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ULURU INC. 10-Q 2010
from10q_063010.htm
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended:June 30, 2010

OR

[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from: ___ to ___.

Commission File Number: 000-49670

ULURU Inc.
(Exact Name of Registrant as Specified in its Charter)

Nevada
41-2118656
(State or Other Jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 

4452 Beltway Drive
Addison, Texas
75001
(Address of Principal Executive Offices)
(Zip Code)

(214) 905-5145
Registrant's Telephone Number, including Area Code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
    Yes  þ    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerate filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company þ


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  þ

As of August 16, 2010, there were 82,117,230 shares of the registrant’s Common Stock, $0.001 par value per share, issued and outstanding.




INDEX TO FORM 10-Q

For the Six Months Ended JUNE 30, 2010



   
Page
 
     
     
 
 
 
 
     
     
     
     
 
     
     
     
     
     
     
     
     
 
     




Financial Statements.


CONDENSED CONSOLIDATED BALANCE SHEETS

   
June 30, 2010
   
December 31, 2009
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 1,700,981     $ 1,934,177  
Accounts receivable
    336,412       218,256  
Other receivable – current portion
    492,731       ---  
Inventory
    923,669       1,008,998  
Prepaid expenses and deferred charges
    115,051       383,419  
Total Current Assets
    3,568,844       3,544,850  
                 
Property, Equipment and Leasehold Improvements, net
    1,531,577       1,631,557  
                 
Other Assets
               
Intangible assets, net
    5,804,475       8,183,146  
Other receivable, net of current portion
    235,538       ---  
Deposits
    18,069       20,819  
Total Other Assets
    6,058,082       8,203,965  
                 
TOTAL ASSETS
  $ 11,158,503     $ 13,380,372  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
         
Current Liabilities
               
Accounts payable
  $ 651,051     $ 617,443  
Accrued liabilities
    185,874       215,431  
Deferred revenue – current portion
    125,592       96,897  
Total Current Liabilities
    962,517       929,771  
                 
Long Term Liabilities
               
Deferred revenue, net of current portion
    1,447,235       1,272,843  
                 
TOTAL LIABILITIES
    2,409,752       2,202,614  
                 
COMMITMENTS AND CONTINGENCIES
    ---       ---  
                 
STOCKHOLDERS' EQUITY
               
                 
Preferred stock - $0.001 par value; 20,000 shares authorized;
               
no shares issued and outstanding
    ---       ---  
                 
Common Stock - $0.001 par value; 200,000,000 shares authorized;
               
82,041,527 and 76,813,886 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively
    82,042       76,814  
Additional paid-in capital
    48,017,730       46,923,499  
Accumulated deficit
    (39,351,021 )     (35,822,555 )
TOTAL STOCKHOLDERS’ EQUITY
    8,748,751       11,177,758  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 11,158,503     $ 13,380,372  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
REVENUES
                       
License fees
  $ 123,530     $ 24,925     $ 145,913     $ 49,576  
Royalty income
    56,308       63,858       109,369       143,103  
Product sales
    51,796       47,311       211,582       79,954  
Other
    ---       ---       ---       32,190  
Total Revenues
    231,634       136,094       466,864       304,823  
                                 
COSTS AND EXPENSES
                               
Cost of goods sold
    6,161       8,921       136,844       14,998  
Research and development
    367,395       854,460       653,179       1,629,879  
Selling, general and administrative
    922,029       1,835,487       1,738,917       4,060,106  
Amortization of intangible assets
    246,282       269,183       492,798       535,449  
Depreciation
    49,990       47,007       99,980       79,578  
Total Costs and Expenses
    1,591,857       3,015,058       3,121,718       6,320,010  
                                 
OPERATING (LOSS)
    ( 1,360,223 )     ( 2,878,964 )     (2,654,854 )     (6,015,187 )
                                 
Other Income (Expense)
                               
Interest and miscellaneous income
    594       21,066       715       35,620  
Interest expense
    (8,500 )     ---       (16,488 )     ---  
Loss on sale of intangible asset
    ( 857,839 )     ---       ( 857,839 )     ---  
Loss on sale of equipment
    ---       (2,121 )     ---       (2,121 )
                                 
(LOSS) BEFORE INCOME TAXES
    ( 2,225,968 )     ( 2,860,019 )     (3,528,466 )     (5,981,688 )
                                 
Income taxes
    ---       ---       ---       ---  
NET (LOSS)
  $ (2,225,968 )   $ (2,860,019 )   $ (3,528,466 )   $ (5,981,688 )
                                 
                                 
Basic and diluted net (loss) per common share
  $ (0.03 )   $ (0.04 )   $ (0.04 )   $ (0.09 )
                                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    81,974,805       65,602,990       80,970,931       65,564,354  
                                 
The accompanying notes are an integral part of these consolidated financial statements.
 




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
Six Months Ended June 30,
 
   
2010
   
2009
 
OPERATING ACTIVITIES :
           
Net (loss)
  $ (3,528,466 )   $ (5,981,688 )
                 
Adjustments to reconcile net (loss) to net cash (used in) provided by operating activities:
               
                 
Amortization of intangible assets
    492,798       535,449  
Depreciation
    99,980       94,278  
Share-based compensation for stock and options issued to employees
    178,737       1,218,726  
Share-based compensation for options issued to non-employees
    62,742       75,074  
Loss on sale of intangible asset
    857,839       ---  
Loss on sale of equipment
    ---       2,121  
                 
Change in operating assets and liabilities:
               
Accounts receivable
    (118,156 )     (122,604 )
Other receivable
    (235 )     ---  
Inventory
    85,329       11,346  
Prepaid expenses and deferred charges
    268,368       306,721  
Deposits
    2,750       ---  
Accounts payable
    33,608       (763,912 )
Accrued liabilities
    (29,557 )     (105,666 )
Deferred revenue
    203,087       (71,766 )
Royalty advance
    ---       (30,417 )
Total
    2,137,290       1,149,350  
                 
Net Cash (Used in) Operating Activities
    (1,391,176 )     (4,832,338 )
                 
INVESTING ACTIVITIES :
               
Purchase of property and equipment
    ---       (14,176 )
Increase in notes receivable
    ---       (1,018,219 )
Proceeds from sale of intangible asset
    300,000       ---  
Proceeds from sale of equipment
    ---       7,150  
Net Cash Provided by (Used in) Investing Activities
    300,000       (1,025,245 )
                 
FINANCING ACTIVITIES :
               
Proceeds from sale of common stock, net
    857,980       ---  
Net Cash Provided by Financing Activities
    857,980       ---  
                 
Net Decrease in Cash
    (233,196 )     (5,857,583 )
                 
Cash,  beginning of period
    1,934,177       7,567,588  
Cash,  end of period
  $ 1,700,981     $ 1,710,005  
                 
SUPPLEMENTAL CASH FLOW DISCLOSURE:
               
Cash paid for interest
  $ 488     $ ---  
Non-cash investing and financing activities:
               
Sale of intangible asset included in Other receivable
  $ 728,034     $ ---  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 




NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.                      COMPANY OVERVIEW AND BASIS OF PRESENTATION

Company Overview

ULURU Inc. (hereinafter “we”, “our”, “us”, “ULURU”, or the “Company”) is a Nevada corporation.  We are a diversified specialty pharmaceutical company committed to developing and commercializing a broad range of innovative wound care and muco-adhesive film products based on our patented NanoflexTM and OraDiscTM drug delivery technologies, with the goal of improving outcomes for patients, health care professionals, and health care payers.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and include the account of ULURU Inc., a Nevada corporation, and its wholly-owned subsidiary, Uluru Delaware Inc., a Delaware corporation.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of June 30, 2010 and the results of its operations for the three and six months ended June 30, 2010 and 2009 and cash flows for the six months ended June 30, 2010 and 2009 have been made.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.  Actual results may differ from those estimates and assumptions.  These differences are usually minor and are included in our consolidated financial statements as soon as they are known.  Our estimates, judgments, and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

All intercompany transactions and balances have been eliminated in consolidation.

Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 24, 2010.


NOTE 2.                      SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and six months ended June 30, 2010 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on March 24, 2010.


NOTE 3.                      THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”).  ASU 2010-06 requires disclosing the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and to describe the reasons for the transfers.  The disclosures were effective for reporting periods beginning after December 15, 2009.  Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in Level 3 fair value measurements will be required for fiscal years beginning after December 15, 2010. The Company adopted the provisions of ASU 2010-06 and it did not have a material effect on our consolidated results of operations, financial position or liquidity.

In April 2010, FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition (“ASU 2010-17”), which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions.  Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts.  The amendments in this ASU provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate.  ASU 2010-17 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010, with early adoption permitted.  The Company does not expect the provisions of ASU 2010-17 to have a material effect on its consolidated results of operations, financial position or liquidity.


NOTE 4.                      SEGMENT INFORMATION

We operate in one business segment: the research, development and commercialization of pharmaceutical products.  Our corporate headquarters in the United States collects product sales, licensing fees, royalties, and sponsored research revenues from our arrangements with external customers and licensees.  Our entire business is managed by a single management team, which reports to the Chief Executive Officer.

Our revenues are currently derived primarily from one licensee for domestic activities, four licensees for international activities, and our sales force for the domestic sale of Altrazeal®.

Revenues per geographic area for the three and six months ended June 30 are summarized as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
Revenues
 
2010
   
%
   
2009
   
%
   
2010
   
%
   
2009
   
%
 
Domestic
  $ 78,969       34 %   $ 69,031       51 %   $ 246,000       53 %   $ 122,837       40 %
International
    152,665       66 %     67,063       49 %     220,864       47 %     181,986       60 %
Total
  $ 231,634       100 %   $ 136,094       100 %   $ 466,864       100 %   $ 304,823       100 %
 
 
A significant portion of our revenues are derived from a few major customers.  Customers with greater than 10% of total sales for the three and six months ended June 30 are represented on the following table:

     
Three Months Ended June 30,
   
Six Months Ended June 30,
 
Customers
Product
 
2010
   
2009
   
2010
   
2009
 
  Discus Dental, Inc.
Aphthasol®
    12 %     16 %     37 %     14 %
  Meldex International
OraDisc™ B
    10 %     17 %     10 %     16 %
  ProStrakan, Ltd.
Zindaclin®
    56 %     31 %     37 %     33 %
  Hoffmann-LaRoche
OraDisc™
    ---       ---       ---       11 %
  Total
      78 %     64 %     84 %     74 %
                                   



NOTE 5.                      OTHER RECEIVABLE

On June 25, 2010, the Company entered into an acquisition and license agreement (the “Agreement”) with Strakan International Limited and Zindaclin Limited, a subsidiary of Crawford Healthcare Limited, a pharmaceutical company based in England.  Under the terms of the Agreement, Zindaclin Limited will pay up to $5.1 million for the exclusive product rights to Zindaclin®, a zinc clindamycin for the treatment of acne, which consideration will be shared equally by Strakan International Limited and ULURU.  Guaranteed payments of $1,050,000 are scheduled to be received by the Company, of which $300,000 occurred in June 2010, $500,000 will occur in the next 12 months, and $250,000 will occur in the following year.  The receipt of the full purchase price will be dependent on product approval in the United States.

Other receivables consisted of the following at June 30, 2010:

 
Payment obligation due:
 
Gross
Receivable
   
Imputed
 Interest
   
Net
Receivable
 
  2010
  $ 250,000     $ ---     $ 250,000  
  2011
    250,000       7,269       242,731  
  Subtotal
    500,000       7,269       492,731  
                         
  2012
    250,000       14,462       235,538  
  Total
  $ 750,000     $ 21,731     $ 728,269  


NOTE 6.                      INVENTORY

As of June 30, 2010, our inventory was comprised of raw materials, manufacturing costs incurred in the production of Altrazeal®, and Altrazeal® finished goods.  Inventories are stated at the lower of cost (first-in, first-out method) or market.  Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value.  Inventory consisted of the following at June 30, 2010 and December 31, 2009:

Inventory
 
June 30, 2010
   
December 31, 2009
 
  Raw materials
  $ 77,761     $ 112,002  
  Work-in-progress
    367,084       375,228  
  Finished goods
    478,824       521,768  
  Total
  $ 923,669     $ 1,008,998  



NOTE 7.                      PROPERTY, EQUIPMENT and LEASHOLD IMPROVEMENTS

Property, equipment and leasehold improvements, net, consisted of the following at June 30, 2010 and December 31, 2009:

Property, equipment and leasehold improvements
 
June 30, 2010
   
December 31, 2009
 
  Laboratory equipment
  $ 424,888     $ 424,888  
  Manufacturing equipment
    1,483,223       1,483,223  
  Computers, office equipment, and furniture
    140,360       140,360  
  Computer software
    4,108       4,108  
  Leasehold improvements
    95,841       95,841  
      2,148,420       2,148,420  
  Less: accumulated depreciation and amortization
    ( 616,843 )     ( 516,863 )
  Property, equipment and leasehold improvements, net
  $ 1,531,577     $ 1,631,557  

Depreciation expense on property, equipment and leasehold improvements was $49,990 and $47,007 for the three months ended June 30, 2010 and 2009, respectively, and was $99,980 and $79,578 for the six months ended June 30, 2010 and 2009, respectively.


NOTE 8.                      INTANGIBLE ASSETS

Intangible assets are comprised of patents acquired in October, 2005.  Intangible assets, net consisted of the following at June 30, 2010 and December 31, 2009:

Intangible assets
 
June 30, 2010
   
December 31, 2009
 
  Patent - Zindaclin®
  $ ---     $ 3,729,000  
  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       13,354,938  
  Less: accumulated amortization
    ( 3,821,463 )     ( 4,455,159 )
  Less: impairment charge
    ---       ( 716,633 )
  Intangible assets, net
  $ 5,804,475     $ 8,183,146  

On June 25, 2010, the Company entered into an acquisition and license agreement for the divestiture of our Zindaclin® intangible asset.  In connection with the divestiture of Zindaclin®, we recognized a loss of $857,839 for the three months ended June 30, 2010.  Refer to Footnote 5 for more detailed disclosure.

Amortization expense for intangible assets was $246,282 and $269,183 for the three months ended June 30, 2010 and 2009, respectively, and was $492,798 and $535,449 for the six months ended June 30, 2010 and 2009, respectively.  The future aggregate amortization expense for intangible assets, remaining as of June 30, 2010, is as follows:

Calendar Years
 
Future Amortization
Expense
 
  2010 (Six months)
  $ 412,908  
  2011
    769,132  
  2012
    476,450  
  2013
    475,148  
  2014
    475,148  
  2015 & Beyond
    3,195,689  
  Total
  $ 5,804,475  


 
- 10 -



NOTE 9.                      ACCRUED LIABILITIES

Accrued liabilities consisted of the following at June 30, 2010 and December 31, 2009:

Accrued Liabilities
 
June 30, 2010
   
December 31, 2009
 
  Accrued taxes – payroll
  $ 106,299     $ 106,299  
  Accrued compensation/benefits
    72,984       56,837  
  Accrued insurance payable
    ---       52,295  
  Product rebates/returns
    141       ---  
  Other
    6,450       ---  
  Total accrued liabilities
  $ 185,874     $ 215,431  


NOTE 10.                      STOCKHOLDERS’ EQUITY

Common Stock

As of June 30, 2010, the Company had 82,041,527 shares of common stock issued and outstanding.  The Company issued 94,870 shares of common stock during the three months ended June 30, 2010 pursuant to the vesting of certain restricted stock awards.

Warrants

The following table summarizes the warrants outstanding and the number of shares of common stock subject to exercise as of June 30, 2010 and the changes therein during the six months then ended:

   
Number of Shares of Common Stock Subject to Exercise
   
Weighted – Average
Exercise Price
 
Balance as of December 31, 2009
    8,687,956     $ 0.48  
Warrants issued
    250,000       0.25  
Warrants exercised
    ---       ---  
Warrants cancelled
    ---       ---  
Balance as of June 30, 2010
    8,937,956     $ 0.47  


Of the warrant shares subject to exercise as of June 30, 2010, expiration of the right to exercise is as follows:
Date of expiration
 
Number of Warrant Shares of Common Stock Subject to Expiration
 
  August 30, 2011
    1,125,000  
  December 6, 2011
    1,670,000  
  July 23, 2014
    785,723  
  May 15, 2015
    5,357,233  
  Total
    8,937,956  


 
- 11 -



NOTE 11.                      EARNINGS PER SHARE

Basic and Diluted Net Loss Per Share

In accordance with ASC Topic 260, Earnings per Share, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period.  Diluted earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, increased to include potential dilutive common shares.  The effect of outstanding stock options, restricted vesting common stock and warrants, when dilutive, is reflected in diluted earnings (loss) per common share by application of the treasury stock method.  We have excluded all outstanding stock options, restricted vesting common stock and warrants from the calculation of diluted net loss per common share because all such securities are antidilutive for all periods presented.

Shares used in calculating basic and diluted net loss per common share exclude these potential common shares as of June 30, 2010 and December 31, 2009:

   
June 30, 2010
   
December 31, 2009
 
Antidilutive warrants to purchase common stock
    8,937,956       8,687,956  
Antidilutive options to purchase common stock
    5,106,000       3,306,000  
Restricted vesting common stock
    178,241       405,882  
Total
    14,222,197       12,399,838  


 
- 12 -



NOTE 12.                      SHARE BASED COMPENSATION

The Company’s share-based compensation plan, the 2006 Equity Incentive Plan (“Incentive Plan”), is administered by the compensation committee of the Board of Directors, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award.

We account for share-based compensation under 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 June 30:

   
2010
   
2009(4)
 
Incentive Stock Options
           
Expected volatility  (1)
    86.9 %     ---  
Risk-free interest rate %  (2)
    2.23 %     ---  
Expected term (in years)
    6.0       ---  
Dividend yield  (3)
    0.0 %     ---  
Forfeiture rate
    0.0 %     ---  
                 
Nonstatutory Stock Options
               
Expected volatility  (1)
    86.9 %     ---  
Risk-free interest rate %  (2)
    2.50 %     ---  
Expected term (in years)
    7.2       ---  
Dividend yield  (3)
    0.0 %     ---  
Forfeiture rate
    0.0 %     ---  

(1)
Expected volatility assumption was based upon a combination of historical stock price volatility measured on a daily basis and an estimate of expected future stock price volatility
(2)
Risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of the stock options.
(3)
The Company does not currently intend to pay cash dividends, thus has assumed a 0% dividend yield.
(4)
The Company did not award any share-based compensation for the three months ended June 30, 2009.


 
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Our Board of Directors granted the following incentive stock option awards to executives or employees and nonstatutory stock option awards to directors or non-employees for the three and six months ended June 30:

   
Three Months Ended
June 30,
   
Six Months Ended
 June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Incentive Stock Options
                       
Quantity
    80,000       ---       100,000       ---  
Weighted average fair value per share
  $ 0.11       ---     $ 0.12       ---  
Fair value
  $ 9,070       ---     $ 11,819       ---  
                                 
Nonstatutory Stock Options
                               
Quantity
    1,800,000       ---       1,800,000       75,000  
Weighted average fair value per share
  $ 0.13       ---     $ 0.13     $ 0.14  
Fair value
  $ 229,711       ---     $ 229,711     $ 10,672  


Stock Options (Incentive and Nonstatutory)

The following table summarizes share-based compensation related to stock options for the three and six months ended June 30:


   
Three Months Ended
 June 30,
   
Six Months Ended
 June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Research and development
  $ 31,028     $ 159,051     $ 54,503     $ 194,741  
Selling, general and administrative
    12,535       224,394       122,118       818,535  
  Total share-based compensation expense
  $ 43,563     $ 383,445     $ 176,621     $ 1,013,276  

At June 30, 2010, 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 $389,892.  The period over which the unearned share-based compensation is expected to be recognized is approximately three years.

 
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The following table summarizes the stock options outstanding and the number of shares of common stock subject to exercise as of June 30, 2010 and the changes therein during the six months then ended:

   
Stock Options
   
Weighted Average Exercise Price per Share
 
Outstanding as of December 31, 2009
    3,306,000     $ 2.34  
Granted
    1,900,000       0.16  
Forfeited/cancelled
    (100,000 )     2.84  
Exercised
    ---       ---  
Outstanding as of June 30, 2010
    5,106,000     $ 1.52  

The following table presents the stock option grants outstanding and exercisable as of June 30, 2010:

Options Outstanding
   
Options Exercisable
 
Stock Options Outstanding
   
Weighted Average Exercise Price per Share
   
Weighted Average Remaining Contractual Life in Years
   
Stock Options Exercisable
   
Weighted Average Exercise Price per Share
 
  2,840,000     $ 0.42       8.4       1,413,333     $ 0.57  
  565,000       1.58       7.0       565,000       1.58  
  931,000       2.43       4.4       760,897       2.46  
  770,000       4.48       7.1       545,000       4.47  
  5,106,000     $ 1.53       7.3       3,284,230     $ 1.83  


Restricted Stock Awards

Restricted stock awards, which typically vest over a period of two to five years, are issued to certain key employees and are subject to forfeiture until the end of an established restriction period.  We utilize the market price on the date of grant as the fair market value of restricted stock awards and expense the fair value on a straight-line basis over the vesting period.

The following table summarizes share-based compensation related to restricted stock awards for the three and six months ended June 30:

   
Three Months Ended
 June 30,
   
Six Months Ended
 June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Research and development
  $ 9,585     $ 54,205     $ 17,194     $ 60,316  
Selling, general and administrative
    34,299       55,036       47,664       220,208  
  Total share-based compensation expense
  $ 43,884     $ 109,241     $ 64,858     $ 280,524  


 
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At June 30, 2010, the balance of unearned share-based compensation to be expensed in future periods related to restricted stock awards, as adjusted for expected forfeitures, is approximately $73,237.  The period over which the unearned share-based compensation related to restricted stock awards is expected to be recognized is approximately three years.

The following table summarizes the non-vested restricted stock awards outstanding and the number of shares of common stock subject to potential issue as of June 30, 2010 and the changes therein during the six months then ended:

   
Restricted stock
   
Weighted Average Grant Date Fair Value
 
Outstanding as of December 31, 2009
    405,882     $ 0.51  
Shares granted
    ---       ---  
Shares forfeited/cancelled
    ---       ---  
Shares exercised/issued
    (227,641 )     0.40  
Outstanding as of June 30, 2010
    178,241     $ 0.65  


Summary of Plans

2006 Equity Incentive Plan

In March 2006 our board of directors (“Board”) adopted and our stockholders approved our 2006 Equity Incentive Plan (“Incentive Plan”), which initially provided for the issuance of up to 2 million 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, and on June 15, 2010, our stockholders approved amendments to the Incentive Plan to increase the total number of shares of Common Stock issuable under the Incentive Plan pursuant to stock options and other equity awards by 4 million shares, 3 million shares, and 3 million shares, respectively.

As of June 30, 2010, we had granted options to purchase 6,110,000 shares of Common Stock since the inception of the Incentive Plan, of which 5,106,000 were outstanding at a weighted average exercise price of $1.52 per share and we had granted awards for 1,029,242 shares of restricted stock since the inception of the Incentive Plan, of which 178,241 were outstanding.  As of June 30, 2010, there were 5,843,180 shares that remained available for future grant under our Incentive Plan.


NOTE 13.                      INCOME TAXES

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.


 
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NOTE 14.                      COMMITMENTS AND CONTINGENCIES

Operating Lease

On January 31, 2006 we entered into a lease agreement for office and laboratory space in Addison, Texas.  The lease, which commenced on April 1, 2006 and continues until April 1, 2013, currently requires a monthly lease obligation of $9,330 per month, which is inclusive of monthly operating expenses.  The future minimum lease payments are as follows as of June 30, 2010:

Calendar Years
 
Future Lease Expense
 
  2010 (Six months)
  $ 55,978  
  2011
    115,971  
  2012
    117,310  
  2013
    29,328  
  Total
  $ 318,587  

Rent expense for our operating lease amounted to $28,872 and $26,311 for the three months ended June 30, 2010 and 2009, respectively, and was $62,350 and $53,726 for the six months ended June 30, 2010 and 2009, 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 may enable 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.

Employment Agreements

As of June 30, 2010 the Company is party to employment agreements with its Vice President and Chief Financial Officer, Terrance K. Wallberg, as well as other key executives including Daniel G. Moro, Vice President – Polymer Drug Delivery and John V. St. John, Ph.D., Vice President - Research and Development.  The employment agreements with Messrs. Wallberg, Moro, and St. John each have a term of one year and include an automatic one-year term renewal for each year thereafter.  Each employment agreement provides for a base salary, bonus, stock options, stock grants, and eligibility for Company provided benefit programs.  Under certain circumstances, the employment agreements provide for certain severance benefits in the event of termination or a change in control.  The employment agreements also contain non-solicitation, confidentiality and non-competition covenants, and a requirement for the assignment of certain invention and intellectual property rights to the Company.

 
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Separation Agreement

On June 4, 2010 the Company entered into a separation agreement with Renaat Van den Hooff, the Company’s former Chief Executive Officer, whereby the Company will provide certain benefits to Mr. Van den Hooff, including: (i) payments of $12,500 per month for a period of eighteen (18) months; (ii) a non-statutory stock option to purchase up to 300,000 shares of the Company’s common stock, which option is immediately exercisable in full and at any time and from time to time through June 4, 2015 at a per share exercise price of $0.14 (the closing price of the Company’s common stock on June 4, 2010); (iii) full acceleration of all vesting schedules for all shares of restricted stock of the Company held by Mr. Van den Hooff; and (iv) for a period of eighteen (18) months following the date of the separation agreement the Company will maintain and provide coverage under Mr. Van den Hooff’s existing health coverage plan.  The separation agreement contains a mutual release of claims and other standard provisions.

As of June 30, 2010 the Company continues to be a party to a separation agreement with Kerry P. Gray, who currently serves as the Company’s Chairman of the Board, Chief Executive Officer, and President, whereby the Company provides or has provided, as applicable, certain benefits to Mr. Gray, including: (i) payments totaling $400,000 during the initial 12 month period following March 9, 2009; (ii) commencing March 1, 2010 and continuing for a period of forty-eight (48) months, the Company has and will continue to pay to Mr. Gray a payment of $12,500 per month; (iii) full acceleration of all vesting schedules for all outstanding Company stock options and shares of restricted stock of the Company held by Mr. Gray, with all such Company stock options remaining exercisable by Mr. Gray until March 1, 2012, provided that Mr. Gray has forfeited 300,000 stock options previously held by him; and (iv) for a period of twenty-four (24) months following March 9, 2009 the Company is required to maintain and provide coverage under Mr. Gray’s existing health coverage plan.  Certain of such payments are secured by a security interest in favor of Mr. Gray in our intellectual property relating to Zindaclin®.  The separation agreement also provides that Mr. Gray was to serve as a consultant to the Company for up to two full days per month through August 31, 2009.  Mr. Gray was not paid for the performance of such consulting services.  The separation agreement contains a mutual release of claims, certain stock lock-up provisions, and other standard provisions.

Milestone Payments

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, 2010, 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, the Company terminated the license agreement with ProStrakan Ltd. for Amlexanox-related products in the United Kingdom and Ireland.  As part of the termination, the Company agreed to pay ProStrakan Ltd. a royalty of 30% on any future payments received by the Company from a new licensee in the United Kingdom and Ireland territories, up to a maximum of $1,400,000.  On November 17, 2008, the Company entered into a licensing agreement for Amlexanox-related product rights to the United Kingdom and Ireland territories with MEDA AB.

 
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NOTE 15.                      LEGAL PROCEEDINGS

The Company was served in April 2009 with a complaint in an action in the Supreme Court for New York County, State of New York.  The plaintiff, R.C.C. Ventures, LLC, alleges that it is due a fee for its performance in procuring or arranging a loan for the Company.  The Company denies all allegations of the complaint and any liability to the plaintiff and will vigorously defend against this claim.  The Company has also made a counterclaim against R.C.C. Ventures, LLC for breach of contract and is seeking monetary damages.


NOTE 16.                      SUBSEQUENT EVENTS

We have evaluated, for potential recognition and disclosure, subsequent events that have occurred after the balance sheet date but before the financial statements were available to be issued, which the Company considers to be the date of filing with the Securities and Exchange Commission.



 
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Management’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 2009 Annual Report on Form 10-K, referred to as our 2009 Form 10-K, which has been previously filed with the Securities and Exchange Commission. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties, including the statement that our cash and cash equivalents are sufficient to fund our operations through the third quarter of 2011.  Our actual results could differ materially from those anticipated by such forward-looking information due to competitive factors and other risks discussed in our 2009 Form 10-K under “Risks Associated with our Business”.

Business Overview

ULURU Inc. (hereinafter “we”, “our”, “us”, “ULURU”, or the “Company”) is a Nevada corporation.  We are a diversified specialty pharmaceutical company committed to developing and commercializing a broad range of innovative wound care and muco-adhesive film products based on our patented NanoflexTM and OraDiscTM drug delivery technologies, with the goal of improving outcomes for patients, health care professionals, and health care payers.

Our strategy is threefold:

§ 
Establish the foundation for a market leadership position in wound management by developing and commercializing a customer focused portfolio of innovative wound care products based on the NanoflexTM technology to treat the various phases of wound healing;
§ 
Develop our oral-transmucosal technology (OraDiscTM) and generate revenues through multiple licensing agreements; and
§ 
Develop our NanoflexTM technology for the medical aesthetics market and enter into one or more strategic partnerships to bring these products to market.


Recent Developments

On July 29, 2010, the Company received notification that Altrazeal® Transforming Powder Dressing had been granted CE Mark Certification.  The issuance of a CE Mark for Altrazeal® represents a significant milestone for the commercial expansion of our advanced woundcare product.
 
On June 28, 2010, the Company entered into a licensing and supply agreement (the “Aiqilin Agreement”) with Jiangxi Aiqilin Pharmaceuticals Group Company, a corporation in China (“Aiqilin”), for the development and commercialization of Altrazeal® in China, including Hong Kong, Macau, and Taiwan.  Under the terms of the Aiqilin Agreement, the Company will receive an upfront licensing payment, milestone payments based on certain regulatory approvals and on the achievement of certain cumulative product sales performance, and a royalty based on product sales.  Aiqilin has also been granted certain manufacturing rights.  The Aiqilin Agreement covers Altrazeal®, Altrazeal® Silver, and Altrazeal® Collagen.

On June 25, 2010, the Company entered into an acquisition and license agreement (the “Zindaclin Agreement”) with Strakan International Limited and Zindaclin Limited, a subsidiary of Crawford Healthcare Limited, a pharmaceutical company based in England.  Under the terms of the Zindaclin Agreement, Zindaclin Limited will pay up to $5.1 million for the product rights to Zindaclin®, a zinc clindamycin for the treatment of acne, which consideration will be shared equally by Strakan International Limited and ULURU.  Guaranteed payments of $1,050,000 are scheduled to be received by the Company, of which $300,000 occurred in June 2010, $500,000 will occur in the next 12 months, and $250,000 will occur in the following year.  The receipt of the full purchase price will be dependent on product approval in the United States.

Effective June 4, 2010, Renaat Van den Hooff resigned as the President and Chief Executive Officer of the Company.  Kerry P. Gray, the Company’s Chairman of the Board has been appointed to also serve as President and Chief Executive Officer.  In connection with Mr. Van den Hooff’s departure, the Company and Mr. Van den Hooff entered into a separation agreement whereby the Company will provide certain benefits to Mr. Van den Hooff, including: (i) payments of $12,500 per month for a period of eighteen (18) months; (ii) a non-statutory stock option to purchase up to 300,000 shares of the Company’s common stock, which option shall be immediately exercisable in full and at any time and from time to time through June 4, 2015 at a per share exercise price of $0.14 (the closing price of the Company’s common stock on June 4, 2010); (iii) full acceleration of all vesting schedules for all shares of restricted stock of the Company held by Mr. Van den Hooff; and (iv) for a period of eighteen (18) months following the date of the separation agreement the Company will maintain and provide coverage under Mr. Van den Hooff’s existing health coverage plan.  The separation agreement contains a mutual release of claims and other standard provisions.



 
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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, 2010 and 2009

Total Revenues

Revenues were $231,634 for the three months ended June 30, 2010, as compared to revenues of $136,094 for the three months ended June 30, 2009, and were comprised of licensing fees of approximately $100,000 for a Zindaclin® milestone and $23,000 for two OraDisc™ licensing agreements, $29,000 of foreign royalties from the sale of Zindaclin®, $27,000 of domestic royalties from the sale of Aphthasol® by our distributor, and product sales of approximately $52,000 for Altrazeal®.

The second quarter 2010 revenues represent an overall increase of approximately $96,000 versus the comparative second quarter 2009 revenues, due primarily to an increase of $100,000 in licensing due to the achievement of a Zindaclin® milestone.

Costs and Expenses

Cost of Goods Sold

Cost of goods sold for the three months ended June 30, 2010 was $6,161 and consisted of approximately $9,700 in costs associated with our Altrazeal® wound dressing and a credit adjustment of $3,500 in costs associated with Aphthasol®.  Cost of goods sold for the three months ended June 30, 2009 was $8,921 and was comprised entirely of costs associated with Altrazeal®.

 
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Research and Development

Research and development expenses totaled $367,395 for the three months ended June 30, 2010, including $40,613 in share-based compensation, compared to $854,460 for the three months ended June 30, 2009, which included $213,256 in share-based compensation.  The decrease of approximately $487,000 in research and development expenses continues to reflect the impact of the Company’s restructured business plan which contributed to decreases in scientific personnel costs of $356,000, regulatory consulting expenses of $128,000, and clinical testing expenses for our wound care technologies of $66,000.  These expense decreases were partially offset by an increase in regulatory fees of $37,000 and direct research costs of $33,000.

The direct research and development expenses for the three months ended June 30, 2010 and 2009 were as follows:

   
Three Months Ended June 30,
 
Technology
 
2010
   
2009
 
  Wound care & nanoparticle
  $ 40,598     $ 18,402  
  OraDisc™
    2,000       5,401  
  Aphthasol® & other technologies
    17,984       4,169  
  Total
  $ 60,582     $ 27,972  

Selling, General and Administrative

Selling, general and administrative expenses totaled $922,029 for the three months ended June 30, 2010, including $46,834 in share-based compensation, compared to $1,835,487 for the three months ended June 30, 2009, which included $279,430 in share-based compensation.

The decrease of approximately $913,000 in selling, general and administrative expenses continues to reflect the impact of the Company’s restructured business plan which contributed to reduced costs associated with our sales and marketing efforts of approximately $579,000 due to lower head count and marketing expenses, a decrease of $297,000 in administrative compensation, lower consulting fees of $41,000, a decrease in travel expenses of $8,000, and lower legal fees of $191,000.  These expense decreases were partially offset by an increase in director fees of $79,000, commissions totaling $30,000 related to the Aiqilin licensing agreement, costs of $40,000 associated with our annual meeting of shareholders, increased public relation expenses of $36,000, and legal fees related to our patents of $26,000.

 
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Amortization of Intangible Assets

Amortization of intangible assets expense totaled $246,282 for the three months ended June 30, 2010 as compared to $269,183 for the three months ended June 30, 2009.  The expense for each period consists primarily of amortization associated with our acquired patents.  There were no additional purchases of patents during the three months ended June 30, 2010 and 2009.

Depreciation

Depreciation expense totaled $49,990 for the three months ended June 30, 2010 as compared to $47,007 for the three months ended June 30, 2009.  The increase of approximately $2,000 is attributable to our purchase of additional equipment during 2009.

Interest and Miscellaneous Income

Interest and miscellaneous income totaled $594 for the three months ended June 30, 2010 as compared to $21,066 for the three months ended June 30, 2009.  The decrease of approximately $20,000 is attributable to a decrease in interest income due to lower cash balances and interest yields in 2010.

Interest Expense

Interest expense totaled $8,500 for the three months ended June 30, 2010 and consisted of interest costs associated with regulatory fees.  There was no interest expense for the three months ended June 30, 2009.

Loss on Sale of Intangible Asset

Loss on sale of intangible asset totaled $857,839 for the three months ended June 30, 2010 and consisted of the divestiture of our Zindaclin® intangible asset.  There was no intangible asset divestiture for the three months ended June 30, 2009.

 
- 23 -



Comparison of the six months ended June 30, 2010 and 2009

Total Revenues

Revenues were $466,864 for the six months ended June 30, 2010, as compared to revenues of $304,823 for the six months ended June 30, 2009, and were comprised of licensing fees of approximately $100,000 for a Zindaclin® milestone and $46,000 for two OraDisc™ licensing agreements, $75,000 of foreign royalties from the sale of Zindaclin® by our distributor, $34,000 of domestic royalties from the sale of Aphthasol® by our distributor, and product sales of approximately $138,000 for Aphthasol® and $74,000 for Altrazeal®.

The six months ended June 30, 2010 revenues represent an overall increase of approximately $162,000 versus the comparative six months ended June 30, 2009 revenues, due primarily to an increase of $138,000 in Aphthasol® product sales as we did not sell any Aphthasol® finished product to our domestic distributor during the first quarter of 2009 and an increase of $100,000 in licensing due to the achievement of a Zindaclin® milestone.  These increases were partially offset by decreases in Zindaclin® royalty fees of $25,000 and sponsored research of $32,000.

Costs and Expenses

Cost of Goods Sold

Cost of goods sold for the six months ended June 30, 2010 was $136,844 and consisted of $123,122 in costs associated with Aphthasol® and $13,722 in costs associated with our Altrazeal® wound dressing.  Cost of goods sold for the six months ended June 30, 2009 was $14,998 and was comprised entirely of costs associated with Altrazeal®.

Research and Development

Research and development expenses totaled $653,179 for the six months ended June 30, 2010, including $71,697 in share-based compensation, compared to $1,629,879 for the six months ended June 30, 2009, which included $255,057 in share-based compensation.  The decrease of approximately $977,000 in research and development expenses was primarily due to the continuation of the Company’s restructured business plan which contributed to decreases in direct research costs of $115,000, scientific personnel costs of $567,000, clinical testing expenses for our wound care technologies of $124,000, and regulatory consulting expenses of $184,000.  These decreases were partially offset by an increase in regulatory fees of $16,000.

The direct research and development expenses for the six months ended June 30, 2010 and 2009 were as follows:

   
Six Months Ended June 30,
 
Technology
 
2010
   
2009
 
  Wound care & nanoparticle
  $ 48,098     $ 49,785  
  OraDisc™
    3,188       159,126  
  Aphthasol® & other technologies
    48,645       6,093  
  Total
  $ 99,931     $ 215,004  


 
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Selling, General and Administrative

Selling, general and administrative expenses totaled $1,738,917 for the six months ended June 30, 2010, including $169,782 in share-based compensation, compared to $4,060,106 for the six months ended June 30, 2009, which included $1,038,743 in share-based compensation.

The decrease of approximately $2,321,000 in selling, general and administrative expenses was primarily due to the continuation of the Company’s restructured business plan which contributed to reduced costs associated with our sales and marketing efforts of approximately $1,215,000 due to lower head count and marketing expenses, a decrease of $933,000 in administrative compensation, lower consulting fees of $85,000, decreased legal fees related to our patents of $30,000, and lower legal fees of $261,000.  These expense decreases were partially offset by an increase in director fees of $96,000, costs of $40,000 associated with our annual meeting of shareholders, commissions totaling $30,000 related to the Aiqilin licensing agreement, increased public relation expenses of $24,000, and higher accounting fees of $11,000 related to the audit fees for 2009.

The net decrease in administrative compensation includes approximately $598,000 of share-based compensation expense that occurred in the first quarter of 2009 after giving effect to certain vesting accelerations of stock options and restricted stock, which were partially offset by certain stock option forfeitures and by savings of $77,000 relating to benefit forfeitures pursuant to the aforementioned separation agreement with our former chief executive officer.

Amortization of Intangible Assets

Amortization of intangible assets expense totaled $492,798 for the six months ended June 30, 2010 as compared to $535,449 for the six months ended June 30, 2009.  The expense for each period consists primarily of amortization associated with our acquired patents.  There were no additional purchases of patents during the three months ended June 30, 2010 and 2009.

Depreciation

Depreciation expense totaled $99,980 for the six months ended June 30, 2010 as compared to $79,578 for the six months ended June 30, 2009.  The increase of approximately $20,000 is attributable to our purchase of additional equipment during 2009.

 
- 25 -



Interest and Miscellaneous Income

Interest and miscellaneous income totaled $715 for the six months ended June 30, 2010 as compared to $35,620 for the six months ended June 30, 2009.  The decrease of approximately $35,000 is attributable to a decrease in interest income due to lower cash balances and interest yields in 2010.

Interest Expense

Interest expense totaled $16,488 for the six months ended June 30, 2010 and consisted of financing costs for our insurance policies and interest costs related to regulatory fees.  There was no interest expense for the six months ended June 30, 2009.

Loss on Sale of Intangible Asset

Loss on sale of intangible asset totaled $857,839 for the six months ended June 30, 2010 and consisted of the divestiture of our Zindaclin® intangible asset.  There was no intangible asset divestiture for the six months ended June 30, 2009.

 
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LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations primarily through the public and private sales of convertible debentures and common stock.  Product sales, royalty payments, contract research, licensing fees and milestone payments from our corporate alliances have provided, and are expected in the future to provide, funding for operations. Our principal source of liquidity is cash and cash equivalents.  As of June 30, 2010 our cash and cash equivalents were $1,700,981 which is a decrease of $233,196 as compared to our cash and cash equivalents at December 31, 2009 of $1,934,177.  Our working capital (current assets less current liabilities) was $2,606,327 at June 30, 2010 as compared to our working capital at December 31, 2009 of $2,615,079.

Consolidated Cash Flow Data
   
Six Months Ended June 30,
 
Net Cash Provided by (Used in)
 
2010
   
2009
 
  Operating activities
  $ (1,391,176 )   $ (4,832,338 )
  Investing activities
    300,000       (1,025,245 )
  Financing activities
    857,980       ---  
  Net (Decrease) in cash and cash equivalents
  $ ( 233,196 )   $ (5,857,583 )

Operating Activities

For the six months ended June 30, 2010, net cash used in operating activities was $1,391,176.  The principal components of net cash used for the six months ended June 30, 2010 were our net loss of approximately $3,528,000, a net increase of $118,000 in accounts receivable due primarily to the Aiqilin licensing agreement, and a decrease of $30,000 in accrued liabilities.  Our net loss for the six months ended June 30, 2010 included a loss of $858,000 from the sale of an intangible asset (Zindaclin®) and substantial non-cash charges of $834,000 in the form of share-based compensation, amortization of patents, and depreciation.  The aforementioned net cash used for the six months ended June 30, 2010 was partially offset by a net increase in deferred revenues of $203,000 relating to the Aiqilin licensing agreement, an increase in accounts payable of $34,000 due to timing of vendor payments, a decrease in prepaid expenses of $268,000 due to expense amortization, and a decrease in inventory of $85,000 due to product sales.

For the six months ended June 30, 2009, net cash used in operating activities was $4,832,338.  The principal component of net cash used for the six months ended June 30, 2009 stems from our net loss of approximately $5,982,000.  This net loss for the six months ended June 30, 2009 included substantial non-cash charges in the form of share-based compensation, amortization of patents, and depreciation.  These non-cash charges totaled approximately $1,924,000.  Additional uses of our net cash included a decrease of $764,000 in accounts payable due to timing of vendor payments, increased accounts receivable of $122,000, a decrease of $106,000 in accrued liabilities, the amortization of deferred revenues of $72,000, and a decrease of $30,000 in our royalty advance for Aphthasol® due to sales by our distributor.  These uses of net cash were partially offset by a decrease of $307,000 in prepaid expenses due to expense amortization, and a decrease of $11,000 in inventory due to Altrazeal® product sales.


 
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Investing Activities

Net cash provided by investing activities during the six months ended June 30, 2010 was $300,000 and relates to the proceeds received in June 2010 from the divestiture of our Zindaclin® intangible asset. The Company expects to receive additional payments from the divestiture of Zindaclin® of $250,000 by November 2010, $250,000 in June 2011, and $250,000 in June 2012.

Net cash used in investing activities during the six months ended June 30, 2009 was $1,025,245 and consisted of a decrease of approximately $1,018,000 in notes receivable associated with the York Pharma loan and a decrease of $14,000 associated with the purchase of manufacturing equipment for Altrazeal®, which were partially offset by $7,000 of proceeds from the sale of laboratory equipment.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2010 was $857,980 from the sale of common stock in February 2010.

There were no financing activities during the six months ended June 30, 2009.

Liquidity

In July 2009, the Company restructured its operations in efforts to reduce operating expenses, optimize operations and to conserve the necessary cash to further the Company’s revised business plan.  These conservation efforts continue to be in effect as part of the Company’s strategic plan for 2010.

The Company continues to seek a strategic relationship whereby the Company can more effectively maximize the revenue potential of Altrazeal® as well as continuing, with the assistance of an investment bank, to explore future fundraising using the Company’s effective shelf registration statement on Form S-3 or through the sale of non-core assets.

Under the Form S-3 shelf registration process, we may from time to time sell common stock, preferred stock, debt securities or warrants to purchase common stock, preferred stock or debt securities, or any combination of the foregoing, either individually or as units comprised of one or more of the other securities, in one or more offerings up to a total dollar amount of $25,000,000, subject to certain limitations.

As of June 30, 2010, we had cash and cash equivalents of $1,700,981.  We expect to use our cash, cash equivalents, and investments on working capital and general corporate purposes, products, product rights, technologies, property and equipment, the payment of contractual obligations, and regulatory or sales milestones that may become due.  Our long-term liquidity will depend to a great extent on our ability to fully commercialize our Altrazeal® and OraDisc™ technologies.  At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth, if any, during 2010 and beyond, such as the degree of market acceptance, patent protection and exclusivity of our products, the impact of competition, the effectiveness of our sales and marketing efforts, and the outcome of our current efforts to develop, receive approval for, and successfully launch our near-term product candidates.

 
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Based on our existing liquidity, the expected level of operating expenses, projected sales of our products combined with other revenues and proceeds from the divestiture of non-core assets, we believe that we will be able to meet our working capital and capital expenditure requirements at least through the third quarter of 2011.  We do not expect any material changes in our capital expenditure spending during 2010.  However, we cannot be sure that our anticipated revenue growth will be realized or that we will generate significant positive cash flow from operations.

As we continue to expend funds to advance our business plan, there can be no assurance that changes in our research and development plans, capital expenditures and/or acquisitions of products or businesses, or other events affecting our operations will not result in the earlier depletion of our funds.  In appropriate situations, we may seek financial assistance from other sources, including contribution by others to joint ventures and other collaborative or licensing arrangements for the development, testing, manufacturing and marketing of products under development.  Additionally, we may explore alternative financing sources for our business activities, including the possibility of loans from banks and public and/or private offerings of debt and equity securities; however we cannot be certain that funding will be available on terms acceptable to us, or at all.

Our future capital requirements and adequacy of available funds will depend on many factors including:

§ 
The ability to successfully commercialize our wound management and burn care products and the market acceptance of these products;
§ 
The ability to establish and maintain collaborative arrangements with corporate partners for the research, development and commercialization of certain product opportunities;
§ 
Continued scientific progress in our development programs;
§ 
The costs involved in filing, prosecuting and enforcing patent claims;
§ 
Competing technological developments;
§ 
The cost of manufacturing and production scale-up; and
§ 
Successful regulatory filings.


 
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Contractual Obligations

The following table summarizes our outstanding contractual cash obligations as of June 30, 2010, which consists of a lease agreement for office and laboratory space in Addison, Texas which commenced on April 1, 2006 and separation agreements with former officers of the Company.

   
Payments Due By Period
 
Contractual Obligations
 
Total
   
Less Than
1 Year
   
2-3
Years
   
4-5
Years
   
After 5
Years
 
  Operating lease
  $ 318,587     $ 113,295     $ 205,292     $ ---     $ ---  
  Separation agreements
    782,594       316,691       365,903       100,000       ---  
  Total contractual cash obligations
  $ 1,101,181     $ 429,986     $ 571,195     $ 100,000     $ ---  


Off-Balance Sheet Arrangements

As of June 30, 2010, 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.


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, 2009 as filed with the Securities and Exchange Commission on March 24, 2010.  We had no significant changes in our critical accounting policies since our last annual report.

 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q (including documents incorporated by reference) 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 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should”, “expect”, “anticipate”, “estimate”, “target”, “may”, “project”, “guidance”, “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 include, among other things, statements regarding the Company’s expected cash and cash equivalents and working capital being sufficient to fund our operations through the third quarter of 2011, and other statements, including the Company’s goals, plans and projections regarding its financial position, results of operations, cash flows, market position, product development, product approvals, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings, 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. The Company has included important factors in the cautionary statements included in its 2009 Annual Report on Form 10-K, particularly under “Risk Associated with our Business” that the Company believes could cause actual results to differ materially from any forward-looking statement.
 
Although the Company believes it has been prudent in its plans and assumptions, 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. The Company undertakes no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.

 
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Quantitative and Qualitative Disclosures About Market Risk.

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 utilize Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as our banking institutions.  At June 30, 2010 and December 31, 2009 our cash and cash equivalents totaled $1,700,981 and $1,934,177, respectively.  However, because deposits are maintained at these two financial institutions, we do not believe that there is a significant risk of loss of uninsured amounts.  We also invest cash in excess of immediate requirements in money market accounts, certificates of deposit, corporate commercial paper with high quality ratings, and U.S. government securities.  These investments are not held for trading or other speculative purposes.  We are exposed to credit risk in the event of default by these high quality corporations.

Concentration of credit risk with respect to trade accounts receivable are customers with balances that exceed 5% of total consolidated trade accounts receivable at June 30, 2010 and at December 31, 2009.  As of June 30, 2010, two customers exceeded the 5% threshold, one customer with 59% and the other customer with 30%.  Three customers exceeded the 5% threshold at December 31, 2009, each customer with 67%, 11%, and 10%, respectively.  We believe that the customer accounts are fully collectible as of June 30, 2010.

Foreign Currency Exchange Rate Risk

The royalty revenues we receive on Zindaclin® are a percentage of the net sales made by the various sub-licensees of our licensee, ProStrakan Ltd.  All of these sales are made in foreign countries and the majority of such sales are denominated in foreign currencies. The royalty payment on these foreign sales is calculated initially in the foreign currency in which the sale is made and is then converted into U.S. dollars to determine the amount that ProStrakan Ltd pays us for royalty revenues. Fluctuations in the exchange ratio of the U.S. dollar and these foreign currencies will have the effect of increasing or decreasing our royalty revenues even if there is a constant amount of sales in foreign currencies. For example, if the U.S. dollar weakens against a foreign currency, then our royalty revenues will increase given a constant amount of sales in such foreign currency.

The impact on our royalty revenues from foreign currency exchange rate risk is based on a number of factors, including the exchange rate (and the change in the exchange rate from the prior period) between a foreign currency and the U.S. dollar, and the amount of Zindaclin® sales by the various sub-licensees of ProStrakan Ltd that are denominated in foreign currencies. We do not currently hedge our foreign currency exchange rate risk.


 
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Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-14(c) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report, concluded that the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within the Company, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in internal controls.

There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to material affect, our internal controls over financial reporting.




 Legal Proceedings.

As of the date of this filing, there have been no additional material legal proceedings or material developments in the legal proceedings disclosed in Part I, Item 3, of our 2009 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 24, 2010.


 Risk Factors.

As of the date of this filing, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our 2009 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 24, 2010.


Unregistered Sales of Equity Securities and Use of Proceeds.

None.



None.

 
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(Removed and Reserved).


Other Information.

None.


Exhibits.

Exhibit Number
 
Description
     
     
     
     
     
     
       
   
*
Filed herewith.
   
**
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities and Exchange Act of 1934.


 
- 34 -





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
ULURU Inc.
   
 Date:  August 16, 2010
 
By:
 /s/ Kerry P. Gray
 
   
Kerry P. Gray
   
Chief Executive Officer and President
   
(Principal Executive Officer)
   
   
 Date:  August 16, 2010
 
By:
 /s/ Terrance K. Wallberg
 
   
Terrance K. Wallberg
   
Chief Financial Officer and Vice President
   
(Principal Financial and Accounting Officer)
 

 

 
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