NOTE 18.

COMMITMENTS AND CONTINGENCIES

Operating Leases

On January 31, 2006 we entered into a lease agreement for office and laboratory space in Addison, Texas. The lease commenced on April 1, 2006 and originally continued until April 1, 2013. The lease required a minimum monthly lease obligation of $9,330, which is inclusive of monthly operating expenses, until April 1, 2011 and at such time increased to $9,776, which is inclusive of monthly operating expenses. On February 22, 2013, we executed an Amendment to Lease Agreement (the "Lease Amendment") that renewed and extended our lease until March 31, 2015. The Lease Amendment requires a minimum monthly lease obligation of $9,128, which is inclusive of monthly operating expenses, until March 31, 2014 and at such time, will increase to $9,314, which is inclusive of monthly operating expenses. The Lease Amendment includes an option whereby we may convert the term of our lease renewal from a two year term to a five year term by providing written notice on or before October 1, 2013. If so elected, the minimum monthly lease obligation for the remainder of the first year shall be reduced to $8,751, which is inclusive of monthly operating expenses, effective on the first day of the month following our election and the minimum monthly lease obligation shall increase annually every April 1^st thereafter by $186 per month until March 31, 2018.

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

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

Calendar Years	Future Lease Expense
2013 (Three months)	$	29,811
2014		120,917
2015		28,881
2016		---
2017		---
Total	$	179,609

Rent expense for our operating leases amounted to $31,083 and $32,971 for the three months ended September 30, 2013 and 2012, respectively, and $86,125 and $98,111 for the nine months ended September 30, 2013 and 2012, respectively.

Employment Agreements

As of September 30, 2013, we are party to employment agreements with our Vice President and Chief Financial Officer, Terrance K. Wallberg, and Daniel G. Moro, Vice President – Polymer Drug Delivery. The employment agreements with Messrs. Wallberg and Moro each have a term of one year and include an automatic one-year term renewal for each year thereafter. Each employment agreement provides for a base salary, bonus, stock options, stock grants, and eligibility for Company provided benefit programs. Under certain circumstances, the employment agreements provide for certain severance benefits in the event of termination or a change in control. The employment agreements also contain non-solicitation, confidentiality and non-competition covenants, and a requirement for the assignment of certain invention and intellectual property rights to the Company.

Separation Agreement

As of September 30, 2013, we continue to be a party to a separation agreement with Kerry P. Gray, dated March 9, 2009. Mr. Gray currently serves as our Chairman of the Board, Chairman of the Board's Executive Committee, Chief Executive Officer, and President. Pursuant to the terms of the separation agreement, we provide or have 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, 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 exercisable by Mr. Gray having expired as of March 1, 2012; and (iv) for a period of twenty-four (24) months following March 9, 2009 we were 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.

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.

Related Party Transactions

On January 17, 2013, the Board of Directors of the Company appointed Helmut Kerschbaumer and Klaus Kuehne to each serve as a director of the Company. Messrs. Kerschbaumer and Kuehne currently serve as directors of IPMD, Altrazeal Trading, Ltd and Melmed Holding AG and thereby have control of, and make investment and business decisions on behalf of IPMD, Altrazeal Trading Ltd. and Melmed Holding AG (collectively, the "Euro Distributors").

For the nine months ended September 30, 2013 and 2012, respectively, the Company had product sales, in approximate numbers, of $143,000 and $22,000 with Euro Distributors, which represented 59% and 11% of our total revenues. As of September 30, 2013 and December 31, 2012, respectively, Euro Distributors had an outstanding accounts receivable, in approximate numbers, of $82,000 and $101,000, which represented 35% and 77% of our total outstanding accounts receivables.

On December 21, 2012, we entered into a Securities Purchase Agreement with IPMD as described in more detail in Note 12.

Related Party Obligations

Since 2011, our named executive officers and certain key executives have temporarily deferred portions of their compensation as part of a plan to conserve the Company's cash and financial resources.

As of September 30, 2013, the following table summarizes the compensation temporarily deferred since 2011:

Name	2013			2012		2011		Total
Kerry P. Gray (1)	$	(23,500	)	$	220,673	$	140,313	$	337,486
Terrance K. Wallberg		(11,539	)	$	24,230	$	36,539	$	49,230
Key executives		(20,000	)	$	27,253	$	20,986	$	28,239
Total	$	(55,039	)	$	272,156	$	197,838	$	414,955

(1)

During 2013, Mr. Gray temporarily deferred compensation of $169,000 which consisted of $11,500 earned pursuant to a Separation Agreement and $157,500 for his duties as Chairman of the Executive Committee of the Company's Board of Directors. During 2013, Mr. Gray was also repaid $192,500 of temporarily deferred compensation, of which $180,000 was used by Mr. Gray for funding required pursuant to the March 2013 Offering.

The Company's obligation for temporarily deferred compensation was $414,955, of which $275,000 was included in accounts payable and $139,955 was included in accrued liabilities, and $469,994 of which $310,000 was included in accounts payable and $159,994 was included in accrued liabilities, as of September 30, 2013 and December 31, 2012, respectively.

Contingent Milestone Obligations

We are subject to paying Access Pharmaceuticals, Inc. ("Access") for certain milestones based on our achievement of certain annual net sales, cumulative net sales, and/or our having reached certain defined technology milestones including licensing agreements and advancing products to clinical development. As of September 30, 2013, the future milestone obligations that we are subject to paying Access, if the milestones related thereto are achieved, total $4,750,000. Such milestones are based on total annual sales of 20 and 40 million dollars of certain products, annual sales of 20 million dollars of any one certain product, and cumulative sales of such products of 50 and 100 million dollars.

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