NOTE 1.
|
COMPANY OVERVIEW AND BASIS OF PRESENTATION
|
Company Overview
ULURU Inc. (hereinafter “we”, “our”, “us”, “ULURU”, or the “Company”) is a Nevada corporation. We are a diversified specialty pharmaceutical company committed to developing and commercializing a broad range of innovative wound care and muco-adhesive film products based on our patented Nanoflex® and OraDisc
TM
drug delivery technologies, with the goal of improving outcomes for patients, health care professionals, and health care payers.
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and include the account of ULURU Inc., a Nevada corporation, and its wholly-owned subsidiary, Uluru Delaware Inc., a Delaware corporation. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete year-end financial statements. In the opinion of management, the accompanying financial statements include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of September 30, 2012, the results of its operations for the three and nine months ended September 30, 2012 and 2011, and cash flows for the nine months ended September 30, 2012 and 2011.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates and assumptions. These differences are usually minor and are included in our consolidated financial statements as soon as they are known. Our estimates, judgments, and assumptions are continually evaluated based on available information and experience.
All intercompany transactions and balances have been eliminated in consolidation.
Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 30, 2012, including the risk factors set forth therein.
Liquidity and Going Concern
The report of our independent registered public accounting firm for the fiscal year ended December 31, 2011 contained an explanatory paragraph to reflect its significant doubt about our ability to continue as a going concern as a result of our history of losses and our liquidity position, as discussed herein and in this Form 10-Q. Based on our existing liquidity, the expected level of operating expenses, projected sales of our existing products combined with other revenues, proceeds from the convertible debt transaction in June 2012, and proceeds from the divestiture of non-core assets, we believe that we will be able to meet our working capital and capital expenditure requirements through the second quarter of 2013. However, we cannot be sure that our anticipated revenue growth will be realized or that we will generate significant positive cash flow from operations. Moreover, we may not be able to raise sufficient additional capital on acceptable returns, or at all, to continue operations and may not be able to execute any strategic transactions. Therefore, we are unable to assert that our financial position is sufficient to fund operations beyond the second quarter of 2013, and as a result, there is substantial doubt about our ability to continue as a going concern beyond the second quarter of 2013.
Explanatory Note Regarding Share Amounts:
All share amounts and per share prices in this Quarterly Report on Form 10-Q have been retroactively adjusted to reflect the effect of our reverse stock split, on a 15 for 1 basis, effective June 29, 2011, unless otherwise indicated. The exercise price for all stock options and warrants and the conversion price for convertible debt in the accompanying condensed consolidated financial statements have been adjusted to reflect the reverse stock split by multiplying the original exercise or conversion price by fifteen.
NOTE 2.
|
SIGNIFICANT ACCOUNTING POLICIES
|
The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and nine months ended September 30, 2012 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 30, 2012.
NOTE 3.
|
THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
|
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08,
“Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment”
(“ASU 2011-08”). ASU 2011-08 updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance is effective for fiscal years beginning after December 15, 2011; however, early adoption is permitted in certain circumstances. We adopted the provisions of ASU 2011-08 in the first quarter of 2012. The adoption of this update does not materially impact our financial statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05,
“Comprehensive Income (Topic 220): Presentation of Comprehensive Income”
(“ASU 2011-05”). ASU 2011-05 amended existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years beginning after December 15, 2011. We adopted the provisions of ASU 2011-05 in the first quarter of 2012. The adoption of this update does not materially impact our financial statements.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04,
“Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”
(“ASU 2011-04”). ASU 2011-04 generally provides a uniform framework for fair value measurements and related disclosures between U.S. generally accepted accounting principles and International Financial Reporting Standards. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will be effective for interim and annual periods beginning on or after December 15, 2011. We adopted the provisions of ASU 2011-04 in the first quarter of 2012. The adoption of this update does not materially impact our financial statements.
NOTE 4.
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SEGMENT INFORMATION
|
We operate in one business segment: the research, development and commercialization of pharmaceutical products. Our corporate headquarters in the United States collects product sales, licensing fees, royalties, and sponsored research revenues from our arrangements with external customers and licensees. Our entire business is managed by a single management team, which reports to the Chief Executive Officer.
Our revenues are currently derived primarily from one licensee for domestic activities, three licensees for international activities, and our sales force for the domestic sale of Altrazeal®.
Revenues per geographic area, along with relative percentages of total revenues, for the three and nine months ended September 30 are summarized as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
Revenues
|
|
2012
|
|
|
%
|
|
|
2011
|
|
|
%
|
|
|
2012
|
|
|
%
|
|
|
2011
|
|
|
%
|
|
Domestic
|
|
$
|
57,179
|
|
|
|
64
|
%
|
|
$
|
67,468
|
|
|
|
92
|
%
|
|
$
|
155,633
|
|
|
|
76
|
%
|
|
$
|
210,660
|
|
|
|
92
|
%
|
International
|
|
|
31,743
|
|
|
|
36
|
%
|
|
|
6,184
|
|
|
|
8
|
%
|
|
|
49,505
|
|
|
|
24
|
%
|
|
|
18,349
|
|
|
|
8
|
%
|
Total
|
|
$
|
88,922
|
|
|
|
100
|
%
|
|
$
|
73,652
|
|
|
|
100
|
%
|
|
$
|
205,138
|
|
|
|
100
|
%
|
|
$
|
229,009
|
|
|
|
100
|
%
|
A significant portion of our revenues are derived from a few major customers. Customers with greater than 10% of total sales, along with their relative percentage of all sales, for the three and nine months ended September 30 are represented on the following table:
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
Customers
|
Product
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Customer A
|
Aphthasol®
|
|
|
19
|
%
|
|
|
25
|
%
|
|
|
24
|
%
|
|
|
22
|
%
|
Customer B
|
Altrazeal®
|
|
|
29
|
%
|
|
|
---
|
|
|
|
15
|
%
|
|
|
---
|
|
Customer C
|
Altrazeal®
|
|
|
*
|
|
|
|
12
|
%
|
|
|
*
|
|
|
|
*
|
|
Total
|
|
|
|
48
|
%
|
|
|
37
|
%
|
|
|
39
|
%
|
|
|
22
|
%
|
* Sales from this customer were less than 10% of total sales for the period reported.
|
|
On June 25, 2010, we entered into an acquisition and license agreement with Strakan International Limited and Zindaclin Limited, a subsidiary of Crawford Healthcare Limited, a pharmaceutical company based in England. Under the terms of the agreement, Zindaclin Limited will pay up to $5.1 million for the exclusive product rights to Zindaclin®, a zinc clindamycin for the treatment of acne, which consideration will be shared equally by Strakan International Limited and us. Guaranteed payments of $1,050,000 were scheduled to be received by us, of which $550,000 occurred in 2010, $250,000 occurred in 2011, and $250,000 was to occur in June 2012. On March 22, 2012, we agreed to accept $220,000 for the early remittance of the final guaranteed payment, which was received prior to March 29, 2012.
As of September 30, 2012, our inventory was comprised of Altrazeal® finished goods, manufacturing costs incurred in the production of Altrazeal® and Aphthasol®, and raw materials. Inventories are stated at the lower of cost (first in, first out method) or market. We regularly review inventories on hand and write down the carrying value of our inventories for excess and potentially obsolete inventories based on historical usage and estimated future usage. In assessing the ultimate realization of our inventories, we are required to make judgments as to future demand requirements. As actual future demand or market conditions may vary from those projected by us, adjustment to inventories may be required. For the three months ended September 30, 2012, we wrote off approximately $79,000 in out-of-date and obsolete finished goods.
The components of inventory, at the different stages of production, consisted of the following at September 30, 2012 and December 31, 2011:
Inventory
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Finished goods
|
|
$
|
323,529
|
|
|
$
|
398,634
|
|
Work-in-progress
|
|
|
290,642
|
|
|
|
367,779
|
|
Raw materials
|
|
|
33,070
|
|
|
|
33,070
|
|
Total
|
|
$
|
647,241
|
|
|
$
|
799,483
|
|
NOTE 7.
|
PROPERTY, EQUIPMENT and LEASEHOLD IMPROVEMENTS
|
Property, equipment and leasehold improvements, net, consisted of the following at September 30, 2012 and December 31, 2011:
Property, equipment and leasehold improvements
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Laboratory equipment
|
|
$
|
424,888
|
|
|
$
|
424,888
|
|
Manufacturing equipment
|
|
|
1,547,572
|
|
|
|
1,483,223
|
|
Computers, office equipment, and furniture
|
|
|
140,360
|
|
|
|
140,360
|
|
Computer software
|
|
|
4,108
|
|
|
|
4,108
|
|
Leasehold improvements
|
|
|
95,841
|
|
|
|
95,841
|
|
|
|
|
2,212,769
|
|
|
|
2,148,420
|
|
Less: accumulated depreciation and amortization
|
|
|
( 1,301,652
|
)
|
|
|
(1,075,960
|
)
|
Property, equipment and leasehold improvements, net
|
|
$
|
911,117
|
|
|
$
|
1,072,460
|
|
Depreciation expense on property, equipment and leasehold improvements was $75,219 and $75,359 for the three months ended September 30, 2012 and 2011, respectively, and was $225,691 and $227,665 for the nine months ended September 30, 2012 and 2011, respectively.
NOTE 8.
|
INTANGIBLE ASSETS
|
Intangible assets are comprised of patents acquired in October, 2005. Intangible assets, net consisted of the following at September 30, 2012 and December 31, 2010:
Intangible assets
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Patent - Amlexanox (Aphthasol®)
|
|
$
|
2,090,000
|
|
|
$
|
2,090,000
|
|
Patent - Amlexanox (OraDisc™ A)
|
|
|
6,873,080
|
|
|
|
6,873,080
|
|
Patent - OraDisc™
|
|
|
73,000
|
|
|
|
73,000
|
|
Patent - Hydrogel nanoparticle aggregate
|
|
|
589,858
|
|
|
|
589,858
|
|
|
|
|
9,625,938
|
|
|
|
9,625,938
|
|
Less: accumulated amortization
|
|
|
( 5,360,190
|
)
|
|
|
(5,003,503
|
)
|
Intangible assets, net
|
|
$
|
4,265,748
|
|
|
$
|
4,622,435
|
|
Amortization expense for intangible assets was $119,763 and $206,454 for the three months ended September 30, 2012 and 2011, respectively, and was $356,687 and $612,632 for the nine months ended September 30, 2012 and 2011, respectively.
The future aggregate amortization expense for intangible assets, remaining as of September 30, 2012, is as follows:
Calendar Years
|
|
Future Amortization
Expense
|
|
2012 (Three months)
|
|
$
|
119,763
|
|
2013
|
|
|
475,148
|
|
2014
|
|
|
475,148
|
|
2015
|
|
|
475,148
|
|
2016
|
|
|
476,450
|
|
2017 & Beyond
|
|
|
2,244,091
|
|
Total
|
|
$
|
4,265,748
|
|
NOTE 9.
|
INVESTMENTS IN UNCONSOLIDATED ENTITIES
|
On January 11, 2012, we executed a shareholders’ agreement for the establishment of Altrazeal Trading Ltd., a single purpose entity to be used for the exclusive marketing of Altrazeal® throughout the European Union, Australia, New Zealand, North Africa, and the Middle East. As a result of this transaction, we received a non-dilutable 25% ownership interest in Altrazeal Trading Ltd.
We use the equity method of accounting for investments in other companies that are not controlled by us and in which our interest is generally between 20% and 50% of the voting shares or we have significant influence over the entity, or both.
As of September 30, 2012, Altrazeal Trading Ltd. had not begun operations and accordingly the net book value of the investee assets had not been determined and there were no equity method investee gains or losses for the three months and the nine months then ended.
NOTE 10.
|
ACCRUED LIABILITIES
|
Accrued liabilities consisted of the following at September 30, 2012 and December 31, 2011:
Accrued Liabilities
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Accrued taxes – payroll
|
|
$
|
106,299
|
|
|
$
|
106,299
|
|
Accrued compensation/benefits
|
|
|
252,924
|
|
|
|
184,080
|
|
Accrued insurance payable
|
|
|
41,379
|
|
|
|
78,246
|
|
Product rebates/returns
|
|
|
151
|
|
|
|
3,160
|
|
Other
|
|
|
1,903
|
|
|
|
4,757
|
|
Total accrued liabilities
|
|
$
|
402,656
|
|
|
$
|
376,542
|
|
NOTE 11.
|
CONVERTIBLE DEBT
|
On June 27, 2012, we entered into a Securities Purchase Agreement (the “Purchase Agreement”), related to our issue of a $2,210,000 Secured Convertible Note (the “June 2012 Note”), with Inter-Mountain Capital Corp., a Delaware corporation (“Inter-Mountain”). The purchase price for the June 2012 Note was paid $500,000 at closing in cash and $1,500,000 in the form of six promissory notes in favor of the Company, each in the principal amount of $250,000 (the “Investor Notes”) and each of which becomes due as the outstanding balance under the June 2012 Note is reduced to certain levels. The purchase price of the June 2012 Note reflected a $200,000 original issue discount and $10,000 in attorney’s fees. The Purchase Agreement also includes representations and warranties, restrictive covenants, and indemnification provisions standard for similar transactions.
The June 2012 Note bears interest at the rate of 8.0% per annum, with monthly installment payments of $83,333 commencing on the date that is the earlier of (i) thirty calendar days after the effective date of a registration statement registering the re-sale of the shares issuable upon conversion under the June 2012 Note and (ii) December 24, 2012, but in no event sooner than September 25, 2012. At our option, subject to certain volume, price, and other conditions, the monthly installment payments on the June 2012 Note may be paid in whole, or in part, in cash or in our common stock. If the monthly installment is paid in common stock, such shares being issued will be based on a price that is 80% of the average of the three lowest volume weighted average prices of the shares of common stock during the preceding twenty trading days. The percentage declines to 70% if the average of the three lowest volume weighted average prices of the shares of common stock during the preceding twenty trading days is less than $0.05.
At the option of Inter-Mountain, the outstanding principal balance of the June 2012 Note may be converted into shares of our common stock at a conversion price of $0.35 per share, subject to certain pricing adjustments and ownership limitations. The initial tranche is $710,000 and the six subsequent tranches are each $250,000, plus interest. At our option, the outstanding principal balance of the June 2012 Note, or a portion thereof, may be prepaid in cash at 120% of the amount elected to be prepaid. The June 2012 Note is secured by a Security Agreement pursuant to which we granted to Inter-Mountain a first-priority security interest in the assets held by the Company.
Events of default under the June 2012 Note include failure to make required payments or to deliver shares upon conversion, the entry of a $100,000 judgment not stayed within 30 days, breach of representations or covenants under the transaction documents, various events associated with insolvency or failure to pay debts, delisting of our common stock, a restatement of financial statements, and a default under certain other agreements. In the event of default, the interest rate under the June 2012 Note increases to 18% and the June 2012 Note becomes callable at a premium. In addition, the holder has all remedies under law and equity, including foreclosing on our assets under the Security Agreement.
As part of the convertible debt financing, Inter-Mountain also received a total of seven warrants (the “Warrants”) to purchase, if they all vest, an aggregate of 3,142,857 shares of common stock, which number of shares could increase based upon the terms and conditions of the Warrants. The Warrants have an exercise price of $0.35 per share, subject to certain pricing adjustments, and are exercisable, subject to vesting provisions and ownership limitations, until June 27, 2017. The Warrant for the initial 785,714 shares of common stock vests immediately. Each of the other Warrants vest upon the payment by the holder of each of the six Investor Notes.
As part of the convertible debt financing, we entered into a Registration Rights Agreement whereby we agreed to prepare and file with the SEC a registration statement for the number of shares referred to therein no later than July 27, 2012 and to cause such registration statement to be declared effective no later than ninety days after such filing with the SEC and to keep such registration statement effective for a period of no less than one hundred and eighty days. The Registration Rights Agreement also grants Inter-Mountain piggy-back registration rights with respect to future offerings by the Company. In accordance with our obligations under the Registration Rights Agreement, we filed with the SEC a registration statement that was declared effective on July 31, 2012.
On October 5, 2012, we and Inter-Mountain entered into a First Amendment to Buyer Trust Deed Note #1 (the “Trust Deed Note Amendment”) for the purpose of revising certain terms and conditions contained in the Buyer Trust Deed Note #1, to include an updated schedule for the timing of certain payment obligations by Inter-Mountain contained therein.
On July 28, 2011, we completed a convertible debt financing for $125,000 with Mr. Kerry P. Gray, the Company’s Chairman, President, and Chief Executive Officer (the “July 2011 Note”). The July 2011 Note bears interest at the rate of 10.0% per annum, with annual payments of interest commencing on July 1, 2012. The full amount of principal and any unpaid interest will be due on July 28, 2014. The outstanding principal balance of the July 2011 Note may be converted into shares of the Company’s common stock, at the option of the note holder and at any time, at a conversion price of $1.08 per share or 115,741 shares of common stock. We may force conversion of the July 2011 Note if our common stock trades for a defined period of time at a price greater than $2.16. The July 2011 Note is collateralized by the grant of a security interest in the inventory, accounts receivables and capital equipment held by the Company. The securities issuable on conversion have not been registered under the Securities Act of 1933 and may not be sold absent registration or an applicable exemption from the registration requirements. As part of the convertible debt financing, Mr. Gray also received a warrant to purchase up to 34,722 shares of the Company’s common stock. The warrant has an exercise price of $1.08 per share and is exercisable at any time until July 28, 2016. On July 3, 2012, the Company and Mr. Gray entered into a Modification Agreement for the purpose of deferring the annual payment of interest due on July 1, 2012 of $11,542 until such time as Mr. Gray provides written notice to us with such notice being no less than 15 days prior to the relevant payment date. Moreover, the parties agreed that no Event of Default under the July 2011 Note occurred as a result of any failure by us to make the annual payment of interest due on July 1, 2012. Commencing on July 1, 2012, interest at the rate of 12.0% per annum will accrue on the deferred interest payment of $11,542 until the relevant payment date.
On June 13, 2011, we completed a $140,000 convertible debt financing with Mr. Gray (the “June 2011 Note”). The June 2011 Note bears interest at the rate of 10% per annum, with annual payments of interest commencing on July 1, 2012. The full amount of principal and any unpaid interest will be due on June 13, 2014. The outstanding principal balance of the June 2011 Note may be converted into shares of the Company’s common stock, at the option of the note holder and at any time, at a conversion price of $1.20 per share or 116,667 shares of common stock. We may force conversion of the convertible note if our common stock trades for a defined period of time at a price greater than $1.80. The June 2011 Note is collateralized by the grant of a security interest in the inventory, accounts receivables, and capital equipment held by the Company. The securities issuable on conversion have not been registered under the Securities Act of 1933 and may not be sold absent registration or an applicable exemption from the registration requirements. As part of the convertible debt financing, Mr. Gray also received a warrant to purchase up to 35,000 shares of the Company’s common stock. The warrant has an exercise price of $1.20 per share and is exercisable at any time until June 13, 2016. On July 3, 2012, the Company and Mr. Gray entered into a Modification Agreement for the purpose of deferring the annual payment of interest due on July 1, 2012 of $14,653 until such time as Mr. Gray provides written notice to us with such notice being no less than 15 days prior to the relevant payment date. Moreover, the parties agreed that no Event of Default under the June 2011 Note occurred as a result of any failure by us to make the annual payment of interest due on July 1, 2012. Commencing on July 1, 2012, interest at the rate of 12.0% per annum will accrue on the deferred interest payment of $14,653 until the relevant payment date.
We account for convertible debt using specific guidelines in accordance with U.S. GAAP. We allocated the value of the proceeds received to the convertible instrument and to the warrant on a relative fair value basis. We calculated the fair value of the warrant issued with the convertible instrument using the Black-Scholes valuation method, using the same assumptions used for valuing employee stock options, except the contractual life of the warrant was used. Using the effective interest method, the allocated fair value was recorded as a debt discount and is being amortized over the expected term of the convertible debt to interest expense.
On the date of issuance of the June 2011 Note, the July 2011 Note, and the June 2012 Note, no portion of the proceeds were attributable to a beneficial conversion feature since the conversion price of the June 2011 Note, the July 2011 Note, and the June 2012 Note exceeded the market price of the Company’s common stock.
Information relating to our convertible notes payable is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012
|
|
Transaction
|
|
Initial
Principal
Amount
|
|
|
Interest
Rate
|
|
Maturity
Date
|
|
Conversion
Price (1)(2)
|
|
|
Principal
Balance
|
|
|
Unamortized
Debt
Discount
|
|
|
Carrying
Value
|
|
June 2011 Note
|
|
$
|
140,000
|
|
|
|
10.0
|
%
|
06/13/2014
|
|
$
|
1.20
|
|
|
$
|
140,000
|
|
|
$
|
6,909
|
|
|
$
|
133,091
|
|
July 2011 Note
|
|
|
125,000
|
|
|
|
10.0
|
%
|
07/28/2014
|
|
$
|
1.08
|
|
|
|
125,000
|
|
|
|
13,881
|
|
|
|
111,119
|
|
June 2012 Note
|
|
|
2,210,000
|
|
|
|
8.0
|
%
|
03/27/2015
|
|
$
|
0.35
|
|
|
|
2,170,867
|
|
|
|
414,211
|
|
|
|
1,756,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,475,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,435,867
|
|
|
$
|
435,001
|
|
|
$
|
2,000,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The outstanding principal balance of the June 2011 Note and the July 2011 Note may be converted, at the option of Mr. Gray, into shares of common stock at a fixed conversion price of $1.20 per share and $1.08 per shares, respectively.
|
(2)
|
The outstanding principal balance of the June 2012 Note may be converted, at the option of Inter-Mountain, into shares of common stock at a conversion price of $0.35 per share, subject to certain pricing adjustments and ownership limitations.
|
The amount of interest cost recognized from the three convertible notes outstanding was $52,121 and $5,721 for three months ended September 30, 2012 and 2011, respectively and was $67,227 and $6,373 for the nine months ended September 30, 2012 and 2011, respectively.
NOTE 12.
|
STOCKHOLDERS’ EQUITY
|
Common Stock
As of September 30, 2012, we had 8,653,289 shares of common stock issued and outstanding. For the three months ended September 30, 2012, we issued 566,891 shares of common stock in payment of the convertible note installment of $83,333 due on September 25, 2012 to Inter-Mountain.
Preferred Stock
As of September 30, 2012, we had 65 shares of Series A preferred stock issued and outstanding. For the three months ended September 30, 2012, we did not issue any shares of preferred stock.
Warrants
The following table summarizes the warrants outstanding and the number of shares of common stock subject to exercise as of September 30, 2012 and the changes therein during the nine months then ended:
|
|
Number of Shares of Common Stock Subject to Exercise
|
|
|
Weighted – Average
Exercise Price
|
|
Balance as of December 31, 2011
|
|
|
612,594
|
|
|
$
|
2.45
|
|
Warrants issued
(1)
|
|
|
785,714
|
|
|
|
0.35
|
|
Warrants exercised
|
|
|
---
|
|
|
|
---
|
|
Warrants cancelled
|
|
|
---
|
|
|
|
---
|
|
Balance as of September 30, 2012
|
|
|
1,398,308
|
|
|
$
|
1.27
|
|
(1)
|
As part of the June 2012 Note, Inter-Mountain received a total of seven warrants to purchase, if they all vest, an aggregate of 3,142,857 shares of common stock, which number of shares could increase based upon the terms and conditions of the warrants. The warrants have an exercise price of $0.35 per share, subject to certain pricing adjustments, and are exercisable, subject to vesting provisions and ownership limitations, until June 27, 2017. The initial warrant for 785,714 shares of common stock vested on June 27, 2012 and only such shares of common stock have been included in this Table, based upon an exercise price of $0.35 per share of common stock. Each of the other warrants vest upon the payment by Inter-Mountain of a related Investor Note.
|
Of the warrant shares subject to exercise as of September 30, 2012, expiration of the right to exercise is as follows:
Date of expiration
|
|
Number of Warrant Shares of Common Stock Subject to Expiration
|
|
July 23, 2014
|
|
|
69,050
|
|
May 15, 2015
|
|
|
357,155
|
|
June 13, 2016
|
|
|
35,000
|
|
July 16, 2016
|
|
|
116,667
|
|
July 28, 2016
|
|
|
34,722
|
|
June 27, 2017
|
|
|
785,714
|
|
Total
|
|
|
1,398,308
|
|
NOTE 13.
|
EARNINGS PER SHARE
|
Basic and Diluted Net Loss Per Share
In accordance with FASB Accounting Standards Codification (“ASC”) Topic 260,
Earnings per Share
, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, increased to include potential dilutive common shares. The effect of outstanding stock options, restricted vesting common stock, convertible debt, convertible preferred stock, and warrants, when dilutive, is reflected in diluted earnings (loss) per common share by application of the treasury stock method. We have excluded all outstanding stock options, restricted vesting common stock, convertible debt, convertible preferred stock, and warrants from the calculation of diluted net loss per common share because all such securities are antidilutive for all periods presented.
Shares used in calculating basic and diluted net loss per common share exclude these potential common shares as of September 30, 2012 and December 31, 2011:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Warrants to purchase common stock
(1)
|
|
|
1,398,308
|
|
|
|
612,594
|
|
Stock options to purchase common stock
|
|
|
158,409
|
|
|
|
287,745
|
|
Unvested restricted common stock
|
|
|
300
|
|
|
|
1,096
|
|
Common stock issuable upon the assumed conversion of our convertible note payable from June 2012
(2)
|
|
|
6,209,369
|
|
|
|
---
|
|
Common stock issuable upon the assumed conversion of our convertible notes payable from June 2011 and July 2011
(3)
|
|
|
378,790
|
|
|
|
232,408
|
|
Common stock issuable upon the assumed conversion of our Series A preferred stock
(4)
|
|
|
985,078
|
|
|
|
357,143
|
|
Total
|
|
|
9,130,254
|
|
|
|
1,490,986
|
|
(1)
|
As part of the June 2012 Note, Inter-Mountain received a total of seven warrants to purchase, if they all vest, an aggregate of 3,142,857 shares of common stock, which number of shares could increase based upon the terms and conditions of the warrants. The initial warrant for 785,714 shares of common stock vested on June 27, 2012 and only such shares of common stock have been included in this Table. Each of the other warrants vest upon the payment by Inter-Mountain of a related Investor Note.
|
(2)
|
The outstanding principal balance and the accrued and unpaid interest of the June 2012 Note may be converted, at the option of Inter-Mountain, into shares of common stock at a conversion price of $0.35 per share, subject to certain pricing adjustments and ownership limitations. For the purposes of this Table, we have assumed a conversion price of $0.35 per share and no ownership limitations.
|
(3)
|
The outstanding principal balance of the June 2011 Note and the July 2011 Note may be converted, at the option of Mr. Gray, into shares of common stock at a fixed conversion price of $1.20 per share and $1.08 per shares, respectively. The accrued and unpaid interest for each convertible note payable may be converted, at the option of Mr. Gray, into shares of common stock at a conversion price based upon the average of the five trading days prior to the payment date, which for the purposes of this Table we have assumed to be September 30, 2012.
|
(4)
|
The outstanding Series A preferred stock and the accrued and unpaid dividends thereon are convertible into shares of the Company’s common stock at the Company’s option at any time after six-months from the date of issuance of the Series A preferred stock. The conversion price for the holder is fixed at $0.70 per share with no adjustment mechanisms, resets, ratchets, or anti- covenants other than the customary adjustments for stock splits. For the purposes of this Table, we have assumed a conversion price of $0.70 per share.
|
NOTE 14.
|
SHARE BASED COMPENSATION
|
The Company’s share-based compensation plan, the 2006 Equity Incentive Plan (“Incentive Plan”), is administered by the compensation committee of the Board of Directors (“Board”), which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award.
We account for share-based compensation under FASB ASC Topic 718,
Stock Compensation
, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors based on estimated fair values of the award on the grant date. We use the Black-Scholes option-pricing model to estimate the fair value of share-based awards.
Our Board granted the incentive stock option awards as indicated below to executives or employees and nonstatutory stock option awards to directors or non-employees for the three and nine months ended September 30, 2012 and 2011:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Incentive Stock Options
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantity
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1,334
|
|
Weighted average fair value per share
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
1.15
|
|
Fair value
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
1,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonstatutory Stock Options
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantity
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Weighted average fair value per share
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Fair value
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
(1)
|
The Company did not award any incentive stock options for the three months ended September 30, 2012 and 2011, respectively.
|
|
(2)
|
The Company did not award any nonstatutory stock options for the three months ended September 30, 2012 and 2011, respectively.
|
Stock Options (Incentive and Nonstatutory)
The following table summarizes share-based compensation related to stock options for the three and nine months ended September 30, 2012 and 2011:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Research and development
|
|
$
|
---
|
|
|
$
|
13,442
|
|
|
$
|
6,280
|
|
|
$
|
39,888
|
|
Selling, general and administrative
|
|
|
6,760
|
|
|
|
22,397
|
|
|
|
25,753
|
|
|
|
67,727
|
|
Total share-based compensation expense
|
|
$
|
6,760
|
|
|
$
|
35,839
|
|
|
$
|
32,033
|
|
|
$
|
107,615
|
|
At September 30, 2012, the balance of unearned share-based compensation to be expensed in future periods related to unvested stock option awards, as adjusted for expected forfeitures, is approximately $42,433. The period over which the unearned share-based compensation is expected to be recognized is approximately two years.
The following table summarizes the stock options outstanding and the number of shares of common stock subject to exercise as of September 30, 2012 and the changes therein during the nine months then ended:
|
|
Stock Options
|
|
|
Weighted Average Exercise Price per Share
|
|
Outstanding as of December 31, 2011
|
|
|
287,745
|
|
|
$
|
16.89
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
Forfeited/cancelled
|
|
|
(129,336
|
)
|
|
|
22.49
|
|
Exercised
|
|
|
---
|
|
|
|
---
|
|
Outstanding as of September 30, 2012
|
|
|
158,409
|
|
|
$
|
12.32
|
|
The following table presents the stock option grants outstanding and exercisable as of September 30, 2012:
Options Outstanding
|
|
|
Options Exercisable
|
|
Stock Options Outstanding
|
|
|
Weighted Average Exercise Price per Share
|
|
|
Weighted Average Remaining Contractual Life in Years
|
|
|
Stock Options Exercisable
|
|
|
Weighted Average Exercise Price per Share
|
|
|
118,671
|
|
|
$
|
5.37
|
|
|
|
6.0
|
|
|
|
90,642
|
|
|
$
|
6.25
|
|
|
19,335
|
|
|
|
23.80
|
|
|
|
4.9
|
|
|
|
19,335
|
|
|
|
23.80
|
|
|
16,069
|
|
|
|
34.52
|
|
|
|
5.4
|
|
|
|
16,069
|
|
|
|
34.52
|
|
|
4,334
|
|
|
|
69.22
|
|
|
|
4.6
|
|
|
|
4,334
|
|
|
|
69.22
|
|
|
158,409
|
|
|
$
|
12.32
|
|
|
|
5.8
|
|
|
|
130,380
|
|
|
$
|
14.43
|
|
Restricted Stock Awards
Restricted stock awards, which typically vest over a period of two to five years, are issued to certain key employees and are subject to forfeiture until the end of an established restriction period. We utilize the market price on the date of grant as the fair market value of restricted stock awards and expense the fair value on a straight-line basis over the vesting period.
The following table summarizes share-based compensation related to restricted stock awards for the three months and nine months ended September 30:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Research and development
|
|
$
|
(391
|
)
|
|
$
|
3,742
|
|
|
$
|
2,814
|
|
|
$
|
12,462
|
|
Selling, general and administrative
|
|
|
1,143
|
|
|
|
2,652
|
|
|
|
3,392
|
|
|
|
8,830
|
|
Total share-based compensation expense
|
|
$
|
752
|
|
|
$
|
6,394
|
|
|
$
|
6,206
|
|
|
$
|
21,292
|
|
At September 30, 2012, the balance of unearned share-based compensation to be expensed in future periods related to restricted stock awards, as adjusted for expected forfeitures, is approximately $3,082. The period over which the unearned share-based compensation related to restricted stock awards is expected to be recognized is approximately six months.
The following table summarizes the non-vested restricted stock awards outstanding and the number of shares of common stock subject to potential issue as of September 30, 2012 and the changes therein during the nine months then ended:
|
|
Restricted stock
|
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding as of December 31, 2011
|
|
|
1,096
|
|
|
$
|
41.47
|
|
Shares granted
|
|
|
---
|
|
|
|
---
|
|
Shares forfeited/cancelled
|
|
|
(97
|
)
|
|
|
34.59
|
|
Shares exercised/issued
|
|
|
(699
|
)
|
|
|
45.39
|
|
Outstanding as of September 30, 2012
|
|
|
300
|
|
|
$
|
34.59
|
|
Summary of Plans
2006 Equity Incentive Plan
In March 2006, our Board adopted and our stockholders approved our Incentive Plan, which initially provided for the issuance of up to 133,333 shares of our common stock pursuant to stock option and other equity awards. At the annual meetings of the stockholders held on May 8, 2007, December 17, 2009, September 15, 2010, and June 14, 2012, our stockholders approved amendments to the Incentive Plan to increase the total number of shares of common stock issuable under the Incentive Plan pursuant to stock options and other equity awards by 266,667 shares, 200,000 shares, 200,000 shares, and 400,000 shares, respectively.
In December 2006, we began issuing stock options to employees, consultants, and directors. The stock options issued generally vest over a period of one to four years and have a maximum contractual term of ten years. In January 2007, we began issuing restricted stock awards to our employees. Restricted stock awards generally vest over a period of six months to five years after the date of grant. Prior to vesting, restricted stock awards do not have dividend equivalent rights, do not have voting rights, and the shares underlying the restricted stock awards are not considered issued and outstanding. Shares of common stock are issued on the date the restricted stock awards vest.
As of September 30, 2012, we had granted options to purchase 408,667 shares of common stock since the inception of the Incentive Plan, of which 158,409 were outstanding at a weighted average exercise price of $12.32 per share and we had granted awards for 68,616 shares of restricted stock since the inception of the Incentive Plan, of which 300 were outstanding. As of September 30, 2012, there were 972,145 shares that remained available for future grant under our Incentive Plan.
NOTE 15.
|
FAIR VALUE MEASUREMENTS
|
In accordance with ASC Topic 820,
Fair Value Measurements
(“ASC Topic 820”), certain assets and liabilities of the Company are required to be recorded at fair value. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. The guidance in ASC Topic 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on our market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.
The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
|
Level 1
|
—
|
Valuations based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
Level 2
|
—
|
Valuations based on observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
|
|
Level 3
|
—
|
Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.
|
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
Our financial instruments, including cash, cash equivalents, accounts receivable, and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. We believe that the carrying value of our other receivable, notes receivable, and convertible notes payable balances approximates fair value based on a valuation methodology using the income approach and a discounted cash flow model.
The following table summarizes the fair value of our financial instruments at September 30, 2012 and December 31, 2011.
Description
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Assets:
|
|
|
|
|
|
|
Other receivable
(1)
|
|
$
|
---
|
|
|
$
|
246,410
|
|
Notes receivable and accrued interest
|
|
$
|
1,531,998
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Convertible note – June 2011
|
|
$
|
133,091
|
|
|
$
|
129,781
|
|
Convertible note – July 2011
|
|
$
|
111,119
|
|
|
$
|
105,101
|
|
Convertible note – June 2012
|
|
$
|
1,756,656
|
|
|
|
---
|
|
|
(1)
|
The Company received remittance in March 2012.
|
|
|
There was no current federal tax provision or benefit recorded for any period since inception, nor were there any recorded deferred income tax assets, as such amounts were completely offset by valuation allowances.
NOTE 17.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
On January 31, 2006, we entered into a lease agreement for office and laboratory space in Addison, Texas. The lease commenced on April 1, 2006 and continues until April 1, 2013. The lease required a minimum monthly lease obligation of $9,330, which is inclusive of monthly operating expenses, until April 1, 2011 and at such time increased to $9,776, which is inclusive of monthly operating expenses. As of September 30, 2012 our current monthly lease obligation is $9,872, which is inclusive of monthly operating expenses.
On December 10, 2010, we entered into a lease agreement for certain office equipment. The lease, which commenced on February 1, 2011 and continues until February 1, 2015, requires a minimum lease obligation of $744 per month.
The future minimum lease payments under the 2006 office lease and the 2010 equipment lease are as follows as of September 30, 2012:
Calendar Years
|
|
Future Lease Expense
|
|
2012 (Three months)
|
|
$
|
31,846
|
|
2013
|
|
|
38,542
|
|
2014
|
|
|
8,926
|
|
2015
|
|
|
744
|
|
2016
|
|
|
---
|
|
Total
|
|
$
|
80,058
|
|
Rent expense for our operating leases amounted to $32,971 and $33,083 for the three months ended September 30, 2012 and 2011, respectively, and $98,111 and $92,768 for the nine months ended September 30, 2012 and 2011, respectively.
Indemnification
In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
In accordance with our restated articles of incorporation and our amended and restated bylaws, we have indemnification obligations to our officers and directors for certain events or occurrences, subject to certain limits, while they are serving at our request in their respective capacities. There have been no claims to date and we have a director and officer insurance policy that enables us to recover a portion of any amounts paid for future potential claims. We have also entered into contractual indemnification agreements with each of our officers and directors.
Employment Agreements
As of September 30, 2012, we were a party to employment agreements with our Vice President and Chief Financial Officer, Terrance K. Wallberg, and our Vice President – Polymer Drug Delivery, Daniel G. Moro. The employment agreements with Messrs. Wallberg and Moro each have a term of one year and include an automatic one-year term renewal for each year thereafter. Each employment agreement provides for a base salary, bonus, stock options, stock grants, and eligibility for our benefit programs. Under certain circumstances, the employment agreements provide for certain severance benefits in the event of termination or a change in control. The employment agreements also contain non-solicitation, confidentiality and non-competition covenants, and a requirement for the assignment of certain invention and intellectual property rights in favor of us.
Separation Agreements
As of September 30, 2012, we continue to be a party to a separation agreement with Renaat Van den Hooff, our former Chief Executive Officer, dated June 4, 2010. Pursuant to the terms of the separation agreement we provide or have provided, as applicable, certain benefits to Mr. Van den Hooff, including: (i) payments of $12,500 per month for a period of eighteen (18) months; (ii) a non-statutory stock option to purchase up to 20,000 shares of our common stock, which option is immediately exercisable in full and at any time and from time to time through June 4, 2015 at a per share exercise price of $2.10 (the closing price of our common stock on June 4, 2010); (iii) full acceleration of all vesting schedules for all shares of restricted stock of the Company held by Mr. Van den Hooff; and (iv) for a period of eighteen (18) months following June 4, 2010 we were required to maintain and provide coverage under Mr. Van den Hooff’s existing health coverage plan. The separation agreement contains a mutual release of claims and other standard provisions.
As of September 30, 2012, we continue to be a party to a separation agreement with Kerry P. Gray, dated March 9, 2009. Mr. Gray currently serves as our Chairman of the Board, Chairman of the Board’s Executive Committee, Chief Executive Officer, and President. Pursuant to the terms of the separation agreement, we provided certain benefits to Mr. Gray, including: (i) payments totaling $400,000 during the initial 12 month period following March 9, 2009; (ii) commencing March 1, 2010 and continuing for a period of forty-eight (48) months, the Company will continue to pay to Mr. Gray a payment of $12,500 per month; (iii) full acceleration of all vesting schedules for all outstanding Company stock options and shares of restricted stock of the Company held by Mr. Gray, with all such Company stock options remaining exercisable by Mr. Gray until March 1, 2012, provided that Mr. Gray forfeited 20,000 stock options previously held by him; and (iv) for a period of twenty-four (24) months following March 9, 2009 we were required to maintain and provide coverage under Mr. Gray’s existing health coverage plan. The separation agreement contains a mutual release of claims, certain stock lock-up provisions, and other standard provisions.
Milestone Payments
Pursuant to the terms of an Asset Sale Agreement dated October 12, 2005, we acquired the assets of Access Pharmaceuticals, Inc. (“Access”). Under that agreement, we are obligated to pay to Access for certain milestones based on our achievement of certain annual net sales, cumulative net sales, and/or our having reached certain defined technology milestones including licensing agreements and advancing products to clinical development. As of September 30, 2012, the future milestone obligations that we are subject to paying Access, if the milestones related thereto are achieved, total $4,750,000. Such milestones are based on total annual sales of $20 and $40 million dollars of certain products, annual sales of $20 million dollars of any one certain product, and cumulative sales of such products of $50 and $100 million dollars.
On March 7, 2008, we terminated an existing license agreement with ProStrakan Ltd. for Amlexanox-related products in the United Kingdom and Ireland. As part of the termination, we agreed to pay ProStrakan Ltd. a royalty of 30% on any future payments received by us from a new licensee in the United Kingdom and Ireland territories, up to a maximum of $1,400,000.
NOTE 18.
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SUBSEQUENT EVENTS
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We have evaluated, for potential recognition and disclosure, subsequent events that have occurred after the balance sheet date but before the financial statements were available to be issued, which we consider to be the date of filing with the Securities and Exchange Commission. No events have occurred that would require potential recognition or disclosure.