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 innovative wound care and drug delivery systems based on our patented technologies. Our mission is to improve the lives of patients the world over by delivering comprehensive solutions that optimize outcomes for the key stakeholders in our healthcare systems: patients, providers and 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 March 31, 2018 and the results of its operations for the three months ended March 31, 2018 and 2017 and cash flows for the three months ended March 31, 2018 and 2017 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. Certain prior period amounts have been reclassified to conform to current period presentations.
Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
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, 2017, as filed with the Securities and Exchange Commission on March 30, 2018 (the "2017 Form 10-K"), including the risk factors set forth therein.
NOTE 2.
|
THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
|
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers ("Topic 606")
, which amends the guidance for accounting for revenue from contracts with customers and requires revenue recognition based on the transfer of promised goods or services to customers in an amount that reflects consideration the Company expects to be entitled to in exchange for goods or services. Topic 606 supersedes prior revenue recognition requirements in ASC Topic 605 and most industry-specific accounting guidance. In 2015 and 2016, the FASB issued additional updated guidance, which clarified certain aspects of the Topic 606 and the related implementation guidance issued by the FASB-IASB Joint Transition Resource Group for Revenue Recognition.
The new revenue standard ("Topic 606") became effective for the Company on January 1, 2018, and was adopted using the modified retrospective method under which previously presented financial statements are not restated and the cumulative effect of adopting the new revenue standard on contracts in process is recognized by an adjustment to retained earnings at the effective date. The cumulative effect of applying the new revenue standard was an increase of $26,662 to stockholder's equity as of January 1, 2018. The adoption of ASC 606 does not materially impact the company's revenue recognition as the company revenue mainly come from a sale of products which do not required long term contracts, contracts with multiple deliverables or performance obligations. Additionally, the Company already historically accounted for variable consideration on its product sale such as sale return and discounts as part of revenue recognition. Topic 606 requires more robust disclosures than required by previous guidance, including disclosures related to disaggregation of revenue into appropriate categories, performance obligations, the judgements made in revenue recognition determinations, adjustments to revenue which relate to activities from previous quarters or years, any significant reversals of revenue, and costs to obtain or fulfill contracts. See Note 3, "Revenue Recognition."
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which supersedes current lease accounting guidance. The primary difference between current GAAP and the new standard is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current GAAP. The standard requires a modified retrospective approach upon adoption, with practical expedients that may be available to elect. The standard is effective for the Company in the first quarter of 2019 and early adoption is permitted. The Company is evaluating the impact of the ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, classification of awards as either equity or liabilities, the estimation of forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. This guidance is effective for the Company on January 1, 2017 and early adoption was permitted. The Company adopted ASU 2016-09 during the first fiscal quarter ended on March 31, 2017. As part of the adoption of this guidance, the Company elected to continue estimating forfeitures in its calculation of stock-based compensation expense. The excess tax benefits and tax deficiencies from stock-based compensation awards accounted for under ASC 718 are recognized as income tax benefit or expense, respectively, in the statement of operations and comprehensive loss. The income tax related items had no effect on the current period presentation as the Company maintains a full valuation allowance against its deferred tax assets. In addition, excess tax benefits for share-based payments are presented as an operating activity in the statement of cash flows rather than financing activity. The changes have been applied prospectively in accordance with the ASU and prior periods have not been adjusted. The adoption of ASU 2016-09 did not have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15"), providing additional guidance on eight specific cash flow classification issues. The goal of ASU 2016-15 is to reduce diversity in practice of classifying certain items. The amendments in ASU 2016-15 are effective for the Company in the first quarter of 2018 using a retrospective transition method, and early adoption is permitted. The Company's adoption of ASU 2016-15 did not have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Restricted Cash, Statement of Cash Flows (Topic 230)
("ASU 2016-18"). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in ASU 2016-18 should be applied using a retrospective transition method to each period presented. The Company's adoption of ASU 2016-18 did not have a material impact on its consolidated financial statements
.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
("ASU 2017-04"). The amended guidance eliminates a step from the goodwill impairment test. Under the amended guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted this new guidance in the fourth quarter of 2017. The Company's adoption of ASU 2017-04 did not have a material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation -
Stock Compensation (Topic 718): Scope of Modification Accounting
("ASU 2017-09"). ASU 2017-09 provides clarity when a change to terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the vesting condition, fair value or the award classification is not the same both before and after a change to the terms and conditions of the award. The new guidance is effective on a prospective basis beginning on January 1, 2018 with early adoption permitted. T
he Company's adoption of ASU 2017-09 did not have a material impact on its consolidated financial statements.
.
NOTE 3.
|
SIGNIFICANT ACCOUNTING POLICIES
|
Please refer to the notes in the Company's 2017 Form 10-K for additional details of the Company's financial condition and a description of the Company's accounting policies, which have been continued without change except for the Company's Revenue Recognition accounting policy, which has been updated as a result of the Company's adoption in the current quarter of ASU 2014-09.
Revenue Recognition
The Company's product, Altrazeal®, is distributed to and through a limited number of specialty distributors internationally and wholesalers in the United States. These customers subsequently resell the Company's product to healthcare providers and patients.
The Company recognizes revenue as the transfer of control of its products to the Company's customers in an amount reflecting the consideration the Company expects to be entitled. In order to achieve this core principle, the Company applies the following five-step approach:
§
|
Identification of the contract, or contracts, with a customer
|
§
|
Recognition of revenue when, or as, we satisfy the performance obligations
|
§
|
Determination of the transaction price
|
§
|
Allocation of the transaction price to the performance obligations in the contract
|
§
|
Recognition of revenue when, or as, we satisfy the performance obligations
|
The Company considers customer purchase orders, which in some cases are governed by master distribution agreements, to be the contracts with the customer. For each contract, the Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. In addition, the Company evaluates the customer's ability to pay as part of its consideration of the contract. As the Company's standard payment terms are less than one year, the Company elected the practical expedient under Accounting Standards Codification (ASC) 606-10-32-18, and determined that its contracts do not have a significant financing component. The Company allocates the transaction price to each distinct product based on the relative standalone selling price. Revenue is recognized when control of the product is transferred to the customer, the customer is obligated to pay the Company, and the Company has no remaining obligations, which is typically at shipment. In certain locations, primarily outside the United States, product shipping terms may vary. Thus, in such locations, the point at which control of the product transfers to the customer and revenue recognition occurs will vary accordingly.
Customer returns of non-conforming products are estimated at the time revenue is recognized. In certain customer relationships, rebates exist, which are recognized according to the terms and conditions of the contractual relationship. Customer returns, rebates, and discounts are not material to the Company's consolidated financial statements. The Company has elected to recognize the revenue and cost for freight and shipping when control over the products has transferred to the customer.
When applicable, taxes collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues.
The Company has elected to immediately expense contract costs from obtaining a contract as the amortization period of the asset the Company otherwise would have recognized would have been less than a year.
Reserves for Variable Consideration
Revenues from product sales are recorded at the transaction price, which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, and other allowances that are offered within contracts between the Company and its customers. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes and contemplates relevant factors such as the Company's historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company's best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company's estimates.
The Company believes that the reserves it has established are reasonable based upon current facts and circumstances. Applying different judgments or interpretations to the same facts and circumstances could result in the estimated amount for reserves to vary. If actual results vary with respect to the Company's reserves, the Company may need to adjust its estimates, which could have a material effect on the Company's results of operations in the period of adjustment. To date, such adjustments have not been material.
Trade Discounts and Allowances
T
he Company receives sales order management, data and distribution services from certain customers. To the extent the services received are distinct from the Company's sale of products to the customer, these payments are classified in selling, general and administrative expenses in the consolidated statements of operations of the Company. The company revenue recognition is net of estimated trade discount and allowances.
Other Revenues
The Company enters into licensing agreements, from time to time, which are within the scope of Topic 606, under which it may license certain rights to its products or product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products. Each of these payments results in revenues recognized and classified as other revenues.
Licenses of intellectual property:
If the license of the Company's intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone Payments:
At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.
Royalties:
For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Under the Company's various contracts, the Company may receive up-front payments and fees, which may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company's right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
We received upfront cash payments for licenses of our technology in years 2007 to 2013. The revenue was recognized straight-line over the life of the patent. Our obligation was performed at the time the license was granted. Following the revenue recognition policies in accordance with ASC 606, we decreased the accumulated deficit by $26,662 as of January 1, 2018 and decreased deferred revenue by the same amount.
Effective January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers
, as amended (commonly referred to as ASC 606) using the modified retrospective transition method. The cumulative effect of applying the standard was an increase of $26,662 to stockholder's equity as of January 1, 2018. Our statement of operations for the quarterly period ended March 31, 2018 and our balance sheet as of March 31, 2018 are presented under ASC 606, while our statement of operations for the quarterly period ended March 31, 2017 and our balance sheet as of December 31, 2017 are presented under ASC 605,
Revenue Recognition
. See below for disclosure of the impact of the adoption of ASC 606 on our statement of operations and balance sheet for the quarterly period ended March 31, 2018, and the effect of changes made to our consolidated balance sheet as of January 1, 2018.
The table below presents the cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet due to the adoption of ASC 606.
|
|
December 31, 2017,
|
|
|
|
|
|
January 1, 2018
|
|
BALANCE SHEET
|
|
As Reported Under
|
|
|
Adjustments Due
|
|
|
As Adjusted
|
|
|
|
ASC 605
|
|
|
to ASC 606
|
|
|
Under ASC 606
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenue
|
|
$
|
35,761
|
|
|
$
|
(5,764
|
)
|
|
$
|
29,997
|
|
Total current liabilities
|
|
|
1,512,634
|
|
|
|
(5,764
|
)
|
|
|
1,506,870
|
|
Deferred revenue, net of current portion
|
|
|
352,698
|
|
|
|
(20,898
|
)
|
|
|
331,800
|
|
Total liabilities
|
|
|
2,435,521
|
|
|
|
(26,662
|
)
|
|
|
2,408,859
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(62,650,287
|
)
|
|
|
26,662
|
|
|
|
(62,623,625
|
)
|
Total equity
|
|
$
|
6,107,796
|
|
|
$
|
26,662
|
|
|
$
|
6,134,458
|
|
The table below presents the impact of the adoption of ASC 606 on our statement of operations
|
|
First Quarter Ended March 31, 2018
|
|
STATEMENT OF OPERATIONS
|
|
Under
|
|
|
Effect of
|
|
|
As Reported
|
|
|
|
ASC 605
|
|
|
ASC 606
|
|
|
Under ASC 606
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
License revenues
|
|
$
|
1,422
|
|
|
$
|
(1,422
|
)
|
|
$
|
---
|
|
Total revenues
|
|
|
85,217
|
|
|
|
(1,422
|
)
|
|
|
83,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(450,959
|
)
|
|
$
|
(1,422
|
)
|
|
$
|
(452,381
|
)
|
Net loss
|
|
$
|
(573,993
|
)
|
|
$
|
(1,422
|
)
|
|
$
|
(575,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The table below presents the impact of the adoption of ASC 606 on our balance sheet.
|
|
March 31, 2018
|
|
BALANCE SHEET
|
|
Under
|
|
|
Effect of
|
|
|
As Reported
|
|
|
|
ASC 605
|
|
|
ASC 606
|
|
|
Under ASC 606
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenue
|
|
$
|
36,882
|
|
|
$
|
(5,764
|
)
|
|
$
|
31,118
|
|
Total current liabilities
|
|
|
2,204,824
|
|
|
|
(5,764
|
)
|
|
|
2,199,060
|
|
Deferred revenue, net of current portion
|
|
|
351,276
|
|
|
|
(19,476
|
)
|
|
|
331,800
|
|
Total liabilities
|
|
|
2,556,100
|
|
|
|
(25,240
|
)
|
|
|
2,530,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(63,224,280
|
)
|
|
|
(25,240
|
)
|
|
|
(63,199,040
|
)
|
Total stockholders' equity
|
|
$
|
5,533,992
|
|
|
$
|
25,240
|
|
|
$
|
5,559,232
|
|
Disaggregation of Revenue
Revenue is disaggregated by primary geographic markets, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors.
For more information on the Company's disaggregated revenue, see Note 4,
Segment Information
.
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, royalties, and sponsored research revenues 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 months ended March 31 are summarized as follows:
Revenues
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
Domestic
|
|
$
|
10,998
|
|
|
|
13
|
%
|
|
$
|
2,537
|
|
|
|
1
|
%
|
International
|
|
|
72,797
|
|
|
|
87
|
%
|
|
|
214,580
|
|
|
|
99
|
%
|
Total
|
|
$
|
83,795
|
|
|
|
100
|
%
|
|
$
|
217,117
|
|
|
|
100
|
%
|
A significant portion of our revenues are derived from a few major customers. For the three months ended March 31, 2018, two customers had greater than 10% of total revenues and jointly represented 85% of total revenues. For the three months ended March 31, 2017, one customer had greater than 10% of total revenues and represented 99% of total revenues.
As of March 31, 2018, 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 March 31, 2018 and December 31, 2017:
Inventory
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Raw materials
|
|
$
|
45,158
|
|
|
$
|
32,329
|
|
Work-in-progress
|
|
|
316,747
|
|
|
|
311,632
|
|
Finished goods
|
|
|
126,264
|
|
|
|
153,500
|
|
Total
|
|
$
|
488,169
|
|
|
$
|
497,461
|
|
NOTE 6.
|
PROPERTY, EQUIPMENT and LEASEHOLD IMPROVEMENTS
|
Property, equipment and leasehold improvements, net, consisted of the following at March 31, 2018 and December 31, 2017:
Property, equipment and leasehold improvements
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Laboratory equipment
|
|
$
|
424,888
|
|
|
$
|
424,888
|
|
Manufacturing equipment
|
|
|
1,589,286
|
|
|
|
1,604,894
|
|
Computers, office equipment, and furniture
|
|
|
154,781
|
|
|
|
154,781
|
|
Computer software
|
|
|
4,108
|
|
|
|
4,108
|
|
Leasehold improvements
|
|
|
95,841
|
|
|
|
95,841
|
|
|
|
|
2,268,904
|
|
|
|
2,284,512
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,220,661
|
)
|
|
|
(2,230,789
|
)
|
Property, equipment and leasehold improvements, net
|
|
$
|
48,243
|
|
|
$
|
53,723
|
|
Depreciation expense on property, equipment and leasehold improvements was $5,480 and $32,716 for the three months ended March 31, 2018 and 2017, respectively.
NOTE 7.
|
INTANGIBLE ASSETS
|
Patents
Intangible patent assets are composed of patents acquired in October, 2005. Intangible assets, net consisted of the following at March 31, 2018 and December 31, 2017:
Intangible assets – patents
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
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
|
|
|
(7,428,025
|
)
|
|
|
(7,418,891
|
)
|
Less: reserve for impairment
|
|
|
(2,027,310
|
)
|
|
|
(2,027,310
|
)
|
Intangible assets - patents, net
|
|
$
|
170,603
|
|
|
$
|
179,737
|
|
Amortization expense for intangible patents assets was $9,134 and $9,134 for the three months ended March 31, 2018 and 2017, respectively.
The future aggregate amortization expense for intangible patent assets, remaining as of March 31, 2018, is as follows:
Calendar Years
|
|
Future Amortization
Expense
|
|
2018 (Nine months)
|
|
$
|
27,910
|
|
2019
|
|
|
37,044
|
|
2020
|
|
|
37,145
|
|
2021
|
|
|
37,044
|
|
2022
|
|
|
31,460
|
|
Total
|
|
$
|
170,603
|
|
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 9. 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 March 31, 2018 and December 31, 2017:
Intangible assets - licensing rights
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Intangible assets – licensing rights, gross
|
|
$
|
4,381,881
|
|
|
$
|
4,381,881
|
|
Less: accumulated amortization
|
|
|
(827,895
|
)
|
|
|
(725,245
|
)
|
Intangible assets - licensing rights, net
|
|
$
|
3,553,986
|
|
|
$
|
3,656,636
|
|
Amortization expense for intangible licensing rights assets was $102,650 and $80,173 for the three months ended March 31, 2018 and 2017, respectively.
The future aggregate amortization expense for intangible licensing rights assets, remaining as of March 31, 2018, is as follows:
Calendar Years
|
|
Future Amortization
Expense
|
|
2018 (Nine months)
|
|
$
|
313,653
|
|
2019
|
|
|
416,303
|
|
2020
|
|
|
416,303
|
|
2021
|
|
|
416,303
|
|
2022
|
|
|
416,303
|
|
2023 & Beyond
|
|
|
1,575,121
|
|
Total
|
|
$
|
3,553,986
|
|
NOTE 8.
|
ACCRUED LIABILITIES
|
Accrued liabilities consisted of the following at March 31, 2018 and December 31, 2017:
Accrued Liabilities
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Accrued compensation/benefits
|
|
$
|
131,458
|
|
|
$
|
124,819
|
|
Accrued property taxes
|
|
|
1,425
|
|
|
|
---
|
|
Accrued royalties
|
|
|
40,388
|
|
|
|
39,144
|
|
Product rebates/returns
|
|
|
---
|
|
|
|
6
|
|
Total accrued liabilities
|
|
$
|
173,271
|
|
|
$
|
163,969
|
|
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 closings 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 provided, among other things, that it would automatically convert 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. Following stockholder approval of an amendment to our articles of incorporation increasing the number of authorized shares of Common Stock from 200,000,000 shares to 750,000,000 shares, the Company filed on July 26, 2017 with the State of Nevada an amendment to its articles of incorporation implementing such increase. This resulted in the conversion of all 1,250 outstanding shares of Series B Convertible Preferred Stock held by Velo LLC into 125,000,000 shares of Common Stock.
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.
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.
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 the Second Note is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
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
|
|
|
$
|
162,773
|
|
|
$
|
4,268
|
|
|
$
|
332,959
|
|
Second Note
|
|
$
|
500,000
|
|
|
|
12.5
|
%
|
03/31/2019
|
|
$
|
0.04
|
|
|
$
|
500,000
|
|
|
$
|
170,324
|
|
|
$
|
4,452
|
|
|
$
|
325,224
|
|
Total
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,000,000
|
|
|
$
|
333,097
|
|
|
$
|
8,720
|
|
|
$
|
658,183
|
|
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 such 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 $30,822 and $6,176 for the three months ended March 31, 2018 and 2017, respectively.
The amount of debt discount amortized from our convertible debt was $85,859 and nil for the three months ended March 31, 2018 and 2017, respectively.
The amount of debt issuance costs amortized from our convertible debt was $2,135 and nil for the three months ended March 31, 2018 and 2017, respectively.
NOTE 10.
|
EQUITY TRANSACTIONS
|
Preferred Stock Transaction
March 2017 Offering
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.
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 July 26, 2017, all 1,250 outstanding shares of Series B Convertible Preferred Stock held by Velo LLC were converted into 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 9. Convertible Debt.
NOTE 11.
|
STOCKHOLDERS' EQUITY
|
Common Stock
As of March 31, 2018, we had 201,349,431 shares of Common Stock issued and outstanding. For the three months ended March 31, 2018, we did not issue or redeem any shares of Common Stock.
Preferred Stock
As of March 31, 2018, we had no shares of Series A Preferred Stock (the "Series A Shares") issued and outstanding. For the three months ended March 31, 2018, we did not issue or redeem any Series A Shares.
As of March 31, 2018, we had no shares of Series B Preferred Stock (the "Series B Shares") issued and outstanding. For the three months ended March 31, 2018, we did not issue or redeem any Series B Shares.
Warrants
The following table summarizes the warrants outstanding and the number of shares of Common Stock subject to exercise as of March 31, 2018 and the changes therein during the three months then ended:
|
|
Number of Shares of Common Stock Subject to Exercise
|
|
|
Weighted – Average
Exercise Price
|
|
Balance as of December 31, 2017
|
|
|
83,234,617
|
|
|
$
|
0.06
|
|
Warrants issued
|
|
|
---
|
|
|
|
---
|
|
Warrants exercised
|
|
|
---
|
|
|
|
---
|
|
Warrants cancelled
|
|
|
(660,000
|
)
|
|
$
|
0.60
|
|
Balance as of March 31, 2018
|
|
|
82,574,617
|
|
|
$
|
0.06
|
|
For the three months ended March 31, 2018, we did not issue or redeem any warrants.
Of the warrant shares subject to exercise as of March 31, 2018, expiration of the right to exercise is as follows:
Date of Expiration
|
|
Number of Warrant Shares of Common Stock Subject to Expiration
|
|
January 15, 2019
|
|
|
80,000
|
|
April 30, 2020
|
|
|
194,118
|
|
March 30, 2021
|
|
|
25,245,442
|
|
March 31, 2027
|
|
|
57,055,057
|
|
Total
|
|
|
82,574,617
|
|
NOTE 12.
|
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 March 31, 2018 and December 31, 2017:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Warrants to purchase Common Stock
|
|
|
82,574,617
|
|
|
|
83,234,617
|
|
Stock options to purchase Common Stock
|
|
|
1,640,335
|
|
|
|
150,736
|
|
Common Stock issuable upon the assumed conversion of our convertible promissory notes (1)
|
|
|
31,250,000
|
|
|
|
31,250,000
|
|
Total
|
|
|
115,464,952
|
|
|
|
114,635,353
|
|
(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.
|
NOTE 13.
|
SHARE BASED COMPENSATION
|
The Company maintains the 2018 Equity Incentive Plan and the 2006 Equity Incentive Plan. Each of the Equity Incentive Plans are administered by the Board of Directors, acting in lieu of a compensation committee, 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.
On March 28, 2018, the Board of Directors approved the 2018 Equity Incentive Plan, which is subject to ratification at the Company's 2018 Annual Meeting of Stockholders, to be held on June 11, 2018. As of March 29, 2016, the 2006 Equity Incentive Plan expired by its terms, and no additional awards may be granted thereunder. The expiration of the 2006 Equity Incentive Plan does not affect outstanding awards.
The 2018 Equity Incentive Plan allows for the Company to grant awards for up to 20,000,000 shares of
C
ommon
S
tock.
Awards under the 2018 Equity Incentive Plan may include the following award types: stock options, which may be either incentive stock options or nonqualified stock options; stock appreciation rights; restricted stock; RSUs; other stock-based awards, including unrestricted shares; or any combination of the foregoing. The exercise price of awards granted under the 2018 Equity Incentive Plan is equal to or greater than the closing price of a share of the Company's
C
ommon
S
tock on the grant date.
Our Board granted the following stock option awards for the three months ended March 31:
|
|
Three Months Ended March 31,
|
|
Stock Option Awards
|
|
2018
|
|
|
2017
(1)
|
|
Quantity
|
|
|
1,500,000
|
|
|
|
---
|
|
Weighted average fair value per share
|
|
$
|
0.03
|
|
|
|
---
|
|
Fair value
|
|
$
|
45,000
|
|
|
|
---
|
|
(1)
|
The Company did not award any shared-based compensation for the three months ended March 31, 2017.
|
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 with the following weighted average assumptions for the three months ended March 31:
|
|
Three Months Ended March 31,
|
|
Stock Option Awards
|
|
2018
|
|
|
2017
(4)
|
|
Expected volatility (1)
|
|
|
136.27
|
%
|
|
|
---
|
|
Risk-free interest rate % (2)
|
|
|
2.56
|
%
|
|
|
---
|
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
---
|
|
Dividend yield (3)
|
|
|
---
|
|
|
|
---
|
|
(1)
|
Expected volatility assumption was based upon a combination of historical stock price volatility measured on a daily basis and an estimate of expected future stock price volatility
|
(2)
|
Risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of the stock options.
|
(3)
|
The Company does not currently intend to pay cash dividends, thus has assumed a 0% dividend yield.
|
(4)
|
The Company did not award any shared-based compensation for the three months ended March 31, 2017.
|
Stock Options (Incentive and Nonstatutory)
The following table summarizes share-based compensation related to stock options for the three months ended March 31:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
---
|
|
|
$
|
1,663
|
|
Selling, general and administrative
|
|
|
189
|
|
|
|
2,661
|
|
Total share-based compensation expense
|
|
$
|
189
|
|
|
$
|
4,324
|
|
As of March 31, 2018, 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 $44,800. The period over which the unearned share-based compensation is expected to be recognized is approximately twenty four months.
The following table summarizes the stock options outstanding and the number of shares of Common Stock subject to exercise as of March 31, 2018 and the changes therein during the three months then ended:
|
|
Stock Options
|
|
|
Weighted Average Exercise Price per Share
|
|
Outstanding as of December 31, 2017
|
|
|
150,736
|
|
|
$
|
4.26
|
|
Granted
|
|
|
1,500,000
|
|
|
$
|
0.05
|
|
Forfeited/cancelled
|
|
|
(10,401
|
)
|
|
$
|
34.46
|
|
Exercised
|
|
|
---
|
|
|
|
---
|
|
Outstanding as of March 31, 2018
|
|
|
1,640,335
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2018
|
|
|
140,335
|
|
|
$
|
2.02
|
|
Summary of Plans
2006 Equity Incentive Plan
In March 2006, our Board adopted and our stockholders approved our 2006 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 subsequent annual meetings of the stockholders held in 2007, 2009, 2010, 2012, 2013, and 2014, our stockholders approved amendments to the 2006 Equity Incentive Plan
that increased
the number of shares of Common Stock issuable under the 2006 Equity Incentive Plan 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 March 31, 2018, we had granted options to purchase 2,061,167 shares of Common Stock since the inception of the 2006 Equity Incentive Plan, of which 140,335 were outstanding at a weighted average exercise price of $2.02 per share, and we had granted awards for 68,616 shares of restricted stock since the inception of the 2006 Equity Incentive Plan, of which none were outstanding. As of March 29, 2016, the 2006 Equity Incentive Plan expired by its terms, and no additional awards may be granted thereunder. The expiration of the 2006 Equity Incentive Plan does not affect outstanding awards.
2018 Equity Incentive Plan
On March 28, 2018, our Board of Directors adopted and approved our 2018 Equity Incentive Plan which initially provides for the issuance of up to 20,000,000 shares of our Common Stock pursuant to stock options and other equity awards.
As of March 31, 2018, we had granted options to purchase 1,500,000 shares of Common Stock since the inception of the 2018 Equity Incentive Plan, of which 1,500,000 were outstanding at a weighted average exercise price of $0.05 per share. As of March 31, 2018, there were 18,500,000 shares that remain available for future grants under the 2018 Equity Incentive Plan.
NOTE 14.
|
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 March 31, 2018 and December 31, 2017.
Description
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Liabilities:
|
|
|
|
|
|
|
Convertible promissory note – March 2017
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Convertible promissory note – February 2017
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Total
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
There was no current federal tax provision or benefit recorded for any period since inception, nor were there any recorded deferred income tax assets and the Company has provided a full valuation allowance. As a result, the effective tax rate is zero and the net deferred tax assets are zero.
NOTE 16.
|
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 required a minimum monthly lease obligation of $9,436, which was inclusive of monthly operating expenses.
On December 15, 2017, we entered into a Termination of Lease Agreement whereby we cancelled our existing lease for office and laboratory space and concurrently entered into a new lease agreement (the "Office Lease") that will continue until December 2019. The Office Lease encompasses approximately 2,500 rentable square feet and requires a minimum monthly lease obligation of $2,721, which is inclusive of monthly operating expenses.
On January 25, 2018, we entered into a lease agreement for storage and warehouse space in Carrollton, Texas. The lease commenced on January 24, 2018 and will continue until December 2019. The lease requires a minimum monthly lease obligation of $1,564, which is inclusive of monthly operating expenses.
On January 16, 2015 we entered into a lease agreement for certain office equipment that commenced on February 1, 2015 and continued until February 1, 2018 and required a minimum lease obligation of $551 per month.
The future minimum lease payments under the Office Lease, the 2018 warehouse lease, and the 2015 equipment lease are as follows as of March 31, 2018:
Calendar Years
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Future Lease Expense
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2018 (Nine months)
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$
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39,396
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2019
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|
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51,059
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2020
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|
|
---
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2021
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|
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---
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Total
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$
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90,455
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Rent expense for our operating leases amounted to $13,753 and $32,348 for the three ended March 31, 2018 and 2017, 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 9. 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 March 31, 2018 and 2017, the Company recorded revenues, in approximate numbers, of nil and $215,000, respectively, with Velocitas GmbH, an affiliated entity of Velocitas, which represented 0% and 99% of our total revenues, respectively. As of March 31, 2018 and December 31, 2017, 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 receives a monthly payment of $25,833 for providing such services to the Company.
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 March 31, 2018, the Company's obligation to these executives for temporarily deferred compensation was approximately $72,000 which was included in accrued liabilities. As of December 31, 2017, the Company's obligation to these executives for temporarily deferred compensation was approximately $72,000 which was included in accrued liabilities.
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 March 31, 2018, 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 March 31, 2018, the Company has accrued approximately $40,000 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") of approximately $535,000 by the United States Department of Health and Human Services (the "DHHS") for the sale and manufacture of Aphthasol® from 2009 to 2012. In November 2017, the Company negotiated a settlement payment of $400,000 with DHHS thereby cancelling certain unpaid invoices and accrued penalties and interest thereon. There continues to be a PDUFA fee and accrued penalties and interest that remains unpaid as of this Report. Since the Company has not yet reached a settlement with the DHHS on the unpaid PDUFA fee, it is possible that the Company may be subject to additional collection costs.
NOTE 17.
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LEGAL PROCEEDINGS
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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.