UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K








ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE SECURITIES EXCHANGE ACT OF 1934








For the fiscal year ended December 31, 2010Commission File No. 000-49670





ULURU Inc.


(Exact name of registrant as specified in its charter)





Nevada

41-2118656(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)4452 Beltway DriveAddison, Texas

75001(Address of principal executive offices)

(Zip Code)





(214) 905-5145


(Registrant’s telephone number, including area code)





-----------------------------





Securities registered under Section 12(b) of the Exchange Act:





Title of Class

Name of exchange on which registeredCommon Stock, $0.001 par value

New York Stock Exchange Amex LLC


-----------------------------





Securities registered under Section 12(g) of the Exchange Act:





None


-----------------------------





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ̈    No  x





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 t 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   ̈    No   ̈





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  x    No   ̈





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x





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 definition of “large accelerated 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 x





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





As of June 30, 2010 (the last business day of the most recently completed second fiscal quarter), the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant (without admitting that any person whose shares are not included in the calculation is an affiliate) was approximately $10,686,827 based on the closing price of the registrant’s common stock as reported on the New York Stock Exchange Amex LLC on such date.





As of March 31, 2011, there were 87,341,709 shares of the registrant’s Common Stock, $0.001 par value per share, issued and outstanding.










ULURU Inc.FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2010TABLE OF CONTENTSItem

PagePart I1.
Description of Business
31A.
Risk Factors
151B.
Unresolved Staff Comments
262.
Description of Property
263.
Legal Proceedings
264.
Submission of Matters to a Vote of Security Holders
26Part II5.
Market for Common Equity, Related Stockholder Matters, and Small Business Issuer Purchases of Equity Securities
276.
Selected Financial Data
287.
Management's Discussion and Analysis of Financial Condition and Results of Operations
297A.
Quantitative and Qualitative Disclosures about Market Risk
428.
Financial Statements and Supplementary Data
429.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
429A.
Controls and Procedures
439B.
Other Information
44Part III10.
Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Section 16(a) Beneficial Ownership Reporting Compliance
4511.
Executive Compensation
4612.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
4613.
Certain Relationships and Related Transactions, and Director Independence
4614.
Principal Accountant Fees and Services
46Part IV15.
Exhibits and Financial Statement Schedules
47Signatures
48








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Part I








FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY





This Annual Report on Form 10-K (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 that 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, the Company’s goals, plans and projections regarding its financial position, statements indicating that the Company has cash and cash equivalents sufficient to fund our operations into the third quarter of 2011, 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 this 2010 Annual Report on Form 10-K, particularly under “Risk Factors”, 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.








ITEM 1.
DESCRIPTION OF BUSINESS





Organizational History





ULURU Inc. (hereinafter “we”, “our”, “us”, or the “Company”), was incorporated on September 17, 1987 under the laws of the State of Nevada, originally under the name Casinos of the World, Inc.  From April 1993 to January 2002, the Company changed its name on four separate occasions, with Oxford Ventures, Inc. being the Company’s name on January 30, 2002.





Our charter was suspended (subject to reinstatement) by the State of Nevada in September 2001 for inactivity and failure to pay annual fees and costs. Its active status was reinstated on January 30, 2002, upon payment of all past due fees and costs.





On December 2, 2003, we issued 8,625,000 shares pursuant to an Asset Purchase Agreement.  On December 5, 2003, we declared a 2.25 stock dividend which increased the issued and outstanding shares from 10,528,276 common shares to 34,216,897 common shares.





On March 1, 2004, we affected a 4 to 1 forward split, increasing our outstanding shares to 136,867,588.





On October 12, 2005, we entered into a merger agreement with ULURU Inc., a Delaware corporation ("ULURU Delaware"), and Uluru Acquisition Corp., a wholly-owned Delaware subsidiary of ours formed on September 29, 2005. Under the terms of the agreement, Uluru Acquisition Corp. merged into ULURU Delaware, after ULURU Delaware had acquired the net assets of the topical component of Access Pharmaceuticals, Inc., under Section 368 (a) (1) (A) of the Internal Revenue Code.





As a result of the merger, we acquired all of the issued and outstanding shares of ULURU Delaware under a stock exchange transaction, and ULURU Delaware became a wholly-owned subsidiary of the Company, its legal parent. However, for financial accounting and reporting purposes, ULURU Delaware is treated as the acquirer and is consolidated with its legal parent, similar to the accounting treatment given in a recapitalization. For accounting presentation purposes only, our net assets are treated as being acquired by ULURU Delaware at fair value as of the date of the stock exchange transaction, and the financial reporting thereafter has not been, and will not be, that of a development stage enterprise, since ULURU Delaware had substantial earned revenues from planned operations.  Both companies have a December 31 fiscal year end.





On March 29, 2006, we filed a Certificate of Amendment to the Articles of Incorporation in Nevada.  This Certificate of Amendment authorized a 400:1 reverse stock split so that in exchange for every 400 outstanding shares of common stock that each shareholder had at the close of business on March 29, 2006, the shareholder would receive one share of common stock.  As a result of this reverse stock split, our issued and outstanding common stock was reduced from 340,396,081 pre-split shares of common stock to 851,094 post-split shares which include additional shares for fractional interests.  The Certificate of Amendment also authorized a decrease in authorized shares of common stock from 400,000,000 shares, par value $.001 each, to 200,000,000, par value $.001 each, and authorized up to 20,000 shares of Preferred Stock, par value $.001.





On March 31, 2006, we filed a Certificate of Amendment to the Articles of Incorporation in Nevada to change our name from "Oxford Ventures, Inc." to "ULURU Inc."  On the same date, we moved our executive offices to Addison, Texas.





On March 31, 2006, we acquired, through our wholly-owned subsidiary (Uluru Acquisition Corp.) a 100% ownership interest in ULURU Delaware through a merger of ULURU Delaware into Uluru Acquisition Corp.  We acquired ULURU Delaware in exchange for 11,000,000 shares of our common stock. As a result of this merger, the former shareholders of ULURU Delaware owned an aggregate of 92.8% of the issued and outstanding shares of our common stock and the pre-merger shareholders of ours owned an aggregate of 7.2% of the issued and outstanding shares of our common stock.





At the effective time of such merger, the members of the ULURU Delaware Board of Directors holding office immediately prior to such merger became our directors, and all persons holding offices of ULURU Delaware at the effective time continued to hold the same offices of the surviving corporation.  Simultaneously, ULURU Inc.'s directors and officers immediately prior to the closing of such merger resigned from all of their respective positions with us.





On May 31, 2006, ULURU Delaware filed a Certificate of Amendment to its Certificate of Incorporation in Delaware to change its name from "Uluru Inc." to "ULURU Delaware Inc."




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Company Mission and Strategy





We are a diversified specialty pharmaceutical company committed to developing and commercializing a broad range of innovative wound care and muco-adhesive film products based on our patented Nanoflex® and OraDiscTM drug delivery technologies, with the goal of improving outcomes for patients, health care professionals, and health care payers.





Our strategy is twofold:





§
Establish the foundation for a market leadership position in wound management by developing and commercializing a customer focused portfolio of innovative wound care products based on the Nanoflex® technology to treat the various phases of wound healing; and§
Develop our oral-transmucosal technology (OraDiscTM) and generate revenues through multiple licensing agreements.








Core Technology Platforms





Nanoflex® Technology





Nanoflex® technology provides unique materials with a broad range of properties and potential applications. While a conventional bulk hydrogel is an "infinite" network of loosely cross-linked hydrophilic polymers that swells when placed in polar solvents, we have discovered that a variety of unique biomaterials can be formed through the aggregation of hydrogel-like nanoparticles. This concept takes advantage of the inherent biocompatibility of hydrogels while overcoming problems with local stress and strain, which cause bulk hydrogels to shear. Unlike bulk hydrogels, these particle aggregates are shape retentive, can be extruded or molded, and offer properties suitable for use in a variety of in-vivo medical devices, and in novel drug delivery systems, by providing tailored regions of drug incorporation and release. The polymers used in our Nanoflex® technology have been extensively researched by the academic and scientific community and commercialized into several major medical products. They are generally accepted as safe, non-toxic and biocompatible.





Our Nanoflex® technology system has at its core a system of hydrogel-like nanoparticles composed of a polymer used in manufacturing contact lenses and other FDA-approved implants.  These nanoparticles aggregate immediately and irreversibly upon contact with physiological fluid, such as wound exudate or blood, forming a flexible, nano-porous, non-resorbable material termed an aggregate.





Utilizing our proprietary Nanoflex® technology, we have developed three separate development platforms from the system:





§
Nanoflex® Powder§
Nanoflex® Gel§
Nanoflex® Injectable Liquid





Each of the systems is composed of nanoparticles which are stabilized to prevent aggregation prior to application to a physiological environment.  We can control the particle size and chemical composition to affect the rate of aggregation, the final material properties such as fluid content and strength of the resulting aggregate, and if desired, the drug delivery profile for actives trapped in the aggregate.


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Nanoflex®Powder





Our Nanoflex® Powder is composed of hydrogel particles that aggregate immediately and irreversibly upon contact with physiological fluid such as wound exudate, forming a micro-porous flexible and non-resorbable skin-like barrier.  The skin-like barrier can be used to cover and protect a wound surface and can also be applied to provide specific drug delivery profiles to a wound or skin surface.





The powder is applied as a dry material and immediately hydrates and forms a uniform, intact micro-porous film with adhesion to the moist wound.  A major advantage of our Nanoflex® technology is the ability to incorporate active drugs, and provide controlled release.  Drug molecules can be trapped within interstitial spaces between particles during aggregate formation. The spaces between particles, or nanopores in the lattice, can be tailored by varying the particle size which controls the diffusion rate.  Particle size directly affects the size of the holes and channels in the aggregate lattice, which slow down or speed up the movement of a compound as it is released.  By choosing specific particle sizes and compositions and formulating these with a given active, the drug delivery profile can be tailored for a specific application.





We have developed and are developing a range of products utilizing our Nanoflex® powder in wound care:





§
Powder dressings for the coverage and protection of acute and chronic wounds without an active ingredient;§
Silver containing dressings with antimicrobial properties; and§
Collagen containing dressings for management of chronic wounds.





Many other actives can be combined with the base technology, which could lead to significant improvements versus the present standard of care, such as:





§
Hemostatic agent containing dressings for acute trauma with blood loss;§
Antibiotic containing dressings for treatment of infection; and§
Growth factor containing dressings for management of slow healing chronic wounds.








Nanoflex®Gel





Our Nanoflex® technology is composed of hydrated nanoparticles that are concentrated into a viscoelastic gel.  The gel fills the shape of a container or envelope and the physical properties such as firmness or elasticity can be varied by changing the particle composition and concentrations.  If the gel is exposed to physiological fluid such as in a body cavity, the particles will aggregate immediately and irreversibly forming a flexible, non-resorbable aggregate.  This technology is currently being developed as an advanced wound filler material suitable for filling tunneling wounds, such as pressure sores.


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Nanoflex®Injectable Liquid





Our family of dermal fillers and facial sculpting products has three major components that form the injectable materials:





§
Hyaluronic acid§
Nanoflex® particles§
Water





Hyaluronic acid is a nonspecies-specific hydrophilic coiled polysaccharide that is present in all connective tissue.  In dermal and sub-dermal tissue, hyaluronic acid binds with water and provides volume and elasticity.  As a dermal filler, hyaluronic acid provides superb biocompatibility, but applications of this material can be limiting because the material is resorbed in a four to twelve month period requiring repeat injections.  Our dermal filler and sub-dermal filler can be composed of between 1 and 95% hyaluronic acid with several choices of molecular weight.  Materials for facial sculpting containing a lower amount of hyaluronic acid result in a higher degree of permanence.





A suspension of hydrogel nanoparticles containing a small percentage of hyaluronic acid, when injected into tissue, immediately and irreversibly aggregates. With time, the hyaluronic acid portion of the aggregate resorbs, leaving behind a porous, Nanoflex® framework which provides the basis for cellular infiltration and acts as the anchor for collagen attachment.  The resulting non-migrating porous scaffold is projected to have a longevity time significantly greater than currently available commercial products.





This injectable system has been studied extensively for safety and for applications as a dermal filler to provide a family of soft tissue filler materials with different degrees of permanency.








Mucoadhesive OraDiscTM Technology





Treatment of oral conditions generally relies upon the use of medications formulated as gels and pastes, which are applied to lesions in the mouth. The duration of effectiveness of these medications is typically short because the applied dose is worn away through the mechanical actions of speaking, eating, and tongue movement, and is washed away by saliva flow. To address these problems, we developed a novel erodible mucoadhesive film product. This technology, known as OraDiscTM, comprises a multi-layered film having an adhesive layer, a pre-formed film layer, and a coated backing layer. Depending upon the intended application, a pharmaceutically active compound can be formulated within any of these layers, providing a wide range of potential applications. The disc stays in place eroding over a period of time, so that subsequent removal is unnecessary. The drug delivery rate is pre-determined by the rate of erosion of the disc, which is in turn controlled by the composition of the backing layer.





Our adhesive film technology has multiple applications, including the localized delivery of drug to a mucosal site, use as a transmucosal delivery device for delivering drugs into the systemic circulation, and incorporating the drug in the outer layer for delivery into the oral cavity. The adhesive film will adhere to any wet mucosal surface, including the vagina, where this technology represents an opportunity to improve the delivery of drugs for female healthcare applications. Additionally, the adhesive film has been formulated to adhere to the surface of teeth and gums for the delivery of dental health and cosmetic dental actives.





OraDiscTM was initially developed as a drug delivery system to treat canker sores with the same active ingredient (amlexanox) that is used in our Aphthasol® paste.  We have continued to develop the OraDiscTM technology and we have generated or are exploring additional prototype drug delivery products, including those for pain palliation in the oral cavity, gingivitis, cough and cold treatment, breath freshener, tooth whitening and other dental applications.


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Marketed Products





We have used our drug delivery technology platforms to develop the following products and product candidates:





Altrazeal®





Altrazeal® Transforming Powder Dressing, based on our Nanoflex® technology, has the potential to change the way health care providers approach their treatment of wounds.  Launched in June 2008, the product is indicated for exuding wounds such as partial thickness burns, donor sites, abrasions, surgical, acute and chronic wounds. The powder fills and seals the wound to provide an optimal moist healing environment. The wound exudate is controlled through the high moisture vapor transpiration rate (MVTR) of the material generated by capillary forces that creates a low pressure environment at the wound bed which supports cellular function and tissue repair and holds the dressing in place. Other characteristics of Altrazeal® that promote healing are oxygen permeability and bacteria impermeability.  Patient comfort is enhanced with the easy application and removal of our wound dressing, where no granulating tissue is harmed during the removal procedure.  In a randomized clinical study Altrazeal® demonstrated a statistically significant improvement in patient pain and comfort compared to Aquacel® AG, a market leading product.  Also, in numerous clinical settings, including venous ulcers, arterial ulcers and second degree burns, significant pain reduction has been reported by patients, enabling increased compliance to therapy and improved clinical outcomes.  The dressing is flexible and adherent and is designed to allow greater range of motion. In addition, Altrazeal® reduces the need for frequent dressing changes, which offers a significant pharmaco-economic benefit.





The regulatory status of Altrazeal® is a 510(k) exempt product. The FDA was notified and the product was registered in June 2008.  The Company plans on filing a 510(k) application to expand label claims to include pain.





Since the roll-out of Altrazeal® in June 2008, there have been many outstanding clinical results; positive clinical experiences have been documented through the completion of one randomized clinical trial, the publishing of more than 35 poster presentations, and one peer reviewed article being published in an international indexed journal.  Altrazeal® has contributed to improved healing and patient quality of life in many acute and chronic wounds, particularly in diabetic foot ulcers, venous ulcers, and geriatric wounds.





The time to achieve the commercial success of Altrazeal® has taken longer than we anticipated.  We have now refined our marketing strategy and are focusing on a limited number of major wound types where Altrazeal® exhibits clinical advantages.  Additionally, our sales call focus has been more clearly defined to include sites of care where barriers to sale are lower, such as home health care where Altrazeal® offers a significant economic benefit to the home health provider.  Also, we continue to expand hospital and wound care center coverage and secure hospital formulary listings which are essential for success in this site of care.  In order to effectively market Altrazeal® we believe that greater sales and marketing resources are needed.  As such, we have been seeking a strategic partner which will allow us to maximize the revenue potential of Altrazeal®.  In the interim, we are executing a parallel sales strategy that involves the hiring throughout the country of experienced wound care Independent Sales Representatives (“ISR’s”) that are compensated on a commission-only basis as well as our own dedicated sales force.


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Aphthasol® and Aptheal® (Amlexanox 5% Paste)





Amlexanox 5% paste is the first drug approved by the FDA for the treatment of canker sores. A Phase IV clinical study conducted in Northern Ireland was completed in November 2000 and results confirmed that amlexanox 5% paste was effective in preventing the formation of an ulcer when used at the first sign or symptom of the disease.





The exclusive United States rights for the sale and marketing of amlexanox 5% paste for the treatment of canker sores is licensed to Discus Dental Inc., a specialty dental company.





The exclusive United Kingdom and Ireland rights for the sale and marketing of amlexanox 5% paste were initially licensed to ProStrakan. Under the terms of this license, ProStrakan was responsible for and assumed all costs associated with the regulatory approval process, including product registration, for amlexanox in the United Kingdom and the European Union.




In November 2008, Meda AB expanded their territorial rights to include the United Kingdom, Ireland, France, Germany, Italy, Belgium, Netherland, Turkey, which were in addition to their existing territories of Scandinavia, the Baltic States, and Iceland. In addition to our license agreement with Meda AB, licensing agreements have been executed with Laboratories Esteve for Spain, Portugal and Greece; Pharmascience Inc. for Canada; EpiTan, Ltd. for Australia and New Zealand; and Orient Europharma, Co., Ltd for Taiwan, Hong-Kong, Philippines, Thailand and Singapore; and KunWha Pharmaceutical Co., LTD for South Korea. Currently, Contract Pharmaceuticals Ltd. Canada is our contract manufacturer for all markets including the United States.





ProStrakan received marketing authorization for amlexanox 5% paste in the United Kingdom in September 2001 under the trade name of Aptheal®. Approval to market was granted in Austria, Germany, Greece, Finland, Ireland, Luxembourg, The Netherlands, Norway, Portugal, and Sweden in conjunction with Meda AB.





The therapeutic Products Programme, the Canadian equivalent of the FDA, has issued a notice of compliance permitting the sale of amlexanox 5% paste, called Apthera®, in Canada by Pharmascience Inc., our Canadian partner.





OraDiscTM A





Treatment of oral conditions generally relies upon the use of medications formulated as gels and pastes that are applied to lesions in the mouth. The duration of effectiveness of these medications is typically short because the applied dose is worn away through the mechanical actions of speaking, eating, and tongue movement, and is washed away by saliva flow. To address these problems, we have developed a novel, cost-effective, adhesive film product that is bioerodible. This technology, known as OraDiscTM, comprises a multi-layered film having an adhesive layer, an optional pre-formed film layer, and a coated backing layer.





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


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This successful development was an important technology milestone which supports the development of our OraDiscTM range of products. To achieve OraDiscTM A approval, in addition to performing the necessary clinical studies to prove efficacy, an irritation study, a 28-day safety study and drug distribution studies were conducted. Additionally, safety in patients as young as 12 years of age was demonstrated. Patients in a 700 patient clinical study and 28-day safety study completed a survey which produced very positive results with regard to perceived effectiveness, ease of application, ability of the disc to remain in place and purchase intent. These data give strong support to our overall development program. The survey data confirms market research studies which indicate a strong patient acceptance of this delivery device.





In order to expedite the commercialization of OraDiscTM A we reacquired the rights in 2008 from Discus Dental Inc. and are pursuing another strategic partner. In the meantime, Discus Dental is continuing to market Aphthasol® in the United States.





In November 2008, we executed an expanded European Agreement with Meda AB, Sweden for OraDiscTM A and Aphthasol (5% amlexanox) paste for distribution into most major European markets. Meda AB paid us an upfront licensing fee and additional milestone payments will be made upon regulatory approval and achievements of commercial milestones.  Meda AB intends to apply for regulatory approval for OraDiscTM A in 2011.





In June 2008, we executed a Licensing and Supply Agreement with KunWha Pharmaceutical Co., Ltd, for OraDiscTM A and Aphthasol (5% amlexanox) paste in South Korea.  KunWha Pharmaceutical Co., Ltd paid us an upfront licensing fee and further milestone payments are to be made on regulatory approval and achievement of certain commercial milestones.





OraDiscTM B





A second mucoadhesive disc product has also been successfully developed for the treatment and management of oral pain. This product contains 15 milligrams of benzocaine which is the maximum allowable strength that falls under the classification of an OTC monograph drug. This classification allows for an easier regulatory pathway to market. The product has been optimized and is ready for commercial scale-up.





In March 2007, we executed a Licensing and Supply Agreement for OraDiscTM B with Meldex International, for the territories of Europe and the Middle East. We received an upfront licensing fee and additional payments based on regulatory approval and commercial milestones.  In January 2010, the Company terminated the Licensing and Supply Agreement with Meldex International.  We are now pursuing a strategic partner for the commercialization of OraDiscTM B.


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Patents





We believe that the value of technology both to us and to our potential corporate partners is established and enhanced by our broad intellectual property positions. Consequently, we have already been issued and seek to obtain additional U.S. and foreign patents for products under development and for new discoveries. Patent applications are filed for our inventions and prospective products with the U.S. Patent and Trademark Office and, when appropriate, with authorities in countries that are part of the Paris Convention’s Patent Cooperation Treaty (“PCT”) (most major countries in Western Europe and the Far East) and with other authorities in major markets not covered by the PCT.





With regards to our Nanoflex® technology, two U.S. patents have issued and one U.S. and four PCT patent applications have been filed. The granted patents and patent applications have a variety of potential applications, such as wound management, burn care, dermal fillers, artificial discs and tissue scaffold.  In December 2006 we acquired from Access Pharmaceuticals Inc. (“Access”) all patent rights and all intellectual properties associated with the Nanoflex® technology.  We then licensed to Access certain specific applications of the Nanoparticle Aggregate technology which include use in intraperotinial, intratumoral, subscutaneous or intramuscular drug delivery implants, excluding aesthetic dermal or facial fillers.





We have one U.S. patent and have filed one U.S. and two PCT patent applications for our OraDiscTM technology. This oral delivery vehicle potentially overcomes the difficulties encountered in using conventional paste and gel formulations for conditions in the mouth. Utilizing this technology, we anticipate that higher drug concentrations will be achieved at the disease site, increasing the effectiveness of the product.  Our patent applications cover the delivery of drugs through or into any mucosal surface and onto the surface of gums and teeth. The patent and patent applications cover our ability to control the erosion time of the adhesive film and the subsequent drug release by adjusting the ratio of hydrophobic to hydrophilic polymers in the outer layer of the composite film.





We also have a patent for amlexanox and the worldwide rights, excluding Japan, for the use of amlexanox for oral and dermatological applications.





We have a strategy of developing an ongoing line of patent continuation applications for both the Nanoflex® and OraDiscTM technologies. By this approach, we are extending the intellectual property protection of our basic technologies to cover additional related inventions, some of which are anticipated to carry the priority dates of the original applications.





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Government Regulation





We are subject to extensive regulation by the federal government, principally by the United States Food and Drug Administration (“FDA”), and, to a lesser extent, by other federal and state agencies as well as comparable agencies in foreign countries where registration of products will be pursued. Although a number of our formulations incorporate extensively tested drug substances, because the resulting formulations make claims of enhanced efficacy and/or improved side effect profiles, they are expected to be classified as new drugs by the FDA.





The Federal Food, Drug and Cosmetic Act and other federal, state and foreign statues and regulations govern the testing, manufacturing, safety, labeling, storage, shipping, and record keeping of our products. The FDA has the authority to approve or not approve new drug applications and/or new medical devices and inspect research, clinical and manufacturing records and facilities.





In Europe, the filing of a Technical File Dossier to a Notified Body allows the medical device to receive a CE mark which allows commercialization of the product in the European Union.





Among the requirements for drug and medical device approval and testing is that the prospective manufacturer’s facilities and methods conform to the Code of Good Manufacturing Practices (“cGMP”) regulations, which establish the manufacturing and quality requirements, and the facilities or controls to be used during, the production process. Such facilities and manufacturing process are subject to ongoing FDA inspection to insure compliance.





The steps required before a pharmaceutical product or medical device product may be produced and marketed in the U.S. can include preclinical tests, the filing of an Investigational New Drug application (“IND”) or an Investigational Device Exemption (“IDE”) with the FDA, which must become effective pursuant to FDA regulations before human clinical trials may commence.  Numerous phases of clinical testing and the FDA approval of a New Drug Application (“NDA”), a Product Marketing Authorization (“PMA”), or a 510(k) application (“510(k)”) is also typically required prior to commercial sale.





Preclinical tests are conducted in the laboratory, usually involving animals, to evaluate the safety and efficacy of the potential product. The results of preclinical tests are submitted as part of the IND and IDE application and are fully reviewed by the FDA prior to granting the sponsor permission to commence clinical trials in humans. All trials are conducted under International Conference on Harmonization, good clinical practice guidelines. All investigator sites and sponsor facilities are subject to FDA inspection to insure compliance. Clinical trials typically involve a three-phase process.  In the case of a pharmaceutical product, Phase I, the initial clinical evaluations, consists of administering the drug and testing for safety and tolerated dosages. Phase II involves a study to evaluate the effectiveness of the drug for a particular indication and to determine optimal dosage and dose interval and to identify possible adverse side effects and risks in a larger patient group. When a product is found safe, an initial efficacy is established in Phase II and it is then evaluated in Phase III clinical trials. Phase III trials consist of expanded multi-location testing for efficacy and safety to evaluate the overall benefit to risk index of the investigational drug in relationship to the disease treated. The results of preclinical and human clinical testing are submitted to the FDA in the form of an NDA, PMA, or 510(k) for approval to commence commercial sales.





The process of performing the requisite testing, data collection, analysis and compilation of an IND, IDE, NDA, PMA, or 510(k) is labor intensive and costly and may take a protracted time period.  In some cases, tests may have to be redone or new tests instituted to comply with FDA requests.  Review by the FDA may also take considerable time and there is no guarantee that an NDA, PMA, or 510(k) will be approved.  Therefore, we cannot estimate with any certainty the length of the approval cycle.





We are also governed by other federal, state and local laws of general applicability, such as laws regulating working conditions, employment practices, as well as environmental protection.


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Competition





The medical device and pharmaceutical industry is characterized by intense competition, rapid product development and technological change.  Competition is intense among manufacturers of prescription pharmaceuticals, medical devices, and other product areas where we may develop and market products in the future.  Most of our potential competitors in the wound care market such as Smith & Nephew plc, Kinetic Concepts, Inc., ConvaTec Inc., Systagenix Wound Management Limited, 3M Company, and Molnlycke Health Care are large, well established medical device, pharmaceutical or healthcare companies with considerably greater financial, marketing, sales and technical resources than are available to us. Additionally, many of our potential competitors have research and development capabilities that may allow such competitors to develop new or improved products that may compete with our product lines.  Our potential products could be rendered obsolete or made uneconomical by the development of new products to treat the conditions to be addressed by our developments, technological advances affecting the cost of production, or marketing or pricing actions by one or more of our potential competitors.  Our business, financial condition and results of operation could be materially adversely affected by any one or more of such developments.  We cannot assure you that we will be able to compete successfully against current or future competitors or that competition will not have a materially adverse effect on our business, financial condition and results of operations.  Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products on their own or with the assistance of major health care companies in areas where we are developing product candidates.  We are aware of certain developmental projects for products to treat or prevent certain disease targeted by us.  The existence of these potential products or other products or treatments of which we are not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products developed by us.





In the area of wound management, burn care, and dermal fillers, which are the focus of our development activities, a number of companies are developing or evaluating new technology approaches.  We expect that technological developments will occur at a rapid rate and that competition is likely to intensify as various alternative technologies achieve similar, if not identical, advantages.





Wound care products developed from our Nanoflex® technology, including Altrazeal®, will compete with numerous well established products including Aquacel® marketed by ConvaTec Inc., Silvercel and Promongran marketed by Systagenix Wound Management Limited, Acticoat and Allevyn marketed by Smith and Nephew plc, and Mepitel and Mepliex marketing by Molnlycke Health Care.  There are numerous well established companies that compete in the advanced wound care market including Smith & Nephew plc, Kinetic Concepts, Inc., ConvaTec Inc., Systagenix Wound Management Limited, 3M Company, and Molnlycke Health Care.





Our product, Aphthasol®, is the only product clinically proven to accelerate the healing of canker sores.  There are numerous products, including prescription steroids such as Kenalog in OraBase, and many over-the-counter pain relief formulations that incorporate a local anesthetic used for the treatment of this condition.





Even if our products are fully developed and receive the required regulatory approval, of which there can be no assurance, we believe that our products that require extensive sales efforts directed both at the consumer and the general practitioner can only compete successfully if marketed by a company having expertise and a strong presence in the therapeutic area or in direct to consumer marketing. Consequently, our business model is to form strategic alliances with major or regional pharmaceutical companies for products to compete in these markets.  Management believes that our development risks should be minimized and that the technology potentially could be more rapidly developed and successfully introduced into the marketplace by adopting this strategy.


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Employees





As of December 31, 2010, we had 9 full-time employees, including 3 in sales and marketing, 2 in research and development (each with advanced scientific degrees), 3 in general and administration and 1 in manufacturing, quality, and service.  In addition, we use four contract consultants for business development, quality control and quality assurance, clinical administration, and regulatory affairs.  Our employees are not represented by a labor union and are not covered by a collective bargaining agreement.  Management believes that we maintain good relations with our personnel.  At times, we may compliment our internal expertise with external scientific consultants, university research laboratories and contract manufacturing organizations that specialize in various aspects of drug development including clinical development, regulatory affairs, toxicology, preclinical testing and process scale-up.








Executive Officers and Key Employees





The following table sets forth the executive officers and key employees of the Company, as of the date hereof, along with their respective ages and positions.  Each of the officers listed below has been appointed to hold the office listed opposite his respective name until the earlier to occur of the death or resignation of such officer or until a successor has been duly appointed by the board of directors of the Company.





Name

Age

PositionKerry P. Gray


58

President, Chief Executive Officer, ChairmanTerrance K. Wallberg


56

Vice President, Chief Financial Officer, Secretary, TreasurerDaniel G. Moro


64

Vice President - Polymer Drug DeliveryJohn V. St. John, Ph.D.


40

Vice President - Research and Development





The following is a brief account of the business experience during the past five years of each executive officer and key employee of the Company, including principal occupations and employment during that period and the name and principal business of any corporation or other organization in which such occupation and employment were carried on.





Kerry P. Gray was the President and CEO and a director of Access Pharmaceuticals, Inc. from June 1993 until May 2005. Previously, Mr. Gray served as Chief Financial Officer of PharmaScience, Inc., a company he co-founded to acquire technologies in the drug delivery area. From May 1990 to August 1991, Mr. Gray was Senior Vice President, Americas, Australia and New Zealand for Rhone-Poulenc Rorer, Inc. Prior to the Rhone-Poulenc Rorer merger, he had been Area Vice President Americas of Rorer International Pharmaceuticals. From 1986 to May 1988, he was Vice President, Finance of Rorer International Pharmaceuticals, having served in the same capacity at the Revlon Health Care Group of companies before the acquisition by Rorer Group. Between 1975 and 1985, he held various senior financial positions with the Revlon Health Care Group.





Terrance K. Wallberg has served as our Vice President and Chief Financial Officer since March, 2006.  Mr. Wallberg is a Certified Public Accountant and possesses an extensive and diverse background with over 30 years of experience with entrepreneurial/start-up companies.  Prior to joining ULURU Inc., Mr. Wallberg was Chief Financial Officer with Alliance Hospitality Management and previous to that was Chief Financial Officer for DCB Investments, Inc., a Dallas, Texas based diversified real estate holding company.  During his five year tenure at DCB Investments, Mr. Wallberg acquired valuable experience with several successful start-up businesses and dealing with the external financial community.  Prior to DCB Investments, Mr. Wallberg spent 22 years with Metro Hotels, Inc., serving in several finance/accounting capacities and culminating his tenure as Chief Financial Officer.  Mr. Wallberg is a member of the American Society and the Texas Society of Certified Public Accountants and is a graduate of the University of Arkansas, Little Rock.


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Daniel G. Moro has served as our Vice President - Polymer Drug Delivery since March 2006.  Previously, Mr. Moro served as Vice President - Polymer Drug Delivery at Access Pharmaceuticals, Inc. from September 2000 until October 2005. He managed various drug delivery projects related to Hydrogel polymers. He invented the mucoadhesive erodible drug delivery technology (OraDiscTM) for the controlled administration of actives and is the co-inventor of our hydrogel nanoparticle aggregate technology.  Previously, Mr. Moro served as Vice President, Operations for a Division of National Patent Development Corporation (“NPDC”) which developed the soft contact lens. Prior to his operational experience, Mr. Moro spent 20 years at the NPDC as a senior research scientist and invented and commercialized several technologies, including a hydrogel burn and wound dressing and a subcutaneous retrievable drug delivery implant to treat prostate cancer. Mr. Moro has over twenty five years experience of pharmaceutical development and holds nine patents related to drug delivery applications, four of which have been commercialized.





Dr. John V. St. Johnhas served as our Vice President - Research and Development since March 2006.  Previously, Dr. St. John served as Senior Scientist at Access Pharmaceuticals, Inc. from March 2000 until October 2005. He served as team leader during the early identification of Access Pharmaceuticals’ oncology drug, AP5346. Dr. St. John served as team leader for the hydrogel team from January 2002 to October 2005 during the development of the Hydrogel Nanoparticle Aggregate Technology and is the co-inventor of this technology.  He holds two patents. Dr. St. John has served as an adjunct faculty member in the Department of Biomedical Engineering at the University of Texas Southwestern Medical School while at Access Pharmaceuticals. Previously, from August 1998 to March 2000, Dr. St. John served as a Dreyfus Fellow and Assistant Professor in the Department of Chemistry of Southern Methodist University. He has earned a graduate certificate in Marketing from the SMU Cox School of Business. Dr. St. John served as the elected Chair of the Dallas Fort Worth American Chemical Society Section for 2005 and is a current member in the American Professional Woundcare Association, American Chemical Society, the Materials Research Society, and the Controlled Release Society.





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ITEM 1A.
RISK FACTORS







You should carefully consider the following risk factors before you decide to invest in our Company and our business because these risk factors may have a significant impact on our business, operating results, financial condition, and cash flows. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected.








Risks Related to Our Operations





Our management and our independent registered public accounting firm, in their report on our financial statements as of and for the year ended December 31, 2010, have concluded that due to our need for additional capital, and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern.





Our audited financial statements for the fiscal year ended December 31, 2010, were prepared on a going concern basis in accordance with United States generally accepted accounting principles.  The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern.  Our management and our independent registered public accounting firm have concluded that due to our need for additional capital, and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern.  We may be forced to reduce our operating expenses, raise additional funds, principally through the additional sales of our securities or debt financings, or enter into a corporate partnership to meet our working capital needs. However, we cannot guarantee that we will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us.  If we are unable to raise sufficient additional capital or complete a strategic transaction, we may be unable to continue to fund our operations, develop our product candidates or realize value from our assets and discharge our liabilities in the normal course of business.  These uncertainties raise substantial doubt about our ability to continue as a going concern.  If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock.





We do not have significant operating revenue and we may never attain profitability.





Our ability to achieve significant revenue or profitability depends upon our ability to successfully complete the development of product candidates, to develop and obtain patent protection and regulatory approvals for our product candidates and to manufacture and commercialize the resulting products.  We may not generate significant revenues or profits from the sale of these products in the future.  Furthermore, we may not be able to ever successfully identify, develop, commercialize, patent, manufacture, obtain required regulatory approvals and market any additional products.  Moreover, even if we do identify, develop, commercialize, patent, manufacture, and obtain required regulatory approvals to market additional products, we may not generate revenues or royalties from commercial sales of these products for a significant number of years, if at all.  Therefore, our proposed operations are subject to all the risks inherent in the establishment of a new business enterprise. In the next few years, our revenues may be limited to minimal product sales and royalties, amounts that we receive under strategic partnerships and research or product development collaborations that we may establish and, as a result, we may be unable to achieve or maintain profitability in the future or to achieve significant revenues to fund our operations.


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A failure to obtain necessary additional capital in the future could jeopardize our operations.





We may not be able to obtain additional financing on terms acceptable to us, if at all. If we raise additional funds by selling equity securities, the relative equity ownership of our existing investors would be diluted and the new investors could obtain terms more favorable than previous investors.  A failure to obtain additional funding to support our working capital and operating requirements could prevent us from making expenditures that are needed to allow us to maintain our operations.





Our financial condition may limit our ability to borrow funds or to raise additional equity as may be required to fund our future operations.





Our ability to borrow funds or raise additional equity may be limited by our financial condition.  Additionally, events such as our inability to continue to reduce our loss from continuing operations, could adversely affect our liquidity and our ability to attract additional funding as required.





Our cash and cash equivalents may not be sufficient to fund our operations beyond the third quarter of 2011.





Assuming our current costs of operations remain relatively unchanged over the next several months, our present cash and cash equivalents may not be sufficient to fund our operations beyond the third quarter of 2011.Unless we are able to raise additional funds from our financing efforts prior to such time, we may not be able to support our operations and may be forced to cease operations and dissolve the Company.  Although the Company believes it has been prudent in this assessment of the rate at which its cash and cash equivalents may be expended, no assurance can be given that such assessment will prove accurate and readers are therefore cautioned not to place undue reliance thereon.





The success of our research and development activities, upon which we primarily focus, is uncertain.





Our primary focus is on our research and development activities and the commercialization of products covered by proprietary biopharmaceutical patents and applications.  Research and development activities, by their nature, preclude definitive statements as to the time required and costs involved in reaching certain objectives.  Actual research and development costs, therefore, could exceed budgeted amounts and estimated time frames may require extension.  Cost overruns, unanticipated regulatory delays or demands, unexpected adverse side effects or insufficient therapeutic efficacy will prevent or substantially slow our research and development effort and our business could ultimately suffer.





We may not successfully commercialize our product candidates.





Our product candidates are subject to the risks of failure inherent in the development of pharmaceuticals based on new technologies and our failure to develop safe, commercially viable products would severely limit our ability to become profitable or to achieve significant revenues.  We may be unable to successfully commercialize our product candidates because:





§
some or all of our product candidates may be found to be unsafe or ineffective or otherwise fail to meet applicable regulatory standards or receive necessary regulatory clearances;§
our product candidates, if safe and effective, may be too difficult to develop into commercially viable products;§
it may be difficult to manufacture or market our product candidates in a large scale;§
proprietary rights of third parties may preclude us from marketing our product candidates; and§
third parties may market superior or equivalent products.





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If we are unable to establish and maintain effective sales, marketing and distribution capabilities, or to enter into agreements with third parties to do so, we will be unable to successfully commercialize Altrazeal®.





We are marketing and selling Altrazeal® through a combination of our own sales force and a network of independent sales representatives (“ISR’s”) in the United States but have only limited experience thus far with marketing, sales or distribution of wound care products. If we are unable to establish the capabilities to sell, market and distribute Altrazeal®, either through our own sales force, our existing ISR capabilities or by entering into agreements with others, or to maintain such capabilities in countries where we have already commenced commercial sales, we will not be able to successfully sell Altrazeal®. In that event, we will not be able to generate significant revenues. We cannot guarantee that we will be able to establish and maintain our own sales force, our ISR capabilities or enter into and maintain any marketing or distribution agreements with third-party providers on acceptable terms, if at all. Even if we hire ISR’s or qualified sales and marketing personnel we need in the United States to support our objectives, or enter into marketing and distribution agreements with third parties on acceptable terms, we may not do so in an efficient manner or on a timely basis. We may not be able to correctly judge the size and experience of the sales and marketing force and the scale of distribution capabilities necessary to successfully market and sell Altrazeal®. Establishing and maintaining sales, marketing and distribution capabilities are expensive and time-consuming. Our expenses associated with building up and maintaining the sales force and distribution capabilities may be disproportional compared to the revenues we may be able to generate on sales of Altrazeal®. We cannot guarantee that we will be successful in commercializing Altrazeal®.





We may be unable to successfully develop, market, or commercialize our products or our product candidates without establishing new relationships and maintaining current relationships.





Our strategy for the research, development and commercialization of our potential pharmaceutical products may require us to enter into various arrangements with corporate and academic collaborators, licensors, licensees and others, in addition to our existing relationships with other parties.  Specifically, we may need to joint venture, sublicense or enter other marketing arrangements with parties that have an established marketing capability or we may choose to pursue the commercialization of such products.  Furthermore, if we maintain and establish arrangements or relationships with third parties, our business may depend upon the successful performance by these third parties of their responsibilities under those arrangements and relationships.  For our commercialized products, we currently rely upon the following relationships in the following marketing territories for sales, manufacturing and/or regulatory approval efforts:





Altrazeal®Jiangxi Aiqilin Pharmaceuticals Group
§
China





Altrazeal® - VeterinaryNovartis Animal Health
§
Worldwide





Amlexanox 5% paste and OraDiscTM ADiscus Dental Inc.
§
United States;Meda AB
§
United Kingdom, Ireland, Scandinavia, the Baltic states, Iceland, Belgium, France, Germany, Italy, Luxembourg, Netherlands, Switzerland, Austria, Bulgaria, Cyprus, Czech Republic, Hungary, Malta, Poland, Romania, Slovenia, Turkey, Russia, and the Commonwealth of Independent StatesEpiTan Pharmaceuticals
§
Australia and New Zealand;KunWha Pharmaceutical
§
South Korea;Laboratories del Dr. Esteve SA
§
Spain, Portugal, Greece, and Andorra;Orient Europharma, Co., Ltd.
§
Taiwan, Hong-Kong, Malaysia, Philippines, Thailand and Singapore;Pharmascience Inc.
§
Canada;





Our ability to successfully commercialize, and market our products and product candidates could be limited if a number of these existing relationships were terminated.


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We may be unable to successfully manufacture our products and our product candidates in clinical quantities or for commercial purposes without the assistance of contract manufacturers, which may be difficult for us to obtain and maintain.





We have limited experience in the manufacture of pharmaceutical products in clinical quantities or for commercial purposes, and we may not be able to manufacture any new pharmaceutical products that we may develop.  As a result, we have established, and in the future intend to establish, arrangements with contract manufacturers to supply sufficient quantities of products to conduct clinical trials and for the manufacture, packaging, labeling, and distribution of finished pharmaceutical products.  If we are unable to contract for a sufficient supply of our pharmaceutical products on acceptable terms, our preclinical and human clinical testing schedule may be delayed, resulting in the delay of our clinical programs and submission of product candidates for regulatory approval, which could cause our business to suffer.  Our business could suffer if there are delays or difficulties in establishing relationships with manufacturers to produce, package, label and distribute our finished pharmaceutical or other medical products, if any, and the market introduction and subsequent sales of such products.  Moreover, contract manufacturers that we may use must adhere to current Good Manufacturing Practices, as required by FDA.  In this regard, the FDA will not issue a pre-market approval or product and establishment licenses, where applicable, to a manufacturing facility for the products until the manufacturing facility passes a pre-approval plant inspection.  If we are unable to obtain or retain third party manufacturing on commercially acceptable terms, we may not be able to commercialize our products as planned.  Our potential dependence upon third parties for the manufacture of our products may adversely affect our ability to generate profits or acceptable profit margins and our ability to develop and deliver such products on a timely and competitive basis.





We may incur substantial product liability expenses due to the use or misuse of our products for which we may be unable to obtain insurance coverage.





Our business exposes us to potential liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. These risks will expand with respect to our drug candidates, if any, that receive regulatory approval for commercial sale, and we may face substantial liability for damages in the event of adverse side effects or product defects identified with any of our products that are used in clinical tests or marketed to the public. We generally procure product liability insurance for product candidates that are undergoing human clinical trials. Product liability insurance for the biotechnology industry is generally expensive, if available at all, and as a result, we may be unable to obtain insurance coverage at acceptable costs or in sufficient amount in the future, if at all.





We may be unable to satisfy any claims for which we may be held liable as a result of the use or misuse of products which we have developed, manufactured or sold and any such product liability could adversely affect our business, operating results or financial condition.





We may incur significant liabilities if we fail to comply with stringent environmental regulations.





Our research and development processes involve the controlled use of hazardous materials.  We are subject to a variety of federal, state and local governmental laws and regulations related to the use, manufacture, storage, handling, and disposal of such material and certain waste products.  Although we believe that our activities and our safety procedures for storing, using, handling and disposing of such material comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated.  In the event of such accident, we could be held liable for any damages that result and any such liability could exceed our resources.





Additional federal, state, foreign and local laws and regulations affecting our operations may be adopted in the future, including laws related to climate change.  We may incur substantial costs to comply with these laws or regulations.  Additionally, we may incur substantial fines or penalties if we violate any of these laws or regulations.


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Intense competition may limit our ability to successfully develop and market commercial products.





The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Our competitors in the United States and elsewhere are numerous and include, among others, major multinational pharmaceutical, device, and chemical companies, specialized biotechnology firms and universities and other research institutions.





In the area of wound management and burn care, which is the primary focus of our commercialization and development activities, a number of companies are developing or evaluating new technology approaches.  Significantly larger companies compete in this marketplace including Smith & Nephew plc, Kinetic Concepts, Inc., ConvaTec Inc., Systagenix Wound Management Limited, 3M Company, Molnlycke Health Care, and numerous other companies.  We expect that technological developments will occur at a rapid rate and that competition is likely to intensify as various alternative technologies achieve similar if not identical advantages.





Prescription steroids such as Kenalog in OraBase, developed by Bristol-Myers Squibb, may compete with our commercialized Aphthasol® product. OTC products including Orajel (Church and Dwight) and Anbesol (Wyeth Consumer Healthcare) also compete in the aphthous ulcer market.





Many of these competitors have and employ greater financial and other resources, including larger research and development, marketing and manufacturing organizations.  As a result, our competitors may successfully develop technologies and drugs that are more effective or less costly than any that we are developing or which would render our technology and future products obsolete and noncompetitive.





In addition, some of our competitors have greater experience than we do in conducting preclinical and clinical trials and may obtain FDA and other regulatory approvals for product candidates more rapidly than we do.  Companies that complete clinical trials obtain required regulatory agency approvals and commence commercial sale of their products before their competitors may achieve a significant competitive advantage.  Products resulting from our research and development efforts or from our joint efforts with collaborative partners therefore may not be commercially competitive with our competitors’ existing products or products under development.





Our ability to successfully develop and commercialize our drug or device candidates will substantially depend upon the availability of reimbursement funds for the costs of the resulting drugs or devices and related treatments.





The successful commercialization of, and the interest of potential collaborative partners to invest in the development of our drug or device candidates, may depend substantially upon the reimbursement at acceptable levels of the costs of the resulting drugs or devices and related treatments from government authorities, private health insurers and other organizations, including health maintenance organizations, or HMOs.  To date, the costs of our marketed products Altrazeal® and Aphthasol® generally have been reimbursed at acceptable levels; however, the amount of such reimbursement in the United States or elsewhere may be decreased in the future or may be unavailable for any drugs or devices that we may develop in the future.  Limited reimbursement for the cost of any drugs or devices that we develop may reduce the demand for, or price of such drugs or devices, which would hamper our ability to obtain collaborative partners to commercialize our drugs or devices, or to obtain a sufficient financial return on our own manufacture and commercialization of any future drugs or devices.


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The market may not accept any pharmaceutical products that we successfully develop.





The drugs and devices that we are attempting to develop may compete with a number of well-established drugs and devices manufactured and marketed by major pharmaceutical companies.  The degree of market acceptance of any drugs or devices developed by us will depend on a number of factors, including the establishment and demonstration of the clinical efficacy and safety of our drug candidates, the potential advantage of our drug candidates over existing therapies and the reimbursement policies of government and third-party payers.  Physicians, patients or the medical community in general may not accept or use any drugs or devices that we may develop independently or with our collaborative partners and if they do not, our business could suffer.





Trends toward managed health care and downward price pressure on medical products and services may limit our ability to profitably sell any drugs or devices that we develop.





Lower prices for pharmaceutical products may result from:





§
Third-party payers’ increasing challenges to the prices charged for medical products and services;§
The trend toward managed health care in the Unites States and the concurrent growth of HMOs and similar organizations that can control or significantly influence the purchase of healthcare services and products; and§
Legislative proposals to reform healthcare or reduce government insurance programs.





The cost containment measures that healthcare providers are instituting, including practice protocols and guidelines and clinical pathways, and the effect of any healthcare reform, could limit our ability to profitably sell any drugs or devices that we may successfully develop.  Moreover, any future legislation or regulation, if any, relating to the healthcare industry or third-party coverage and reimbursement, may cause our business to suffer.





Our business could suffer if we lose the services of, or fail to attract, key personnel.





We are highly dependent upon the efforts of our senior management and scientific team.  The loss of the services of one or more of these individuals could delay or prevent the achievement of our research, development, marketing, or product commercialization objectives.  While we have employment agreements with our senior management, their employment may be terminated at any time.  We do not maintain any "key-man" insurance policies on any of our senior management and we do not intend to obtain such insurance.  In addition, due to the specialized scientific nature of our business, we are highly dependent upon our ability to attract and retain qualified scientific and technical personnel.  In view of the stage of our development and our research and development programs, we have restricted our hiring to a small sales team, research scientists and a small administrative staff and we have made only limited investments in manufacturing, production or regulatory compliance resources.  There is intense competition among major pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions for qualified personnel in the areas of our activities, however, and we may be unsuccessful in attracting and retaining these personnel.


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Our future financial results could be adversely impacted by asset impairments or other charges.





Accounting Standards Codification (“ASC”) Topic 350-30, Intangibles Other than Goodwill requires that we test goodwill and other intangible assets determined to have indefinite lives for impairment on an annual, or on an interim basis if certain events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying value or if the fair value of intangible assets with indefinite lives falls below their carrying value. In addition, under ASC Topic 350-30, long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that its carrying value may not be recoverable. A significant decrease in the fair value of a long-lived asset, an adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition or an expectation that a long-lived asset will be sold or disposed of significantly before the end of its previously estimated life are among several of the factors that could result in an impairment charge.




We evaluate intangible assets determined to have indefinite lives for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, sales or disposition of a significant portion of the business, or other factors such as a decline in our market value below our book value for an extended period of time.




We evaluate the estimated lives of all intangible assets on an annual basis, to determine if events and circumstances continue to support an indefinite useful life or the remaining useful life, as applicable, or if a revision in the remaining period of amortization is required. The amount of any such annual or interim impairment charge could be significant, and could have a material adverse effect on reported financial results for the period in which the charge is taken.





Failure to achieve and maintain effective internal controls could have a material adverse effect on our business.





Effective internal controls are necessary for us to provide reliable financial reports.  If we cannot provide reliable financial reports, our operating results could be harmed.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial preparation and presentation.





While we continue to evaluate and improve our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future.  Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.





If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time; we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.  Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.


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Risks Related to Development, Clinical Testing and Regulatory Approval





We are subject to extensive governmental regulation which increases our cost of doing business and may affect our ability to commercialize any new products that we may develop.





The FDA and comparable agencies in foreign countries impose substantial requirements upon the introduction of pharmaceutical products through lengthy and detailed laboratory, preclinical and clinical testing procedures and other costly and time-consuming procedures to establish their safety and efficacy. Some of our products and product candidates require receipt and maintenance of governmental approvals for commercialization. Preclinical and clinical trials and manufacturing of our product candidates will be subject to the rigorous testing and approval processes of the FDA and corresponding foreign regulatory authorities. Satisfaction of these requirements typically takes a significant number of years and can vary substantially based upon the type, complexity and novelty of the product. The status of our principal products is as follows:





§
Altrazeal® is a product approved for sale in the U.S. and the European Union (together with countries that recognize the CE mark);§
Other Altrazeal® products are currently in clinical and development phases;§
Nanoparticle aggregate product candidates are in the preclinical and clinical phase;§
5% amlexanox paste is a product approved for sale in the U.S. (Aphthasol®); approved in the UK, Canada, and ten EU countries but not yet sold;§
OraDiscTM A is a product approved for sale in the U.S. as of September 2004; we are completing steps for manufacturing and sale of the product in 2011; and§
Our other OraDiscTM products are currently in the development phase.








Due to the time consuming and uncertain nature of the drug and device candidate development process and the governmental approval process described above, we cannot assure you when we, independently or with our collaborative partners, might submit a New Drug Application (“NDA”), or a 510(k), for FDA or other regulatory review.





Government regulation also affects the manufacturing and marketing of pharmaceutical and medical device products. Government regulations may delay marketing of our potential drugs or potential medical devices for a considerable or indefinite period of time, impose costly procedural requirements upon our activities and furnish a competitive advantage to larger companies or companies more experienced in regulatory affairs. Delays in obtaining governmental regulatory approval could adversely affect our marketing as well as our ability to generate significant revenues from commercial sales. Our drug or device candidates may not receive FDA or other regulatory approvals on a timely basis or at all. Moreover, if regulatory approval of a drug or device candidate is granted, such approval may impose limitations on the indicated use for which such drug or device may be marketed. Even if we obtain initial regulatory approvals for our drug or device candidates, our drugs or devices and our manufacturing facilities would be subject to continual review and periodic inspection, and later discovery of previously unknown problems with a drug, or device, manufacturer or facility may result in restrictions on the marketing or manufacture of such drug or device, including withdrawal of the drug or device from the market. The FDA and other regulatory authorities stringently apply regulatory standards and failure to comply with regulatory standards can, among other things, result in fines, denial or withdrawal of regulatory approvals, product recalls or seizures, operating restrictions and criminal prosecution.





The uncertainty associated with preclinical and clinical testing may affect our ability to successfully commercialize new products.





Before we can obtain regulatory approvals for the commercial sale of our potential products, the product candidates may be subject to extensive preclinical and clinical trials to demonstrate their safety and efficacy in humans. In this regard, for example, adverse side effects can occur during the clinical testing of a new drug on humans which may delay ultimate FDA approval or even lead us to terminate our efforts to develop the product for commercial use. Companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after demonstrating promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a product candidate under development could delay or prevent regulatory approval of the product candidate. A delay or failure to receive regulatory approval for any of our product candidates could prevent us from successfully commercializing such candidates and we could incur substantial additional expenses in our attempts to further develop such candidates and obtain future regulatory approval.


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Risks Related to Our Intellectual Property





We may not be successful in protecting our intellectual property and proprietary rights.





Our success depends, in part, on our ability to obtain U.S. and foreign patent protection for our drug and device candidates and processes, preserve our trade secrets and operate our business without infringing the proprietary rights of third parties.  Legal standards relating to the validity of patents covering pharmaceutical and biotechnology inventions and the scope of claims made under such patents are still developing and there is no consistent policy regarding the breadth of claims allowed in biotechnology patents.  The patent position of a biotechnology firm is highly uncertain and involves complex legal and factual questions.  We cannot assure you that any existing or future patents issued to, or licensed by, us will not subsequently be challenged, infringed upon, invalidated or circumvented by others.  As a result, although we, together with our subsidiaries, are the owner of U.S. patents and U.S. patent applications now pending, and European patents and European patent applications, we cannot assure you that any additional patents will issue from any of the patent applications owned by us.  Furthermore, any rights that we may have under issued patents may not provide us with significant protection against competitive products or otherwise be commercially viable.





Our patents for the following technologies expire in the years and during the date ranges indicated below:





§
5% amlexanox paste in 2011§
OraDiscTM in 2021§
Hydrogel Nanoparticle Aggregate in 2022§
Altrazeal® wound dressing in 2029





In addition, patents may have been granted to third parties or may be granted covering products or processes that are necessary or useful to the development of our product candidates.  If our product candidates or processes are found to infringe upon the patents or otherwise impermissibly utilize the intellectual property of others, our development, manufacture and sale of such product candidates could be severely restricted or prohibited. In such event, we may be required to obtain licenses from third parties to utilize the patents or proprietary rights of others.  We cannot assure you that we will be able to obtain such licenses on acceptable terms, if at all.  If we become involved in litigation regarding our intellectual property rights or the intellectual property rights of others, the potential cost of such litigation, regardless of the strength of our legal position, and the potential damages that we could be required to pay could be substantial.


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Risks Related to Our Common Stock





If we fail to comply with the listing requirements of NYSE Amex, the price of our common stock and our ability to access the capital markets could be negatively impacted, and our business will be harmed.





Our common stock is currently listed on New York Stock Exchange Amex LLC, or NYSE Amex.  Our stock has traded below $1.00 per share for more than 12 months.  On March 7, 2011, we received a letter from NYSE Amex advising that we are not in compliance with a certain condition of NYSE Amex’s continued listing standards under Section 1003 of NYSE Amex’s Company Guide (the “Company Guide”).  In the letter, NYSE Amex stated that it is concerned that our common stock, as a result of its low selling price, may not be suitable for auction market trading.  Therefore, pursuant to Section 1003(f)(v) of the Company Guide, the Company’s continued listing is predicated on effecting a reverse stock split of its common stock by no later than June 7, 2011.  As a result of the foregoing, we have become subject to the procedures and requirements of Section 1009 of the Company Guide.  We intend to attempt to satisfy NYSE Amex’s continued listing standards by presenting a proposal and resolution to be voted on by our shareholders, to effect a reverse stock split of our common stock, at our next annual meeting of shareholders, which we intend to hold no later than June 1, 2011.





Reverse stock splits frequently result in a loss in stockholder value as the actual post-split price is often lower than the pre-split price, adjusted for the split.  If we fail to comply with the listing standards, our common stock may be delisted and traded on the over-the-counter bulletin board network.  Moving our listing off the NYSE Amex could adversely affect the liquidity of our common stock and the delisting of our common stock would significantly affect the ability of investors to trade our securities and could significantly negatively affect the value and liquidity of our common stock.  In addition, the delisting of our common stock could adversely affect our ability to raise capital on terms acceptable to us or at all. Delisting from NYSE Amex could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest, and fewer business development opportunities.  In addition, we would be subject to a number of restrictions regarding the registration and qualification of our common stock under federal and state securities laws.





Moreover, even if we effect a reverse stock split in order to comply with NYSE Amex continued listing standards, there is no assurance that we will continue to maintain compliance with such standards.  For example, NYSE Amex may again determine that the selling price per share of our common stock is low and require that we effect another reverse stock split of our common stock, which would require stockholder approval that we may be unable to obtain.  The NYSE Amex can also, in its discretion, discontinue listing a company’s common stock pursuant to various other factors, including that the most recent independent public accountants’ opinion on the financial statements contains a qualified opinion or unqualified opinion with a “going concern” emphasis or the Company is unable to meet current debt obligations or to adequately finance operations.





Provisions of our charter documents could discourage an acquisition of our company that would benefit our stockholders and may have the effect of entrenching, and making it difficult to remove, management.





Provisions of our Certificate of Incorporation and By-laws may make it more difficult for a third party to acquire control of our company, even if a change in control would benefit our stockholders.  In particular, shares of our preferred stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as our Board of Directors may determine, including for example, rights to convert into our common stock.  The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any of our preferred stock that may be issued in the future.  The issuance of our preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire control of us.  This could limit the price that certain investors might be willing to pay in the future for shares of our common stock and discourage these investors from acquiring a majority of our common stock.





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Our stockholders may experience substantial dilution in the value of their investment if we issue additional shares of our capital stock.





Our charter allows us to issue up to 200,000,000 shares of our common stock and to issue and designate the rights of, without stockholder approval, up to 20,000 shares of preferred stock. In the event we issue additional shares of our capital stock, dilution to our stockholders could result. In addition, if we issue and designate a class of preferred stock, these securities may provide for rights, preferences or privileges senior to those of holders of our common stock.





Substantial sales of our common stock could lower our stock price.





The market price for our common stock could drop as a result of sales of a large number of our presently outstanding shares of common stock or shares that we may issue or be obligated to issue in the future.





We do not expect to pay dividends in the foreseeable future.





We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors.  Accordingly, you will have to rely on appreciation in the price of our common stock, if any, to earn a return on your investment in our common stock. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends.





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ITEM 1B.
UNRESOLVED STAFF COMMENTS





None.








ITEM 2.
DESCRIPTION OF PROPERTY





As of December 31, 2010, we did not own any real property.  We entered into a lease on January 31, 2006, which commenced on April 1, 2006, for approximately 9,000 square feet of administrative offices and laboratories in Addison, Texas.  The lease agreement expires in April 2013.  Additional space is available in the complex for future expansion which we believe would accommodate growth for the foreseeable future.  The minimum monthly lease obligation of $9,330, which is inclusive of monthly operating expenses, continues through April 1, 2011 and at such time increases to $9,776, which is inclusive of monthly operating expenses, for the duration of the lease.





We believe that our existing leased facilities are suitable for the conduct of our business and adequate to meet our growth requirements.








ITEM 3.
LEGAL PROCEEDINGS





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








ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.








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Part II








ITEM 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES





Market for Common Equity





Our common stock began trading on the NYSE Amex exchange under the symbol “ULU” on July 26, 2007. From March 31, 2006 to July 25, 2007 our common stock was quoted on the OTC Bulletin Board under the symbol “ULUR.OB”.





The following table sets forth, on a quarterly basis, the high and low per share closing prices of our common stock as reported on the NYSE Amex exchange from January 1, 2009 through December 31, 2010.





Year Ended December 31, 2010

High


LowFirst Quarter

$
0.26


$
0.17Second Quarter

$
0.19


$
0.08Third Quarter

$
0.15


$
0.10Fourth Quarter

$
0.12


$
0.08Year Ended December 31, 2009First Quarter

$
0.40


$
0.13Second Quarter

$
0.29


$
0.15Third Quarter

$
0.25


$
0.10Fourth Quarter

$
0.24


$
0.12


Holders of Common Stock
 
 As of March 31, 2011, there were approximately 25 shareholders of record holding our common stock based upon the records of our transfer agent which do not include beneficial owners of common stock whose shares are held in the names of various securities brokers, dealers, and registered clearing agencies.  On March 31, 2011, the closing price of our common stock was $0.07 and there were 87,341,709 shares of our common stock issued and outstanding.
 
 Dividend Policy
 
 To date, we have not declared or paid any cash dividends on our preferred stock or common stock and we do not anticipate paying any cash dividends on them in the foreseeable future.  The payment of dividends, if any, in the future is within the discretion of our Board of Directors and will depend on our earnings, capital requirements, and financial condition and other relevant facts.  We currently intend to retain all future earnings, if any, to finance the development and growth of our business.


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Securities Authorized for Issuance Under Equity Compensation Plans





In March 2006 our board of directors (“Board”) adopted and our stockholders approved our 2006 Equity Incentive Plan (“Incentive Plan”), which initially provided for the issuance of up to 2 million shares of our Common Stock pursuant to stock option and other equity awards.





At the annual meetings of the stockholders held on May 8, 2007, December 17, 2009, and on June 15, 2010, our stockholders approved amendments to the Incentive Plan to increase the total number of shares of Common Stock issuable under the Incentive Plan pursuant to stock options and other equity awards by 4 million shares, 3 million shares, and 3 million shares, respectively.





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, 2010, we had granted options to purchase 6,110,000 shares of Common Stock since the inception of the Incentive Plan, of which 4,356,000 were outstanding at a weighted average exercise price of $1.12 per share and we had granted awards for 1,029,242 shares of restricted stock since the inception of the Incentive Plan, of which 95,038 were outstanding.  As of December 31, 2010, there were 6,600,680 shares that remained available for future grant under our Incentive Plan.





The following table sets forth the outstanding stock options or rights that have been authorized under equity compensation plans as of December 31, 2010.





Plan Category

Number of securities to

be issued upon exercise

of outstanding options,

warrants and rights


Weighted-average

exercise price of

outstanding options,

warrants and rights


Number of securities

remaining available for

future issuance under

equity compensation

plans (excluding

securities reflected in

column (a))(a)


(b)


(c)Equity compensation plans approved by security holders2006 Equity Incentive Plan


4,356,000


$
1.12



6,600,680Equity compensation plans not approved by security holders


-0-



n/a



-0-Total


4,356,000


$
1.12



6,600,680











ITEM 6.
SELECTED FINANCIAL DATA





Not applicable.





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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The following discussion and other information in this Form 10-K contains forward-looking statements that are subject to significant risks and uncertainties. There are several important factors that could cause actual results to differ materially from historical results and percentages and results anticipated by the forward-looking statements. We have sought to identify the most significant risks to our business, but cannot predict whether or to what extent any of such risks may be realized nor can there be any assurance that we have identified all possible risks that might arise. Investors should carefully consider all of such risks before making an investment decision with respect to our stock.





The following contains certain statements that are forward-looking within the meaning of Section 27a of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and that involve risks and uncertainties, including, but not limited to penetration rates, the uncertainties associated with research and development activities, clinical trials, the timing of and our ability to achieve regulatory approvals, dependence on others to market our licensed products, collaborations, future cash flow, the timing and receipt of licensing and milestone revenues, our ability to achieve licensing and milestone revenues, the future success of our marketed products and products in development, our ability to raise additional financing to sustain our operations, our ability to maintain our listing on the NYSE Amex, and other risks described below as well as those discussed elsewhere in this Form 10-K, documents incorporated by reference and other documents and reports that we file periodically with the Securities and Exchange Commission.





Business





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





Our strategy is twofold:





§
Establish the foundation for a market leadership position in wound management by developing and commercializing a customer focused portfolio of innovative wound care products based on the Nanoflex® technology to treat the various phases of wound healing; and§
Develop our oral-transmucosal technology (OraDiscTM) and generate revenues through multiple licensing agreements.





Utilizing our technologies, three of our products have been approved for marketing in various global markets.  In addition, numerous additional products are under development utilizing our patented Nanoflex® and OraDiscTM drug delivery technologies.  Altrazeal®, the first product developed from our Nanoflex® technology, was launched in the United States in June 2008.





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Recent Developments





On March 7, 2011, we received a letter from NYSE Amex LLC (the “Exchange”) advising that we are not in compliance with a certain condition of the Exchange’s continued listing standards under Section 1003 of the Exchange’s Company Guide (the “Company Guide”).  In the letter, the Exchange stated that it is concerned that our common stock, as a result of its low selling price, may not be suitable for auction market trading.  Therefore, pursuant to Section 1003(f)(v) of the Company Guide, the Company’s continued listing is predicated on effecting a reverse stock split of its common stock by no later than June 7, 2011.  As a result of the foregoing, we have become subject to the procedures and requirements of Section 1009 of the Company Guide.  We intend to attempt to satisfy the Exchange’s continued listing standards by presenting a proposal and resolution to be voted on by our shareholders, to effect a reverse stock split of our common stock, at our next annual meeting of shareholders, which we intend to hold no later than June 1, 2011.  There can be no assurance that our shareholders will approve the proposed reverse stock split or that, if effected, the reverse stock split will allow us to continue to maintain our listing on the Exchange.





On January 19, 2011; we announced the signing of a Binding Letter of Intent (“Agreement”) with Exciton Technologies Inc. (“Exciton”) to develop and market a product that will combine Altrazeal® with Exciton’s proprietary exSALTTM Antimicrobial Technology.  Under the terms of the agreement we will be granted a worldwide license, excluding China, to market the Altrazeal® exSALTTM product.  Exciton will be responsible for conducting the necessary product testing, filing a 510(k) application with the FDA and interacting with the FDA to secure product approval. We will be responsible for product approval in International markets including gaining CE Mark approval.  The Company will pay Exciton to prepare and prosecute the 510(k) application, milestone payments on the attainment of sales targets and a royalty based on product sales.  The parties have agreed to negotiate a final agreement that will supersede the Binding Letter of Intent.





On January 3, 2011, we entered into a Securities Purchase Agreement with an institutional investor whereby we agreed to sell and issue to the investor the following securities (the “January Offering”):




§
5,000,000 shares of our common stock, par value $0.001 per share; and§
Warrants to purchase up to 1,750,000 shares of our common stock (the “Warrants”).


The Warrants have an initial exercise price of $0.102 per share, and may be exercised at any time and from time to time on or after July 6, 2011 through and including July 6, 2016.





On January 6, 2011, we closed the January Offering and received aggregate net proceeds of approximately $410,000 after deducting placement fees and offering expenses payable by us (and excluding any proceeds from exercise of the Warrants).





Rodman & Renshaw, LLC, acting as our exclusive placement agent pursuant to an engagement letter dated November 9, 2009, received a placement fee of $35,000 (equal to 7% of the aggregate gross proceeds of the January Offering) as well as compensation warrants to purchase up to an aggregate of 250,000 shares (equal to 5% of the aggregate number of shares sold in the January Offering) of our common stock at an exercise price of $0.128 per share (equal to 125% of the then public offering price per share).  The compensation warrants will expire on July 23, 2014 and will otherwise comply with Rule 5110 of the Financial Institutions Regulatory Authority.





The offering and sale of the above shares and warrants was made 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 January 5, 2011.





On September 8, 2010, the Company entered into a worldwide distribution agreement appointing Novartis Animal Health, Inc. (“Novartis”) as the exclusive distributor of a veterinary version of Altrazeal® for marketing to the animal health sector.  Under the terms of the agreement the Company will supply Novartis with finished product for marketing in the global markets.  The agreement further states that other wound care products developed by the Company may also be covered by the agreement upon the mutual agreement of the parties.





On August 2, 2010, the Company received notice that Altrazeal® Transforming Powder Dressing was granted CE Mark Certification in all countries within the European Economic Area (“EEA”), which consists of 27 Member States of the EU and EFTA countries.  The CE Mark designation for Altrazeal® provides the Company with significant licensing and marketing opportunities throughout the EEA.  In addition, we believe that our having met the standards required for granting a CE Mark will allow us to more quickly gain approval for marketing Altrazeal® in Asia, South America, and other territories.  Receiving CE Mark Certification is mandatory for advanced wound dressings and is the necessary approval for marketing in the EEA.  With the granting of the CE Mark, the Company is evaluating potential collaborations to launch Altrazeal® in the first European market.


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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 December 31, 2010 our cash and cash equivalents were $641,441 which is a decrease of $1,292,736 as compared to our cash and cash equivalents at December 31, 2009 of $1,934,177.  Our working capital (current assets less current liabilities) was $976,668 at December 31, 2010 as compared to our working capital at December 31, 2009 of $2,615,079.





Consolidated Cash Flow Data


Year Ended December 31,Net Cash Provided by (Used in)

2010


2009Operating activities

$
(2,700,716
)

$
(6,888,084
)Investing activities


550,000



(7,027
)Financing activities


857,980



1,261,700Net decrease in cash and cash equivalents

$
(1,292,736
)

$
(5,633,411
)





Operating Activities





For the year ended December 31, 2010, net cash used in operating activities was $2,700,716.  The principal components of net cash used for the year ended December 31, 2010 was our net loss of approximately $5,035,000.  Our net loss for the year ended December 31, 2010 included a loss of $858,000 from the sale of intangible assets related to the Zindaclin® product and substantial non-cash charges of $1,567,000 in the form of share-based compensation, amortization of patents, and depreciation.  Additional uses of our net cash included a decrease of $750,000 in deferred revenue as we recognized unamortized licensing fees from the termination of the licensing and supply agreement with Meldex International.





The aforementioned net cash used for the year ended December 31, 2010 was partially offset by an increase in accounts payable of $141,000 due to timing of vendor payments, an increase in accrued liabilities of $21,000, a decrease in prepaid expenses of $168,000 due to expense amortization, a decrease in accounts receivable of $136,000 due to collection activities, and a decrease in inventory of $191,000 due to product sales and inventory valuation.





For the year ended December 31, 2009, net cash used in operating activities was $6,888,084.  The principal component of net cash used for the year ended December 31, 2009 stems from our net loss of approximately $9,226,000.  This net loss for the year ended December 31, 2009 included substantial non-cash charges in the form of share-based compensation, amortization of patents, depreciation, and the intangible asset impairment loss.  These non-cash charges totaled approximately $3,599,000.  Additional uses of our net cash included a decrease of $824,000 in accounts payable due to timing of vendor payments, a decrease of $433,000 in accrued liabilities for employee benefits and incentives, the amortization of deferred revenues of $109,000, an increase of $23,000 in accounts receivable, 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 $85,000 in prepaid expenses due to expense amortization, and a decrease of $71,000 in inventory due to Altrazeal® product sales.


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Investing Activities





Net cash provided by investing activities during the year ended December 31, 2010 was $550,000 and relates to the proceeds received in June, September, and November 2010 from the divestiture of our Zindaclin® intangible assets.  The Company expects to receive additional payments from the divestiture of Zindaclin® of $250,000 in June 2011, and $250,000 in June 2012.





Net cash used in investing activities for the year ended December 31, 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 $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.





Financing Activities





Net cash provided by financing activities during the year ended December 31, 2010 was $857,980 from the net proceeds of our sale of common stock in February 2010.





Net cash provided by financing activities during the year ended December 31, 2009 was $1,261,700 from the net proceeds of our sale of common stock in November 2009.





Liquidity





In July 2009, the Company restructured its operations in efforts to reduce operating expenses, optimize operations, and to conserve the necessary cash to further the Company’s business plan.  These conservation efforts were in place during 2010 and will continue to be in effect as part of the Company’s strategic plan for 2011.  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 with our own sales force and a network of independent sales representatives throughout the country.





On November 11, 2009, we entered into a Securities Purchase Agreement with several institutional investors whereby we agreed to sell and issue to those investors the following securities (the “November 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 with 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.





On November 16, 2009, we closed the November Offering and received aggregate net proceeds of approximately $1.26 million, after deducting placement fees and offering expenses payable by us (and excluding any proceeds from exercise of the aforementioned warrants).





Rodman & Renshaw, LLC, acting as our exclusive placement agent, received a placement fee of $105,002 (equal to 7% of the aggregate gross proceeds of the November Offering) as well as compensation warrants to purchase up to an aggregate of 535,723 shares (equal to 5% of the aggregate number of shares sold in the November Offering) of our common stock at an exercise price of $0.238 per share (equal to 125% of the then public offering price per share).  Such compensation warrants will expire on July 23, 2014 and will otherwise comply with Rule 5110 of the Financial Institutions Regulatory Authority.


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On February 2, 2010, we entered into a Securities Purchase Agreement with several institutional investors whereby we agreed to sell and issue to those investors 5,000,000 shares of our common stock, par value $0.001 per share (the “February Offering”).  On February 5, 2010, we closed the February Offering and received aggregate net proceeds of approximately $858,000, after deducting placement fees and offering expenses payable by us.





Rodman & Renshaw, LLC, acting as our exclusive placement agent, received a placement fee of $70,000 (equal to 7% of the aggregate gross proceeds of the February Offering) as well as compensation warrants to purchase up to an aggregate of 250,000 shares (equal to 5% of the aggregate number of shares sold in the February Offering) of our common stock at an exercise price of $0.25 per share (equal to 125% of the then public offering price per share).  Such compensation warrants will expire on July 23, 2014 and will otherwise comply with Rule 5110 of the Financial Institutions Regulatory Authority.





On January 3, 2011, we entered into a Securities Purchase Agreement with an institutional investor whereby we agreed to sell and issue to the investor the following securities (the “January Offering”):




§
5,000,000 shares of our common stock, par value $0.001 per share; and§
Warrants to purchase up to 1,750,000 shares of our common stock (the “Warrants”). The Warrants have an initial exercise price of $0.102 per share, and may be exercised at any time and from time to time on or after July 6, 2011 through and including July 6, 2016
 On January 6, 2011, we closed the January Offering and received aggregate net proceeds of approximately $410,000 after deducting placement fees and offering expenses payable by us (and excluding any proceeds from exercise of the Warrants).





Rodman & Renshaw, LLC, acting as our exclusive placement agent pursuant to an engagement letter dated November 9, 2009, received a placement fee of $35,000 (equal to 7% of the aggregate gross proceeds of the January Offering) as well as compensation warrants to purchase up to an aggregate of 250,000 shares (equal to 5% of the aggregate number of shares sold in the January Offering) of our common stock at an exercise price of $0.128 per share (equal to 125% of the then public offering price per share).  The compensation warrants will expire on July 23, 2014 and will otherwise comply with Rule 5110 of the Financial Institutions Regulatory Authority.





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





The Company filed a Form S-3 shelf registration statement in July 2009 where we may from time to time sell an indeterminate number of shares of 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 million.  The registration statement was declared effective by the Securities and Exchange Commission on July 23, 2009 (File No. 333-160568).


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Management initially utilized this shelf registration statement in connection with the November Offering in November 2009 by completing a registered direct offering of 10,714,467 shares of the Company’s common stock and warrants to purchase up to 5,357,233 shares of the Company’s common stock for aggregate gross proceeds of $1.5 million ($1.3 million approximate net proceeds to the Company).  The February Offering in February 2010 constituted the Company’s second registered direct offering.  In the February Offering, the Company sold 5,000,000 shares of its common stock for aggregate gross proceeds of $1 million ($0.9 million approximate net proceeds to the Company).  The January Offering in January 2011 constituted the Company’s third registered direct offering.  In the January Offering, the Company sold 5,000,000 shares of its common stock and warrants to purchase up to 1,750,000 shares of its common stock for aggregate gross proceeds of $0.5 million ($0.4 million approximate net proceeds to the Company).  As of March 1, 2011 approximately $22.0 million remains available under the Company’s 2009 shelf registration statement.





As of March 1, 2011, we had cash and cash equivalents of approximately $688,000.  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 OraDiscTM 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, if any, during 2011 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 January Offering, our existing liquidity, the expected level of operating expenses, projected sales of our existing products combined with other revenues and proceeds from the divestiture of non-core assets, we believe that we will be able to meet our working capital and capital expenditure requirements into the third quarter of 2011.  We do not expect any material changes in our capital expenditure spending during 2011.  However, we cannot be sure that our anticipated revenue growth will be realized or that we will generate significant positive cash flow from operations.  We are unable to assert that our financial position is sufficient to fund operations beyond the third quarter of 2011, and as a result, there is substantial doubt about our ability to continue as a going concern.




As we continue to expend funds to advance our business plan, there can be no assurance that changes in our research and development plans, capital expenditures and/or acquisitions of products or businesses, or other events affecting our operations will not result in the earlier depletion of our funds.  In appropriate situations, we may seek financial assistance from other sources, including contribution by others to joint ventures and other collaborative or licensing arrangements for the development, testing, manufacturing and marketing of products under development.  Additionally, we may explore alternative financing sources for our business activities, including the possibility of loans from banks and public and/or private offerings of debt and equity securities; however we cannot be certain that funding will be available on terms acceptable to us, or at all.
 
 Our future capital requirements and adequacy of available funds will depend on many factors including:
 
 §
The ability to successfully commercialize our wound management and burn care products and the market acceptance of these products;§
The ability to establish and maintain collaborative arrangements with corporate partners for the research, development and commercialization of certain product opportunities;§
Continued scientific progress in our development programs;§
The costs involved in filing, prosecuting and enforcing patent claims;§
Competing technological developments;§
The cost of manufacturing and production scale-up; and§
Successful regulatory filings.


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Contractual Obligations





The following table summarizes our outstanding contractual cash obligations as of December 31, 2010, which consists of a lease agreement for office and laboratory space in Addison, Texas which commenced on April 1, 2006, a lease agreement for office equipment, and separation agreements with a former chief executive officer and our current chief executive officer, Kerry P. Gray.





Payments Due By PeriodContractual Obligations

Total


Less Than

1 Year


2-3

Years


4-5

Years


After 5

YearsOperating leases

$
296,843


$
122,683


$
164,490


$
9,670


$
---Separation agreements


614,631



289,631



300,000



25,000



---Total contractual cash obligations

$
911,474


$
412,314


$
464,490


$
34,670


$
---








Off-Balance Sheet Arrangements





As of December 31, 2010, we did not have any off balance sheet arrangements.








Impact of Inflation





We have experienced only moderate price increases over the last three fiscal years under our agreements with third-party manufacturers as a result of raw material and labor price increases.  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.











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RESULTS OF OPERATIONS








Fluctuations in Operating Results





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





Comparison of the year ended December 31, 2010 and 2009





Total Revenues





Our revenues totaled $1,557,357 for the year ended December 31, 2010, as compared to revenues of $667,949 for the year ended December 31, 2009, and were comprised of licensing fees of approximately $100,000 for a Zindaclin® milestone, $990,000 for two OraDiscTM licensing agreements that included $751,000 in recognition of unamortized licensing fees from the termination of the licensing and supply agreement with Meldex International, $10,000 for an Altrazeal® licensing agreement, domestic royalties of approximately $72,000 from sales of Aphthasol® by our distributor, foreign royalties of approximately $86,000 from sales of Zindaclin®, and product sales of approximately $161,000 for Altrazeal® and $138,000 for Aphthasol®.





The year ended December 31, 2010 revenues represent an overall increase of approximately $889,000 versus the comparative 2009 revenues, due primarily to an increase of $903,000 in OraDiscTM licensing fees, an increase of $138,000 in Aphthasol® product sales as we did not sell any Aphthasol® finished product to our domestic distributor during 2009, and an increase of $10,000 in Altrazeal® licensing fees.  These increases were partially offset by decreases in Zindaclin® royalty and licensing fees of $87,000 due to our divestiture of this product in June 2010, a decrease in sponsored research of $38,000, a decrease of $20,000 in Altrazeal® product sales, and a decrease of $17,000 in Aphthasol® royalties.




Costs and Expenses





Cost of Goods Sold





Cost of goods sold for the year ended December 31, 2010 was $153,470 and consisted of $123,122 in costs associated with Aphthasol® and $30,348 in costs associated with Altrazeal®.  Cost of goods sold for the year ended December 31, 2009 was $35,073 and was comprised entirely of costs associated with Altrazeal®.


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Research and Development





Research and development expenses totaled $1,258,060 for the year ended December 31, 2010, which included $136,451 of share-based compensation, compared to $2,250,153 for the year ended December 31, 2009, which included $320,239 of share-based compensation.  The decrease of approximately $992,000 in research and development expenses was due primarily to decreases in direct research costs of $73,000, scientific personnel costs of $561,000, clinical testing expenses for our wound care technologies of $163,000, and regulatory consulting of $195,000.





The direct research and development expenses for the years ended December 31, 2010 and 2009 were as follows:




Year EndedDecember 31,Technology

2010


2009Wound care & Nanoflex®

$
168,709


$
63,413OraDiscTM


9,188



187,591Aphthasol® & other technologies


52,209



52,416Total

$
230,106


$
303,420








Selling, General and Administrative





Selling, general and administrative expenses totaled $3,119,881 for the year ended December 31, 2010, which included $229,673 of share-based compensation, compared to $5,665,559 for the year ended December 31, 2009, which included $1,295,107 in share-based compensation.  The decrease of approximately $2,546,000 in selling, general and administrative expenses reflects the Company’s restructured business plan which contributed to reduced costs associated with our sales and marketing efforts of $1,182,000 due to lower head count and marketing expenses, a decrease of $1,167,000 in administrative compensation, a decrease of $329,000 in legal fees as 2009 included expenses related to the proposed York Pharma acquisition, lower consulting fees of $113,000, decreased legal fees related to our patents of $62,000, a decrease of $19,000 in insurance costs, and lower travel expenses of $38,000.





These expense decreases were partially offset by an increase in director fees of $223,000, increased investor relation expenses of $73,000, a commission of $30,000 related to the Aiqilin licensing agreement, additional costs of $14,000 for shareholder related expenses, higher accounting fees of $16,000 related to the audit fees for 2009, and an increase of $8,000 in administrative operating costs.





The net decrease in administrative compensation of $1,167,000 includes savings in direct compensation expense of $249,000 due to lower head count and lower share-based compensation expense of $918,000 as 2009 included the impact of certain vesting accelerations of stock options and restricted stock pursuant to the separation agreement with our former chief executive officer.





Amortization of Intangible Assets





Amortization expense of intangible assets totaled $905,706 for the year ended December 31, 2010 as compared to $1,065,300 for the year ended December 31, 2009.  The expense for each period consists primarily of amortization associated with our acquired patents.  The decrease of approximately $160,000 is attributable to our divestiture of the Zindaclin® technology in June 2010.  There were no purchases of patents during the year ended December 31, 2010.


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Depreciation





Depreciation expense totaled $256,073 for the year ended December 31, 2010 as compared to $186,690 for the year ended December 31, 2009.  The increase of approximately $69,000 is attributable to our purchase of additional equipment during 2009 and placing certain manufacturing equipment into service in July 2010.





Interest and Miscellaneous Income





Interest and miscellaneous income totaled $9,930 for the year ended December 31, 2010, as compared to $42,571 for the year ended December 31, 2009.  The decrease of approximately $33,000 is attributable to a decrease in interest income due to lower cash balances and interest yields in 2010.





Interest Expense





Interest expense totaled $50,851 for the year ended December 31, 2010 as compared to $14,619 for the year ended December 31, 2009.  Interest expense is comprised of financing costs for our insurance policies and interest costs related to regulatory fees.  The increase of approximately $36,000 is attributable to interest costs related to regulatory fees.





Impairment of Intangible Assets





We performed an evaluation of our intangible assets for purposes of determining possible impairment as of December 31, 2010.  Upon completion of the evaluation, the fair value of our intangible assets exceeded the recorded remaining book value.  We performed a similar evaluation of our intangible assets for purposes of determining possible impairment as of December 31, 2009.  Upon completion of the evaluation, the fair value of our intangible assets exceeded the recorded remaining book value except for the valuation of the patent associated with our Zindaclin® technology.  We recognized an impairment charge of $716,633 for the year ended December 31, 2009.





Loss on Sale of Intangible Assets





Loss on sale of intangible assets totaled $857,839 for the year ended December 31, 2010 and consisted of the divestiture of our Zindaclin® intangible assets.  There was no intangible asset divestiture for the year ended December 31, 2009.








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CRITICAL ACCOUNTING POLICIES AND ESTIMATES





Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth herein are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for 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.





We set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and which require complex management judgment.





Revenue Recognition





We recognize revenue in accordance with generally accepted accounting principles as outlined in the ASC Topic 605, Revenue Recognition(“ASC Topic 605”), which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. We recognize revenue as products are shipped based on FOB shipping point terms when title passes to customers. We negotiate credit terms on a customer-by-customer basis and products are shipped at an agreed upon price. All product returns must be pre-approved.





We also generate revenue from license agreements and research collaborations and recognize this revenue when earned. In accordance with ASC Topic 605-25, Revenue Recognition - Multiple Element Arrangements, for deliverables which contain multiple deliverables, we separate the deliverables into separate accounting units if they meet the following criteria: i) the delivered items have a stand-alone value to the customer; ii) the fair value of any undelivered items can be reliably determined; and iii) if the arrangement includes a general right of return, delivery of the undelivered items is probable and substantially controlled by the seller. Deliverables that do not meet these criteria are combined with one or more other deliverables into one accounting unit.  Revenue from each accounting unit is recognized based on the applicable accounting literature, primarily ASC Topic 605.





We analyze the rate of historical returns when evaluating the adequacy of the allowance for sales returns.  At December 31, 2010 and 2009, this reserve was nil as we have not experienced historically any product returns.  If the historical data we use to calculate these estimates does not properly reflect future returns, revenue could be overstated.





Allowance for Doubtful Accounts





We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  Actual write-off of receivables may differ from estimates due to changes in customer and economic circumstances.








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Inventory





We state our inventory at the lower of cost (first-in, first-out method) or market.  The estimated value of excess, obsolete and slow-moving inventory as well as inventory with a carrying value in excess of its net realizable value is established by us on a quarterly basis through review of inventory on hand and assessment of future demand, anticipated release of new products into the market, historical experience and product expiration.  Our stated value of inventory could be materially different if demand for our products decreased because of competitive conditions or market acceptance, or if products become obsolete because of advancements in the industry.





Accrued Expenses





As part of the process of preparing financial statements, we are required to estimate accrued expenses.  This process involves identifying services which have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements.





In accruing service fees, we estimate the time period over which services will be provided and the level of effort in each period.  If the actual timing of the provision of services or the level of effort varies from the estimate, we will adjust the accrual accordingly.  The majority of our service providers invoice us monthly in arrears for services performed.  In the event that we do not identify costs that have begun to be incurred or we underestimate or overestimate the level of services performed or the costs of such services, our actual expenses could differ from such estimates.  The date on which some services commence, the level of services performed on or before a given date and the cost of such services are often subjective determinations. We make judgments based upon facts and circumstances known to us in accordance with GAAP.





Share based Compensation – Employee Share based Awards





We primarily grant qualified stock options for a fixed number of shares to employees with an exercise price equal to the market value of the shares at the date of grant.  Under the fair value recognition provisions of ASC Topic 718, Stock Compensation (“ASC Topic 718”), and ASC Topic 505, Equity (“ASC Topic 505”), share based compensation cost is based on the value of the portion of share based awards that is ultimately expected to vest during the period.





We selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value for share based awards.  The Black-Scholes model requires the use of assumptions which determine the fair value of the share based awards.  Determining the fair value of share based awards at the grant date requires judgment, including estimating the expected term of stock options, the expected volatility of our stock, and expected dividends. In accordance with ASC Topic 718 and ASC Topic 505, we are required to estimate forfeitures at the grant date and recognize compensation costs for only those awards that are expected to vest.  Judgment is required in estimating the amount of share based awards that are expected to be forfeited.


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If factors change and we employ different assumptions in the application of ASC Topic 718 and ASC Topic 505 in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.  Therefore, we believe it is important for investors to be aware of the high degree of subjectivity involved when using option pricing models to estimate share-based compensation under ASC Topic 718 and ASC Topic 505.  There is risk that our estimates of the fair values of our share-based compensation awards on the grant dates may differ from the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future.  Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements.  Alternatively, value may be realized from these instruments that is significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements.  Although the fair value of employee share-based awards is determined in accordance with ASC Topic 718 and ASC Topic 505 using an option pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.





Share based Compensation – Non-Employee Share based Awards





We occasionally grant stock option awards to our consultants and directors.  Such grants are accounted for pursuant to ASC Topic 505 and, accordingly, we recognize compensation expense equal to the fair value of such awards and amortize such expense over the performance period.  We estimate the fair value of each award using the Black-Scholes model.  The unvested equity instruments are revalued on each subsequent reporting date until performance is complete, with an adjustment recognized for any changes in their fair value.  We amortize expense related to non-employee stock options in accordance with ASC Topic 718.





Income Taxes





The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient taxable income in the United States based on estimates and assumptions. We record a valuation allowance to reduce the carrying value of our net deferred tax asset to the amount that is more likely than not to be realized.  In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase net income in the period such determination is made.  On a quarterly basis, we evaluate the realizability of our deferred tax assets and assess the requirement for a valuation allowance.





Asset Valuations and Review for Potential Impairment





We review our fixed assets and intangible assets at least annually or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  This review requires that we make assumptions regarding the value of these assets and the changes in circumstances that would affect the carrying value of these assets.  If such analysis indicates that a possible impairment may exist, we are then required to estimate the fair value of the asset and, as deemed appropriate, expense all or a portion of the asset.  The determination of fair value includes numerous uncertainties, such as the impact of competition on future value.  We believe that we have made reasonable estimates and judgments in determining whether our long-term assets have been impaired; however, if there is a material change in the assumptions used in our determination of fair value or if there is a material change in economic conditions or circumstances influencing fair value, we could be required to recognize certain impairment charges in the future.





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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Concentrations of Credit Risk





Concentration of credit risk with respect to financial instruments, consisting primarily of cash and cash equivalents, potentially expose us to concentrations of credit risk due to the use of a limited number of banking institutions and due to maintaining cash balances in banks, which, at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation.  During 2010, we utilized Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as our banking institutions.  At December 31, 2010 and December 31, 2009 our cash and cash equivalents totaled $641,441 and $1,934,177, respectively.  We also invest cash in excess of immediate requirements in money market accounts, certificates of deposit, corporate commercial paper with high quality ratings, and U.S. government securities.  These investments are not held for trading or other speculative purposes.  We are exposed to credit risk in the event of default by these institutions.





Concentration of credit risk with respect to trade accounts receivable are customers with balances that exceed 5% of total consolidated trade accounts receivable at December 31, 2010 and at December 31, 2009.  As of December 31, 2010, three customers exceeded the 5% threshold, each customer with 56%, 19%, and 6%, respectively.  Three customers exceeded the 5% threshold at December 31, 2009, each customer with 67%, 11%, and 10%, respectively.  We believe that the customer accounts are fully collectible as of December 31, 2010.








ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The information required by this Item is included in our Financial Statements and Supplementary Data listed in Item 15 of Part IV of this annual report on Form 10-K.








ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None.








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ITEM 9A.
CONTROLS AND PROCEDURES





Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on its evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.





Evaluation of Disclosure Controls and Procedures





Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2010, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to the company's management, as appropriate, to allow timely decisions regarding required disclosure, and are operating in an effective manner.





Changes in Internal Controls Over Financial Reporting





During the fiscal quarter ended December 31, 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Management’s Annual Report on Internal Control Over Financial Reporting





Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:





§
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;§
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and§
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.





Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.





Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that as of December 31, 2010 our internal control over financial reporting is effective based on those criteria.





This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.








ITEM 9B.
OTHER INFORMATION





None.








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Part III








ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Directors





The information concerning our directors required under this Item is incorporated herein by reference from our definitive proxy statement, to be filed pursuant to Regulation 14A, related to our 2011 Annual Meeting of Stockholders to be held on May 30, 2011 (our “2011 Proxy Statement”).





Information concerning our Audit Committee and the independence of its members, along with information about the financial expert serving on the Audit Committee, will be set forth in the Audit Committee segment of our 2011 Proxy Statement and is incorporated herein by reference.





Executive Officers





The information concerning our executive officers is provided in Item 1 of Part I of this Annual Report on Form 10-K under the caption “Executive Officers and Key Employees”.





Corporate Governance





Information concerning certain corporate governance matters will appear in our 2011 Proxy Statement under “Corporate Governance Matters”, “Meetings of the Board and Certain Committees”, “Compensation Committee Discussion on Executive Compensation”, and “Report of the Audit Committee”.  These portions will be contained in our 2011 Proxy Statement and are incorporated herein by reference.





Section 16(a) Beneficial Ownership Reporting Compliance





Information concerning compliance with Section 16(a) of the Securities and Exchange Act of 1934 will be set forth in the “Section 16(a) Beneficial Ownership Reporting Compliance” segment of our 2011 Proxy Statement and is incorporated herein by reference.





Code of Business Conduct and Ethics





On March 31, 2006 we adopted a written Code of Business Conduct and Ethics for Employees, Executive Officers and Directors, applicable to all employees, management, and directors, designed to deter wrongdoing and promote honest and ethical conduct, full, fair and accurate disclosure, compliance with laws, prompt internal reporting and accountability to adherence to the Code of Business Conduct and Ethics.





Web Availability





We make available free of charge through our web site, www.uluruinc.com, our annual reports on Form 10-K and other reports required under the Securities and Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are filed with, or furnished to, the Securities and Exchange Commission as well as certain of our corporate governance policies, including the charters for the Board of Director's corporate governance committees and our code of ethics, corporate governance guidelines and whistleblower policy. We will provide to any person without charge, upon request, a copy of any of the foregoing materials.  Any such request must be made in writing to ULURU Inc., 4452 Beltway Drive, Addison, TX 75001, Attn: Investor Relations.





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ITEM 11.
EXECUTIVE COMPENSATION





The information concerning executive compensation for the Company required under this Item will be contained in our 2011 Proxy Statement and is incorporated herein by reference.








ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





The information concerning security ownership of certain beneficial owners and management required under this Item will be contained in our 2011 Proxy Statement and is incorporated herein by reference.








ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





The information concerning certain relationships and related transactions, and director independence required under this Item will be contained in our 2011 Proxy Statement and is incorporated herein by reference.








ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES





The information concerning principal accountant fees and services required under this Item will be contained in our 2011 Proxy Statement and is incorporated herein by reference.








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Part IV








ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)
The following documents are filed as part of this report:1.
Financial StatementsReport of Independent Registered Public Accounting Firm
50Consolidated Balance Sheets as of December 31, 2010 and 2009
51Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
52Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010 and 2009
53Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
54Notes to Consolidated Financial Statements
552.
Financial Statement SchedulesAll other schedules are omitted because they are not applicable or because the required information is shown in the consolidated financial statements or the notes thereto.3.
List of ExhibitsThe exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index hereto.



In reviewing the agreements included as exhibits to this annual report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements.  The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:§
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;§
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;§
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and§
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this annual report on Form 10-K and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.








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SIGNATURESPursuant to the requirements of Section 13 or 15(d) 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 authorizedULURU Inc.Date: March 31, 2011
By
/s/ Kerry P. GrayKerry P. GrayChief Executive OfficerPrincipal Executive OfficerDate: March 31, 2011
By
/s/ Terrance K. WallbergTerrance K. WallbergChief Financial OfficerPrincipal Accounting Officer








Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.











Date: March 31, 2011
/s/ William W. CrouseWilliam W. Crouse, DirectorDate: March 31, 2011
/s/ Jeffrey B. DavisJeffrey B. Davis, DirectorDate: March 31, 2011
/s/ Kerry P. GrayKerry P. Gray, DirectorDate: March 31, 2011
/s/ Jeffrey A. StoneJeffrey A. Stone, Director





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INDEX TO FINANCIAL STATEMENTSPageFinancial StatementsReport of Independent Registered Public Accounting Firm
50Consolidated Balance Sheets as of December 31, 2010 and 2009
51Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
52Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010 and 2009
53Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
54Notes to Consolidated Financial Statements
55





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REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the Board of Directors and Stockholders


ULURU Inc.


Addison, Texas





We have audited the consolidated balance sheets of ULURU Inc. (a Nevada corporation) as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2010.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ULURU Inc. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, negative cash flows from operating activities and is dependent upon raising additional funds from strategic transactions, sales of equity, and/or issuance of debt.  The Company’s ability to consummate such transactions is uncertain.  As a result, there is substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.








/s/ Lane Gorman Trubitt, PLLC


Lane Gorman Trubitt, PLLC


Dallas, TX





March 31, 2011


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ULURU Inc.


CONSOLIDATED BALANCE SHEETS








December 31,2010


2009ASSETSCurrent AssetsCash and cash equivalents

$
641,441


$
1,934,177Accounts receivable, net


74,466



218,256Other receivable, current portion


246,430



---Inventory


818,304



1,008,998Prepaid expenses and deferred charges


215,624



383,419Total Current Assets


1,996,265



3,544,850Property, Equipment and Leasehold Improvements, net


1,375,484



1,631,557Other AssetsIntangible assets, net


5,391,567



8,183,146Other receivable, net of current portion


239,128



---Deposits


18,069



20,819Total Other Assets


5,648,764



8,203,965TOTAL ASSETS

$
9,020,513


$
13,380,372LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable

$
758,578


$
617,443Accrued liabilities


236,486



215,431Deferred revenue, current portion


24,533



96,897Total Current Liabilities


1,019,597



929,771Long Term LiabilitiesDeferred revenue, net of current portion


594,653



1,272,843TOTAL LIABILITIES


1,614,250



2,202,614COMMITMENTS AND CONTINGENCIES


---



---STOCKHOLDERS' EQUITYPreferred stock – $0.001 par value; 20,000 shares authorized;no shares issued and outstanding


---



---Common Stock – $ 0.001 par value; 200,000,000 shares authorized;82,117,230 and 76,813,886 shares issued and outstanding at December 31, 2010 and December 31, 2009, respectively


82,117



76,814Additional paid-in capital


48,181,294



46,923,499Accumulated  (deficit)


(40,857,148
)


(35,822,555
)TOTAL STOCKHOLDERS’ EQUITY


7,406,263



11,177,758TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
9,020,513


$
13,380,372The accompanying notes are an integral part of these consolidated financial statements.





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ULURU Inc.


CONSOLIDATED STATEMENTS OF OPERATIONS








Years Ended December 31,2010


2009REVENUESLicense fees

$
1,099,554


$
193,290Royalty income


158,464



255,738Product sales, net


299,339



180,731Other


---



38,190Total Revenues


1,557,357



667,949COSTS AND EXPENSESCost of goods sold


153,470



35,073Research and development


1,258,060



2,250,153Selling, general and administrative


3,119,881



5,665,559Amortization of intangible assets


905,706



1,065,390Depreciation


256,073



186,690Total Costs and Expenses


5,693,190



9,202,865OPERATING (LOSS)


(4,135,833
)


(8,534,916
)Other Income (Expense)Interest and miscellaneous income


9,930



42,571Interest expense


(50,851
)


(14,619
)Impairment of intangible assets


---



(716,633
)Loss on sale of intangible assets


(857,839
)


---Loss on sale of equipment


---



(2,121
)(LOSS) BEFORE INCOME TAXES


(5,034,593
)


(9,225,718
)Income taxes


---



---NET (LOSS)

$
(5,034,593
)

$
(9,225,718
)Basic and diluted net (loss) per common share

$
(0.06
)

$
(0.14
)WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING


81,540,495



67,168,941The accompanying notes are an integral part of these consolidated financial statements.


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ULURU Inc.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYYears Ended December 31, 2010 and 2009Common Stock


Additional Paid-in


Accumulated


Stockholders’Shares Issued


Amount


Capital


(Deficit)


Equity (Deficit)Balance as of December 31, 2008


65,509,481


$
65,510


$
44,057,757


$
(26,596,837
)

$
17,526,430Issuance of common stock and warrants in a private placement, net of fund raising costs ($279,919)


10,714,467



10,714



1,250,986



---



1,261,700Issuance of common stock – vesting of restricted stock


589,938



590



(590
)


---



---Share-based compensation of employees


---



---



1,521,084



---



1,521,084Share-based compensation of non-employees


---



---



94,262



---



94,262Net (loss) for the year


---



---



---



(9,225,718
)


(9,225,718
)Balance as of December 31, 2009


76,813,886


$
76,814


$
46,923,499


$
(35,822,555
)

$
11,177,758Issuance of common stock in a private placement, net of fund raising costs ($142,020)


5,000,000



5,000



852,980



---



857,980Issuance of common stock – vesting of restricted stock


303,344



303



(303
)


---



---Share-based compensation of employees


---



---



267,416



---



267,416Share-based compensation of non-employees


---



---



98,708



---



98,708Warrants issued for services


---



---



38,994



---



38,994Net (loss) for the year


---



---



---



(5,034,593
)


(5,034,593
)Balance as of December 31, 2010


82,117,230


$
82,117


$
48,181,294


$
(40,857,148
)

$
7,406,263The accompanying notes are an integral part of these consolidated financial statements.





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ULURU Inc.


CONSOLIDATED STATEMENTS OF CASH FLOWS





Years Ended December 31,2010


2009OPERATING ACTIVITIES :Net (loss)

$
(5,034,593
)

$
(9,225,718
)Adjustments to reconcile net (loss) to net cash used in operating activities:Amortization of intangible assets


905,706



1,065,390Depreciation


256,073



201,390Share-based compensation for stock and options issued to employees


267,416



1,521,084Share-based compensation for options issued to non-employees


98,708



94,262Warrants issued for services


38,994



---Impairment of intangible assets


---



716,633Loss on sale of intangible assets


857,839



---Loss on sale of equipment


---



2,120Change in operating assets and liabilities:Accounts receivable


143,790



(22,694
)Other receivable


(7,524
)


---Inventory


190,694



71,268Prepaid expenses and deferred charges


167,795



85,206Deposits


2,750



---Accounts payable


141,135



(824,543
)Accrued liabilities


21,055



(433,115
)Deferred revenue


(750,554
)


(108,950
)Royalty advance


---



(30,417
)Total


2,333,877



2,337,634Net Cash (Used in) Operating Activities


(2,700,716
)


(6,888,084
)INVESTING ACTIVITIES :Purchase of property and equipment


---



(14,177
)Investment in notes receivable


---



(1,018,219
)Proceeds from notes receivable


---



1,018,219Proceeds from sale of intangible assets


550,000



---Proceeds from sale of equipment


---



7,150Net Cash Provided by (Used in) Investing Activities


550,000



(7,027
)FINANCING ACTIVITIES :Proceeds from sale of common stock and warrants, net


---



1,261,700Proceeds from sale of common stock, net


857,980



---Net Cash Provided by Financing Activities


857,980



1,261,700Net (Decrease) in Cash


(1,292,736
)


(5,633,411
)Cash,  beginning of period


1,934,177



7,567,588Cash,  end of period

$
641,441


$
1,934,177SUPPLEMENTAL CASH FLOW DISCLOSURE:Cash paid for interest

$
3,495


$
3,138Non-cash investing and financing activities:Sale of intangible assets included in Other receivable

$
478,034The accompanying notes are an integral part of these consolidated financial statements.


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ULURU Inc.





NOTES TO


CONSOLIDATED FINANCIAL STATEMENTS














NOTE 1.
COMPANY OVERVIEW AND BASIS OF PRESENTATION





Company Overview





ULURU Inc. (hereinafter “we”, “our”, “us”, “ULURU”, or the “Company”) is a Nevada corporation.  We are a diversified specialty pharmaceutical company committed to developing and commercializing a broad range of innovative wound care and muco-adhesive film products based on our patented Nanoflex® and OraDiscTM drug delivery 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.


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Liquidity and Going Concern





The Company currently believes its existing liquidity, the proceeds from the January Offering, the expected level of operating expenses, projected sales of our existing products combined with other revenues and proceeds from the divestiture of non-core assets, will be sufficient to meet our working capital and capital expenditure requirements into the third quarter of 2011.  The Company is unable to assert that its liquidity will be sufficient to fund operations beyond the third quarter of 2011, and as a result, there is substantial doubt about the Company’s ability to continue as a going concern beyond the third quarter of 2011.  These consolidated financial statements have been prepared with the assumption that the Company will continue as a going concern and will be able to realize its assets and discharge its liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern.  The Company may not be able to raise sufficient capital on acceptable terms, or at all, to continue operations and may not be able to execute any strategic transaction.





The Company’s liquidity, and its ability to raise additional capital or complete any strategic transaction, depends on a number of factors, including, but not limited to, the following:





•

the market price of the Company’s stock and the availability and cost of additional equity capital from existing and potential new investors;





•

the Company’s ability to retain the listing of its common stock on the NYSE Amex;





•

general economic and industry conditions affecting the availability and cost of capital;





•

the Company’s ability to control costs associated with its operations;





•

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and





•

the terms and conditions of the Company’s existing collaborative and licensing agreements.





The sale of additional equity or convertible debt securities would likely result in substantial additional dilution to the Company’s stockholders.  If the Company raises additional funds through the incurrence of indebtedness, the obligations related to such indebtedness would be senior to rights of holders of the Company’s capital stock and could contain covenants that would restrict the Company’s operations.  The Company also cannot predict what consideration might be available, if any, to the Company or its stockholders, in connection with any strategic transaction.  Should strategic alternatives or additional capital not be available to the Company in the near term, or not be available on acceptable terms, the Company may be unable to realize value from its assets and discharge its liabilities in the normal course of business which may, among other alternatives, cause the Company to further delay, substantially reduce or discontinue operational activities to conserve its cash resources.


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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.





Trade Accounts Receivable and Allowance for Doubtful Accounts





Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  The Company estimates the collectability of our trade 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. Trade accounts receivable are subject to an allowance for collection when it is probable that the balance will not be collected. As of December 31, 2010 and 2009, the allowance for doubtful accounts was $314 and nil, respectively.  For the years ended December 31, 2010 and 2009 the accounts written off as uncollectible was $471 and nil, 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.





Prepaid Expenses and Deferred Charges





From time to time fees are payable to the United States Food and Drug Administration (“FDA”) in connection with new drug applications submitted by the Company and annual prescription drug user fees. Such fees are being amortized ratably over the FDA’s prescribed fiscal period of 12 months ending September 30th.





Additionally, 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.


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Property and Equipment





Property and equipment 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 and equipment categories are as follows:





Furniture, fixtures, and laboratory equipment

7 yearsComputer and office equipment

5 yearsComputer software

3 yearsLeasehold improvements

Lease term






Patents and Applications





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.





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.





Accrual for Clinical Study Costs





We record accruals for estimated clinical study costs.  Clinical study costs represent costs incurred by clinical research organizations, or CROs, and clinical sites.  These costs are recorded as a component of R&D expenses.  We analyze the progress of the clinical trials, including levels of patient enrollment and/or patient visits, invoices received and contracted costs when evaluating the adequacy of the accrued liabilities.  Significant judgments and estimates must be made and used in determining the accrued balance in any accounting period.  Actual costs incurred may or may not match the estimated costs for a given accounting period.





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.


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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.





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.


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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.  Causes of unusual wholesaler buying patterns include actual or anticipated product supply issues, weather patterns, anticipated changes in the transportation network, redundant holiday stocking, and changes in wholesaler business operations.  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.





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.





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 cost, 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, 2010 and 2009.




We may enter into certain research agreements in which we share expenses with a collaborator. We may also enter into other collaborations where we are reimbursed for work performed on behalf of our collaborative partners.  We record the expenses for such work as research and development expenses. If the arrangement is a cost-sharing arrangement and there is a period during which we receive payments from the collaborator, we record payments by the collaborator for their share of the development effort as a reduction of research and development expense. If the arrangement is a reimbursement of research and development expenses, we record the reimbursement as sponsored research income.


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Basic and Diluted Net Loss Per Share





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





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 2010, we utilized Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as our banking institutions.  At December 31, 2010 and December 31, 2009 our cash and cash equivalents totaled $641,441 and $1,934,177, 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, 2010 and at December 31, 2009.  As of December 31, 2010, three customers exceeded the 5% threshold, each customer with 56%, 19%, and 6%, respectively.  Three customers exceeded the 5% threshold at December 31, 2009, each customer with 67%, 11%, and 10%, respectively.  We believe that the customer accounts are fully collectible as of December 31, 2010.


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Fair Value of Financial Instruments





Effective January 1, 2008, we partially adopted ASC Topic 820, Fair Value Measurements.  This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.   As permitted, the Company elected to defer the adoption of the nonrecurring fair value measurement disclosure of nonfinancial assets and liabilities until January 1, 2009.  The adoption of ASC 820 did not have a material impact on the Company’s results of operations, cash flows or financial position.  To increase consistency and comparability in fair value measurements, ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:





Level 1
—
quoted prices (unadjusted) in active markets for identical assets or liabilities;





Level 2
—
observable inputs other than Level 1, 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 model-derived prices whose inputs are observable or whose significant value drivers are observable; and





Level 3
—
assets and liabilities whose significant value drivers are unobservable.





Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s 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.  There were no changes in the Company’s valuation techniques used to measure fair value on a recurring or non-recurring basis as a result of adopting ASC Topic 820.  There were no financial assets or liabilities measured at fair value, with the exception of cash, accounts receivable, accounts payable, and accrued liabilities as of December 31, 2010 and 2009.  The fair values of these financial instruments approximate their carrying amounts.





Derivatives





We occasionally issue financial instruments that contain an embedded instrument. At inception, we assess whether the economic characteristics of the embedded derivative instrument are clearly and closely related to the economic characteristics of the financial instrument (host contract), whether the financial instrument that embodies both the embedded derivative instrument and the host contract is currently measured at fair value with changes in fair value reported in earnings, and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument.





If the embedded derivative instrument is determined not to be clearly and closely related to the host contract, is not currently measured at fair value with changes in fair value reported in earnings, and the embedded derivative instrument would qualify as a derivative instrument, the embedded derivative instrument is recorded apart from the host contract and carried at fair value with changes recorded in current-period earnings.





We determined that all embedded items associated with financial instruments during 2010 and 2009 which qualify for derivative treatment, were properly separated from their host.  As of December 31, 2010 and 2009, we did not have any derivative instruments.





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NOTE 3.
THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS





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





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








NOTE 4.
SEGMENT INFORMATION





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





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





Revenues per geographic area for the year ended December 31 are summarized as follows:





Revenues

2010


%


2009


%Domestic

$
371,265



24
%

$
275,323



41
%International


1,186,092



76
%


392,626



59
%Total

$
1,557,357



100
%

$
667,949



100
%





A significant portion of our revenues are derived from a few major customers.  Customers with greater than 10% of total revenues for the year ended December 31 are represented on the following table:





Customers
Product

2010


2009Meldex International
OraDiscTM B


63
%


12
%Discus Dental, Inc.
Aphthasol®


14
%


13
%ProStrakan, Ltd.
Zindaclin®


12
%


41
%Total



89
%


66
%





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NOTE 5.
OTHER RECEIVABLE





On June 25, 2010, the Company entered into an acquisition and license agreement (the “Agreement”) with Strakan International Limited and Zindaclin Limited, a subsidiary of Crawford Healthcare Limited, a pharmaceutical company based in England.  Under the terms of the Agreement, Zindaclin Limited will pay up to $5.1 million for the exclusive product rights to Zindaclin®, a zinc clindamycin for the treatment of acne, which consideration will be shared equally by Strakan International Limited and ULURU.  Guaranteed payments of $1,050,000 are scheduled to be received by the Company, of which $300,000 occurred in June 2010, $125,000 occurred in September 2010, $125,000 occurred in November 2010, $250,000 will occur in June 2011, and $250,000 will occur in June 2012.  The receipt of the full purchase price will be dependent on product approval in the United States.





Other receivables consisted of the following at December 31, 2010:





Payment obligation due:

Gross

Receivable


Imputed

Interest


Net

Receivable2011

$
250,000


$
3,570


$
246,4302012


250,000



10,872



239,128Total

$
500,000


$
14,442


$
485,558








NOTE 6.
INVENTORY





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





Inventory

2010


2009Finished goods

$
450,820


$
521,768Work-in-progress


296,485



375,228Raw materials


70,999



112,002Total

$
818,304


$
1,008,998








NOTE 7.
PROPERTY, EQUIPMENT and LEASEHOLD IMPROVEMENTS





Property, equipment and leasehold improvements, net, consisted of the following at December 31:





Property, equipment and leasehold improvements

2010


2009Laboratory equipment

$
424,888


$
424,888Manufacturing equipment


1,483,223



1,483,223Computers, office equipment, and furniture


140,360



140,360Computer software


4,108



4,108Leasehold improvements


95,841



95,8412,148,420



2,148,420Less: accumulated depreciation and amortization


(772,936
)


(516,863
)Property, equipment and leasehold improvements, net

$
1,375,484


$
1,631,557





Depreciation expense on property, equipment, and leasehold improvements was $256,073 for the year ended December 31, 2010 and $201,390, of which $14,700 was included in cost of goods sold, for the year ended December 31, 2009.





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NOTE 8.
INTANGIBLE ASSETS





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





Intangible assets

2010


2009Patent - Zindaclin®

$
---


$
3,729,000Patent - Amlexanox (Aphthasol®)


2,090,000



2,090,000Patent - Amlexanox (OraDiscTM A)


6,873,080



6,873,080Patent - OraDiscTM


73,000



73,000Patent - Hydrogel nanoparticle aggregate


589,858



589,8589,625,938



13,354,938Less: accumulated amortization


(4,234,371
)


(4,455,159
)Less: impairment charge


---



(716,633
)Intangible assets, net

$
5,391,567


$
8,183,146





On June 25, 2010, the Company entered into an acquisition and license agreement for the divestiture of our Zindaclin® intangible asset.  In connection with the divestiture of Zindaclin®, we recognized a loss of $857,839 for the year ended December 31, 2010.  Refer to Footnote 5 for more detailed disclosure.





We performed an evaluation of our intangible assets for purposes of determining possible impairment as of December 31, 2010.  Based upon recent market conditions, and a lack of 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 the Company considers 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 assets exceeded the recorded remaining book value.





Amortization expense for intangible assets was $905,706 and $1,065,390 for the years ended December 31, 2010 and 2009, respectively.  The future aggregate amortization expense for intangible assets, remaining as of December 31, 2010, is as follows:





Calendar Years

Future Amortization

Expense2011

$
769,1322012


476,4502013


475,1482014


475,1482015


475,1482016 & Beyond


2,720,541Total

$
5,391,567





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NOTE 9.
ACCRUED LIABILITIES





Accrued liabilities consisted of the following at December 31:





Accrued Liabilities

2010


2009Accrued taxes – payroll

$
106,299


$
106,299Accrued compensation/benefits


48,078



56,837Accrued insurance payable


74,603



52,295Product rebates/returns


282



---Other


7,224



---Total accrued liabilities

$
236,486


$
215,431








NOTE 10.
EQUITY TRANSACTIONS





On February 2, 2010, we entered into a Securities Purchase Agreement with several institutional investors whereby we agreed to sell and issue to those investors 5,000,000 shares of our common stock, par value $0.001 per share (the “February Offering”).  On February 5, 2010, we closed the February Offering and received aggregate net proceeds of approximately $858,000, after deducting placement fees and offering expenses payable by us.





Rodman & Renshaw, LLC, acting as our exclusive placement agent, received a placement fee of $70,000 (equal to 7% of the aggregate gross proceeds of the February Offering) as well as compensation warrants to purchase up to an aggregate of 250,000 shares (equal to 5% of the aggregate number of shares sold in the February Offering) of our common stock at an exercise price of $0.25 per share (equal to 125% of the then public offering price per share).  The compensation warrants will expire on July 23, 2014 and will otherwise comply with Rule 5110 of the Financial Institutions Regulatory Authority.





We completed the offering and sale of the above shares in the February Offering 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 February 4, 2010.








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NOTE 11.
STOCKHOLDERS’ EQUITY





Common Stock





As of December 31, 2010, the Company had 82,117,230 shares of common stock issued and outstanding.  The Company issued 5,303,344 shares of common stock for the year ended December 31, 2010 comprised of 303,344 shares of common stock for the vesting of certain restricted stock awards and 5,000,000 shares of common stock for the equity raise completed on February 5, 2010.





Warrants





The following table summarizes the warrants outstanding and the number of shares of common stock subject to exercise as of December 31, 2010 and the changes therein during the two years then ended:




Number of Shares of Common Stock Subject to Exercise


Weighted – Average

Exercise PriceBalance as of December 31, 2008


2,795,000


$
1.07Warrants issued


5,892,956



0.19Warrants exercised


---



---Warrants cancelled


---



---Balance as of December 31, 2009


8,687,956


$
0.48Warrants issued


850,000



0.14Warrants exercised


---



---Warrants cancelled


---



---Balance as of December 31, 2010


9,537,956


$
0.45





Of the warrant shares subject to exercise as of December 31, 2010, expiration of the right to exercise is as follows:




Date of Expiration

Number of Warrant Shares of Common Stock Subject to ExpirationAugust 30, 2011


1,125,000December 6, 2011


1,670,000July 23, 2014


785,723May 15, 2015


5,357,233December 1, 2015


600,000Total


9,537,956





For the year ended December 31, 2010, the Company issued warrants to purchase up to an aggregate of 850,000 shares of our common stock which consisted (i) of a warrant issued to Rodman & Renshaw, as compensation for acting as our exclusive placement agent in the February Offering, to purchase up to an aggregate of 250,000 shares of our common stock at an exercise price of $0.25 per share and (ii) of warrants issued to two consultants, as compensation for their services, to purchase up to an aggregate of 600,000 shares of our common stock at an exercise price of $0.09 per share.








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NOTE 12.
EARNINGS PER SHARE





Basic and Diluted Net Loss Per Share





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





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





2010


2009Antidilutive warrants to purchase common stock


9,537,956



8,687,956Antidilutive options to purchase common stock


4,356,000



3,306,000Restricted vesting common stock


95,038



405,882Total


13,988,994



12,399,838





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NOTE 13.
SHARE BASED COMPENSATION





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





We account for share-based compensation under ASC Topic 718, Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors 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 years ended December 31:





2010


2009Incentive Stock OptionsExpected volatility  (1)


86.5
%


---Risk-fee interest rate %  (2)


2.27
%


---Expected term (in years)


6.0



---Dividend yield  (3)


0.0
%


---Nonstatutory Stock OptionsExpected volatility  (1)


86.9
%


73.7
%Risk-fee interest rate %  (2)


2.50
%


1.79
%Expected term (in years)


7.2



3.0Dividend yield  (3)


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 years ended December 31:





2010


2009Incentive Stock OptionsQuantity


100,000



---Weighted average fair value per share

$
0.12



---Fair value

$
11,819



---Nonstatutory Stock OptionsQuantity


1,800,000



75,000Weighted average fair value per share

$
0.13


$
0.14Fair value

$
229,711


$
10,672





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Stock Options (Incentive and Nonstatutory)





The following table summarizes share-based compensation related to stock options for the years ended December 31:





2010


2009Research and development

$
103,701


$
244,367Selling, general and administrative


176,654



1,047,581Total share-based compensation expense

$
280,355


$
1,291,948





At December 31, 2010, the balance of unearned share-based compensation to be expensed in future periods related to unvested stock option awards, as adjusted for expected forfeitures, is approximately $253,891.  The period over which the unearned share-based compensation is expected to be recognized is approximately three years.





The following table summarizes the stock options outstanding and the number of shares of common stock subject to exercise as of December 31, 2010 and the changes therein during the two years then ended:





Stock Options


Weighted Average Exercise Price per ShareOutstanding as of December 31, 2008


3,706,000


$
2.37Granted


75,000



0.29Forfeited/cancelled


(475,000
)


2.25Exercised


---



---Outstanding as of December 31, 2009


3,306,000



2.34Granted


1,900,000



0.16Forfeited/cancelled


(850,000
)


3.73Exercised


---



---Outstanding as of December 31, 2010


4,356,000


$
1.12








The following table presents the stock option grants outstanding and exercisable as of December 31, 2010:





Options Outstanding


Options ExercisableStock Options Outstanding


Weighted Average Exercise Price per Share


Weighted Average Remaining Contractual Life in Years


Stock Options Exercisable


Weighted Average Exercise Price per Share2,740,000


$
0.39



7.9



1,471,250


$
0.59565,000



1.58



6.5



565,000



1.58881,000



2.44



3.7



772,980



2.46170,000



4.40



6.2



170,000



4.404,356,000


$
1.12



6.8



2,979,230


$
1.48





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Restricted Stock Awards





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





The following table summarizes share-based compensation related to restricted stock awards for the years ended December 31:





2010


2009Research and development

$
32,750


$
75,872Selling, general and administrative


53,019



247,526Total share-based compensation expense

$
85,769


$
323,398





At December 31, 2010, the balance of unearned share-based compensation to be expensed in future periods related to restricted stock awards, as adjusted for expected forfeitures, is approximately $39,990. The period over which the unearned share-based compensation related to restricted stock awards is expected to be recognized is approximately two years.





The following table summarizes the non-vested restricted stock awards outstanding and the number of shares of common stock subject to potential issue as of December 31, 2010 and the changes therein during the two years then ended:


Restricted stock


Weighted Average Grant Date Fair ValueOutstanding as of December 31, 2008


154,918


$
2.70Granted


871,530



0.19Forfeited/cancelled


(30,628
)


0.26Exercised/issued


(589,938
)


0.62Outstanding as of December 31, 2009


405,882


$
0.51Granted


---



---Forfeited/cancelled


(7,500
)


0.85Exercised/issued


(303,344
)


0.37Outstanding as of December 31, 2010


95,038


$
0.95





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Summary of Plans





2006 Equity Incentive Plan





In March 2006, our board of directors (“Board”) adopted and our stockholders approved our 2006 Equity Incentive Plan (“Incentive Plan”), which initially provided for the issuance of up to 2 million shares of our Common Stock pursuant to stock option and other equity awards.  At the annual meetings of the stockholders held on May 8, 2007, December 17, 2009, and on June 15, 2010, our stockholders approved amendments to the Incentive Plan to increase the total number of shares of Common Stock issuable under the Incentive Plan pursuant to stock options and other equity awards by 4 million shares, 3 million shares, and 3 million shares, respectively.





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, 2010, we had granted options to purchase 6,110,000 shares of Common Stock since the inception of the Incentive Plan, of which 4,356,000 were outstanding at a weighted average exercise price of $1.12 per share and we had granted awards for 1,029,242 shares of restricted stock since the inception of the Incentive Plan, of which 95,038 were outstanding.  As of December 31, 2010, there were 6,600,680 shares that remained available for future grant under our Incentive Plan.








NOTE 14.
EMPLOYMENT BENEFIT PLAN







The Company maintains a defined contribution or 401(k) Plan for its 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.  The Company may make discretionary matching contributions as well as discretionary profit-sharing contributions to the 401(k) Plan.  The Company’s 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.  The Company contributed $41,359 and $79,739 to the 401(k) Plan during the years ended December 31, 2010 and 2009, respectively.





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NOTE 15.
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. Deferred tax assets as of December 31, 2010, of $14,655,516 were reduced to zero, after considering the valuation allowance of $14,655,516, since there is no assurance of future taxable income.  As of December 31, 2010 we have consolidated net operating loss carryforwards (“NOL”) and research credit carryforwards for income tax purposes of approximately $38,938,172 and $443,785, 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

Carryforwards2021

$
34,248


$
---2023


95,666



---2024


910,800



13,5842025


1,687,528



21,5632026


11,950,281



60,7972027


3,431,365



85,0522028


8,824,940



139,7532029


6,889,761



81,9402030


5,113,583



41,096Total

$
38,938,172


$
443,785





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 and 2006 which may significantly limit the Company’s ability to utilize its NOL and tax credit carryforwards against taxable earnings in future periods.  Ownership changes in future periods may place additional limits on the Company’s ability to utilize NOLs and tax credit carryforwards.








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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, 2010 and 2009 are as follows:





2010


2009Deferred tax assets:Net operating loss carryforwards

$
13,962,815


$
12,173,632Intangible assets


318,809



504,401Other


443,994



402,689Total gross deferred tax assets


14,725,618



13,080,722Deferred tax liabilities:Property and equipment


70,102



95,451Total gross deferred tax liabilities


70,102



95,451Net total of deferred assets and liabilities


14,655,516



12,985,271Valuation allowance


(14,655,516
)


(12,985,271
)Net deferred tax assets

$
---


$
---





The valuation allowance increased by $1,670,245 and $2,798,244 in 2010 and 2009, respectively.





The following a reconciliation of the expected statutory federal income tax rate to our actual income tax rate for the year ended December 31:





2010


2009Expected income tax (benefit) at federal statutory tax rate -35%

$
( 1,922,141
)

$
( 2,952,367
)Permanent differences


132,387



540,951Research tax credits


(41,096
)


(81,940
)Amortization of deferred start up costs


---



---Valuation allowance


1,830,850



2,493,356Income tax expense

$
---


$
---





Effective January 1, 2007, the Company adopted ASC Topic 740, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for 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 the company has 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, the company 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.  The Company 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.





The Company files income tax returns in the U.S. federal and state of Texas jurisdictions.  The Company is no longer subject to tax examinations for years before 2007.  The Company does not believe there will be any material changes in our unrecognized tax positions over the next 12 months.  The Company’s policy is that we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.  As of the date of adoption of ASC 740, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits nor was any interest expense recognized during the period.  The liability for unrecognized tax benefits is zero at December 31, 2010 and 2009.


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NOTE 16.
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 continues until April 1, 2013.  The lease currently requires a minimum monthly lease obligation of $9,330, which is inclusive of monthly operating expenses, that continues through April 1, 2011 and at such time increases to $9,776, which is inclusive of monthly operating expenses, for the duration of the lease.





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





The future minimum lease payments are as follows as of December 31, 2010:





Calendar Years

Future Lease Expense2011

$
122,6832012


126,2362013


38,2542014


8,9262015


744Total

$
296,843





Rent expense for our operating leases amounted to $118,562 and $108,556 for the years ended December 31, 2010 and 2009, respectively.





Indemnification





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





In accordance with our restated articles of incorporation and our amended and restated bylaws, we have indemnification obligations to our officers and directors for certain events or occurrences, subject to certain limits, while they are serving at our request in their respective capacities. There have been no claims to date and we have a director and officer insurance policy that 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 December 31, 2010, the Company is party to employment agreements with its Vice President and Chief Financial Officer, Terrance K. Wallberg, as well as other key executives including Daniel G. Moro, Vice President – Polymer Drug Delivery and John V. St. John, Ph.D., Vice President - Research and Development.  The employment agreements with Messrs. Wallberg, Moro, and St. John each have a term of one year and include an automatic one-year term renewal for each year thereafter.  Each employment agreement provides for a base salary, bonus, stock options, stock grants, and eligibility for Company provided benefit programs.  Under certain circumstances, the employment agreements provide for certain severance benefits in the event of termination or a change in control.  The employment agreements also contain non-solicitation, confidentiality and non-competition covenants, and a requirement for the assignment of certain invention and intellectual property rights to the Company.


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Separation Agreements





As of December 31, 2010, the Company continues to be a party to a separation agreement with Renaat Van den Hooff, the Company’s former Chief Executive Officer, dated June 4, 2010.  Pursuant to the terms of the separation agreement the Company provides or has provided, as applicable, certain benefits to Mr. Van den Hooff, including: (i) payments of $12,500 per month for a period of eighteen (18) months; (ii) a non-statutory stock option to purchase up to 300,000 shares of the Company’s common stock, which option is immediately exercisable in full and at any time and from time to time through June 4, 2015 at a per share exercise price of $0.14 (the closing price of the Company’s common stock on June 4, 2010); (iii) full acceleration of all vesting schedules for all shares of restricted stock of the Company held by Mr. Van den Hooff; and (iv) for a period of eighteen (18) months following June 4, 2010 the Company is required to maintain and provide coverage under Mr. Van den Hooff’s existing health coverage plan.  The separation agreement contains a mutual release of claims and other standard provisions.





As of December 31, 2010, the Company continues to be a party to a separation agreement with Kerry P. Gray, dated March 9, 2009.  Mr. Gray currently serves as the Company’s Chairman of the Board, Chairman of the Board’s Executive Committee, Chief Executive Officer, and President.  Pursuant to the terms of the separation agreement, the Company provides or has provided, as applicable, certain benefits to Mr. Gray, including: (i) payments totaling $400,000 during the initial 12 month period following March 9, 2009; (ii) commencing March 1, 2010 and continuing for a period of forty-eight (48) months, the Company has and will continue to pay to Mr. Gray a payment of $12,500 per month; (iii) full acceleration of all vesting schedules for all outstanding Company stock options and shares of restricted stock of the Company held by Mr. Gray, with all such Company stock options remaining exercisable by Mr. Gray until March 1, 2012, provided that Mr. Gray forfeited 300,000 stock options previously held by him; and (iv) for a period of twenty-four (24) months following March 9, 2009 the Company is required to maintain and provide coverage under Mr. Gray’s existing health coverage plan.  The separation agreement contains a mutual release of claims, certain stock lock-up provisions, and other standard provisions.





Milestone Payments





We are subject to paying Access Pharmaceuticals, Inc. (“Access”) for certain milestones based on our achievement of certain annual net sales, cumulative net sales, and/or our having reached certain defined technology milestones including licensing agreements and advancing products to clinical development.  As of December 31, 2010, the future milestone obligations that we are subject to paying Access, if the milestones related thereto are achieved, total $4,750,000.  Such milestones are based on total annual sales of 20 and 40 million dollars of certain products, annual sales of 20 million dollars of any one certain product, and cumulative sales of such products of 50 and 100 million dollars.





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








NOTE 17.
LEGAL PROCEEDINGS





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


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NOTE 18.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)





The following table contains condensed information from the Company’s Consolidated Statements of Operations for each quarter of the years ended December 31, 2010 and 2009. The Company has derived this data from its unaudited quarterly financial statements. We believe that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.





First Quarter


Second Quarter


Third Quarter


Fourth Quarter2010Revenues

$
235,230


$
231,634


$
61,617


$
1,028,876Costs and expenses


1,529,861



1,591,857



1,253,929



1,317,543Operating (loss)


(1,294,631
)


(1,360,223
)


(1,192,312
)


(288,667
)Other income (expense)


(7,867
)


(865,745
)


(15,810
)


(9,338
)Net (loss)

$
(1,302,498
)

$
(2,225,968
)

$
(1,208,122
)

$
(298,005
)Basic and diluted net (loss) per common share

$
(0.02
)

$
(0.03
)

$
(0.01
)

$
(0.00
)2009Revenues

$
168,729


$
136,094


$
130,234


$
232,892Costs and expenses


3,304,952



3,015,058



1,683,714



1,199,141Operating (loss)


(3,136,223
)


(2,878,964
)


(1,553,480
)


(966,249
)Other income (expense)


14,554



18,945



4,750



(729,051
)Net (loss)

$
(3,121,669
)

$
(2,860,019
)

$
(1,548,730
)

$
(1,695,300
)Basic and diluted net (loss) per common share

$
(0.05
)

$
(0.04
)

$
(0.02
)

$
(0.02
)





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NOTE 19.
SUBSEQUENT EVENTS





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





On January 3, 2011, we entered into a Securities Purchase Agreement with an institutional investor whereby we agreed to sell and issue to the investor the following securities (the “January Offering”):




§
5,000,000 shares of our common stock, par value $0.001 per share; and§
Warrants to purchase up to 1,750,000 shares of our common stock (the “Warrants”).


The Warrants have an initial exercise price of $0.102 per share, and may be exercised at any time and from time to time on or after July 6, 2011 through and including July 6, 2016.





On January 6, 2011, we closed the January Offering and received aggregate net proceeds of approximately $410,000 after deducting placement fees and offering expenses payable by us (and excluding any proceeds from exercise of the Warrants).





Rodman & Renshaw, LLC, acting as our exclusive placement agent pursuant to an engagement letter dated November 9, 2009, received a placement fee of $35,000 (equal to 7% of the aggregate gross proceeds of the January Offering) as well as compensation warrants to purchase up to an aggregate of 250,000 shares (equal to 5% of the aggregate number of shares sold in the January Offering) of our common stock at an exercise price of $0.128 per share (equal to 125% of the then public offering price per share).  The compensation warrants will expire on July 23, 2014 and will otherwise comply with Rule 5110 of the Financial Institutions Regulatory Authority.





The offering and sale of the above shares and warrants was made 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 January 5, 2011.








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EXHIBIT INDEX





Exhibit

Number

Description of Document3.1

Restated Articles of Incorporation dated November 5, 2007 (8)3.2

Amended and Restated Bylaws dated December 5, 2008 (10)10.1

Agreement and Plan of Merger and Reorganization dated October 12, 2005 by and among the Registrant, Uluru Acquisition Corp., and ULURU Delaware Inc. (1)10.2

Asset Sale Agreement dated October 12, 2005 by and between ULURU Delaware Inc. and Access Pharmaceuticals, Inc. (3)10.3

Patent Assignment Agreement dated October 12, 2005 by and between ULURU Delaware Inc. and Access Pharmaceuticals, Inc. (3)10.4

License Agreement dated October 12, 2005 by and between ULURU Delaware Inc. and Access Pharmaceuticals, Inc. (3)10.5

Lease Agreement dated January 31, 2006 by and between ULURU Delaware Inc. and Addison Park Ltd. (3)10.6

License Agreement dated August 14, 1998 by and between ULURU Delaware Inc. and Strakan Ltd. (3)10.7

License and Supply Agreement dated April 15, 2005 by and between ULURU Delaware Inc. and Discus Dental. (3)10.8

Amendment to License and Supply Agreement dated November 18, 2005 by and between ULURU Delaware Inc. and Discus Dental. (3)10.9
*
Employment Agreement dated January 1, 2006 by and between ULURU Delaware Inc. and Terrance K. Wallberg. (3)10.10
*
Employment Agreement dated January 1, 2006 by and between ULURU Delaware Inc. and Daniel G. Moro. (3)10.11

Warrant to Purchase Common Stock of Uluru Inc. issued to Prenox, LLC, dated August 30, 2006. (4)10.12

Agreement dated August 30, 2006 by and between Uluru Inc. and ULURU Delaware Inc. (4)10.13
*
Uluru Inc. 2006 Equity Incentive Plan (2)10.14

Agreement dated December 6, 2006 by and among the Registrant, ULURU Delaware Inc., Prenox, LLC, and Cornell Capital, LP. (5)10.15

Common Stock Purchase Agreement dated December 6, 2006 by and among the Registrant and the purchasers’ party thereto. (5)10.16

Investor Rights Agreement dated December 6, 2006 by and among the Registrant and the purchasers’ party thereto. (5)10.17

Amendment to Asset Sale Agreement dated December 8, 2006 by and between ULURU Delaware Inc. and Access Pharmaceuticals, Inc. (5)10.18
*
Employment Agreement dated December 1, 2006 by and between ULURU Delaware Inc. and John V. St. John, PhD. (6)10.19

License and Supply Agreement dated February 6, 2007 by and between DexoBiopharm LTD and ULURU Inc. (7)10.20
*
Employment Agreement dated September 25, 2007 by and between ULURU Delaware Inc. and Renaat Van den Hooff. (9)10.21

License and Supply Agreement dated November 17, 2008 by and between Meda AB and ULURU Inc. (11)10.22
*
Separation Agreement dated March 9, 2009 by and between ULURU Inc. and Kerry P. Gray. (12)10.23

Note Purchase Agreement dated March 31, 2009 by and between ULURU Inc. and York Pharma, plc. (12)10.24

Indemnification Agreements dated July 10, 2009 by and between ULURU Inc. and its current directors. (13)10.25

Indemnification Agreement dated July 13, 2009 by and between ULURU Inc. and Renaat Van den Hooff. (14)10.26

Indemnification Agreement dated July 13, 2009 by and between ULURU Inc. and Terrance K. Wallberg. (14)10.27

Forbearance Agreement dated July 22, 2009 by and between ULURU Inc. and York Pharma, plc. (15)10.28

Engagement letter dated November  9, 2009 by and between ULURU Inc. and Rodman & Renshaw, LLC (16)10.29

Securities and Purchase Agreement dated November 11, 2009 by and between ULURU Inc. and the purchasers’ party thereto. (16)10.30

Common Stock Purchase Warrants dated November 16, 2009 by and between ULURU Inc. and the purchasers’ party thereto. (16)10.31

Securities and Purchase Agreement dated February 2, 2010 by and between ULURU Inc. and the purchasers’ party thereto. (17)10.32
*
Separation Agreement dated June 4, 2010 by and between ULURU Inc. and Renaat Van den Hooff. (18)10.33

Acquisition and Licensing Agreement dated June 25, 2010 by and between ULURU Inc., Strakan International Limited and Zindaclin Limited. (18)21.1
**
Subsidiaries of ULURU Inc.23.1
**
Consent of Independent Registered Public Accounting Firm31.1
**
Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Amended31.2
**
Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Amended32.1
**
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
**
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002-----------------------------------------(1)

Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 18, 2005.(2)

Incorporated by reference to the Company’s Definitive Schedule 14C filed on March 1, 2006.(3)

Incorporated by reference to the Company’s Form 8-K filed on March 31, 2006.(4)

Incorporated by reference to the Company’s Form 10-QSB filed on November 20, 2006.(5)

Incorporated by reference to the Company’s Form SB-2 Registration Statement filed on December 15, 2006.(6)

Incorporated by reference to the Company’s Form SB-2/A Registration Statement filed on February 9, 2007.(7)

Incorporated by reference to the Company’s Form 10-QSB filed on May 15, 2007.(8)

Incorporated by reference to the Company’s Form 8-K filed on November 6, 2007.(9)

Incorporated by reference to the Company’s Form 10-QSB filed on November 13, 2007.(10)

Incorporated by reference to the Company’s Form 8-K filed on December 11, 2008.(11)

Incorporated by reference to the Company’s Form 10-K filed on March 30, 2009.(12)

Incorporated by reference to the Company’s Form 10-Q filed on May 15, 2009.(13)

Incorporated by reference to the Company’s Form 8-K filed on July 10, 2009.(14)

Incorporated by reference to the Company’s Form 8-K filed on July 14, 2009.(15)

Incorporated by reference to the Company’s Form 8-K filed on July 27, 2009.(16)

Incorporated by reference to the Company’s Form 8-K filed on November 12, 2009.(17)

Incorporated by reference to the Company’s Form 8-K filed on February 3, 2010.(18)

Incorporated by reference to the Company’s Form 10-Q filed on August 16, 2010.*
Management contract or compensation plan arrangements.**
Filed herewith.





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