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 specialty medical technology company committed to developing and commercializing a 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 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. All adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of September 30, 2017 and the results of its operations for the three and nine months ended September 30, 2017 and 2016 and cash flows for the nine months ended September 30, 2017 and 2016 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 from those estimates.
All intercompany transactions and balances have been eliminated in consolidation.
Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
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, 2016, referred to as our 2016 Form 10-K as filed with the Securities and Exchange Commission on April 17, 2017, including the risk factors set forth therein.
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, 2017 are consistent with those discussed in Note 2 to the consolidated financial statements in our 2016 Form 10-K, as filed with the Securities and Exchange Commission on April 17, 2017.
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
|
Our entire business is managed by a single management team, which reports to the Chief Executive Officer. Our corporate headquarters in the United States collects proceeds from product sales, licensing fees, and royalties from our arrangements with external customers and licensees. Our revenues are currently derived primarily from distribution partners for international activities and our domestic sales activities for our products.
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
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
Domestic
|
|
$
|
3,012
|
|
|
|
2
|
%
|
|
$
|
1,453
|
|
|
|
26
|
%
|
|
$
|
8,427
|
|
|
|
2
|
%
|
|
$
|
16,232
|
|
|
|
4
|
%
|
International
|
|
|
197,927
|
|
|
|
98
|
%
|
|
|
4,196
|
|
|
|
74
|
%
|
|
|
413,943
|
|
|
|
98
|
%
|
|
|
362,542
|
|
|
|
96
|
%
|
Total
|
|
$
|
200,939
|
|
|
|
100
|
%
|
|
$
|
5,649
|
|
|
|
100
|
%
|
|
$
|
422,370
|
|
|
|
100
|
%
|
|
$
|
378,774
|
|
|
|
100
|
%
|
A significant portion of our revenues are derived from a few major customers. For the three months ended September 30, 2017 and 2016, one customer and four customers, respectively, had greater than 10% of total revenues. The one customer for the three-month period ending in 2017 represented 98% of total revenues and the four customers for the three-month period ending in 2016 represented, in the aggregate, 71% of total revenues. For the nine months ended September 30, 2017 and 2016, two customers and two customers, respectively, had greater than 10% of total revenues. The two customers for the nine-month period ending in 2017 represented, in the aggregate, 97% of total revenues and the two customers for the nine-month period ending in 2016 represented, in the aggregate, 88% of total revenues.
As of September 30, 2017, 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 net realizable value. 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, 2017 and December 31, 2016:
Inventory
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
26,666
|
|
|
$
|
35,800
|
|
Work-in-progress
|
|
|
372,825
|
|
|
|
424,741
|
|
Finished goods
|
|
|
98,609
|
|
|
|
99,059
|
|
Total
|
|
$
|
498,100
|
|
|
$
|
559,600
|
|
NOTE 6.
|
PROPERTY, EQUIPMENT and LEASEHOLD IMPROVEMENTS
|
Property, equipment and leasehold improvements, net, consisted of the following at September 30, 2017 and December 31, 2016:
Property, equipment and leasehold improvements
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Laboratory equipment
|
|
$
|
424,888
|
|
|
$
|
424,888
|
|
Manufacturing equipment
|
|
|
1,604,894
|
|
|
|
1,604,894
|
|
Computers, office equipment, and furniture
|
|
|
154,781
|
|
|
|
151,280
|
|
Computer software
|
|
|
4,108
|
|
|
|
4,108
|
|
Leasehold improvements
|
|
|
95,841
|
|
|
|
95,841
|
|
|
|
|
2,284,512
|
|
|
|
2,281,011
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,225,309
|
)
|
|
|
(2,154,270
|
)
|
Property, equipment and leasehold improvements, net
|
|
$
|
59,203
|
|
|
$
|
126,741
|
|
Depreciation expense on property, equipment and leasehold improvements was $5,481 and $33,237 for the three months ended September 30, 2017 and 2016, respectively, and was $71,039 and $99,567 for the nine months ended September 30, 2017 and 2016, 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, 2017 and December 31, 2016:
Intangible assets – patents
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
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 wound dressing
|
|
|
589,858
|
|
|
|
589,858
|
|
|
|
|
9,625,938
|
|
|
|
9,625,938
|
|
Less: accumulated amortization
|
|
|
(7,409,554
|
)
|
|
|
(7,381,847
|
)
|
Less: reserve for impairment
|
|
|
(2,027,310
|
)
|
|
|
(2,027,310
|
)
|
Intangible assets - patents, net
|
|
$
|
189,074
|
|
|
$
|
216,781
|
|
Amortization expense for intangible patents assets was $9,337 and $119,763 for the three months ended September 30, 2017 and 2016, respectively, and was $27,707 and $356,687 for the nine months ended September 30, 2017 and 2016, respectively.
The future aggregate amortization expense for intangible patent assets, remaining as of September 30, 2017, is as follows:
Calendar Years
|
|
Future Amortization
Expense
|
|
2017 (Three months)
|
|
$
|
9,337
|
|
2018
|
|
|
37,044
|
|
2019
|
|
|
37,044
|
|
2020
|
|
|
37,145
|
|
2021
|
|
|
37,044
|
|
2022 & Beyond
|
|
|
31,460
|
|
Total
|
|
$
|
189,074
|
|
Licensing rights
Acquisition of Licensing Rights – 2017
On February 27, 2017, we entered into a Note, Warrant and Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Velocitas Partners, LLC (“Velocitas") and Velocitas I LLC (“Velo LLC”), an entity controlled by Velocitas, with respect to an aggregate financing of up to $6,000,000.
Refer to a description in greater detail of the financing event with Velocitas and Velo LLC in Note 10. Convertible Debt.
At the second closing of the financing event with Velocitas and Velo LLC, which occurred on March 31, 2017, the Company acquired the Altrazeal® distributor agreements Velocitas had with its sub-distributors in exchange for the issuance of 13,375,000 shares of Common Stock. The Company has valued the acquisition of the Altrazeal® distributor agreement from Velocitas at $869,375 based on the closing price of $0.065 per share of the Company’s Common Stock on March 31, 2017.
Licensing rights, net consisted of the following at September 30, 2017 and December 31, 2016:
Intangible assets - licensing rights
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Intangible assets – licensing rights, gross
|
|
$
|
4,381,881
|
|
|
$
|
3,512,506
|
|
Less: accumulated amortization
|
|
|
(620,314
|
)
|
|
|
(331,419
|
)
|
Intangible assets - licensing rights, net
|
|
$
|
3,761,567
|
|
|
$
|
3,181,087
|
|
Amortization expense for intangible licensing rights assets was $104,931 and $81,955 for the three months ended September 30, 2017 and 2016, respectively, and was $288,895 and $243,193 for the nine months ended September 30, 2017 and 2016, respectively.
The future aggregate amortization expense for intangible licensing rights assets, remaining as of September 30, 2017, is as follows:
Calendar Years
|
|
Future Amortization
Expense
|
|
2017 (Three months)
|
|
$
|
104,931
|
|
2018
|
|
|
416,303
|
|
2019
|
|
|
416,303
|
|
2020
|
|
|
416,303
|
|
2021
|
|
|
416,303
|
|
2022 & Beyond
|
|
|
1,991,424
|
|
Total
|
|
$
|
3,761,567
|
|
NOTE 8.
|
ACCRUED LIABILITIES
|
Accrued liabilities consisted of the following at September 30, 2017 and December 31, 2016:
Accrued Liabilities
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Accrued compensation/benefits
|
|
$
|
120,910
|
|
|
$
|
274,874
|
|
Accrued insurance payable
|
|
|
---
|
|
|
|
40,422
|
|
Accrued property taxes
|
|
|
4,215
|
|
|
|
---
|
|
Accrued royalties
|
|
|
34,744
|
|
|
|
---
|
|
Product rebates/returns
|
|
|
6
|
|
|
|
4
|
|
Total accrued liabilities
|
|
$
|
159,875
|
|
|
$
|
315,300
|
|
NOTE 9.
|
PROMISSORY NOTES PAYABLE
|
On December 15, 2016, January 18, 2017, and February 16, 2017, we issued promissory notes to Velocitas with principal amounts and purchase prices of $20,000, $65,000, and $30,000, respectively. Each of the promissory notes bore interest at the rate of 6.0% per annum with payment of principal and interest due on the earlier of (i) 180 days from the date of issuance, (ii) the date of closing of any debt or equity financing transaction by and between Uluru and Velocitas, or (iii) the payment to Uluru of certain invoices due from selected Company’s distributors. Each of the promissory notes was secured by a pledge of certain product inventory, and there were no debt issuance costs incurred by the Company. On February 27, 2017, each of the promissory notes was repaid in connection with the issuance of the Convertible Promissory Note, dated February 27, 2017, in the amount of $500,000 (the “Initial Note”) under the Purchase Agreement with Velocitas.
On February 21, 2017, we issued a promissory note to Kirkwood Investors, Inc. (“Kirkwood”) with a principal amount and purchase price of $25,000. The promissory note bore interest at the rate of 6.0% per annum with payment of principal and interest due on the earlier of (i) 60 days from the date of issuance, (ii) the date of closing of any debt or equity financing transaction by Uluru, or (iii) no later than two days after receiving written request by Kirkwood. The promissory note was secured by a pledge of certain product inventory and accounts receivables and there were no debt issuance costs incurred by the Company. The Company’s Vice President and Chief Financial Officer, Terrance K. Wallberg, is President and sole shareholder of Kirkwood. On February 27, 2017, the outstanding promissory note to Kirkwood was repaid in connection with the issuance of the Initial Note under the Purchase Agreement with Velocitas.
NOTE 10.
|
CONVERTIBLE DEBT
|
Debt Financing – February and March 2017
On February 27, 2017, the Company entered into the Purchase Agreement with Velocitas and Velo LLC under which the Company received gross proceeds of $6,000,000, in two closing with the initial closing occurring on February 27, 2017 and the second closing occurring on March 31, 2017, which we refer to as the March 2017 Offering.
The first closing, which occurred on February 27, 2017, included the purchase by Velocitas at face value of the $500,000 Initial Note, with the Initial Note accruing interest at 12.5% per annum and having a term of two years (subject to acceleration under certain circumstances).
The second closing, which occurred on March 31, 2017, included the purchase by Velocitas at face value of an additional $500,000 Secured Convertible Note, dated March 31, 2017, (the “Second Note”) with the Second Note accruing interest at 12.5% per annum and having a term of two years (subject to acceleration under certain circumstances), and Velo LLC purchasing 1,250 shares of Series B Convertible Preferred Stock of the Company for gross proceeds of $5,000,000, at an as-converted-to-Common Stock purchase price of $0.04 per share.
The Initial Note and the Second Note are convertible into shares of Common Stock at a conversion price of $0.04 per share, subject to equitable adjustments, with mandatory conversion of all unpaid principal and interest required on the second anniversary of each such note, unless an event of default has occurred and is continuing. The Initial Note and the Second Note are secured by all of the assets of the Company and its subsidiaries pursuant to a Security Agreement executed at the initial closing.
The Series B Convertible Preferred Stock that was issued in connection with the second closing, (a) voted together with the Common Stock as a single class (subject to standard protective provisions for the Series B Convertible Preferred Stock), (b) had the same dividend rights as the Common Stock, (c) had a liquidation preference equal to the greater of its purchase price and its as converted-to-Common Stock value, (d) automatically converted into Common Stock when the number of authorized shares of Common Stock is increased within 190 days of the second closing as necessary to permit all outstanding convertible or exercisable securities (including the Series B Convertible Preferred Stock) to convert to Common Stock, and (e) was convertible into Common Stock at the discretion of the holder, subject to the availability of authorized shares.
As a condition of the March 2017 Offering, the Company issued to Velocitas at the second closing a warrant to purchase up to 57,055,057 shares of Common Stock (the “Warrant”). The Warrant has an exercise price of $0.04 per share, a 10-year term and is subject to cashless exercise. In addition, at the second closing, the Company acquired the Altrazeal distributor agreements Velocitas had with its sub-distributors in exchange for the issuance of 13,375,000 shares of Common Stock.
The Company, Velocitas, Velo LLC, and certain affiliates also signed a Voting Agreement (the “Voting Agreement”) pursuant to which the parties agreed to set the size of the Board of Directors at six directors, and agreed to vote for the election to the Board of Directors of four persons designated by Velocitas (initially to be Anish Shah, Oksana Tiedt, Vaidehi Shah and Arindam Bose), one director designated by Bradley J. Sacks and one additional director designated by a major investor or by the Board of Directors. In addition, the parties to the Voting Agreement agreed to vote in favor of a proposal to amend the Company’s articles of incorporation to increase the authorized shares as required to permit the conversion of the Series B Convertible Preferred Stock.
At the 2017 Annual Meeting of Stockholders, held on July 25, 2017, a proposal to increase the number of authorized shares of Common Stock from 200,000,000 shares to 750,000,000 shares was approved by a majority vote of the stockholders, and the Company filed with the State of Nevada an amendment to its articles of incorporation implementing such increase. On August 1, 2017, the Company received notice from Velo LLC for the conversion of all 1,250 outstanding shares of Series B Convertible Preferred Stock held by Velo LLC in exchange for 125,000,000 shares of Common Stock.
In addition, the Company, Velocitas, Velo LLC, and certain affiliates entered into an Investor Rights Agreement (the “Investor Rights Agreement”) that provides the parties thereto with demand Form S-3 and piggy back registration rights, Rule 144 information rights, and a right of first offer (or preemptive rights) in connection with future sales of securities by the Company (subject to standard exceptions). The Investor Rights Agreement includes indemnification obligations associated with the registration rights. Michael I. Sacks and Bradley Sacks and affiliates are parties to the Investor Rights Agreement, in part in exchange for the termination by certain of such persons and The Punch Trust of a Registration Rights Agreement dated as of January 31, 2014.
As required by the Purchase Agreement, at the initial closing, the Company appointed Ms. Vaidehi Shah to serve as the Company’s Chief Executive Officer and to also serve as a member of the Company’s Board of Directors. Concurrent with the initial closing and as a condition of the March 2017 Offering, the Company received resignation notices from Helmut Kerschbaumer, the Company’s Interim President, Chief Executive and Director, and Klaus Kuehne, a member of the Company’s Board of Directors.
As required by the Purchase Agreement, at the second closing, the Company appointed Mr. Anish Shah and Ms. Oksana Tiedt to join the Company and to serve as part of the Company’s executive management team and together with Mr. Arindam Bose to join the Company’s Board of Directors.
Concurrent with the second closing and as a condition of the second closing, the Company received resignation notices from Robert F. Goldrich and Terrance K. Wallberg, each being a member of the Company’s Board of Directors. Mr. Wallberg continues to serve as the Company’s Vice President, Chief Financial Officer, Secretary, and Treasurer. Also occurring at the second closing, Mr. Bradley J. Sacks stepped down as Chairman of the Board of Directors and Ms. Vaidehi Shah, the Company’s Chief Executive Officer and Director, assumed such duties. Mr. Sacks continues to serve as a Director of the Company.
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 Initial Note and Second Note is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
Transaction
|
|
Initial
Principal
Amount
|
|
|
Interest
Rate
|
|
Maturity
Date
|
|
Conversion Price
|
|
|
Principal
Balance
|
|
|
Unamortized
Debt Discount
|
|
|
Unamortized Debt Issuance Costs
|
|
|
Carrying
Value
|
|
Initial Note
|
|
$
|
500,000
|
|
|
|
12.5
|
%
|
02/27/2019
|
|
$
|
0.04
|
|
|
$
|
500,000
|
|
|
$
|
251,470
|
|
|
$
|
6,466
|
|
|
$
|
242,064
|
|
Second Note
|
|
$
|
500,000
|
|
|
|
12.5
|
%
|
03/31/2019
|
|
$
|
0.04
|
|
|
$
|
500,000
|
|
|
$
|
255,253
|
|
|
$
|
6,466
|
|
|
$
|
238,281
|
|
Total
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,000,000
|
|
|
$
|
506,723
|
|
|
$
|
12,932
|
|
|
$
|
480,345
|
|
As part of the Initial Note and the Second Note, at the holder’s option, all unpaid principle and interest due under each convertible promissory note may be converted into shares of Common Stock based on a conversion price of $0.04 per share. The Initial Note and the Second Note mature on February 27, 2019 and March 31, 2019, respectively, and on each maturity date each convertible promissory note, and accrued interest thereon, is subject to mandatory conversion based on a conversion price of $0.04 per share, unless an event of default has occurred and is continuing.
The amount of interest cost recognized from our promissory notes and our convertible debt was $31,507 and $1,106 for the three months ended September 30, 2017 and 2016, respectively, and $68,848 and $14,079 for the nine months ended September 30, 2017 and 2016, respectively.
The amount of debt discount amortized from our promissory notes and our convertible debt was $87,571 and $6,003 for the three months ended September 30, 2017 and 2016, respectively, and $174,577 and $32,015 for the nine months ended September 30, 2017 and 2016, respectively.
The amount of debt issuance costs amortized from our promissory notes was $2,060 and $4,269 for the three months ended September 30, 2017 and 2016, respectively, and $3,976 and $22,927 for the nine months ended September 30, 2017 and 2016, respectively.
NOTE 11.
|
EQUITY TRANSACTIONS
|
Preferred Stock Transaction
March 2017 Offering
On February 27, 2017, the Company entered into a Note, Warrant and Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Velocitas and Velo LLC under which the Company received gross proceeds of $6,000,000, in two closing with the initial closing occurring on February 27, 2017 and the second closing occurring on March 31, 2017 (the “March 2017 Offering”).
The second closing included, among other transaction components, the purchase by Velo LLC of 1,250 shares of Series B Convertible Preferred Stock of the Company for $5,000,000.
On August 1, 2017, the Company received notice from Velo LLC for the conversion of all 1,250 outstanding shares of Series B Convertible Preferred Stock held by Velo LLC in exchange for 125,000,000 shares of Common Stock.
Refer to a description in greater detail of the financing event with Velocitas and Velo LLC in Note 10. Convertible Debt.
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 during the one year following the date of issuance (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 $26,000 which is equal to 10% of the gross proceeds, provided that the investors referred by such placement agent are 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 former 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 former Vice President of Polymer Drug Delivery.
NOTE 12.
|
STOCKHOLDERS’ EQUITY
|
Common Stock
As of September 30, 2017, we had 201,349,431 shares of Common Stock issued and outstanding. For the nine months ended September 30, 2017, we issued 138,375,000 shares of Common Stock which is composed of 13,375,000 shares of Common Stock issued to Velocitas for the acquisition of licensing rights and 125,000,000 shares of Common Stock issued to Velo LLC for the conversion and exchange of all 1,250 outstanding shares of Series B Convertible Preferred Stock held by Velo LLC.
At the 2017 Annual Meeting of Stockholders, held on July 25, 2017, a proposal to increase the number of authorized shares of Common Stock from 200,000,000 shares to 750,000,000 shares was approved by a majority vote of the stockholders and the Company filed with the State of Nevada an amendment to its articles of incorporation implementing such increase.
Preferred Stock
As of September 30, 2017, we had no shares of Series A Preferred Stock issued and outstanding. For the nine months ended September 30, 2017, we did not issue or redeem any Series A Preferred Stock.
As of September 30, 2017, we had no shares of Series B Convertible Preferred Stock issued and outstanding. For the nine months ended September 30, 2017, we issued 1,250 Series B Shares to Velo LLC, and on August 1, 2017, all outstanding shares of Series B Convertible Preferred Stock held by Velo LLC were mandatorily converted into an aggregate of 125,000,000 shares of Common Stock.
Warrants
The following table summarizes the warrants outstanding and the number of shares of Common Stock subject to exercise as of September 30, 2017 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, 2016
|
|
|
26,179,560
|
|
|
$
|
0.11
|
|
Warrants issued
|
|
|
57,055,057
|
|
|
$
|
0.04
|
|
Warrants exercised
|
|
|
---
|
|
|
|
---
|
|
Warrants cancelled
|
|
|
---
|
|
|
|
---
|
|
Balance as of September 30, 2017
|
|
|
83,234,617
|
|
|
$
|
0.06
|
|
For the nine months ended September 30, 2017, we have issued a warrant to purchase up to an aggregate of 57,055,057 shares of our Common Stock at an exercise price of $0.04 per share pursuant to the March 2017 Offering.
Of the warrant shares subject to exercise as of September 30, 2017, expiration of the right to exercise is as follows:
Date of Expiration
|
|
Number of Warrant Shares of Common Stock Subject to Expiration
|
|
March 14, 2018
|
|
|
660,000
|
|
January 15, 2019
|
|
|
80,000
|
|
April 30, 2020
|
|
|
194,118
|
|
March 30, 2021
|
|
|
25,245,442
|
|
March 31, 2027
|
|
|
57,055,057
|
|
Total
|
|
|
83,234,617
|
|
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, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Warrants to purchase Common Stock
|
|
|
83,234,617
|
|
|
|
26,179,560
|
|
Stock options to purchase Common Stock
|
|
|
152,403
|
|
|
|
691,237
|
|
Common stock issuable upon the assumed conversion of our convertible promissory notes (1)
|
|
|
31,250,000
|
|
|
|
---
|
|
Common stock issuable upon the assumed conversion of our Series B Convertible Preferred Stock (2)
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
|
114,637,020
|
|
|
|
26,870,797
|
|
(1)
|
As part of the Initial Note and the Second Note, at the holder’s option, all unpaid principle and interest due under each convertible promissory note may be converted into shares of Common Stock based on a conversion price of $0.04 per share. The Initial Note and the Second Note mature on February 27, 2019 and March 31, 2019, respectively, and on each maturity date each convertible promissory note, and accrued interest thereon, is subject to mandatory conversion based on a conversion price of $0.04 per share, unless an event of default has occurred and is continuing. For the purposes of this Table, we have assumed that all outstanding principal and interest will be converted on each applicable maturity date.
|
(2)
|
Pursuant to the March 2017 Offering, Velo LLC purchased 1,250 shares of Series B Convertible Preferred Stock of the Company for $5,000,000. The Series B Convertible Preferred Stock that was issued in the March 2017 Offering, (a) voted together with the Common Stock as a single class (subject to standard protective provisions for the Series B Convertible Preferred Stock), (b) had the same dividend rights as the Common Stock, (c) had a liquidation preference equal to the greater of its purchase price and its as converted-to-Common Stock value, (d) automatically converted into Common Stock when the number of authorized shares of Common Stock was increased within 190 days of the second closing as necessary to permit all outstanding convertible or exercisable securities (including the Series B Convertible Preferred Stock) to convert to Common Stock, and (e) was convertible into Common Stock at the discretion of the holder, subject to the availability of authorized shares, at an as-converted-to-Common Stock purchase price of $0.04 per share. On August 1, 2017, all 1,250 outstanding shares of Series B Convertible Preferred Stock converted in exchange for 125,000,000 shares of Common Stock as a result of the approval by the stockholders at the 2017 Annual Meeting of Stockholders held on July 25, 2017, and the filing in July 2017, of an amendment increasing our authorized shares of Common Stock from 200,000,000 shares to 750,000,000 shares.
|
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 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 non-statutory stock option awards to directors or non-employees for the three and nine months ended September 30, 2017 and 2016, 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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
(3,345
|
)
|
|
$
|
(3,079
|
)
|
|
$
|
---
|
|
|
$
|
5,914
|
|
Selling, general and administrative
|
|
|
2,571
|
|
|
|
17,190
|
|
|
|
7,923
|
|
|
|
54,212
|
|
Total share-based compensation expense
|
|
$
|
(774
|
)
|
|
$
|
14,111
|
|
|
$
|
7,923
|
|
|
$
|
60,126
|
|
As of September 30, 2017, 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 zero.
The following table summarizes the stock options outstanding and the number of shares of Common Stock subject to exercise as of September 30, 2017 and the changes therein during the nine months then ended:
|
|
Stock Options
|
|
|
Weighted Average Exercise Price per Share
|
|
Outstanding as of December 31, 2016
|
|
|
691,237
|
|
|
$
|
1.94
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
Forfeited/cancelled
|
|
|
(538,834
|
)
|
|
$
|
1.08
|
|
Exercised
|
|
|
---
|
|
|
|
---
|
|
Outstanding as of September 30, 2017
|
|
|
152,403
|
|
|
$
|
4.98
|
|
The following table presents the stock option grants outstanding and exercisable as of September 30, 2017:
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
|
|
|
90,000
|
|
|
$
|
0.33
|
|
|
|
5.5
|
|
|
|
90,000
|
|
|
$
|
0.33
|
|
|
40,000
|
|
|
|
1.15
|
|
|
|
7.0
|
|
|
|
40,000
|
|
|
|
1.15
|
|
|
22,403
|
|
|
|
30.48
|
|
|
|
0.5
|
|
|
|
22,403
|
|
|
|
30.48
|
|
|
152,403
|
|
|
$
|
4.98
|
|
|
|
5.1
|
|
|
|
152,403
|
|
|
$
|
4.98
|
|
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, 2017, we had granted options to purchase 2,061,167 shares of Common Stock since the inception of the Equity Incentive Plan, of which 152,403 were outstanding at a weighted average exercise price of $4.98 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, 2017, there were 2,578,151 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 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 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, 2017 and December 31, 2016.
Description
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Liabilities:
|
|
|
|
|
|
|
Convertible promissory note – March 2017
|
|
$
|
500,000
|
|
|
|
---
|
|
Convertible promissory note – February 2017
|
|
$
|
500,000
|
|
|
|
---
|
|
Promissory note – December 2016
|
|
|
---
|
|
|
$
|
20,000
|
|
Total
|
|
$
|
1,000,000
|
|
|
$
|
20,000
|
|
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 notes and our convertible promissory note balances approximates fair value based on a valuation methodology using the income approach and a discounted cash flow model.
For the nine months ended September 30, 2017, the Company incurred a consolidated tax loss of approximately $1,843,000.
As of September 30, 2017, the Company has consolidated net operating loss carryforwards and research credit carryforwards for income tax purposes of approximately $58,295,000 and $555,000 respectively. The Company has provided a full valuation allowance for all of its deferred tax assets. As a result, the effective tax rate is zero and the net deferred tax assets are zero.
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, 2016, and 2017 which may significantly limit our ability to utilize our NOL and tax credit carryforwards against taxable earnings in future periods.
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 January 16, 2015, we entered into a lease agreement for certain office equipment. The 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, 2017:
Calendar Years
|
|
Future Lease Expense
|
|
2017 (Three months)
|
|
$
|
30,300
|
|
2018
|
|
|
29,199
|
|
2019
|
|
|
---
|
|
2020
|
|
|
---
|
|
Total
|
|
$
|
59,499
|
|
Rent expense for our operating leases amounted to $30,301 and $36,709 for the three months ended September 30, 2017 and 2016, respectively, and $96,245 and $97,241 for the nine months ended September 30, 2017 and 2016, respectively.
Indemnification
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. 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
Note, Warrant and Preferred Stock Purchase Agreement
On February 27, 2017, we entered into the Purchase Agreement with Velocitas and Velo LLC, an entity controlled by Velocitas, with respect to an aggregate financing of up to $6,000,000.
Refer to a description in greater detail of the financing event with Velocitas and Velo LLC in Note 10. Convertible Debt.
On March 31, 2017, the second closing of the Purchase Agreement included, amongst other transaction components, the Company acquiring the Altrazeal distributor agreements Velocitas had with its sub-distributors in exchange for the issuance of 13,375,000 shares of Common Stock. The Company has valued the acquisition of the Altrazeal distributor agreement from Velocitas at $869,375 based on the closing price of $0.065 per share of the Company’s Common Stock on March 31, 2017.
For the three months ended September 30, 2017 and 2016, the Company did not record any revenues with Velocitas GmbH, an affiliated entity of Velocitas. For the nine months ended September 30, 2017 and 2016, the Company recorded revenues, in approximate numbers, of $214,000 and nil, respectively, with Velocitas GmbH which represented 51% and 0% of our total revenues, respectively. As of September 30, 2017 and December 31, 2016, Velocitas GmbH did not have any outstanding net accounts receivable.
Consulting Agreement – Velocitas GmbH
On April 1, 2017, the Company entered into a Consulting
Agreement with
Velocitas GmbH to provide the Company with operational support services in the fields of regulatory administration, finance, international customer account management, manufacturing, supply chain logistics, and other services required by the Company. Velocitas GmbH will receive a monthly payment of $25,833 for providing such services to the Company.
Temporary Advances
On December 15, 2016, January 18, 2017, and February 16, 2017, we issued promissory notes to Velocitas with purchase prices of $20,000, $65,000, and $30,000, respectively. Each of the promissory notes bore interest at the rate of 6.0% per annum with payment of principal and interest due on the earlier of (i) 180 days from the date of issuance, (ii) the date of closing of any debt or equity financing transaction by and between Uluru and Velocitas, or (iii) the payment to Uluru of certain invoices due from selected Company’s distributors. Each of the promissory notes was secured by a pledge of certain product inventory and there were no debt issuance costs incurred by the Company. On February 27, 2017, each of the promissory notes was repaid in connection with the issuance of the Initial Note under the Purchase Agreement with Velocitas.
On February 21, 2017, we issued a promissory note to Kirkwood with a purchase price of $25,000. The promissory note bore interest at the rate of 6.0% per annum with payment of principal and interest due on the earlier of (i) 60 days from the date of issuance, (ii) the date of closing of any debt or equity financing transaction by the Company, or (iii) no later than two days after receiving written request by Kirkwood. The promissory note was secured by a pledge of certain product inventory and accounts receivables and there were no debt issuance costs incurred by the Company. The Company’s Vice President and Chief Financial Officer, Terrance K. Wallberg, is President and sole shareholder of Kirkwood. On February 27, 2017, the outstanding promissory note to Kirkwood was repaid in connection with the issuance of the Initial Note under the Purchase Agreement with Velocitas.
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, 2017, the Company’s obligation to these executives for temporarily deferred compensation was approximately $72,000 of which approximately $72,000 was included in accrued liabilities.
As of December 31, 2016, the Company’s obligation to these executives for temporarily deferred compensation was approximately $473,000 of which approximately $200,000 was included in accrued liabilities and approximately $273,000 was included in accounts payable.
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, 2017, 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. As of September 30, 2017, the Company has accrued approximately $35,000 of expense relating to future milestone payments to Access.
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.
Prescription Drug User Fee Obligation
The Company was assessed prescription drug user fees (“PDUFA”) by the United States Department of Health and Human Services (the “DHHS”) for the sale and manufacture of Aphthasol®. The Company had contested the assessments as it believed such fees should be waived because the Company should qualify for abatement of the PDUFA fees. However, the Company’s challenge has been denied by the DHHS. As of September 30, 2017, the Company has recognized amounts due, to include potential penalties and interest, of approximately $1,067,000 related to the unpaid PDUFA fees. The PDUFA fees remain unpaid as of the date of this Quarterly Report on Form 10-Q. Since the Company has not yet reached a settlement with the DHHS, it is possible that the Company may be subject to additional collection costs.
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.
NOTE 19.
|
SUBSEQUENT EVENTS
|
None.