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ULURU INC. 10-Q 2015

Documents found in this filing:

  1. 10-Q/A
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form10qa_093014.htm


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

FORM 10-Q/A
Amendment No. 1

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

For the quarterly period ended:September 30, 2014

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: 001-336180

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 November 14, 2014, there were 24,458,018 shares of the registrant’s Common Stock, $0.001 par value per share, and no shares of Series A Preferred Stock, $0.001 par value per share, issued and outstanding.

 
 

 

Explanatory Note

We are filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to our Quarterly Report on Form 10-Q for the period ended September 30, 2014 (the “Original Report”) as filed with the U.S. Securities and Exchange Commission on November 14, 2014 (a) to correct the Condensed Consolidated Financial Statements that were included in the Original Report, and (b) to modify other Items affected by the correction to the Condensed Consolidated Financial Statements.

Background for the Restatement

On June 27, 2012, we entered into a Securities Purchase Agreement related to our issuance of a $2,210,000 Secured Convertible Note (the “June 2012 Note”), with Inter-Mountain Capital Corp., a Delaware corporation (“Inter-Mountain”). As part of the June 2012 Note transaction, we received $1,500,000 in the form of six promissory notes in favor of the Company, each in the principal amount of $250,000 (the “Investor Notes”) and each of which became due as the outstanding balance under the June 2012 Note is reduced to certain levels. On January 22, 2014, we provided notice to Inter-Mountain of our election to exercise our rights under the June 2012 Note to offset amounts we owed to Inter-Mountain against amounts Inter-Mountain owed to us under the Investor Notes.  As a result of this offset, the amount owed by Inter-Mountain to the Company under the Investor Notes was reduced to zero.  As a result of this offset and a subsequent conversion by Inter-Mountain of the remaining balance of the June 2012 Note, the outstanding balance owed by the Company under the June 2012 Note was reduced to zero.

In connection with the preparation of our consolidated financial statements for the year ended December 31, 2014, we determined that entries recorded in the Original Report reflecting a gain of $142,703 on the early extinguishment of the June 2012 Note on January 22, 2014 (as reflected in the Condensed Consolidated Statements of Operations), a loss of $410,873 relating to the issuance of common stock for the final conversion of the June 2012 Note that occurred on March 7, 2014 (as reflected in the Condensed Consolidated Balance Sheets and included under the caption “Additional paid-in capital”), and amortization of debt discount of $970 (as reflected in the Condensed Consolidated Statements of Operations and included under the caption of “Interest expense”) did not properly take into account the effect of certain allocations of unamortized debt discount.  In this Amendment, the Company corrects this error and the financial statement herein reflect a loss of $135,078 on the early extinguishment of June 2012 Note (as reflected in the Condensed Consolidated Statements of Operations), a loss of $234,042 relating to the issuance of common stock for the final conversion of the June 2012 Note (as reflected in the Condensed Consolidated Balance Sheets and included under the caption “Additional paid-in capital”), and amortization of debt discount of $(99,980) (as reflected in the Condensed Consolidated Statements of Operations and included under the caption of “Interest expense”).  After restatement, total Stockholders’ Equity, as of September 30, 2014, remains unchanged at $2,358,126.

Because these revisions are treated as corrections of errors to our prior period financial results, the revisions are considered to be a “restatement” under U.S. generally accepted accounting principles. Accordingly, the revised financial information included in this Amendment has been identified as “restated”.
 
Items Amended in this Amendment

In this Amendment, the following Items have been revised in part:

·  
Part I, Item I Financial Statements (including Note 1 - Organization and Basis of Presentation which contains tabular disclosure regarding the restatement).
·  
Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
·  
Part I, Item 4. Controls and Procedures.
·  
Part II, Item 6. Exhibits (including currently dated certifications required by Rule 13a-14(a) under the Exchange Act).

Items in Original Report not identified above have not been modified in this Amendment. For convenience, this Amendment includes Items from the Original Report that have not been modified.  Except as required for the restatement or as addressed in the Original Report, this Amendment is as of the period ended September 30, 2014 and the date of the Original Report and does not address subsequent events  You should read this Amendment in connection with the Company’s other filings with the SEC subsequent to the Original Filing.

Restatement of Other Financial Statements

In addition to this Amendment, we are concurrently filing an amendment to our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014. We are filing amendments to such reports to restate our unaudited condensed consolidated financial statements and related financial information for the periods contained in those reports and to amend certain other Items within those reports consistent with the amendments set forth herein.

Disclosure and Internal Control Considerations

Management has assessed the effect of the restatement on the Company's internal control over financial reporting and disclosure controls and procedures and reports its conclusions in Part I, Item 4 of this Amendment.

 

 
 

 



INDEX TO FORM 10-Q/A

For the Quarter Ended SEPTEMBER 30, 2014

   
Page
 
     
     
 
 
 
 
     
     
     
     
 
     
     
     
     
     
     
     
     
 
     
     
     
     





ITEM 1.
CONDENSED CONSOLIDATED BALANCE SHEETS
   
September 30, 2014
   
December 31, 2013
 
   
(Unaudited)
   
(Audited)
 
   
(As restated, see Note 1)
       
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 40,394     $ 5,119  
Accounts receivable, net
    705,942       185,078  
Notes receivable and accrued interest, current portion
    ---       777,710  
Inventory
    319,402       395,605  
Prepaid expenses and deferred charges
    105,957       123,812  
Total Current Assets
    1,171,695       1,487,324  
                 
Property, Equipment and Leasehold Improvements, net
    488,782       638,614  
                 
Other Assets
               
Intangible assets, net
    3,315,452       3,670,837  
Investment in unconsolidated subsidiary
    ---       ---  
Deferred financing costs, net
    ---       86,770  
Deposits
    18,069       18,069  
Total Other Assets
    3,333,521       3,775,676  
                 
TOTAL ASSETS
  $ 4,993,998     $ 5,901,614  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities
               
Accounts payable
  $ 1,460,635     $ 1,734,725  
Accrued liabilities
    262,243       315,963  
Accrued interest
    ---       13,360  
Convertible notes payable, net of unamortized debt discount, current portion
    ---       1,147,057  
Deferred revenue, current portion
    58,959       58,959  
Total Current Liabilities
    1,781,837       3,270,064  
                 
Long Term Liabilities
               
Deferred revenue, net of current portion
    854,035       898,133  
Total Long Term Liabilities
    854,035       898,133  
                 
TOTAL LIABILITIES
    2,635,872       4,168,197  
                 
COMMITMENTS AND CONTINGENCIES
    ---       ---  
                 
STOCKHOLDERS' EQUITY
               
                 
Preferred stock - $0.001 par value; 20,000 shares authorized;
               
Preferred Stock Series A, 1,000 shares designated; no shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
    ---       ---  
                 
Common Stock - $0.001 par value; 200,000,000 shares authorized;
               
24,458,018 and 18,871,420 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
    24,458       18,872  
Additional paid-in capital
    56,212,114       53,336,127  
Accumulated  (deficit)
    (53,878,446 )     (51,621,582 )
TOTAL STOCKHOLDERS’ EQUITY
    2,358,126       1,733,417  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 4,993,998     $ 5,901,614  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2014
   
2013
   
2014
   
2013
 
               
(As restated, see Note 1)
       
Revenues
                       
License fees
  $ 14,861     $ 11,400     $ 44,098     $ 33,827  
Royalty income
    24,439       10,276       41,452       10,276  
Product sales, net
    283,483       88,904       548,508       197,405  
Total Revenues
    322,783       110,580       634,058       241,508  
                                 
Costs and Expenses
                               
Cost of goods sold
    223,646       60,245       377,779       104,236  
Research and development
    172,556       201,244       544,574       577,712  
Selling, general and administrative
    389,876       302,093       1,270,228       914,509  
Amortization of intangible assets
    119,763       119,763       355,385       355,385  
Depreciation
    58,702       59,688       178,809       185,536  
Total Costs and Expenses
    964,543       743,033       2,726,775       2,137,378  
Operating (Loss)
    (641,760 )     (632,453 )     (2,092,717 )     (1,895,870 )
                                 
Other Income (Expense)
                               
Interest and miscellaneous income
    198       15,088       5,258       55,564  
Interest expense
    (27,030 )     (125,904 )     (24,061 )     (385,965 )
Equity in earnings (loss) of unconsolidated subsidiary
    ---       ---       ---       ---  
Foreign currency transaction (loss)
    (10,267 )     ---       (10,267 )     ---  
Loss on early extinguishment of convertible note
    ---       ---       (135,078 )     ---  
Gain on sale of equipment
    ---       ---       ---       3,627  
(Loss) Before Income Taxes
    (678,859 )     (743,269 )     (2,256,865 )     (2,222,644 )
                                 
Income taxes
    ---       ---       ---       ---  
Net (Loss)
  $ (678,859 )   $ (743,269 )   $ (2,256,865 )   $ (2,222,644 )
                                 
Less preferred stock dividends
    ---       (6,061 )     ---       (30,236 )
Net (Loss) Allocable to Common Stockholders
  $ (678,859 )   $ (749,330 )   $ (2,256,865 )   $ (2,252,880 )
                                 
                                 
Basic and diluted net (loss) per common share
  $ (0.03 )   $ (0.05 )   $ (0.10 )   $ (0.16 )
                                 
Weighted average number of common shares outstanding
    24,518,208       15,659,822       23,363,579       13,677,186  
                                 
The accompanying notes are an integral part of these consolidated financial statements.
 




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
Nine Months Ended September 30,
 
   
2014
   
2013
 
   
(As restated, see Note 1)
       
OPERATING ACTIVITIES :
           
Net loss
  $ (2,256,865 )   $ (2,222,644 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:
               
                 
Amortization of intangible assets
    355,385       355,385  
Depreciation
    178,809       185,536  
Share-based compensation for stock and options issued to employees
    14,452       10,933  
Share-based compensation for options issued to non-employees
    56,951       45,910  
Equity in earnings (loss) of unconsolidated subsidiary
    ---       ---  
Amortization of debt discount on convertible note
    (78,078 )     134,052  
Amortization of deferred financing costs
    7,309       55,841  
Warrants issued (cancelled) for services
    72,771       (48,776 )
Common stock issued (cancelled) for services
    (22,650 )     158,250  
Common stock issued for wages
    ---       20,000  
Common stock issued for interest due on convertible note
    2,063       101,917  
Loss on early extinguishment of convertible note
    135,078       ---  
Gain on sale of equipment
    ---       (3,627 )
                 
Change in operating assets and liabilities:
               
Accounts receivable
    (520,864 )     (104,529 )
Inventory
    76,203       39,659  
Prepaid expenses and deferred charges
    17,855       63,452  
Notes receivable and accrued interest
    777,710       538,566  
Accounts payable
    (274,090 )     (637,401 )
Accrued liabilities
    (53,720 )     (29,638 )
Accrued interest
    (13,360 )     (7,158 )
Deferred revenue
    (44,098 )     91,173  
Total
    687,726       969,545  
                 
Net Cash Used in Operating Activities
    (1,569,139 )     (1,253,099 )
                 
INVESTING ACTIVITIES :
               
Purchase of property and equipment
    (28,977 )     (32,030 )
Proceeds from sale of equipment
    ---       4,937  
Net Cash Used in Investing Activities
    (28,977 )     (27,093 )
                 
FINANCING ACTIVITIES :
               
Proceeds from sale of common stock and warrants, net
    610,000       1,391,446  
Proceeds from exercise of common stock warrants
    1,800,000       ---  
Proceeds from redemption of preferred stock, net
    ---       1,864  
Repayment of principle due on convertible note
    (776,609 )     (81,666 )
Net Cash Provided by Financing Activities
    1,633,391       1,311,644  
                 
Net Increase in Cash
    35,275       31,452  
                 
Cash,  beginning of period
    5,119       21,549  
Cash,  end of period
  $ 40,394     $ 53,001  
                 
SUPPLEMENTAL CASH FLOW DISCLOSURE:
               
Cash paid for interest
  $ 29,006     $ 33,544  
                 
Non-cash investing and financing activities:
               
Issuance of common stock for principle due on convertible notes
  $ 582,029     $ 566,414  
                 
The accompanying notes are an integral part of these condensed 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 Nanoflex® and OraDiscTM technologies, with the goal of improving outcomes for patients, health care professionals, and health care payers.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and include the accounts of ULURU Inc., a Nevada corporation, and its wholly-owned subsidiary, Uluru Delaware Inc., a Delaware corporation.  They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of September 30, 2014 and the results of its operations for the three and nine months ended September 30, 2014 and 2013 and cash flows for the nine months ended September 30, 2014 and 2013 have been made.

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

All intercompany transactions and balances have been eliminated in consolidation.

Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 31, 2014, including the risk factors set forth therein.



Restatement of Prior Period Financial Statements

In connection with the preparation of our consolidated financial statements for the year ended December 31, 2014, we determined that entries recorded in the Original Report reflecting a gain of $142,703 on the early extinguishment of the June 2012 Note on January 22, 2014 (as reflected in the Condensed Consolidated Statements of Operations), a loss of $410,873 relating to the issuance of common stock for the final conversion of the June 2012 Note that occurred on March 7, 2014 (as reflected in the Condensed Consolidated Balance Sheets and included under the caption “Additional paid-in capital”), and amortization of debt discount of $970 (as reflected in the Condensed Consolidated Statements of Operations and included under the caption of “Interest expense”) did not properly take into account the effect of certain allocations of unamortized debt discount.  In this Amendment, the Company corrects this error and the financial statement herein reflect a loss of $135,078 on the early extinguishment of June 2012 Note (as reflected in the Condensed Consolidated Statements of Operations), a loss of $234,042 relating to the issuance of common stock for the final conversion of the June 2012 Note (as reflected in the Condensed Consolidated Balance Sheets and included under the caption “Additional paid-in capital”), and amortization of debt discount of $(99,980) (as reflected in the Condensed Consolidated Statements of Operations and included under the caption of “Interest expense”).  After restatement, total Stockholders’ Equity, as of September 30, 2014, remains unchanged at $2,358,126.

The following tables present the effects of the restatement on the previously issued financial statements presented herein.

Condensed Consolidated Statements of Operations (Unaudited)
 
Nine Months Ended September 30, 2014
 
   
As previously reported
   
As restated
   
Adjustment
 
Operating (Loss)
    (2,092,717 )     (2,092,717 )     ---  
Interest and miscellaneous income
    5,258       5,258       ---  
Interest expense
    (125,011 )     (24,061 )     100,950  
Equity in earnings (loss) of unconsolidated subsidiary
    ---       ---       ---  
Foreign currency transaction (loss)
    (10,267 )     (10,267 )     ---  
Gain (loss) on early extinguishment of convertible note
    142,703       (135,078 )     (277,781 )
(Loss) Before Income Taxes
    (2,080,034 )     (2,256,865 )     (176,831 )
Income taxes
    ---       ---       ---  
Net (Loss)
  $ (2,080,034 )   $ (2,256,865 )   $ (176,831 )
Less preferred stock dividends
    ---       ---       ---  
Net (Loss) Allocable to Common Stockholders
  $ (2,080,034 )   $ (2,256,865 )   $ (176,831 )
                         
Basic and diluted net (loss) per common share
  $ (0.09 )   $ (0.10 )   $ (0.01 )


Condensed Consolidated Balance Sheet (Unaudited)
 
As of September 30, 2014
 
   
As previously reported
   
As restated
   
Adjustment
 
Common stock
    24,458       24,458       ---  
Additional paid-in capital
    56,035,283       56,212,114       176,831  
Accumulated (deficit)
    (53,701,615 )     (53,878,446 )     (176,831 )
                         
Total Stockholders’ Equity
    2,358,126       2,358,126       ---  



Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended September 30, 2014
 
   
As previously reported
   
As restated
   
Adjustment
 
Net (Loss)
  $ (2,080,034 )   $ (2,256,865 )   $ (176,831 )
                         
Amortization of debt discount on convertible note
    22,872       (78,078 )     (100,950 )
Gain (loss) on early extinguishment of convertible note
    (142,703 )     135,078       277,781  
                         
Changes in operating assets and liabilities: Total
    510,895       687,726       176,831  
Net Cash Used in Operating Activities
    (1,569,139 )     (1,569,139 )     ---  






NOTE 2.
SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and nine months ended September 30, 2014 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, 2013, as filed with the Securities and Exchange Commission on March 31, 2014, with the inclusion of the following significant accounting policy:

Foreign currency transaction gain (loss)

Our functional currency and our reporting currency is the U.S. dollar and foreign currency transactions are primarily undertaken in Euros.  Monetary assets and liabilities are translated using the foreign currency exchange rate prevailing at the balance sheet date.  Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of foreign currency exchange in effect at the date of the transaction.  Expenses are translated at average foreign currency exchange rates for the period.  Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of net income.


NOTE 3.
THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

There were no new accounting pronouncements adopted or enacted during the periods presented that had, or are expected to have, a material impact on our financial statements.


NOTE 4.
SEGMENT INFORMATION

We operate in one business segment: the research, development and commercialization of pharmaceutical products.  Our corporate headquarters in the United States collects product sales, licensing fees, 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 seven licensees for international activities and our domestic sales activities of Altrazeal®.

Revenues per geographic area, along with relative percentages of total revenues, for the three and nine months ended September 30 are summarized as follows:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
Revenues
 
2014
   
%
   
2013
   
%
   
2014
   
%
   
2013
   
%
 
Domestic
  $ 8,992       3 %   $ 17,197       16 %   $ 30,435       5 %   $ 54,594       23 %
International
    313,791       97 %     93,383       84 %     603,623       95 %     186,914       77 %
Total
  $ 322,783       100 %   $ 110,580       100 %   $ 634,058       100 %   $ 241,508       100 %

A significant portion of our revenues are derived from a few major customers.  Customers with greater than 10% of total sales, along with their relative percentage of all sales, for the three and nine months ended September 30 are represented on the following table:

     
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
Customers
Product
 
2014
   
2013
   
2014
   
2013
 
  Customer A
Altrazeal®
    93 %     ---       76 %     ---  
  Customer B
Altrazeal®
    2 %     70 %     15 %     66 %
  Total
      95 %     70 %     91 %     66 %
                                   




NOTE 5.
NOTES RECEIVABLE

On June 27, 2012, we entered into a Securities Purchase Agreement related to our issuance of a $2,210,000 Secured Convertible Note (the “June 2012 Note”), with Inter-Mountain Capital Corp., a Delaware corporation (“Inter-Mountain”).  As part of the June 2012 Note transaction, we received $1,500,000 in the form of six promissory notes in favor of the Company, each in the principal amount of $250,000 (the “Investor Notes”) and each of which becomes due as the outstanding balance under the June 2012 Note is reduced to certain levels.  As of December 31, 2013, we had $777,710 in notes receivable which is comprised of $687,500 for three Investor Notes and $90,210 for accrued interest thereon.

On January 22, 2014, we provided notice to Inter-Mountain of our election to exercise our rights under the June 2012 Note and to offset amounts we owed to Inter-Mountain against amounts it owed to us under the Investor Notes.  Our notice provided that such deduction and offset occurred on January 22, 2014, that we will not incur the 120% prepayment premium with respect to amounts paid under the June 2012 Note as a result of the deduction and offset, that no warrants will become exercisable as a result of the offset, and that any warrants unvested as of January 22, 2014 shall immediately and automatically terminate.  As a result of the deduction and offset, the outstanding amount owed to us under the Investor Notes was reduced to zero.

Please refer to Note 11. for a more detailed description of the June 2012 Note transaction.


NOTE 6.
INVENTORY

As of September 30, 2014, our inventory was comprised of Altrazeal® finished goods, manufacturing costs incurred in the production of Altrazeal®, and raw materials.  Inventories are stated at the lower of cost (first in, first out method) or market.  We regularly review inventories on hand and write down the carrying value of our inventories for excess and potentially obsolete inventories based on historical usage and estimated future usage.  In assessing the ultimate realization of our inventories, we are required to make judgments as to future demand requirements.  As actual future demand or market conditions may vary from those projected by us, adjustment to inventories may be required.

The components of inventory, at the different stages of production, consisted of the following at September 30, 2014 and December 31, 2013:

Inventory
 
September 30, 2014
   
December 31, 2013
 
  Finished goods
  $ 20,917     $ 85,993  
  Work-in-progress
    267,603       299,464  
  Raw materials
    30,882       10,148  
  Total
  $ 319,402     $ 395,605  





NOTE 7.
PROPERTY, EQUIPMENT and LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements, net, consisted of the following at September 30, 2014 and December 31, 2013:

Property, equipment and leasehold improvements
 
September 30, 2014
   
December 31, 2013
 
  Laboratory equipment
  $ 424,888     $ 424,888  
  Manufacturing equipment
    1,597,987       1,581,728  
  Computers, office equipment, and furniture
    153,078       140,360  
  Computer software
    4,108       4,108  
  Leasehold improvements
    95,841       95,841  
      2,275,902       2,246,925  
  Less: accumulated depreciation and amortization
    ( 1,787,120 )     (1,608,311 )
  Property, equipment and leasehold improvements, net
  $ 488,782     $ 638,614  

Depreciation expense on property, equipment and leasehold improvements was $58,702 and $59,688 for the three months ended September 30, 2014 and 2013, respectively, and was $178,809 and $185,536 for the nine months ended September 30, 2014 and 2013, respectively.

NOTE 8.
INTANGIBLE ASSETS

Intangible assets are comprised of patents acquired in October, 2005.  Intangible assets, net consisted of the following at September 30, 2014 and December 31, 2013:

Intangible assets
 
September 30, 2014
   
December 31, 2013
 
  Patent - Amlexanox (Aphthasol®)
  $ 2,090,000     $ 2,090,000  
  Patent - Amlexanox (OraDisc™ A)
    6,873,080       6,873,080  
  Patent - OraDisc™
    73,000       73,000  
  Patent - Hydrogel nanoparticle aggregate
    589,858       589,858  
      9,625,938       9,625,938  
  Less: accumulated amortization
    ( 6,310,486 )     (5,955,101 )
  Intangible assets, net
  $ 3,315,452     $ 3,670,837  

Amortization expense for intangible assets was $119,763 and $119,763 for the three months ended September 30, 2014 and 2013, respectively, and was $355,385 and $355,385 for the nine months ended September 30, 2014 and 2013, respectively.

The future aggregate amortization expense for intangible assets, remaining as of September 30, 2014, is as follows:
Calendar Years
 
Future Amortization
Expense
 
  2014 (Three months)
  $ 119,763  
  2015
    475,148  
  2016
    476,450  
  2017
    475,148  
  2018
    475,148  
  2019 & Beyond
    1,293,795  
  Total
  $ 3,315,452  

 
- 10 -


 
NOTE 9.
INVESTMENTS IN UNCONSOLIDATED ENTITIES

We use the equity method of accounting for investments in other companies that are not controlled by us and in which our interest is generally between 20% and 50% of the voting shares or we have significant influence over the entity, or both.

Altrazeal Trading Ltd.

On January 11, 2012, we executed a shareholders’ agreement for the establishment of Altrazeal Trading Ltd., a single purpose entity to be used for the exclusive marketing of Altrazeal® throughout the European Union, Australia, New Zealand, North Africa, and the Middle East.  As a result of this transaction, we received a non-dilutable 25% ownership interest in Altrazeal Trading Ltd.  On February 1, 2014, Altrazeal Trading Ltd. transferred all of their rights and obligations under the existing shareholders’ agreement to Altrazeal Trading GmbH.

Audited financial statements of Altrazeal Trading Ltd. for the year ended December 31, 2013 and unaudited financial statements for the three months and nine months ended September 30, 2014 have not been released to us and, therefore, we have not included the effect of the financial activities of Altrazeal Trading Ltd. in our financial statements for each reporting period.  We believe that our share of the cumulative losses of Altrazeal Trading Ltd. for the years ended December 31, 2012 and 2013 and for the nine months ended September 30, 2014 would exceed the carrying value of our investment, therefore the equity method of accounting would be suspended for such reporting periods and no additional losses would be charged to operations.

Based upon audited financial statements received in May 2014, our unrecorded share of Altrazeal Trading Ltd. losses for the year ended December 31, 2012 totaled $129,207.

Summarized financial information for our investment in Altrazeal Trading Ltd. assuming 100% ownership is as follows:

Altrazeal Trading Ltd.
 
December 31, 2012
 
  Balance sheet
     
Total assets
  $ 136,661  
Total liabilities
  $ 660,006  
Total stockholders’ equity
  $ (523,345 )
  Statement of operations
       
Revenues
  $ 61,028  
Net (loss)
  $ (516,829 )
 
Altrazeal Trading GmbH

On February 1, 2014, Altrazeal Trading Ltd. transferred all of their rights and obligations under the existing shareholders’ agreement to Altrazeal Trading GmbH.  As a result of this transfer, we received a non-dilutable 25% ownership interest in Altrazeal Trading GmbH.

Audited financial statements of Altrazeal Trading GmbH for the year ended December 31, 2013 and unaudited financial statements for the three months and nine months ended September 30, 2014 have not been released to us and, therefore, we have not included the effect of the financial activities of Altrazeal Trading GmbH. in our financial statements for each reporting period.  We believe that our share of the cumulative losses of Altrazeal Trading GmbH for the years ended December 31, 2012 and 2013 and for the nine months ended September 30, 2014 would exceed the carrying value of our investment, therefore the equity method of accounting would be suspended for such reporting periods and no additional losses would be charged to operations.

Based upon the unaudited financial statements for the year ended December 31, 2013, our unrecorded share of Altrazeal Trading GmbH cumulative losses as of December 31, 2013 totaled $213,370.

Summarized financial information for our investment in Altrazeal Trading GmbH assuming 100% ownership is as follows:

Altrazeal Trading GmbH
 
December 31, 2013
(Unaudited)
 
  Balance sheet
     
Total assets
  $ 757,784  
Total liabilities
  $ 1,563,046  
Total stockholders’ equity
  $ (805,262 )
  Statement of operations
       
Revenues
  $ ---  
Net (loss)
  $ (798,009 )
 
 
- 11 -




ORADISC GmbH

On October 19, 2012, we executed a shareholders’ agreement for the establishment of ORADISC GmbH, a single purpose entity to be used for the exclusive development and marketing of OraDisc™ erodible film technology products.  We received a non-dilutable 25% ownership interest in ORADISC GmbH.

Audited financial statements of ORADISC GmbH for the year ended December 31, 2013 and unaudited financial statements for the three months and nine months ended September 30, 2014 have not been released to us and, therefore, we have not included the effect of the financial activities of ORADISC GmbH. in our financial statements for each reporting period.  We believe that our share of the cumulative losses of ORADISC GmbH for the years ended December 31, 2012 and 2013 and for the nine months ended September 30, 2014 would exceed the carrying value of our investment, therefore the equity method of accounting would be suspended for such reporting periods and no additional losses would be charged to operations.

Based upon the unaudited financial statements for the year ended December 31, 2013, our unrecorded share of ORADISC GmbH cumulative losses as of December 31, 2013 totaled $11,430.

Summarized financial information for our investment in ORADISC GmbH assuming 100% ownership is as follows:

ORADISC GmbH
 
December 31, 2013
(Unaudited)
 
  Balance sheet
     
Total assets
  $ 305,069  
Total liabilities
  $ 302,572  
Total stockholders’ equity
  $ 2,497  
  Statement of operations
       
Revenues
  $ ---  
Net (loss)
  $ (34,671 )


Altrazeal AG

On February 1, 2014, we executed a shareholders’ agreement with Altrazeal AG, a single purpose entity for the marketing of Altrazeal® in several territories, including Africa (markets not already licensed), Latin America, Georgia, Turkmenistan, Ukraine, the Commonwealth of Independent States, Jordan, Syria, Asia and the Pacific (excluding China, Hong Kong, Macau, Taiwan, South Korea, Japan, Australia, and New Zealand).  As a result of this transaction, we received a non-dilutable 25% ownership interest in Altrazeal AG.

Financial statements of Altrazeal AG for the three months and nine months ended September 30, 2014 have not been released to us and, therefore, we have not included the effect of the financial activities of Altrazeal AG in our financial statements for such reporting period.  We believe that our share of the cumulative losses of Altrazeal AG for the nine months ended September 30, 2014 would exceed the carrying value of our investment, therefore the equity method of accounting would be suspended for such reporting periods and no additional losses would be charged to operations.
 

NOTE 10.
ACCRUED LIABILITIES

Accrued liabilities consisted of the following at September 30, 2014 and December 31, 2013:

Accrued Liabilities
 
September 30, 2014
   
December 31, 2013
 
  Accrued taxes – payroll
  $ 106,299     $ 106,299  
  Accrued compensation/benefits
    98,424       148,683  
  Accrued insurance payable
    47,999       60,113  
  Accrued property taxes
    8,950       ---  
  Product rebates/returns
    13       32  
  Other
    558       836  
  Total accrued liabilities
  $ 262,243     $ 315,963  

 
- 12 -


NOTE 11.
CONVERTIBLE DEBT

Convertible Note – June 2012

On June 27, 2012, we entered into a Securities Purchase Agreement (the “Purchase Agreement”), related to our issuance of the June 2012 Note, with Inter-Mountain.  The purchase price for the June 2012 Note was paid $500,000 at closing in cash and $1,500,000 in the form of six Investor Notes in favor of the Company, each in the principal amount of $250,000 at an interest rate of 8.0% per annum, and each of which becomes due as the outstanding balance under the June 2012 Note is reduced to certain levels.  The purchase price of the June 2012 Note also reflected a $200,000 original issue discount and $10,000 in attorney’s fees. The Purchase Agreement also includes representations and warranties, restrictive covenants, and indemnification provisions standard for similar transactions.

The June 2012 Note bears interest at the rate of 8.0% per annum, with monthly installment payments of $83,333 commencing on the date that is the earlier of (i) thirty calendar days after the effective date of a registration statement registering the re-sale of the shares issuable upon conversion under the June 2012 Note or (ii) December 24, 2012, but in no event sooner than September 25, 2012.  At our option, subject to certain volume, price, and other conditions, the monthly installment payments on the June 2012 Note may be paid in whole, or in part, in cash or in our Common Stock.  If the monthly installment is paid in Common Stock, such shares being issued will be based on a price that is 80% of the average of the three lowest volume weighted average prices of the shares of Common Stock during the preceding twenty trading days.  The percentage declines to 70% if the average of the three lowest volume weighted average prices of the shares of Common Stock during the preceding twenty trading days is less than $0.05.

At the option of Inter-Mountain, the outstanding principal balance of the June 2012 Note may be converted into shares of our Common Stock at a conversion price of $0.35 per share, subject to certain pricing adjustments and ownership limitations.  The initial tranche was $710,000 and the six subsequent tranches are each $250,000, plus interest.  At our option, the outstanding principal balance of the June 2012 Note, or a portion thereof, may be prepaid in cash at 120% of the amount elected to be prepaid.  The June 2012 Note is secured by a Security Agreement pursuant to which we granted to Inter-Mountain a first-priority security interest in the assets held by the Company.

Events of default under the June 2012 Note include failure to make required payments or to deliver shares upon conversion, the entry of a $100,000 judgment not stayed within 30 days, breach of representations or covenants under the transaction documents, various events associated with insolvency or failure to pay debts, delisting of our Common Stock, a restatement of financial statements, and a default under certain other agreements.  In the event of default, the interest rate under the June 2012 Note increases to 18% and the June 2012 Note becomes callable at a premium.  In addition, the holder has all remedies under law and equity, including foreclosing on our assets under a Security Agreement with Inter-Mountain.
 
As part of the convertible debt financing, Inter-Mountain also received a total of seven warrants (the “Warrants”) to purchase, if they all vest, an aggregate of 3,142,857 shares of Common Stock, which number of shares could increase based upon the terms and conditions of the Warrants.  The Warrants have an exercise price of $0.35 per share, subject to certain pricing adjustments, and are exercisable, subject to vesting provisions and ownership limitations, until June 27, 2017.  Warrants for 785,714, 392,857, 392,857, and 392,857 shares of Common Stock vested on June 27, 2012, December 31, 2012, February 26, 2013, and July 15, 2013, respectively.  Each of the three remaining Warrants has terminated, as described below.  As of September 30, 2014, we have issued 725,274 shares of Common Stock to Inter-Mountain for the cashless exercise of three warrants that vested prior to February 26, 2013 to purchase 1,571,428 shares of Common Stock.  Such issuance of shares of Common Stock following the cashless exercise of three warrants by Inter-Mountain during 2013 was based upon an agreement in December 2013 with Inter-Mountain modifying the formula in the Warrants for determining the number of shares to be issued upon a cashless exercise.  As of September 30, 2014, there is one warrant that remains vested but unexercised for 392,857 shares of Common Stock.  Inter-Mountain delivered a notice of a cashless exercise with respect to this warrant on or about May 1, 2014 purporting to exercise it with respect to the delivery of 782,284 shares of Common Stock.  We believe that, as a result of the December 2013 agreement, the warrant is exercisable, on a cashless basis, with respect to only 261,516 shares of Common Stock as of May 1, 2014 and, as a result, have not honored such warrant exercise.

As part of the convertible debt financing, we entered into a Registration Rights Agreement whereby we agreed to prepare and file with the SEC a registration statement for the number of shares referred to therein no later than July 27, 2012 and to cause such registration statement to be declared effective no later than ninety days after such filing with the SEC and to keep such registration statement effective for a period of no less than one hundred and eighty days.  The Registration Rights Agreement also grants Inter-Mountain piggy-back registration rights with respect to future offerings by the Company.  In accordance with our obligations under the Registration Rights Agreement, we filed with the SEC a registration statement that was declared effective on July 31, 2012, which registration statement expired by rule on April 30, 2013.

 
- 13 -

On October 5, 2012, we and Inter-Mountain entered into a First Amendment to Buyer Trust Deed Note #1 for the purpose of revising certain terms and conditions contained in the Buyer Trust Deed Note #1, to include an updated schedule for the timing of certain payment obligations by Inter-Mountain contained therein.

On January 22, 2014, we provided notice to Inter-Mountain of our election to exercise our rights under the June 2012 Note and to offset amounts we owed to Inter-Mountain against amounts it owed to us under the Investor Notes. Our notice provided that such deduction and offset occurred on January 22, 2014, that we will not incur the 120% prepayment premium with respect to amounts paid under the June 2012 Note as a result of the deduction and offset, that no warrants will become exercisable as a result of the offset, and that any warrants unvested as of January 22, 2014 shall immediately and automatically terminate.   As a result of the deduction and offset, the outstanding amount owed under the June 2012 Note was reduced to approximately $317,000 as of January 22, 2014.

On February 27, 2014 and on March 3, 2014, we received conversion notices from Inter-Mountain whereby we issued an aggregate of 435,502 shares of Common Stock for the final payment of approximately $152,000 due under the June 2012 Note.
 
Convertible Note – July 2011

On July 28, 2011, we completed a convertible debt financing for $125,000 with Mr. Kerry P. Gray, the Company’s Chairman, President, and Chief Executive Officer (the “July 2011 Note”).  The July 2011 Note bears interest at the rate of 10.0% per annum, with annual payments of interest commencing on July 1, 2012.  The full amount of principal and any unpaid interest will be due on July 28, 2014.  The outstanding principal balance of the July 2011 Note may be converted into shares of the Company’s Common Stock, at the option of the note holder and at any time, at a conversion price of $1.08 per share or 115,741 shares of Common Stock.  We may force conversion of the July 2011 Note if our Common Stock trades for a defined period of time at a price greater than $2.16.  The July 2011 Note is collateralized by the grant of a security interest in the inventory, accounts receivables and capital equipment held by the Company.  The securities issuable on conversion have not been registered under the Securities Act of 1933 and may not be sold absent registration or an applicable exemption from the registration requirements.  As part of the convertible debt financing, Mr. Gray also received a warrant to purchase up to 34,722 shares of the Company’s Common Stock.  The warrant has an exercise price of $1.08 per share and is exercisable at any time until July 28, 2016.

On July 3, 2012, the Company and Mr. Gray entered into a Modification Agreement for the purpose of deferring the annual payment of interest due on July 1, 2012 of $11,542 until such time as Mr. Gray provides written notice to us with such notice being no less than 15 days prior to the relevant payment date.  Moreover, the parties agreed that no Event of Default under the July 2011 Note occurred as a result of any failure by us to make the annual payment of interest due on July 1, 2012.  Commencing on July 1, 2012, interest at the rate of 12.0% per annum accrued on the deferred interest payment of $11,542 until the relevant payment date.  On September 5, 2013, we remitted to Mr. Gray the annual interest due on July 1, 2012 of $11,542 and accrued interest thereon of $1,643.

On July 1, 2013, the Company and Mr. Gray entered into a Modification Agreement for the purpose of deferring the annual payment of interest due on July 1, 2013 of $12,501 until such time as Mr. Gray provides written notice to us with such notice being no less than 15 days prior to the relevant payment date.  Moreover, the parties agreed that no Event of Default under the July 2011 Note occurred as a result of any failure by us to make the annual payment of interest due on July 1, 2013.  Commencing on July 1, 2013, interest at the rate of 12.0% per annum accrued on the deferred interest payment of $12,501 until the relevant payment date.  On October 28, 2013, we remitted to Mr. Gray the annual interest due on July 1, 2013 of $12,501 and accrued interest thereon of $492.

On July 28, 2014, we issued 115,741 shares of Common Stock to Mr. Gray for the conversion and final payment of $125,000 due under the July 2011 Note and remitted to Mr. Gray the annual interest due on July 28, 2014 of $13,457.



 
- 14 -




Convertible Note – June 2011

On June 13, 2011, we completed a $140,000 convertible debt financing with Mr. Gray (the “June 2011 Note”).  The June 2011 Note bears interest at the rate of 10% per annum, with annual payments of interest commencing on July 1, 2012.  The full amount of principal and any unpaid interest will be due on June 13, 2014.  The outstanding principal balance of the June 2011 Note may be converted into shares of the Company’s Common Stock, at the option of the note holder and at any time, at a conversion price of $1.20 per share or 116,667 shares of Common Stock.  We may force conversion of the convertible note if our Common Stock trades for a defined period of time at a price greater than $1.80.  The June 2011 Note is collateralized by the grant of a security interest in the inventory, accounts receivables, and capital equipment held by the Company.  The securities issuable on conversion have not been registered under the Securities Act of 1933 and may not be sold absent registration or an applicable exemption from the registration requirements.  As part of the convertible debt financing, Mr. Gray also received a warrant to purchase up to 35,000 shares of the Company’s Common Stock.  The warrant has an exercise price of $1.20 per share and is exercisable at any time until June 13, 2016.

On July 3, 2012, the Company and Mr. Gray entered into a Modification Agreement for the purpose of deferring the annual payment of interest due on July 1, 2012 of $14,653 until such time as Mr. Gray provides written notice to us with such notice being no less than 15 days prior to the relevant payment date.  Moreover, the parties agreed that no Event of Default under the June 2011 Note occurred as a result of any failure by us to make the annual payment of interest due on July 1, 2012.  Commencing on July 1, 2012, interest at the rate of 12.0% per annum accrued on the deferred interest payment of $14,653 until the relevant payment date.  On September 5, 2013, we remitted to Mr. Gray the annual interest due on July 1, 2012 of $14,653 and accrued interest thereon of $2,080.

On July 1, 2013, the Company and Mr. Gray entered into a Modification Agreement for the purpose of deferring the annual payment of interest due on July 1, 2013 of $14,001 until such time as Mr. Gray provides written notice to us with such notice being no less than 15 days prior to the relevant payment date.  Moreover, the parties agreed that no Event of Default under the June 2011 Note occurred as a result of any failure by us to make the annual payment of interest due on July 1, 2013.  Commencing on July 1, 2013, interest at the rate of 12.0% per annum accrued on the deferred interest payment of $14,001 until the relevant payment date.  On October 28, 2013, we remitted to Mr. Gray the annual interest due on July 1, 2013 of $14,001 and accrued interest thereon of $553.

On June 13, 2014, we issued 116,667 shares of Common Stock to Mr. Gray for the conversion and final payment of $140,000 due under the June 2011 Note and remitted to Mr. Gray the annual interest due on June 13, 2014 of $13,346.

We account for convertible debt using specific guidelines in accordance with U.S. GAAP.  We allocated the value of the proceeds received to the convertible instrument and to the warrant on a relative fair value basis.  We calculated the fair value of the warrant issued with the convertible instrument using the Black-Scholes valuation method, using the same assumptions used for valuing employee stock options, except the contractual life of the warrant was used. Using the effective interest method, the allocated fair value was recorded as a debt discount and is being amortized over the expected term of the convertible debt to interest expense.

On the date of issuance of the June 2011 Note, the July 2011 Note, and the June 2012 Note, no portion of the proceeds were attributable to a beneficial conversion feature since the conversion price of the June 2011 Note, the July 2011 Note, and the June 2012 Note exceeded the market price of the Company’s Common Stock.

The amount of interest cost recognized from our convertible notes payable was $956 and $38,032 for the three months ended September 30, 2014 and 2013, respectively, and was $20,853 and $124,677 for the nine months ended September 30, 2014 and 2013, respectively.

The amount of debt discount amortized from our convertible notes payable was $552 and $44,591 for the three months ended September 30, 2014 and 2013, respectively, and was $(78,078) and $134,052 for the nine months ended September 30, 2014 and 2013, respectively.
 
 
- 15 -


NOTE 12.
EQUITY TRANSACTIONS

Common Stock Transactions

March 2013 Offering

On March 14, 2013, we entered into a Securities Purchase Agreement (the “March SPA”) with Kerry P. Gray, the Company’s Chairman, President, and Chief Executive Officer and Terrance K. Wallberg, the Company’s Vice President and Chief Financial Officer (collectively, the “Investors”) relating to an equity investment of $440,000 by the Investors for 1,100,000 shares of our Common Stock (the “March Shares”) and warrants to purchase up to 660,000 shares of our Common Stock (the “March Warrants”) (the “March 2013 Offering”).  Under the March SPA, the purchase and sale of the March Shares and March Warrants took place at four closings over twelve months, with $88,000 being funded at the initial closing under the March SPA, $110,000 being funded on the four-month anniversary of the initial closing, $132,000 being funded on the eight-month anniversary of the initial closing, and $110,000 being funded on the one-year anniversary of the initial closing.  The March Warrants have a fixed exercise price of $0.60 per share, become exercisable in tranches on each of the four funding dates, and expire on the five-year anniversary of the initial closing.  On March 14, 2013, we closed the March 2013 Offering and received the initial funding tranche of $88,000 for the purchase of 220,000 shares of our Common Stock.  We received subsequent funding tranches of $110,000, $132,000, and $110,000 for the purchase of 275,000, 330,000, and 275,000 shares of our Common Stock on July 15, 2013, November 14, 2013, and March 14, 2014, respectively.
 
January 2013 Offering

On December 21, 2012, we entered into a Securities Purchase Agreement (the “SPA”) with IPMD GmbH (“IPMD”) relating to an equity investment of $2,000,000 by IPMD for 5,000,000 shares of our Common Stock (the “Shares”) and warrants to purchase up to 3,000,000 shares of our Common Stock (the “Warrants”) (the “January 2013 Offering”).  Under the SPA, the purchase and sale of the Shares and Warrants took place at four closings over twelve months, with $400,000 being funded at the initial closing under the SPA, $500,000 being funded on the four-month anniversary of the initial closing, $600,000 being funded on the eight-month anniversary of the initial closing, and $500,000 being funded on the one-year anniversary of the initial closing.  The Warrants have a fixed exercise price of $0.60 per share, become exercisable in tranches on each of the four funding dates, and expire on the one-year anniversary of the initial closing.  On January 3, 2013, we closed the January 2013 Offering and received the initial funding tranche of $400,000 for the purchase of 1,000,000 shares of our Common Stock.  We received subsequent funding tranches of $500,000, $300,000, $300,000, and $500,000 for the purchase of 1,250,000, 750,000, 750,000, and 1,250,000 shares of our Common Stock on May 7, 2013, September 6, 2013, October 24, 2013, and January 6, 2014 respectively.

In the SPA, we also agree to appoint up to two directors nominated by IPMD to serve on our Board of Directors.  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.  Messrs. Kerschbaumer and Kuehne are the designees of IPMD to serve on the Company’s Board of Directors pursuant to covenants in the SPA with IPMD.

On January 3, 2014, the Warrants vested with respect to 3,000,000 shares of our Common Stock and were exercised by IPMD on that date pursuant to a Notice of Exercise, accepted by the Company, that provided for the issuance of 750,000 shares of Common Stock on each of January 31, 2014, February 28, 2014, March 31, 2014, and April 30, 2014 in exchange for the payment of $450,000 on each such date.

On January 31, 2014, IPMD entered into an Assignment Agreement (the “Assignment Agreement”) with The Punch Trust (“TPT”) and Michael I. Sacks (“Sacks”) pursuant to which IPMD assigned to TPT and Sacks its rights and interests to purchase up to 3,000,000 shares of our Common Stock as detailed in the Warrants and the Notice of Exercise.  Neither TPT nor Sacks paid any monetary consideration to IPMD in connection with the assignments under the Assignment Agreement.

Concurrent with the assignment under the Assignment Agreement described above, ULURU, TPT, Sacks, and IPMD entered into an Implementation Agreement (the “Implementation Agreement”) pursuant to which we consented and agreed to the assignment of the Warrants to TPT and Sacks.  We also agreed to issue and facilitate the delivery of the shares of Common Stock under the Warrants to TPT and Sacks upon their payment of the corresponding purchase price due under the Warrants.  Under the terms of the Warrants, Sacks made payments of $450,000 on each of January 31, 2014 and February 28, 2014 and $150,000 on each of March 31, 2014 and April 30, 2014.  The Company issued 750,000 shares of Common Stock to Sacks on each of January 31, 2014 and February 28, 2014 and 250,000 shares of Common Stock on each of March 31, 2014 and April 30, 2014.  Under the terms of the Warrants, TPT made payments of $300,000 on each of March 31, 2014 and April 30, 2014 and the Company issued 500,000 shares of Common Stock to TPT on each date, respectively.

On January 31, 2014, we also entered into a Registration Rights Agreement with TPT and Sacks whereby we agreed to prepare and file with the SEC a registration statement for the number of shares referred to therein within sixty days after request and to use commercially reasonable efforts to cause such registration statement to be declared effective with the SEC and to keep such registration statement effective for a period of eighty days and, if necessary, such eighty day period being extended for up to sixty additional days.


 
- 16 -


NOTE 13.
STOCKHOLDERS’ EQUITY

Common Stock

As of September 30, 2014, we had 24,458,018 shares of Common Stock issued and outstanding.  We issued 3,241 shares of Common Stock for the three months ended September 30, 2014 comprised of 115,741 shares of Common Stock issued for the conversion and final payment of the July 2011 Note held by Kerry Gray and the net cancellation of 112,500 shares of Common Stock related to consulting services provided to the Company.

Preferred Stock

As of September 30, 2014, we had no shares of Series A Preferred Stock (the “Series A Shares”).  For the three months ended September 30, 2014, we did not issue or redeem any Series A Shares.

Warrants

The following table summarizes the warrants outstanding and the number of shares of Common Stock subject to exercise as of September 30, 2014 and the changes therein during the nine months then ended:

   
Number of Shares of Common Stock Subject to Exercise
   
Weighted – Average
Exercise Price
 
Balance as of December 31, 2013
    4,665,451     $ 0.82  
Warrants issued
    80,000     $ 1.20  
Warrants exercised
    (3,000,000 )   $ 0.60  
Warrants cancelled
    (69,050 )   $ 3.22  
Balance as of September 30, 2014 (1)
    1,676,401     $ 1.14  

(1)
As part of the June 2012 Note, Inter-Mountain received a total of seven warrants to purchase, if they all had vested, an aggregate of 3,142,857 shares of Common Stock, which number of shares could increase based upon the terms and conditions of the warrants.  The warrants have an exercise price of $0.35 per share, subject to certain pricing adjustments, and are exercisable, subject to vesting provisions and ownership limitations, until June 27, 2017.  Warrants for 785,714, 392,857, 392,857, and 392,857 shares of Common Stock vested on June 27, 2012, December 31, 2012, February 26, 2013, and July 15, 2013, respectively, and three warrants for 1,571,428 shares of Common Stock were exercised in 2013.  Such issuance of shares of Common Stock following the cashless exercise of three warrants by Inter-Mountain during 2013 was based upon an agreement in December 2013 with Inter-Mountain modifying the formula in the Warrants for determining the number of shares to be issued upon a cashless exercise.  On January 22, 2014, we elected to offset and deduct the three remaining Investor Notes from the principle amount due to Inter-Mountain under the June 2012 Note and as a result of the offset and deduction the three remaining warrants terminated.  For the purposes of this Table, only such net vested shares of Common Stock from one unexercised warrant (392,857 shares) have been included, based upon an exercise price of $0.35 per share of Common Stock.

For the nine months ended September 30, 2014, we issued a warrant to Torrey Hills Capital, Inc., to purchase up to an aggregate of 80,000 shares of our Common Stock at an exercise price of $1.20 per share, for consulting services.
 
Of the warrant shares subject to exercise as of September 30, 2014, expiration of the right to exercise is as follows:
Date of Expiration
 
Number of Warrant Shares of Common Stock Subject to Expiration
 
  May 15, 2015
    357,155  
  June 13, 2016
    35,000  
  July 16, 2016
    116,667  
  July 28, 2016
    34,722  
  June 27, 2017
    392,857  
  March 14, 2018
    660,000  
  January 15, 2019
    80,000  
  Total
    1,676,401  
 
 
- 17 -




NOTE 14.
EARNINGS PER SHARE


Basic and Diluted Net Loss Per Share

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

Shares used in calculating basic and diluted net loss per common share exclude these potential common shares as of September 30, 2014 and December 31, 2013:

   
September 30, 2014
   
December 31, 2013
 
Warrants to purchase Common Stock
    1,676,401       4,665,451  
Stock options to purchase common stock
    1,699,907       1,014,907  
Unvested restricted common stock
    ---       ---  
Common stock issuable upon the assumed conversion of our convertible note payable from June 2012 (1)
    ---       3,124,680  
Common stock issuable upon the assumed conversion of our convertible note payable from June 2011 (2)
    ---       127,712  
Common stock issuable upon the assumed conversion of our convertible note payable from July 2011 (2)
    ---       125,603  
  Total
    3,376,308       9,058,353  

(1)
The outstanding principal balance and the accrued and unpaid interest of the June 2012 Note may be converted, at the option of Inter-Mountain, into shares of Common Stock at a conversion price of $0.35 per share, subject to certain pricing adjustments and ownership limitations.  For the purposes of this Table, we have assumed a conversion price of $0.35 per share and no ownership limitations.  On February 27, 2014 and on March 3, 2014, we received conversion notices from Inter-Mountain whereby we issued an aggregate of 435,502 shares of Common Stock for the final payment of approximately $152,000 due under the June 2012 Note.
(2)
On June 13, 2014, Mr. Gray elected to convert the outstanding principal balance ($140,000) of the June 2011 Note and we issued 116,667 shares of Common Stock for such conversion.  On July 28, 2014, Mr. Gray elected to convert the outstanding principal balance ($125,000) of the July 2011 Note and we issued 115,741 shares of Common Stock for such conversion.







 
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NOTE 15.
SHARE BASED COMPENSATION

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

Our Board 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 nine months ended September 30:

   
Three Months Ended
September 30,
   
Nine Months Ended
 September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Incentive Stock Options  (1)
                       
Quantity
    125,000       ---       125,000       232,500  
Weighted average fair value per share
  $ 0.81       ---     $ 0.81     $ 0.24  
Fair value
  $ 101,171       ---     $ 101,171     $ 56,112  
                                 
Nonstatutory Stock Options  (2)
                               
Quantity
    560,000       ---       560,000       735,000  
Weighted average fair value per share
  $ 0.81       ---     $ 0.81     $ 0.24  
Fair value
  $ 453,250       ---     $ 453,250     $ 177,388  

 
(1)
The Company did not award any incentive stock options for the three months ended September 30, 2013.
 
(2)
The Company did not award any nonstatutory stock options for the three months ended September 30, 2013.

We account for share-based compensation under FASB ASC Topic 718, Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors based on estimated fair values of the award on the grant date.  We use the Black-Scholes option-pricing model to estimate the fair value of share-based awards with the following weighted average assumptions:

   
Nine Months Ended September 30,
 
   
2014
   
2013
 
Incentive Stock Options
           
Expected volatility  (1)
    107.66 %     103.55 %
Risk-free interest rate %  (2)
    1.75 %     0.81 %
Expected term (in years)
    5.0       5.0  
Dividend yield  (3)
    ---       ---  
Forfeiture rate
    ---       ---  
                 
Nonstatutory Stock Options
               
Expected volatility  (1)
    107.66 %     103.55 %
Risk-free interest rate %  (2)
    1.75 %     0.81 %
Expected term (in years)
    5.0       5.0  
Dividend yield  (3)
    ---       ---  
Forfeiture rate
    ---       ---  

 
(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.


 
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Stock Options (Incentive and Nonstatutory)

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

   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Research and development
  $ 6,164     $ 5,425     $ 16,836     $ 11,438  
Selling, general and administrative
    18,316       19,662       54,567       44,414  
  Total share-based compensation expense
  $ 24,480     $ 25,087     $ 71,403     $ 55,852  

At September 30, 2014, 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 $635,461.  The period over which the unearned share-based compensation is expected to be recognized is approximately three years.

The following table summarizes the stock options outstanding and the number of shares of Common Stock subject to exercise as of September 30, 2014 and the changes therein during the nine months then ended:

   
Stock Options
   
Weighted Average Exercise Price per Share
 
Outstanding as of December 31, 2013
    1,014,907     $ 2.12  
Granted
    685,000     $ 1.15  
Forfeited/cancelled
    ---       ---  
Exercised
    ---       ---  
Outstanding as of September 30, 2014
    1,699,907     $ 1.73  

The following table presents the stock option grants outstanding and exercisable as of September 30, 2014:

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
 
  892,500     $ 0.33       8.5       595,000     $ 0.33  
  685,000       1.15       8.2       15,000       1.15  
  53,334       2.38       3.7       53,334       2.38  
  69,073       25.12       2.8       69,073       25.12  
  1,699,907     $ 1.73       8.0       732,407     $ 2.83  



 
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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 nine months ended September 30:

   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Research and development
  $ ---     $ ---     $ ---     $ 444  
Selling, general and administrative
    ---       ---       ---       547  
  Total share-based compensation expense
  $ ---     $ ---     $ ---     $ 991  

At September 30, 2014, the balance of unearned share-based compensation to be expensed in future periods related to restricted stock awards, as adjusted for expected forfeitures, is zero.

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 September 30, 2014 and the changes therein during the nine months then ended:

   
Restricted stock
   
Weighted Average Grant Date Fair Value
 
Outstanding as of December 31, 2013
    ---       ---  
Shares granted
    ---       ---  
Shares forfeited/cancelled
    ---       ---  
Shares exercised/issued
    ---       ---  
Outstanding as of September 30, 2014
    ---       ---  


Summary of Plans

2006 Equity Incentive Plan

In March 2006, our Board adopted and our stockholders approved our Equity Incentive Plan, which initially provided for the issuance of up to 133,333 shares of our Common Stock pursuant to stock option and other equity awards.  At the annual meetings of the stockholders held on May 8, 2007, December 17, 2009, June 15, 2010, June 14, 2012, June 13, 2013, and on June 5, 2014, our stockholders approved amendments to the Equity Incentive Plan to increase the total number of shares of Common Stock issuable under the Equity Incentive Plan pursuant to stock options and other equity awards by 266,667 shares, 200,000 shares, 200,000 shares, 400,000 shares, 600,000 shares, and 1,000,000 shares, respectively, to a total of 2,800,000 shares.

In December 2006, we began issuing stock options to employees, consultants, and directors.  The stock options issued generally vest over a period of one to four years and have a maximum contractual term of ten years.  In January 2007, we began issuing restricted stock awards to our employees.  Restricted stock awards generally vest over a period of six months to five years after the date of grant.  Prior to vesting, restricted stock awards do not have dividend equivalent rights, do not have voting rights and the shares underlying the restricted stock awards are not considered issued and outstanding.  Shares of Common Stock are issued on the date the restricted stock awards vest.

As of September 30, 2014, we had granted options to purchase 2,061,167 shares of Common Stock since the inception of the Equity Incentive Plan, of which 1,699,907 were outstanding at a weighted average exercise price of $1.73 per share, and we had granted awards for 68,616 shares of restricted stock since the inception of the Equity Incentive Plan, of which none were outstanding.  As of September 30, 2014, there were 1,030,647 shares that remained available for future grants under our Equity Incentive Plan.
 
 
- 21 -


NOTE 16.
FAIR VALUE MEASUREMENTS

In accordance with FASB ASC Topic 820, Fair Value Measurements, (“ASC Topic 820”) certain assets and liabilities of the Company are required to be recorded at fair value.  Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants.  The guidance in ASC Topic 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimized the use of unobservable inputs by requiring that the most observable inputs be used when available.

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on our market assumptions.  Unobservable inputs require significant management judgment or estimation.  In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy.  In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement.  Such determination requires significant management judgment.

The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

 
Level 1
Valuations based on quoted prices (unadjusted) for identical assets or liabilities in active markets.

 
Level 2
Valuations based on observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

 
Level 3
Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements.  We review the fair value hierarchy classification on a quarterly basis.  Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

Our financial instruments, including cash, cash equivalents, accounts receivable, and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments.  We believe that the carrying value of our 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.

The following table summarizes the fair value of our financial instruments at September 30, 2014 and December 31, 2013.

Description
 
September 30, 2014
   
December 31, 2013
 
Assets:
           
Notes receivable and accrued interest
    ---     $ 777,710  
                 
Liabilities:
               
Convertible note – June 2011
    ---     $ 138,220  
Convertible note – July 2011
    ---     $ 120,738  
Convertible note – June 2012
    ---     $ 888,099  


NOTE 17.
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 18.
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.  Effective August 1, 2014, our minimum monthly lease obligation increased to $9,436, which is inclusive of monthly operating expenses.

On December 10, 2010 we entered into a lease agreement for certain office equipment.  The lease, which commenced on February 1, 2011 and continues until February 1, 2015, requires a minimum lease obligation of $744 per month.

The future minimum lease payments under the 2013 office lease and the 2010 equipment lease are as follows as of September 30, 2014:

Calendar Years
 
Future Lease Expense
 
  2014 (Three months)
  $ 30,539  
  2015
    29,051  
  2016
    ---  
  2017
    ---  
  2018
    ---  
  Total
  $ 59,590  

Rent expense for our operating leases amounted to $32,369 and $31,083 for the three months ended September 30, 2014 and 2013, respectively, and $93,195 and $86,125 for the nine months ended September 30, 2014 and 2013, 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.



 
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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.  Mr. Kerschbaumer currently serves as a director of Altrazeal Trading GmbH, Altrazeal AG, and Melmed Holding AG (collectively, the “Altrazeal Distributors”) and Mr. Kuehne currently serves as a director of Altrazeal AG.  In such capacities, Mr. Kerschbaumer may be considered, either singularly or collectively, to have 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 control of, and make investment and business decisions on behalf of Altrazeal AG.

Currently, we are party to License and Supply Agreements with Altrazeal Trading GmbH, Altrazeal AG, and Melmed Holding AG for the marketing and distribution of Altrazeal in various international territories.

For the nine months ended September 30, 2014 and 2013, the Company recorded revenues, in approximate numbers, of $586,000 and $169,000, respectively, with the various Altrazeal Distributors, which represented approximately 92% and 70% of our total revenues.

As of September 30, 2014 and December 31, 2013, Altrazeal Distributors had an outstanding net accounts receivable, in approximate numbers, of $703,000 and $174,000, respectively, which represented approximately 99% and 97% of our gross outstanding accounts receivables.

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 the Company’s cash and financial resources.

As of September 30, 2014, the following table summarizes the compensation temporarily deferred and subsequent repayments:

Name
 
2014
   
2013
   
2012
   
2011
   
Total
 
  Kerry P. Gray (1) (2)
  $ (154,986 )   $ (91,000 )   $ 220,673     $ 140,313     $ 115,000  
  Terrance K. Wallberg
    (25,000 )     (35,769 )   $ 24,230     $ 36,539       ---  
  Key executives
    (28,239 )     (20,000 )   $ 27,253     $ 20,986       ---  
  Total
  $ (208,225 )   $ (146,769 )   $ 272,156     $ 197,838     $ 115,000  

 
(1)
During 2014, Mr. Gray temporarily deferred compensation of $115,000 which consisted of $62,500 earned as salary compensation for his duties as President of the Company and $52,500 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 the March 2013 Offering.
 
(2)
During 2013, Mr. Gray temporarily deferred compensation of $221,500 which consisted of $11,500 earned pursuant to a Separation Agreement and $210,000 for his duties as Chairman of the Executive Committee of the Company’s Board of Directors.  During 2013, Mr. Gray 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.

As of September 30, 2014 and December 31, 2013, the Company’s obligation for temporarily deferred compensation was $115,000 of which $62,500 was included in accrued liabilities and $52,500 was included in accounts payable, and $323,225 of which $207,500 was included in accounts payable and $115,725 was included in accrued liabilities, respectively.
 
Contingent Milestone Obligations

We are subject to paying Access Pharmaceuticals, Inc. (“Access”) for certain milestones based on our achievement of certain annual net sales, cumulative net sales, and/or our having reached certain defined technology milestones including licensing agreements and advancing products to clinical development.  As of September 30, 2014, 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.

 
- 24 -




NOTE 19.
LEGAL PROCEEDINGS

On or about August 22, 2014, Inter-Mountain filed a Complaint against Uluru in a matter now pending in the U.S. Federal Court for the District of Utah, Central Division.  The Complaint relates to Inter-Mountain’s delivery of a notice of a cashless exercise with respect to its last remaining warrant to purchase Common Stock on or about May 1, 2014 purporting to exercise it with respect to the delivery of 782,284 shares of Common Stock under the non-standard cashless exercise or conversion provisions in the warrant.  Uluru declined to honor the exercise on the basis that, as a result of an amendment to the warrant agreed to in December 2013, the warrant was exercisable, on a cashless basis, with respect to only 261,516 shares of Common Stock as of May 1, 2014.   Inter-Mountain alleges that Uluru’s refusal to honor the exercise constitutes a breach of the warrant, breach of implied covenant of good faith and fair dealing, unjust enrichment, a violation of securities laws and common law fraud and seeks actual damages, consequential damages, treble damages, specific performance, attorneys’ fees and costs and other relief.  Answers, counterclaims, and answers to counterclaims have been filed, and Uluru expects scheduling and discovery to commence soon.  Uluru denies any breach or other wrongdoing and is vigorously defending the matter.

On or about November 6, 2012, Discus Dental, LLC (“Discus”) and Philips Oral Healthcare Inc. (“Philips”) filed a Complaint against Uluru in the United States District Court, Central District of California (the “Action”).  Discus, a subsidiary of Philips’ parent company, is party to a license agreement under which Uluru’s predecessor granted it a defined license.  The license contractually required that Discus use commercially reasonable efforts to, market and sell Aphthasol® paste, a prescription pharmaceutical.  Prior to the filing of the Action,  Uluru sent a demand letter contending that Discus did not fulfill its obligations under the license agreement, including the obligation to retain an adequate selling organization and otherwise use commercially reasonable efforts to market and sell Aphthasol® paste.  In response to Uluru’s demand letter, the Plaintiffs instituted the Action seeking a declaratory judgment that Discus did not breach the license agreement.  On November 20, 2012, the Plaintiffs filed Amended Complaint adding  a claim requesting that Uluru be ordered to return certain royalty payments that  Discus paid to  Uluru after the expiration of the license period.  On October 7, 2014, Discus filed a Second Amended Complaint, withdrawing Philips as a plaintiff and adding claims that Uluru breached the license by allegedly making a profit from the manufacture of Aphthasol® paste.  Uluru has denied liability with regard to Discus’s claims and has asserted counterclaims for breach of contract against Discus, seeking compensatory damages and attorneys’ fees.  The Action is currently set for trial in February 2015.


NOTE 20.
SUBSEQUENT EVENTS

Not applicable.



 
- 25 -

 
ITEM 2.
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 Amendment and with our consolidated financial statements and related notes included in our 2013 Annual Report on Form 10-K, referred to as our 2013 Form 10-K, which has been previously filed with the Securities and Exchange Commission on March 31, 2014, including the risk factors set forth therein.  In addition to historical information, the following discussion and other parts of this Amendment contain forward-looking information that involve risks and uncertainties, including the statement that our cash and cash equivalents are sufficient to fund our operations and capital expenditures through 2014 and beyond.  Our actual results could differ materially from those anticipated by such forward-looking information due to competitive factors and other risks discussed in our 2013 Form 10-K under “Risks Associated with our Business”.

Management’s Discussion and Analysis of Financial Condition and Results of Operations has been revised for the effects of the restatement.  See Note 1 – Organization and Basis of Presentation.

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 Nanoflex® and OraDiscTM technologies, with the goal of improving outcomes for patients, health care professionals, and health care payers.

Our strategy is twofold:

§
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 Nanoflex® technology to treat the various phases of wound healing; and
§
Develop our oral-transmucosal technology (OraDiscTM) and generate revenues through multiple licensing agreements.

Utilizing our technologies, three of our products have been approved for marketing in various global markets.  In addition, numerous additional products are under development utilizing our patented Nanoflex® and OraDiscTM 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 domestically in September 2008 and internationally in July 2012, the product is indicated for exuding wounds such as partial thickness burns, donor sites, abrasions, surgical, acute and chronic wounds.

Aphthasol®, our Amlexanox 5% paste product, is the first drug approved by the FDA for the treatment of canker sores.

OraDisc™ A was initially developed as a drug delivery system to treat canker sores with the same active ingredient (amlexanox) that is used in Aphthasol® paste. We anticipate that higher amlexanox concentrations will be achieved at the disease site, increasing the effectiveness of the product.  OraDisc™ A was approved by the FDA in September 2004.

Recent Developments (as of September 30, 2014)

Altrazeal® marketing and licensing activities

On September 30, 2013, we executed an Exclusive License and Supply Agreement with Altrazeal AG (the “AG Agreement”) to market Altrazeal® in several territories, including Africa (markets not already licensed), Latin America, Georgia, Turkmenistan, Ukraine, and the Commonwealth of Independent States.  Under the terms of the AG Agreement, we received an up-front licensing payment, will receive certain royalties on product sales within the territories, and will supply Altrazeal® at an agreed upon price.  On February 1, 2014, we executed a shareholders’ agreement with Altrazeal AG and received a non-dilutable 25% ownership interest in Altrazeal AG.

In October 2013 and February 2014, we executed amendments to the AG Agreement for the purpose of expanding the territories to include Asia and the Pacific (excluding China, Hong Kong, Macau, Taiwan, South Korea, Japan, Australia, and New Zealand), Jordan, and Syria.

In February 2014, we executed an amendment to the Melmed Agreement for the purpose of expanding the territories to include Albania, Bosnia, Croatia, Kosovo, Macedonia, Montenegro, and Serbia.  Currently, such marketing efforts are being performed by Altrazeal Trading GmbH, an affiliate of Melmed Holding AG.

On July 8, 2014, we announced the expansion of our international marketing network to include Russia, Greece and the United Arab Emirates.  On September 30, 2014, we announced the further expansion of our international marketing network to include Germany.

As of the end of the third quarter 2014, we have now shipped Altrazeal® to twenty two international territories and expect to ship Altrazeal® to several new territories in the fourth quarter of 2014.
 
 
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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, commercialization, and sale 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 September 30, 2014 and 2013

Total Revenues

Revenues were approximately $323,000 for the three months ended September 30, 2014, as compared to revenues of approximately $111,000 for the three months ended September 30, 2013, and were comprised of, in approximate numbers, licensing fees of $15,000 from Altrazeal® and OraDisc™ licensing agreements, royalties of $24,000 from the sale of Altrazeal®, and product sales of approximately $284,000 for Altrazeal®.

The third quarter 2014 revenues represent an overall increase of approximately $212,000 versus the comparative third quarter 2013 revenues.  The increase in revenues is primarily attributable to, in approximate numbers, an increase of $195,000 in Altrazeal® product sales by our international distributors, an increase of $14,000 in royalties related to Altrazeal®, and an increase of $3,000 in Altrazeal® licensing.

 Costs and Expenses>

Cost of Goods Sold

Cost of goods sold for the three months ended September 30, 2014 was approximately $224,000 and was comprised of $213,000 of costs from the sale of our Altrazeal® products and $11,000 from the write-off of obsolete inventory.  Cost of goods sold for the three months ended September 30, 2013 was approximately $60,000 and was comprised entirely of costs associated with Altrazeal®.

Research and Development

Research and development expenses totaled approximately $173,000 for the three months ended September 30, 2014, including $6,000 in share-based compensation, as compared to approximately $201,000 for the three months ended September 30, 2013, which included $5,000 in share-based compensation.  The decrease of approximately $28,000 in research and development expenses was primarily due to, in approximate numbers, a decrease of $22,000 in regulatory costs and a decrease of $19,000 in direct research costs primarily related to Altrazeal®.  These expense decreases were partially offset by an increase of $13,000 in scientific compensation related primarily to a higher head count.

The direct research and development expenses for the three months ended September 30, 2014 and 2013 were, in approximate numbers, as follows:

   
Three months ended September 30,
 
Technology
 
2014
   
2013
 
  Wound care & nanoparticle
  $ 46,000     $ 62,000  
  OraDisc™
    4,000       7,000  
  Aphthasol® & other technologies
    ---       ---  
  Total
  $ 50,000     $ 69,000  

 
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Selling, General and Administrative

Selling, general and administrative expenses totaled approximately $390,000 for the three months ended September 30, 2014, including $18,000 in share-based compensation, as compared to approximately $302,000 for the three months ended September 30, 2013, which included $20,000 in share-based compensation.

The increase of approximately $88,000 in selling, general and administrative expenses was primarily due to, in approximate numbers, an increase of $93,000 in legal expenses related to a licensing agreement dispute, an increase of $44,000 in sales and marketing expenses, an increase of $24,000 related to doubtful account accruals, and an increase of $5,000 in legal fees related to our patents.  These expense increases were partially offset by a decrease of $66,000 in investor relations consulting related to share-based compensation, a decrease of $10,000 related to property tax accruals, and a decrease of $2,000 in director fee expenses.

Amortization of Intangible Assets

Amortization of intangible assets expense totaled approximately $120,000 for the three months ended September 30, 2014 as compared to approximately $120,000 for the three months ended September 30, 2013.  The expense for each period consists of amortization associated with our acquired patents.  There were no additional purchases of patents during the three months ended September 30, 2014 and 2013, respectively.

Depreciation

Depreciation expense totaled approximately $59,000 for the three months ended September 30, 2014 as compared to approximately $60,000 for the three months ended September 30, 2013.

Interest and Miscellaneous Income

Interest and miscellaneous income totaled approximately $200 for the three months ended September 30, 2014 as compared to approximately $15,000 for the three months ended September 30, 2013.  The decrease of approximately $15,000 in interest income is attributable to the offset in January 2014 of the outstanding Inter-Mountain notes receivable.

Interest Expense

Interest expense totaled approximately $27,000 for the three months ended September 30, 2014 as compared to approximately $126,000 for the three months ended September 30, 2013.  Interest expense is comprised of 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 our convertible debt.  The decrease of approximately $99,000 is primarily attributable to the deduction and offset in January 2014 of the outstanding notes receivable against the outstanding principle due on the convertible promissory note with Inter-Mountain and the final payoff of the convertible promissory note with Inter-Mountain in March 2014, the final payoff of the June 2011 convertible promissory note in June 2014, and the final payoff of the July 2011 convertible note in July 2014.

Foreign currency transaction (loss)

Foreign currency transaction loss totaled approximately $10,000 for the three months ended September 30, 2014 as compared to nil for the three months ended September 30, 2013.

 
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Comparison of the nine months ended September 30, 2014 and 2013

Total Revenues

Revenues were approximately $634,000 for the nine months ended September 30, 2014, as compared to revenues of approximately $242,000 for the nine months ended September 30, 2013, and were comprised of, in approximate numbers, licensing fees of $44,000 from Altrazeal® and OraDisc™ licensing agreements, royalties of $41,000 from the sale of Altrazeal®, and product sales of approximately $549,000 for Altrazeal®.

The nine months ended September 30, 2014 revenues represent an overall increase of approximately $392,000 versus the comparative nine months ended September 30, 2013 revenues.  The increase in revenues is primarily attributable to, in approximate numbers, an increase of $351,000 in Altrazeal® product sales by our international distributors, an increase of $31,000 in royalties related to Altrazeal®, and an increase of $10,000 in Altrazeal® licensing.

Costs and Expenses

Cost of Goods Sold

Cost of goods sold for the nine months ended September 30, 2014 was approximately $378,000 and was comprised of $367,000 of costs from the sale of our Altrazeal® products and $11,000 from the write-off of obsolete inventory.  Cost of goods sold for the nine months ended September 30, 2013 was approximately $104,000 and was comprised entirely of costs associated with Altrazeal®.

Research and Development

Research and development expenses totaled approximately $545,000 for the nine months ended September 30, 2014, including $17,000 in share-based compensation, as compared to approximately $578,000 for the nine months ended September 30, 2013, which included $12,000 in share-based compensation.  The decrease of approximately $33,000 in research and development expenses was primarily due to, in approximate numbers, a decrease of $69,000 in regulatory costs, a decrease of $49,000 in direct research costs primarily related to Altrazeal®, and a decrease of $12,000 in miscellaneous operating costs.  There expense decreases were partially offset by an increase of $77,000 in scientific compensation related to share-based compensation and a higher head count and an increase of $20,000 in clinical study costs related to Altrazeal®.

The direct research and development expenses for the nine months ended September 30, 2014 and 2013 were, in approximate numbers, as follows:

   
Nine months ended September 30,
 
Technology
 
2014
   
2013
 
  Wound care & nanoparticle
  $ 170,000     $ 216,000  
  OraDisc™
    11,000       14,000  
  Aphthasol® & other technologies
    2,000       2,000  
  Total
  $ 183,000     $ 232,000  
 
 
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Selling, General and Administrative

Selling, general and administrative expenses totaled approximately $1,270,000 for the nine months ended September 30, 2014, including $54,000 in share-based compensation, as compared to approximately $915,000 for the nine months ended September 30, 2013, which included $45,000 in share-based compensation.

The increase of approximately $355,000 in selling, general and administrative expenses was primarily due to, in approximate numbers, an increase of $160,000 in legal expenses related to a licensing agreement dispute, an increase of $90,000 in sales and marketing expenses, an increase of $75,000 in investor relations consulting related to share-based compensation, an increase of $16,000 in legal fees related to our patents, an increase of $9,000 in compensation costs related to share-based compensation, an increase of $8,000 in director fees related to share-based compensation, an increase of $8,000 in insurance costs, an increase of $7,000 in occupancy costs, and an increase of $3,000 in miscellaneous expenses.  These expense increases were partially offset a decrease of $10,000 in consulting related to product licensing, a decrease of $9,000 in consulting costs related to XBRL reporting, and a decrease of $2,000 related to property tax accruals.
 
Amortization of Intangible Assets

Amortization of intangible assets expense totaled approximately $355,000 for the nine months ended September 30, 2014 as compared to approximately $355,000 for the nine months ended September 30, 2013.  The expense for each period consists primarily of amortization associated with our acquired patents.  There were no additional purchases of patents during the nine months ended September 30, 2014 and 2013, respectively.

Depreciation

Depreciation expense totaled approximately $179,000 for the nine months ended September 30, 2014 as compared to approximately $186,000 for the nine months ended September 30, 2013.  The decrease of approximately $7,000 is attributable to certain equipment being fully depreciated.

Interest and Miscellaneous Income

Interest and miscellaneous income totaled approximately $5,000 for the nine months ended September 30, 2014 as compared to approximately $56,000 for the nine months ended September 30, 2013.  The decrease of approximately $51,000 in interest income is attributable to the offset in January 2014 of the outstanding Inter-Mountain notes receivable.

Interest Expense

Interest expense totaled approximately $24,000 for the nine months ended September 30, 2014 as compared to approximately $386,000 for the nine months ended September 30, 2013.  Interest expense is comprised of 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 our convertible debt.  The decrease of approximately $362,000 is primarily attributable to the deduction and offset in January 2014 of the outstanding notes receivable against the outstanding principle due on the convertible promissory note with Inter-Mountain and the final payoff of the convertible promissory note with Inter-Mountain in March 2014, the final payoff of the June 2011 convertible promissory note in June 2014, and the final payoff of the July 2011 convertible note in July 2014.

Foreign currency transaction (loss)

Foreign currency transaction loss totaled approximately $10,000 for the nine months ended September 30, 2014 as compared to nil for the nine months ended September 30, 2013.


 
 
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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 September 30, 2014 our cash and cash equivalents were approximately $40,000 which is an increase of approximately $35,000 as compared to our cash and cash equivalents at December 31, 2013 of approximately $5,000.  Our working capital (current assets less current liabilities) was approximately $(610,000) at September 30, 2014 as compared to our working capital at December 31, 2013 of approximately $(1,783,000).

Consolidated Cash Flow Data
   
Nine Months Ended September 30,
 
Net Cash Provided by (Used in)
 
2014
   
2013
 
  Operating activities
  $ (1,569,000 )   $ (1,253,000 )
  Investing activities
    (29,000 )     (27,000 )
  Financing activities
    1,633,000       1,311,000  
  Net Increase in cash and cash equivalents
  $ 35,000     $ 31,000  

Operating Activities

For the nine months ended September 30, 2014, net cash used in operating activities was approximately $1,569,000.  The principal components of net cash used for the nine months ended September 30, 2014 were, in approximate numbers, our net loss of $2,257,000, a decrease of $274,000 in accounts payable due to timing of vendor payments, a decrease of $54,000 in accrued liabilities related to compensation and insurance, a decrease of $44,000 in deferred revenues due to amortization of revenues, a decrease of $13,000 in accrued interest, and an increase of $521,000 in accounts receivable.  Our net loss for the nine months ended September 30, 2014 included substantial non-cash charges of approximately $722,000 in the form of share-based compensation, amortization of patents, depreciation, amortization of debt discount, amortization of deferred financings costs, interest due on convertible notes settled with common stock, common stock and warrants issued for services, and the loss on early extinguishment of a convertible note.  The aforementioned net cash used for the nine months ended September 30, 2014 was partially offset by, in approximate numbers, a decrease of $778,000 in notes receivable due to our offset in January 2014 of all outstanding Investor Notes issued by Inter-Mountain, a decrease of $76,000 in inventory, and a decrease of $18,000 in prepaid expenses.

For the nine months ended September 30, 2013, net cash used in operating activities was approximately $1,253,000.  The principal components of net cash used for the nine months ended September 30, 2013 were, in approximate numbers, our net loss of $2,223,000, a decrease in accounts payable of $637,000 due to timing of vendor payments, an increase in accounts receivable of $105,000, a decrease in accrued liabilities of $30,000 due primarily to the final installment payments on our insurance premium financing, a decrease in accrued interest of $7,000 due to annual interest payments on our convertible notes, and the cancellation of a warrant issued for service for $49,000.  Our net loss for the nine months ended September 30, 2013 included substantial non-cash charges of approximately $1,064,000 in the form of share-based compensation, amortization of patents, depreciation, amortization of debt discount, amortization of deferred financings costs, common stock issued for services, and interest due on convertible notes settled with common stock.  The aforementioned net cash used for the nine months ended September 30, 2013 was partially offset by, in approximate numbers, a decrease in notes receivable of $539,000 due to remittance of Investor Notes by Inter-Mountain, a net increase in deferred revenues of $91,000 due primarily to the receipt of a licensing milestone, a decrease in prepaid expenses of $64,000 due to amortization of expenses, and a decrease in inventory of $40,000 related to product sales.
 
Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2014 was approximately $29,000 and relates to the purchase of equipment for the manufacture of Altrazeal® and equipment for our computer systems.

Net cash used in investing activities for the nine months ended September 30, 2013 was approximately $27,000 and is comprised of the purchase of manufacturing equipment for $32,000 and partially offset by the proceeds of $5,000 from the sale of manufacturing equipment.
 
 
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Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2014 was approximately $1,633,000 and was comprised of, in approximate numbers, the final funding of $500,000 from the sale of common stock and warrants pursuant to the January 2013 Offering,  the final funding $110,000 from the sale of common stock and warrants pursuant to the March 2013 Offering, the funding of $1,800,000 from the exercise of warrants to purchase 3,000,000 shares of common stock pursuant to the Implementation Agreement with Sacks and TPT, and the repayment of $777,000 of principle due on the convertible promissory note with Inter-Mountain attributable to the deduction and offset in January 2014 of the outstanding Investor Notes against the outstanding principle due on the convertible promissory note with Inter-Mountain.

Net cash provided by financing activities for the nine months ended September 30, 2013 was approximately $1,311,000 and was comprised of, in approximate numbers, net proceeds of $1,195,000 from the sale of common stock and warrants pursuant to the January 2013 Offering, net proceeds of $196,000 from the sale of common stock and warrants pursuant to the March 2013 Offering, net proceeds of $2,000 from the redemption