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.
|
SUBSEQUENT EVENTS
|
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.
ITEM 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
|
You should read the following discussion and analysis together with all financial and non-financial information appearing elsewhere in this report and with our consolidated financial statements and related notes included in our 2011 Annual Report on Form 10-K, referred to as our 2011 Form 10-K, which has been previously filed with the Securities and Exchange Commission on March 30, 2012, including the risk factors set forth therein. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involve risks and uncertainties, including the statement that our cash and cash equivalents are sufficient to fund our operations and capital expenditures through the second quarter of 2013. Our actual results could differ materially from those anticipated by such forward-looking information due to competitive factors and other risks discussed in our 2011 Form 10-K under “Risks Associated with our Business”.
Business 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.
Our strategy is twofold:
§
|
Establish the foundation for a market leadership position in wound management by developing and commercializing a customer-focused portfolio of innovative wound care products based on the Nanoflex® technology to treat the various phases of wound healing; and
|
§
|
Develop our oral-transmucosal technology (OraDisc
TM
) and generate revenues through multiple licensing agreements.
|
Utilizing our technologies, three of our products have been approved for marketing in various global markets. In addition, numerous additional products are under development utilizing our patented Nanoflex® and OraDisc
TM
drug delivery technologies.
Altrazeal® Transforming Powder Dressing, based on our Nanoflex® technology, has the potential to change the way health care providers approach their treatment of wounds. Launched in September 2008, the product is indicated for exuding wounds such as partial thickness burns, donor sites, abrasions, surgical, acute and chronic wounds.
Aphthasol®, our Amlexanox 5% paste product is the first drug approved by the FDA for the treatment of canker sores.
OraDisc™ A was initially developed as a drug delivery system to treat canker sores with the same active ingredient (amlexanox) that is used in Aphthasol® paste. We anticipate that higher amlexanox concentrations will be achieved at the disease site, increasing the effectiveness of the product. OraDisc™ A was approved by the FDA in September 2004.
Recent Developments
On September 20, 2012, we entered into a Binding Term Sheet (the “Term Sheet”) with an affiliate of Melmed Holding AG (“Melmed”) relating to an equity investment of $2,000,000 by Melmed for 5,000,000 shares of our common stock, par value $0.001 per share (the “Shares”) and warrants to purchase up to 3,000,000 shares of our common stock (the “Warrants”). Under the Term Sheet, the purchase and sale of the Shares and Warrants will take place at four closings over the next twelve months, with $400,000 being funded upon signing of definitive documents. The Warrants will have a fixed exercise price of $0.60 per share and may be exercised at any time and from time to time through and including the one-year anniversary thereof. We have agreed to appoint up to two directors nominated by Melmed to serve on our Board of Directors.
Additionally, pursuant to the Term Sheet, Melmed will enter into a worldwide license and supply agreement with the Company related to certain dental applications of our OraDisc™ erodible film technology, to include benzocaine, amlexanox (exclusive of Europe), re-mineralization, fluoride, de-sensitizing, and long acting breath freshener. We will receive a non-dilutable 25% ownership interest in a subsidiary that will be established to license the OraDisc™ rights and will also receive a 5% royalty on products sold worldwide. The Company also agreed to expand the territory (currently European Union, Australia, New Zealand, North Africa, and the Middle East) in its existing license and supply agreement with Melmed Holding AG to include Asia (exclusive of China, Hong Kong, Macau, Taiwan, South Korea and Japan).
The Term Sheet, although binding, will be superseded by definitive agreements.
RESULTS OF OPERATIONS
Fluctuations in Operating Results
Our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the timing and amount of payments received pursuant to our current and future collaborations, and the progress and timing of expenditures related to our development and commercialization efforts. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results may not be a good indication of our future performance.
Comparison of the three months ended September 30, 2012 and 2011
Total Revenues
Revenues were approximately $89,000 for the three months ended September 30, 2012, as compared to revenues of approximately $74,000 for the three months ended September 30, 2011, and were comprised of, in approximate numbers, licensing fees of $11,000 from Altrazeal® and OraDisc™ licensing agreements, royalties of $17,000 from the sale of Aphthasol® by our domestic distributor, and Altrazeal® product sales of $61,000.
The third quarter 2012 revenues represent an overall increase of approximately $15,000 versus the comparative third quarter 2011 revenues. The increase in revenues is primarily attributable to an increase of approximately $12,000 in Altrazeal® product sales and an increase of approximately of $5,000 in Altrazeal® licensing fees. These revenue increases were partially offset by a decrease of approximately $2,000 in Aphthasol® royalties from our domestic distributor.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the three months ended September 30, 2012 was approximately $113,000 and was comprised of $34,000 from the sale of our Altrazeal® products and $79,000 from the write-off of out-of-date and obsolete finished goods. Cost of goods sold for the three months ended September 30, 2011 was approximately $11,000 and was comprised entirely of costs associated with the sale of our Altrazeal® products.
Research and Development
Research and development expenses totaled approximately $153,000 for the three months ended September 30, 2012, including approximately nil in share-based compensation, compared to approximately $233,000 for the three months ended September 30, 2011, which included approximately $17,000 in share-based compensation. The decrease of approximately $80,000 in research and development expenses was primarily due, in approximate numbers, to a $20,000 decrease in costs for regulatory consulting and a $60,000 decrease in scientific compensation costs related to share-based compensation and a lower head-count.
The direct research and development expenses for the three months ended September 30, 2012 and 2011 were as follows:
|
|
Three Months Ended September 30,
|
|
Technology
|
|
2012
|
|
|
2011
|
|
Wound care & nanoparticle
|
|
$
|
30,000
|
|
|
$
|
31,000
|
|
OraDisc™
|
|
|
4,000
|
|
|
|
3,000
|
|
Aphthasol® & other technologies
|
|
|
1,000
|
|
|
|
---
|
|
Total
|
|
$
|
35,000
|
|
|
$
|
34,000
|
|
Selling, General and Administrative
Selling, general and administrative expenses totaled approximately $376,000 for the three months ended September 30, 2012, including $8,000 in share-based compensation, compared to approximately $567,000 for the three months ended September 30, 2011, which included $25,000 in share-based compensation.
The decrease of approximately $191,000 in selling, general and administrative expenses was primarily due, in approximate numbers, to a $51,000 decrease in costs for compensation as a result of the termination of payments associated with a separation agreement with our former President and reduced share-based compensation, a $47,000 decrease in consulting costs for investor relations costs, a $29,000 decrease in sales and marketing costs due to a revised sales and marketing plan, a $16,000 decrease in insurance costs, a $14,000 decrease in legal expenses, a $12,000 decrease due to reduced corporate travel, a $8,000 decrease in fees associated with listing exchange fees, a $7,000 decrease for reduced consulting services, a $4,000 decrease in legal costs relating to our patents, and a $3,000 decrease in costs for director fees.
Amortization of Intangible Assets
Amortization of intangible assets expense totaled approximately $120,000 for the three months ended September 30, 2012 as compared to approximately $206,000 for the three months ended September 30, 2011. The expense for each period consists primarily of amortization associated with our acquired patents. The decrease of approximately $86,000 is attributable to the expiration of the amortization of the Aphthasol® patent in November 2011. There were no additional purchases of patents during the three months ended September 30, 2012 and 2011, respectively.
Depreciation
Depreciation expense totaled approximately $75,000 for the three months ended September 30, 2012 as compared to approximately $75,000 for the three months ended September 30, 2011.
Interest and Miscellaneous Income
Interest and miscellaneous income totaled approximately $31,000 for the three months ended September 30, 2012 as compared to approximately $2,000 for the three months ended September 30, 2011. The increase of approximately $29,000 is attributable to an increase in interest income resulting from interest recognized from the outstanding notes receivable with Inter-Mountain Capital Corp.
Interest Expense
Interest expense totaled approximately $134,000 for the three months ended September 30, 2012 as compared to approximately $22,000 for the three months ended September 30, 2011. Interest expense is comprised of financing costs for our insurance policies, interest costs related to regulatory fees, and interest costs and amortization of debt discount related to our convertible debt. The increase of approximately $112,000 is primarily attributable to costs associated with our convertible debt and interest costs relating to regulatory fees.
Comparison of the nine months ended September 30, 2012 and 2011
Total Revenues
Revenues were approximately $205,000 for the nine months ended September 30, 2012, as compared to revenues of approximately $229,000 for the nine months ended September 30, 2011, and were comprised of, in approximate numbers, licensing fees of $29,000 from Altrazeal® and OraDisc™ licensing agreements, $50,000 of royalties from the sale of Aphthasol® by our domestic distributor, and Altrazeal® product sales of $126,000.
The nine months ended September 30, 2012 revenues represent an overall decrease of approximately $24,000 versus the comparative nine months ended September 30, 2011 revenues. The decrease in revenues is primarily attributable to a decrease of approximately $33,000 in Altrazeal® product sales and a decrease of approximately $2,000 in royalties from the sale of Aphthasol® by our domestic distributor. The revenue decrease was partially offset by an increase of approximately $11,000 in Altrazeal® licensing fees.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the nine months ended September 30, 2012 was approximately $136,000 and was comprised of $48,000 of costs from the sale of our Altrazeal® products and $88,000 from the write-off of out-of-date and obsolete finished goods. Cost of goods sold for the nine months ended September 30, 2011 was approximately $36,000 and was comprised entirely of costs associated with the sale of our Altrazeal® products.
Research and Development
Research and development expenses totaled approximately $517,000 for the nine months ended September 30, 2012, including approximately $9,000 in share-based compensation, compared to approximately $749,000 for the nine months ended September 30, 2011, which included approximately $52,000 in share-based compensation. The decrease of approximately $232,000 in research and development expenses was primarily due, in approximate numbers, to an $88,000 decrease in scientific compensation costs related to share-based compensation and a lower head count, an $80,000 decrease in direct research costs, a $50,000 decrease in costs for regulatory consulting, and a $14,000 decrease in maintenance costs.
The direct research and development expenses for the nine months ended September 30, 2012 and 2011 were as follows:
|
|
Nine Months Ended September 30,
|
|
Technology
|
|
2012
|
|
|
2011
|
|
Wound care & nanoparticle
|
|
$
|
46,000
|
|
|
$
|
127,000
|
|
OraDisc™
|
|
|
12,000
|
|
|
|
9,000
|
|
Aphthasol® & other technologies
|
|
|
3,000
|
|
|
|
5,000
|
|
Total
|
|
$
|
61,000
|
|
|
$
|
141,000
|
|
Selling, General and Administrative
Selling, general and administrative expenses totaled approximately $1,365,000 for the nine months ended September 30, 2012, including approximately $29,000 in share-based compensation, compared to approximately $1,779,000 for the nine months ended September 30, 2011, which included approximately $77,000 in share-based compensation.
The decrease of approximately $414,000 in selling, general and administrative expenses was primarily due, in approximate numbers, to a $147,000 decrease in compensation costs as a result of the termination of payments associated with a separation agreement with our former President and reduced share-based compensation, a $164,000 decrease in sales and marketing costs due to a revised sales and marketing plan, a $66,000 decrease in legal costs relating to our patents, a decrease of $19,000 in fees associated with listing exchange fees, a $19,000 decrease in consulting costs, a $16,000 decrease in insurance costs, a $15,000 decrease due to reduced corporate travel costs, a $15,000 decrease in costs associated with our annual meeting of shareholders held in June 2012, a $12,000 decrease in costs for director fees, an $11,000 decrease in legal expenses, a $9,000 decrease in operating costs, and a $6,000 decrease in bad debt expense. These expense decreases were partially offset, in approximate numbers, by a $25,000 increase in consulting costs for investor relations, the cost of $28,000 associated with the early remittance of the receivable from our divestiture of the Zindaclin® technology in June 2010, the cost of $24,000 for the litigation settlement with R.C.C. Ventures, LLC, and a $8,000 increase in accounting fees for the annual audit.
Amortization of Intangible Assets
Amortization of intangible assets expense totaled approximately $357,000 for the nine months ended September 30, 2012 as compared to approximately $613,000 for the nine months ended September 30, 2011. The expense for each period consists primarily of amortization associated with our acquired patents. The decrease of approximately $256,000 is attributable to the expiration of the amortization of the Aphthasol® patent in November 2011. There were no additional purchases of patents during the nine months ended September 30, 2012 and 2011, respectively.
Depreciation
Depreciation expense totaled approximately $226,000 for the nine months ended September 30, 2012 as compared to approximately $228,000 for the nine months ended September 30, 2011. The decrease of approximately $2,000 is attributable to certain equipment being fully depreciated.
Interest and Miscellaneous Income
Interest and miscellaneous income totaled approximately $34,000 for the nine months ended September 30, 2012 as compared to approximately $9,000 for the nine months ended September 30, 2011. The increase of approximately $25,000 is primarily attributable to an increase in interest income resulting from interest recognized from the outstanding notes receivable with Inter-Mountain.
Interest Expense
Interest expense totaled approximately $191,000 for the nine months ended September 30, 2012 as compared to approximately $49,000 for the nine months ended September 30, 2011. Interest expense is comprised of financing costs for our insurance policies, interest costs related to regulatory fees, and interest costs and amortization of debt discount related to our convertible debt. The increase of approximately $142,000 is primarily attributable to costs associated with our convertible debt and interest costs relating to regulatory fees.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the public and private sales of convertible notes and common stock. Product sales, royalty payments, contract research, licensing fees and milestone payments from our corporate alliances have provided, and are expected in the future to provide, funding for operations. Our principal source of liquidity is cash and cash equivalents. As of September 30, 2012, our cash and cash equivalents were $36,557 which is a decrease of $10,063 as compared to our cash and cash equivalents at December 31, 2011 of $46,620. Our working capital (defined as current assets less current liabilities) was $(1,284,057) at September 30, 2012 as compared to our working capital at December 31, 2011 of $(704,411).
Consolidated Cash Flow Data
|
|
Nine Months Ended September 30,
|
|
Net Cash Provided by (Used in)
|
|
2012
|
|
|
2011
|
|
Operating activities
|
|
$
|
(937,692
|
)
|
|
$
|
(1,552,699
|
)
|
Investing activities
|
|
|
155,651
|
|
|
|
250,000
|
|
Financing activities
|
|
|
771,978
|
|
|
|
768,247
|
|
Net Decrease in cash and cash equivalents
|
|
$
|
(10,063
|
)
|
|
$
|
(534,452
|
)
|
Operating Activities
For the nine months ended September 30, 2012, net cash used in operating activities was approximately $938,000. The principal components of net cash used in operating activities for the nine months ended September 30, 2012 were our net operating loss of approximately $2,553,000 and an increase in notes receivable of approximately $32,000 due to the accrual of interest income. Our net loss for the nine months ended September 30, 2012 included substantial non-cash charges of approximately $868,000 in the form of share-based compensation, amortization of patents, depreciation, amortization of debt discount, amortization of deferred financings costs, and common stock issued for services. The aforementioned net cash used for the nine months ended September 30, 2012 was partially offset by an increase in deferred revenue of approximately $196,000 due primarily to the receipt of licensing milestone payments, an increase in accounts payable of approximately $353,000 due to timing of vendor payments, an increase in accrued liabilities of approximately $26,000, an increase in accrued interest of approximately $23,000 relating to our convertible debt, a decrease in inventory of approximately $152,000 due primarily to the write-off of out-of-date and obsolete inventory and product sales, a decrease in receivables of approximately $20,000, and a decrease in prepaid expenses of approximately $9,000 due primarily to expense amortization.
For the nine months ended September 30, 2011, net cash used in operating activities was approximately $1,553,000. The principal components of net cash used for the nine months ended September 30, 2011 were our net loss of approximately $3,214,000, an increase of approximately $134,000 in inventory related to the manufacture of Aphthasol®, and an increase in prepaid expenses of approximately $26,000. Our net loss for the nine months ended September 30, 2011 included substantial non-cash charges of approximately $948,000 in the form of share-based compensation, amortization of patents, and depreciation. The aforementioned net cash used for the nine months ended September 30, 2011 was partially offset by an increase in accounts payable of approximately $658,000 due to timing of vendor payments, an increase in accrued expense of approximately $114,000, an increase in deferred revenue of approximately $82,000, an increase in accrued interest of approximately $6,000 relating to our convertible debt, and a decrease in receivables of approximately $13,000 due to collection activities.
Investing Activities
Net cash provided by investing activities for the nine months ended September 30, 2012 was approximately $156,000 and is comprised of the fourth and final payment to us of $220,000 from the divestiture of our Zindaclin® intangible asset and a purchase of manufacturing equipment for approximately $64,000.
Net cash provided by investing activities for the nine months ended September 30, 2011 was $250,000 and relates to the third payment to us, received in June 2011, from the divestiture of our Zindaclin® intangible asset.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2012 was approximately $772,000 and was comprised of, in approximate numbers, $276,000 from the net proceeds of our sale of preferred stock in January 2012, $467,000 of net proceeds from the convertible debt transaction in June 2012, and $29,000 from a decrease in the estimate of offering costs associated with the sale of preferred stock in 2011.
Net cash provided by financing activities for the nine months ended September 30, 2011 was approximately $768,000 and was comprised of, in approximate numbers, $91,000 from the sale of preferred stock in September 2011, $412,000 from the sale of common stock in January 2011, and $265,000 from the two convertible debt offerings, which occurred in June and July 2011. The net cash provided by the aforementioned financing activities was partially offset by our payment of cash in lieu of fractional shares of common stock associated with the Company’s reverse stock split on June 29, 2011 in the amount of $35.
Liquidity
In July 2009, we restructured our operations in efforts to reduce operating expenses, optimize operations, and to conserve the necessary cash to further our business plan. These conservation efforts were in place during 2010 and 2011 and will continue to be in effect as part of our strategic plan for 2012. Currently, a core management group is being supplemented by a small selection of external consultants to support our primary business activities. Selling efforts for Altrazeal® are continuing with our own sales force and a network of independent sales representatives throughout the country.
We continue to seek strategic relationships whereby we can more effectively maximize the revenue potential of Altrazeal®, future product candidates, as well as continuing, with the assistance of an investment bank, to explore future fundraising and through the sale of non-core assets.
As of October 31, 2012, we had cash and cash equivalents of approximately $200,000. We expect to use our cash, cash equivalents, and investments on working capital, general corporate purposes, products, product rights, technologies, property and equipment, the payment of contractual obligations, and regulatory or sales milestones that may become due. Our long-term liquidity will depend to a great extent on our ability to fully commercialize our Altrazeal® and OraDisc™ technologies; therefore we are continuing to search both domestically and internationally for opportunities that will enable us to continue our business. At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth, if any, during 2012 and beyond, such as the degree of market acceptance, patent protection and exclusivity of our products, the impact of competition, the effectiveness of our sales and marketing efforts, and the outcome of our current efforts to develop, receive approval for, and successfully launch our near-term product candidates.
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. We do not expect any material changes in our capital expenditure spending during 2012. However, we cannot be sure that our anticipated revenues will be realized or that we will generate significant positive cash flow from operations. 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.
As we continue to expend funds to advance our business plan, there can be no assurance that changes in our research and development plans, capital expenditures and/or acquisitions of products or businesses, or other events affecting our operations will not result in the earlier depletion of our funds. In appropriate situations, we may seek financial assistance from other sources, including contribution by others to joint ventures and other collaborative or licensing arrangements for the development, testing, manufacturing and marketing of products under development. Additionally, we may receive additional proceeds from the repayment of the Investor Notes received as part of our convertible debt financing, and we may explore alternative financing sources for our business activities, including the possibility of loans from banks and public and/or private offerings of debt and equity securities. On September 20, 2012, we entered the Term Sheet with Melmed relating to a pending equity investment of $2,000,000 by Melmed for 5,000,000 shares of our common stock and warrants to purchase up to 3,000,000 shares of our common stock. Under the Term Sheet, the purchase and sale of such shares and warrants will take place at four closings over the next twelve months, with $400,000 being funded upon signing of definitive documents. Other than the Term Sheet and the Investor Notes from Inter-Mountain, we have no agreements with respect to our potential receipt of capital. We cannot be certain that necessary funding will be available on terms acceptable to us, or at all.
Our future capital requirements and adequacy of available funds will depend on many factors including:
§
|
Our ability to successfully commercialize our wound management and burn care products and the market acceptance of these products;
|
§
|
Our ability to establish and maintain collaborative arrangements with corporate partners for the research, development and commercialization of certain product opportunities;
|
§
|
Continued scientific progress in our development programs;
|
§
|
The costs involved in filing, prosecuting and enforcing patent claims;
|
§
|
Competing technological developments;
|
§
|
The cost of manufacturing and production scale-up; and
|
§
|
Successful regulatory filings.
|
Contractual Obligations
The following table summarizes our outstanding contractual cash obligations as of September 30, 2012, which consists of a lease agreement for office and laboratory space in Addison, Texas which commenced on April 1, 2006, a lease agreement for office equipment, separation agreements with a former chief executive officer and our current chief executive officer, Kerry P. Gray, two convertible note agreements with Kerry P. Gray, and one convertible note agreement with Inter-Mountain.
|
|
Payments Due By Period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
2-3
Years
|
|
|
4-5
Years
|
|
|
After 5
Years
|
|
Operating leases
|
|
$
|
80,058
|
|
|
$
|
68,156
|
|
|
$
|
11,902
|
|
|
$
|
---
|
|
|
$
|
---
|
|
Separation agreements
|
|
|
265,841
|
|
|
|
203,341
|
|
|
|
62,500
|
|
|
|
---
|
|
|
|
---
|
|
Convertible notes
|
|
|
2,736,611
|
|
|
|
1,052,691
|
|
|
|
1,683,920
|
|
|
|
---
|
|
|
|
---
|
|
Total contractual cash obligations
|
|
$
|
3,082,510
|
|
|
$
|
1,324,188
|
|
|
$
|
1,758,322
|
|
|
$
|
---
|
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Off-Balance Sheet Arrangements
As of September 30, 2012, we did not have any off balance sheet arrangements.
Impact of Inflation
We have experienced only moderate price increases over the last three fiscal years under our agreements with third-party manufacturers as a result of raw material and labor price increases. However, there can be no assurance that possible future inflation would not impact our operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of our financial statements requires that we make 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 amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate these estimates and judgments. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are summarized 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. We had no significant changes in our critical accounting policies since our last annual report.