NOTE 1.
|
COMPANY OVERVIEW AND BASIS OF PRESENTATION
|
Company Overview
ULURU Inc. (hereinafter “we”, “our”, “us”, “ULURU”, or the “Company”) is a Nevada corporation. We are a diversified specialty pharmaceutical company committed to developing and commercializing a broad range of innovative wound care and muco-adhesive film products based on our patented Nanoflex® and OraDisc
TM
technologies, with the goal of improving outcomes for patients, health care professionals, and health care payers.
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and include the accounts of ULURU Inc., a Nevada corporation, and its wholly-owned subsidiary, Uluru Delaware Inc., a Delaware corporation. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of September 30, 2016 and the results of its operations for the three and nine months ended September 30, 2016 and 2015 and cash flows for the nine months ended September 30, 2016 and 2015 have been made.
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, and may differ materially, from those estimates.
All intercompany transactions and balances have been eliminated in consolidation.
Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on March 30, 2016, including the risk factors set forth therein.
Liquidity and Going Concern
The report of our independent registered public accounting firm for the fiscal year ended December 31, 2015, contained an explanatory paragraph to reflect its significant doubt about our ability to continue as a going concern as a result of our history of losses and our liquidity position, as discussed herein and in this Form 10-Q. Based on our liquidity as of September 30, 2016, the expected level of operating expenses, and the projected sales of our existing products combined with other revenues, we believe that it may be possible for us to meet our working capital and capital expenditure requirements through the fourth quarter of 2016. However, we cannot be sure that our revenues will grow or that we will generate significant positive cash flow from operations. Moreover, we may not be able to raise sufficient additional capital on acceptable terms, or at all, to continue operations beyond the fourth quarter of 2016. Therefore, we are unable to assert that our financial position is sufficient to fund operations beyond the fourth quarter of 2016, and, as a result, there is substantial doubt about our ability to continue as a going concern beyond the fourth quarter of 2016. In order to continue to advance our business plan and outstanding obligations after the fourth quarter of 2016, we will need to raise additional capital. The Company is currently in the process of exploring capital raising opportunities but there is no assurance that these efforts will be successful or on beneficial terms.
NOTE 2.
|
SIGNIFICANT ACCOUNTING POLICIES
|
The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and nine months ended September 30, 2016 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on March 30, 2016.
NOTE 3.
|
THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
|
There were no new accounting pronouncements adopted or enacted during the periods presented that had, or are expected to have, a material impact on our financial statements.
NOTE 4.
|
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, and royalties 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 derived primarily from the sale of Altrazeal® which has occurred in twenty international markets and from our sales activities in the United States. With respect to revenues for the three and nine months ended September 30, 2016, revenues reported for international sales represent the recognition of previously unamortized licensing fees only and do not include any Altrazeal® product sales.
Revenues per geographic area for the three and nine months ended September 30 are summarized as follows:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
Revenues
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
Domestic
|
|
$
|
1,453
|
|
|
|
26
|
%
|
|
$
|
6,156
|
|
|
|
25
|
%
|
|
$
|
16,232
|
|
|
|
4
|
%
|
|
$
|
20,043
|
|
|
|
3
|
%
|
International
|
|
|
4,196
|
|
|
|
74
|
%
|
|
|
18,643
|
|
|
|
75
|
%
|
|
|
362,542
|
|
|
|
96
|
%
|
|
|
558,401
|
|
|
|
97
|
%
|
Total
|
|
$
|
5,649
|
|
|
|
100
|
%
|
|
$
|
24,799
|
|
|
|
100
|
%
|
|
$
|
378,774
|
|
|
|
100
|
%
|
|
$
|
578,444
|
|
|
|
100
|
%
|
A significant portion of our revenues are derived from a few major customers. Customers with greater than 10% of total sales, along with their relative percentage of all sales, for the three and nine months ended September 30 are represented on the following table:
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
Customers
|
Product
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Customer A
|
Altrazeal®
|
|
|
---
|
|
|
|
10
|
%
|
|
|
---
|
|
|
|
89
|
%
|
Customer B
|
Altrazeal®
|
|
|
---
|
|
|
|
21
|
%
|
|
|
63
|
%
|
|
|
*
|
|
Customer C
|
Altrazeal®
|
|
|
---
|
|
|
|
14
|
%
|
|
|
25
|
%
|
|
|
*
|
|
Customer D
|
Altrazeal®
|
|
|
---
|
|
|
|
22
|
%
|
|
|
---
|
|
|
|
*
|
|
Customer E
|
OraDisc™
|
|
|
26
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer F
|
Altrazeal®
|
|
|
21
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer G
|
Altrazeal®
|
|
|
12
|
%
|
|
|
---
|
|
|
|
*
|
|
|
|
*
|
|
Customer H
|
Altrazeal®
|
|
|
12
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Total
|
|
|
|
71
|
%
|
|
|
67
|
%
|
|
|
88
|
%
|
|
|
89
|
%
|
* Sales from this customer were less than 10% of total sales for the period reported.
|
|
As of September 30, 2016, 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.
The components of inventory, at the different stages of production, consisted of the following at September 30, 2016 and December 31, 2015:
Inventory
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Raw materials
|
|
$
|
37,564
|
|
|
$
|
38,037
|
|
Work-in-progress
|
|
|
444,071
|
|
|
|
485,123
|
|
Finished goods
|
|
|
99,818
|
|
|
|
8,261
|
|
Total
|
|
$
|
581,453
|
|
|
$
|
531,421
|
|
NOTE 6.
|
PROPERTY, EQUIPMENT and LEASEHOLD IMPROVEMENTS
|
Property, equipment and leasehold improvements, net, consisted of the following at September 30, 2016 and December 31, 2015:
Property, equipment and leasehold improvements
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Laboratory equipment
|
|
$
|
424,888
|
|
|
$
|
424,888
|
|
Manufacturing equipment
|
|
|
1,604,893
|
|
|
|
1,604,894
|
|
Computers, office equipment, and furniture
|
|
|
156,030
|
|
|
|
153,865
|
|
Computer software
|
|
|
4,108
|
|
|
|
4,108
|
|
Leasehold improvements
|
|
|
95,841
|
|
|
|
95,841
|
|
|
|
|
2,285,760
|
|
|
|
2,283,596
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,125,746
|
)
|
|
|
(2,026,179
|
)
|
Property, equipment and leasehold improvements, net
|
|
$
|
160,014
|
|
|
$
|
257,417
|
|
Depreciation expense on property, equipment and leasehold improvements was $33,237 and $41,973 for the three months ended September 30, 2016 and 2015, respectively, and was $99,567 and $146,500 for the nine months ended September 30, 2016 and 2015, respectively.
NOTE 7.
|
INTANGIBLE ASSETS
|
Patents
Intangible patent assets are comprised of patents acquired in October, 2005. Intangible assets, net consisted of the following at September 30, 2016 and December 31, 2015:
Intangible assets – patents
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
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
|
|
|
( 7,262,084
|
)
|
|
|
(6,905,397
|
)
|
Intangible assets - patents, net
|
|
$
|
2,363,854
|
|
|
$
|
2,720,541
|
|
Amortization expense for intangible patents assets was $119,763 and $119,763 for the three months ended September 30, 2016 and 2015, respectively, and was $356,687 and $355,385 for the nine months ended September 30, 2016 and 2015, respectively.
The future aggregate amortization expense for intangible patent assets, remaining as of September 30, 2016, is as follows:
Calendar Years
|
|
Future Amortization
Expense
|
|
2016 (Three months)
|
|
$
|
119,763
|
|
2017
|
|
|
475,148
|
|
2018
|
|
|
475,148
|
|
2019
|
|
|
475,148
|
|
2020
|
|
|
476,450
|
|
2021 & Beyond
|
|
|
342,197
|
|
Total
|
|
$
|
2,363,854
|
|
Licensing rights
On December 24, 2015, we entered into and closed the transaction contemplated by a License Purchase and Termination Agreement (the “Altrazeal Termination Agreement”) with Altrazeal Trading GmbH (“Altrazeal Trading”) and IPMD GmbH (“IPMD”). The Altrazeal Termination Agreement relates to the License and Supply Agreement dated January 11, 2012 (the “Altrazeal License”), under which Altrazeal Trading and its affiliates were authorized by the Company to distribute our Altrazeal® wound care product in the European Union, Australia, New Zealand, Middle East (excluding Jordan and Syria), North Africa, Albania, Bosnia, Croatia, Kosovo, Macedonia, Montenegro, and Serbia. Under the Altrazeal Termination Agreement, the Altrazeal License was assigned to the Company, thereby effecting its termination, and the Company’s 25% ownership interest in Altrazeal Trading was cancelled. In addition, the Company agreed to assume from Altrazeal Trading and certain affiliated entities rights and future obligations under sub-distribution agreements in numerous territories within the scope of the Altrazeal License and related consulting agreements.
Under the terms of the Altrazeal Termination Agreement, we agreed to pay to Altrazeal Trading a net transfer fee of €1,570,271 and to pay IPMD a transfer fee of €703,500. The net transfer fee to Altrazeal Trading includes adjustments for amounts owed by Altrazeal Trading to the Company. The Company paid the net transfer fee (a) to Altrazeal Trading by means of the issuance of 4,441,606 shares of Common Stock together with warrants to purchase 444,161 shares of Common Stock and (b) to IPMD by means of the issuance of 2,095,241 shares of Common Stock, together with warrants to purchase 209,525 shares of Common Stock. The warrants have an exercise price of $0.68 per share and a term of one-year.
Altrazeal Trading also agreed to return inventory of Altrazeal® blisters held in its possession in an amount up to €88,834 (“Inventory Payment”). To the extent Altrazeal Trading does not return the entire inventory, we may deduct from the Inventory Payment €4.20 per Altrazeal® blister not returned in usable condition. We are currently in the process of confirming with Altrazeal Trading the actual number of Altrazeal® blisters to be returned.
Under the Altrazeal Termination Agreement, we also agreed to file within twenty (20) days of closing a registration statement registering the resale of 2,500,000 shares of Common Stock issued under the Altrazeal Termination Agreement and to use all commercially reasonable efforts to cause such registration Statement to become effective. In accordance with our obligations under the Altrazeal Termination Agreement, we filed with the SEC a registration statement that was declared effective on February 16, 2016. We are required to keep the registration statement effective at all times with respect to such 2,500,000 shares, other than permitted suspension periods, until the earliest of (i) June 24, 2016, (ii) the date when Altrazeal Trading and IPMD may sell all of the registered shares under Rule 144 under the Securities Act without volume limitations, or (iii) the date when Altrazeal Trading and IPMD no longer own any of the registered shares. As of the date of this filing, shares cannot be sold under the registration statement because the associated prospectus is not current.
In connection with the Altrazeal Termination Agreement, we also entered into a Mutual Termination and Release Agreement, dated December 24, 2015, for the purpose of terminating the Binding Term Sheet dated May 12, 2015 with Altrazeal Trading and Firnron LTD (the “Term Sheet”). Under the Term Sheet, it was contemplated that the Company would acquire all of the remaining equity interests in Altrazeal Trading.
Licensing rights, net consisted of the following at September 30, 2016 and December 31, 2015:
Intangible assets - licensing rights
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
European Union, Australia, New Zealand, Middle East (excluding Jordan and Syria), North Africa, Albania, Bosnia, Croatia, Kosovo, Macedonia, Montenegro, and Serbia.
|
|
$
|
3,512,506
|
|
|
$
|
3,512,506
|
|
Less: accumulated amortization
|
|
|
(249,464
|
)
|
|
|
(6,271
|
)
|
Intangible assets - licensing rights, net
|
|
$
|
3,263,042
|
|
|
$
|
3,506,235
|
|
Amortization expense for intangible licensing rights assets was $81,955 and nil for the three months ended September 30, 2016 and 2015, respectively, and was $243,193 and nil for the nine months ended September 30, 2016 and 2015, respectively.
The future aggregate amortization expense for intangible licensing rights assets, remaining as of September 30, 2016, is as follows:
Calendar Years
|
|
Future Amortization
Expense
|
|
2016 (Three months)
|
|
$
|
81,955
|
|
2017
|
|
|
325,148
|
|
2018
|
|
|
325,148
|
|
2019
|
|
|
325,148
|
|
2020
|
|
|
325,148
|
|
2021 & Beyond
|
|
|
1,880,495
|
|
Total
|
|
$
|
3,263,042
|
|
NOTE 8.
|
INVESTMENTS IN UNCONSOLIDATED ENTITIES
|
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 over which we have significant influence, or both.
Altrazeal Trading GmbH
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. On February 1, 2014, Altrazeal Trading Ltd. transferred all of their rights and obligations under the existing shareholders’ agreement to Altrazeal Trading GmbH (“Altrazeal Trading”). As a result of this transfer, we were entitled to receive a non-dilutable 25% ownership interest in Altrazeal Trading.
On December 24, 2015, we completed the Altrazeal Termination Agreement with Altrazeal Trading and IPMD as more fully described in Note 7. Under the Altrazeal Termination Agreement, our ownership interest in Altrazeal Trading was cancelled.
Altrazeal AG
On February 1, 2014, we executed a shareholders’ agreement with Altrazeal AG, a single purpose entity for the marketing of Altrazeal® in several territories, including Africa (markets not already licensed), Latin America, Georgia, Turkmenistan, Ukraine, the Commonwealth of Independent States, Jordan, Syria, Asia and the Pacific (excluding China, Hong Kong, Macau, Taiwan, South Korea, Japan, Australia, and New Zealand). As a result of this transaction, we were entitled to receive a non-dilutable 25% ownership interest in Altrazeal AG.
In late March 2016, we provided Altrazeal AG with a notice identifying certain breaches in the Exclusive License and Supply Agreement, dated September 30, 2013 with Altrazeal AG (as amended, the “ELSA”). On or about March 24, 2016, we learned that Altrazeal AG had commenced an insolvency proceeding in Switzerland and immediately sent an additional notice of termination referencing the insolvency. On or about April 18, 2016, we learned that the insolvency petition filed by Altrazeal AG in Switzerland has been accepted by the court and an administrator is to be appointed. As a result of the breaches by Altrazeal AG in the ELSA, the ELSA has been terminated in accordance with its terms. As a result of the accepted insolvency petition, we believe that our ownership interest in Altrazeal AG is deemed to be worthless and certain net accounts receivables with Altrazeal AG are uncollectible.
ORADISC GmbH
On October 19, 2012, we executed a shareholders’ agreement for the establishment of ORADISC GmbH, through which OraDisc™ erodible film technology products would be developed and marketed. We were entitled to receive a non-dilutable 25% ownership interest in ORADISC GmbH.
In October 2012, we executed a License and Supply Agreement with ORADISC GmbH for the marketing of applications of our OraDisc™ erodible film technology for dental applications including benzocaine (OraDisc™ B), re-mineralization dental strips, fluoride dental strips, long-acting breath freshener, Amlexanox (OraDisc™ A). We also granted to ORADISC GmbH a twenty-four month option to utilize the OraDisc™ erodible film technology for drug delivery for migraine, nausea and vomiting, cough and cold, and pain. In January 2015, the initial twenty-four month option period to utilize the OraDisc™ erodible film technology by ORADISC GmbH was extended until December 31, 2015. In addition, this option expanded the applications for use to include anti-psychotics, neurologic products, and actives for the treatment of erectile dysfunction. On December 30, 2015, we received notice from ORADISC GmbH of their exercise of the option. We informed ORADISC GmbH that under the terms of the option, the right to use the OraDisc™ erodible film technology expired on December 31, 2015. In March 2016, we also provided ORADISC GmbH with a notice identifying certain breaches in the License and Supply Agreement with ORADISC GmbH. As a result of the breaches by ORADISC GmbH in the License and Supply Agreement, the License and Supply Agreement has been terminated in accordance with its terms and ORADISC GmbH has ceased to be a product distributor for the Company. Since delivering the termination notice to ORADISC GmbH we have not had any communication from ORADISC GmbH with respect to the License and Supply Agreement.
In March 2016, we learned that insolvency proceedings have been initiated with an Austrian commercial court with respect to IPMD GmbH and that one of its affiliated operating entities, ORADISC GmbH, might be affected by such insolvency proceeding filing. Subsequently, we were informed that the insolvency application was opposed with various parties taking opposing views and that these legal proceedings continue to evolve. We continue to evaluate our position with respect to IPMD GmbH and ORADISC GmbH.
Financial statements for the nine months ended September 30, 2016 and for the year ended December 31, 2015 have not been released to us and, therefore, we have not included the effect of the financial activities of ORADISC GmbH in our financial statements for such reporting periods. We believe that our share of the cumulative losses of ORADISC GmbH for the nine months ended September 30, 2016 and for the years ended December 31, 2015, 2014, and 2013 would exceed the carrying value of our investment, therefore the equity method of accounting would be suspended for such reporting periods and no additional losses would be charged to operations.
Based upon the unaudited financial statements for the years ended December 31, 2014 and 2013, as provided to us by ORADISC GmbH, our unrecorded share of ORADISC GmbH cumulative losses as of December 31, 2014 totaled $22,826.
Summarized financial information for our investment in ORADISC GmbH assuming 100% ownership is as follows:
ORADISC GmbH
|
|
December 31, 2014
(Unaudited)
|
|
|
December 31, 2013
(Unaudited)
|
|
Balance sheet
|
|
|
|
|
|
|
Total assets
|
|
$
|
237,726
|
|
|
$
|
305,069
|
|
Total liabilities
|
|
$
|
286,643
|
|
|
$
|
302,572
|
|
Total stockholders’ (deficit)/equity
|
|
$
|
(48,917
|
)
|
|
$
|
2,497
|
|
Statement of operations
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
---
|
|
|
$
|
---
|
|
Net (loss)
|
|
$
|
(47,450
|
)
|
|
$
|
(34,671
|
)
|
NOTE 9.
|
ACCRUED LIABILITIES
|
Accrued liabilities consisted of the following at September 30, 2016 and December 31, 2015:
Accrued Liabilities
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Accrued compensation/benefits
|
|
$
|
264,625
|
|
|
$
|
329,131
|
|
Accrued insurance payable
|
|
|
---
|
|
|
|
73,074
|
|
Accrued property taxes
|
|
|
3,844
|
|
|
|
---
|
|
Product rebates/returns
|
|
|
4
|
|
|
|
9
|
|
Total accrued liabilities
|
|
$
|
268,473
|
|
|
$
|
402,214
|
|
NOTE 10.
|
PROMISSORY NOTE PAYABLE
|
Debt Financing – April 2015
On April 15, 2015, we entered into a Securities Purchase Agreement dated April 14, 2015 (the “Purchase Agreement”) with Inter-Mountain Capital Corp. (“Inter-Mountain”) related to our issuance of a $550,000 Promissory Note (the “April 2015 Note”). The purchase price for the April 2015 Note, which reflects a $50,000 original issue discount, was $500,000. The Purchase Agreement also included representations and warranties, restrictive covenants and indemnification provisions standard for similar transactions.
The April 2015 Note bears interest at the rate of 10.0% per annum, with monthly installment payments of $45,000 commencing on the date that is 120 calendar days after the issuance date of the April 2015 Note. At our option, subject to certain volume, price and other conditions, the monthly installments may be paid in whole, or in part, in cash or in Common Stock. If the monthly installments are 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 per share. At our option, the outstanding principal balance of the April 2015 Note, or a portion thereof, may be prepaid in cash at 120% of the amount elected to be prepaid. The April 2015 Note is unsecured and is not subject to conversion at the discretion of Inter-Mountain.
Events of default under the April 2015 Note include failure to make required payments, 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 the Common Stock, a restatement of financial statements and a default under certain other agreements. In the event of default, the interest rate under the April 2015 Note increases to 18% and the April 2015 Note becomes callable at a premium. In addition, Inter-Mountain has all remedies under law and equity.
As part of the debt financing, Inter-Mountain also received a warrant (the “Warrant”) to purchase up to an aggregate of 194,118 shares of Common Stock. The Warrant has an exercise price of $0.85 per share and expires on April 30, 2020. The Warrant includes a standard net cashless exercise provision and provisions requiring proportionate adjustments in connection with a recapitalization transaction.
As part of the debt financing, we entered into a Registration Rights Agreement whereby we agreed to prepare and file with the Securities and Exchange Commission (the “SEC”) a registration statement no later than May 11, 2015 and to cause such registration statement to be declared effective no later than 120 after the closing date and to keep such registration statement effective for a period of no less than 180 days. In accordance with our obligations under the Registration Rights Agreement, we filed with the SEC a registration statement that was declared effective on June 4, 2015. Such registration statement ceased to be effective in April 2016.
On January 11, 2016, we executed a Waiver Agreement with Inter-Mountain. The Waiver Agreement relates to the April 2015 Note and our failure to make the installment payment under the April 2015 Note due in November 2015 on a timely basis. Subsequent installment payments with respect to 2015 and 2016 have all been made on a timely basis. Under the terms of the Waiver Agreement, we agreed to remit the November 2015 installment payment of $45,000 in cash and to pay Inter-Mountain an accommodation fee of $25,000, with the accommodation fee being added to the outstanding loan balance.
Using specific guidelines in accordance with U.S. GAAP, we allocated the value of the proceeds received to the promissory note and to the warrant on a relative fair value basis. We calculated the fair value of the warrant issued with the debt 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 of the warrant was recorded as a debt discount and is being amortized over the expected term of the promissory note to interest expense.
Information relating to the April 2015 Note is as follows:
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
|
|
|
Transaction
|
|
Initial
Principal
Amount
|
|
|
Interest
Rate
|
|
Maturity
Date
|
Conversion Price (1)
|
|
Principal
Balance (2)
|
|
|
Unamortized
Debt
Discount
|
|
|
Unamortized Debt Issuance Costs
|
|
|
Carrying
Value
|
|
April 2015 Note
|
|
$
|
550,000
|
|
|
|
10.0
|
%
|
08/12/2016
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
$
|
550,000
|
|
|
|
|
|
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
(1)
|
As part of the April 2015 Note, at our option, subject to certain volume, price and other conditions, the monthly installments of principle and interest due under the April 2015 Note may be paid in whole, or in part, in cash or in Common Stock. If the monthly installments are 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 per share.
|
(2)
|
On August 11, 2016, the Company issued the final installment payment due under the April 2015 Note.
|
For the nine months ended September 30, 2016, we have remitted six installment payments in cash totaling $343,526 and have remitted one installment payment by issuing 694,056 shares of Common Stock for principal and interest due under the April 2015 Note.
The amount of interest cost recognized from our promissory note was $1,106 and $13,678 for the three months ended September 30, 2016 and 2015, respectively, and $14,079 and $25,442 for the nine months ended September 30, 2016 and 2015, respectively.
The amount of debt discount amortized from our promissory note was $6,003 and $13,053 for the three months ended September 30, 2016 and 2015, respectively, and $32,015 and $24,088 for the nine months ended September 30, 2016 and 2015, respectively.
The amount of debt issuance costs amortized from our promissory note was $4,269 and $9,524 for the three months ended September 30, 2016 and 2015, respectively, and $22,927 and $17,627 for the nine months ended September 30, 2016 and 2015, respectively.
NOTE 11.
|
EQUITY TRANSACTIONS
|
Common Stock Transaction
March 2016 Offering
On March 29, 2016, we entered into a Stock Purchase Agreement with fifteen investors for the offer and sale of 25,245,442 shares of Common Stock and warrants to purchase an additional 25,245,442 shares of Common Stock at a purchase price of $0.0713 per unit, with each unit consisting of one share and one warrant to purchase Common Stock, for an aggregate purchase price of $1,800,000 (the “March 2016 Offering). The issue price of the shares sold was based on a 10% discount to the average closing price between March 7, 2016 and March 11, 2016 and the warrant exercise price was based on a 10% premium to the same average closing price. The warrants have an exercise price of $0.0871 per share and a five-year term. The warrants also include cashless exercise provisions and a “full ratchet” anti-dilution provision under which the exercise price of such warrants resets to any lower sales price at which the Company offers or sells Common Stock or Common Stock equivalents for one year (subject to standard exceptions).
The March 2016 Offering resulted in gross proceeds of $1,800,000, of which $1,439,000 was received in March 2016 and $361,000 was received in April 2016. As part of the offering expenses, we paid to a European placement agent a referral fee of $29,000 which is equal to 10% of the gross proceeds, provided that the investors referred by such placement agent were not U.S. Persons and were solicited outside the United States.
Purchasers in the March 2016 Offering include Michael I. Sacks ($1,000,000), the father of Bradley J. Sacks, the Chairman of our Board of Directors, Centric Capital Ventures, LLC ($19,000), an investment entity controlled by Bradley J. Sacks, Terrance K. Wallberg ($50,000), our Vice President and Chief Financial Officer, and Daniel G. Moro ($10,000), our Vice President of Polymer Drug Delivery.
NOTE 12.
|
STOCKHOLDERS’ EQUITY
|
Common Stock
As of September 30, 2016, we had 62,974,431 shares of Common Stock issued and outstanding. For the three months ended September 30, 2016, we did not issue any shares of Common Stock.
Preferred Stock
As of September 30, 2016, we had no shares of Series A Preferred Stock (the “Series A Shares”) issued and outstanding. For the three months ended September 30, 2016, we did not issue or redeem any Series A Shares.
Warrants
The following table summarizes the warrants outstanding and the number of shares of Common Stock subject to exercise as of September 30, 2016 and the changes therein during the nine months then ended:
|
|
Number of Shares of Common Stock Subject to Exercise
|
|
|
Weighted – Average
Exercise Price
|
|
Balance as of December 31, 2015
|
|
|
1,774,193
|
|
|
$
|
0.77
|
|
Warrants issued
|
|
|
25,245,442
|
|
|
$
|
0.09
|
|
Warrants exercised
|
|
|
---
|
|
|
|
---
|
|
Warrants cancelled
|
|
|
(186,389
|
)
|
|
$
|
1.38
|
|
Balance as of September 30, 2016
|
|
|
26,833,246
|
|
|
$
|
0.12
|
|
For the three months ended September 30, 2016, we did not issue any warrants to purchase our Common Stock.
Of the warrant shares subject to exercise as of September 30, 2016, expiration of the right to exercise is as follows:
Date of Expiration
|
|
Number of Warrant Shares of Common Stock Subject to Expiration
|
|
December 24, 2016
|
|
|
653,686
|
|
March 14, 2018
|
|
|
660,000
|
|
January 15, 2019
|
|
|
80,000
|
|
April 30, 2020
|
|
|
194,118
|
|
March 30, 2021
|
|
|
25,245,442
|
|
Total
|
|
|
26,833,246
|
|
NOTE 13.
|
EARNINGS PER SHARE
|
Basic and Diluted Net Loss Per Share
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260,
Earnings per Share
, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, increased to include potential dilutive common shares. The effect of outstanding stock options, restricted vesting Common Stock, convertible debt, convertible preferred stock, and warrants, when dilutive, is reflected in diluted earnings (loss) per common share by application of the treasury stock method. We have excluded all outstanding stock options, restricted vesting Common Stock, convertible debt, convertible preferred stock, and warrants from the calculation of diluted net loss per common share because all such securities are antidilutive for all periods presented.
Shares used in calculating basic and diluted net loss per common share exclude these potential common shares as of September 30, 2016 and December 31, 2015:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Warrants to purchase Common Stock
|
|
|
26,833,246
|
|
|
|
1,774,193
|
|
Stock options to purchase Common Stock
|
|
|
714,571
|
|
|
|
1,664,573
|
|
Common stock issuable upon the assumed conversion of payments due under our promissory note from April 2015 (1)
|
|
|
---
|
|
|
|
1,934,718
|
|
Total
|
|
|
27,547,817
|
|
|
|
5,373,484
|
|
(1)
|
As part of the April 2015 Note, at our option, subject to certain volume, price and other conditions, the monthly installments of principle and interest due under the April 2015 Note may be paid in whole, or in part, in cash or in Common Stock. If the monthly installments are 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 per share. On August 11, 2016, the Company issued the final installment payment due under the April 2015 Note.
|
NOTE 14.
|
SHARE BASED COMPENSATION
|
The Company’s share-based compensation plan, the 2006 Equity Incentive Plan, as amended (“Equity Incentive Plan”), is administered by the compensation committee of the Board of Directors (“Board”), which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award.
Our Board did not grant any incentive stock option awards to executives or employees or any nonstatutory stock option awards to directors or non-employees for the three and nine months ended September 30, 2016 and 2015, respectively.
We account for share-based compensation under FASB ASC Topic 718,
Stock Compensation
, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors based on estimated fair values of the award on the grant date. We use the Black-Scholes option-pricing model to estimate the fair value of share-based awards.
Stock Options (Incentive and Nonstatutory)
The following table summarizes share-based compensation related to stock options for the three and nine months ended September 30:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
(3,079
|
)
|
|
$
|
18,692
|
|
|
$
|
5,914
|
|
|
$
|
56,123
|
|
Selling, general and administrative
|
|
|
17,190
|
|
|
|
52,115
|
|
|
|
54,212
|
|
|
|
159,870
|
|
Total share-based compensation expense
|
|
$
|
14,111
|
|
|
$
|
70,807
|
|
|
$
|
60,126
|
|
|
$
|
215,993
|
|
At September 30, 2016, 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 $17,000. The period over which the unearned share-based compensation is expected to be recognized is approximately twelve months.
The following table summarizes the stock options outstanding and the number of shares of Common Stock subject to exercise as of September 30, 2016 and the changes therein during the nine months then ended:
|
|
Stock Options
|
|
|
Weighted Average Exercise Price per Share
|
|
Outstanding as of December 31, 2015
|
|
|
1,664,573
|
|
|
$
|
1.73
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
Forfeited/cancelled
|
|
|
(950,002
|
)
|
|
$
|
1.27
|
|
Exercised
|
|
|
---
|
|
|
|
---
|
|
Outstanding as of September 30, 2016
|
|
|
714,571
|
|
|
$
|
2.35
|
|
The following table presents the stock option grants outstanding and exercisable as of September 30, 2016:
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
|
|
|
422,500
|
|
|
$
|
0.33
|
|
|
|
6.5
|
|
|
|
422,500
|
|
|
$
|
0.33
|
|
|
240,000
|
|
|
|
1.15
|
|
|
|
8.0
|
|
|
|
240,000
|
|
|
|
1.15
|
|
|
52,071
|
|
|
|
24.20
|
|
|
|
0.9
|
|
|
|
52,071
|
|
|
|
24.20
|
|
|
714,571
|
|
|
$
|
2.35
|
|
|
|
6.6
|
|
|
|
714,571
|
|
|
$
|
2.35
|
|
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, June 13, 2013, and on June 5, 2014, 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, 600,000 shares, and 1,000,000 shares, respectively, to a total of 2,800,000 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 September 30, 2016, we had granted options to purchase 2,061,167 shares of Common Stock since the inception of the Equity Incentive Plan, of which 714,571 were outstanding at a weighted average exercise price of $2.35 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 September 30, 2016, there were 2,015,983 shares that remained available for future grants under our Equity Incentive Plan.
NOTE 15.
|
FAIR VALUE MEASUREMENTS
|
In accordance with FASB ASC Topic 820,
Fair Value Measurements
, (“ASC Topic 820”) certain assets and liabilities of the Company are required to be recorded at fair value. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. The guidance in ASC Topic 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on our market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.
The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
|
Level 1
|
—
|
Valuations based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
Level 2
|
—
|
Valuations based on observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
|
|
Level 3
|
—
|
Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.
|
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
Our financial instruments, including cash, cash equivalents, accounts receivable, and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. We believe that the carrying value of our promissory note payable balances approximates fair value based on a valuation methodology using the income approach and a discounted cash flow model.
The following table summarizes the fair value of our financial instruments at September 30, 2016 and December 31, 2015.
Description
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Promissory note – April 2015 (1)
|
|
$
|
---
|
|
|
$
|
370,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) On August 11, 2016, the Company issued the final installment payment due under the April 2015 Note.
|
|
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 and convertible note payable balances approximates fair value based on a valuation methodology using the income approach and a discounted cash flow model.
There was no current federal tax provision or benefit recorded for any period since inception, nor were there any recorded deferred income tax assets, as such amounts were completely offset by valuation allowances.
NOTE 17.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
On January 31, 2006 we entered into a lease agreement for office and laboratory space in Addison, Texas. The lease commenced on April 1, 2006 and 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 required a minimum monthly lease obligation of $9,193, which was inclusive of monthly operating expenses, until March 31, 2014 and at such time, increased to $9,379, which was inclusive of monthly operating expenses. On March 17, 2015, we executed a Second Amendment to Lease Agreement (the “Second Amendment”) that renewed and extended our lease until March 31, 2018. The Second Amendment requires a minimum monthly lease obligation of $9,436, which is inclusive of monthly operating expenses.
On December 10, 2010 we entered into a lease agreement for certain office equipment that commenced on February 1, 2011 and continued until February 1, 2015 and required a minimum lease obligation of $744 per month. On January 16, 2015 we entered into a new lease agreement for certain office equipment. The new office equipment lease, that commenced on February 1, 2015 and continues until February 1, 2018, requires a minimum lease obligation of $551 per month.
The future minimum lease payments under the 2015 office lease and the 2015 equipment lease are as follows as of September 30, 2016:
Calendar Years
|
|
Future Lease Expense
|
|
2016 (Three months)
|
|
$
|
30,010
|
|
2017
|
|
|
120,041
|
|
2018
|
|
|
28,908
|
|
2019
|
|
|
---
|
|
2020
|
|
|
---
|
|
Total
|
|
$
|
178,959
|
|
Rent expense for our operating leases amounted to $36,709 and $30,539 for the three months ended September 30, 2016 and 2015, respectively, and $97,241 and $91,238 for the nine months ended September 30, 2016 and 2015, 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.
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.
During 2015, Mr. Kerschbaumer served as a director of Altrazeal Trading GmbH, Altrazeal AG, and Melmed Holding AG (collectively, the “Altrazeal Distributors”) and Mr. Kuehne served as a director of Altrazeal AG. In such capacities, Mr. Kerschbaumer may have been considered, either singularly or collectively, to have had 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 had control of, and make investment and business decisions on behalf of, Altrazeal AG.
As a result of the Altrazeal Termination Agreement in December 2015, Altrazeal Trading GmbH and Melmed Holding AG ceased to be product distributors for the Company.
As a result of the breaches in March and April 2016 by Altrazeal AG in the ELSA, we believe that the ELSA has been cancelled and Altrazeal AG has ceased to be a product distributor for the Company.
Each of Mr. Kerschbaumer and Mr. Kuehne were managing directors of ORADISC GmbH and in such capacities may be considered, either singularly or collectively, to had control of, and made investment and business decisions on behalf of the ORADISC GmbH. In April 2016, Mr. Kerschbaumer and Mr. Kuehne each resigned as a managing director of ORADISC GmbH.
In October 2012, we executed a License and Supply Agreement with ORADISC GmbH for the marketing of applications of our OraDisc™ erodible film technology for dental applications including benzocaine (OraDisc™ B), re-mineralization dental strips, fluoride dental strips, long-acting breath freshener, Amlexanox (OraDisc™ A). We also granted to ORADISC GmbH a twenty-four month option to utilize the OraDisc™ erodible film technology for drug delivery for migraine, nausea and vomiting, cough and cold, and pain. In January 2015, the initial twenty-four month option period to utilize the OraDisc™ erodible film technology by ORADISC GmbH was extended until December 31, 2015. In addition, this option expanded the applications for use to include anti-psychotics, neurologic products, and actives for the treatment of erectile dysfunction. On December 30, 2015, we received notice from ORADISC GmbH of their exercise of the option. We informed ORADISC GmbH that under the terms of the option, the right to use the OraDisc™ erodible film technology expired on December 31, 2015. In March 2016, we also provided ORADISC GmbH with a notice identifying certain breaches in the License and Supply Agreement with ORADISC GmbH. As a result of the breaches by ORADISC GmbH in the License and Supply Agreement, the License and Supply Agreement has been terminated in accordance with its terms and ORADISC GmbH has ceased to be a product distributor for the Company. Since delivering the termination notice to ORADISC GmbH we have not had any communication from ORADISC GmbH with respect to the License and Supply Agreement.
For the nine months ended September 30, 2016 and 2015, the Company recorded revenues, in approximate numbers, of nil and $538,000, respectively, with the various Altrazeal Distributors, which represented 0% and 93% of our total revenues. As of September 30, 2016 and December 31, 2015, Altrazeal Distributors had an outstanding net accounts receivable, in approximate numbers, of nil and $3,000, respectively, which represented 0% and 3% of our net outstanding accounts receivables.
License Purchase and Termination Agreement
On December 24, 2015, we entered into and closed the transaction contemplated by a License Purchase and Termination Agreement (the “Altrazeal Termination Agreement”) with Altrazeal Trading. The Altrazeal Termination Agreement relates to the License and Supply Agreement dated January 11, 2012 (the “Altrazeal License”), under which Altrazeal Trading and its affiliates were authorized by the Company to distribute our Altrazeal® wound care product in the European Union, Australia, New Zealand, Middle East (excluding Jordan and Syria), North Africa, Albania, Bosnia, Croatia, Kosovo, Macedonia, Montenegro, and Serbia. Under the Altrazeal Termination Agreement, the Altrazeal License was assigned to the Company thereby effecting its termination and the Company’s 25% ownership interest in Altrazeal Trading was cancelled. In addition, the Company assumed from Altrazeal Trading and certain affiliated entities rights and future obligations under sub-distribution agreements in numerous territories within the scope of the Altrazeal License and related consulting agreements.
Under the terms of the Altrazeal Termination Agreement, we agreed to pay to Altrazeal Trading a net transfer fee of €1,570,271 and to pay IPMD a transfer fee of €703,500. The net transfer fee to Altrazeal Trading includes adjustments for amounts owed by Altrazeal Trading to the Company. The Company paid the net transfer fee (a) to Altrazeal Trading by means of the issuance of 4,441,606 shares of Common Stock together with warrants to purchase 444,161 shares of Common Stock and (b) to IPMD by means of the issuance of 2,095,241 shares of Common Stock, together with warrants to purchase 209,525 shares of Common Stock. The warrants have an exercise price of $0.68 per share and a term of one-year.
Altrazeal Trading also agreed to return inventory of Altrazeal® blisters held in its possession in an amount up to €88,834 (the “Inventory Payment”). To the extent Altrazeal Trading does not return the entire inventory, we may deduct from the Inventory Payment €4.20 per Altrazeal® blister not returned in usable condition. We are currently in the process of confirming with Altrazeal Trading the actual number of Altrazeal® blisters to be returned.
Under the Altrazeal Termination Agreement, we also agreed to file within twenty (20) days of closing a registration statement registering the resale of 2,500,000 shares of Common Stock issued under the Altrazeal Termination Agreement and to use all commercially reasonable efforts to cause such registration Statement to become effective. In accordance with our obligations under the Altrazeal Termination Agreement, we filed with the SEC a registration statement that was declared effective on February 16, 2016. We are required to keep the registration statement effective at all times with respect to such 2,500,000 shares, other than permitted suspension periods, until the earliest of (i) June 24, 2016, (ii) the date when Altrazeal Trading and IPMD may sell all of the registered shares under Rule 144 under the Securities Act without volume limitations, or (iii) the date when Altrazeal Trading and IPMD no longer owns any of the registered shares.
In connection with the Altrazeal Termination Agreement, we also entered into a Mutual Termination and Release Agreement, dated December 24, 2015, for the purpose of terminating the Binding Term Sheet dated May 12, 2015 with Altrazeal Trading and Firnron LTD (the “Term Sheet”). Under the Term Sheet, it was contemplated that the Company would acquire all of the remaining equity interests in Altrazeal Trading.
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 and manage the Company’s cash and financial resources.
As of September 30, 2016, the following table summarizes the Company’s obligation for compensation temporarily deferred by our employees.
Name
|
|
2016
|
|
|
2015
|
|
|
|
2014 – 2011
|
|
|
Total
|
|
Kerry P. Gray (1) (2) (3) (4)
|
|
$
|
---
|
|
|
$
|
275,153
|
|
|
$
|
150,000
|
|
|
$
|
425,153
|
|
Terrance K. Wallberg
|
|
|
(20,207
|
)
|
|
|
53,540
|
|
|
|
---
|
|
|
|
33,333
|
|
Other employees
|
|
|
(54,871
|
)
|
|
|
54,871
|
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
$
|
(75,078
|
)
|
|
$
|
383,564
|
|
|
$
|
150,000
|
|
|
$
|
458,486
|
|
(1)
|
On November 19, 2015, Mr. Gray resigned as the Company’s President and Chief Executive Officer and on February 18, 2016 resigned as a director for the Company.
|
(2)
|
During 2015, Mr. Gray temporarily deferred compensation of $275,153 which consisted of $51,770 earned as salary compensation for his duties as President of the Company, $186,083 for his duties as Chairman of the Executive Committee of the Company’s Board of Directors, and $37,300 as a temporary advance of working capital.
|
(3)
|
During 2014, Mr. Gray temporarily deferred compensation of $150,000 which consisted of $62,500 earned as salary compensation for his duties as President of the Company and $87,500 for his duties as Chairman of the Executive Committee of the Company’s Board of Directors. During 2014, Mr. Gray was also repaid $269,986 of temporarily deferred compensation, of which $100,000 was used by Mr. Gray for funding required pursuant to a Securities Purchase Agreement, dated March 14, 2013 (the “March 2013 Offering”). Prior to 2014, over a three year period Mr. Gray temporarily deferred, at various times, aggregate compensation of $582,486 and during the same time period 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.
|
(4)
|
The Company is asserting in a dispute with Mr. Gray that amounts recorded as being owed to Mr. Gray are not in fact owed to Mr. Gray or are offset by amounts Mr. Gray owes to the Company.
|
As of September 30, 2016, the Company’s obligation for temporarily deferred compensation was $458,486 of which $184,903 was included in accrued liabilities and $273,583 was included in accounts payable, respectively.
As of December 31, 2015, the Company’s obligation for temporarily deferred compensation was $533,564 of which $259,981 was included in accrued liabilities and $273,583 was included in accounts payable, 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 September 30, 2016, 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 18.
|
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; however, one or more events may lead to a formal dispute or proceeding in the future.
In October 2016, we learned that insolvency proceedings have been initiated with an Austrian commercial court with respect to Altrazeal Trading, currently a shareholder of the Company and previously a distributor of Altrazeal® for the Company. We are evaluating our position with respect to the insolvency filing by Altrazeal Trading GmbH.
On May 17, 2016, we provided KunWha Pharmaceutical Co., Ltd with a notice identifying certain breaches in the License and Supply Agreement, dated June 2, 2008. KunWha Pharmaceutical Co., Ltd failed to remedy the breaches within 30 (thirty) days of receiving our notice, and therefore, we believe that the License and Supply Agreement has been cancelled.
On May 17, 2016, we provided Jiangxi Aiqilin Pharmaceuticals Group with a notice identifying certain breaches in the License and Supply Agreement, dated June 28, 2010. Jiangxi Aiqilin Pharmaceuticals Group failed to remedy the breaches within 30 (thirty) days of receiving our notice, and therefore, we believe that the License and Supply Agreement has been cancelled.
On May 17, 2016, we provided Novartis Animal Health Inc. with a notice identifying certain breaches in the Distribution Agreement, dated August 23, 2010. In July 2016, we received confirmation from Novartis Animal Health Inc. that the Distribution Agreement has been cancelled.
In late March 2016, we provided Altrazeal AG with a notice identifying certain breaches in the ELSA. On or about March 24, 2016, we learned that Altrazeal AG had commenced an insolvency proceeding in Switzerland and immediately sent an additional notice of termination referencing the insolvency. On or about April 18, 2016, we have learned that the insolvency petition filed by Altrazeal AG in Switzerland has been accepted by the court and an administrator is to be appointed. As a result of the breaches by Altrazeal AG in the ELSA, we believe that the ELSA has been cancelled. As a result of the accepted insolvency petition, we believe that our ownership interest in Altrazeal AG is deemed to be worthless and certain net accounts receivables with Altrazeal AG are uncollectible.
In March 2016, we learned that insolvency proceedings have been initiated with an Austrian commercial court with respect to IPMD GmbH and that one of its affiliated operating entities, ORADISC GmbH, might be affected by such insolvency proceeding filing. Subsequently, we were informed that the insolvency application was opposed with various parties taking opposing views and that these legal proceedings continue to evolve. We continue to evaluate our position with respect to IPMD GmbH and ORADISC GmbH.
In October 2012, we executed a License and Supply Agreement with ORADISC GmbH for the marketing of applications of our OraDisc™ erodible film technology for dental applications including benzocaine (OraDisc™ B), re-mineralization dental strips, fluoride dental strips, long-acting breath freshener, Amlexanox (OraDisc™ A). We also granted to ORADISC GmbH a twenty-four month option to utilize the OraDisc™ erodible film technology for drug delivery for migraine, nausea and vomiting, cough and cold, and pain. In January 2015, the initial twenty-four month option period to utilize the OraDisc™ erodible film technology by ORADISC GmbH was extended until December 31, 2015. In addition, this option expanded the applications for use to include anti-psychotics, neurologic products, and actives for the treatment of erectile dysfunction. On December 30, 2015, we received notice from ORADISC GmbH of their exercise of the option. We informed ORADISC GmbH that under the terms of the option, the right to use the OraDisc™ erodible film technology expired on December 31, 2015. In March 2016, we also provided ORADISC GmbH with a notice identifying certain breaches in the License and Supply Agreement with ORADISC GmbH. As a result of the breaches by ORADISC GmbH in the License and Supply Agreement, the License and Supply Agreement has been terminated in accordance with its terms and ORADISC GmbH has ceased to be a product distributor for the Company. Since delivering the termination notice to ORADISC GmbH we have not had any communication from ORADISC GmbH with respect to the License and Supply Agreement.
NOTE 19.
|
SUBSEQUENT EVENTS
|
None.