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EX-31.2 - CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER PURSUANT TO RULE 13A-14(A) AND 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED - ULURU Inc.ex_31-2.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350. AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ULURU Inc.ex_32-1.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ULURU Inc.ex_32-2.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) AND 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED - ULURU Inc.ex_31-1.htm

 


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

FORM 10-Q

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

For the quarterly period ended: September 30, 2009

OR

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

For the transition period from: ___ to ___.

Commission File Number: 000-49670

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


Nevada
 
41-2118656
(State or Other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
   
     
4452 Beltway Drive
   
Addison, Texas
 
75001
(Address of Principal Executive Offices)
 
(Zip Code)
     
(214) 905-5145
Registrant's Telephone Number, including Area Code
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o

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

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

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

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

As of November 10, 2009, there were 66,099,419 shares of the registrant’s Common Stock, $0.001 par value per share, issued and outstanding.


 
 

 


INDEX TO FORM 10-Q

For the Three Months Ended SEPTEMBER 30, 2009



   
Page
 
     
     
 
 
 
 
     
     
     
     
 
     
     
     
     
     
     
     
     
 
     





CONDENSED CONSOLIDATED BALANCE SHEETS

   
September 30, 2009
   
December 31, 2008
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
  $ 1,399,113     $ 7,567,588  
Accounts receivable
    112,618       195,562  
Inventory
    1,047,225       1,080,266  
Prepaid expenses and deferred charges
    225,070       468,625  
Total Current Assets
    2,784,026       9,312,041  
                 
Property and Equipment, net
    1,681,547       1,828,040  
                 
Other Assets
               
Patents, net
    9,168,315       9,965,169  
Deposits
    20,819       20,819  
Total Other Assets
    9,189,134       9,985,988  
                 
TOTAL ASSETS
  $ 13,654,707     $ 21,126,069  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
         
                 
Current Liabilities
               
Accounts payable
  $ 429,846     $ 1,441,986  
Accrued liabilities
    395,774       648,546  
Deferred revenue – current portion
    101,288       122,164  
Royalty advance
    ---       30,417  
Total Current Liabilities
    926,908       2,243,113  
                 
Long Term Liabilities
               
Deferred revenue, net – less current portion
    1,280,437       1,356,526  
                 
TOTAL LIABILITIES
    2,207,345       3,599,639  
                 
COMMITMENTS AND CONTINGENCIES
    ---       ---  
                 
STOCKHOLDERS' EQUITY
               
                 
Preferred stock - $0.001 par value; 20,000 shares authorized;
               
no shares issued and outstanding
    ---       ---  
                 
Common Stock - $0.001 par value; 200,000,000 shares authorized;
               
66,099,419 and 65,509,481 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively
    66,099       65,510  
Additional paid-in capital
    45,508,518       44,057,757  
Accumulated  (deficit)
    (34,127,255 )     (26,596,837 )
TOTAL STOCKHOLDERS’ EQUITY
    11,447,362       17,526,430  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 13,654,707     $ 21,126,069  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
REVENUES
                       
License fees
  $ 22,979     $ 26,556     $ 72,555     $ 65,849  
Royalty income
    61,727       80,822       204,830       241,168  
Product sales
    39,528       2,565       119,482       169,443  
Other
    6,000       15,494       38,190       494  
Total Revenues
    130,234       125,437       435,057       476,954  
                                 
COSTS AND EXPENSES
                               
Cost of goods sold
    7,785       484       22,783       138,218  
Research and development
    376,191       901,344       2,006,070       2,644,104  
Selling, general and administrative
    981,212       1,731,877       5,041,318       3,966,347  
Amortization
    272,102       272,102       807,551       810,469  
Depreciation
    46,424       31,229       126,002       81,703  
Total Costs and Expenses
    1,683,714       2,937,036       8,003,724       7,640,841  
                                 
OPERATING (LOSS)
    ( 1,553,480 )     (2,811,599 )     (7,568,667 )     (7,163,887 )
                                 
Other Income (Expense)
                               
Interest and miscellaneous income
    6,676       65,868       42,296       269,801  
Interest expense
    (1,926 )     ---       (1,926 )     ---  
Loss on sale of equipment
    ---       ---       (2,121 )     ---  
                                 
(LOSS) BEFORE INCOME TAXES
    ( 1,548,730 )     (2,745,731 )     (7,530,418 )     (6,894,086 )
                                 
Income taxes
    ---       ---       ---       ---  
NET (LOSS)
  $ (1,548,730 )   $ (2,745,731 )   $ (7,530,418 )   $ (6,894,086 )
                                 
                                 
Basic and diluted net (loss) per common share
  $ (0.02 )   $ (0.04 )   $ (0.11 )   $ (0.11 )
                                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    66,038,079       64,669,503       65,723,998       63,193,491  
                                 
The accompanying notes are an integral part of these consolidated financial statements.
 




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine Months Ended September 30,
 
   
2009
   
2008
 
OPERATING ACTIVITIES :
           
Net (loss)
  $ (7,530,418 )   $ (6,894,086 )
                 
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
               
                 
Amortization
    807,551       810,469  
Depreciation
    140,702       91,753  
Share-based compensation for stock and options issued to employees
    1,366,682       613,598  
Share-based compensation for options issued to non-employees
    84,668       135,513  
Loss on sale of equipment
    2,121       ---  
                 
Change in operating assets and liabilities:
               
Accounts receivable
    82,944       613,128  
Inventory
    33,041       (299,643 )
Prepaid expenses and deferred charges
    243,555       (91,378 )
Deposits
    ---       2,430  
Accounts payable
    (1,012,140 )     350,613  
Accrued liabilities
    (252,772 )     225,252  
Deferred revenue
    (96,965 )     603,657  
Royalty advance
    (30,417 )     (67,565 )
Total
    1,368,970       2,987,827  
                 
Net Cash (Used in) Operating Activities
    (6,161,448 )     (3,906,259 )
                 
INVESTING ACTIVITIES :
               
Purchase of property and equipment
    (14,177 )     (445,798 )
Investment in notes receivable
    (1,018,219 )     ---  
Proceeds from collection of notes receivable
    1,018,219       ---  
Proceeds from sale of equipment
    7,150       ---  
Purchase of licensing rights
    ---       (142,650 )
Net Cash (Used in) Investing Activities
    (7,027 )     (588,448 )
                 
FINANCING ACTIVITIES :
               
Proceeds from warrant exercises
    ---       ---  
Proceeds from stock option exercises
    ---       47,500  
Net Cash Provided by Financing Activities
    ---       47,500  
                 
Net (Decrease) in Cash
    (6,168,475 )     (4,447,207 )
                 
Cash,  beginning of period
    7,567,588       13,979,828  
Cash,  end of period
  $ 1,399,113     $ 9,532,621  
                 
Supplemental Schedule of Noncash Investing and Financing Activities :
               
                 
For the nine months ended September 30, 2008, the issuance of 3,042,600 shares of common stock pursuant to cashless exercise of warrants to purchase 3,066,667 shares of common stock
          $ ---  
                 
                 
OTHER SUPPLEMENTAL INFORMATION 
               
Cash paid for interest
  $ ---     $ ---  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 




NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.                      COMPANY OVERVIEW AND BASIS OF PRESENTATION

Company Overview

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

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and include the account of ULURU Inc., a Nevada corporation, and its wholly-owned subsidiary, Uluru Delaware Inc., a Delaware corporation.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of September 30, 2009 and the results of its operations for the three and nine months ended September 30, 2009 and 2008 and cash flows for the nine months ended September 30, 2009 and 2008 have been made.

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

All intercompany transactions and balances have been eliminated in consolidation.

Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2009.




NOTE 2.                      SIGNIFICANT ACCOUNTING POLICIES

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 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.

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 product. 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.

Sponsored Research Income

Sponsored research income has no significant associated costs since it is being paid only for information pertaining to a specific research and development project in which the sponsor may become interested in acquiring products developed thereby.  Payments received prior to the Company’s performance are deferred. Contract amounts are not recognized as revenue until the customer accepts or verifies the research has been completed.

 
NOTE 3.                      THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

Recently Adopted Accounting Standards

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued Statement No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162, hereafter referred to as Accounting Standards Codification (the “Codification,” “ASC”, or “ASC Topic 105”).  ASC Topic 105 is the sole source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants.  The Codification supersedes all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification are non-authoritative.  Following the adoption of the Codification, the FASB will issue Accounting Standards Updates, which the FASB will not consider as authoritative in their own right, but which will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification.  We adopted ASC Topic 105 effective with our consolidated financial statements as of September 30, 2009.  The adoption of ASC Topic 105 did not have a material impact on our consolidated financial statements.

In May 2009, FASB issued SFAS No. 165, Subsequent Events, which was primarily codified into Topic 855 Subsequent Events (“ASC 855”) in the ASC.  ASC 855 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Specifically, ASC 855 requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the issuance of their financial statements. ASC 855 is effective for interim and annual reporting periods ending after June 15, 2009. We adopted this statement in the second quarter of fiscal 2009 and the adoption did not have a material impact on our condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, (“SFAS No. 141R”), which was primarily codified into Topic 805 Business Combinations (“ASC 805”) in the ASC.  ASC 805 retains the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree.  ASC 805 also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  ASC 805 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The impact of adopting ASC 805 will be dependent on the future business combinations that the Company may pursue after its effective date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an Amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”), which was primarily codified into Topic 810 Consolidations (“ASC 810”) in the ASC.  ASC 810 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated.  ASC 810 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.  ASC 810 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The adoption did not have a material effect on our consolidated financial statements.


NOTE 4.                      SEGMENT INFORMATION

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

Our revenues are currently derived primarily from one licensee for domestic activities, two licensees for international activities, and our own domestic sales of Altrazeal™.

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
Revenues
 
2009
   
%
   
2008
   
%
   
2009
   
%
   
2008
   
%
 
Domestic
  $ 68,246       52 %   $ 32,995       26 %   $ 191,084       44 %   $ 227,007       48 %
International
    61,988       48 %     92,442       74 %     243,973       56 %     249,947       52 %
Total
  $ 130,234       100 %   $ 125,437       100 %   $ 435,057       100 %   $ 476,954       100 %

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

     
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
Customers
Product
 
2009
   
2008
   
2009
   
2008
 
  Discus Dental, Inc.
  Aphthasol®
    17 %     20 %     15 %     49 %
  Meldex International
  OraDisc™ B
    18 %     22 %     16 %     14 %
  ProStrakan, Ltd.
  Zindaclin®
    28 %     44 %     32 %     36 %
  Total
      63 %     86 %     63 %     99 %




NOTE 5.                      INVENTORY

As of September 30, 2009, our inventory was comprised of raw materials, manufacturing costs incurred in the production of Altrazeal™, and Altrazeal™ finished goods.  Inventory consisted of the following at September 30, 2009 and December 31, 2008:

Inventory
 
September 30, 2009
   
December 31, 2008
 
  Raw materials
  $ 112,002     $ 113,916  
  Work-in-progress
    372,603       344,921  
  Finished goods
    562,620       621,429  
  Total
  $ 1,047,225     $ 1,080,266  


NOTE 6.                      PROPERTY AND EQUIPMENT

Property and equipment, net, consisted of the following at September 30, 2009 and December 31, 2008:

Property and equipment
 
September 30, 2009
   
December 31, 2008
 
  Laboratory equipment
  $ 424,888     $ 427,888  
  Manufacturing equipment
    1,483,223       1,469,046  
  Computers, office equipment, and furniture
    140,360       150,589  
  Computer software
    4,108       4,108  
  Leasehold improvements
    95,841       95,841  
      2,148,420       2,147,472  
  Less: accumulated depreciation and amortization
    ( 466,873 )     ( 319,432 )
  Property and equipment, net
  $ 1,681,547     $ 1,828,040  

Depreciation and amortization expense on property and equipment was $49,990 and $34,794 for the three months ended September 30, 2009 and 2008, respectively and was $136,699 and $92,400 for the nine months ended September 30, 2009 and 2008, respectively.




NOTE 7.                      PATENTS

Patents, net, consisted of the following at September 30, 2009 and December 31, 2008:

Patents
 
September 30, 2009
   
December 31, 2008
 
  Patents
  $ 13,354,938     $ 13,354,938  
  Less: accumulated amortization
    ( 4,186,623 )     ( 3,389,769 )
  Patents, net
  $ 9,168,315     $ 9,965,169  

Amortization expense on patents was $268,536 and $268,536 for the three months ended September 30, 2009 and 2008, respectively and was $796,854 and $799,772 for the nine months ended September 30, 2009 and 2008, respectively.  The future aggregate amortization expense for patent assets, remaining as of September 30, 2009, is as follows:

Year Ending December 31,
 
Future Amortization
Expense
 
  2009 (Three months)
  $ 268,536  
  2010
    1,065,390  
  2011
    1,015,436  
  2012
    723,428  
  2013
    721,452  
  2014 & Beyond
    5,374,073  
  Total
  $ 9,168,315  


NOTE 8.                      STOCKHOLDERS’ EQUITY

Common Stock

As of September 30, 2009 the Company had 66,099,419 shares of common stock issued and outstanding.  The Company issued 144,546 shares of common stock during the three months ended September 30, 2009 pursuant to the vesting of restricted stock awards held by various employees.

Warrants

The following table summarizes the warrants outstanding and the number of shares of common stock subject to exercise as of September 30, 2009 and the changes therein during the nine months then ended:

   
Number of Shares of Common Stock Subject to Exercise
   
Weighted – Average
Exercise Price
 
Balance as of December 31, 2008
    2,795,000     $ 1.07  
Warrants issued
    ---       ---  
Warrants exercised
    ---       ---  
Warrants cancelled
    ---       ---  
Balance as of September 30, 2009
    2,795,000     $ 1.07  



Of the warrant shares subject to exercise as of September 30, 2009, expiration of the right to exercise is as follows:
Date of expiration
 
Number of Warrant Shares of Common Stock Subject to Expiration
 
  August 30, 2011
    1,125,000  
  December 6, 2011
    1,670,000  
  Total
    2,795,000  


NOTE 9.                      EARNINGS PER SHARE

Basic and Diluted Net Loss Per Share

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

Shares used in calculating basic and diluted net loss per common share exclude these potential common shares as of September 30, 2009 and December 31, 2008:

   
September 30, 2009
   
December 31, 2008
 
Antidilutive warrants to purchase common stock
    2,795,000       2,795,000  
Antidilutive options to purchase common stock
    3,306,000       3,706,000  
Restricted vesting common stock
    405,882       154,918  
  Total
    6,506,882       6,655,918  







NOTE 10.                      SHARE BASED COMPENSATION

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

We account for share-based compensation under FASB ASC Topic 718 Compensation – Stock Compensation (“ASC 718”).  ASC 718 requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors in the financial statements and is measured based on the estimated fair value of the award on the grant date.  We use the Black-Scholes option-pricing model to estimate the fair value of share-based awards with the following weighted average assumptions for the nine months ended September 30:

   
2009
   
2008
 
Incentive Stock Options
           
Expected volatility  (1)
    ---       67.7 %
Risk-free interest rate %  (2)
    ---       2.77 %
Expected term (in years)
    ---       5.0  
Dividend yield  (3)
    ---       0.0 %
Forfeiture rate
    ---       5.1 %
                 
Nonstatutory Stock Options
               
Expected volatility  (1)
    73.7 %     69.4 %
Risk-free interest rate %  (2)
    1.79 %     3.23 %
Expected term (in years)
    3.0       3.3  
Dividend yield  (3)
    0.0 %     0.0 %
Forfeiture rate
    0.0 %     0.0 %

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






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

   
Three Months Ended
September 30,
   
Nine Months Ended
 September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Incentive Stock Options
                       
Quantity
    ---       75,000       ---       1,450,000  
Weighted average fair value per share
    ---     $ 0.89       ---     $ 1.23  
Fair value
    ---     $ 66,702       ---     $ 1,788,711  
                                 
Nonstatutory Stock Options
                               
Quantity
    ---       ---       75,000       355,000  
Weighted average fair value per share
    ---       ---     $ 0.14     $ 0.70  
Fair value
    ---       ---     $ 10,672     $ 249,375  


Stock Options (Incentive and Nonstatutory)

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

   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Research and development
  $ 23,325     $ 38,821     $ 218,066     $ 106,822  
Selling, general and administrative
    112,789       223,699       931,324       590,794  
  Total share-based compensation expense
  $ 136,114     $ 262,520     $ 1,149,390     $ 697,616  
                                 

At September 30, 2009, the balance of unearned share-based compensation to be expensed in future periods related to unvested stock option awards, as adjusted for expected forfeitures, is approximately $1,054,063.  The period over which the unearned share-based compensation is expected to be recognized is approximately three years.

The activity for stock options is summarized as follows:

   
Stock Options
   
Weighted Average Exercise Price per Share
 
Outstanding as of December 31, 2008
    3,706,000     $ 2.37  
Granted
    75,000       0.29  
Forfeited/cancelled
    (475,000 )     2.25  
Exercised
    ---       ---  
Outstanding as of September 30, 2009
    3,306,000     $ 2.34  




The following table presents the stock option grants outstanding and exercisable as of September 30, 2009:

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
 
  940,000     $ 0.89       7.7       536,456     $ 0.95  
  615,000       1.57       7.8       551,146       1.56  
  931,000       2.43       5.7       368,520       2.43  
  820,000       4.47       7.9       504,062       4.45  
  3,306,000     $ 2.34       7.2       1,960,184     $ 2.30  


Restricted Stock Awards

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

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

   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Research and development
  $ 7,778     $ 4,544     $ 68,094     $ 12,499  
Selling, general and administrative
    13,659       14,090       233,866       38,996  
  Total share-based compensation expense
  $ 21,437     $ 18,634     $ 301,960     $ 51,495  

At September 30, 2009, the balance of unearned share-based compensation to be expensed in future periods related to restricted stock awards, as adjusted for expected forfeitures, is approximately $155,330.

The activity of our non-vested restricted stock awards is summarized as follows:

   
Restricted stock
   
Weighted Average Grant Date Fair Value
 
Outstanding as of December 31, 2008
    154,918     $ 2.70  
Shares granted
    871,530       0.19  
Shares forfeited/cancelled
    (30,628 )     0.26  
Shares exercised/issued
    (589,938 )     0.62  
Outstanding as of September 30, 2009
    405,882     $ 0.51  




Summary of Plans

2006 Equity Incentive Plan

In March 2006 our board of directors (“Board”) adopted and our stockholders approved our 2006 Equity Incentive Plan (“Incentive Plan”), which initially provided for the issuance of up to 2 million shares of our Common Stock pursuant to stock option and other equity awards.  At the annual meeting of the stockholders held on May 8, 2008, our stockholders approved an amendment to the Incentive Plan to increase from 2 million shares to 6 million shares the total number of shares of Common Stock issuable under the Incentive Plan pursuant to stock option and other equity awards.  As of September 30, 2009, we had granted options to purchase 4,210,000 shares of Common Stock since the inception of the Incentive Plan, of which 3,306,000 were outstanding at a weighted average exercise price of $2.34 per share and we had granted awards for 1,029,242 share of restricted stock since the inception of the Incentive Plan, of which 405,882 were outstanding.  As of September 30, 2009, there were 1,643,180 shares that remained available for future grant under our Incentive Plan.


NOTE 11.                      INCOME TAXES

There was no current federal tax provision or benefit recorded for any period since inception, nor were there any recorded deferred income tax assets, as such amounts were completely offset by valuation allowances.


NOTE 12.                      COMMITMENTS AND CONTINGENCIES

Operating Lease

On January 31, 2006 we entered into a lease agreement for office and laboratory space in Addison, Texas.  The lease, which commenced on April 1, 2006 and continues until April 1, 2013, currently requires a monthly lease obligation of $9,228 per month, which is inclusive of monthly operating expenses.

As of September 30, 2009, the future minimum lease payments are as follows:

Year Ending December 31,
 
Amount
 
  2009 (Three months)
  $ 27,685  
  2010
    110,740  
  2011
    114,755  
  2012
    116,094  
  2013
    29,024  
  Total minimum lease payments
  $ 398,298  

Rent expense for our operating lease amounted to $27,415 and $23,831 for the three months ended September 30, 2009 and 2008, respectively and was $81,140 and $79,678 for the nine months ended September 30, 2009 and 2008, respectively.



 
Indemnification

In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.

In accordance with our restated articles of incorporation and our amended and restated bylaws, we have indemnification obligations to our officers and directors for certain events or occurrences, subject to certain limits, while they are serving at our request in their respective capacities. There have been no claims to date and we have a director and officer insurance policy that enables us to recover a portion of any amounts paid for future potential claims. We have also entered into contractual indemnification agreements with each of our officers and directors.

Employment Agreements

As of September 30, 2009 the Company is party to employment agreements with its officers, which include Renaat Van den Hooff, President and Chief Executive Officer and Terrance K. Wallberg, Vice President and Chief Financial Officer, as well as other key executives including Daniel G. Moro, Vice President – Polymer Drug Delivery and John V. St. John, Ph.D., Vice President - Research and Development.  The employment agreement with Mr. Van den Hooff has an initial term of two years and includes an automatic one-year term renewal for each year thereafter.  The employment agreements with Mssrs. Wallberg, Moro, and St. John each have a term of one year and include an automatic one-year term renewal for each year thereafter.  Each employment agreement provides for a base salary, bonus, stock options, stock grants, and eligibility for Company provided benefit programs.  Under certain circumstances, the employment agreements provide for certain severance benefits in the event of termination or a change in control.  The employment agreements also contain non-solicitation, confidentiality and non-competition covenants, and a requirement for the assignment of certain invention and intellectual property rights to the Company.

Separation Agreement

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

Milestone Payments

We were subject to paying Access Pharmaceuticals, Inc. (“Access”) for certain milestones based on our achievement of certain annual net sales, cumulative net sales, and/or our having reached certain defined technology milestones including licensing agreements and advancing products to clinical development.  As of September 30, 2009, the future milestone obligations that we are subject to paying Access, if the milestones related thereto are achieved, total $4,750,000.  Such milestones are based on total annual sales of 20 and 40 million dollars of certain products, annual sales of 20 million dollars of any one certain product, and cumulative sales of such products of 50 and 100 million dollars.

On March 7, 2008, the Company terminated the license agreement with ProStrakan Ltd. for Amlexanox-related products in the United Kingdom and Ireland.  As part of the termination, the Company agreed to pay ProStrakan Ltd. a royalty of 30% on any future payments received by the Company from a new licensee in the United Kingdom and Ireland territories, up to a maximum of $1,400,000.  On November 17, 2008, the Company conveyed the Amlexanox-related product rights to the United Kingdom and Ireland territories to MEDA AB.




NOTE 13.                      SUBSEQUENT EVENTS

We have evaluated, for potential recognition and disclosure, subsequent events through November 16, 2009, the date when we issued our condensed consolidated financial statements for the quarter ended September 30, 2009 and determined the following subsequent event to be disclosed.

On November 9, 2009, the Company entered into an engagement letter (the “Engagement Letter”) with Rodman & Renshaw, LLC (the “Placement Agent”), pursuant to which the Placement Agent agreed to act as exclusive placement agent on a reasonable best efforts basis for a proposed offering of our securities.

On November 11, 2009, we entered into a Securities Purchase Agreement with several institutional investors (the “Securities Purchase Agreement”).  Pursuant to the Securities Purchase Agreement, we agreed to issue to those investors the following securities (the “Offering”):

§ 
10,714,467 shares of our common stock, par value $0.001 per share; and
§ 
Warrants to purchase up to 5,357,233 shares of our common stock (the “Warrants”);

The Warrants have an initial exercise price of $0.19 per share, and may be exercised at any time and from time to time on or after May 15, 2010 through and including May 15, 2015.

The closing of the Offering took place on November 16, 2009.  The Placement Agent received a placement fee equal to 7% of the aggregate gross proceeds of the Offering as well as warrants to purchase up to an aggregate of 535,723 shares of our common stock at an exercise price equal to $0.238 per share.

The aggregate net proceeds from the Offering, after deducting the Placement Agents’ fees and estimated offering expenses payable by us (and excluding any proceeds from exercise of the Warrants), were approximately $1.35 million.

We made the offering and sale of the above shares and warrants pursuant to a shelf registration statement on Form S-3 (Registration No. 333-160568) declared effective by the Securities and Exchange Commission on July 23, 2009, and a base prospectus dated as of the same date, as supplemented by a prospectus supplement filed with the Securities and Exchange Commission on November 13, 2009.







You should read the following discussion and analysis together with all financial and non-financial information appearing elsewhere in this report and with our consolidated financial statements and related notes included in our 2008 Annual Report on Form 10-K, referred to as our 2008 Form 10-K, which has been previously filed with the Securities and Exchange Commission. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties, including the statement that our cash and cash equivalents are sufficient to fund our operations through March 2011.  Our actual results could differ materially from those anticipated by such forward-looking information due to competitive factors and other risks discussed in our 2008 Form 10-K under “Risks Associated with our Business”.

Business Overview

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

Our strategy is threefold:

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




Recent Developments

On November 9, 2009, the Company entered into an engagement letter (the “Engagement Letter”) with Rodman & Renshaw, LLC (the “Placement Agent”), pursuant to which the Placement Agent agreed to act as exclusive placement agent on a reasonable best efforts basis for a proposed offering of our securities.

On November 11, 2009, we entered into a Securities Purchase Agreement with several institutional investors (the “Securities Purchase Agreement”).  Pursuant to the Securities Purchase Agreement, we agreed to issue to those investors the following securities (the “Offering”):

§ 
10,714,467 shares of our common stock, par value $0.001 per share; and
§ 
Warrants to purchase up to 5,357,233 shares of our common stock (the “Warrants”);

The Warrants have an initial exercise price of $0.19 per share, and may be exercised at any time and from time to time on or after May 15, 2010 through and including May 15, 2015.

The closing of the Offering took place on November 16, 2009.  The Placement Agent received a placement fee equal to 7% of the aggregate gross proceeds of the Offering as well as warrants to purchase up to an aggregate of 535,723 shares of our common stock at an exercise price equal to $0.238 per share.

The aggregate net proceeds from the Offering, after deducting the Placement Agents’ fees and estimated offering expenses payable by us (and excluding any proceeds from exercise of the Warrants), were approximately $1.35 million.

We made the offering and sale of the above shares and warrants pursuant to a shelf registration statement on Form S-3 (Registration No. 333-160568) declared effective by the Securities and Exchange Commission on July 23, 2009, and a base prospectus dated as of the same date, as supplemented by a prospectus supplement filed with the Securities and Exchange Commission on November 13, 2009.

On September 16, 2009, the Company announced the results from the first completed randomized clinical trial for Altrazeal.  The recently completed clinical study compared healing, pain and comfort of skin graft donor sites treated with either AltrazealTM or with a leading commercial sodium carboxymethylcellulose-silver (“CMC-Ag”) dressing.

Major results from the study indicated that there was a significant difference in patient’s pain scores, all favoring Altrazeal with lower pain scores at each time point (p<0.0001).  When asked about the comfort of the wound dressing at the edges, these subjects found Altrazeal to be more comfortable (p<0.001) and less painful when the dressing came in contact with clothes or bedding (p<0.001).  The study endpoints validated the hypothesis for time to healing for both dressings in this particular type of acute surgical wound.

The study was a single-center, prospective randomized trial in which each patient served as his/her own control. Each patient had at least two split-thickness donor sites of which one was dressed with AltrazealTM and the other one with the CMC-Ag dressing.

On July 23, 2009, the Company received a notice of effectiveness for the Company’s registration statement on Form S-3, using a “shelf” registration process, from the Securities and Exchange Commission. Under this shelf registration process, we may from time to time sell common stock, preferred stock, debt securities or warrants to purchase common stock, preferred stock or debt securities, or any combination of the foregoing, either individually or as units comprised of one or more of the other securities, in one or more offerings up to a total dollar amount of $25,000,000.  As discussed above, the Offering was made pursuant to this registration statement declared effective on July 23, 2009 and a base prospectus dated as of the same date, as supplemented by a prospectus supplement filed with the Securities and Exchange Commission on November 13, 2009.

In July 2009 the Company implemented a revised business plan in order to reduce operating expenses, optimize operations, and conserve cash while seeking strategic relationships for its products and fund raising to provide needed liquidity.




RESULTS OF OPERATIONS

Fluctuations in Operating Results

Our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the timing and amount of payments received pursuant to our current and future collaborations, and the progress and timing of expenditures related to our development and commercialization efforts. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results may not be a good indication of our future performance.


Comparison of the three months ended September 30, 2009 and 2008

Total Revenues

Revenues were $130,234 for the three months ended September 30, 2009, as compared to revenues of $125,437 for the three months ended September 30, 2008, and were comprised of licensing fees of approximately $23,000 for two OraDisc™ licensing agreements, $23,000 for domestic royalties from the sale of Aphthasol® by our distributor, $39,000 of foreign royalties from the sale of Zindaclin®, $6,000 for sponsored research associated with OraDisc™ technologies, and $40,000 of Altrazeal® product sales.

The third quarter 2009 revenues represent an overall increase of approximately $5,000 versus the comparative third quarter 2008 revenues, primarily due to an increase of $37,000 in Altrazeal revenues.  This increase was partially offset by decreases of $18,000 in Zindaclin® royalties and licensing fees, $9,000 in sponsored research, and $2,000 in Aphthasol® royalties.

Costs and Expenses

Cost of Goods Sold

Cost of goods sold for the three months ended September 30, 2009 was $7,785 and consisted of product costs for our Altrazeal® wound dressing.  Cost of goods sold for the three months ended September 30, 2008 were only $484, as Altrazeal™ was initially launched in June 2008.

Research and Development

Research and development expenses totaled $376,191 for the three months ended September 30, 2009, including $31,103 in share-based compensation, compared to $901,344 for the three months ended September 30, 2008, including $43,365 in share-based compensation.  The decrease of approximately $525,000 in research and development expenses was due primarily to a decrease in direct research costs of $248,000, a decrease in regulatory consulting costs of $44,000 along with savings of $258,000 due to the Company’s compensation reduction plan that was initiated in July 2009.  These decreases were partially offset by an increase in clinical testing expenses associated with our wound care technologies of $27,000.

The direct research and development expenses for the three months ended September 30, 2009 and 2008 were as follows:

   
Three Months Ended
September 30,
 
Technology
 
2009
   
2008
 
  Wound care & nanoparticle
  $ 4,636     $ 140,393  
  OraDisc™
    4,200       138,945  
  Aphthasol® & other technologies
    28,617       6,132  
  Total
  $ 37,453     $ 285,470  

 
Selling, General and Administrative
 
Selling, general and administrative expenses totaled $981,212 for the three months ended
September 30, 2009, including $126,448 in share-based compensation, compared to $1,731,877 for the three months ended September 30, 2008, including $237,789 in share-based compensation.  The decrease of approximately $751,000 in selling, general and administrative expenses was due primarily to reduced costs for marketing and selling expenses of $509,000, savings of $158,000 due to the Company’s compensation reduction plan, decreased corporate travel expenses of $37,000, decreased investor relations costs of $14,000, lower patent-related legal fees of $9,000, decreased administrative operating expenses of $12,000, and savings of $48,000 in Director fees.

These decreases were partially offset by an increase of $27,000 in legal and consulting fees, along with an increase of $6,000 in insurance costs.

Amortization

Amortization expense totaled $272,102 for the three months ended September 30, 2009, which is the same amount of amortization expense for the three months ended September 30, 2008.  The expense for each period consisted primarily of amortization associated with our patents.  There were no additional purchases of patents during the three months ended September 30, 2009.

Depreciation

Depreciation expense totaled $46,424 for the three months ended September 30, 2009 as compared to $31,229 for the three months ended September 30, 2008.  The increase of approximately $15,000 is attributable to our purchase of additional equipment, primarily manufacturing items, during 2009.


Interest and Miscellaneous Income

Interest and miscellaneous income totaled $6,676 for the three months ended September 30, 2009 as compared to $65,868 for the three months ended September 30, 2008.  The decrease of approximately $59,000 is attributable to a decrease in interest income due to lower cash balances and interest yields in 2009.




Comparison of the nine months ended September 30, 2009 and 2008

Total Revenues

Revenues were $435,057 for the nine months ended September 30, 2009, as compared to revenues of $476,954 for the nine months ended September 30, 2008, and were comprised of licensing fees of $74,775 from two OraDisc™ licensing agreements, domestic royalties of $65,601 from the sale of Aphthasol® by our distributor, foreign royalties of $137,009 from the sale of Zindaclin®, OraDisc™ related sponsored research program fees of $38,190, and Altrazeal® product sales of $119,482.

The nine months ended September 30, 2009 revenues represent an overall decrease of approximately $42,000 versus the comparative nine months ended September 30, 2008 revenues, primarily due to a decrease of $166,000 in Aphthasol® product sales, which was non-recurring revenue from the prior year, and a decrease of $34,000 in Zindaclin® royalties.  These decreases were partially offset by an increase of $116,000 in Altrazeal™ product sales, increased licensing fees of $6,000 for OraDisc technologies, and increased Ora Disc™ related sponsored research program fees of $37,000.

Costs and Expenses

Cost of Goods Sold

Cost of goods sold for the nine months ended September 30, 2009 was $22,783 and consisted entirely of costs associated with the manufacture of Altrazeal®, whereas the cost of goods sold for the nine months ended September 30, 2008 was comprised of $137,615 in costs associated with the manufacture of Aphthasol® and $603 for costs associated with the manufacture of Altrazeal®.

Research and Development

Research and development expenses totaled $2,006,070 for the nine months ended September 30, 2009, including $286,160 in share-based compensation, compared to $2,644,104 for the nine months ended September 30, 2008, including $119,321 in share-based compensation.  The decrease of approximately $638,000 in research and development expenses was due primarily to decreases in direct research costs of $682,000 relating to our wound care and OraDisc™ technologies and savings of $133,000 due to the Company’s compensation reduction plan.  These decreases were partially offset by increased clinical testing expenses for our wound care technologies of $38,000 and increased regulatory consulting and expenses of $141,000.

The direct research and development expenses for the nine months ended September 30, 2009 and 2008 were as follows:

   
Nine Months Ended
 September 30,
 
Technology
 
2009
   
2008
 
  Wound care & nanoparticle
  $ 54,421     $ 572,843  
  OraDisc™
    163,326       328,608  
  Aphthasol® & other technologies
    34,710       32,713  
  Total
  $ 252,457     $ 934,164  




Selling, General and Administrative

Selling, general and administrative expenses totaled $5,041,318 for the nine months ended September 30, 2009, including $1,165,190 in share-based compensation, compared to $3,966,347 for the nine months ended September 30, 2008, including $629,790 in share-based compensation.

The increase of approximately $1,075,000 in selling, general and administrative expenses was due primarily to additional costs of approximately $602,000 for the ramp-up of our sales and marketing efforts, distribution services of $140,000 and a net increase of administrative compensation costs of $244,000.  The net increase in administrative compensation costs includes approximately $454,000 of share based compensation increases relating to the Company’s compensation reduction plan in September 2009 and costs of $47,000 associated with the Separation Agreement with our former chief executive officer; which are offset by a decrease of $263,000 in accruals for incentives.

We also incurred increases in legal services associated with our patent filings of $33,000, increases of $8,000 in accounting fees, and legal fees of $309,000 associated with filings made with the Securities and Exchange Commission, financing activities, and the proposed York Pharma acquisition.

Each of these factors were partially offset by a decrease of $73,000 in corporate travel expenses, lower consulting fees of $23,000, a decrease in investor relations expenses of $19,000, lower shareholder expenses of $24,000 due to having the Company’s annual shareholder meeting at a later date than in prior years, decreased director compensation of $60,000, and lower due diligence costs of $64,000 associated with financing activities.

Amortization

Amortization expense totaled $807,551 for the nine months ended September 30, 2009 as compared to $810,469 for the nine months ended September 30, 2008.  The expense for each period consists primarily of amortization associated with our patents.  There were no additional purchases of patents during the nine months ended September 30, 2009.

Depreciation

Depreciation expense totaled $126,002 for the nine months ended September 30, 2009 as compared to $81,703 for the nine months ended September 30, 2008.  The increase of approximately $44,000 is attributable to our purchase of additional equipment, primarily manufacturing items, during 2009.

Interest and Miscellaneous Income

Interest and miscellaneous income totaled $42,296 for the nine months ended September 30, 2009 as compared to $269,801 for the nine months ended September 30, 2008.  The decrease of approximately $228,000 is attributable to a decrease in interest income due to lower cash balances and interest yields in 2009.




LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations primarily through the private sales of convertible debentures and common stock.  Product sales, royalty payments, contract research, licensing fees and milestone payments from our corporate alliances have provided, and are expected in the future to provide partial funding for operations.  As of September 30, 2009 our cash and cash equivalents were $1,399,113 which is a decrease of $6,168,475 as compared to our cash and cash equivalents at December 31, 2008 of $7,567,588.  Our working capital (current assets less current liabilities) was $1,857,118 at September 30, 2009 as compared to our working capital at December 31, 2008 of $7,068,928.

Consolidated Cash Flow Data
   
Nine Months Ended September 30,
 
Net Cash Provided by (Used in)
 
2009
   
2008
 
  Operating activities
  $ (6,161,448 )   $ (3,906,259 )
  Investing activities
    (7,027 )     (588,448 )
  Financing activities
    ---       47,500  
  Net (Decrease) in cash and cash equivalents
  $ (6,168,475 )   $ (4,447,207 )

Operating Activities

For the nine months ended September 30, 2009, net cash used in operating activities was $6,161,448.  The principal component of net cash used for the nine months ended September 30, 2009 stems from our net loss of approximately $7,530,000.  This net loss for the nine months ended September 30, 2009 included substantial non-cash charges in the form of share-based compensation, amortization of patents, and depreciation.  These non-cash charges totaled approximately $2,400,000.

Additional uses of our net cash included a decrease of $1,012,000 in accounts payable due to timing of vendor payments, a decrease of $253,000 in accrued liabilities for employee benefits and incentives, the amortization of deferred revenues of $97,000, and a decrease of $30,000 in our royalty advance for Aphthasol® due to sales by our distributor.  These uses of net cash were partially offset by a decrease of $244,000 in prepaid expenses due to expense amortization, a decrease of $83,000 in accounts receivable, and a decrease of $33,000 in inventory due to Altrazeal™ product sales.

For the comparable nine months of 2008, net cash used in operating activities was $3,906,259.  The principal component of net cash used for the nine months ended September 30, 2008 stems from our net loss of approximately $6,894,000 which included $1,651,000 of non-cash charges in the form of share-based compensation, amortization of patents, and depreciation.

Additional uses of our net cash included an increase of approximately $300,000 in inventory due to the work-in-progress manufacturing costs for Altrazeal™, an increase of $91,000 for renewal fees with the Food & Drug Administration, and a decrease of $67,000 in our royalty advance for Aphthasol® due to domestic sales by our distributor.  These uses of net cash were partially offset by a decrease of $613,000 in accounts receivable due to customer collections, an increase of $350,000 in accounts payable due to costs for product manufacturing, an increase in accrued liabilities of $225,000 due to timing, and an increase in deferred revenues of $604,000 from the receipt of licensing agreements associated with our OraDisc™ technologies.



Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2009 was $7,027.  The investing activities include approximately $1,018,000 in notes receivable associated with the loan to York Pharma in April 2009, the subsequent collection of the York loan in July 2009, and a decrease of $14,000 associated with the purchase of Altrazeal™ manufacturing equipment.  The uses of net cash were partially offset by $7,000 of proceeds from the sale of laboratory equipment.

For the comparable nine months of 2008, net cash used in investing activities was $588,448 and consisted primarily of manufacturing equipment purchases for our Altrazeal™ and OraDisc™ products along with $142,650 for the buy-back of OraDisc™ licensing rights previously held by Zambon S.p.A.

Financing Activities

There were no financing activities during the nine months ended September 30, 2009.

Net cash provided by financing activities during the nine months ended September 30, 2008 was $47,500 from the exercise of stock options to purchase 50,000 shares of our common stock.

Liquidity

In July 2009, the Company restructured its operations in efforts reduce operating expenses, optimize operations and to conserve the necessary cash to further the Company’s revised business plan.  Currently, a core management group is being supplemented by a small selection of external consultants to support the Company’s primary business activities. Selling efforts for Altrazeal™ are continuing through a network of independent sales representatives throughout the country.

On November 11, 2009, we entered into a Securities Purchase Agreement with several institutional investors (the “Securities Purchase Agreement”).  Pursuant to the Securities Purchase Agreement, we agreed to issue to those investors the following securities (the “Offering”):

§ 
10,714,467 shares of our common stock, par value $0.001 per share; and
§ 
Warrants to purchase up to 5,357,233 shares of our common stock (the “Warrants”);

The Warrants have an initial exercise price of $0.19 per share, and may be exercised at any time and from time to time on or after May 15, 2010 through and including May 15, 2015.

The closing of the Offering took place on November 16, 2009.  Rodman and Renshaw, LLC, acting as our placement agent, received a placement fee equal to 7% of the aggregate gross proceeds of the Offering as well as warrants to purchase up to an aggregate of 535,723 shares of our common stock at an exercise price equal to $0.238 per share.

The aggregate net proceeds from the Offering, after deducting the Placement Agents’ fees and estimated offering expenses payable by us (and excluding any proceeds from exercise of the Warrants), were approximately $1.35 million.  



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

As of November 1, 2009, we had cash and cash equivalents of approximately $1,177,000.  We expect to use our cash, cash equivalents, and investments on working capital and general corporate purposes, products, product rights, technologies, property and equipment, the payment of contractual obligations, and regulatory or sales milestones that may become due.  Our long-term liquidity will depend to a great extent on our ability to fully commercialize our Altrazeal™ and OraDisc™ technologies; therefore we are continuing to search both domestically and internationally for opportunities that will enable us to continue our business.  At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth during 2009 and beyond, such as the degree of market acceptance, patent protection and exclusivity of our products, the impact of competition, the effectiveness of our sales and marketing efforts, and the outcome of our current efforts to develop, receive approval for, and successfully launch our near-term product candidates.

Based on the proceeds from the closing of our Offering, our existing liquidity, the expected level of operating expenses, projected sales of our existing products and estimated sales from our product candidates, if approved, combined with other revenues and interest income, we believe that we will be able to meet our working capital and capital expenditure requirements at least through March 2011.  We do not expect any material changes in our capital expenditure spending during the remainder of 2009.  However, we cannot be sure that our anticipated revenue growth will be realized or that we will generate significant positive cash flow from operations.

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

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

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





Contractual Obligations

The following table summarizes our outstanding contractual cash obligations as of September 30, 2009, which consists of a lease agreement for office and laboratory space in Addison, Texas which commenced on April 1, 2006 and a separation agreement with our former chief executive officer which was effective on March 9, 2009.

   
Payments Due By Period
 
Contractual Obligations
 
Total
   
Less Than
1 Year
   
2-3
Years
   
4-5
Years
   
After 5
Years
 
  Operating lease
  $ 398,298     $ 110,740     $ 229,511     $ 58,047     $ ---  
  Separation agreement
    662,500       150,000       300,000       212,500       ---  
  Total contractual cash obligations
  $ 1,060,798     $ 260,740     $ 529,511     $ 270,547     $ ---  


Off-Balance Sheet Arrangements

As of September 30, 2009, we did not have any off balance sheet arrangements.


Impact of Inflation

We have experienced only moderate price increases under our agreements with third-party manufacturers as a result of raw material and labor price increases.  We have generally passed these price increases along to our customers.  However, there can be no assurance that possible future inflation would not impact our operations.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The preparation of our financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate these estimates and judgments. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  Our critical account policies are summarized in our Annual Report on Form 10-K for the year ended December 31, 2008.  We had no significant changes in our critical accounting policies since our last annual report.




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q (including documents incorporated by reference) and other written and oral statements the Company makes from time to time contain certain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should”, “expect”, “anticipate”, “estimate”, “target”, “may”, “project”, “guidance”, “intend”, “plan”, “believe” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts.  Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, statements regarding the Company’s expected cash and cash equivalents and working capital being sufficient until March 2011, and other statements, including, the Company’s goals, plans and projections regarding its financial position, results of operations, cash flows, market position, product development, product approvals, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings, acquisitions, and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years. The Company has included important factors in the cautionary statements included in its 2008 Annual Report on Form 10-K, particularly under “Risk Associated with our Business”, that the Company believes could cause actual results to differ materially from any forward-looking statement.
 
Although the Company believes it has been prudent in its plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. The Company undertakes no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.
 
 
 

Concentrations of Credit Risk

Concentration of credit risk with respect to financial instruments, consisting primarily of cash and cash equivalents, potentially expose us to concentrations of credit risk due to the use of a limited number of banking institutions and due to maintaining cash balances in banks, which, at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation.  Currently, we utilize Bank of America and Bank of America Investment Services, Inc. as our banking institutions.  At September 30, 2009 and December 31, 2008 our cash and cash equivalents totaled $1,399,113 and $7,567,588, respectively.  However, because deposits are maintained at these two financial institutions, we do not believe that there is a significant risk of loss of uninsured amounts.  We also invest cash in excess of immediate requirements in money market accounts, certificates of deposit, corporate commercial paper with high quality ratings, and U.S. government securities.  These investments are not held for trading or other speculative purposes.  We are exposed to credit risk in the event of default by these high quality corporations.

Concentration of credit risk with respect to trade accounts receivable are customers with balances that exceed 5% of total consolidated trade accounts receivable at September 30, 2009 and at December 31, 2008.  As of September 30, 2009, five customers exceeded the 5% threshold.  Two customers exceeded the 5% threshold at December 31, 2008.  We believe that these customer accounts are fully collectible as of September 30, 2009.

Foreign Currency Exchange Rate Risk

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

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



Evaluation of Disclosure Controls and Procedures.

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

Changes in internal controls.

There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to material affect, our internal controls over financial reporting.






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



There have been no material changes in our risk factors from those disclosed in our 2008 Annual Report on Form 10-K, filed on March 30, 2009.



None.



None.



None.



None.





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



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

 
ULURU Inc.
   
 Date:  November 16, 2009
 
By:
/s/ Renaat Van den Hooff
 
   
Renaat Van den Hooff
   
Chief Executive Officer and President
   
(Principal Executive Officer)
   
   
 Date:  November 16, 2009
 
By:
/s/ Terrance K. Wallberg
 
   
Terrance K. Wallberg
   
Chief Financial Officer and Vice President
   
(Principal Financial and Accounting Officer)
 

 

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