is whether the Merger Agreement is dead and the License Agreement is prospectively enforceable.” 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.
 
Pursuant to the interim award, the Company applied for an award of fees and costs of approximately $3.9 million against Xcorporeal and of approximately $105,000 against Gura. Such amounts included fees and costs of the Company’s attorneys, experts and certain witnesses, as well as the costs and fees of the arbitration service, court reporters and litigation support services. Gura filed a separate application against the Company for approximately $617,000 in fees and costs. Because the Company had prevailed on some, but not all, of its claims, the arbitrator awarded the Company approximately $1.87 million in fees and costs. The arbitrator rejected the Company’s application against Gura and Gura’s application against the Company.
 
On August 4, 2008, the arbitrator issued a second interim award in which he established a schedule for completion of the Technology Transaction, as well as for the filing of a registration statement with respect to the resale of the shares of Xcorporeal to be issued to the Company at the closing (the “Registration Statement”). In the second interim award, the arbitrator clarified that the only conditions to the closing of the Technology Transaction were the filing and mailing of information statements by the parties as required by law, and the filing by Xcorporeal of the Registration Statement. On the basis of his interpretation of the parties’ intent as reflected by the provision in the Merger Agreement specifying that the Company was entitled, upon consummation of the Technology Transaction, to a 48% interest in Xcorporeal, as measured as of the date of the Merger Agreement and as adjusted for stock splits and certain other events, the arbitrator further confirmed that the Company was entitled to 9,230,000 shares of Xcorporeal, Inc. (AMEX: XCR) upon closing of the Technology Transaction.
 
Under the schedule established by the arbitrator, Xcorporeal was required to file an information statement or a proxy statement with respect to the Technology Transaction not later than August 22, 2008. Xcorporeal filed a proxy statement on August 22, 2008 seeking approval of its stockholders for the issuance of common stock in connection with the Technology Transaction. Xcorporeal was directed to close the Technology Transaction promptly following satisfaction of statutory requirements regarding information statements or proxy statements, as the case may be, and to file the Registration Statement within 30 days of closing. The Registration Statement was required to become effective within 90 days of filing. In the event that the Technology Transaction was not approved by Xcorporeal’s shareholders, the Company was to receive an alternate award in which all of the technology covered by the License Agreement would be decreed to be the sole and exclusive property of the Company. In such an event, the arbitrator would hold additional hearings to determine whether the portable artificial kidney technology currently under development by Xcorporeal was included in the technology under the License Agreement that would revert to the Company, and whether the Company would be entitled to compensatory damages.
 
The arbitrator further ordered in the second interim award that the License Agreement would remain in effect until the closing of the Technology Transaction, or until the arbitrator determined that no such closing will occur and that instead the alternate award described above will apply. By issuing “interim” awards, the arbitrator retained jurisdiction to oversee either the closing of the Technology Transaction or the implementation of the alternate award. The arbitrator stated that he would issue a single final, complete and self-contained award following the conclusion of his monitoring and supervision of the provisions of the second interim award.

 
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On January 30, 2009, the arbitrator issued an order, in which the arbitrator modified the second interim award by reserving on what the final terms Xcorporeal's obligation to file the resale registration statement would be and stating that such registration obligation shall be in accordance with applicable laws, including applicable U.S. federal securities laws. While the arbitrator also retained jurisdiction to monitor Xcorporeal's compliance with such obligation, to award any appropriate relief to the Company if Xcorporeal failed to comply with such obligation and to render a decision on any other matters contested in the arbitration, the time periods set forth in the second interim award and summarized above were no longer applicable. The order also provided, among other things, that if Xcorporeal filed the proxy statement, obtained stockholder approval to issue to the Company 9,230,000 shares of Xcorporeal common stock as consideration for the closing of the Technology Transaction and issued such shares to the Company, the arbitrator anticipated confirming that all of the Technology covered by the License Agreement would be declared Xcorporeal's sole and exclusive property.
 
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.
 
Binding Memorandum of Understanding
 
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.
 
Sale Negotiations
 
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 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, which also included proposed provisions prohibiting Xcorporeal and the Company from soliciting other offers. The non-binding term sheet indicated that any further efforts by FUSA would be subject to its remaining due diligence and confirmation by FUSA and its counsel of certain approvals that would allow it to proceed with the transaction.
 
On September 21, 2009, the Company and Xcorporeal and FUSA executed an exclusivity letter (the “Exclusivity Letter’) pursuant to which the Company and Xcorporeal agreed to grant FUSA access to the respective books, records, personnel, properties, contracts and other data of Company and Xcorporeal. The Company and Xcorporeal also agreed that, until the later of (i) December 21, 2009 and (ii) the date on which any of the parties provided the others with written notice that negotiations to execute a definitive agreement were terminated (which any of the parties were entitled to do in their sole discretion), they would not directly or indirectly (i) solicit or take any other action to facilitate any offers from third parties with respect to the acquisition of the Company or a part or all of its assets, (ii) enter into an agreement to facilitate, approve or endorse such proposal or in connection with such proposal, abandon or terminate the proposed transaction between the Company and Xcorporeal and FUSA or (iii) enter into discussions, inquire or furnish information with respect to any such proposal.

 
7

 
 
The Company’s Board of Directors determined that the proposed asset sale would maximize stockholder value and that the Company’s best chance to receive any royalty payment(s) from the sale of its assets was to consummate the asset sale and thereby, indirectly partnering with FUSA, the world’s largest integrated provider of products and services for individuals undergoing dialysis because of chronic kidney failure.
 
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.
 
Terms of the Asset Sale
 
The Asset Purchase Agreement 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 (as more fully discussed below). 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 will be 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 will not 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 will be entitled to 40% of the HD WAK Royalty and Xcorporeal will be entitled to the remaining 60%.
 
Additionally, during the life of any patents referred to as the Supersorbent Technology (the “Supersorbent Patents”), the Company will be 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 payment for supersorbent cartridges will not be 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 will be entitled to 60% of the Supersorbent Royalty payments and Xcorporeal will be 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.

 
8

 
 
Written Consent of the Company's Stockholders
 
On December 14, 2009, the holders of more than 50% of the issued and outstanding commons stock of the Company, considered and approved by written consent the Asset Sale. This written consent was sufficient to approve the Asset Sale and delivery of any an all documents necessary to the consummation of the Asset Sale.
 
Completion of the Asset Sale
 
On March 19, 2010, the Company and Xcorporeal completed the transactions contemplated by the Asset Purchase Agreement and the Company and Xcorporeal transferred substantially all of their respective assets to FUSA. The Company received $1,950,000 ($2,150,000 less $200,000 to resolve issues under the Asset Sale) at the Closing. On April 1, 2010 we received $1,625,000.  On April 1, 2011 we received $1,675,000 ($1,925,000 less $250,000 to resolve issues under the Asset Sale).  The closing of the Asset Sale also terminated the arbitration proceedings with Xcorporeal.
 
Item 1A.  Risk Factors
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
 
Item1B.  Unresolved Staff Comments
 
Not applicable.
 
Item 2.  Description of Property
 
As of December 31, 2008, we rented office space located at 9454 Wilshire Boulevard, Penthouse 6, Beverly Hills, California 90212, which served as our principal executive offices, on a month-to-month basis at $1,690 per month through the end of April 2009.
 
Item 3.  Legal Proceedings
 
On December 1, 2006, Xcorporeal filed a demand for arbitration at JAMS in Santa Monica, California against us, alleging an unspecified anticipatory breach of the License Agreement that we entered into with Xcorporeal on September 1, 2006. At the same time we entered into the License Agreement, we entered into an interrelated and inter-dependent Merger Agreement with Xcorporeal. Effective as of December 29, 2006, we terminated the merger and license agreements 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 we terminated the Merger Agreement and the License Agreement, we filed a lawsuit against Xcorporeal and against Victor Gura, a former officer and director of the Company.  Xcorporeal and Gura stipulated to our filing of our claims against them as part of the arbitration proceedings related to the License Agreement, and we dismissed our lawsuit without prejudice.  The arbitration was terminated with the closing of the Asset Sale in March 2010.  A description of the arbitration proceedings is set forth at “Item 1.  Description of Business—Events Prior to the Sale of Our Assets”.
 
On February 17, 2011, the Company commenced a binding arbitration 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 between the Company and Xcorporeal and certain transactional and litigation matters handled by the law firm for the Company. The former law firm has asserted that approximately $2,729,000 million fees and costs are owed to it, plus interest.  The binding arbitration is being heard in Los Angeles County by a panel of three arbitrators.  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 December 2, 2011 the arbitrators had not rendered their decision.

 
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Item 4.  [Reserved]
 
PART II
 
Item 4.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
 
During 2008, our common stock was listed for trading in the over-the-counter market on the NASD Bulletin Board under the symbol “NQCI.OB”. Our common stock has a very limited trading history.
 
The following table sets forth quotations for the high and low closing sale prices for the common stock for the periods indicated below, based upon quotations between dealers, without adjustments for stock splits, dividends, retail mark-ups, mark-downs or commissions, and therefore, may not represent actual transactions:
 
   
High
   
Low
 
Year Ended December 31, 2008
           
First Quarter
  $ 0.15     $ 0.08  
Second Quarter
  $ 0.17     $ 0.04  
Third Quarter
  $ 0.12     $ 0.05  
Fourth Quarter
  $ 0.05     $ 0.02  
                 
Year Ended December 31, 2007
               
First Quarter
  $ 0.36     $ 0.22  
Second Quarter
  $ 0.36     $ 0.15  
Third Quarter
  $ 0.22     $ 0.08  
Fourth Quarter
  $ 0.17     $ 0.07  

As of December 31, 2008, our authorized capital stock consisted of 125,000,000 shares of common stock, par value $0.01 per share and 5,000,000 shares of preferred stock, par value $0.01 per share. As of December 31, 2008, there were issued and outstanding 73,916,252 shares of common stock held by approximately 435 holders of record. There were no shares of preferred stock issued and outstanding.
 
Equity Compensation Plan Information
 
The following is a summary of all of our equity compensation plans and individual arrangements that provide for the issuance of equity securities as compensation, as of December 31, 2008:
 
   
(A)
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
   
(B)
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
   
(C)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (excluding
securities reflected in
column (A))
 
Equity compensation plans approved by security holders
    990,000     $ 0.24       10,000 (1)
Equity compensation plans not approved by security holders
    4,480,000     $ 0.51       N/A  
Total
    5,470,000     $ 0.46       10,000 (1)
 

(1)
Represents shares available under the Company’s 1998 Stock Option Plan.

Dividend Policy
 
We have not declared or paid any dividend since inception on our common stock. We do not anticipate that any dividends will be declared or paid in the future on our common stock.

 
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Our transfer agent is Colonial Stock Transfer, 66 Exchange Place, Salt Lake City, Utah 84111, telephone (801) 355-5740.
 
Recent Sales of Unregistered Securities
 
Between March 2008 through October 16, 2008, the Company completed various transactions that involved the sale of securities that were not registered under the Securities Act of 1933 (“1933 Act”) in reliance upon Section 4(2) and Regulation D of the 1933 Act.  These transactions are described under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”  There was no commission payable with respect to these transactions.
 
Item 5.  Selected Financial Data
 
Not applicable.
 
Item 6.  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.

 
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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.
 
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 December 2, 2011, 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 December 31, 2008 in the accompanying consolidated financial statements.  Given the Company’s limited liquidity and working capital resources, the Company may be unable to satisfy such obligation should a decision adverse to the Company be rendered.
 
Going Concern
 
The Company’s 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.
 
For the past several years, the Company has experienced net operating losses and negative operating cash flows. As of December 31, 2008, the Company had an accumulated deficit of $16,410,185, a working capital deficiency of $3,429,307, and its total liabilities exceeded its total assets by $3,484,609. 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 consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 
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.
 
Significant Accounting Policies
 
The Company prepared its 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
 
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.
 
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.
 
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.
 
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 consolidated statement of operations.
 
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.

 
13

 
 
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.
 
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 Years Ended December 31, 2008 and 2007
 
General and administrative expenses for the year ended December 31, 2008 were $3,041,438, as compared to $3,111,631 for the year ended December 31, 2007, a decrease of $70,193 or 2.3%. Included in such costs was stock-based compensation of $28,350 and $150,994 in 2008 and 2007, respectively. Significant expense categories reflecting, in part, the net decrease in general and administrative expenses in 2008 as compared to 2007 consisted of a decrease in share-based compensation of $122,644, and a decrease in officer salary of approximately $120,000 and accounting related expense of $60,000, offset by an increase in legal fees of approximately $155,000. Significant legal fees have been incurred due primarily to the arbitration with Xcorporeal and increased needs in connection with financing and reporting activities.
 
Research and development expenses for the year ended December 31, 2008 were $387,894, as compared to  $59,860 for the year ended December 31, 2007, an increase of 548%. Pending resolution of the arbitration with Xcorporeal, Peizer and Gura related to, among other things, the rights to use our Wearable Kidney technology, the Company suspended its research and development activities. However, in November 2007, the Company entered into short-term agreements with consultants to continue research and development efforts previously undertaken by them. These efforts involved additional study and development activities related to the use of sorbents, which trap and evacuate amine and urea materials from dialysis solutions. In addition, during the second quarter of 2008, the Company granted 1,500,000 options to purchase common stock and issued a promissory note in the principal amount of $120,000 to settle a contract dispute to one of the consultants.
 
Interest expense was $269,266 for the year ended December 31, 2008, as compared to $220,874 for the year ended December 31, 2007, as a result of continued borrowings utilized to fund operating activities.
 
Interest income was $0 for the year ended December 31, 2008, as compared to $26,955 for the year ended December 31, 2007, as a result of reduced levels of cash in 2008.
 
Other income was $121,011 for the year ended December 31, 2008, as compared to $148,751 for the year ended December 31, 2007.
 
The Company incurred a net loss from continuing operations for the years ended December 31, 2008 and 2007 of $3,577,587 and $3,216,659, respectively.
 
The Company incurred net income (loss) from discontinued operations for the years ended December 31, 2008 and 2007 of $4,727 and $(58,664), respectively.
 
The Company incurred a net loss for the years ended December 31, 2008 and 2007 of $3,572,860 and $3,275,323, respectively.
 
Losses are expected to continue until such time of resolution of the arbitration with Xcorporeal, Peizer and Gura, and commercial marketing or alternative economic exploitation of the wearable artificial kidney.

 
14

 
 
At December 31, 2008, the Company had net operating loss carryforwards for federal income tax purposes of approximately $19,220,000, which, if not utilized, expire through 2028. In addition, the Company had net operating loss carryforwards of approximately $12,400,000 for state tax purposes, which expire through 2028.
 
Liquidity and Capital Resources
 
Cash and cash equivalents were $116,800 as of December 31, 2008, as compared to $709,579 as of December 31, 2007, a decrease of $592,779. 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.
 
For the year ended December 31, 2007, the Company’s cash flow needs were primarily met through the sale of common stock under a private placement to the Company’s Chief Executive Officer ($900,000), its Chief Financial Officer’s affiliates ($15,000), and a director of the Company ($6,000) in June 2007, and a $700,000 advance from the Company’s Chief Executive Officer in the form of an uncollateralized convertible promissory note in December 2007. The Company had a working capital deficit of $3,429,307 and $1,071,479 at December 31, 2008 and 2007, respectively.
 
As of December 31, 2008, the Company had notes payable to related parties of $896,776, including accrued interest and net of discount, all of which was current at that date.  As of December 31, 2007, the Company had notes payable to related parties of $524,417, including accrued interest and net of discounts, all of which was current at that date.  Notes payable to related parties increased by $372,359 at December 31, 2008, as compared to December 31, 2007.
 
Operating Activities
 
During the year ended December 31, 2008, the Company used cash of $1,588,067 in continuing operating activities, as compared to using cash of $2,126,875 in continuing operating activities during the year ended December 31, 2007, a decrease of $538,808, primarily as a result of an increase in accounts payable and accrued expenses.
 
During the year ended December 31, 2008, the Company did not use or generate any cash from discontinued operations.  During the year ended December 31, 2007, the Company generated $36,712 of cash from discontinued operations.
 
During the year ended December 31, 2008, the Company used cash of $1,588,067 in operations, as compared to using cash of $2,090,163 in operating activities during the year ended December 31, 2007.
 
Financing Activities
 
During the year ended December 31, 2008, the Company generated $995,288 of cash from financing activities, consisting of the proceeds from the issuance of common stock, payments received on stock subscription receivables, and the exercise of stock options and stock warrants of $845,288, and the proceeds from the issuance of convertible notes payable to a related party of $150,000.  During the year ended December 31, 2007, the Company generated $1,068,835 of cash from financing activities, consisting of the proceeds from the issuance of common stock and the payments received on stock subscription receivables of $917,580, the proceeds from the issuance of convertible notes payable to a related party of $700,000, reduced by the repayment of long-term borrowings of $547,633 and the repayment of advances from stockholders related to discontinued operations of $1,112.
 
The following significant financing transactions, primarily equity related, were completed in 2007 and 2008:

 
15

 

On June 22, 2007, the Company completed a private placement of an aggregate of 5,756,250 Units (the “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 one third in cash at closing, with the balance thereof satisfied through delivery of a promissory note. One-half of the principal amount of each such promissory note, together with accrued and unpaid interest thereunder, was due and payable September 22, 2007, and the remaining principal balance, together with accrued and unpaid interest thereunder, was due and payable December 22, 2007. The unpaid principal amount under each promissory note bears 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 classified in stockholders’ equity on the consolidated balance sheet. These notes receivable were paid during the first quarter of 2008.  The purchasers of the Units were:  Robert M. Snukal, 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.
 
On December 26, 2007, the Company entered into a $700,000 uncollateralized convertible promissory note with Robert M. Snukal, director and chief executive officer, bearing interest at 6% per annum, payable on December 31, 2008. The note was 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 could be converted into shares of the Company’s common stock at a conversion price of $0.07 per share at any time. 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, at which time the Company received proceeds of $350,000.  The relative fair value of the warrants amounting to $179,163 was determined at the time of issuance using the Black-Scholes option-pricing model, was recorded as a discount to the note payable, reducing the initial carrying value of the note, and is being amortized to interest expense over the term of the note using the straight-line method. For the year ended December 31, 2008, the Company recognized $176,273 of amortized discount in interest expense.  There was no unamortized discount as of December 31, 2008.  The note was outstanding at December 31, 2008.
 
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.

 
16

 

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.
 
The Company entered in the following significant financing transactions, primarily equity related, subsequent to December 31, 2008:
 
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 will be 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.

 
17

 
 
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.
 
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 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.
 
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. 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, and will be charged to operations in 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, and will be charged to operations in 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 will be charged to operations in 2009.

 
18

 
 
Item 6A.  Quantitative and Qualitative Disclosures About Market Risk
 
Not applicable.
 
Item 7.  Financial Statements and Supplementary Data
 
The financial statements required by this Item 7 are included elsewhere in this Annual Report and incorporated herein by this reference.
 
Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
The Company’s Board of Directors dismissed PMB Helin Donovan, LLP (“PMB”) as the Company’s independent registered public accounting firm effective March 4, 2011.
 
The Company’s 2007 Annual Report on Form 10-K included a Report of Independent Registered Public Accounting Firm issued by PMB on the Company’s consolidated balance sheet as of December 31, 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2007 and 2006.
 
PMB’s reports on the Company’s consolidated financial statements for the year ended December 31, 2007 contained an opinion raising “substantial doubt about the Company’s ability to continue as a going concern.”
 
During the Company’s two most recent fiscal years ended December 31, 2007 and the subsequent interim period through the date of PMB’s dismissal, there were no disagreements between the Company and PMB on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of PMB, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports.
 
During the Company’s two most recent fiscal years ended December 31, 2007 and the subsequent interim period through the date of PMB’s dismissal, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. The Company discussed this matter with PMB and authorized PMB to respond fully to the inquiries of the successor independent registered public accounting firm.
 
The Company requested a letter from PMB addressed to the Securities and Exchange Commission, stating whether or not it is in agreement with the above statements. A copy of such letter, dated March 4, 2011, has been provided by PMB and has been filed as an exhibit to our Current Report on Form 8-k dated March 4, 2011.
 
Effective March 4, 2011, the Company engaged the accounting firm of Gumbiner Savett Inc. as the Company’s new independent registered public accounting firm. The retention of Gumbiner Savette Inc. was approved by the Company’s Board of Directors.  During the two most recent fiscal years and the subsequent interim period to the date hereof, the Company did not consult with Gumbiner Savett Inc. regarding any of the matters or events set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.
 
Item 8A.  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 December 31, 2008, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses.

 
19

 
 
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.
 
Report on Internal Control  over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:
 
 
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
 
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and 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.
  
 
20

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
 
As of December 31, 2008, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and Securities and Exchange Commission guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
 
The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of written documentation of internal control policies and procedures; (2) inadequate segregation of duties consistent with control objectives; and (3) lack of review and supervision over period end financial disclosure and reporting processes.
 
Management believes that the lack of documentation of internal controls did not have an effect on our financial results. However, management believes that the lack of segregation of duties, and a lack of review and supervision of reporting, could result in a material misstatement in our financial statements in future periods.
 
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 8B.  Other Information
 
None.
 
PART III
 
Item 10.  Directors and Executive Officers
 
Executive Officers and Directors
 
The directors of the Company currently have terms which will end at the next annual meeting of the stockholders of the Company or until their successors are elected and qualify, subject to their prior death, resignation or removal. Officers serve at the discretion of the Board of Directors. There are no family relationships among any of our directors and executive officers.

 
21

 
 
The following sets forth the names, ages and principal positions of our directors and executive officers as of December 31, 2008:
 
Name
 
Age
 
Position
Leonardo Berezovsky, M.D.
 
64
 
Chairman of the Board of Directors, Chief Financial Officer
Robert M. Snukal
 
65
 
Chief Executive Officer, President and Director
Ronald P. Lang, M.D.
 
58
 
Executive Vice-President, Secretary and Director
Edmond Rambod
 
48
 
Chief Scientific Officer and Director
Jose Spiwak, M.D.
 
63
 
Director

Leonardo Berezovsky, M.D. has been a director since 2003, Chairman since 2005, and Chief Financial Officer since March 2007. Dr. Berezovsky is the Chairman and CEO of AssistMed, Inc., which utilizes proprietary technology to deliver integrated solutions for online clinical documentation and related business processes within the healthcare industry. In addition, Dr. Berezovsky was the Co-Founder, Chairman and CEO of AHI Healthcare Systems, Inc., a managing company for primary care physicians and comprehensive healthcare delivery networks. AHI completed a public offering and was later sold via merger to FPA Medical Management, Inc. in 1997. Dr. Berezovsky was also the co-founder, Chairman and CEO of Fiberspace, Inc., an optical networking concern that manufactured innovative fiber optic components for the telecommunications and oil and gas industries. Dr. Berezovsky completed his training in Internal Medicine and Cardiology at the Cleveland Clinic in Cleveland, Ohio, and practiced at Cedars Sinai Medical Center in Los Angeles, California. Dr. Berezovsky received his bachelor’s degree in 1960 and M.D. in 1968 from the Universidad de Rosario in Rosario, Argentina.
 
Robert M. Snukal has been a director since February 2003 and CEO and President since December 2005. From 1997 to 2002, he served as a member of the Board of Directors, Chief Executive Officer and President of Fountain View, Inc., a healthcare provider providing physical therapy, occupational therapy, speech therapy and pharmacy services as well as operating skilled nursing facilities and assisted living facilities. Mr. Snukal holds a Bachelors Degree and a Masters Degree in English Literature from the University of Manitoba. Mr. Snukal has been a lecturer and an assistant professor at several universities, including the University of British Columbia, the University of Sussex in England and the University of Calgary.
 
Ronald P. Lang, M.D. has been a director and the Secretary of the Company since May 1996. Dr. Lang is a medical doctor who is board certified in internal medicine/nephrology. He has been a physician with Medipace Medical Group, Inc. since 1983. Dr. Lang graduated from the Ohio State University College of Medicine in 1973, completed his residency at St. Luke’s Medical Center in Chicago, Illinois, and was a fellow in the nephrology department at UCLA-Center for the Health Sciences/Wadsworth Veterans Hospital. Dr. Lang also serves as a Clinical Assistant Professor of Medicine at UCLA School of Medicine. Dr. Lang also received M.A. and M.Ph. degrees in economics from Yale University and was an Economist — Program Analyst for the U.S. Department of Health, Education and Welfare (office of the Assistant Secretary for Planning and Education) from 1973 to 1974.
 
Edmond Rambod was appointed as a director and as the Company’s Chief Scientific Officer in August 2008. As the Company’s Chief Scientific Officer, Dr. Rambod is responsible for the Company’s scientific, technical and intellectual property related activities. Dr. Rambod is the inventor of the Company’s wearable devices and has provided the Company with scientific, technical and intellectual property consulting services since 2002. Dr. Rambod is the founder and Chief Executive Officer of BioQuantetics, Inc., a California-based corporation which has developed, among others, an ultrasound diagnostic technology with a variety of medical applications. Dr. Rambod received a Bachelors of Science degree in Chemical Engineering, a Masters of Science degree in Biomedical Engineering and a Doctorate of Philosophy degree in Medicine and Medical Sciences from the Technion - Israel Institute of Technology in Haifa, Israel. Currently, Dr. Rambod holds a Visiting Scholar appointment at the Department of Aeronautics and Bioengineering at the California Institute of Technology in Pasadena, California, where he also served as a Senior Scientist between 1993 and 2000. Prior to 1993, Dr. Rambod served as a Research Scientist in the Department of Cardiothoracic Surgery at Cedars-Sinai Medical Center and as an Associate Scientist in the Biomedical Engineering Program at the University of California at Los Angeles. Dr. Rambod is the recipient of the Achievements Award of the American Physical Society and is an active member of several professional, scientific and medical organizations such as the American Heart Association and the American Association for the Advancement of Science. Many of Dr. Rambod’s accomplishments and peer-reviewed reports relating to science, medicine and healthcare have been published in major medical and scientific journals. Between 1987 and 1989, Dr. Rambod actively served in the Israeli Defense Force.

 
22

 
 
Jose Spiwak M.D. has been a director since February 1998. Dr. Spiwak is a board certified thoracic and cardiovascular surgeon, and serves as Chairman of the Cardiovascular Thoracic Section of St. Francis Medical Center and Presbyterian Intercommunity Hospital in Los Angeles, California. He served as Vice-Chairman of American Health, Inc., a managing company of primary care physicians and comprehensive healthcare delivery networks, which was sold to FPA Medical Management, Inc. in April 1997. Dr. Spiwak graduated from the Universidad Javeriana Medical School (Bogotá, Columbia) in 1968 and performed his residency in Israel and the United States. Dr. Spiwak is a member of the Board of Directors of the American Cancer Society.
 
Audit Committee
 
The members of the Audit Committee of our Board of Directors are Ronald P. Lang, M.D. and Jose Spiwak M.D. The Audit Committee of our Board of Directors does not have a member that qualifies as an “audit committee financial expert” as that term is defined under applicable rules of the Securities and Exchange Commission.
 
Code of Ethics
 
We have adopted a code of ethics for directors, executive officers and other employees. We will provide to any person without charge, upon request, a copy of our code of ethics. Such copy may be obtained by writing to Secretary, National Quality Care, Inc., 2431 Hill Drive, Los Angeles, California 90041.
 
Compliance with Section 16(a) of the Securities Exchange Act of 1934
 
Section 16(a) of the Exchange Act requires its directors and executive officers and beneficial holders of more than 10% of our common stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our equity securities. Based solely on a review of copies of such forms we have received and other information provided to us, Section 16(a) reports applicable to our officers, directors and greater-than-10% shareholders were timely filed during the year ended December 31, 2008.
 
Item 11.  Executive Compensation
 
Summary Compensation Table
 
The following table sets forth for the periods shown information as to the compensation of our principal executive officer, principal financial officer and our two other executive officers:
 
Name
[and Principal Position]
 
Year
 
Salary
($)
   
Bonus
($)
   
Stock
Awards
($)
   
Option
Awards
($)*
   
Non-Equity
Incentive
Plan
Compensation
($)
   
Nonqualified
Deferred
Compensation
Earnings
($)
   
All Other
Compensation
($)
   
Total
($)
 
Leonardo Berezovsky
 
2008
    0       0       0       0       0       0       0       0  
Chairman of the Board, CFO (2)
 
2007
    0 (13)     0       0       40,139 (9)     0       0       0       40,139  
   
2006
    0       0       0       437,450 (1)(8)     0       0       0       437,450  
                                                                     
Robert M. Snukal
 
2008
    0       0       0       0       0       0       0       0  
CEO, President (2)
 
2007
    0 (13)     0       0       86,528 (10)     0       0       0       86,528  
   
2006
    0       175,000 (3)     221,563 (4)     873,700 (5)(8)     0       0       0       1,270,263 (6)
                                                                     
Ronald Lang, M.D.
 
2008
    0       0       0       0       0       0       0       0  
Executive Vice President
 
2007
    0       0       0       8,028 (11)     0       0       0       8,028  
   
2006
    10,431       0       0       114,950 (7)(8)     0       0       0       125,381  
                                                                     
Edmond Rambod
 
2008
    0       0       0       10,414 (12)     0       0       0       10,414  
Executive Vice President/
 
2007
 
______
   
______
   
______
   
______
   
______
   
______
   
______
   
______
 
Chief Science Officer
 
2006
 
______
   
______
   
______
   
______
   
______
   
______
   
______
   
______
 
 

*
Represents dollar amount recognized for financial statement reporting purposes in accordance with Statement of Financial Accounting Standards No. 123(R). See the 2008 Consolidated Financial Statements for a discussion of valuation assumptions.
 
(1)
Includes options to purchase 1,000,000 shares of common stock at an exercise price of $0.65 per share.
 
(2)
Mr. Snukal was appointed as Chief Executive Officer and President in December 2005. Mr. Berezovsky was appointed as Chief Financial Officer in March 2007.
 
(3)
At his election, in August 2006, Mr. Snukal accepted 530,303 shares of the Company’s common stock in exchange for a cash payment of this bonus.
 
 
23

 

(4)
Represents 443,126 shares of common stock issued to Mr. Snukal in exchange for his successfully negotiating settlements with creditors that resulted in extinguishment of over $370,000 of long-term debt and over $21,000 of trade payables.
 
(5)
Includes options to purchase 2,000,000 and 50,000 shares of common stock at exercise prices of $0.65 and $0.07 per share, respectively. Of these options, 50,000 (which vested in 2006) were issued in connection with Mr. Snukal’s joining our Board of Directors in 2003.
 
(6)
Represents all non-cash compensation.
 
(7)
Includes options to purchase 250,000 shares of common stock at an exercise price of $0.65 per share.
 
(8)
Includes $7,450 relating to options to purchase 20,000 shares of common stock at an exercise price of $0.62, which were granted to each director in exchange for services in that capacity.
 
(9)
Includes options to purchase 250,000 shares of common stock at an exercise price of $0.25 per share.
 
(10)
Includes options to purchase 500,000 shares of common stock at an exercise price of $0.25 per share.
 
(11)
Includes options to purchase 50,000 shares of common stock at an exercise price of $0.25 per share.
 
(12)
Includes options to purchase 1,000,000 shares of common stock at an exercise price of $0.12 per share, vested in eight equal semi-annual installments commencing on February 8, 2009 and continuing on each August 8 and February 8 thereafter, until the options become fully vested on the fourth anniversary of the date of grant (August 8, 2008).
 
(13)
Effective August 9, 2007, we 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 (the “Participants”), 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:
 
 
(a)
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;
 
 
(b)
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;
 
 
(c)
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
 
 
(d)
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.
 
We have no employment agreements with our current named executive officers.

 
24

 
 
The following table sets forth certain information concerning outstanding equity awards held by our named executive officers at December 31, 2008:
 
Outstanding Equity Awards at 2008 Fiscal Year-End
 
Option Awards
 
Stock Awards
 
Name
 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable(1)
   
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
options (#)
   
Option
Exercise
Price ($)
 
Option|
Expiration
date
 
Number of
Shares or
Units of
Stock That
have Not
Vested (#)
   
Market
value of
Shares or
Units of
Stock That
Have Not
Vested
($)
   
Equity
Incentive
Plan
Awards:
Number of
Unearned
shares,
Units or
Other Rights
That Have
Not Vested
(#)
   
Equity
Incentive
Plan
Awards:
Market or
Payout value
of Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
($)
 
                                                   
Leonardo Berezovsky
 
      200,000       0       0       0.52  
3/4/2016
    0       0       0       0  
      1,000,000       0       0       0.65  
4/19/2016
    0       0       0       0  
      5,000       0       0       0.62  
1/2/2016
    0       0       0       0  
      5,000       0       0       0.62  
4/3/2016
    0       0       0       0  
      5,000       0       0       0.62  
7/1/2016
    0       0       0       0  
      5,000       0       0       0.62  
10/1/2016
    0       0       0       0  
      250,000       0       0       0.25  
5/3/2017
    0       0       0       0  
                                                                   
Robert M. Snukal
 
      400,000       0       0       0.52  
3/4/2016
    0       0       0       0  
      2,000,000       0       0       0.65  
4/19/2016
    0       0       0       0  
      5,000       0       0       0.62  
1/2/2016
    0       0       0       0  
      5,000       0       0       0.62  
4/3/2016
    0       0       0       0  
      5,000       0       0       0.62  
7/1/2016
    0       0       0       0  
      5,000       0       0       0.62  
10/1/2016
    0       0       0       0  
      500,000       0       0       0.25  
5/3/2017
    0       0       0       0  
                                                                   
Ronald Lang
 
      250,000       0       0       0.65  
4/19/2016
    0       0       0       0  
      5,000       0       0       0.62  
1/2/2016
    0       0       0       0  
      5,000       0       0       0.62  
4/3/2016
    0       0       0       0  
      5,000       0       0       0.62  
7/1/2016
    0       0       0       0  
      5,000       0       0       0.62  
10/1/2016
    0       0       0       0  
      50,000       0       0       0.25  
5/3/2017
    0       0       0       0  
                                                                   
Edmond Rambod
 
      0       0       1,000,000       0.12  
8/8/2018
    0       0       0       0  
 
 
25

 
 
Director Compensation
 
The following table sets forth certain information concerning compensation paid for services as our directors during the fiscal year December 31, 2008:
 
2008 Director Compensation
 
Name
 
Fees Earned or
paid in
Cash
($)
   
Stock Awards
($)
   
Option
Awards(2)
($)
   
All Other
Compensation
($)
   
Total
($)
 
Leonard Berezovsky (1)
    0       0       0       0       0  
Robert M. Snukal (1)
    0       0       6,250       0       6,250  
Ronald Lang (1)
    0       0       0       0       0  
Jose Spiwak
    0       0       0       0       0  
Edmond Rambod
    0       0       10,414 (3)     0       10,414  
 

(1)
See “Summary Compensation Table” for compensation paid to these executive officers named therein.
 
(2)
Represents dollar amount recognized for financial statement reporting purposes in accordance with Statement of Financial Accounting Standards No. 123(R). See the 2008 Consolidated Financial Statements for a discussion of valuation assumptions.  At December 31, 2008, the number of outstanding option awards held by the directors was as follows: L. Berezovsky — 1,470,000, R. Snukal — 2,920,000, R. Lang — 320,000, J. Spiwak — 70,000, Edmond Rambod — 2,500,000.
 
(3)
Represents options to purchase 1,000,000 shares of common stock at an exercise price of $0.12 per share, vested in eight equal semi-annual installments commencing on February 8, 2009 and continuing on each August 8 and February 8 thereafter, until the options become fully vested on the fourth anniversary of the date of grant (August 8, 2008).  In addition, Mr. Rambod was issued options to purchase 1,500,000 shares on June 21, 2008 prior to the time he joined the Board of Directors in connection with the settlement of the dispute with the Company.  See “Item 13. Certain Relationships, Related Transactions and Director Independence.”
 
 
26

 
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The following table reflects, as of December 31, 2008, based on 73,916,252 shares outstanding, the beneficial ownership of our common stock by: (a) each director of the Company, (b) each executive officer named in the Summary Compensation Table presented elsewhere in this document, (c) each person (or group of affiliated persons) known by us to be the beneficial owner of 5% or more of our common stock, and (d) all current executive officers and directors of the Company as a group:
 
Name and Address of Beneficial Owner
 
Number of
Shares
Beneficially
Owned(11)
   
Percentage of
Shares
Beneficially
Owned
 
Robert M. Snukal
    47,276,776 (2)     55.2 %
                 
Victor Gura
    15,497,250 (3)     20.9 %
                 
Leonard Berezovsky
    6,160,383 (4)     8.3 %
                 
Ronald P. Lang
    3,658,449 (5)     4.9 %
                 
Jose Spiwak
    1,982,500 (6)     2.7 %
                 
Edmond Rambod
    2,800,000 (7)     3.6 %
                 
Executive officers and directors as a group (5 persons)
    61,878,108 (8)     74.7 %
  

(1)
Such persons have sole voting and investment power with respect to all shares of Common Stock shown as being beneficially owned by them, subject to community property laws, where applicable, and the information contained in the footnotes to this table.
 
(2)
Includes 11,732,500 shares subject to options and warrants held by Mr. Snukal which are exercisable or become exercisable within 60 days after December 31, 2008.
 
(3)
Includes 800,000 shares held by Medipace Medical Group, Inc., an affiliate of Dr. Gura. Also includes 250,000 shares subject to warrants held by Dr. Gura which are currently exercisable.
 
(4)
Includes 2,979,966 shares held by various family and charitable trusts of which 2,879,966 shares are common stock and 100,000 shares are subject to warrants which are currently exercisable. Dr. Berezovsky has voting and investment power with respect to the shares held by the trusts. Also includes 1,470,000 shares subject to options held by Dr. Berezovsky which are exercisable or become exercisable within 60 days after December 31, 2008.
 
(5)
Includes 800,000 shares held by Medipace Medical Group, Inc., an affiliate of Dr. Lang. Also includes 320,000 shares subject to options held by Dr. Lang which are exercisable or become exercisable within 60 days after December 31, 2008.
 
(6)
Includes 70,000 shares subject to options and warrants held by Dr. Spiwak which are exercisable or become exercisable within 60 days after December 31, 2008.
 
(7)
Includes 2,500,000 shares subject to options which are exercisable or become exercisable within 60 days after December 31, 2008.
 
(8)
Includes 16,092,500 shares subject to options and warrants beneficially owned by current officers and directors as a group which are exercisable within 60 days after December 31, 2008.
 
 
27

 

Item 13.  Certain Relationships, Related Transactions and Director Independence
 
On June 22, 2007, the Company completed a private placement of an aggregate of $5,625,000 units at a purchase price of $0.16 per unit, for a total purchase price of $900,000 to Robert M. Snukal, director and chief executive officer.  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 $300,000 in cash at closing with the balance of $600,000 satisfied through delivery of promissory notes.  The unpaid principal amount under each promissory note bore interest at the rate of 4.84% per annum.  The principal amount of the promissory note, together with interest, was paid in full as of December 31, 2007.
 
On December 26, 2007, we entered into a $700,000 uncollateralized convertible promissory note with Robert M. Snukal, director and chief executive officer. The note bears interest at 6% per annum, is convertible into common stock at $0.07 per share and is payable on December 31, 2008. The note becomes immediately payable upon the consummation of a change of control transaction. In connection with this note, we 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 at which the Company received proceeds of $350,000.  The relative fair value of the warrants amounting to $179,163 was determined at the time of issuance using the Black-Scholes option-pricing model, was recorded as additional paid-in capital, reduced the initial carrying value of the note, and is being amortized to interest expense over the term of the note using the straight-line method. For the year ended December 31, 2008, the Company recognized $176,273 of amortized discount in interest expense. There was no unamortized discount as of December 31, 2008.  The note was outstanding as of December 31, 2008.
 
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 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.

 
28

 

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, 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 June 21, 2008, the Company issued options to purchase 1,500,000 shares of common stock to Dr. Rambod in connection with a dispute between Mr. Rambod and the Company that occurred while Mr. Rambod was a consultant for the Company but prior to the time Mr. Rambod joined the Company’s board of directors.  The options became fully vested on August 7, 2008, the date the Company and Mr. Rambod entered into a settlement agreement.  The options have an exercise price of $0.08 per share and expire 10 years from the date of issuance.  In August 2008, Mr. Rambod was elected to the Board of Directors and received an issuance of an additional 1,000,000 options at an exercise price of $0.12 per share, and vest in eight equal semi-annual installments commencing February 8, 2009.
 
Director Independence
 
Jose Spiwak qualifies as an independent director under the independence standards of the Nasdaq Stock Market (Rule 4200(a)(15)).
 
Item 14.  Principal Accounting Fees and Services
 
The Company paid or accrued fees in each of the fiscal years presented below to its independent public accounting firm, PMB Helin Donovan, LLP (“PMB”), as follows:
 
   
For the Year Ended December 31,
 
   
2008
   
2007
 
Audit fees
  $ -     $ 32,500  
Audit-related fees
  $ 14,858     $ 25,170  
Tax fees
  $ -     $ 6,500  
All other fees
  $ -     $ -  
Total fees
  $ 14,858     $ 64,170  

“Audit-related fees” consisted of fees for the review of financial statements included in the Company’s quarterly reports on Form 10-Q.
 
“Tax fees” consisted of fees for the preparation of the Company’s 2008 and 2007 federal and state income tax returns.
 
The Board of Directors is responsible for approving every engagement of our independent registered public accounting firm.

 
29

 

PART IV
 
Item 15.  Exhibits and Financial Statement Schedules
 
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.
 
 
30

 
 
NATIONAL QUALITY CARE, INC.
AND SUBSIDIARY
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS)

Years Ended December 31, 2008 and 2007
 
Report of Independent Registered Public Accounting Firms -
   
Gumbiner Savett, Inc.
 
F-2
PMB Helin Donovan, LLP
 
F-3
     
Consolidated Balance Sheets - December 31, 2008 and 2007
 
F-4
     
Consolidated Statements of Operations - Years Ended December 31, 2008 and 2007
 
F-5
     
Consolidated Statement of Stockholders’ Equity (Deficiency) - Years Ended December 31, 2008 and 2007
 
F-6
     
Consolidated Statements of Cash Flows - Years Ended December 31, 2008 and 2007
 
F-7
     
Notes to Consolidated Financial Statements – Years Ended December 31, 2008 and 2007
 
F-9
 
 
F-1

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of National Quality Care, Inc.

We have audited the consolidated balance sheet of National Quality Care, Inc. and its wholly-owned subsidiary (the “Company”) as of December 31, 2008, and the related consolidated statements of operations, stockholders’ deficiency, and cash flows for the year ended December 31, 2008.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Quality Care, Inc. and its wholly-subsidiary as of December 31, 2008, and the results of their operations and their cash flows for the year ended December 31, 2008, in conformity with United States generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered losses from operations and negative cash flows from operations that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ Gumbiner Savett, Inc.
Gumbiner Savett, Inc.
Santa Monica, California
December 2, 2011
 
 
F-2

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
National Quality Care, Inc.
Los Angeles, California

We have audited the accompanying consolidated balance sheet of National Quality Care, Inc. and its wholly-owned subsidiary (the “Company”) as of December 31, 2007, and the related consolidated statements of operations, stockholders’ deficiency and cash flows for the year ended December 31, 2007.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Quality Care, Inc. as of December 31, 2007, and the consolidated results of their operations and their consolidated cash flows for the year ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the accompanying consolidated financial statements, for the year ended December 31, 2007, the Company experienced a net loss from operations of $3,275,323, and the Company has an accumulated deficit of $12,837,325.  These conditions raise substantial doubt about its ability to continue as a going concern.  Management’s plan in regard to these matters is also discussed in Note 2.  These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ PMB Helin Donovan, LLP
PMB Helin Donovan, LLP
San Francisco, California
March 25, 2008
 
 
F-3

 

NATIONAL QUALITY CARE, INC.
AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS
 
   
December 31,
 
   
2008
   
2007
 
             
ASSETS
           
Current assets:
           
Cash
  $ 116,800     $ 709,579  
Prepaid expenses and other current assets
    13,291       45,038  
Prepaid expenses and other current assets – discontinued operations
          31,330  
Total current assets
    130,091       785,947  
Technology rights, net of accumulated amortization of $35,302 in 2008 and $30,442 in 2007
    64,698       69,558  
Total assets
  $ 194,789     $ 855,505  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 2,662,622     $ 1,210,175  
Accounts payable and accrued expenses – discontinued operations
          74,230  
Due to stockholder – discontinued operations
          4,854  
Notes payable to related party, including accrued interest of $46,776 and $690 at December 31, 2008 and 2007, respectively, net of discounts of $-0- and $176,273 at December 31, 2008 and 2007, respectively
    896,776       524,417  
Derivative liability
          43,750  
Total current liabilities
    3,559,398       1,857,426  
Note payable to consultant
    120,000        
Total liabilities
    3,679,398       1,857,426  
                 
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 – 73,916,252 shares and 54,191,252 shares at December 31, 2008 and 2007, respectively
    739,163       541,913  
Additional paid-in capital
    12,186,413       11,343,306  
Stock subscriptions and other receivables from stockholders
          (49,815 )
Accumulated deficit
    (16,410,185 )     (12,837,325 )
Total stockholders’ deficiency
    (3,484,609 )     (1,001,921 )
Total liabilities and stockholders’ deficiency
  $ 194,789     $ 855,505  

See accompanying notes to consolidated financial statements.

 
F-4

 

NATIONAL QUALITY CARE, INC.
AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF OPERATIONS

   
Years Ended
December 31,
 
   
2008
   
2007
 
Revenues
  $     $  
                 
Operating expenses:
               
General and administrative, including $28,350 and $150,994 of stock-based compensation costs for the years ended December 31, 2008 and 2007, respectively
    3,041,438       3,111,631  
Research and development, including $84,279 of stock-based compensation costs for the year ended December 31, 2008
    387,894       59,860  
Total operating expenses
    3,429,332       3,171,491  
Loss from continuing operations
    (3,429,332 )     (3,171,491 )
Interest expense
    (269,266 )     (220,874 )
Interest income
          26,955  
Other income
    121,011       148,751  
Net loss from continuing operations
    (3,577,587 )     (3,216,659 )
Net income (loss) from discontinued operations
    4,727       (58,664 )
Net loss
  $ (3,572,860 )   $ (3,275,323 )
                 
Net loss per common share – basic and diluted:
               
From continuing operations
  $ (0.06 )   $ (0.06 )
From discontinued operations
    0.00       (0.00 )
Total net loss per common share
  $ (0.06 )   $ (0.06 )
                 
Weighted average common shares outstanding – basic and diluted
    63,263,520       51,734,816  

See accompanying notes to consolidated financial statements.

 
F-5

 

NATIONAL QUALITY CARE, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
 
Years Ended December 31, 2008 and 2007

   
Common Stock
   
Additional
Paid-in
   
Stock
Subscriptions
and
Other
Receivables
from
   
Accumulated
   
Total
Stockholders’
Equity
 
   
Shares
   
Amount
   
Capital
   
Stockholders
   
Deficit
   
(Deficiency)
 
Balance at December 31, 2006
    48,919,222     $ 489,192     $ 9,650,780     $ (46,395 )   $ (9,562,002 )   $ 531,575  
Shares issued in private placement
    5,756,250       57,563       863,437       (614,000 )           307,000  
Reclassification of derivative liability
                581,250                   581,250  
Payments received on stock subscription receivables
                      610,580             610,580  
Stock-based compensation costs for directors
                142,724                   142,724  
Stock-based compensation costs for consultants
                8,270                   8,270  
Shares returned and cancelled in connection with settlement of dispute with consultant
    (484,220 )     (4,842     (82,318 )                 (87,160 )
Fair value of warrants issued in connection with convertible debt
                179,163                   179,163  
Net loss
                            (3,275,323 )     (3,275,323 )
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 placements
    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 for directors
                16,664                   16,664  
Stock-based compensation costs for consultants
                95,965                   95,965  
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 )

See accompanying notes to consolidated financial statements.
 
 
F-6

 

NATIONAL QUALITY CARE, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Years Ended
December 31,
 
   
2008
   
2007
 
Cash flows from operating activities:
           
Continuing operations:
           
Net loss from continuing operations
  $ (3,577,587 )   $ (3,216,659 )
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
               
Amortization of technology rights
    4,860       4,860  
Amortization of discount on notes payable
    221,751       184,431  
Stock-based compensation costs
    112,629       150,994  
Amortization of prepaid interest
          13,050  
Legal settlement satisfied by return of common stock
          (87,160 )
Forgiveness of payables
    (114,017 )      
Note payable issued for services rendered
    120,000        
Changes in operating assets and liabilities:
               
Decrease in -
               
Prepaid expenses and other current assets
    31,747       378  
Increase in -
               
Accounts payable and accrued expenses
    1,565,774       822,541  
Accrued interest due to related party
    46,776       690  
Net cash used in continuing operating activities
    (1,588,067 )     (2,126,875 )
Discontinued operations:
               
Net income (loss) from discontinued operations
    4,727       (58,664 )
Adjustments to reconcile income (loss) from discontinued operations to net cash provided by discontinued operating activities:
               
Write-off of other receivables, including $63,170 from related party
    74,357        
Forgiveness of payables, including $33,304 to related party
    (79,084 )      
Changes in discontinued operating assets and liabilities:
               
Decrease in -
               
Accounts receivable
          14,715  
Prepaid expenses and other current assets
          107,189  
Decrease in -
               
Accounts payable and accrued expenses
          (26,528 )
Net cash provided by discontinued operating activities
          36,712  
Net cash used in operating activities
    (1,588,067 )     (2,090,163 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    404,000       307,000  
Payments received on stock subscription receivables
    36,788       610,580  
Proceeds from exercise of stock options
    17,500        
Proceeds from exercise of stock warrants
    387,000        
Proceeds from issuance of convertible notes payable to related party
    150,000       700,000  
Repayment of long-term borrowings
          (547,633 )
Repayment of advances from stockholders – discontinued operations
          (1,112 )
Net cash provided by financing activities
    995,288       1,068,835  
                 
Net decrease in cash
    (592,779 )     (1,021,328 )
Cash balance at beginning of year
    709,579       1,730,907  
Cash balance at end of year
  $ 116,800     $ 709,579  

(Continued)

 
F-7

 

NATIONAL QUALITY CARE, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)

  
 
Years Ended
December 31,
 
  
 
2008
   
2007
 
             
Cash paid for -
           
Interest
  $ 214     $ 69,442  
Income taxes
  $ 1,600     $ 4,800  
                 
Non-cash financing activities:
               
Derivative liability reclassified to additional paid-in capital
  $ 43,750     $ 581,250  
Discount recorded for issuance of warrants in connection with a convertible notes payable to related party
  $ 45,478     $ 179,163  
Common stock issued for stock subscription receivables
  $ 30,000     $ 614,000  

See accompanying notes to consolidated financial statements.

 
F-8

 

NATIONAL QUALITY CARE, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Years Ended December 31, 2008 and 2007
 
1. 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, NCQI, 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 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 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 December 31, 2008, the Company had an accumulated deficit of $16,410,185, a working capital deficiency of $3,429,307, and its total liabilities exceeded its total assets by $3,484,609. 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 consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

2.  Summary of Significant Accounting Policies

Principles of Consolidation
 
The accompanying 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.

 
F-9

 

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. 

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.

On January 1, 2007, the Company adopted new accounting rules which address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  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 new accounting rules also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.  The adoption of the new accounting rules did not have any effect on the Company’s financial statements. As of December 31, 2008, 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 December 31, 2008, the Company had no accrued interest or penalties related to uncertain tax positions.

 
F-10

 
 
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 December 31, 2008 and 2007, 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.

   
2008
   
2007
 
             
Warrants
    10,090,625       8,778,125  
Stock options
    7,570,000       5,420,000  
Convertible notes payable
    11,894,598       10,009,857  
Total
    29,555,223       24,207,982  
 
 
F-11

 

Fair Value of Financial Instruments

The carrying amounts of cash, prepaid expenses and other current assets, accounts payable and accrued expenses and due to stockholder 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 $4,860 for the years ended December 31, 2008 and 2007. 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 2007 consolidated financial statements have been reclassified to conform to the current year’s presentation.

3.  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.

 
F-12

 

Note 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 years ended December 31, 2008 and 2007, the Company recorded interest expense of $176,273 and $2,890, respectively, relative to the amortized discount. The unamortized discount was $176,273 as of December 31, 2007. 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. For the year ended December 31, 2008, the Company recorded interest expense of $45,478 relative to the amortized discount. The discount was fully amortized as of December 31, 2008.

Subsequent to year-end, 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. In March 2010, the $914,611 note, with accrued interest of $42,424, was paid in full.

Subsequent to year-end, 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 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.

Subsequent to year-end, 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.
 
On April 25, 2006, the Company entered into a $600,000 uncollateralized convertible promissory note with a director, bearing interest at 8% per annum, payable on April 25, 2007. 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 $0.32 per share at any time. The Company evaluated the convertible debenture in accordance with EITF No.s 98-5 and 00-27, and it was determined that the embedded conversion option within the debenture is beneficial to the holder because the conversion price of $0.32 per share was lower than the market price on the commitment date. The intrinsic value of the conversion option was calculated to be $581,250 and has been recognized as a reduction to the carrying amount of the debenture and as additional paid-in capital. This reduction to the carrying amount of the debenture, or discount, was amortized to interest expense on the straight-line method over the term of the convertible promissory note. For the year ended December 31, 2007, the Company recognized $181,541 of amortized discount in interest expense. The Company repaid this loan during April 2007.
 
During the years ended December 21, 2008 and 2007, the Company recorded total interest expense of $221,751 and $184,431, respectively, relative to the amortization of discounts.

 
F-13

 

4. Income Taxes
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets as of December 31, 2008 and 2007 are summarized below.

  
 
December 31,
 
  
 
2008
   
2007
 
Net operating loss carryforwards
  $ 6,256,000     $ 5,923,000  
Share-based compensation
    676,000       634,000  
Amortization of intangible assets
    49,000       71,000  
Accrued interest to related party
    18,000        
Accrued unpaid professional fees
    1,003,000        
Other
    2,000       2,000  
Total deferred tax assets
    8,004,000       6,630,000  
Valuation allowance
    (8,004,000 )     (6,630,000 )
Net deferred tax assets
  $     $  
 
In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. As of December 31, 2008 and 2007, management was unable to determine if it is more likely than not that the Company’s deferred tax assets will be realized, and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates.
 
No federal tax provision has been provided for the years ended December 31, 2008 and 2007 due to the losses incurred during such periods. Presented below is a reconciliation between the income tax rate computed by applying the U.S. federal statutory rate and the effective tax rate for the years ended December 31, 2008 and 2007.

  
 
Years Ended
December 31,
 
   
2008
   
2007
 
             
U. S. federal statutory tax rate