NOTE 1.
|
COMPANY OVERVIEW AND BASIS OF PRESENTATION
|
Company Overview
ULURU Inc. (hereinafter "we", "our", "us", "ULURU", or the "Company") is a Nevada corporation.
We are a specialty medical technology company committed to developing and commercializing a range of innovative wound care and mucoadhesive film products based on our patented Nanoflex® and OraDisc
TM
technologies, with the goal of improving outcomes for patients, health care professionals, and health care payers.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United State of America ("U.S. GAAP") and include the accounts of ULURU Inc., a Nevada corporation, and its wholly-owned subsidiary, ULURU Delaware Inc., a Delaware corporation. Both companies have a December 31 fiscal year end.
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.
NOTE 2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The following is a summary of significant accounting policies used in the preparation of these consolidated financial statements:
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The carrying value of these cash equivalents approximates fair value.
We invest cash in excess of immediate requirements in money market accounts, certificates of deposit, corporate commercial paper with high quality ratings, and U.S. government securities taking into consideration the need for liquidity and capital preservation. These investments are not held for trading or other speculative purposes.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. We estimate the collectability of our accounts receivable. In order to assess the collectability of these receivables, we monitor the current creditworthiness of each customer and analyze the balances aged beyond the customer's credit terms. Theses evaluations may indicate a situation in which a certain customer cannot meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The allowance requirements are based on current facts and are reevaluated and adjusted as additional information is received. Accounts receivable are subject to an allowance for collection when it is probable that the balance will not be collected. As of December 31, 2017 and 2016, the allowance for doubtful accounts was $20,543 and $2,679, respectively. For the years ended December 31, 2017 and 2016, the accounts written off as uncollectible were $2,156 and $72,644, respectively.
Inventory
Inventories are stated at the lower of cost or market value. Raw material inventory cost is determined on the first-in, first-out method. Costs of finished goods are determined by an actual cost method. 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.
Prepaid Expenses and Deferred Charges
As of December 31, 2017 and 2016, prepaid expenses were composed primarily of insurance policy costs. We amortize our insurance costs ratably over the term of each policy. Typically, our insurance policies are subject to renewal in July and October of each year.
Property, Equipment and Leasehold Improvements
Property, equipment, and leasehold improvements are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. Estimated useful lives for property, equipment, and leasehold improvements categories are as follows:
Laboratory and manufacturing equipment
|
7 years
|
Computers, office equipment, and furniture
|
5 years
|
Computer software
|
3 years
|
Leasehold improvements
|
Lease term
|
Intangible Assets
We expense internal patent and application costs as incurred because, even though we believe the patents and underlying processes have continuing value, the amount of future benefits to be derived from them are uncertain. Purchased patents are capitalized and amortized over the life of the patent.
Licensing Rights
Purchased licensing rights are capitalized and amortized over the life of the patent associated with the licensed product.
Impairment of Assets
In accordance with the provisions of Accounting Standards Codification ("ASC") Topic 350-30,
Intangibles Other than Goodwill,
our policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets and certain identifiable intangibles when certain events have taken place that indicate the remaining unamortized balance may not be recoverable, or at least annually to determine the current value of the intangible asset. When factors indicate that the intangible assets should be evaluated for possible impairment, we use an estimate of undiscounted cash flows. Considerable management judgment is necessary to estimate the undiscounted cash flows. Accordingly, actual results could vary significantly from management's estimates.
Debt Issuance Costs
We defer debt issuance costs associated with the issuance of our promissory note payable and amortize those costs over the period of the promissory note obligation using the effective interest method. In 2017, we incurred approximately $101,000 of debt issuance costs related to our issuance to Velocitas GmbH of a convertible promissory note and Series B preferred stock, of which approximately $17,000 was allocated to the convertible promissory note and approximately $84,000 was allocated to the Series B preferred stock. In 2016, we did not incur any new debt issuance costs. During 2017 and 2016, we recorded amortization of approximately $6,000 and $23,000, respectively, of debt issuance costs. Unamortized debt issuance costs at December 31, 2017 and 2016 were approximately $11,000 and nil, respectively.
Shipping and Handling Costs
Shipping and handling costs incurred for product shipments are included in cost of goods sold.
Income Taxes
We use the liability method of accounting for income taxes pursuant to ASC Topic 740,
Income Taxes
. Under this method, deferred income taxes are recorded to reflect the tax consequences in future periods of temporary differences between the tax basis of assets and liabilities and their financial statement amounts at year-end.
Revenue Recognition and Deferred Revenue
License Fees
We recognize revenue from license payments not tied to achieving a specific performance milestone ratably during the period over which we are obligated to perform services. The period over which we are obligated to perform services is estimated based on available facts and circumstances. Determination of any alteration of the performance period normally indicated by the terms of such agreements involves judgment on management's part. License revenues with no specific performance criteria are recognized when received from our foreign licensee and their various foreign sub-licensees as there is no control by us over the various foreign sub-licensees and no performance criteria to which we are subject.
We recognize revenue from performance payments ratably, when such performance is substantially in our control and when we believe that completion of such performance is reasonably probable, over the period during which we estimate that we will complete such performance obligations. In circumstances where the arrangement includes a refund provision, we defer revenue recognition until the refund condition is no longer applicable unless, in our judgment, the refund circumstances are within our operating control and are unlikely to occur.
Substantive at-risk milestone payments, which are based on achieving a specific performance milestone when performance of such milestone is contingent on performance by others or for which achievement cannot be reasonably estimated or assured, are recognized as revenue when the milestone is achieved and the related payment is due, provided that there is no substantial future service obligation associated with the milestone.
For the year ended December 31, 2017, we recognized approximately $6,000 in licensing fees due to the amortization of a licensing fee originally received in 2008 from one of our international distributors. For the year ended December 31, 2016, we recognized approximately $343,000 in licensing fees due to the one-time recognition of unamortized licensing fees related to the cancellation of distribution agreements with three distributors. The recognition of unamortized licensing fees was based upon the cancellation of each distribution agreements and that there are no further performance obligations that are required by the Company under each distribution agreement.
Royalty Income
We receive royalty revenues under license agreements with a number of third parties that sell products based on technology we have developed or to which we have rights. The license agreements provide for the payment of royalties to us based on sales of the licensed products. We record these revenues based on estimates of the sales that occurred during the relevant period. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties we have been paid (adjusted for any changes in facts and circumstances, as appropriate).
We maintain regular communication with our licensees in order to gauge the reasonableness of our estimates. Differences between actual royalty revenues and estimated royalty revenues are reconciled and adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material based on actual amounts paid by licensees. As it relates to royalty income, there are no future performance obligations on our part under these license agreements. To the extent we do not have sufficient ability to accurately estimate revenue; we record it on a cash basis.
Product Sales
We recognize revenue and related costs from the sale of our products at the time the products are shipped to the customer.
Provisions for returns, rebates, and discounts are established in the same period the related product sales are recorded.
We review the supply levels of our products sold to major wholesalers in the U.S., primarily by reviewing reports supplied by our major wholesalers and available volume information for our products, or alternative approaches. When we believe wholesaler purchasing patterns have caused an unusual increase or decrease in the sales of a major product compared with underlying demand, we disclose this in our product sales discussion if we believe the amount is material to the product sales trend; however, we are not always able to accurately quantify the amount of stocking or destocking. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual product returns.
We establish sales return accruals for anticipated product returns. We record the return amounts as a deduction to arrive at our net product sales. Consistent with revenue recognition accounting guidance, we estimate a reserve when the sales occur for future product returns related to those sales. This estimate is primarily based on historical return rates as well as specifically identified anticipated returns due to known business conditions and product expiry dates. Actual product returns have been nil over the past two years.
We establish sales rebate and discount accruals in the same period as the related sales. The rebate and discount amounts are recorded as a deduction to arrive at our net product sales. We base these accruals primarily upon our historical rebate and discount payments made to our customer segment groups and the provisions of current rebate and discount contracts.
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. Revenues, 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.
Research and Development Expenses
Pursuant to ASC Topic 730,
Research and Development
, our research and development costs are expensed as incurred. Research and development expenses include, but are not limited to, salaries and benefits, laboratory supplies, facilities expenses, preclinical development costs, clinical trial and related clinical manufacturing expenses, contract services, consulting fees and other outside expenses. The cost of materials and equipment or facilities that are acquired for research and development activities and that have alternative future uses are capitalized when acquired. There were no such capitalized materials, equipment or facilities for the years ended December 31, 2017 and 2016.
Basic and Diluted Net Loss Per Common Share
In accordance with ASC Topic 260,
Earnings per Share
, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period increased to include potential dilutive common shares. The effect of outstanding stock options, restricted vesting common stock and warrants, when dilutive, is reflected in diluted earnings (loss) per common share by application of the treasury stock method. We have excluded all outstanding stock options, restricted vesting common stock and warrants from the calculation of diluted net loss per common share because all such securities are antidilutive for all periods presented.
Concentrations of Credit Risk
Concentration of credit risk with respect to financial instruments, consisting primarily of cash and cash equivalents, that potentially expose us to concentrations of credit risk due to the use of a limited number of banking institutions and due to maintaining cash balances in banks, which, at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation. During 2017, we utilized Bank of American, N.A. and South State Bank as our banking institutions. During 2016, we utilized Bank of America, N.A. as our banking institution. At December 31, 2017 and 2016 our cash and cash equivalents totaled approximately $3,711,000 and $37,000, respectively. We also invest cash in excess of immediate requirements in money market accounts, certificates of deposit, corporate commercial paper with high quality ratings, and U.S. government securities. These investments are not held for trading or other speculative purposes. We are exposed to credit risk in the event of default by these high-quality corporations.
Concentration of credit risk with respect to trade accounts receivable are customers with balances that exceed 5% of total consolidated trade accounts receivable at December 31, 2017 and 2016. As of December 31, 2017, three customers, of which two are our international distributors, exceeded the 5% threshold, jointly with 99%. One customer, being one of our international distributors, exceeded the 5% threshold at December 31, 2016, with 95%. As a result, we believe that accounts receivable credit risk exposure is limited. We maintain an allowance for doubtful accounts, but historically have not experienced any significant losses related to an individual customer or group of customers.
Concentrations of Foreign Currency Risk
A portion of our revenues and all of our expenses are denominated in U.S. dollars. We are expecting an increase in revenues in international territories denominated in a foreign currency. Certain of our licensing and distribution agreements in international territories are denominated in Euros. Currently, we do not employ forward contracts or other financial instruments to mitigate foreign currency risk. As our international operations continue to grow, we may engage in hedging activities to hedge our exposure to foreign currency risk.
Fair Value of Financial Instruments
In accordance with portions of ASC Topic 820,
Fair Value Measurements
, 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.
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, notes receivable and accrued interest, and convertible note payable balances approximates fair value based on a valuation methodology using the income approach and a discounted cash flow model.
NOTE 3.
|
THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
|
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will be effective for the Company on January 1, 2018. The standard permits the use of either the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. Additionally, in March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net
), which clarifies the implementation guidance on principal versus agent considerations in ASU No. 2014-09. In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which relates to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. These standards have the same effective date and transition date of January 1, 2018. The Company adopted this standard on January 1, 2018 using the modified retrospective method. This approach allows the Company to apply the new standard to (1) all new contracts entered into after January 1, 2018 and (2) all existing contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance as of January 1, 2018 through a cumulative adjustment to equity. Revenue presented in the Company's comparative financial statements for periods prior to January 1, 2018 would not be revised.
The new revenue recognition standard referred to as ASC 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and replaces most of the existing revenue recognition standards in U.S. GAAP. A five-step model will be utilized to achieve the core principle; (1) identify the customer contract, (2) identify the contract's performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenue when or as a performance obligation is satisfied. Under ASC 606, the timing of recognizing royalties, sales-based milestones and other forms of contingent consideration is not expected to change. However, transaction prices are no longer required to be fixed or determinable and certain variable consideration might be recognized prior to the occurrence or resolution of the contingent event to the extent it is probable that a significant reversal in the amount of estimated cumulative revenue will not occur.
The Company evaluated its contracts with customers under the above ASUs (collectively, "ASC 606"). The impact of adopting ASC 606 on the Company's results of operations, financial condition, and cash flows varies depending on the contract. For some contracts, there is no change to timing or method of recognizing revenue while for others, there are changes to timing and/or method of recognizing revenue. The Company will record adjustments upon the adoption of ASC 606 as a result of different accounting treatment of our revenue agreements with respect to the inclusion of milestone payments in the initial transaction price and the method to be used to recognize upfront fees. Under the old standard, milestone payments are recognized when earned and upfront fees were generally recognized as revenue over the research term on a straight-line basis if another method of revenue recognition did not more clearly match the pattern of delivery of goods or services to the customer. Under the new standard, milestone payments are included in the initial transaction price when it is probable that a significant reversal of the milestone payment will not occur. In addition, the Company can no longer default to the straight-line method as the default method in recognizing revenue for goods or services delivered over time. We are currently evaluating the effect of this guidance will have on our consolidated financial statements. In addition to any impact on our consolidated financial statements, we will include expanded disclosures, including the disaggregation of revenue, significant judgments made with regard to revenue recognition and reconciliation of contract balances, among other disclosures.
In August 2014, FASB issued ASU No. 2014-15,
"Presentation of Financial Statements – Going Concern"
. ASU No 2014-15 provides guidance regarding management's responsibility to evaluate whether there exists substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. ASU No. 2014-15 is effective for annual reporting periods beginning after December 15, 2016, and interim periods thereafter. The adoption of ASU No. 2015-15 did not have a material effect on our financial position and results of operations
In April 2015, FASB issued ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective January 1, 2016 with early adoption permitted. The Company has elected early adoption as the guidance is a change in financial statement presentation only and will not have a material impact on our consolidated financial results.
In July 2015, FASB issued ASU No. 2015-11,
"Simplifying the Measurement of Inventory."
Under ASU No. 2015-11, inventory should be measured at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. ASU No. 2015-11 is effective for annual reporting periods beginning after December 15, 2016, and interim periods thereafter. The adoption of ASU No. 2015-11 did not have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes
. The new standard requires that deferred tax assets and liabilities be classified as non-current in a classified statement of financial position. We adopted this standard on January 1, 2017, and the adoption did not have an impact on our consolidated financial statements due to the full valuation allowance position.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842)
. Under ASU 2016-2, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We plan to adopt this guidance beginning with its first quarter ending March 31, 2019. We are currently evaluating the effect ASU 2016-02 will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, classification of awards as either equity or liabilities, the estimation of forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. This guidance is effective for the Company on January 1, 2017 and early adoption was permitted. The Company adopted ASU 2016-09 during the first fiscal quarter ended on March 31, 2017. As part of the adoption of this guidance, the Company elected to continue estimating forfeitures in its calculation of stock-based compensation expense.
The excess tax benefits and tax deficiencies from stock-based compensation awards accounted for under ASC 718 are recognized as income tax benefit or expense, respectively, in the statement of operations and comprehensive loss. The income tax related items had no effect on the current period presentation as the Company maintains a full valuation allowance against its deferred tax assets. In addition, excess tax benefits for share-based payments are presented as an operating activity in the statement of cash flows rather than financing activity. The changes have been applied prospectively in accordance with the ASU and prior periods have not been adjusted. The adoption of ASU 2016-09 did not have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The new standard provides clarification on the cash flow presentation and classification of certain transactions, including debt prepayment or extinguishment, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. The new standard is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. We plan to adopt this standard in the first quarter ended March 31, 2018.
In November 2016, the FASB issued ASU No. 2016-18,
Restricted Cash, Statement of Cash Flows (Topic 230)
. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU should be applied using a retrospective transition method to each period presented. We plan
to adopt this standard in the first quarter ended March 31, 2018.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The new standard simplifies the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted. We are currently evaluating the effect ASU 2017-04 will have on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation -
Stock Compensation (Topic 718): Scope of Modification Accounting
. This accounting standard update provides clarity when a change to terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the vesting condition, fair value or the award classification is not the same both before and after a change to the terms and conditions of the award. The new guidance is effective on a prospective basis beginning on January 1, 2018 with early adoption permitted. We plan to adopt this standard in the first quarter ended March 31, 2018.
There are no other new accounting pronouncements adopted or enacted during the years ended December 31, 2017 and 2016 that had, or are expected to have, a material impact on our consolidated financial statements.
NOTE 4.
|
SEGMENT INFORMATION
|
Our entire business is managed by a single management team, which reports to the Chief Executive Officer. Our corporate headquarters in the United States collects proceeds from product sales, licensing fees, royalties, and sponsored research revenues from our arrangements with external customers and licensees. Our revenues are currently derived primarily from licensees for international activities and our domestic sales activities for our products.
Revenues per geographic area, along with relative percentages of total revenues, for the year ended December 31, are summarized as follows:
Revenues
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
Domestic
|
|
$
|
11,127
|
|
|
|
2
|
%
|
|
$
|
20,326
|
|
|
|
5
|
%
|
International
|
|
|
706,030
|
|
|
|
98
|
%
|
|
|
422,239
|
|
|
|
95
|
%
|
Total
|
|
$
|
717,157
|
|
|
|
100
|
%
|
|
$
|
442,565
|
|
|
|
100
|
%
|
A significant portion of our revenues are derived from a few major customers. For the year ended December 31, 2017, three customers had greater than 10% of total revenues, and jointly represented 92% of total revenues. For the year ended December 31, 2016, three customers had greater than 10% of total revenues, and jointly represented 88% of total revenues.
As of December 31, 2017 and 2016, our inventory was composed of Altrazeal® finished goods, manufacturing costs incurred in the production of Altrazeal®, and raw materials. Inventories are stated at the lower of cost (first in, first out method) or net realizable value. We regularly review inventories on hand and write down the carrying value of our inventories for excess and potentially obsolete inventories based on historical usage and estimated future usage. In assessing the ultimate realization of our inventories, we are required to make judgments as to future demand requirements. As actual future demand or market conditions may vary from those projected by us, adjustment to inventories may be required. For the years ended December 31, 2017 and 2016, we wrote off approximately $5,000 and nil, respectively, in obsolete inventories.
The components of inventory, at the different stages of production, consisted of the following at December 31:
Inventory
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
32,329
|
|
|
$
|
35,800
|
|
Work-in-progress
|
|
|
311,632
|
|
|
|
424,741
|
|
Finished goods
|
|
|
153,500
|
|
|
|
99,059
|
|
Total
|
|
$
|
497,461
|
|
|
$
|
559,600
|
|
NOTE 6.
|
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
|
Property, equipment and leasehold improvements, net, consisted of the following at December 31:
Property, equipment and leasehold improvements
|
|
2017
|
|
|
2016
|
|
Laboratory equipment
|
|
$
|
424,888
|
|
|
$
|
424,888
|
|
Manufacturing equipment
|
|
|
1,604,894
|
|
|
|
1,604,894
|
|
Computers, office equipment, and furniture
|
|
|
154,781
|
|
|
|
151,280
|
|
Computer software
|
|
|
4,108
|
|
|
|
4,108
|
|
Leasehold improvements
|
|
|
95,841
|
|
|
|
95,841
|
|
|
|
|
2,284,512
|
|
|
|
2,281,011
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,230,789
|
)
|
|
|
(2,154,270
|
)
|
Property, equipment and leasehold improvements, net
|
|
$
|
53,723
|
|
|
$
|
126,741
|
|
Depreciation expense on property, equipment, and leasehold improvements was $76,519 and $132,841 for the years ended December 31, 2017 and 2016, respectively.
NOTE 7.
|
INTANGIBLE ASSETS
|
Patents
Intangible patent assets are composed of patents acquired in October 2005. Intangible patent assets, net consisted of the following at December 31:
Intangible assets - patents
|
|
2017
|
|
|
2016
|
|
Patent - Amlexanox (Aphthasol®)
|
|
$
|
2,090,000
|
|
|
$
|
2,090,000
|
|
Patent - Amlexanox (OraDisc™ A)
|
|
|
6,873,080
|
|
|
|
6,873,080
|
|
Patent - OraDisc™
|
|
|
73,000
|
|
|
|
73,000
|
|
Patent - Hydrogel nanoparticle aggregate
|
|
|
589,858
|
|
|
|
589,858
|
|
|
|
|
9,625,938
|
|
|
|
9,625,938
|
|
Less: accumulated amortization
|
|
|
(7,418,891
|
)
|
|
|
(7,381,847
|
)
|
Less: reserve for impairment
|
|
|
(2,027,310
|
)
|
|
|
(2,027,310
|
)
|
Intangible assets, net
|
|
$
|
179,737
|
|
|
$
|
216,781
|
|
We performed an evaluation of our intangible patent assets for purposes of determining possible impairment as of December 31, 2017. Based upon recent market conditions and comparable market transactions for similar intangible assets, we determined that an income approach using a discounted cash flow model was an appropriate valuation methodology to determine each intangible asset's fair value. The income approach converts future amounts to a single present value amount (discounted cash flow model). Our discounted cash flow models are highly reliant on various assumptions, including estimates of future cash flow (including long-term growth rates), discount rate, and expectations about variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows, all of which we consider level 3 inputs for determination of fair value. We believe we have appropriately reflected our best estimate of the assumptions that market participants would use in determining the fair value of our intangible assets at the measurement date. Upon completion of the evaluation, the fair value of our intangible patent assets exceeded the recorded remaining book value except for the valuation of two patents; "Amlexanox (OraDisc™ A)" and "OraDisc™". We previously recognized an impairment charge of $2,027,310 for these two patents during the year ended December 31, 2016.
Amortization expense for intangible patent assets was $37,044 and $476,450 for the years ended December 31, 2017 and 2016, respectively. The future aggregate amortization expense for intangible patent assets, remaining as of December 31, 2017, is as follows:
Calendar Years
|
|
Future Amortization
Expense
|
|
2018
|
|
$
|
37,044
|
|
2019
|
|
|
37,044
|
|
2020
|
|
|
37,145
|
|
2021
|
|
|
37,044
|
|
2022
|
|
|
31,460
|
|
2023 & Beyond
|
|
|
---
|
|
Total
|
|
$
|
179,737
|
|
Licensing rights
Acquisition of Licensing Rights – 2015
On December 24, 2015, we entered into and closed the transaction contemplated by a License Purchase and Termination Agreement (the "Altrazeal Termination Agreement") with Altrazeal Trading GmbH ("Altrazeal Trading") and IPMD GmbH ("IPMD"). The Altrazeal Termination Agreement relates to the License and Supply Agreement dated January 11, 2012 (the "Altrazeal License"), under which Altrazeal Trading and its affiliates were authorized by the Company to distribute our Altrazeal® wound care product in the European Union, Australia, New Zealand, Middle East (excluding Jordan and Syria), North Africa, Albania, Bosnia, Croatia,
Kosovo, Macedonia, Montenegro, and Serbia.
Under the Altrazeal Termination Agreement, the Altrazeal License was assigned to the Company, thereby effecting its termination, and the Company's 25% ownership interest in Altrazeal Trading was cancelled. In addition, the Company agreed to assume from Altrazeal Trading and certain affiliated entities rights and future obligations under sub-distribution agreements in numerous territories within the scope of the Altrazeal License and related consulting agreements.
Under the terms of the Altrazeal Termination Agreement, we agreed to pay to Altrazeal Trading a net transfer fee of €1,570,271 and to pay IPMD a transfer fee of €703,500. The net transfer fee to Altrazeal Trading included adjustments for amounts owed by Altrazeal Trading to the Company. The Company paid the net transfer fee (a) to Altrazeal Trading by means of the issuance of 4,441,606 shares of Common Stock together with warrants to purchase 444,161 shares of Common Stock and (b) to IPMD by means of the issuance of 2,095,241 shares of Common Stock, together with warrants to purchase 209,525 shares of Common Stock. The warrants have an exercise price of $0.68 per share and a term of one-year and, as a result, have expired.
Under the Altrazeal Termination Agreement, we also agreed to file within twenty (20) days of closing a registration statement registering the resale of 2,500,000 shares of Common Stock issued under the Altrazeal Termination Agreement and to use all commercially reasonable efforts to cause such registration Statement to become effective. In accordance with our obligations under the Altrazeal Termination Agreement, we filed with the SEC a registration statement that was declared effective on February 16, 2016. We were required to keep the registration statement effective at all times with respect to such 2,500,000 shares, other than permitted suspension periods, until the earliest of (i) June 24, 2016, (ii) the date when Altrazeal Trading and IPMD may sell all of the registered shares under Rule 144 under the Securities Act without volume limitations, or (iii) the date when Altrazeal Trading and IPMD no longer own any of the registered shares. As of the date of this filing, shares cannot be sold under the registration statement because the associated prospectus is not current.
In connection with the Altrazeal Termination Agreement, we also entered into a Mutual Termination and Release Agreement, dated December 24, 2015, for the purpose of terminating the Binding Term Sheet dated May 12, 2015 with Altrazeal Trading and Firnron LTD (the "Term Sheet"). Under the Term Sheet, it was contemplated that the Company would acquire all of the remaining equity interests in Altrazeal Trading.
Acquisition of Licensing Rights – 2017
On February 27, 2017, we entered into a Note, Warrant and Preferred Stock Purchase Agreement (the "Purchase Agreement") with Velocitas Partners, LLC ("Velocitas") and Velocitas I LLC ("Velo LLC"), an entity controlled by Velocitas, with respect to an aggregate financing of up to $6,000,000.
Refer to a description in greater detail of the financing event with Velocitas and Velo LLC in Note 10. Convertible Debt.
At the second closing of the financing event with Velocitas and Velo LLC, which occurred on March 31, 2017, the Company acquired the Altrazeal® distributor agreements Velocitas had with its sub-distributors in exchange for the issuance of 13,375,000 shares of Common Stock. The Company has valued the acquisition of the Altrazeal® distributor agreement from Velocitas at $869,375 based on the closing price of $0.065 per share of the Company's Common Stock on March 31, 2017.
Licensing rights, net consisted of the following at December 31:
Intangible assets - licensing rights
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Intangible assets – licensing rights, gross
|
|
$
|
4,381,881
|
|
|
$
|
3,512,506
|
|
Less: accumulated amortization
|
|
|
(725,245
|
)
|
|
|
(331,419
|
)
|
Intangible assets - licensing rights, net
|
|
$
|
3,656,636
|
|
|
$
|
3,181,087
|
|
We performed an evaluation of our intangible licensing rights assets for purposes of determining possible impairment as of December 31, 2017. Based upon recent market conditions and comparable market transactions for similar licensing rights, we determined that an income approach using a discounted cash flow model was an appropriate valuation methodology to determine each licensing rights asset fair value. The income approach converts future amounts to a single present value amount (discounted cash flow model). Our discounted cash flow models are highly reliant on various assumptions, including estimates of future cash flow (including long-term growth rates), discount rate, and expectations about variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows, all of which we consider level 3 inputs for determination of fair value. We believe we have appropriately reflected our best estimate of the assumptions that market participants would use in determining the fair value of our intangible licensing rights assets at the measurement date. Upon completion of the evaluation, the fair value of our intangible licensing rights assets exceeded the recorded remaining book value.
Amortization expense for intangible licensing rights assets was $393,826 and $325,148 for the years ended December 31, 2017 and 2016, respectively. The future aggregate amortization expense for intangible licensing rights assets, remaining as of December 31, 2017, is as follows:
Calendar Years
|
|
Future Amortization
Expense
|
|
2018
|
|
$
|
416,303
|
|
2019
|
|
|
416,303
|
|
2020
|
|
|
416,303
|
|
2021
|
|
|
416,303
|
|
2022
|
|
|
416,303
|
|
2023 & Beyond
|
|
|
1,575,121
|
|
Total
|
|
$
|
3,656,636
|
|
NOTE 8.
|
ACCRUED LIABILITIES
|
Accrued liabilities consisted of the following at December 31:
Accrued Liabilities
|
|
2017
|
|
|
2016
|
|
Accrued compensation/benefits
|
|
$
|
124,819
|
|
|
$
|
274,874
|
|
Accrued insurance payable
|
|
|
---
|
|
|
|
40,422
|
|
Accrued royalties
|
|
|
39,144
|
|
|
|
---
|
|
Product rebates/returns
|
|
|
6
|
|
|
|
4
|
|
Total accrued liabilities
|
|
$
|
163,969
|
|
|
$
|
315,300
|
|
NOTE 9.
|
PROMISSORY NOTES PAYABLE
|
On December 15, 2016, January 18, 2017, and February 16, 2017, we issued promissory notes to Velocitas with principal amounts and purchase prices of $20,000, $65,000, and $30,000, respectively. Each of the promissory notes bore interest at the rate of 6.0% per annum with payment of principal and interest due on the earlier of (i) 180 days from the date of issuance, (ii) the date of closing of any debt or equity financing transaction by and between Uluru and Velocitas, or (iii) the payment to the Company of certain invoices due from selected Company distributors. Each of the promissory notes was secured by a pledge of certain product inventory, and there were no debt issuance costs incurred by the Company. On February 27, 2017, each of the promissory notes was repaid in connection with the issuance of the Convertible Promissory Note, dated February 27, 2017, in the amount of $500,000 (the "Initial Note") under the Purchase Agreement with Velocitas.
On February 21, 2017, we issued a promissory note to Kirkwood Investors, Inc. ("Kirkwood") with a principal amount and purchase price of $25,000. The promissory note bore interest at the rate of 6.0% per annum with payment of principal and interest due on the earlier of (i) 60 days from the date of issuance, (ii) the date of closing of any debt or equity financing transaction by Uluru, or (iii) no later than two days after receiving written request by Kirkwood. The promissory note was secured by a pledge of certain product inventory and accounts receivables and there were no debt issuance costs incurred by the Company. The Company's Vice President and Chief Financial Officer, Terrance K. Wallberg, is President and sole shareholder of Kirkwood. On February 27, 2017, the outstanding promissory note to Kirkwood was repaid in connection with the issuance of the Initial Note under the Purchase Agreement with Velocitas.
NOTE 10.
|
CONVERTIBLE DEBT
|
Debt Financing – February and March 2017
On February 27, 2017, the Company entered into the Purchase Agreement with Velocitas and Velo LLC under which the Company received gross proceeds of $6,000,000 in two closings with the initial closing occurring on February 27, 2017 and the second closing occurring on March 31, 2017, which we refer to as the "March 2017 Offering".
The first closing, which occurred on February 27, 2017, included the purchase by Velocitas at face value of the $500,000 Initial Note, with the Initial Note accruing interest at 12.5% per annum and having a term of two years (subject to acceleration under certain circumstances).
The second closing, which occurred on March 31, 2017, included the purchase by Velocitas at face value of an additional $500,000 Secured Convertible Note, dated March 31, 2017, (the "Second Note") with the Second Note accruing interest at 12.5% per annum and having a term of two years (subject to acceleration under certain circumstances), and Velo LLC purchasing 1,250 shares of Series B Convertible Preferred Stock of the Company for gross proceeds of $5,000,000, at an as-converted-to-Common Stock purchase price of $0.04 per share.
The Initial Note and the Second Note are convertible into shares of Common Stock at a conversion price of $0.04 per share, subject to equitable adjustments, with mandatory conversion of all unpaid principal and interest required on the second anniversary of each such note, unless an event of default has occurred and is continuing. The Initial Note and the Second Note are secured by all of the assets of the Company and its subsidiaries pursuant to a Security Agreement executed at the initial closing.
The Series B Convertible Preferred Stock that was issued in connection with the second closing provided, among other things, that it would automatically convert into Common Stock when the number of authorized shares of Common Stock is increased within 190 days of the second closing as necessary to permit all outstanding convertible or exercisable securities (including the Series B Convertible Preferred Stock) to convert to Common Stock. Following stockholder approval of an amendment to our articles of incorporation increasing the number of authorized shares of Common Stock from 200,000,000 shares to 750,000,000 shares, the Company filed on July 26, 2017 with the State of Nevada an amendment to its articles of incorporation implementing such increase. This resulted in the conversion of all 1,250 outstanding shares of Series B Convertible Preferred Stock held by Velo LLC into 125,000,000 shares of Common Stock.
As a condition of the March 2017 Offering, the Company issued to Velocitas at the second closing a warrant to purchase up to 57,055,057 shares of Common Stock (the "Warrant"). The Warrant has an exercise price of $0.04 per share, a 10-year term and is subject to cashless exercise. In addition, at the second closing, the Company acquired the Altrazeal distributor agreements Velocitas had with its sub-distributors in exchange for the issuance of 13,375,000 shares of Common Stock.
The Company, Velocitas, Velo LLC, and certain affiliates also signed a Voting Agreement (the "Voting Agreement") pursuant to which the parties agreed to set the size of the Board of Directors at six directors, and agreed to vote for the election to the Board of Directors of four persons designated by Velocitas (initially to be Anish Shah, Oksana Tiedt, Vaidehi Shah and Arindam Bose), one director designated by Bradley J. Sacks and one additional director designated by a major investor or by the Board of Directors. In addition, the parties to the Voting Agreement agreed to vote in favor of a proposal to amend the Company's articles of incorporation to increase the authorized shares as required to permit the conversion of the Series B Convertible Preferred Stock.
In addition, the Company, Velocitas, Velo LLC, and certain affiliates entered into an Investor Rights Agreement (the "Investor Rights Agreement") that provides the parties thereto with demand, Form S-3 and piggy back registration rights, Rule 144 information rights, and a right of first offer (or preemptive rights) in connection with future sales of securities by the Company (subject to standard exceptions). The Investor Rights Agreement includes indemnification obligations associated with the registration rights. Michael I. Sacks and Bradley Sacks and affiliates are parties to the Investor Rights Agreement, in part in exchange for the termination by certain of such persons and The Punch Trust of a Registration Rights Agreement dated as of January 31, 2014.
Using specific guidelines in accordance with U.S. GAAP, we allocated the value of the proceeds received to the promissory note and to the Warrant on a relative fair value basis. We calculated the fair value of the Warrant issued with the debt instrument using the Black-Scholes valuation method, using the same assumptions used for valuing employee stock options, except the contractual life of the Warrant was used. Using the effective interest method, the allocated fair value of the Warrant was recorded as a debt discount and is being amortized over the expected term of the promissory note to interest expense.
Information relating to the Initial Note and Second Note is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Transaction
|
|
Initial
Principal
Amount
|
|
|
Interest
Rate
|
|
Maturity
Date
|
|
Conversion Price
|
|
|
Principal
Balance
|
|
|
Unamortized
Debt
Discount
|
|
|
Unamortized Debt Issuance Costs
|
|
|
Carrying
Value
|
|
Initial Note
|
|
$
|
500,000
|
|
|
|
12.5
|
%
|
02/27/2019
|
|
$
|
0.04
|
|
|
$
|
500,000
|
|
|
$
|
206,634
|
|
|
$
|
5,361
|
|
|
$
|
288,005
|
|
Second Note
|
|
$
|
500,000
|
|
|
|
12.5
|
%
|
03/31/2019
|
|
$
|
0.04
|
|
|
$
|
500,000
|
|
|
$
|
212,322
|
|
|
$
|
5,494
|
|
|
$
|
282,184
|
|
Total
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,000,000
|
|
|
$
|
418,956
|
|
|
$
|
10,855
|
|
|
$
|
570,189
|
|
As part of the Initial Note and the Second Note, at the holder's option, all unpaid principle and interest due under each convertible promissory note may be converted into shares of Common Stock based on a conversion price of $0.04 per share. The Initial Note and the Second Note mature on February 27, 2019 and March 31, 2019, respectively, and on each maturity date each convertible promissory note, and accrued interest thereon, is subject to mandatory conversion based on a conversion price of $0.04 per share, unless an event of default has occurred and is continuing.
The amount of interest cost recognized from our promissory notes and our convertible debt was $100,355 and $14,079 for the years ended December 31, 2017 and 2016, respectively. The amount of debt discount amortized from our promissory notes and our convertible debt was $262,344 and $32,015 for the years ended December 31, 2017 and 2016, respectively. The amount of debt issuance costs amortized from our promissory notes was $6,053 and $22,927 for the years ended December 31, 2017 and 2016, respectively.
NOTE 11.
|
EQUITY TRANSACTIONS
|
Preferred Stock Transaction
March 2017 Offering
On February 27, 2017, the Company entered into the Purchase Agreement with Velocitas and Velo LLC under which the Company received gross proceeds of $6,000,000, in two closing with the initial closing occurring on February 27, 2017 and the second closing occurring on March 31, 2017.
The second closing included, among other transaction components, the purchase by Velo LLC of 1,250 shares of Series B Convertible Preferred Stock of the Company for $5,000,000.
As of July 26, 2017, all 1,250 outstanding shares of Series B Convertible Preferred Stock held by Velo LLC were converted into 125,000,000 shares of Common Stock.
Refer to a description in greater detail of the financing event with Velocitas and Velo LLC in Note 10. Convertible Debt.
Common Stock Transaction
March 2016 Offering
On March 29, 2016, we entered into a Stock Purchase Agreement with fifteen investors for the offer and sale of 25,245,442 shares of Common Stock and warrants to purchase an additional 25,245,442 shares of Common Stock at a purchase price of $0.0713 per unit, with each unit consisting of one share and one warrant to purchase Common Stock, for an aggregate purchase price of $1,800,000 (the "March 2016 Offering). The issue price of the shares sold was based on a 10% discount to the average closing price between March 7, 2016 and March 11, 2016 and the warrant exercise price was based on a 10% premium to the same average closing price. The warrants have an exercise price of $0.0871 per share and a five-year term. The warrants also include cashless exercise provisions and a "full ratchet" anti-dilution provision under which the exercise price of such warrants resets to any lower sales price at which the Company offers or sells Common Stock or Common Stock equivalents during the one year following the date of issuance (subject to standard exceptions).
The March 2016 Offering resulted in gross proceeds of $1,800,000, of which $1,439,000 was received in March 2016 and $361,000 was received in April 2016. As part of the offering expenses, we paid to a European placement agent a referral fee of $26,000 which is equal to 10% of the gross proceeds, provided that the investors referred by such placement agent are not U.S. Persons and were solicited outside the United States.
Purchasers in the March 2016 Offering include Michael I. Sacks ($1,000,000), the father of Bradley J. Sacks, the former Chairman of our Board of Directors, Centric Capital Ventures, LLC ($19,000), an investment entity controlled by Bradley J. Sacks, Terrance K. Wallberg ($50,000), our Vice President and Chief Financial Officer, and Daniel G. Moro ($10,000), our former Vice President of Polymer Drug Delivery.
NOTE 12.
|
STOCKHOLDERS' EQUITY
|
Common Stock
As of December 31, 2017, we had 201,349,431 shares of Common Stock issued and outstanding. For the year ended December 31, 2017, we issued 138,375,000 shares of Common Stock which is composed of 13,375,000 shares of Common Stock issued to Velocitas for the acquisition of licensing rights and 125,000,000 shares of Common Stock issued to Velo LLC for the conversion and exchange of all 1,250 outstanding shares of Series B Convertible Preferred Stock held by Velo LLC.
At the 2017 Annual Meeting of Stockholders, held on July 25, 2017, a proposal to increase the number of authorized shares of Common Stock from 200,000,000 shares to 750,000,000 shares was approved by a majority vote of the stockholders. On the next day, the Company filed with the State of Nevada an amendment to its articles of incorporation implementing such increase.
Preferred Stock
As of December 31, 2017, we had no shares of Series A Preferred Stock issued and outstanding. For the year ended December 31, 2017, we did not issue or redeem any Series A Preferred Stock.
As of December 31, 2017, we had no shares of Series B Convertible Preferred Stock issued and outstanding. For the year ended December 31, 2017, we issued 1,250 Series B Shares to Velo LLC, and on August 1, 2017, all outstanding shares of Series B Convertible Preferred Stock held by Velo LLC were mandatorily converted into an aggregate of 125,000,000 shares of Common Stock.
Warrants
The following table summarizes the warrants outstanding and the number of shares of common stock subject to exercise as of December 31, 2017 and the changes therein during the two years then ended:
|
|
Number of Shares of Common Stock Subject to Exercise
|
|
|
Weighted – Average
Exercise Price
|
|
Balance as of December 31, 2015
|
|
|
1,774,193
|
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
|
25,245,442
|
|
|
$
|
0.09
|
|
Warrants exercised
|
|
|
---
|
|
|
|
---
|
|
Warrants cancelled
|
|
|
(840,075
|
)
|
|
$
|
0.84
|
|
Balance as of December 31, 2016
|
|
|
26,179,560
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
|
57,055,057
|
|
|
$
|
0.04
|
|
Warrants exercised
|
|
|
---
|
|
|
|
---
|
|
Warrants cancelled
|
|
|
---
|
|
|
|
---
|
|
Balance as of December 31, 2017
|
|
|
83,234,617
|
|
|
$
|
0.06
|
|
For the year ended December 31, 2017, we issued a warrant to purchase up to an aggregate of 57,055,057 shares of our Common Stock at an exercise price of $0.04 per shares pursuant to the March 2017 Offering.
Of the warrant shares subject to exercise as of December 31, 2017, expiration of the right to exercise is as follows:
Date of Expiration
|
|
Number of Warrant Shares of Common Stock Subject to Expiration
|
|
March 14, 2018
|
|
|
660,000
|
|
January 15, 2019
|
|
|
80,000
|
|
April 30, 2020
|
|
|
194,118
|
|
March 30, 2021
|
|
|
25,245,442
|
|
March 31, 2027
|
|
|
57,055,057
|
|
Total
|
|
|
83,234,617
|
|
NOTE 13.
|
EARNINGS PER SHARE
|
Basic and Diluted Net Loss Per Share
In accordance with 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 December 31:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Warrants to purchase Common Stock
|
|
|
83,234,617
|
|
|
|
26,179,560
|
|
Stock options to purchase Common Stock
|
|
|
150,736
|
|
|
|
691,237
|
|
Common Stock issuable upon the assumed conversion of our convertible promissory notes (1)
|
|
|
31,250,000
|
|
|
|
---
|
|
Common Stock issuable upon the conversion of our Series B Convertible Preferred Stock (2)
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
|
114,635,353
|
|
|
|
26,870,797
|
|
(1)
|
As part of the Initial Note and the Second Note, at the holder's option, all unpaid principle and interest due under each convertible promissory note may be converted into shares of Common Stock based on a conversion price of $0.04 per share. The Initial Note and the Second Note mature on February 27, 2019 and March 31, 2019, respectively, and on each maturity date each convertible promissory note, and accrued interest thereon, is subject to mandatory conversion based on a conversion price of $0.04 per share, unless an event of default has occurred and is continuing. For the purposes of this Table, we have assumed that all outstanding principal and interest will be converted on each applicable maturity date.
|
(2)
|
Pursuant to the March 2017 Offering, Velo LLC purchased 1,250 shares of Series B Convertible Preferred Stock of the Company for $5,000,000. The Series B Convertible Preferred Stock that was issued in the March 2017 Offering, (a) voted together with the Common Stock as a single class (subject to standard protective provisions for the Series B Convertible Preferred Stock), (b) had the same dividend rights as the Common Stock, (c) had a liquidation preference equal to the greater of its purchase price and its as converted-to-Common Stock value, (d) automatically converted into Common Stock when the number of authorized shares of Common Stock was increased within 190 days of the second closing as necessary to permit all outstanding convertible or exercisable securities (including the Series B Convertible Preferred Stock) to convert to Common Stock, and (e) was convertible into Common Stock at the discretion of the holder, subject to the availability of authorized shares, at an as-converted-to-Common Stock purchase price of $0.04 per share. On August 1, 2017, all 1,250 outstanding shares of Series B Convertible Preferred Stock converted in exchange for 125,000,000 shares of Common Stock as a result of the approval by the stockholders at the 2017 Annual Meeting of Stockholders held on July 25, 2017, and the filing in July 2017, of an amendment increasing our authorized shares of Common Stock from 200,000,000 shares to 750,000,000 shares.
|
NOTE 14.
|
SHARE BASED COMPENSATION
|
The Company's share-based compensation plan, the 2006 Equity Incentive Plan ("Incentive Plan"), is administered by the compensation committee of the Board of Directors, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award.
Our Board did not grant any incentive stock option awards to executives or employees or any nonstatutory stock option awards to directors or non-employees for the years ended December 31, 2017 and 2016, respectively.
We account for share-based compensation under FASB ASC Topic 718,
Stock Compensation
, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors based on estimated fair values of the award on the grant date. We use the Black-Scholes option-pricing model to estimate the fair value of share-based awards.
Stock Options (Incentive and Nonstatutory)
The following table summarizes share-based compensation related to stock options for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
---
|
|
|
$
|
7,614
|
|
Selling, general and administrative
|
|
|
7,923
|
|
|
|
12,360
|
|
Total share-based compensation expense
|
|
$
|
7,923
|
|
|
$
|
19,974
|
|
At December 31, 2017, the balance of unearned share-based compensation to be expensed in future periods related to unvested stock option awards, as adjusted for expected forfeitures, is zero.
The following table summarizes the stock options outstanding and the number of shares of Common Stock subject to exercise as of December 31, 2017 and the changes therein during the two years then ended:
|
|
Stock Options
|
|
|
Weighted Average Exercise Price per Share
|
|
Outstanding as of December 31, 2015
|
|
|
1,6664,573
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
Forfeited/cancelled
|
|
|
(973,336
|
)
|
|
|
1.58
|
|
Exercised
|
|
|
---
|
|
|
|
---
|
|
Outstanding as of December 31, 2016
|
|
|
691,237
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
Forfeited/cancelled
|
|
|
(540,501
|
)
|
|
|
1.30
|
|
Exercised
|
|
|
---
|
|
|
|
---
|
|
Outstanding as of December 31, 2017
|
|
|
150,736
|
|
|
$
|
4.26
|
|
The following table presents the stock option grants outstanding and exercisable as of December 31, 2017:
Options Outstanding
|
|
|
Options Exercisable
|
|
Stock Options Outstanding
|
|
|
Weighted Average Exercise Price per Share
|
|
|
Weighted Average Remaining Contractual Life in Years
|
|
|
Stock Options Exercisable
|
|
|
Weighted Average Exercise Price per Share
|
|
|
90,000
|
|
|
$
|
0.33
|
|
|
|
5.2
|
|
|
|
90,000
|
|
|
$
|
0.33
|
|
|
40,000
|
|
|
|
1.15
|
|
|
|
6.7
|
|
|
|
40,000
|
|
|
|
1.15
|
|
|
20,736
|
|
|
|
27.33
|
|
|
|
0.3
|
|
|
|
20,736
|
|
|
|
27.33
|
|
|
150,736
|
|
|
$
|
4.26
|
|
|
|
4.9
|
|
|
|
150,736
|
|
|
$
|
4.26
|
|
Restricted Stock Awards
Restricted stock awards, which typically vest over a period of six months 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.
For the years ended December 31, 2017 and 2016, we did not grant any restricted stock awards. At December 31, 2017, the balance of unearned share-based compensation to be expensed in future periods related to restricted stock awards, as adjusted for expected forfeitures, is nil.
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 December 31, 2017, we had granted options to purchase 2,061,167 shares of Common Stock since the inception of the Equity Incentive Plan, of which 150,736 were outstanding at a weighted average exercise price of $4.26 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 March 29, 2016, the Incentive Plan expired by its terms, and no additional awards may be granted thereunder. The expiration of the Incentive Plan does not affect outstanding awards.
On March 28, 2018, our Board of Directors adopted and approved our 2018 Equity Incentive Plan which initially provides for the issuance of up to 20,000,000 shares of our Common Stock pursuant to stock options and other equity awards.
NOTE 15.
|
EMPLOYMENT BENEFIT PLAN
|
We maintain a defined contribution or 401(k) Plan for our qualified employees. Participants may contribute a percentage of their compensation on a pre-tax basis, subject to a maximum annual contribution imposed by the Internal Revenue Code. We may make discretionary matching contributions as well as discretionary profit-sharing contributions to the 401(k) Plan. Our contributions to the 401(k) Plan are made in cash and vest immediately. The Company's Common Stock is not an investment option available to participants in the 401(k) Plan. We contributed $9,569 and $17,396 to the 401(k) Plan during the years ended December 31, 2017 and 2016, respectively.
NOTE 16.
|
FAIR VALUE MEASUREMENTS
|
In accordance with 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 notes receivable and accrued interest and convertible note payable balances approximates fair value based on a valuation methodology using the income approach and a discounted cash flow model.
The fair value of our financial instruments consisted of the following at December 31:
Description
|
|
2017
|
|
|
2016
|
|
Liabilities:
|
|
|
|
|
|
|
Convertible promissory note – March 2017
|
|
$
|
500,000
|
|
|
|
---
|
|
Convertible promissory note – February 2017
|
|
$
|
500,000
|
|
|
|
---
|
|
Promissory note – December 2016
|
|
|
---
|
|
|
$
|
20,000
|
|
Total
|
|
$
|
1,000,000
|
|
|
$
|
20,000
|
|
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. Deferred tax assets as of December 31, 2017, of $13,584,125 were reduced to zero, after considering the valuation allowance of $13,584,125, since there is no assurance of future taxable income. As of December 31, 2017, we have consolidated net operating loss carryforwards ("NOL") and research credit carryforwards for income tax purposes of approximately $58,787,306 and $555,177, respectively.
The following are the consolidated operating loss carryforwards and research credit carryforwards that will begin expiring as follows:
Calendar Years
|
|
Consolidated Operating Loss Carryforwards
|
|
|
Research Activities
Carryforwards
|
|
2021
|
|
$
|
34,248
|
|
|
$
|
---
|
|
2023
|
|
|
95,666
|
|
|
|
---
|
|
2024
|
|
|
910,800
|
|
|
|
13,584
|
|
2025
|
|
|
1,687,528
|
|
|
|
21,563
|
|
2026
|
|
|
11,950,281
|
|
|
|
60,797
|
|
2027
|
|
|
3,431,365
|
|
|
|
85,052
|
|
2028
|
|
|
8,824,940
|
|
|
|
139,753
|
|
2029
|
|
|
6,889,761
|
|
|
|
81,940
|
|
2030
|
|
|
5,113,583
|
|
|
|
41,096
|
|
2031
|
|
|
3,728,626
|
|
|
|
43,592
|
|
2032
|
|
|
3,695,792
|
|
|
|
8,690
|
|
2033
|
|
|
3,187,559
|
|
|
|
15,882
|
|
2034
|
|
|
1,797,031
|
|
|
|
19,491
|
|
2035
|
|
|
2,594,151
|
|
|
|
21,113
|
|
2036
|
|
|
2,510,546
|
|
|
|
2,624
|
|
2037
|
|
|
2,335,429
|
|
|
|
---
|
|
Total
|
|
$
|
58,787,306
|
|
|
$
|
555,177
|
|
The Tax Reform Act of 1986 contains provisions, which limit the amount of NOL and tax credit carryforwards that companies may utilize in any one year in the event of cumulative changes in ownership over a three-year period in excess of 50%. Since the effective date of the Tax Reform Act of 1986, the Company has completed significant share issuances in 2003, 2006, and 2017 which may significantly limit our ability to utilize our NOL and tax credit carryforwards against taxable earnings in future periods. Ownership changes in future periods may place additional limits on our ability to utilize NOLs and tax credit carryforwards.
An analysis of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
12,637,559
|
|
|
$
|
20,056,077
|
|
Intangible assets
|
|
|
387,249
|
|
|
|
816,389
|
|
Other
|
|
|
577,633
|
|
|
|
575,065
|
|
Total gross deferred tax assets
|
|
|
13,602,441
|
|
|
|
21,447,531
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
18,316
|
|
|
|
10,391
|
|
Total gross deferred tax liabilities
|
|
|
18,316
|
|
|
|
10,391
|
|
|
|
|
|
|
|
|
|
|
Net total of deferred assets and liabilities
|
|
|
13,584,125
|
|
|
|
21,437,140
|
|
Valuation allowance
|
|
|
(13,584,125
|
)
|
|
|
(21,437,140
|
)
|
Net deferred tax assets
|
|
$
|
---
|
|
|
$
|
---
|
|
The valuation allowance decreased by $7,853,015 in 2017 and increased by $1,531,890 in 2016.
The following is a reconciliation of the expected statutory federal income tax rate to our actual income tax rate for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
Expected income tax (benefit) at federal statutory tax rate -35%
|
|
$
|
( 677,456
|
)
|
|
$
|
( 1,558,549
|
)
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
5,908
|
|
|
|
7,739
|
|
Research tax credits
|
|
|
---
|
|
|
|
(2,624
|
)
|
Amortization of deferred startup costs
|
|
|
---
|
|
|
|
---
|
|
Valuation allowance
|
|
|
671,548
|
|
|
|
1,553,434
|
|
Income tax expense
|
|
$
|
---
|
|
|
$
|
---
|
|
Effective January 1, 2007, we adopted ASC Topic 740,
Accounting for Uncertainty in Income Taxes
. ASC Topic 740 is a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that we have taken or expects to take on a tax return. If an income tax position exceeds a more likely than not (greater than 50%) probability of success upon tax audit, we will recognize an income tax benefit in its financial statements. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures consistent with jurisdictional tax laws. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing ASC Topic 740.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, we revalued our ending net deferred tax assets at December 31, 2017, which were fully offset by a valuation allowance. The Company has evaluated the other changes resulting from the Tax Act and does not expect them to have a material impact on the tax provision, therefore, the Company considers the accounting complete.
At December 31, 2017, the Company had NOLs and research credit carryforwards of approximately $58,787,000 and $555,000, respectively. At December 31, 2017, the utilization of a portion of our NOLs is subject to an annual limitation under Section 382 of the Internal Revenue Code (IRC). If not utilized, these federal NOLs will begin to expire in 2020. The Company continues to evaluate IRC Section 382, which may limit NOLs generated in future years.
The Company evaluates deferred tax assets, including the benefit from NOLs, to determine if a valuation allowance is required. Such evaluation is based on consideration of all available evidence using a "more likely than not" standard with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses; forecasts of future profitability; the length of statutory carryforward periods; the Company's experience with operating losses; and tax-planning alternatives. The significant piece of objective negative evidence evaluated was the cumulative loss incurred through the year ended December 31, 2017. Given this evidence and the expectation to incur operating losses in the foreseeable future, a full valuation allowance has been recorded against the net deferred tax asset. The Company will continue to maintain a full valuation allowance against the entire amount of its net deferred tax asset, until such time as the Company has determined that the weight of the objectively verifiable positive evidence exceeds that of the negative evidence and it is likely that the Company will be able to utilize all of its net deferred tax asset relating to its federal and state NOL carryforwards. Although the Company has established a full valuation allowance on its net deferred tax asset, it has not forfeited the right to carryforward tax losses up to 20 years and apply such tax losses against taxable income in such years, thereby reducing its future tax obligations. The Company is subject to taxation in the United States and various state jurisdictions.
As of December 31, 2017, federal income tax returns for fiscal years
2014
through
2017
remain open and subject to examination by the Internal Revenue Service. We file and remit state income taxes in various states where we have determined it is required to file state income taxes. Our filings with those states remain open for audit for the fiscal years
2014
through
2017
.
The Company applies the provisions of ASC 740 related to accounting for uncertain tax positions and concluded there were no such positions associated with the Company requiring accrual of a liability. As of December 31, 2017, the Company has not accrued for any such positions. The Company is currently not under audit for federal or state tax purposes. The Company does not expect a significant change to occur within the next 12 months.
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. On March 17, 2015, we executed a Second Amendment to Lease Agreement (the "Second Amendment") that renewed and extended our lease until March 31, 2018. The Second Amendment required a minimum monthly lease obligation of $9,436, which was inclusive of monthly operating expenses.
On December 15, 2017, we entered into a Termination of Lease Agreement whereby we cancelled our existing lease for office and laboratory space and concurrently entered into a new lease agreement (the "Office Lease") that will continue until December 2019. The Office Lease encompasses approximately 2,500 rentable square feet and requires a minimum monthly lease obligation of $2,721, which is inclusive of monthly operating expenses.
On January 25, 2018, we entered into a lease agreement for storage and warehouse space in Carrollton, Texas. The lease commenced on January 24, 2018 and will continue until December 2019. The lease requires a minimum monthly lease obligation of $1,564, which is inclusive of monthly operating expenses.
On January 16, 2015 we entered into a lease agreement for certain office equipment that commenced on February 1, 2015 and continued until February 1, 2018 and required a minimum lease obligation of $551 per month.
The future minimum lease payments under the Office Lease, the 2018 warehouse lease, and the 2015 equipment lease are as follows as of December 31, 2017:
Calendar Years
|
|
Future Lease Expense
|
|
2018
|
|
$
|
50,399
|
|
2019
|
|
|
51,059
|
|
2020
|
|
|
---
|
|
2021
|
|
|
---
|
|
2022
|
|
|
---
|
|
Total
|
|
$
|
101,458
|
|
Rent expense for our operating leases amounted to $124,463 and $130,098 for the years ended December 31, 2017 and 2016, respectively.
Indemnification
In accordance with our restated articles of incorporation and our amended and restated bylaws, we have indemnification obligations to our officers and directors for certain events or occurrences, subject to certain limits, while they are serving at our request in their respective capacities. We have a director and officer insurance policy that enables us to recover a portion of any amounts paid for future potential claims. We have also entered into contractual indemnification agreements with each of our officers and directors.
Related Party Transactions and Concentration
Note, Warrant and Preferred Stock Purchase Agreement
On February 27, 2017, we entered into the Purchase Agreement with Velocitas and Velo LLC, an entity controlled by Velocitas, with respect to an aggregate financing of up to $6,000,000.
Refer to a description in greater detail of the financing event with Velocitas and Velo LLC in Note 10. Convertible Debt.
On March 31, 2017, the second closing of the Purchase Agreement included, amongst other transaction components, the Company acquiring the Altrazeal distributor agreements Velocitas had with its sub-distributors in exchange for the issuance of 13,375,000 shares of Common Stock. The Company has valued the acquisition of the Altrazeal distributor agreement from Velocitas at $869,375 based on the closing price of $0.065 per share of the Company's Common Stock on March 31, 2017.
For the years ended December 31, 2017 and 2016, the Company recorded revenues, in approximate numbers, of $214,000 and nil, respectively, with Velocitas GmbH which represented 30% and 0% of our total revenues, respectively. As of December 31, 2017 and December 31, 2016, Velocitas GmbH did not have any outstanding net accounts receivable.
Consulting Agreement – Velocitas GmbH
On April 1, 2017, the Company entered into a Consulting
Agreement with
Velocitas GmbH to provide the Company with operational support services in the fields of regulatory administration, finance, international customer account management, manufacturing, supply chain logistics, and other services required by the Company. Velocitas GmbH receives a monthly payment of $25,833 for providing such services to the Company.
Temporary Advances
On December 15, 2016, January 18, 2017, and February 16, 2017, in exchange for cash equal to the principal amount, we issued promissory notes to Velocitas with purchase prices of $20,000, $65,000, and $30,000, respectively. Each of the promissory notes bore interest at the rate of 6.0% per annum with payment of principal and interest due on the earlier of (i) 180 days from the date of issuance, (ii) the date of closing of any debt or equity financing transaction by and between Uluru and Velocitas, or (iii) the payment to Uluru of certain invoices due from selected Company's distributors. Each of the promissory notes was secured by a pledge of certain product inventory and there were no debt issuance costs incurred by the Company. On February 27, 2017, each of the promissory notes was repaid in connection with the issuance of the Initial Note under the Purchase Agreement with Velocitas.
On February 21, 2017, we issued a promissory note to Kirkwood with a purchase price of $25,000. The promissory note bore interest at the rate of 6.0% per annum with payment of principal and interest due on the earlier of (i) 60 days from the date of issuance, (ii) the date of closing of any debt or equity financing transaction by the Company, or (iii) no later than two days after receiving written request by Kirkwood. The promissory note was secured by a pledge of certain product inventory and accounts receivables and there were no debt issuance costs incurred by the Company. The Company's Vice President and Chief Financial Officer, Terrance K. Wallberg, is President and sole shareholder of Kirkwood. On February 27, 2017, the outstanding promissory note to Kirkwood was repaid in connection with the issuance of the Initial Note under the Purchase Agreement with Velocitas.
Related Party Obligations
Since 2011, our named executive officers and certain key executives have temporarily deferred portions of their compensation as part of a plan to conserve and manage the Company's cash and financial resources. As of December 31, 2017, the Company's obligation to these executives for temporarily deferred compensation was approximately $72,000 which was included in accrued liabilities. As of December 31, 2016, the Company's obligation to these executives for temporarily deferred compensation was approximately $473,000 of which approximately $200,000 was included in accrued liabilities and approximately $273,000 was included in accounts payable.
Contingent Milestone Obligations
We are subject to paying Access Pharmaceuticals, Inc. ("Access") for certain milestones based on our achievement of certain annual net sales, cumulative net sales, and/or our having reached certain defined technology milestones including licensing agreements and advancing products to clinical development. As of December 31, 2017, the future milestone obligations that we are subject to paying Access, if the milestones related thereto are achieved, total $4,750,000. Such milestones are based on total annual sales of 20 and 40 million dollars of certain products, annual sales of 20 million dollars of any one certain product, and cumulative sales of such products of 50 and 100 million dollars. As of December 31, 2017, the Company has accrued approximately $39,000 of expense relating to future milestone payments to Access.
On March 7, 2008, we terminated the license agreement with ProStrakan Ltd. for Amlexanox-related products in the United Kingdom and Ireland. As part of the termination, we agreed to pay ProStrakan Ltd. a royalty of 30% on any future payments received by us from a new licensee in the United Kingdom and Ireland territories, up to a maximum of $1,400,000. On November 17, 2008, we entered into a licensing agreement for Amlexanox-related product rights to the United Kingdom and Ireland territories with MEDA AB.
Prescription Drug User Fee Obligation
The Company was assessed prescription drug user fees ("PDUFA") of approximately $535,000 by the United States Department of Health and Human Services (the "DHHS") for the sale and manufacture of Aphthasol® from 2009 to 2012. The Company had contested the assessments as it believed such fees should be waived because the Company should qualify for abatement of the PDUFA fees. However, the Company's challenge has been denied by the DHHS. As of September 30, 2017, the Company had accrued potential penalties and interest of approximately $1,067,000 related to the unpaid PDUFA fees. In November 2017, the Company negotiated a settlement payment of $400,000 with DHHS thereby cancelling certain unpaid invoices and accrued penalties and interest thereon. There continues to be a PDUFA fee that remains unpaid as of this Report. Since the Company has not yet reached a settlement with the DHHS on the unpaid PDUFA fee, it is possible that the Company may be subject to additional collection costs.
NOTE 19.
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LEGAL PROCEEDINGS
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From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings, the adverse outcome of which, in management's opinion, individually or in the aggregate, would have a material adverse effect on the results of our operations or financial position. There are no material proceedings to which any director, officer or any of our affiliates, any owner of record or beneficially of more than five percent of any class of our voting securities, or any associate of any such director, officer, our affiliates, or security holder, is a party adverse to us or our consolidated subsidiary or has a material interest adverse thereto; however, one or more events may lead to a formal dispute or proceeding in the future.
NOTE 20.
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SUBSEQUENT EVENTS
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None.