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 June 30, 2016, we had granted options to purchase 2,061,167 shares of Common Stock since the inception of the Equity Incentive Plan, of which 714,571 were outstanding at a weighted average exercise price of $2.35 per share, and we had granted awards for 68,616 shares of restricted stock since the inception of the Equity Incentive Plan, of which none were outstanding. As of June 30, 2016, there were 2,015,983 shares that remained available for future grants under our Equity Incentive Plan.
NOTE 15.
|
FAIR VALUE MEASUREMENTS
|
In accordance with FASB ASC Topic 820,
Fair Value Measurements
, (“ASC Topic 820”) certain assets and liabilities of the Company are required to be recorded at fair value. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. The guidance in ASC Topic 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on our market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.
The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
|
Level 1
|
—
|
Valuations based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
Level 2
|
—
|
Valuations based on observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
|
|
Level 3
|
—
|
Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.
|
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
Our financial instruments, including cash, cash equivalents, accounts receivable, and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. We believe that the carrying value of our promissory note payable balances approximates fair value based on a valuation methodology using the income approach and a discounted cash flow model.
The following table summarizes the fair value of our financial instruments at June 30, 2016 and December 31, 2015.
Description
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Liabilities:
|
|
|
|
|
|
|
Promissory note – April 2015
|
|
$
|
125,000
|
|
|
$
|
370,000
|
|
|
|
|
|
|
|
|
|
|
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 other receivable and convertible note payable balances approximates fair value based on a valuation methodology using the income approach and a discounted cash flow model.
There was no current federal tax provision or benefit recorded for any period since inception, nor were there any recorded deferred income tax assets, as such amounts were completely offset by valuation allowances.
NOTE 17.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
On January 31, 2006 we entered into a lease agreement for office and laboratory space in Addison, Texas. The lease commenced on April 1, 2006 and originally continued until April 1, 2013. The lease required a minimum monthly lease obligation of $9,330, which was inclusive of monthly operating expenses, until April 1, 2011 and at such time increased to $9,776, which was inclusive of monthly operating expenses. On February 22, 2013, we executed an Amendment to Lease Agreement (the “Lease Amendment”) that renewed and extended our lease until March 31, 2015. The Lease Amendment required a minimum monthly lease obligation of $9,193, which was inclusive of monthly operating expenses, until March 31, 2014 and at such time, increased to $9,379, which was inclusive of monthly operating expenses. On March 17, 2015, we executed a Second Amendment to Lease Agreement (the “Second Amendment”) that renewed and extended our lease until March 31, 2018. The Second Amendment requires a minimum monthly lease obligation of $9,436, which is inclusive of monthly operating expenses.
On December 10, 2010 we entered into a lease agreement for certain office equipment that commenced on February 1, 2011 and continued until February 1, 2015 and required a minimum lease obligation of $744 per month. On January 16, 2015 we entered into a new lease agreement for certain office equipment. The new office equipment lease, that commenced on February 1, 2015 and continues until February 1, 2018, requires a minimum lease obligation of $551 per month.
The future minimum lease payments under the 2015 office lease and the 2015 equipment lease are as follows as of June 30, 2016:
Calendar Years
|
|
Future Lease Expense
|
|
2016 (Six months)
|
|
$
|
59,920
|
|
2017
|
|
|
119,840
|
|
2018
|
|
|
28,858
|
|
2019
|
|
|
---
|
|
2020
|
|
|
---
|
|
Total
|
|
$
|
208,618
|
|
Rent expense for our operating leases amounted to $30,571 and $29,837 for the three months ended June 30, 2016 and 2015, respectively, and $60,531 and $61,002 for the six months ended June 30, 2016 and 2015, respectively.
Indemnification
In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
In accordance with our restated articles of incorporation and our amended and restated bylaws, we have indemnification obligations to our officers and directors for certain events or occurrences, subject to certain limits, while they are serving at our request in their respective capacities. There have been no claims to date and we have a director and officer insurance policy that enables us to recover a portion of any amounts paid for future potential claims. We have also entered into contractual indemnification agreements with each of our officers and directors.
Related Party Transactions and Concentration
On January 17, 2013, the Board of Directors of the Company appointed Helmut Kerschbaumer and Klaus Kuehne to each serve as a director of the Company.
During 2015, Mr. Kerschbaumer served as a director of Altrazeal Trading GmbH, Altrazeal AG, and Melmed Holding AG (collectively, the “Altrazeal Distributors”) and Mr. Kuehne served as a director of Altrazeal AG. In such capacities, Mr. Kerschbaumer may have been considered, either singularly or collectively, to have had control of, and make investment and business decisions on behalf of, the Altrazeal Distributors and Mr. Kuehne may be considered, either singularly of collectively, to have had control of, and make investment and business decisions on behalf of, Altrazeal AG.
As a result of the Altrazeal Termination Agreement in December 2015, Altrazeal Trading GmbH and Melmed Holding AG ceased to be product distributors for the Company.
As a result of the breaches in March and April 2016 by Altrazeal AG in the ELSA, we believe that the ELSA has been cancelled and Altrazeal AG has ceased to be a product distributor for the Company.
Each of Mr. Kerschbaumer and Mr. Kuehne are managing directors of ORADISC GmbH and in such capacities may be considered, either singularly or collectively, to have control of, and make investment and business decisions on behalf of the ORADISC GmbH. In April 2016, Mr. Kerschbaumer and Mr. Kuehne each resigned as a managing director of ORADISC GmbH.
In October 2012, we executed a License and Supply Agreement with ORADISC GmbH for the marketing of applications of our OraDisc™ erodible film technology for dental applications including benzocaine (OraDisc™ B), re-mineralization dental strips, fluoride dental strips, long-acting breath freshener, Amlexanox (OraDisc™ A). We also granted to ORADISC GmbH a twenty-four month option to utilize the OraDisc™ erodible film technology for drug delivery for migraine, nausea and vomiting, cough and cold, and pain. In January 2015, the initial twenty-four month option period to utilize the OraDisc™ erodible film technology by ORADISC GmbH was extended until December 31, 2015. In addition, this option expanded the applications for use to include anti-psychotics, neurologic products, and actives for the treatment of erectile dysfunction. On December 30, 2015, we received notice from ORADISC GmbH of their exercise of the option. We informed ORADISC GmbH that under the terms of the option, the right to use the OraDisc™ erodible film technology expired on December 31, 2015. In March 2016, we also provided ORADISC GmbH with a notice identifying certain breaches in the License and Supply Agreement with ORADISC GmbH. As a result of the breaches by ORADISC GmbH in the License and Supply Agreement, the License and Supply Agreement has been terminated in accordance with its terms and ORADISC GmbH has ceased to be a product distributor for the Company. Since delivering the termination notice to ORADISC GmbH we have not had any communication from ORADISC GmbH with respect to the License and Supply Agreement.
For the six months ended June 30, 2016 and 2015, the Company recorded revenues, in approximate numbers, of nil and $527,000, respectively, with the various Altrazeal Distributors, which represented 0% and 95% of our total revenues. As of June 30, 2016 and December 31, 2015, Altrazeal Distributors had an outstanding net accounts receivable, in approximate numbers, of nil and $3,000, respectively, which represented 0% and 3% of our net outstanding accounts receivables.
License Purchase and Termination Agreement
On December 24, 2015, we entered into and closed the transaction contemplated by a License Purchase and Termination Agreement (the “Altrazeal Termination Agreement”) with Altrazeal Trading and. The Altrazeal Termination Agreement relates to the License and Supply Agreement dated January 11, 2012 (the “Altrazeal License”), under which Altrazeal Trading and its affiliates were authorized by the Company to distribute our Altrazeal® wound care product in the European Union, Australia, New Zealand, Middle East (excluding Jordan and Syria), North Africa, Albania, Bosnia, Croatia, Kosovo, Macedonia, Montenegro, and Serbia. Under the Altrazeal Termination Agreement, the Altrazeal License was assigned to the Company thereby effecting its termination and the Company’s 25% ownership interest in Altrazeal Trading was cancelled. In addition, the Company assumed from Altrazeal Trading and certain affiliated entities rights and future obligations under sub-distribution agreements in numerous territories within the scope of the Altrazeal License and related consulting agreements.
Under the terms of the Altrazeal Termination Agreement, we agreed to pay to Altrazeal Trading a net transfer fee of €1,570,271 and to pay IPMD a transfer fee of €703,500. The net transfer fee to Altrazeal Trading includes adjustments for amounts owed by Altrazeal Trading to the Company. The Company paid the net transfer fee (a) to Altrazeal Trading by means of the issuance of 4,441,606 shares of Common Stock together with warrants to purchase 444,161 shares of Common Stock and (b) to IPMD by means of the issuance of 2,095,241 shares of Common Stock, together with warrants to purchase 209,525 shares of Common Stock. The warrants have an exercise price of $0.68 per share and a term of one-year.
Altrazeal Trading also agreed to return inventory of Altrazeal® blisters held in its possession in an amount up to €88,834 (“Inventory Payment”). To the extent Altrazeal Trading does not return the entire inventory, we may deduct from the Inventory Payment €4.20 per Altrazeal® blister not returned in usable condition. We are currently in the process of confirming with Altrazeal Trading the actual number of Altrazeal® blisters to be returned.
Under the Altrazeal Termination Agreement, we also agreed to file within twenty (20) days of closing a registration statement registering the resale of 2,500,000 shares of Common Stock issued under the Altrazeal Termination Agreement and to use all commercially reasonable efforts to cause such registration Statement to become effective. In accordance with our obligations under the Altrazeal Termination Agreement, we filed with the SEC a registration statement that was declared effective on February 16, 2016. We are required to keep the registration statement effective at all times with respect to such 2,500,000 shares, other than permitted suspension periods, until the earliest of (i) June 24, 2016, (ii) the date when Altrazeal Trading and IPMD may sell all of the registered shares under Rule 144 under the Securities Act without volume limitations, or (iii) the date when Altrazeal Trading and IPMD no longer owns any of the registered shares.
In connection with the Altrazeal Termination Agreement, we also entered into a Mutual Termination and Release Agreement, dated December 24, 2015, for the purpose of terminating the Binding Term Sheet dated May 12, 2015 with Altrazeal Trading and Firnron LTD (the “Term Sheet”). Under the Term Sheet, it was contemplated that the Company would acquire all of the remaining equity interests in Altrazeal Trading.
Related Party Obligations
Since 2011, our named executive officers and certain key executives have temporarily deferred portions of their compensation as part of a plan to conserve and manage the Company’s cash and financial resources.
As of June 30, 2016, the following table summarizes the Company’s obligation for compensation temporarily deferred by our employees.
Name
|
|
2016
|
|
|
2015
|
|
|
|
2014 – 2011
|
|
|
Total
|
|
Kerry P. Gray (1) (2) (3) (4)
|
|
$
|
---
|
|
|
$
|
275,153
|
|
|
$
|
150,000
|
|
|
$
|
425,153
|
|
Terrance K. Wallberg
|
|
|
(33,540
|
)
|
|
|
53,540
|
|
|
|
---
|
|
|
|
20,000
|
|
Other employees
|
|
|
(54,871
|
)
|
|
|
54,871
|
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
$
|
(88,411
|
)
|
|
$
|
383,564
|
|
|
$
|
150,000
|
|
|
$
|
445,153
|
|
(1)
|
On November 19, 2015, Mr. Gray resigned as the Company’s President and Chief Executive Officer and on February 18, 2016 resigned as a director for the Company.
|
(2)
|
During 2015, Mr. Gray temporarily deferred compensation of $275,153 which consisted of $51,770 earned as salary compensation for his duties as President of the Company, $186,083 for his duties as Chairman of the Executive Committee of the Company’s Board of Directors, and $37,300 as a temporary advance of working capital.
|
(3)
|
During 2014, Mr. Gray temporarily deferred compensation of $150,000 which consisted of $62,500 earned as salary compensation for his duties as President of the Company and $87,500 for his duties as Chairman of the Executive Committee of the Company’s Board of Directors. During 2014, Mr. Gray was also repaid $269,986 of temporarily deferred compensation, of which $100,000 was used by Mr. Gray for funding required pursuant to a Securities Purchase Agreement, dated March 14, 2013 (the “March 2013 Offering”). Prior to 2014, over a three year period Mr. Gray temporarily deferred, at various times, aggregate compensation of $582,486 and during the same time period was also repaid $312,500 of temporarily deferred compensation, of which $300,000 was used by Mr. Gray for funding required pursuant to the March 2013 Offering.
|
(4)
|
The Company is asserting in a dispute with Mr. Gray that amounts recorded as being owed to Mr. Gray are not in fact owed to Mr. Gray or are offset by amounts Mr. Gray owes to the Company.
|
As of June 30, 2016, the Company’s obligation for temporarily deferred compensation was $445,153 of which $171,570 was included in accrued liabilities and $273,583 was included in accounts payable, respectively.
As of December 31, 2015, the Company’s obligation for temporarily deferred compensation was $533,564 of which $259,981 was included in accrued liabilities and $273,583 was included in accounts payable, respectively.
Contingent Milestone Obligations
We are subject to paying Access Pharmaceuticals, Inc. (“Access”) for certain milestones based on our achievement of certain annual net sales, cumulative net sales, and/or our having reached certain defined technology milestones including licensing agreements and advancing products to clinical development. As of June 30, 2016, the future milestone obligations that we are subject to paying Access, if the milestones related thereto are achieved, total $4,750,000. Such milestones are based on total annual sales of 20 and 40 million dollars of certain products, annual sales of 20 million dollars of any one certain product, and cumulative sales of such products of 50 and 100 million dollars.
On March 7, 2008, we terminated the license agreement with ProStrakan Ltd. for Amlexanox-related products in the United Kingdom and Ireland. As part of the termination, we agreed to pay ProStrakan Ltd. a royalty of 30% on any future payments received by us from a new licensee in the United Kingdom and Ireland territories, up to a maximum of $1,400,000. On November 17, 2008, we entered into a licensing agreement for Amlexanox-related product rights to the United Kingdom and Ireland territories with MEDA AB.
NOTE 18.
|
LEGAL PROCEEDINGS
|
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the results of our operations or financial position. There are no material proceedings to which any director, officer or any of our affiliates, any owner of record or beneficially of more than five percent of any class of our voting securities, or any associate of any such director, officer, our affiliates, or security holder, is a party adverse to us or our consolidated subsidiary or has a material interest adverse thereto; however, one or more events may lead to a formal dispute or proceeding in the future.
On May 17, 2016, we provided KunWha Pharmaceutical Co., Ltd with a notice identifying certain breaches in the License and Supply Agreement, dated June 2, 2008. KunWha Pharmaceutical Co., Ltd failed to remedy the breaches within 30 (thirty) days of receiving our notice and therefore we believe that the License and Supply Agreement has been cancelled.
On May 17, 2016, we provided Jiangxi Aiqilin Pharmaceuticals Group with a notice identifying certain breaches in the License and Supply Agreement, dated June 28, 2010. Jiangxi Aiqilin Pharmaceuticals Group failed to remedy the breaches within 30 (thirty) days of receiving our notice and therefore we believe that the License and Supply Agreement has been cancelled.
On May 17, 2016, we provided Novartis Animal Health Inc. with a notice identifying certain breaches in the Distribution Agreement, dated August 23, 2010. In July 2016, we received confirmation from Novartis Animal Health Inc. that the Distribution Agreement has been cancelled.
In late March 2016, we provided Altrazeal AG with a notice identifying certain breaches in the Exclusive License and Supply Agreement, dated September 30, 2013 (the “ELSA”). On or about March 24, 2016, we learned that Altrazeal AG had commenced an insolvency proceeding in Switzerland and immediately sent an additional notice of termination referencing the insolvency. On or about April 18, 2016, we have learned that the insolvency petition filed by Altrazeal AG in Switzerland has been accepted by the court and an administrator is to be appointed. As a result of the breaches by Altrazeal AG in the ELSA, we believe that the ELSA has been cancelled. As a result of the accepted insolvency petition, we believe that our ownership interest in Altrazeal AG is deemed to be worthless and certain net accounts receivables with Altrazeal AG are uncollectible.
In March 2016, we learned that insolvency proceedings have been initiated with an Austrian commercial court with respect to IPMD GmbH and that one of its affiliated operating entities, ORADISC GmbH, might be affected by such insolvency proceeding filing. Recently, we were informed that the insolvency application was opposed with various parties taking opposing views and that these legal proceedings continue to evolve. We continue to evaluate our position with respect to IPMD GmbH and ORADISC GmbH.
In October 2012, we executed a License and Supply Agreement with ORADISC GmbH for the marketing of applications of our OraDisc™ erodible film technology for dental applications including benzocaine (OraDisc™ B), re-mineralization dental strips, fluoride dental strips, long-acting breath freshener, Amlexanox (OraDisc™ A). We also granted to ORADISC GmbH a twenty-four month option to utilize the OraDisc™ erodible film technology for drug delivery for migraine, nausea and vomiting, cough and cold, and pain. In January 2015, the initial twenty-four month option period to utilize the OraDisc™ erodible film technology by ORADISC GmbH was extended until December 31, 2015. In addition, this option expanded the applications for use to include anti-psychotics, neurologic products, and actives for the treatment of erectile dysfunction. On December 30, 2015, we received notice from ORADISC GmbH of their exercise of the option. We informed ORADISC GmbH that under the terms of the option, the right to use the OraDisc™ erodible film technology expired on December 31, 2015. In March 2016, we also provided ORADISC GmbH with a notice identifying certain breaches in the License and Supply Agreement with ORADISC GmbH. As a result of the breaches by ORADISC GmbH in the License and Supply Agreement, the License and Supply Agreement has been terminated in accordance with its terms and ORADISC GmbH has ceased to be a product distributor for the Company. Since delivering the termination notice to ORADISC GmbH we have not had any communication from ORADISC GmbH with respect to the License and Supply Agreement.
NOTE 19.
|
SUBSEQUENT EVENTS
|
None.
ITEM 2.
|
Manage
ment’s Discussion and Analysis of Financial Condition and Results of Operations.
|
You should read the following discussion and analysis together with all financial and non-financial information appearing elsewhere in this report and with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015, referred to as our 2015 Form 10-K, which has been previously filed with the Securities and Exchange Commission on March 30, 2016, including the risk factors set forth therein. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results will differ, and could differ materially, from those anticipated by such forward-looking information due to competitive factors and other risks discussed in our 2015 Form 10-K under “Risks Associated with our Business”.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (including documents incorporated by reference) (this “Report”) and other written and oral statements the Company makes from time to time contain certain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these forward-looking statements by the fact that they use words such as “should”, “expect”, “anticipate”, “estimate”, “target”, “may”, “project”, “guidance”, “will”, “intend”, “plan”, “believe” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, the Company’s goals, plans and projections regarding its financial position, statements indicating that the Company has cash and cash equivalents sufficient to fund our operations in the future, statements regarding expected cash flows, market position, product development, product approvals, increases in revenue, expense levels, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings, acquisitions, and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years.
No assurance can be given that any goal or plan set forth in forward-looking statements can be achieved, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.
Business Overview
ULURU Inc. (together with our subsidiaries, “we”, “our”, “us”, “ULURU”, or the “Company”) is a Nevada corporation. We are a specialty pharmaceutical company committed to developing and commercializing a range of innovative wound care and muco-adhesive film products based on our patented Nanoflex® and OraDisc
TM
technologies, with the goal of improving outcomes for patients, health care professionals, and health care payers.
Our strategy is twofold:
§
|
Establish a market leadership position in wound management by developing and commercializing a customer focused portfolio of innovative wound care products based on our Nanoflex® technology to treat the various phases of wound healing; and
|
§
|
Develop our oral muco-adhesive film technology (OraDisc
TM
) for systemic drug delivery and for delivery of actives to the oral cavity.
|
Utilizing our technologies, three of our products have been approved for marketing in various global markets. In addition, additional products may be developed utilizing our patented Nanoflex® and OraDisc
TM
technologies.
§
|
Altrazeal® Transforming Powder Dressing, based on our Nanoflex® technology, has the potential to change the way health care providers approach their treatment of wounds. Launched in September 2008, the product is indicated for both exuding acute wounds such as partial thickness burns, donor sites, non-healing surgical wounds, and trauma and for chronic wounds such as venous leg ulcers, diabetic foot ulcers, and pressure ulcers;
|
§
|
Aphthasol® is a drug approved by the FDA for the treatment of canker sores; and
|
§
|
OraDisc™ A was developed as an improved drug delivery system for the treatment of canker sores.
|
Recently, we have developed a series of operational plans to enhance and streamline the business:
§
|
We have embarked on a plan to consolidate operations of disparate affiliates to remove inefficiency and align interests;
|
§
|
We completed the acquisition of the European, Middle East and Australian marketing and distribution rights for Altrazeal® from Altrazeal Trading GmbH and its affiliates;
|
§
|
As a result of a breach by Altrazeal AG of its obligations under our licensing agreement, we currently do not have a direct distributor acting on our behalf in the territories previously covered by the AG Agreement, which included Africa (markets not already licensed), Latin America, Georgia, Turkmenistan, Ukraine, the Commonwealth of Independent States, Jordan, Syria, Asia and the Pacific (excluding China, Hong Kong, Macau, Taiwan, South Korea, Japan, Australia, and New Zealand). We now have the opportunity to potentially form direct relationships with sub-distributors in the territories previously covered by the AG Agreement for the purpose of accepting orders directly from, and fulfilling orders directly to, such sub-distributors;
|
§
|
We have determined that creating a product roadmap with line extensions is necessary to respond to market interest in Altrazeal®;
|
§
|
As a result of a breach by ORADISC GmbH of its obligations under our licensing agreement, we have regained control of all of the OraDisc™ rights and we have the opportunity to develop and commercialize products utilizing our OraDisc™ film technology ourselves or together with other partners;
|
§
|
We have implemented a plan to restructure our operations to improve efficiency and reduce cost, including production, distribution, and administration costs;
|
§
|
We are undertaking efforts to stimulate sales and enhance marketing; and
|
§
|
We have developed a new plan to streamline regulatory activity to expedite new market entry.
|
Recent Developments
Product Distribution
One of our primary international distributors, Altrazeal AG, breached certain material terms and conditions of our license and supply agreement with them including provisions related to timely payment of amounts owed. Given the uncertainty of collecting payment for any product shipments to territories previously controlled by Altrazeal AG, the Company felt it prudent to delay product shipments to these territories until such time as credit can be established with a new licensee or direct relationships can be formed with existing sub-distributors. As a result, pending orders for Altrazeal® totaling approximately $86,000 were placed on credit hold and were not shipped during the first or second quarter of 2016. The Company had previously disclosed that Altrazeal AG had initiated insolvency proceedings and that, given the various breaches in the license and supply agreement between the parties, the agreement was cancelled. As a result, the rights for Altrazeal in all markets previously serviced by Altrazeal AG have reverted back to the Company.
On May 17, 2016, we provided notices to KunWha Pharmaceutical Co., Ltd, and Jiangxi Aiqilin Pharmaceuticals Group, identifying certain breaches in each of their respective product distribution agreements. Each distributor failed to remedy the breaches within 30 days of receiving our notice and therefore we believe that each of the product distribution agreements has been cancelled. On May 17, 2016, we also provided Novartis Animal Health Inc. with a notice identifying certain breaches in the Distribution Agreement, dated August 23, 2010. In July 2016, we received confirmation from Novartis Animal Health Inc. that the Distribution Agreement has been cancelled. We are currently evaluating the prospect of appointing a new marketing partner for each of these territories.
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 being sold was based on a 10% discount to the average closing price between March 7, 2016 and March 11, 2016 and the warrant exercise price was based on a 10% premium to the same average closing price.
The warrants have an exercise price of $0.0871 per share and a five-year term. The warrants also include cashless exercise provisions and a “full ratchet” anti-dilution provision under which the exercise price of such warrants resets to any lower sales price at which the Company offers or sells Common Stock or Common Stock equivalents for one year (subject to standard exceptions).
The March 2016 Offering resulted in gross proceeds of $1,800,000, of which $1,439,000 was received in March 2016 and $361,000 was received in April 2016. As part of the offering expenses, we paid to a European placement agent a referral fee of $29,000 which is equal to 10% of the gross proceeds, provided that the investors referred by such placement agent are not U.S. Persons and were solicited outside the United States.
Purchasers in the March 2016 Offering included Michael I. Sacks ($1,000,000), the father of Bradley J. Sacks, the Chairman of our Board of Directors, Centric Capital Ventures, LLC ($19,000), an investment entity controlled by Bradley J. Sacks, Terrance K. Wallberg ($50,000), our Vice President and Chief Financial Officer, and Daniel G. Moro ($10,000), our Vice President of Polymer Drug Delivery.
RESULTS OF OPERATIONS
Fluctuations in Operating Results
Our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the timing and amount of payments received pursuant to our current and future collaborations, and the progress and timing of expenditures related to our development and commercialization efforts. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results may not be a good indication of our future performance.
Comparison of the three months ended June 30, 2016 and 2015
Total Revenues
Revenues were approximately $264,000 for the three months ended June 30, 2016, as compared to revenues of approximately $259,000 for the three months ended June 30, 2015, and were composed of, in approximate amounts, licensing fees of $260,000 from Altrazeal® and OraDisc™ licensing agreements and product sales of $4,000 for Altrazeal®.
The net increase of $5,000 in revenues is primarily attributable to the recognition of unamortized licensing fees of approximately $253,000 related to the cancellation of distribution agreements with two distributors; KunWha Pharmaceutical Co., and Jiangxi Aiqilin Pharmaceuticals Group; which is offset by a decrease of approximately $239,000 in Altrazeal® product sales as territories in Europe and the Middle East have not generated product orders consistent with prior year and one of our international distributors, Altrazeal AG, breached material terms and conditions of the ELSA, including provisions related to timely payment of amounts owed. Given the uncertainty of collecting payment for any product shipments to territories previously controlled by Altrazeal AG, we felt it prudent to delay product shipments to these territories until such time as credit can be established with a new licensee or direct relationships can be formed with existing sub-distributors.
The recognition of unamortized licensing fees is based upon the cancellation of the distribution agreements and that there are no further performance standards that are required by the Company under each distribution agreement. The Company originally received a licensing payment from KunWha Pharmaceutical Co. of $50,000 in June 2008 and received licensing payments from Jiangxi Aiqilin Pharmaceuticals Group of $250,000 and $100,000 in June 2010 and September 2011, respectively.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the three months ended June 30, 2016 and 2015 were approximately $500 and $81,000, respectively, and were composed entirely of costs associated with Altrazeal®.
Research and Development
Research and development expenses totaled approximately $135,000 for the three months ended June 30, 2016, including $300 in share-based compensation, compared to approximately $219,000 for the three months ended June 30, 2015, which included $19,000 in share-based compensation. The decrease of approximately $84,000 in research and development expenses was primarily due to, in approximate numbers, a decrease of $39,000 direct research costs primarily related to consulting costs and product registration costs, and a decrease of $67,000 in scientific compensation related wage reductions by existing staff, lower head count, and lower share-based compensation. These expense decreases were partially offset by an increase of $16,000 in regulatory consulting costs and an increase of $6,000 in miscellaneous operating costs.
The direct research and development expenses for the three months ended June 30, 2016 and 2015 were, in approximate numbers, as follows:
|
|
Three Months Ended June 30,
|
|
Technology
|
|
2016
|
|
|
2015
|
|
Wound care & nanoparticle
|
|
$
|
33,000
|
|
|
$
|
71,000
|
|
OraDisc™
|
|
|
4,000
|
|
|
|
4,000
|
|
Aphthasol® & other technologies
|
|
|
---
|
|
|
|
1,000
|
|
Total
|
|
$
|
37,000
|
|
|
$
|
76,000
|
|
Selling, General and Administrative
Selling, general and administrative expenses totaled approximately $385,000 for the three months ended June 30, 2016, including $18,000 in share-based compensation, compared to approximately $495,000 for the three months ended June 30, 2015, which included $51,000 in share-based compensation. The decrease of approximately $110,000 in selling, general and administrative expenses was primarily due to, in approximate numbers, a decrease of $64,000 in compensation as costs associated with our Interim President and Chief Executive Officer are categorized under international sales management whereas the costs for our prior President and Chief Executive Officer were categorized under compensation, a decrease of $84,000 in directors fees that is composed of a decrease of $32,000 in share-based compensation and a decrease of $52,000 in cash compensation, a decrease of $25,000 in legal costs due to the settlement of a licensing agreement dispute, a decrease of $6,000 in XBRL translation costs, and a decrease of $2,000 in property tax accruals. These expense decreases were partially offset by, in approximate numbers, an increase of $36,000 in operating costs associated with international sales management, an increase of $22,000 in brand marketing and convention costs, an increase of $4,000 in legal fees related to our patents, and an increase of $9,000 in miscellaneous expenses.
Amortization of Intangible Assets
Amortization of intangible assets expense totaled approximately $200,000 for the three months ended June 30, 2016 as compared to approximately $118,000 for the three months ended June 30, 2015. The expense for each period consists primarily of amortization associated with our acquired patents and licensing rights. The increase of approximately $82,000 is attributable to the acquisition of licensing rights that occurred in December 2015. There were no additional purchases of patents or licensing rights during the three months ended June 30, 2016 and 2015, respectively.
Depreciation
Depreciation expense totaled approximately $33,000 for the three months ended June 30, 2016 as compared to approximately $46,000 for the three months ended June 30, 2015. The decrease of approximately $13,000 is attributable to certain equipment being fully depreciated.
Interest and Miscellaneous Income
Interest and miscellaneous income totaled approximately $500 for the three months ended June 30, 2016 as compared to approximately $70 for the three months ended June 30, 2015.
Interest Expense
Interest expense totaled approximately $44,000 for the three months ended June 30, 2016 as compared to approximately $63,000 for the three months ended June 30, 2015. Interest expense typically includes financing costs for our insurance policies, interest costs related to regulatory fees, and interest costs and amortization of debt discount and financing costs related to debt. The decrease of approximately $19,000 in interest expense is primarily attributable to the decreased principal balance due under the April 2015 Note with Inter-Mountain and
accruals for interest expense associated with regulatory fees.
Foreign Currency Transaction Gain (Loss)
Foreign currency transaction loss totaled approximately $3,000 for the three months ended June 30, 2016 as compared to a foreign currency transaction gain of approximately $35,000 for the three months ended June 30, 2015. The decrease of approximately $38,000 is related to fluctuations in the Euro exchange rate experienced during 2015 and 2016 and the pricing of Altrazeal® to our international distributors being denominated in Euros.
Comparison of the six months ended June 30, 2016 and 2015
Total Revenues
Revenues were approximately $373,000 for the six months ended June 30, 2016, as compared to revenues of approximately $554,000 for the six months ended June 30, 2015, and were composed of, in approximate amounts, licensing fees of $361,000 from Altrazeal® and OraDisc™ licensing agreements and product sales of $12,000 for Altrazeal®.
The net decrease of $181,000 in revenues is primarily attributable to a decrease of approximately $511,000 in Altrazeal® product sales as territories in Europe and the Middle East have not generated product orders consistent with prior year and one of our international distributors, Altrazeal AG, breached material terms and conditions of the ELSA, including provisions related to timely payment of amounts owed. Given the uncertainty of collecting payment for any product shipments to territories previously controlled by Altrazeal AG, we felt it prudent to delay product shipments to these territories until such time as credit can be established with a new licensee or direct relationships can be formed with existing sub-distributors. The decrease in Altrazeal® product sales was partially offset by the recognition of unamortized licensing fees of approximately $343,000 related to the cancellation of distribution agreements with three distributors; Altrazeal AG, KunWha Pharmaceutical Co., and Jiangxi Aiqilin Pharmaceuticals Group.
The recognition of unamortized licensing fees is based upon the cancellation of the distribution agreements and that there are no further performance standards that are required by the Company under each distribution agreement. The Company originally received a licensing payment from Altrazeal AG of $125,000 in September 2013, received a licensing payment from KunWha Pharmaceutical Co. of $50,000 in June 2008, and received licensing payments from Jiangxi Aiqilin Pharmaceuticals Group of $250,000 and $100,000 in June 2010 and September 2011, respectively.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the six months ended June 30, 2016 and 2015 were approximately $1,500 and $183,000, respectively, and were composed entirely of costs associated with Altrazeal®.
Research and Development
Research and development expenses totaled approximately $271,000 for the six months ended June 30, 2016, including $9,000 in share-based compensation, compared to approximately $423,000 for the six months ended June 30, 2015, which included $37,000 in share-based compensation. The decrease of approximately $152,000 in research and development expenses was primarily due to, in approximate numbers, a decrease of $99,000 in direct research costs primarily related to consulting costs and product registration costs, and a decrease of $92,000 in scientific compensation related wage reductions by existing staff, lower head count, and lower share-based compensation. These expense decreases were partially offset by an increase of $33,000 in regulatory consulting costs and an increase of $6,000 in miscellaneous operating costs.
The direct research and development expenses for the six months ended June 30, 2016 and 2015 were, in approximate numbers, as follows:
|
|
Six months Ended June 30,
|
|
Technology
|
|
2016
|
|
|
2015
|
|
Wound care & nanoparticle
|
|
$
|
46,000
|
|
|
$
|
143,000
|
|
OraDisc™
|
|
|
8,000
|
|
|
|
8,000
|
|
Aphthasol® & other technologies
|
|
|
---
|
|
|
|
2,000
|
|
Total
|
|
$
|
54,000
|
|
|
$
|
153,000
|
|
Selling, General and Administrative
Selling, general and administrative expenses totaled approximately $704,000 for the six months ended June 30, 2016, including $37,000 in share-based compensation, compared to approximately $941,000 for the six months ended June 30, 2015, which included $108,000 in share-based compensation. The decrease of approximately $237,000 in selling, general and administrative expenses was primarily due to, in approximate numbers, a decrease of $101,000 in compensation, as costs associated with our Interim President and Chief Executive Officer are categorized under international sales management whereas the costs for our prior President and Chief Executive Officer were categorized under compensation, a decrease of $174,000 in directors fees that is composed of a decrease of $105,000 in cash compensation and a decrease of $69,000 in share-based compensation, a decrease of $41,000 in legal costs due to the settlement of a licensing agreement dispute, a decrease of $11,000 in legal fees related to our patents, a decrease of $7,000 in accounting fees, and a decrease of $4,000 in miscellaneous expenses. These expense decreases were partially offset by, in approximate numbers, an increase of $38,000 in operating costs associated with international sales management, an increase of $22,000 in brand marketing and convention costs, an increase of $16,000 in bad debt expense accruals, and an increase of $25,000 in commission costs relating to a product license as the prior year included a one-time credit adjustment.
Amortization of Intangible Assets
Amortization of intangible assets expense totaled approximately $398,000 for the six months ended June 30, 2016 as compared to approximately $236,000 for the six months ended June 30, 2015. The expense for each period consists primarily of amortization associated with our acquired patents and licensing rights. The increase of approximately $162,000 is attributable to the acquisition of licensing rights that occurred in December 2015. There were no additional purchases of patents or licensing rights during the six months ended June 30, 2016 and 2015, respectively.
Depreciation
Depreciation expense totaled approximately $66,000 for the six months ended June 30, 2016 as compared to approximately $104,000 for the six months ended June 30, 2015. The decrease of approximately $38,000 is attributable to certain equipment being fully depreciated.
Interest and Miscellaneous Income
Interest and miscellaneous income totaled approximately $500 for the six months ended June 30, 2016 as compared to approximately $200 for the six months ended June 30, 2015.
Interest Expense
Interest expense totaled approximately $91,000 for the six months ended June 30, 2016 as compared to approximately $76,000 for the six months ended June 30, 2015. Interest expense typically includes financing costs for our insurance policies, interest costs related to regulatory fees, and interest costs and amortization of debt discount and financing costs related to debt. The increase of approximately $15,000 in interest expense is primarily attributable to the April 2015 Note with Inter-Mountain.
Foreign Currency Transaction Gain (Loss)
Foreign currency transaction gain totaled approximately $1,000 for the six months ended June 30, 2016 as compared to a foreign currency transaction loss of approximately $58,000 for the six months ended June 30, 2015. The improvement of approximately $59,000 is related to fluctuations in the Euro exchange rate experienced during 2015 and 2016 and the pricing of Altrazeal® to our international distributors being denominated in Euros.
Accommodation fee due on promissory note
Accommodation fee due on promissory note was $25,000 for the six months ended June 30, 2016 as compared to nil for the six months ended June 30, 2015. The fee is based on a January 2016 Waiver Agreement with Inter-Mountain. The Waiver Agreement relates to the April 2015 Note and our failure to make the installment payment under the April 2015 Note due in November 2015 on a timely basis. Under the terms of the Waiver Agreement, we agreed to remit the November 2015 installment payment of $45,000 in cash and to pay Inter-Mountain an accommodation fee of $25,000, with the accommodation fee being added to the outstanding loan balance.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the public and private sales of convertible notes and Common Stock. Product sales, royalty payments, licensing fees and milestone payments from our corporate alliances have also provided, and are expected in the future to provide, funding for operations.
Based on our liquidity as of June 30, 2016, we believe that our liquidity will be sufficient to fund operations through the third quarter of 2016. In order to continue to advance our business plan and outstanding obligations, we will need to raise additional capital.
On March 29, 2016, we entered into a Stock Purchase Agreement 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 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 being sold was based on a 10% discount to the average closing price between March 7, 2016 and March 11, 2016 and the warrant exercise price was based on a 10% premium to the same average closing price. The warrants have an exercise price of $0.0871 per share and a five-year term. The warrants also include cashless exercise provisions and a “full ratchet” anti-dilution provision under which the exercise price of such warrants resets to any lower sales price at which the Company offers or sells Common Stock or Common Stock equivalents for one year (subject to standard exceptions).
The March 2016 Offering has resulted in gross proceeds of $1,800,000, of which $1,439,000 was received in March 2016 and $361,000 was received in April 2016. As part of the offering expenses, we paid to a European placement agent a referral fee of $29,000 which is equal to 10% of the gross proceeds, provided that the investors referred by such placement agent were not U.S. Persons and were solicited outside the United States. Purchasers in the March 2016 Offering include Michael I. Sacks ($1,000,000), the father of Bradley J. Sacks, the Chairman of our Board of Directors, Centric Capital Ventures, LLC ($19,000), an investment entity controlled by Bradley J. Sacks, Terrance K. Wallberg ($50,000), our Vice President and Chief Financial Officer, and Daniel G. Moro ($10,000), our Vice President of Polymer Drug Delivery.
Our principal source of liquidity is cash and cash equivalents. As of June 30, 2016, our cash and cash equivalents were approximately $718,000 which is an increase of approximately $538,000 as compared to our cash and cash equivalents at December 31, 2015 of approximately $180,000. Our working capital (current assets less current liabilities) was approximately $(779,000) at June 30, 2016 as compared to our working capital at December 31, 2015 of approximately $(1,614,000).
Consolidated Cash Flow Data
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Net Cash Provided by (Used in)
|
|
2016
|
|
|
2015
|
|
Operating activities
|
|
$
|
(947,000
|
)
|
|
$
|
(1,026,000
|
)
|
Investing activities
|
|
|
---
|
|
|
|
(1,000
|
)
|
Financing activities
|
|
|
1,485,000
|
|
|
|
496,000
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
538,000
|
|
|
$
|
(531,000
|
)
|
Operating Activities
For the six months ended June 30, 2016, net cash used in operating activities was approximately $947,000. The principal components of net cash used for the six months ended June 30, 2016 were, in approximate numbers, our net loss of $1,183,000, a decrease of $321,000 in deferred revenues due to amortization of revenues, a decrease of $151,000 in accrued liabilities due to repayment of temporary compensation deferrals, an increase of $50,000 in inventory, and an increase of $2,000 in deposits. Our net loss for the six months ended June 30, 2016 included substantial non-cash charges of approximately $618,000 in the form of share-based compensation, amortization of patents and licensing rights, depreciation, amortization of debt discount, amortization of deferred financings costs, interest due on promissory notes settled with Common Stock, consulting services settled in Common Stock, and an accommodation fee due on the promissory note. The aforementioned net cash used for the six months ended June 30, 2016 was partially offset by, in approximate numbers, a decrease of $72,000 in prepaid expenses related to insurance, listing fees, and consulting, a decrease of $39,000 in accounts receivable due to collection activities, and an increase of $31,000 in accounts payable due to timing of vendor payments.
For the six months ended June 30, 2015, net cash used in operating activities was approximately $1,026,000. The principal components of net cash used for the six months ended June 30, 2015 were, in approximate numbers, our net loss of $1,468,000, an increase of $450,000 in accounts receivable related to higher international product sales, and an increase of $212,000 in inventory related to the manufacture of Altrazeal®. Our net loss for the six months ended June 30, 2015 included substantial non-cash charges of approximately $504,000 in the form of share-based compensation, amortization of patents, amortization of debt discount, amortization of debt issuance costs, and depreciation. The aforementioned net cash used for the six months ended June 30, 2015 was partially offset by, in approximate numbers, an increase of $450,000 in accounts payable due to timing of vendor payments, an increase of $54,000 in accrued liabilities due to compensation deferrals, an increase of $11,000 in accrued interest related to Inter-Mountain debt, an increase of $8,000 in deferred revenues, and a decrease of $77,000 in prepaid expenses related to insurance, listing fees, and consulting fees.
Investing Activities
There were no investing activities for the six months ended June 30, 2016.
Net cash used in investing activities for the six months ended June 30, 2015 was approximately $1,000 and relates to the purchase of computer equipment.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2016 was approximately $1,485,000 and was composed of, in approximate numbers, the net proceeds of $1,732,000 from the March 2016 Offering, offering costs of $22,000 associated with the acquisition of licensing rights that occurred in December 2015, and the repayment of $225,000 in principle due on the promissory note with Inter-Mountain.
Net cash provided by financing activities for the six months ended June 30, 2015 was approximately $496,000 and was composed of, in approximate numbers, $485,000 from the debt transaction with Inter-Mountain in April 2015 and an adjustment of $11,000 of offering costs associated with our sale of preferred stock in 2011.
Liquidity
As of June 30, 2016, we had cash and cash equivalents of approximately $718,000. We expect to use our cash, cash equivalents, and investments on working capital, general corporate purposes, property and equipment, and the payment of contractual obligations. Our long-term liquidity will depend to a great extent on our ability to fully commercialize our Altrazeal® and OraDisc™ technologies; therefore we are continuing to look both domestically and internationally for opportunities that will enable us to expand our business. At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth, if any, during 2016 and beyond, such as the speed and degree of market acceptance, the impact of competition, the effectiveness of the sales and marketing efforts of our distributors and sub-distributors, and the outcome of our current efforts to develop, receive approval for, and successfully launch our near-term product candidates.
As of June 30, 2016, our net working capital (current assets less current liabilities) was approximately $(779,000). Based on our liquidity as of June 30, 2016, we believe that our liquidity will be sufficient to fund operations through the third quarter of 2016.
In order to continue to advance our business plan and outstanding obligations, we will need to raise additional capital in the foreseeable future to fund our operations and to potentially expand our business. We expect to seek additional funding through public and/or private offerings of debt and equity securities. We may also seek capital from other sources, including contribution by others to joint ventures, or collaborative arrangements or licensing for the development, testing, manufacturing and marketing of products under development. As of this Report, we have no agreements with respect to our potential receipt of additional capital.
Historically, we have been able to raise capital as needed to fund our operations at a base level, but we have generally not raised capital sufficient to fund unexpected occurrences, to cover projected expenses over the long term or to fund extensive research, marketing and development. As of the date of this report, we have not commenced discussions with respect to any future offerings. As a result, there is a risk that we will not be able to obtain capital as needed later in 2016. In addition, we will need to continue to seek capital from the market over the long term. To the extent we raise capital, it generally will be on terms that are dilutive to shareholders and may require the issuance of warrants or similar incentives, the agreement to restrictive covenants and/or the pledge of our assets as securities for debt financings.
Our future capital requirements and adequacy of available funds will depend on many factors including:
§
|
our ability, or inability, to successfully commercialize our wound management products and the market acceptance of these products;
|
§
|
our ability to establish and maintain collaborative arrangements with corporate partners for the development and commercialization of certain product opportunities;
|
§
|
continued scientific progress in our development programs;
|
§
|
our ability to collect outstanding receivables;
|
§
|
the costs involved in filing, prosecuting and enforcing patent claims;
|
§
|
competing technological developments;
|
§
|
the trading volume and price of our capital stock;
|
§
|
the actions of parties whose consents, waivers or prompt responses are required for approval of a financing (such as parties with rights of first refusal or consent rights);
|
§
|
our general financial situation, including the amount of our indebtedness; and
|
§
|
the cost of, and other issues associated with, manufacturing and production scale-up.
|
Contractual Obligations
The following table summarizes our outstanding contractual cash obligations as of June 30, 2016, which is composed of the principle due under the April 2015 Note, a lease agreement for office and laboratory space in Addison, Texas and a lease agreement for office equipment. These obligations and commitments assume non-termination of agreements and represent expected payments based on current operating forecasts, which are subject to change:
|
|
Payments Due By Period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
1-2
Years
|
|
|
3-5
Years
|
|
|
After 5
Years
|
|
April 2015 Note
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
Operating leases
|
|
$
|
208,618
|
|
|
$
|
119,840
|
|
|
$
|
88,778
|
|
|
$
|
---
|
|
|
$
|
---
|
|
Total contractual cash obligations
|
|
$
|
333,618
|
|
|
$
|
244,840
|
|
|
$
|
88,778
|
|
|
$
|
---
|
|
|
$
|
---
|
|
Capital Expenditures
For the six months ended June 30, 2016 and 2015, our expenditures for property, equipment, and leasehold improvements were nil and $787, respectively. At this time, we believe that our capital expenditures for 2016 will be approximately $30,000 and consist of equipment related to the manufacture of our products.
Off-Balance Sheet Arrangements
As of June 30, 2016, we did not have any off balance sheet arrangements.
Impact of Inflation
We have experienced only moderate price increases over the last three fiscal years under our agreements with third-party manufacturers as a result of raw material and labor price increases. However, there can be no assurance that possible future inflation would not impact our operations.
Concentrations of Credit Risk
Concentration of credit risk with respect to financial instruments, consisting primarily of cash and cash equivalents, potentially expose us to concentrations of credit risk due to the use of a limited number of banking institutions and due to maintaining cash balances in banks, which, at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation. Currently, we utilized Bank of America, N.A. as our banking institution. At June 30, 2016 and December 31, 2015 our cash and cash equivalents totaled approximately $718,000 and $180,000, respectively. We also invest cash in excess of immediate requirements in money market accounts, certificates of deposit, corporate commercial paper with high quality ratings, and U.S. government securities. These investments are not held for trading or other speculative purposes. We are exposed to credit risk in the event of default by these institutions.
Concentration of credit risk with respect to trade accounts receivable are customers with balances that exceed 5% of total consolidated trade accounts receivable at June 30, 2016 and at December 31, 2015. As of June 30, 2016, one customer, being one of our international distributors, exceeded the 5% threshold, with 83%. At December 31, 2015, one customer, being one of our international distributors, exceeded the 5% threshold with 92%. Historically, we have relied primarily on a group of affiliated entities for the distributions of our products. At least one of these entities, Altrazeal AG, is insolvent, and we believe that related distributors may also be insolvent. The weak financial position of these distributors has historically led to issues collecting accounts receivable. Going forward, we are routinely assessing the financial strength of our most significant customers and monitoring the amounts owed to us, taking appropriate action when necessary. As a result, we believe that our prospective accounts receivable credit risk exposure is limited.
Concentrations of Foreign Currency Risk
Currently, a portion of our revenues and all of our expenses are denominated in U.S. dollars. We are experiencing an increase in revenues in international territories denominated in a foreign currency. Certain of our licensing and distribution agreements in international territories are denominated in Euros. Currently, we do not employ forward contracts or other financial instruments to mitigate foreign currency risk. As our international operations continue to grow, we may engage in hedging activities to hedge our exposure to foreign currency risk.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The preparation of our financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate these estimates and judgments. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are summarized in our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the Securities and Exchange Commission on March 30, 2016. We had no significant changes in our critical accounting policies since our last annual report.
ITEM 3.
|
Quant
itative and Qualitative Disclosures About Market Risk.
|
This item is not applicable to smaller reporting companies.
ITEM 4.
|
C
ont
rols and Procedures.
|
Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this quarterly report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to the Company's management, as appropriate, to allow timely decisions regarding required disclosure, and are operating in an effective manner.
Changes in Internal Controls Over Financial Reporting
During the fiscal quarter ended June 30, 2016, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.