|
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 mucoadhesive film products based on our patented Nanoflex® and OraDisc
TM
technologies, with the goal of improving outcomes for patients, health care professionals, and health care payers.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United State of America (“U.S. GAAP”) and include the accounts of ULURU Inc., a Nevada corporation, and its wholly-owned subsidiary, Uluru Delaware Inc., a Delaware corporation. Both companies have a December 31 fiscal year end.
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. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.
All intercompany transactions and balances have been eliminated in consolidation.
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NOTE 2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The following is a summary of significant accounting policies used in the preparation of these consolidated financial statements:
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The carrying value of these cash equivalents approximates fair value.
We invest cash in excess of immediate requirements in money market accounts, certificates of deposit, corporate commercial paper with high quality ratings, and U.S. government securities taking into consideration the need for liquidity and capital preservation. These investments are not held for trading or other speculative purposes.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. We estimate the collectability of our accounts receivable. In order to assess the collectability of these receivables, we monitor the current creditworthiness of each customer and analyze the balances aged beyond the customer's credit terms. Theses evaluations may indicate a situation in which a certain customer cannot meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The allowance requirements are based on current facts and are reevaluated and adjusted as additional information is received. Accounts receivable are subject to an allowance for collection when it is probable that the balance will not be collected. As of December 31, 2013 and 2012, the allowance for doubtful accounts was $907 and $18,932, respectively. For the years ended December 31, 2013 and 2012, the accounts written off as uncollectible or previously written off and recovered were $(1,126) and $17,135, respectively.
Inventory
Inventories are stated at the lower of cost or market value. Raw material inventory cost is determined on the first-in, first-out method. Costs of finished goods are determined by an actual cost method. 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.
Prepaid Expenses and Deferred Charges
From time to time fees are payable to the United States Food and Drug Administration (“FDA”) in connection with new drug applications submitted by us and annual prescription drug user fees (“PDUFA”). Such fees are being amortized ratably over the FDA’s prescribed fiscal period of twelve months ending September 30th. As of December 31, 2013 and 2012, the amount of prepaid PDUFA fees was nil and $73,582, respectively.
Additionally, we amortize our insurance costs ratably over the term of each policy. Typically, our insurance policies are subject to renewal in July and October of each year.
Notes Receivable
Notes receivable are stated at unpaid principle balance. Interest on notes receivable is recognized over the term of the note and is calculated by the simple interest method on principle amounts outstanding. We estimate the collectability of our notes receivable. This estimate is based on similar evaluation criteria as used in estimating the collectability of our trade accounts receivable. Notes receivable are subject to an allowance for collection when it is probable that the balance, or a portion thereof, will not be collected. As of December 31, 2013 and 2012, the allowance for collection for our notes receivable was nil.
Property, Equipment and Leasehold Improvements
Property, equipment, and leasehold improvements are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. Estimated useful lives for property, equipment, and leasehold improvements categories are as follows:
|
Furniture, fixtures, and laboratory equipment
|
7 years
|
|
Computer and office equipment
|
5 years
|
|
Computer software
|
3 years
|
|
Leasehold improvements
|
Lease term
|
Intangible Assets
We expense internal patent and application costs as incurred because, even though we believe the patents and underlying processes have continuing value, the amount of future benefits to be derived from them are uncertain. Purchased patents are capitalized and amortized over the life of the patent.
Impairment of Assets
In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 350-30,
Intangibles Other than Goodwill,
our policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets and certain identifiable intangibles when certain events have taken place that indicate the remaining unamortized balance may not be recoverable, or at least annually to determine the current value of the intangible asset. When factors indicate that the intangible assets should be evaluated for possible impairment, we use an estimate of undiscounted cash flows. Considerable management judgment is necessary to estimate the undiscounted cash flows. Accordingly, actual results could vary significantly from management’s estimates.
Deferred Financing Costs
We defer financing costs associated with the issuance of our convertible notes payable and amortize those costs over the period of the convertible notes using the effective interest method. In 2012, we incurred $200,000 of financing costs related to our convertible note payable with Inter-Mountain Capital Corp.
During 2013 and 2012, we recorded amortization of approximately $74,000 and $39,000, respectively, of deferred financing costs. Other assets at December 31, 2013 and 2012 included net deferred financing costs of approximately of $87,000 and $161,000, respectively.
Accrual for Clinical Study Costs
We record accruals for estimated clinical study costs. Clinical study costs represent costs incurred by clinical research organizations, or CROs, and clinical sites. These costs are recorded as a component of research and development expenses. We analyze the progress of the clinical trials, including levels of patient enrollment and/or patient visits, invoices received and contracted costs when evaluating the adequacy of the accrued liabilities. Significant judgments and estimates must be made and used in determining the accrued balance in any accounting period. Actual costs incurred may or may not match the estimated costs for a given accounting period. As of December 31, 2013 and 2012, the accrual for estimated clinical study costs was nil.
Shipping and Handling Costs
Shipping and handling costs incurred for product shipments are included in cost of goods sold.
Income Taxes
We use the liability method of accounting for income taxes pursuant to ASC Topic 740,
Income Taxes
. Under this method, deferred income taxes are recorded to reflect the tax consequences in future periods of temporary differences between the tax basis of assets and liabilities and their financial statement amounts at year-end.
Revenue Recognition and Deferred Revenue
License Fees
We recognize revenue from license payments not tied to achieving a specific performance milestone ratably during the period over which we are obligated to perform services. The period over which we are obligated to perform services is estimated based on available facts and circumstances. Determination of any alteration of the performance period normally indicated by the terms of such agreements involves judgment on management's part. License revenues with no specific performance criteria are recognized when received from our foreign licensee and their various foreign sub-licensees as there is no control by us over the various foreign sub-licensees and no performance criteria to which we are subject.
We recognize revenue from performance payments ratably, when such performance is substantially in our control and when we believe that completion of such performance is reasonably probable, over the period during which we estimate that we will complete such performance obligations. In circumstances where the arrangement includes a refund provision, we defer revenue recognition until the refund condition is no longer applicable unless, in our judgment, the refund circumstances are within our operating control and are unlikely to occur.
Substantive at-risk milestone payments, which are based on achieving a specific performance milestone when performance of such milestone is contingent on performance by others or for which achievement cannot be reasonably estimated or assured, are recognized as revenue when the milestone is achieved and the related payment is due, provided that there is no substantial future service obligation associated with the milestone.
Royalty Income
We receive royalty revenues under license agreements with a number of third parties that sell products based on technology we have developed or to which we have rights. The license agreements provide for the payment of royalties to us based on sales of the licensed products. We record these revenues based on estimates of the sales that occurred during the relevant period. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties we have been paid (adjusted for any changes in facts and circumstances, as appropriate).
We maintain regular communication with our licensees in order to gauge the reasonableness of our estimates. Differences between actual royalty revenues and estimated royalty revenues are reconciled and adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material based on actual amounts paid by licensees. As it relates to royalty income, there are no future performance obligations on our part under these license agreements. To the extent we do not have sufficient ability to accurately estimate revenue; we record it on a cash basis.
Product Sales
We recognize revenue and related costs from the sale of our products at the time the products are shipped to the customer. Provisions for returns, rebates, and discounts are established in the same period the related product sales are recorded.
We review the supply levels of our products sold to major wholesalers in the U.S., primarily by reviewing reports supplied by our major wholesalers and available volume information for our products, or alternative approaches. When we believe wholesaler purchasing patterns have caused an unusual increase or decrease in the sales of a major product compared with underlying demand, we disclose this in our product sales discussion if we believe the amount is material to the product sales trend; however, we are not always able to accurately quantify the amount of stocking or destocking. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual product returns.
We establish sales return accruals for anticipated product returns. We record the return amounts as a deduction to arrive at our net product sales. Consistent with Revenue Recognition accounting guidance, we estimate a reserve when the sales occur for future product returns related to those sales. This estimate is primarily based on historical return rates as well as specifically identified anticipated returns due to known business conditions and product expiry dates. Actual product returns have been nil over the past two years.
We establish sales rebate and discount accruals in the same period as the related sales. The rebate and discount amounts are recorded as a deduction to arrive at our net product sales. We base these accruals primarily upon our historical rebate and discount payments made to our customer segment groups and the provisions of current rebate and discount contracts.
Sponsored Research Income
Sponsored research income has no significant associated costs since it is being paid only for information pertaining to a specific research and development project in which the sponsor may become interested in acquiring products developed thereby. Payments received prior to our performance are deferred. Contract amounts are not recognized as revenue until the customer accepts or verifies the research has been completed.
Research and Development Expenses
Pursuant to ASC Topic 730,
Research and Development
, our research and development costs are expensed as incurred.
Research and development expenses include, but are not limited to, salaries and benefits, laboratory supplies, facilities expenses, preclinical development cost, clinical trial and related clinical manufacturing expenses, contract services, consulting fees and other outside expenses. The cost of materials and equipment or facilities that are acquired for research and development activities and that have alternative future uses are capitalized when acquired. There were no such capitalized materials, equipment or facilities for the years ended December 31, 2013 and 2012.
We may enter into certain research agreements in which we share expenses with a collaborator. We may also enter into other collaborations where we are reimbursed for work performed on behalf of our collaborative partners. We record the expenses for such work as research and development expenses. If the arrangement is a cost-sharing arrangement and there is a period during which we receive payments from the collaborator, we record payments by the collaborator for their share of the development effort as a reduction of research and development expense. If the arrangement is a reimbursement of research and development expenses, we record the reimbursement as sponsored research income.
Basic and Diluted Net Loss Per Common Share
In accordance with 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 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 and warrants from the calculation of diluted net loss per common share because all such securities are antidilutive for all periods presented.
Concentrations of Credit Risk
Concentration of credit risk with respect to financial instruments, consisting primarily of cash and cash equivalents, that potentially expose us to concentrations of credit risk due to the use of a limited number of banking institutions and due to maintaining cash balances in banks, which, at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation. During 2013, we utilized Bank of America, N.A. as our banking institution. At December 31, 2013 and December 31, 2012 our cash and cash equivalents totaled $5,119 and $21,549, respectively. We also invest cash in excess of immediate requirements in money market accounts, certificates of deposit, corporate commercial paper with high quality ratings, and U.S. government securities. These investments are not held for trading or other speculative purposes. We are exposed to credit risk in the event of default by these high quality corporations.
Concentration of credit risk with respect to trade accounts receivable are customers with balances that exceed 5% of total consolidated trade accounts receivable at December 31, 2013 and at December 31, 2012. As of December 31, 2013, two customers exceeded the 5% threshold, with 86% and 11%, respectively. Two customers exceeded the 5% threshold at December 31, 2012, with 77% and 13%, respectively. To reduce risk, we routinely assess the financial strength of our most significant customers and monitor the amounts owed to us, taking appropriate action when necessary. As a result, we believe that accounts receivable credit risk exposure is limited. We maintain an allowance for doubtful accounts, but historically have not experienced any significant losses related to an individual customer or group of customers.
Concentrations of Foreign Currency Risk
Substantially all of our revenue and expenses are denominated in U.S. dollars, although we expect our revenues in international territories to increase in the future. Certain of our licensing and distribution agreements in international territories are denominated in Euros. Currently, we do not employ forward contracts or other financial instruments to mitigate foreign currency risk. As our international operations grow, we may engage in hedging activities to hedge our exposure to foreign currency risk.
Fair Value of Financial Instruments
In accordance with portions of ASC Topic 820,
Fair Value Measurements
, 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.
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 accrued interest, and convertible note payable balances approximates fair value based on a valuation methodology using the income approach and a discounted cash flow model.
Derivatives
We occasionally issue financial instruments that contain an embedded instrument. At inception, we assess whether the economic characteristics of the embedded derivative instrument are clearly and closely related to the economic characteristics of the financial instrument (host contract), whether the financial instrument that embodies both the embedded derivative instrument and the host contract is currently measured at fair value with changes in fair value reported in earnings, and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument.
If the embedded derivative instrument is determined not to be clearly and closely related to the host contract, is not currently measured at fair value with changes in fair value reported in earnings, and the embedded derivative instrument would qualify as a derivative instrument, the embedded derivative instrument is recorded apart from the host contract and carried at fair value with changes recorded in current-period earnings.
We determined that all embedded items associated with financial instruments during 2013 and 2012 which qualify for derivative treatment, were properly separated from their host. As of December 31, 2013 and 2012, we did not have any derivative instruments.
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NOTE 3.
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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 was 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.
There are no other new accounting pronouncements adopted or enacted during the year ended December 31, 2013 that had, or are expected to have, a material impact on our financial statements.
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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 seven licensees for international activities and our domestic sales activities for Altrazeal®.
Revenues per geographic area, along with relative percentages of total revenues, for the year ended December 31, are summarized as follows:
|
Revenues
|
|
2013
|
|
|
%
|
|
|
2012
|
|
|
%
|
|
|
Domestic
|
|
$
|
65,546
|
|
|
|
18
|
%
|
|
$
|
177,440
|
|
|
|
48
|
%
|
|
International
|
|
|
305,022
|
|
|
|
82
|
%
|
|
|
193,154
|
|
|
|
52
|
%
|
|
Total
|
|
$
|
370,568
|
|
|
|
100
|
%
|
|
$
|
370,594
|
|
|
|
100
|
%
|
A significant portion of our revenues are derived from a few major customers. Customers with greater than 10% of total revenues, along with their relative percentage of total revenues, for the year ended December 31 are represented on the following table:
|
Customers
|
Product
|
|
2013
|
|
|
2012
|
|
|
Customer A
|
Altrazeal®
|
|
|
67
|
%
|
|
|
32
|
%
|
|
Customer B
|
Altrazeal® Veterinary
|
|
|
---
|
|
|
|
14
|
%
|
|
Customer C
|
Aphthasol®
|
|
|
---
|
|
|
|
13
|
%
|
|
Total
|
|
|
|
67
|
%
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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 product 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.
On June 27, 2012, we entered into a Securities Purchase Agreement related to our issuance of a $2,210,000 Secured Convertible Note (the “June 2012 Note”), with Inter-Mountain Capital Corp., a Delaware corporation (“Inter-Mountain”). As part of the June 2012 Note transaction, we received $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. 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 receiving payments of $100,000, $100,000, and $50,000 on October 5, 2012, November 30, 2012, and December 31, 2012, respectively, and any interest thereon. As of December 31, 2013, we had $777,710 in notes receivable which is comprised of $687,500 for three Investor Notes and $90,210 for accrued interest thereon.
Please refer to Note 12. for a more detailed description of the June 2012 Note transaction.
As of December 31, 2013, our inventory was comprised of Altrazeal® finished goods, manufacturing costs incurred in the production of Altrazeal®, 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 years ended December 31, 2013 and 2012, we wrote off approximately $60,000 and $88,000, respectively, in obsolete inventories.
The components of inventory, at the different stages of production, consisted of the following at December 31:
|
Inventory
|
|
2013
|
|
|
2012
|
|
|
Finished goods
|
|
$
|
85,993
|
|
|
$
|
303,779
|
|
|
Work-in-progress
|
|
|
299,464
|
|
|
|
190,794
|
|
|
Raw materials
|
|
|
10,148
|
|
|
|
33,070
|
|
|
Total
|
|
$
|
395,605
|
|
|
$
|
527,643
|
|
|
NOTE 8.
|
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
|
Property, equipment and leasehold improvements, net, consisted of the following at December 31:
|
Property, equipment and leasehold improvements
|
|
2013
|
|
|
2012
|
|
|
Laboratory equipment
|
|
$
|
424,888
|
|
|
$
|
424,888
|
|
|
Manufacturing equipment
|
|
|
1,581,728
|
|
|
|
1,547,572
|
|
|
Computers, office equipment, and furniture
|
|
|
140,360
|
|
|
|
140,360
|
|
|
Computer software
|
|
|
4,108
|
|
|
|
4,108
|
|
|
Leasehold improvements
|
|
|
95,841
|
|
|
|
95,841
|
|
|
|
|
|
2,246,925
|
|
|
|
2,212,769
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,608,311
|
)
|
|
|
(1,367,234
|
)
|
|
Property, equipment and leasehold improvements, net
|
|
$
|
638,614
|
|
|
$
|
845,535
|
|
Depreciation expense on property, equipment, and leasehold improvements was $244,704 and $291,274 for the years ended December 31, 2013 and 2012, respectively.
|
NOTE 9.
|
INTANGIBLE ASSETS
|
Intangible assets are comprised of patents acquired in October 2005. Intangible assets, net consisted of the following at December 31:
|
Intangible assets
|
|
2013
|
|
|
2012
|
|
|
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
|
|
|
(5,955,101
|
)
|
|
|
(5,479,953
|
)
|
|
Intangible assets, net
|
|
$
|
3,670,837
|
|
|
$
|
4,145,985
|
|
We performed an evaluation of our intangible assets for purposes of determining possible impairment as of December 31, 2013. Based upon recent market conditions and comparable market transactions for similar intangible assets, we determined that an income approach using a discounted cash flow model was an appropriate valuation methodology to determine each intangible asset’s fair value. The income approach converts future amounts to a single present value amount (discounted cash flow model). Our discounted cash flow models are highly reliant on various assumptions, including estimates of future cash flow (including long-term growth rates), discount rate, and expectations about variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows, all of which we consider level 3 inputs for determination of fair value. We believe we have appropriately reflected our best estimate of the assumptions that market participants would use in determining the fair value of our intangible assets at the measurement date. Upon completion of the evaluation, the fair value of our intangible assets exceeded the recorded remaining book value.
Amortization expense for intangible assets was $475,148 and $476,450 for the years ended December 31, 2013 and 2012, respectively. The future aggregate amortization expense for intangible assets, remaining as of December 31, 2013, is as follows:
|
Calendar Years
|
|
Future Amortization
Expense
|
|
|
2014
|
|
$
|
475,148
|
|
|
2015
|
|
|
475,148
|
|
|
2016
|
|
|
476,450
|
|
|
2017
|
|
|
475,148
|
|
|
2018
|
|
|
475,148
|
|
|
2019 & Beyond
|
|
|
1,293,795
|
|
|
Total
|
|
$
|
3,670,837
|
|
|
NOTE 10.
|
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
|
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.
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.
Financial statements of Altrazeal Trading Ltd. for the years ended December 31, 2013 and 2012 have not been released to us and, therefore, we have not included the effect of the financial activities of Altrazeal Trading Ltd. in our financial statements for each year. We believe that our share of the cumulative losses of Altrazeal Trading Ltd. for the years ended December 31, 2013 and 2012 would exceed the carrying value of our investment, therefore the equity method of accounting would be suspended for such years and no additional losses would be charged to operations.
Based upon the unaudited financial statements provided by Altrazeal Trading Ltd. for the year ended December 31, 2012, our unrecorded share of Altrazeal Trading Ltd. losses for the year ended December 31, 2012 totaled $82,740.
Summarized financial information for our investment in Altrazeal Trading Ltd. assuming 100% ownership is as follows:
|
Altrazeal Trading Ltd.
|
|
2012
|
|
|
Balance sheet
|
|
|
|
|
Total assets
|
|
$
|
415,248
|
|
|
Total liabilities
|
|
$
|
205,991
|
|
|
Total stockholders’ equity
|
|
$
|
209,257
|
|
|
Statement of operations
|
|
|
|
|
|
Revenues
|
|
$
|
131,869
|
|
|
Net (loss)
|
|
$
|
(330,961
|
)
|
On October 19, 2012, we executed a shareholders’ agreement for the establishment of ORADISC GmbH, a single purpose entity to be used for the exclusive development and marketing of OraDisc™ erodible film technology products. We received a non-dilutable 25% ownership interest in ORADISC GmbH.
As of December 31, 2013, ORADISC GmbH 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 year ended December 31, 2013.
|
NOTE 11.
|
ACCRUED LIABILITIES
|
Accrued liabilities consisted of the following at December 31:
|
Accrued Liabilities
|
|
2013
|
|
|
2012
|
|
|
Accrued taxes – payroll
|
|
$
|
106,299
|
|
|
$
|
106,299
|
|
|
Accrued compensation/benefits
|
|
|
148,683
|
|
|
|
213,005
|
|
|
Accrued insurance payable
|
|
|
60,113
|
|
|
|
52,629
|
|
|
Product rebates/returns
|
|
|
32
|
|
|
|
81
|
|
|
Other
|
|
|
836
|
|
|
|
951
|
|
|
Total accrued liabilities
|
|
$
|
315,963
|
|
|
$
|
372,965
|
|
|
NOTE 12.
|
CONVERTIBLE DEBT
|
Convertible Note – June 2012
On June 27, 2012, we entered into a Securities Purchase Agreement (the “Purchase Agreement”), related to our issuance of the June 2012 Note, with 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”), each of which bears interest at the rate of 8.0% per annum, 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 also 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 or (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 was $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 a Security Agreement with Intermountain.
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. Warrants for 785,714, 392,857, 392,857, and 392,857 shares of common stock vested on June 27, 2012, December 31, 2012, February 26, 2013, and July 15, 2013, respectively. Each of the three remaining Warrants have terminated, as described below. For the year ended December 31, 2013, we issued 725,274 shares of common stock to Inter-Mountain for the cashless exercise of three warrants to purchase 1,571,428 shares of common stock.
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 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 January 22, 2014, we provided notice to Inter-Mountain of our election to exercise our rights under the June 2012 Note and to offset amounts we owed to Inter-Mountain against amounts it owed to us under the Investor Notes. Our notice provided that such deduction and offset occurred on January 22, 2014, that we will not incur the 120% prepayment premium with respect to amounts paid under the June 2012 Note as a result of the deduction and offset, that no warrants will become exercisable as a result of the offset, and that any warrants unvested as of January 22, 2014 shall immediately and automatically terminate. As a result, the outstanding amount owed under the June 2012 Note was reduced to approximately $317,000 as of January 22, 2014.
On February 27, 2014 and on March 3, 2014, we received conversion notices from Inter-Mountain whereby we issued an aggregate of 435,502 shares of common stock for the final payment of approximately $152,000 due under the June 2012 Note.
Convertible Note – July 2011
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 accrued on the deferred interest payment of $11,542 until the relevant payment date. On September 5, 2013, we remitted to Mr. Gray the annual interest due on July 1, 2012 of $11,542 and accrued interest thereon of $1,643.
On July 1, 2013, the Company and Mr. Gray entered into a Modification Agreement for the purpose of deferring the annual payment of interest due on July 1, 2013 of $12,501 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, 2013. Commencing on July 1, 2013, interest at the rate of 12.0% per annum accrued on the deferred interest payment of $12,501 until the relevant payment date. On October 28, 2013, we remitted to Mr. Gray the annual interest due on July 1, 2013 of $12,501 and accrued interest thereon of $492.
Convertible Note – June 2011
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 accrued on the deferred interest payment of $14,653 until the relevant payment date. On September 5, 2013, we remitted to Mr. Gray the annual interest due on July 1, 2012 of $14,653 and accrued interest thereon of $2,080.
On July 1, 2013, the Company and Mr. Gray entered into a Modification Agreement for the purpose of deferring the annual payment of interest due on July 1, 2013 of $14,001 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, 2013. Commencing on July 1, 2013, interest at the rate of 12.0% per annum accrued on the deferred interest payment of $14,001 until the relevant payment date. On October 28, 2013, we remitted to Mr. Gray the annual interest due on July 1, 2013 of $14,001 and accrued interest thereon of $553.
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 December 31, 2013
|
|
|
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
|
|
|
$
|
1,780
|
|
|
$
|
138,220
|
|
|
July 2011 Note
|
|
|
125,000
|
|
|
|
10.0
|
%
|
07/28/2014
|
|
$
|
1.08
|
|
|
|
125,000
|
|
|
|
4,262
|
|
|
|
120,738
|
|
|
June 2012 Note
|
|
|
2,210,000
|
|
|
|
8.0
|
%
|
03/27/2015
|
|
$
|
0.35
|
|
|
|
1,093,638
|
|
|
|
205,539
|
|
|
|
888,099
|
|
|
Total
|
|
$
|
2,475,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,358,638
|
|
|
$
|
211,581
|
|
|
$
|
1,147,057
|
|
|
(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 our convertible notes payable was $157,027 and $117,711 for years ended December 31, 2013 and 2012, respectively.
The amount of debt discount amortized from our convertible notes payable was $178,548 and $97,901 for years ended December 31, 2013 and 2012, respectively.
The future minimum payments relating to our convertible notes payable, as of December 31, 2013, are as follows:
|
|
|
Payments Due By Period
|
|
Transaction
|
|
Total
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
June 2011 Note
|
|
$ 140,000
|
|
$ 140,000
|
|
$ ---
|
|
$ ---
|
|
$ ---
|
|
$ ---
|
|
July 2011 Note
|
|
125,000
|
|
125,000
|
|
---
|
|
---
|
|
---
|
|
---
|
|
June 2012 Note
|
|
1,093,638
|
|
1,093,638
|
|
---
|
|
---
|
|
---
|
|
---
|
|
Total
|
|
$ 1,358,638
|
|
$ 1,358,638
|
|
$ ---
|
|
$ ---
|
|
$ ---
|
|
$ ---
|
|
NOTE 13.
|
EQUITY TRANSACTIONS
|
Common Stock Transactions
March 2013 Offering
On March 14, 2013, we entered into a Securities Purchase Agreement (the “March SPA”) with Kerry P. Gray, the Company’s Chairman, President, and Chief Executive Officer and Terrance K. Wallberg, the Company’s Vice President and Chief Financial Officer (collectively, the “Investors”) relating to an equity investment of $440,000 by the Investors for 1,100,000 shares of our common stock, par value $0.001 per share (the “March Shares”) and warrants to purchase up to 660,000 shares of our common stock (the “March Warrants”) (the “March 2013 Offering”). Under the March SPA, the purchase and sale of the March Shares and March Warrants will take place at four closings over the next twelve months, with $88,000 being funded at the initial closing under the March SPA, $110,000 being funded on the four-month anniversary of the initial closing, $132,000 being funded on the eight-month anniversary of the initial closing, and $110,000 being funded on the one-year anniversary of the initial closing. The March Warrants have a fixed exercise price of $0.60 per share, become exercisable in tranches on each of the four funding dates, and expire on the five-year anniversary of the initial closing. On March 14, 2013, we closed the March 2013 Offering and received the initial funding tranche of $88,000 for the purchase of 220,000 shares of our common stock. We received subsequent funding tranches of $110,000, $132,000, and $110,000 for the purchase of 275,000, 330,000, and 275,000 shares of our common stock on July 15, 2013, November 14, 2013, and March 14, 2014, respectively.
January 2013 Offering
On December 21, 2012, we entered into a Securities Purchase Agreement (the “SPA”) with IPMD GmbH (“IPMD”) relating to an equity investment of $2,000,000 by IPMD 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”) (the “January 2013 Offering”). Under the SPA, 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 at the initial closing under the SPA, $500,000 being funded on the four-month anniversary of the initial closing, $600,000 being funded on the eight-month anniversary of the initial closing, and $500,000 being funded on the one-year anniversary of the initial closing. The Warrants have a fixed exercise price of $0.60 per share, become exercisable in tranches on each of the four funding dates, and expire on the one-year anniversary of the initial closing. On January 3, 2013, we closed the January 2013 Offering and received the initial funding tranche of $400,000 for the purchase of 1,000,000 shares of our common stock. We received subsequent funding tranches of $500,000, $300,000, $300,000, and $500,000 for the purchase of 1,250,000, 750,000, 750,000, and 1,250,000 shares of our common stock on May 7, 2013, September 6, 2013, October 24, 2013, and January 6, 2014 respectively.
In the SPA, we also agree to appoint up to two directors nominated by IPMD to serve on our Board of Directors. On January 17, 2013, the Board of Directors of the Company appointed Helmut Kerschbaumer and Klaus Kuehne to each serve as a director of the Company. Messrs. Kerschbaumer and Kuehne are the designees of IPMD to serve on the Company’s Board of Directors pursuant to covenants in the SPA with IPMD.
On January 3, 2014, the Warrants vested with respect to 3,000,000 shares of our common stock and were exercised by IPMD on that date pursuant to a Notice of Exercise, accepted by the Company, that provided for the issuance of 750,000 shares of common stock on each of January 31, 2014, February 28, 2014, March 31, 2014, and April 30, 2014 in exchange for the payment of $450,000 on each such date.
On January 31, 2014, IPMD entered into an Assignment Agreement (the “Assignment Agreement”) with The Punch Trust (“TPT”) and Michael I. Sacks (“Sacks”) pursuant to which IPMD assigned to TPT and Sacks its rights and interests to purchase up to 3,000,000 shares of our common stock as detailed in the Warrants and the Notice of Exercise. Neither TPT nor Sacks paid any monetary consideration to IPMD in connection with the assignments under the Assignment Agreement.
Concurrent with the assignment under the Assignment Agreement described above, ULURU, TPT, Sacks, and IPMD entered into an Implementation Agreement (the “Implementation Agreement”) pursuant to which we consented and agreed to the assignment of the Warrants to TPT and Sacks. We also agreed to issue and facilitate the delivery of the shares of Common Stock under the Warrants to TPT and Sacks upon their payment of the corresponding purchase price due under the Warrants. Under the terms of the Warrants, Sacks made payments of $450,000 on each of January 31, 2014 and February 28, 2014 and the Company issued 750,000 shares of Common Stock to him on each date, respectively. Of the 3,000,000 shares of Common Stock issuable under the Warrants, the Implementation Agreement provides for Sacks to acquire 2,000,000 shares (750,000 on each of January 31 and February 28 and 250,000 on each of March 31 and April 30) and TPT to acquire 1,000,000 shares (500,000 on each of March 31 and April 30).
On January 31, 2014, we also entered into a Registration Rights Agreement with TPT and Sacks whereby we agreed to prepare and file with the SEC a registration statement for the number of shares referred to therein within sixty days after request and to use commercially reasonable efforts to cause such registration statement to be declared effective with the SEC and to keep such registration statement effective for a period of eighty days and, if necessary, such eighty day period being extended for up to sixty additional days.
|
NOTE 14.
|
STOCKHOLDERS’ EQUITY
|
Common Stock
As of December 31, 2013, we had 18,871,420 shares of common stock issued and outstanding. We issued 8,796,972 shares of common stock for the year ended December 31, 2013 comprised of 3,750,000 shares of common stock issued to IPMD pursuant to the January 2013 Offering, 825,000 shares of common stock issued to Messrs. Gray and Wallberg pursuant to the March 2013 Offering, 3,072,648 shares of common stock issued for installment payments due on the June 2012 Note with Inter-Mountain, 725,274 shares of common stock issued for the cashless exercise of warrants held by Inter-Mountain, 363,750 shares of common stock issued for consulting services, 60,000 shares of common stock issued in lieu of wages, and 300 shares of common stock issued for the vesting of certain restricted stock awards
Preferred Stock
As of December 31, 2013, we had no shares of Series A Preferred Stock (the “Series A Shares”). For the year ended December 31, 2013, we did not issue any new Series A Shares.
On August 15, 2013, we provided notice to Ironridge Global III, LLC (“Ironridge”) for the redemption of all of the outstanding Series A Shares, a total of 65 Series A Shares. An affiliate of Ironridge, the issuer of promissory notes held by us, due 7.5 years from the issue date, in the principal amount of $969,000 (the “Notes”), agreed to accept the cancellation of the Notes held by us as full and final payment for the redemption amounts of the Series A Shares.
Warrants
The following table summarizes the warrants outstanding and the number of shares of common stock subject to exercise as of December 31, 2013 and the changes therein during the two years 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
|
|
|
1,428,571
|
|
|
|
0.35
|
|
|
Warrants exercised
|
|
|
---
|
|
|
|
---
|
|
|
Warrants cancelled
|
|
|
---
|
|
|
|
---
|
|
|
Balance as of December 31, 2012
|
|
|
2,041,165
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
|
4,445,714
|
|
|
|
0.56
|
|
|
Warrants exercised
(1)
|
|
|
(1,571,428
|
)
|
|
|
0.35
|
|
|
Warrants cancelled
|
|
|
(250,000
|
)
|
|
|
0.35
|
|
|
Balance as of December 31, 2013
(1)
|
|
|
4,665,451
|
|
|
$
|
0.82
|
|
|
(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. Warrants for 785,714, 392,857, 392,857, and 392,857 shares of common stock vested on June 27, 2012, December 31, 2012, February 26, 2013, and July 15, 2013, respectively, and three warrants for 1,571,428 shares of common stock have been exercised. For the purposes of this Table, only such net vested shares of common stock from the fourth warrant (392,857 shares) have been included, based upon an exercise price of $0.35 per share of common stock. On January 22, 2014, we elected to offset and deduct the three remaining Investor Notes from the principle amount due to Inter-Mountain under the June 2012 Note and as a result of the offset and deduction the three remaining warrants terminated.
|
For the year ended December 31, 2013, we issued warrants to purchase up to an aggregate of 4,445,714 shares of our common stock which consisted of (i) a warrant issued to IPMD pursuant to the January 2013 Offering to purchase up to an aggregate of 3,000,000 shares of our common stock at an exercise price of $0.60 per share, (ii) a warrant issued to Kerry P. Gray pursuant to the March 2013 Offering to purchase up to an aggregate of 600,000 shares of our common stock at an exercise price of $0.60 per share, (iii) a warrant issued to Terrance K. Wallberg pursuant to the March 2013 Offering to purchase up to an aggregate of 60,000 shares of our common stock at an exercise price of $0.60 per share, and (iv) two warrants issued to Inter-Mountain to purchase up to an aggregate of 785,714 shares of our common stock at an exercise price of $0.35 per share. Also occurring during the year ended December 31, 2013 was the cashless exercise of warrants to purchase 1,571,428 shares of our common stock, at an exercise price of $0.35 per share, by Inter-Mountain and the cancellation of a warrant issued to NUWA Group LLC to purchase up to an aggregate of 250,000 shares of our common stock at an exercise price of $0.35 per share.
Of the warrant shares subject to exercise as of December 31, 2013, expiration of the right to exercise is as follows:
|
Date of Expiration
|
|
Number of Warrant Shares of Common Stock Subject to Expiration
|
|
|
January 3, 2014
|
|
|
3,000,000
|
|
|
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
|
|
|
392,857
|
|
|
March 14, 2018
|
|
|
660,000
|
|
|
Total
|
|
|
4,665,451
|
|
|
NOTE 15.
|
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 December 31:
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
Warrants to purchase common stock
(1)
|
|
|
4,665,451
|
|
|
|
2,041,165
|
|
|
Stock options to purchase common stock
|
|
|
1,014,907
|
|
|
|
158,409
|
|
|
Unvested restricted common stock
|
|
|
---
|
|
|
|
300
|
|
|
Common stock issuable upon the assumed conversion of our convertible note payable from June 2012
(2)
|
|
|
3,124,680
|
|
|
|
5,617,974
|
|
|
Common stock issuable upon the assumed conversion of our convertible notes payable from June 2011 and July 2011
(3)
|
|
|
253,315
|
|
|
|
368,637
|
|
|
Common stock issuable upon the assumed conversion of our Series A preferred stock
(4)(5)
|
|
|
---
|
|
|
|
1,002,634
|
|
|
Total
|
|
|
9,058,353
|
|
|
|
9,189,119
|
|
|
(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. Warrants for 785,714, 392,857, 392,857, and 392,857 shares of common stock vested on June 27, 2012, December 31, 2012, February 26, 2013, and July 15, 2013, respectively, and three warrants for 1,571,428 shares of common stock have been exercised. For the purposes of this Table, only such net vested shares of common stock from the fourth warrant (392,857 shares) have been included, based upon an exercise price of $0.35 per share of common stock. On January 22, 2014, we elected to offset and deduct the three remaining Investor Notes from the principle amount due to Inter-Mountain under the June 2012 Note and as a result of the offset and deduction the three remaining warrants terminated.
|
|
(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 share, 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 December 31, 2013.
|
|
(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-dilution 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.
|
|
(5)
|
On August 15, 2013, we provided notice to Ironridge for the redemption of all of our Series A Shares held by Ironridge, a total of 65 Series A Shares. An affiliate of Ironridge, the issuer of promissory notes held by us, due 7.5 years from the issue date, in the principal amount of $969,000, agreed to accept the cancellation of the promissory notes held by us as full and final payment for the redemption amounts of the Series A Shares.
|
|
NOTE 16.
|
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, 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.
Our Board of Directors granted the following incentive stock option awards to executives or employees and nonstatutory stock option awards to directors or non-employees for the years ended December 31:
|
|
|
2013
|
|
|
2012
(1)
|
|
|
Incentive Stock Options
|
|
|
|
|
|
|
|
Quantity
|
|
|
232,500
|
|
|
|
---
|
|
|
Weighted average fair value per share
|
|
$
|
0.24
|
|
|
|
---
|
|
|
Fair value
|
|
$
|
56,112
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonstatutory Stock Options
|
|
|
|
|
|
|
|
|
|
Quantity
|
|
|
735,000
|
|
|
|
---
|
|
|
Weighted average fair value per share
|
|
$
|
0.24
|
|
|
|
---
|
|
|
Fair value
|
|
$
|
177,388
|
|
|
|
---
|
|
|
(1)
|
The Company did not award any share-based compensation for the year ended December 31, 2012.
|
We account for share-based compensation under ASC Topic 718,
Stock Compensation
, which requires the measurement and recognition of compensation expense in the financial statements for all share-based payment awards made to employees, consultants, and directors is measured based on the estimated fair value of the award on the grant date. We use the Black-Scholes option-pricing model to estimate the fair value of share-based awards with the following weighted average assumptions for the years ended December 31:
|
|
|
2013
|
|
|
2012
(4)
|
|
|
Incentive Stock Options
|
|
|
|
|
|
|
|
Expected volatility (1)
|
|
|
103.55
|
%
|
|
|
---
|
|
|
Risk-fee interest rate % (2)
|
|
|
0.81
|
%
|
|
|
---
|
|
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
---
|
|
|
Dividend yield (3)
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonstatutory Stock Options
|
|
|
|
|
|
|
|
|
|
Expected volatility (1)
|
|
|
103.55
|
%
|
|
|
---
|
|
|
Risk-fee interest rate % (2)
|
|
|
0.81
|
%
|
|
|
---
|
|
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
---
|
|
|
Dividend yield (3)
|
|
|
---
|
|
|
|
---
|
|
|
(1)
|
Expected volatility assumption was based upon a combination of historical stock price volatility measured on a daily basis and an estimate of expected future stock price volatility.
|
|
(2)
|
Risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of the stock options.
|
|
(3)
|
The Company does not currently intend to pay cash dividends, thus has assumed a 0% dividend yield.
|
|
(4)
|
The Company did not award any share-based compensation for the year ended December 31, 2012.
|
Stock Options (Incentive and Nonstatutory)
The following table summarizes share-based compensation related to stock options for the years ended December 31:
|
|
|
2013
|
|
|
2012
|
|
|
Research and development
|
|
$
|
16,863
|
|
|
$
|
6,280
|
|
|
Selling, general and administrative
|
|
|
64,076
|
|
|
|
31,617
|
|
|
Total share-based compensation expense
|
|
$
|
80,939
|
|
|
$
|
37,897
|
|
At December 31, 2013, 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 $152,443. The period over which the unearned share-based compensation is expected to be recognized is approximately twenty seven months.
The following table summarizes the stock options outstanding and the number of shares of common stock subject to exercise as of December 31, 2013 and the changes therein during the two years 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 December 31, 2012
|
|
|
158,409
|
|
|
|
12.32
|
|
|
Granted
|
|
|
967,500
|
|
|
|
0.33
|
|
|
Forfeited/cancelled
|
|
|
(111,002
|
)
|
|
|
1.03
|
|
|
Exercised
|
|
|
---
|
|
|
|
---
|
|
|
Outstanding as of December 31, 2013
|
|
|
1,014,907
|
|
|
$
|
2.12
|
|
The following table presents the stock option grants outstanding and exercisable as of December 31, 2013:
|
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
|
|
|
|
892,500
|
|
|
$
|
0.33
|
|
|
|
9.2
|
|
|
|
197,500
|
|
|
$
|
0.33
|
|
|
|
53,334
|
|
|
|
2.38
|
|
|
|
4.5
|
|
|
|
46,668
|
|
|
|
2.36
|
|
|
|
30,002
|
|
|
|
14.40
|
|
|
|
3.3
|
|
|
|
30,002
|
|
|
|
14.40
|
|
|
|
39,071
|
|
|
|
33.35
|
|
|
|
3.8
|
|
|
|
39,071
|
|
|
|
33.35
|
|
|
|
1,014,907
|
|
|
$
|
2.12
|
|
|
|
8.6
|
|
|
|
313,241
|
|
|
$
|
6.10
|
|
Restricted Stock Awards
Restricted stock awards, which typically vest over a period of six months 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 years ended December 31:
|
|
|
2013
|
|
|
2012
|
|
|
Research and development
|
|
$
|
444
|
|
|
$
|
3,762
|
|
|
Selling, general and administrative
|
|
|
547
|
|
|
|
4,535
|
|
|
Total share-based compensation expense
|
|
$
|
991
|
|
|
$
|
8,297
|
|
At December 31, 2013, the balance of unearned share-based compensation to be expensed in future periods related to restricted stock awards, as adjusted for expected forfeitures, is nil.
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 December 31, 2013 and the changes therein during the two years then ended:
|
|
|
Restricted Stock
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Outstanding as of December 31, 2011
|
|
|
1,096
|
|
|
$
|
41.47
|
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
|
Forfeited/cancelled
|
|
|
(97
|
)
|
|
|
34.59
|
|
|
Exercised/issued
|
|
|
(699
|
)
|
|
|
45.39
|
|
|
Outstanding as of December 31, 2012
|
|
|
300
|
|
|
$
|
34.59
|
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
|
Forfeited/cancelled
|
|
|
---
|
|
|
|
---
|
|
|
Exercised/issued
|
|
|
(300
|
)
|
|
|
34.59
|
|
|
Outstanding as of December 31, 2013
|
|
|
---
|
|
|
$
|
---
|
|
Summary of Plans
2006 Equity Incentive Plan
In March 2006, our Board adopted and our stockholders approved our Equity 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, June 15, 2010, June 14, 2012, and on June 13, 2013, our stockholders approved amendments to the Equity Incentive Plan to increase the total number of shares of common stock issuable under the Equity Incentive Plan pursuant to stock options and other equity awards by 266,667 shares, 200,000 shares, 200,000 shares, 400,000 shares, and 600,000 shares, respectively, to a total of 1,800,000 shares.
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 December 31, 2013, we had granted options to purchase 1,376,167 shares of common stock since the inception of the Equity Incentive Plan, of which 1,014,907 were outstanding at a weighted average exercise price of $2.12 per share, and we had granted awards for 68,616 shares of restricted stock since the inception of the Equity Incentive Plan, of which none were outstanding. As of December 31, 2013, there were 715,647 shares that remained available for future grants under our Equity Incentive Plan.
|
NOTE 17.
|
EMPLOYMENT BENEFIT PLAN
|
We maintain a defined contribution or 401(k) Plan for our qualified employees. Participants may contribute a percentage of their compensation on a pre-tax basis, subject to a maximum annual contribution imposed by the Internal Revenue Code. We may make discretionary matching contributions as well as discretionary profit-sharing contributions to the 401(k) Plan. Our contributions to the 401(k) Plan are made in cash and vest immediately. The Company’s common stock is not an investment option available to participants in the 401(k) Plan. We contributed $20,917 and $25,085 to the 401(k) Plan during the years ended December 31, 2013 and 2012, respectively.
|
NOTE 18.
|
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 minimized 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 notes receivable and accrued interest and convertible note payable balances approximates fair value based on a valuation methodology using the income approach and a discounted cash flow model.
The fair value of our financial instruments consisted of the following at December 31:
|
Description
|
|
2013
|
|
|
2012
|
|
|
Assets:
|
|
|
|
|
|
|
|
Notes receivable and accrued interest
|
|
$
|
777,710
|
|
|
$
|
1,302,220
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Convertible note – June 2011
|
|
$
|
138,220
|
|
|
$
|
134,154
|
|
|
Convertible note – July 2011
|
|
$
|
120,738
|
|
|
$
|
113,084
|
|
|
Convertible note – June 2012
|
|
$
|
888,099
|
|
|
$
|
1,593,924
|
|
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. Deferred tax assets as of December 31, 2013, of $18,344,933 were reduced to zero, after considering the valuation allowance of $18,344,933, since there is no assurance of future taxable income. As of December 31, 2013 we have consolidated net operating loss carryforwards (“NOL”) and research credit carryforwards for income tax purposes of approximately $49,550,149 and $511,949, respectively.
The following are the consolidated operating loss carryforwards and research credit carryforwards that will begin expiring as follows:
|
Calendar Years
|
|
Consolidated Operating Loss Carryforwards
|
|
|
Research Activities
Carryforwards
|
|
|
2021
|
|
$
|
34,248
|
|
|
$
|
---
|
|
|
2023
|
|
|
95,666
|
|
|
|
---
|
|
|
2024
|
|
|
910,800
|
|
|
|
13,584
|
|
|
2025
|
|
|
1,687,528
|
|
|
|
21,563
|
|
|
2026
|
|
|
11,950,281
|
|
|
|
60,797
|
|
|
2027
|
|
|
3,431,365
|
|
|
|
85,052
|
|
|
2028
|
|
|
8,824,940
|
|
|
|
139,753
|
|
|
2029
|
|
|
6,889,761
|
|
|
|
81,940
|
|
|
2030
|
|
|
5,113,583
|
|
|
|
41,096
|
|
|
2031
|
|
|
3,728,626
|
|
|
|
43,592
|
|
|
2032
|
|
|
3,695,792
|
|
|
|
8,690
|
|
|
2033
|
|
|
3,187,559
|
|
|
|
15,882
|
|
|
Total
|
|
$
|
49,550,149
|
|
|
$
|
511,949
|
|
The Tax Reform Act of 1986 contains provisions, which limit the amount of NOL and tax credit carryforwards that companies may utilize in any one year in the event of cumulative changes in ownership over a three-year period in excess of 50%. Since the effective date of the Tax Reform Act of 1986, the Company has completed significant share issuances in 2003 and 2006 which may significantly limit our ability to utilize our NOL and tax credit carryforwards against taxable earnings in future periods. Ownership changes in future periods may place additional limits on our ability to utilize NOLs and tax credit carryforwards.
An analysis of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are as follows:
|
|
|
2013
|
|
|
2012
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
17,657,746
|
|
|
$
|
16,549,134
|
|
|
Intangible assets
|
|
|
247,248
|
|
|
|
305,552
|
|
|
Other
|
|
|
512,286
|
|
|
|
502,732
|
|
|
Total gross deferred tax assets
|
|
|
18,417,280
|
|
|
|
17,357,418
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
72,347
|
|
|
|
77,839
|
|
|
Total gross deferred tax liabilities
|
|
|
72,347
|
|
|
|
77,839
|
|
|
|
|
|
|
|
|
|
|
|
|
Net total of deferred assets and liabilities
|
|
|
18,344,933
|
|
|
|
17,279,579
|
|
|
Valuation allowance
|
|
|
(18,344,933
|
)
|
|
|
(17,279,579
|
)
|
|
Net deferred tax assets
|
|
$
|
---
|
|
|
$
|
---
|
|
The valuation allowance increased by $1,065,354 and $1,225,683 in 2013 and 2012, respectively.
The following is a reconciliation of the expected statutory federal income tax rate to our actual income tax rate for the years ended December 31:
|
|
|
2013
|
|
|
2012
|
|
|
Expected income tax (benefit) at federal statutory tax rate -35%
|
|
$
|
( 1,137,320
|
)
|
|
$
|
( 1,309,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
21,754
|
|
|
|
16,500
|
|
|
Research tax credits
|
|
|
(15,882
|
)
|
|
|
(8,690
|
)
|
|
Amortization of deferred start up costs
|
|
|
---
|
|
|
|
---
|
|
|
Valuation allowance
|
|
|
1,131,448
|
|
|
|
1,302,165
|
|
|
Income tax expense
|
|
$
|
---
|
|
|
$
|
---
|
|
Effective January 1, 2007, we adopted ASC Topic 740,
Accounting for Uncertainty in Income Taxes
. ASC Topic 740 is a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that we have taken or expects to take on a tax return. If an income tax position exceeds a more likely than not (greater than 50%) probability of success upon tax audit, we will recognize an income tax benefit in its financial statements. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures consistent with jurisdictional tax laws. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing ASC Topic 740.
Federal income tax returns for fiscal years 2010 through 2013 remain open and subject to examination by the Internal Revenue Service. We file and remit state income taxes in various states where we have determined it is required to file state income taxes. Our filings with those states remain open for audit for the fiscal years 2010 through 2013.
We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months. Our policy is that we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of ASC 740, we did not have any accrued interest or penalties associated with any unrecognized tax benefits nor was any interest expense recognized during the period. The liability for unrecognized tax benefits is zero at December 31, 2013 and 2012.
|
NOTE 20.
|
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 originally continued until April 1, 2013. The lease required a minimum monthly lease obligation of $9,330, which was inclusive of monthly operating expenses, until April 1, 2011 and at such time increased to $9,776, which was inclusive of monthly operating expenses. On February 22, 2013, we executed an Amendment to Lease Agreement (the “Lease Amendment”) that renewed and extended our lease until March 31, 2015. The Lease Amendment requires a minimum monthly lease obligation of $9,193, which is inclusive of monthly operating expenses, until March 31, 2014 and at such time, will increase to $9,379, 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 2013 office lease and the 2010 equipment lease are as follows as of December 31, 2013:
|
Calendar Years
|
|
Future Lease Expense
|
|
|
2014
|
|
$
|
120,917
|
|
|
2015
|
|
|
28,881
|
|
|
2016
|
|
|
---
|
|
|
2017
|
|
|
---
|
|
|
2018
|
|
|
---
|
|
|
Total
|
|
$
|
149,798
|
|
Rent expense for our operating leases amounted to $116,488 and $130,065 for the years ended December 31, 2013 and 2012, 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.
Separation Agreement
As of December 31, 2013, 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 provide or have provided, as applicable, 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, 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 exercisable by Mr. Gray having expired on 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.
Related Party Transactions and Concentration
On January 17, 2013, the Board of Directors of the Company appointed Helmut Kerschbaumer and Klaus Kuehne to each serve as a director of the Company. Mr. Kerschbaumer currently serves as a director of IPMD, Altrazeal Trading GmbH, Altrazeal AG, and Melmed Holding AG (collectively, the Altrazeal Distributors”) and Mr. Kuehne currently serves as a director of Altrazeal AG. In such capacities, Mr. Kerschbaumer may be considered, either singularly or collectively, to have control of, and make investment and business decisions on behalf of the Altrazeal Distributors and Mr. Kuehne may be considered, either singularly of collectively, to have control of, and make investment and business decisions on behalf of Altrazeal AG.
Currently, we are party to License and Supply Agreements with Altrazeal Trading GmbH, Altrazeal AG, and Melmed Holding AG for the marketing and distribution of Altrazeal in various international territories. On December 21, 2012, we entered into a Securities Purchase Agreement with IPMD as described in more detail in Note 12.
For the years ended December 31, 2013 and 2012, the Company recorded revenues, in approximate numbers, of $281,000 and $117,000, respectively, with Altrazeal Distributors, which represented 76% and 32% of our total revenues. As of December 31, 2013 and December 31, 2012, Altrazeal Distributors had an outstanding accounts receivable, in approximate numbers, of $174,000 and $101,000, respectively, which represented 97% and 77% of our total outstanding accounts receivables.
Related Party Obligations
Since 2011, our named executive officers and certain key executives have temporarily deferred portions of their compensation as part of a plan to conserve the Company’s cash and financial resources.
As of December 31, 2013, the following table summarizes the compensation temporarily deferred since 2011:
|
Name
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Total
|
|
|
Kerry P. Gray
(1)
|
|
$
|
(91,000
|
)
|
|
$
|
220,673
|
|
|
$
|
140,313
|
|
|
$
|
269,986
|
|
|
Terrance K. Wallberg
|
|
|
(35,769
|
)
|
|
$
|
24,230
|
|
|
$
|
36,539
|
|
|
$
|
25,000
|
|
|
Key executives
|
|
|
(20,000
|
)
|
|
$
|
27,253
|
|
|
$
|
20,986
|
|
|
$
|
28,239
|
|
|
Total
|
|
$
|
(146,739
|
)
|
|
$
|
272,156
|
|
|
$
|
197,838
|
|
|
$
|
323,225
|
|
|
|
(1)
|
During 2013, Mr. Gray temporarily deferred compensation of $221,500 which consisted of $11,500 earned pursuant to a Separation Agreement and $210,000 for his duties as Chairman of the Executive Committee of the Company’s Board of Directors. During 2013, Mr. Gray was also repaid $312,500 of temporarily deferred compensation, of which $300,000 was used by Mr. Gray for funding required pursuant to the March 2013 Offering.
|
For the years ended December 31, 2013 and 2012, the Company’s obligation for temporarily deferred compensation was $323,225, of which $207,500 was included in accounts payable and $115,725 was included in accrued liabilities, and $469,994, of which $310,000 was included in accounts payable and $159,994 was included in accrued liabilities, respectively.
Contingent Milestone Obligations
We are subject to paying Access Pharmaceuticals, Inc. (“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 December 31, 2013, 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 the 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. On November 17, 2008, we entered into a licensing agreement for Amlexanox-related product rights to the United Kingdom and Ireland territories with MEDA AB.
|
NOTE 21.
|
LEGAL PROCEEDINGS
|
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the results of our operations or financial position. There are no material proceedings to which any director, officer or any of our affiliates, any owner of record or beneficially of more than five percent of any class of our voting securities, or any associate of any such director, officer, our affiliates, or security holder, is a party adverse to us or our consolidated subsidiary or has a material interest adverse thereto.
|
NOTE 22.
|
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
The following table contains condensed information from the Company’s Consolidated Statements of Operations for each quarter of the years ended December 31, 2013 and 2012. We have derived this data from its unaudited quarterly financial statements. We believe that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
102,044
|
|
|
$
|
28,884
|
|
|
$
|
110,580
|
|
|
$
|
129,060
|
|
|
Costs and expenses
|
|
|
649,413
|
|
|
|
744,932
|
|
|
|
743,033
|
|
|
|
880,888
|
|
|
Operating (loss)
|
|
|
(547,369
|
)
|
|
|
(716,048
|
)
|
|
|
(632,453
|
)
|
|
|
(751,828
|
)
|
|
Other income (expense)
|
|
|
(109,221
|
)
|
|
|
(106,737
|
)
|
|
|
(110,816
|
)
|
|
|
(106,442
|
)
|
|
Net (loss)
|
|
$
|
(656,590
|
)
|
|
$
|
(822,785
|
)
|
|
$
|
(743,269
|
)
|
|
$
|
(858,270
|
)
|
|
Less preferred stock dividends
|
|
|
(12,021
|
)
|
|
|
(12,154
|
)
|
|
|
(6,061
|
)
|
|
|
---
|
|
|
Net (loss) allocable to common stockholders
|
|
$
|
(668,611
|
)
|
|
$
|
(834,939
|
)
|
|
$
|
(749,330
|
)
|
|
$
|
(858,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net (loss) per common share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
60,005
|
|
|
$
|
56,211
|
|
|
$
|
88,922
|
|
|
$
|
165,456
|
|
|
Costs and expenses
|
|
|
879,717
|
|
|
|
884,289
|
|
|
|
837,149
|
|
|
|
1,034,259
|
|
|
Operating (loss)
|
|
|
(819,712
|
)
|
|
|
(828,078
|
)
|
|
|
(748,227
|
)
|
|
|
(868,803
|
)
|
|
Other income (expense)
|
|
|
(23,697
|
)
|
|
|
(30,068
|
)
|
|
|
(103,498
|
)
|
|
|
(109,266
|
)
|
|
Net (loss)
|
|
$
|
(843,409
|
)
|
|
$
|
(858,146
|
)
|
|
$
|
(851,725
|
)
|
|
$
|
(978,069
|
)
|
|
Less preferred stock dividends
|
|
|
(10,726
|
)
|
|
|
(12,154
|
)
|
|
|
(12,288
|
)
|
|
|
(12,288
|
)
|
|
Net (loss) allocable to common stockholders
|
|
$
|
(854,135
|
)
|
|
$
|
(870,300
|
)
|
|
$
|
(864,013
|
)
|
|
$
|
(990,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net (loss) per common share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.10
|
)
|
|
NOTE 23.
|
SUBSEQUENT EVENTS
|
Convertible Note – June 2012
On January 22, 2014, we provided notice to Inter-Mountain of our election to exercise our rights under the June 2012 Note and to offset amounts we owed to Inter-Mountain against amounts it owed to us under the Investor Notes. Our notice provided that such deduction and offset occurred on January 22, 2014, that we will not incur the 120% prepayment premium with respect to amounts paid under the June 2012 Note as a result of the deduction and offset, that no warrants will become exercisable as a result of the offset, and that any warrants unvested as of January 22, 2014 shall immediately and automatically terminate. As a result, the outstanding amount owed under the June 2012 Note was reduced to $317,029 as of January 22, 2014.
On February 27, 2014 and on March 3, 2014, we received conversion notices from Inter-Mountain whereby we issued an aggregate of 435,502 shares of common stock for the final payment of $152,426 due under the June 2012 Note.
January 2013 Offering
On January 3, 2014, the Warrants vested with respect to 3,000,000 shares of our common stock and were exercised by IPMD on that date pursuant to a Notice of Exercise, accepted by the Company, that provided for the issuance of 750,000 shares of common stock on each of January 31, 2014, February 28, 2014, March 31, 2014, and April 30, 2014 in exchange for the payment of $450,000 on each such date.
On January 31, 2014, IPMD entered into an Assignment Agreement (the “Assignment Agreement”) with The Punch Trust (“TPT”) and Michael I. Sacks (“Sacks”) pursuant to which IPMD assigned to TPT and Sacks its rights and interests to purchase up to 3,000,000 shares of our common stock as detailed in the Warrants and the Notice of Exercise. Neither TPT nor Sacks paid any monetary consideration to IPMD in connection with the assignments under the Assignment Agreement.
Concurrent with the assignment under the Assignment Agreement described above, ULURU, TPT, Sacks, and IPMD entered into an Implementation Agreement (the “Implementation Agreement”) pursuant to which we consented and agreed to the assignment of the Warrants to TPT and Sacks. We also agreed to issue and facilitate the delivery of the shares of Common Stock under the Warrants to TPT and Sacks upon their payment of the corresponding purchase price due under the Warrants. Under the terms of the Warrants, Sacks made payments of $450,000 on each of January 31, 2014 and February 28, 2014 and the Company issued 750,000 shares of Common Stock to him on each date, respectively. Of the 3,000,000 shares of Common Stock issuable under the Warrants, the Implementation Agreement provides for Sacks to acquire 2,000,000 shares (750,000 on each of January 31 and February 28 and 250,000 on each of March 31 and April 30) and TPT to acquire 1,000,000 shares (500,000 on each of March 31 and April 30).
On January 31, 2014, we also entered into a Registration Rights Agreement with TPT and Sacks whereby we agreed to prepare and file with the SEC a registration statement for the number of shares referred to therein within sixty days after request and to use commercially reasonable efforts to cause such registration statement to be declared effective with the SEC and to keep such registration statement effective for a period of eighty days and, if necessary, such eighty day period being extended for up to sixty additional days.