UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
March 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For transition period from
to
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Commission File Number:
001-33216
OCULUS INNOVATIVE SCIENCES,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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68-0423298
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1129 N. McDowell
Blvd.
Petaluma, California 94954
(Address
of principal executive offices) (Zip Code)
(707) 782-0792
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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common stock, $0.0001 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
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 o No þ
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 o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data file required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 229.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of September 30, 2008, the aggregate market value of
voting and non-voting common stock held by non-affiliates of the
registrant was approximately $28.0 million, based on the
closing price of the common stock as reported on the NASDAQ
Global Market for that date.
There were 20,136,722 shares of the registrants
common stock issued and outstanding on June 4, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Item 10 (as to directors and Section 16(a) Beneficial
Ownership Reporting Compliance), 11, 12, 13 and 14 of
Part III incorporate by reference information from the
registrants proxy statement to be filed with the
Securities and Exchange Commission in connection with the
solicitation of proxies for the registrants 2009 Annual
Meeting of Stockholders.
PART I
This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
When used in this report, the words expects,
anticipates, suggests,
believes, intends,
estimates, plans, projects,
continue, ongoing,
potential, expect, predict,
believe, intend, may,
will, should, could,
would and similar expressions are intended to
identify forward-looking statements. These are statements that
relate to future periods and include statements about, but not
limited to: the progress and timing of our development programs
and regulatory approvals for our products; the benefits and
effectiveness of our products; the ability of our products to
meet existing or future regulatory standards; the progress and
timing of clinical trials and physician studies; our
expectations related to the use of our cash reserves; our
expectations and capabilities relating to the sales and
marketing of our current products and our product candidates;
our ability to compete with other companies that are developing
or selling products that are competitive with our products; the
establishment of strategic partnerships for the development or
sale of products; the timing of commercializing our products;
our relationship with Quimica Pasteur; our ability to penetrate
markets through our sales force, distribution network,
and strategic business partners and generate attractive
margins; the expansion of our sales force and distribution
network; the ability to attain specified revenue goals within a
specified time frame, if at all, or to reduce costs; the outcome
of discussions with the FDA and other regulatory agencies; the
content and timing of submissions to, and decisions made by, the
FDA and other regulatory agencies, including demonstrating to
the satisfaction of the FDA the safety and efficacy of our
products; our ability to manufacture sufficient amounts of our
product candidates for clinical trials and products for
commercialization activities; our ability to protect our
intellectual property and operate our business without
infringing on the intellectual property of others; our ability
to continue to expand our intellectual property portfolio; our
expectations about the outcome of litigation and controversies
with third parties; our ability to attract and retain qualified
directors, officers and employees; our expectations relating to
the concentration of our revenue from international sales; our
ability to expand to and commercialize products in markets
outside the wound care market; and the impact of the
Sarbanes-Oxley Act of 2002 and any future changes in accounting
regulations or practices in general with respect to public
companies.
Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties
include, but are not limited to, our ability to develop and
commercialize new products; the risk of unanticipated delays in
research and development efforts; the risk that we may not
obtain reimbursement for our existing test and any future
products we may develop; the risks and uncertainties associated
with the regulation of our products by the U.S. Food and
Drug Administration; our ability to compete against third
parties; our ability to obtain capital when needed; our history
of operating losses and the risks set forth under Risks
Related to our Business. These forward-looking statements
speak only as of the date hereof. We expressly disclaim any
obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to
reflect any change in our expectations with regard thereto or
any change in events, conditions or circumstances on which any
such statement is based except as required by law.
Corporate
Information
We incorporated under the laws of the State of California in
April 1999 as Micromed Laboratories, Inc. In August 2001, we
changed our name to Oculus Innovative Sciences, Inc. In December
2006, we reincorporated under the laws of the State of Delaware.
Our principal executive offices are located at
1129 N. McDowell Blvd., Petaluma, California, 94954,
and our telephone number is
(707) 782-0792.
We have two principal subsidiaries: Oculus Technologies of
Mexico, S.A. de C.V., organized in Mexico, and Oculus Innovative
Sciences Netherlands, B.V., organized in the Netherlands. On
January 20, 2009, we dissolved our subsidiary, Oculus
Innovative Sciences Japan, KK., organized under Japanese law.
Our fiscal year end is March 31. Our website is
www.oculusis.com. We do not intend for information on our
website to be incorporated into this
10-K.
Our
Business
We develop, manufacture and market, a family of products
intended to significantly reduce the need for antibiotics as it
prevents and treats infections in chronic and acute wounds while
simultaneously enhancing wound
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healing through modes of action unrelated to the treatment of
infection. Infection is a serious potential complication in both
chronic and acute wounds, and controlling infection is a
critical step in wound healing. Our platform technology, called
Microcyn®,
is a proprietary solution of electrically charged oxychlorine
small molecules designed to treat a wide range of organisms that
cause disease, or pathogens. These include viruses, fungi,
spores and antibiotic-resistant strains of bacteria, such as
Methicillin-resistant Staphylococcus aureus, or MRSA, and
Vancomycin-resistant Enterococcus, or VRE, in wounds. Our
device product is cleared for sale in the United States as a
510(k) medical device for wound cleaning, debridement,
lubricating, moistening and dressing; is a device under CE Mark
in Europe; is approved by the State Food and Drug
Administration, or SFDA, in China as a technology that reduces
the propagation of microbes in wounds and creates a moist
environment for wound healing; and is approved as a drug in
India and Mexico. We do not have the necessary regulatory
approvals to market Microcyn in the United States as a drug, nor
do we have the necessary regulatory clearance or approval to
market Microcyn in the U.S. as a medical device for an
antimicrobial or wound healing indication.
Clinical testing we conducted in connection with our submissions
to the FDA, as well as physician clinical studies, suggest that
our Microcyn-based product may help reduce a wide range of
pathogens from acute and chronic wounds while curing or
improving infection and concurrently enhancing wound healing
through modes of action unrelated to the treatment of infection.
These physician clinical studies suggest that our Microcyn-based
product is safe, easy to use and complementary to many existing
treatment methods in wound care. Physician clinical studies and
usage in the United States suggest that our 510(k) product may
shorten hospital stays, lower aggregate patient care costs and,
in certain cases, reduce the need for systemic antibiotics. We
are also pursuing the use of our Microcyn platform technology in
other markets outside of wound care, including in the
respiratory, ophthalmology, dental and dermatology markets.
In 2005, chronic and acute wound care represented an aggregate
of $9.6 billion in global product sales, of which
$3.3 billion was spent for the treatment of skin ulcers,
$1.6 billion to treat burns and $4.7 billion for the
treatment of surgical and trauma wounds, according to Kalorama
Information, a life sciences market research firm. In the
Kalorama Information, we believe the markets most related to our
product involve approximately $1.3 billion for the
treatment of skin ulcers, $300 million for the treatment of
burns and $700 million for the treatment of surgical and
trauma wounds. Common methods of controlling infection,
including topical antiseptics and antibiotics, have proven to be
only moderately effective in combating infection in the wound
bed. However, topical antiseptics tend to inhibit the healing
process due to their toxicity and may require specialized
preparation or handling. Antibiotics can lead to the emergence
of resistant bacteria, such as MRSA and VRE. Systemic
antibiotics may be less effective in controlling infection in
patients with disorders affecting circulation, such as diabetes,
which are commonly associated with chronic wounds. As a result,
no single treatment is used across all types of wounds and
stages of healing.
We believe Microcyn is the only known stable, anti-infective
therapeutic available in the world today that simultaneously
cures or improves infection while also promoting wound healing
through increased blood flow to the wound bed and reduction of
inflammation. Also, we believe Microcyn provides significant
advantages over current methods of care in the treatment of a
wide range of chronic and acute wounds throughout all stages of
treatment. These stages include cleaning, debridement,
prevention and treatment of infections and wound healing. We
believe that unlike antibiotics, antiseptics, growth regulators
and other advanced wound care products, Microcyn is the only
stable wound care solution that is as safe as saline, and also
cures infection while simultaneously accelerating wound healing.
Also, unlike most antibiotics, we believe Microcyn does not
target specific strains of bacteria, a practice which has been
shown to promote the development of resistant bacteria. In
addition, our products are shelf stable, require no special
preparation and are easy to use.
Our goal is to become a worldwide leader as the standard of care
in the treatment and irrigation of open wounds. We currently
have, and intend to seek additional, regulatory clearances and
approvals to market our Microcyn-based products worldwide. In
July 2004, we began selling Microcyn in Mexico after receiving
approval from the Mexican Ministry of Health, or MOH, for the
use of Microcyn as an antiseptic, disinfectant and sterilant.
Since then, physicians in the United States, Europe, India,
Pakistan, China and Mexico have conducted more than 28 physician
clinical studies assessing Microcyns use in the treatment
of infections in a variety of wound types, including
hard-to-treat wounds such as diabetic ulcers and burns. Most of
these studies were not intended to be rigorously designed or
controlled clinical trials and, as such, did not have all of the
controls required for clinical
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trials used to support a new drug application, or NDA,
submission to the FDA. A number of these studies did not include
blinding, randomization, predefined clinical end points, use of
placebo and active control groups or U.S. good clinical
practices requirements. We used the data generated from some of
these studies to support our application for the CE Mark, or
European Union certification, for wound cleaning and reduction
of microbial load. We received the CE Mark in November 2004 and
additional international approvals in China, Canada, Mexico and
India. Microcyn has also received five FDA 510(k) clearances for
use as a medical device in wound cleaning, or debridement,
lubricating, moistening and dressing, including traumatic wounds
and acute and chronic dermal lesions. Most recently, on
May 27, 2009, we received a 510(k) clearance from the FDA
to market our Microcyn Skin and Wound Gel as both a prescription
and over-the-counter formulation Additionally, on June 4,
2009, we received an expanded 510(k) label clearance from the
FDA to market our Microcyn Skin and Wound Cleanser with
preservatives as both a prescription and over-the-counter
formulation. The new prescription product is indicated for use
by health care professionals to manage the debridement of wounds
such as stage I-IV pressure ulcers, diabetic foot ulcers,
post-surgical wounds, first- and second-degree wounds, grafted
and donor sites.
In the fourth quarter of 2007, we completed a Phase II
randomized clinical trial, which was designed to evaluate the
effectiveness of Microcyn in mildly infected diabetic foot
ulcers with the primary endpoint of clinical cure or improvement
in signs and symptoms of infection according to guidelines of
Infectious Disease Society of America. We used 15 clinical sites
and enrolled 48 evaluable patients in three arms, using Microcyn
alone, Microcyn plus an oral antibiotic and saline plus an oral
antibiotic. We announced the results of our Phase II trial
in March 2008. In the clinically evaluable population of the
study, the clinical success rate at visit four (test of cure)
for patients treated with Microcyn alone was 93.3% compared to
56.3% for the Levofloxacin plus saline-treated patients. This
study was not statistically powered, but the high clinical
success rate (93.3%) and the p-value (0.033) would suggest the
difference is meaningfully positive for the Microcyn-treated
patients. Also, for this set of data, the 95.0% confidence
interval for the Microcyn-only arm ranged from 80.7% to 100.0%
while the 95.0% confidence interval for the Levofloxacin and
saline arm ranged from 31.9% to 80.6%; the confidence intervals
do not overlap, thus indicating a favorable clinical success for
Microcyn compared to Levofloxacin. At visit three (end of
treatment) the clinical success rate for patients treated with
Microcyn alone was 77.8% compared to 61.1% for the Levofloxacin
plus saline-treated patients.
We conducted a review meeting with the FDA in August 2008 to
discuss the results of our Phase II trial and our future
clinical program. Following a review of the Phase II data
on Microcyn Technology for the treatment of mildly infected
diabetic foot ulcers, the FDA agreed:
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We may move forward into the pivotal phase of our
U.S. clinical program for Microcyn Technology.
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There were no safety issues relative to moving into this next
clinical phase immediately, and carcinogenicity studies will not
be required for product approval; and
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Clinical requirements for efficacy and safety for a new drug
application, or NDA, will be appropriately accounted for within
the agreed upon pivotal trial designs.
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Two pivotal clinical trials must be completed for submission to
the FDA of an NDA, for the treatment of mildly infected diabetic
foot ulcers. Commencement of these trials will be dependent upon
the support of a strategic partner. In the event that we
successfully complete clinical trials and obtain drug approval
from the FDA, we may seek clearance for treatment of other types
of wounds. We are currently pursuing strategic partnerships to
assess potential applications for Microcyn in several other
markets and therapeutic categories, including respiratory,
ophthalmology, dermatology, dental and veterinary markets. FDA
or other governmental approvals will be required for any
potential new products or new indications.
We currently make Microcyn available, both as a prescription and
over-the-counter product, under our five 510(k) clearances in
the United States, primarily through a partnership with Advocos,
a specialty U.S. contract sales organization. In the
quarter ending December 31, 2008, we initiated an
aggressive commercialization into the podiatry market in the
United States. In the second quarter of 2009, we expanded this
sales effort to include wound care centers, hospitals, nursing
homes, urgent care clinics and home healthcare. Additionally, we
are in the process of introducing Microcyn-based consumer
healthcare products both in the United States and abroad.
Initially, these will include an oral care rinse, nasal care
wash and a skin hydrogel.
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On January 26, 2009, we announced a strategic
revenue-sharing partnership with Vetericyn, Inc. Pursuant to
this agreement, we granted Vetericyn, Inc. exclusive rights to
market the Microcyn Technology in the North American animal
healthcare market. As part of this agreement, we will not incur
marketing or sales expenses, but will share in all revenues.
Our partner, Union Springs Pharmaceuticals, a subsidiary of the
Drug Enhancement Company of America, or DECA, has marketed
MyClyns, an over-the-counter first responder pen
application, with Microcyn in the United States since
January 2008.
We have announced the development of a Microcyn hydrogel which
we recieved a 510(k) approval in the U.S. We will pursue
additional approvals in Europe, China, India and Mexico and we
will initiate commercialization upon obtaining these approvals.
We currently rely on exclusive agreements with country-specific
distributors for the sale of Microcyn-based products in Europe.
In Mexico, we sell Microcyn through a network of distributors
and through a contract sales force dedicated exclusively to
selling Microcyn, including salespeople, nurses and clinical
support staff. In India, we sell through Alkem, the fifth
largest pharmaceutical company in India. The first full year of
Microcyn product distribution in India was in 2008. In China, we
signed a distribution agreement with China Bao Tai, which
secured marketing approval from the SFDA in March 2008. China
Bao Tai is working with Sinopharm, the largest pharmaceutical
group in China, to distribute Microcyn-based products to
hospitals, doctors and clinics. China Bao Tai and Sinopharm are
in process of providing samples broadly to many hospitals and
doctors throughout many provinces in China in anticipation of a
product launch after price registration has been completed.
Market
Opportunity Key Limitations of Existing
Treatments
Commonly used topical antiseptics and antibiotics have
limitations and side effects that may constrain their usage. For
example:
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antibiotics and antiseptics can kill bacteria and cure infection
but do not independently accelerate wound healing;
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many antiseptics, including Betadine, hydrogen peroxide and
Dakins solution, are toxic, can destroy human cells and
tissue, may cause allergic reactions and can impede the wound
healing process;
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silver-based products are expensive and require precise dosage
and close monitoring by trained medical staff to minimize the
potential for tissue toxicity, allergic reactions and bacterial
resistance;
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the increase in antibiotic-resistant bacterial strains, such as
MRSA and VRE, have compromised the effectiveness of some widely
used topical and systemic antibiotics, including Neosporin and
Bacitracin;
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oral and systemic antibiotics often are not effective in
treating topical infections especially if the patient does not
have adequate blood flow to the wound and they can also cause
serious side effects; and
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growth regulators, skin substitutes and vacuum-assisted closure
accelerate wound healing but do not cure infection.
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Our
Solution
We believe Microcyn has potential advantages over current
methods of care in the treatment of chronic and acute wounds,
including the following:
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Reduces Need for Antibiotics While Curing
Infection. Our Phase II results and several
physician based studies suggest that Microcyn may be effective
in curing and improving the signs and symptoms of infections
while reducing the use of antibiotics.
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Accelerates Wound Healing. Based on numerous
physician based studies and usage feedback from doctors, we
believe that Microcyn may accelerate the wound healing process
independently of the benefits of curing the infection.
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Wound Care Solution. Our 510(k) product is
cleared as a medical device for sale in the United States for
wound cleaning, or debridement, lubricating, moistening and
dressing. Laboratory testing and physician clinical studies
further suggest that our 510(k) Microcyn product is effective
against a wide range of bacteria that causes infection in a
variety of acute and chronic wounds. In addition, because of its
mechanism of action, we believe Microcyn does not target
specific strains of bacteria, the practice of which has been
shown to promote the development of resistant bacteria. In
physician clinical studies, our 510(k) Microcyn product has been
used in conjunction with other wound care therapeutic products.
Data from these studies suggest that patients generally
experienced less pain, improved mobility and physical activity
levels and better quality of life.
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Non-irritating. Our 510(k) product label
states that our 510(k) product, which is based on our Microcyn
technology, is non-irritating and non-sensitizing to the skin
and eyes. Throughout all our clinical trials and physician
clinical studies to date and since our first commercial sale of
Microcyn in Mexico in 2004, we have received no reports of
serious adverse events related to the use of Microcyn products
when used according to label instructions.
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Ease of Use. Our 510(k) product label states
that our 510(k) product requires no special handling
precautions. Our products require no preparation before use or
at time of disposal, and caregivers can use our products without
significant training. In addition, Microcyn can be stored at
room temperature. Unlike other oxychlorine solutions, which are
typically stable for not more than 48 hours, our laboratory
tests show that Microcyn has a shelf life of up to two years
depending on the size and type of packaging. Our products are
also designed to be complementary to most advanced technologies
to treat serious wounds, such as negative-pressure wound
therapy, jet lavage and tissue-engineered skin substitutes.
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Cost-Effectiveness. The treatment of many
wounds requires extended hospitalization and care, including the
use of expensive systemic antibiotics. Infection prolongs the
healing time and necessitates increased use of systemic
antibiotics. We believe that Microcyn has the potential to cure
infection, accelerate healing time and, in certain cases, may
help reduce the need for systemic antibiotics, reduce the need
for amputation and lead to earlier hospital discharge, thereby
lowering overall patient cost.
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Microcyn
Platform Technology
Mechanism
of Action
We believe Microcyns ability to reduce the use of
antibiotics through prevention and treatment of infections while
promoting wound healing is based on its uniquely engineered
chemistry. As a result of our patented manufacturing process,
Microcyn is a proprietary solution of oxychlorine compounds
that, among other things, interact with and inactivate surface
proteins on cell walls and membranes of microorganisms and
viruses. The function of these proteins are varied and play
significant roles in cell communication, nutrient and waste
transport and other required functions for cell viability. Once
Microcyn surrounds single cell microorganisms, it damages these
proteins, causing the cell membrane to rupture, leading to cell
death, which we believe is caused by increased membrane
permeability and induced osmotic pressure imbalance. We continue
to study the exact mechanisms by which protein and structural
components of the bacterial cell walls and membranes, and the
protein shell that surrounds a virus, are affected by Microcyn.
This destruction of the cell appears to occur through a
fundamentally different process than that which occurs as a
result of contact with a bleach-based solution because
experiments have demonstrated that Microcyn kills
bleach-resistant bacteria. However, we believe the solution
remains non-irritating to human tissues because human cells have
unique protective mechanisms, are interlocked, and prevent
Microcyn from targeting and surrounding single cells topically
on the body. Our laboratory tests suggest that our solution does
not penetrate and kill multi-cellular organisms and does not
damage or affect human DNA.
In laboratory tests, Microcyn has been shown to destroy certain
biofilms. A biofilm is a complex cluster of microorganisms or
bacteria marked by the formation of a protective shell, allowing
the bacteria to collect and proliferate. It is estimated that
over 65% of microbial infections in the body involve bacteria
growing as a biofilm. Bacteria living in a biofilm typically
have significantly different properties from free-floating
bacteria of the same species. One result of this film
environment is increased resistance to antibiotics and to the
bodys immune system.
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In chronic wounds, biofilms interfere with the normal healing
process and halt or slow wound closure. In our laboratory
studies, Microcyn was shown to destroy two common biofilms after
five minutes of exposure.
In recently published studies, Microcyn has been shown to
significantly increase the dilation of capillaries in wounds as
indicated by higher levels of oxygen at a wound site after the
application of our product and also reduce inflammation by
inhibiting certain inflammatory responses from allergy-producing
mast cells. It is widely accepted that reducing inflammation
surrounding an injury or wound is beneficial to wound healing.
Our laboratory research suggests that Microcyns
interference with these cells is selective to only the
inflammatory response and does not interfere with other
functions of these cells.
Microcyn has demonstrated antimicrobial activity against
numerous bacterial, viral and fungal pathogens, including
antibiotic-resistant strains, as evidenced by passing results in
numerous standardized laboratory microbiology tests conducted on
our 510(k) product by a variety of certified independent testing
laboratories. Some of the pathogens against which Microcyn has
demonstrated antimicrobial activity are listed below:
Pathogen
Antibiotic-Resistant Bacteria
Vancomycin Resistant Enterococcus faecalis (VRE)
Methicillin Resistant Staphylococcus aureus (MRSA)
Other Bacteria
Acinetobacter baumanii
Aspergillus niger
Clostridium difficile
Escherichia coli
Escherichia coli O157:H7
Mycobacterium bovis
Pseudomonas aeruginosa
Salmonella typhi
Viruses
Human Coronavirus
Human Immunodeficiency Virus Type 1 HIV
Influenza A
Rhinovirus Type 37
Fungi
Candida albicans
Trichophyton mentagrophytes
In addition to the above mentioned independent laboratory
microbiology tests, a study was completed and published in the
Journal of Hospital Infection in 2005, that showed that
Microcyn exerts a wide range of antimicrobial activity
(Landa-Solis, González-Espinosa D, Guzman B, Snyder M,
Reyes-Terán G, Torres K and Gutiérrez AA. Microcyn: a
novel super-oxidized water with neutral pH and disinfectant
activity. J Hosp Infect (UK) 61:
291-299).
Current
Regulatory Approvals and Clearances
All of our current products are based on our Microcyn platform
technology. We are able to modify the chemistry of Microcyn by
changing the oxidation-reduction potential, pH level and
concentrations of specific ions or chemicals, which allows us to
manufacture a variety of solutions, each specifically designed
for maximum efficacy and safety by indication. The indications
for our products vary from country to country due to different
regulatory requirements and standards from jurisdiction to
jurisdiction. The indications below are summaries of the
indications approved by the regulatory authority or authorities
in the listed jurisdiction. The similarly named products have
similar formulations; however, they may not have identical
specifications due to varying
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requirements in different jurisdictions regulatory
agencies. The following is a list of the regulatory approvals
and clearances that Microcyn-based products have received for
our most significant or potentially significant markets:
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Approval or
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Year of Approval
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Region
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Clearance Type
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or Clearance
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Summary Indication
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United States
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510(k)
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2005
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Moistening and lubricating absorbent wound dressings for
traumatic wounds.
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510(k)
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2005
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Moistening and debriding acute and chronic dermal lesions.
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510(k)
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2006
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Moistening absorbent wound dressings and cleaning minor cuts.
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European Union
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CE Mark
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2004
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Debriding, irrigating and moistening acute and chronic wounds in
comprehensive wound treatment by reducing microbial load and
creating moist environment.
|
Mexico
|
|
Product Registration
|
|
2004
|
|
Antiseptic treatment of wounds and infected areas.
|
|
|
Product Registration
|
|
2003
|
|
Antiseptic disinfection solution for high level disinfection of
medical instruments, and/or equipment and clean-rooms, areas of
medical instruments, equipment and clean room areas.
|
Canada
|
|
Class II Medical Device
|
|
2004
|
|
Moistening, irrigating, cleansing and debriding acute and
chronic dermal lesions, diabetic ulcers and post-surgical wounds.
|
India(1)
|
|
Drug License
|
|
2006
|
|
Cleaning and debriding in wound management.
|
China
|
|
Medical Device
|
|
2008
|
|
Reduces the propagation of microbes in wounds and creates a
moist environment for wound healing.
|
United States
|
|
510(k)
|
|
2009
|
|
Management of exuding wounds such as leg ulcers, pressure
ulcers, diabetic ulcers and for the management of mechanically
or surgically debridement of wounds.
|
United States
|
|
510(k)
|
|
2009
|
|
Debridement of wounds, such as stage I-IV pressure ulcers,
diabetic foot ulcers, post surgical wounds, first and second
burns, grafted and donor sites.
|
Notes
|
|
|
(1) |
|
Drug license held by Indian distributor as required by Indian
law. |
9
Clinical
Trials
We have completed a proof-of-concept Phase II trial in the
U.S., which demonstrated the effectiveness of Microcyn in mildly
infected diabetic foot ulcers with the primary endpoint of
clinical cure and improvement of infection. We used 15 clinical
sites and enrolled 48 evaluable patients in three arms, using
Microcyn alone, Microcyn plus an oral antibiotic and saline plus
an oral antibiotic. We announced the results of our
Phase II trial in March 2008. In the clinically evaluable
population of the study, the clinical success rate at visit four
(test of cure) for Microcyn-alone-treated patients was 93.3%
compared to 56.3% for the levofloxacin plus saline-treated
patients. This study was not statistically powered, but the high
clinical success rate (93.3%) and the p-value (0.033) suggests
the difference is meaningfully positive for the Microcyn-treated
patients. Also, for this set of data, the 95.0% confidence
interval for the Microcyn only arm ranged from 80.7% to 100%
while the 95.0% confidence interval for the levofloxacin and
saline arm ranged from 31.9% to 80.6%; the confidence intervals
do not overlap, indicating a favorable clinical success for
Microcyn compared to levofloxacin. At visit 3 (end of
treatment), the clinical success rate for patients treated with
Microcyn-alone was 77.8% compared to 61.1% for the levofloxacin
plus saline-treated patients.
Physician
Clinical Studies
In addition to the Phase II trial mentioned above, several
physicians and scientists have conducted more than 28 clinical
studies of Microcyn generating data suggesting that the Microcyn
technology is non-irritating to healthy tissue, reduces
microbial load, accelerates wound healing, reduces pain,
shortens treatment time and may have the potential to reduce
costs to healthcare providers and patients. We have sponsored
many of the physicians performing these studies by supplying
Microcyn, unrestricted research grants, paying expenses or
providing honoraria. In some cases, the physicians who performed
these studies also hold equity in our Company. The studies were
performed in the United States, Europe, India, Pakistan, China
and Mexico, and used various endpoints, methods and controls
(for example, saline, antiseptics and antibiotics). These
studies were not intended to be rigorously designed or
controlled clinical trials and, as such, did not have all of the
controls required for clinical trials used to support an NDA
submission to the FDA in that they did not necessarily include
blinding, randomization, predefined clinical endpoints, use of
placebo and active control groups or U.S. good clinical
practice requirements.
In many cases the physicians who led these studies have
published articles on their studies and results. The following
table lists publications and presentations at peer-reviewed
meetings from physicians who have completed studies on the use
of Microcyn for wound care and wound irrigation.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Physician
|
|
Country
|
|
Patients
|
|
Publication
|
|
David E. Allie, M.D.(1)
|
|
U.S.
|
|
|
40
|
|
|
Allie D. Super-Oxidized Dermacyn in Lower-Extremity Wounds.
Wounds, 2006, 18 (Suppl), 3-6.
|
Tom Wolvos, M.D.(2)
|
|
U.S.
|
|
|
26
|
|
|
Wolvos TA. Advanced Wound Care with Stable, Super-Oxidized
Water. A look at how combination therapy can optimize wound
healing. Wounds, 2006, 18 (Suppl),
11-13.
|
Cheryl Bongiovanni, Ph.D.(3)
|
|
U.S.
|
|
|
8
|
|
|
Bongiovanni CM. Superoxidized Water Improves Wound Care Outcomes
in Diabetic Patients. Diabetic Microvascular Complications
Today, 2006, May-Jun:
11-14.
|
|
|
|
|
|
3
|
|
|
Bongiovanni CM. Nonsurgical Management of Chronic Wounds in
Patients with Diabetes. Journal of Vascular Ultrasound,
2006, 30:
215-218,
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Physician
|
|
Country
|
|
Patients
|
|
Publication
|
|
Luca Dalla Paola, M.D.(4)
|
|
Italy
|
|
|
218
|
|
|
Dalla Paola L, Brocco E, Senesi, A, Merico M, De Vido D,
Assaloni R, DaRos R. Super-Oxidized Solution (SOS) Therapy for
Infected Diabetic Foot Ulcers. Wounds, 2006, vol. 18:
262-270
Dalla Paola, L. Treating diabetic foot ulcers with
super-oxidized water. Wounds, 2006, 18 (Suppl),
14-16
|
Alberto Piagessi, M.D.(5)
|
|
Italy
|
|
|
33
|
|
|
Goretti C, Mazzurco S, Ambrosini Nobili L, Macchiarini S,
Tedeschi A, Palumbo F, Scatena A, Rizzo L and Piaggesi A.
Clinical Outcomes of Wide Postsurgical Lesions in the Infected
Diabetic Foot Managed With 2 Different Local Treatment Tegimes
Compared Using a Quasi-Experimental Study Design: A Preliminary
Communication. Int. J. Lower Extremity Wounds, 2007 6:
22-27.
|
Ariel Miranda, M.D.(5)
|
|
Mexico
|
|
|
64
|
|
|
Miranda-Altamirano A. Reducing Bacterial Infectious
Complications from Burn Wounds. A look at the use of Oculus
Microcyn60 to treat wounds in Mexico. Wounds, 2006, 18
(Suppl),
17-19.
|
Lenka Veverkova, M.D.(3)
|
|
Czech
Republic
|
|
|
27
|
|
|
Veverkova L, Jedlicka V, Vesely M, Tejkalova R, Zabranska
S, Capov I, Votava M. Methicilin-resistent Staphylococcus
aureus problem in health care. J Wound Healing
2005, 2:201-202.
|
Elia Ricci M.D.(6)
|
|
Italy
|
|
|
40
|
|
|
Ricci E, Astolfi S, Cassino R. Clinical results about an
antimicrobial solution (Dermacyn Wound Care) in the treatment of
infected chronic wounds. 17th Conference. EWMA Meeting
2005. Glasgow, UK. May 2-4, 2007. In preparation for publication.
|
Alfredo Barrera MD(5)
|
|
Mexico
|
|
|
40
|
|
|
Barrera-Zavala A, Guillen-Rojas M, Escobedo-Anzures J, Rendon J,
Ayala O & Gutiérrez AA. A pilot study on source
control of peritonitis with a neutral pH super
oxidized solution16th World Congress of the International,
Association of Surgeons and Gastroenterologists (IASG). Madrid,
Spain. 25th-27th May, 2006.
|
D Peterson MD
|
|
U.S.
|
|
|
5
|
|
|
Peterson D, Hermann K, Niezgoda J, Dermacyn Effective in
Treatment of Chronic Wounds with Extensive Bioburden While
Reducing Local Pain Levels. Symposium on Advanced Wound Care and
Wound Healing Society, Tampa, FL, April 28-May 1, 2007.
|
Steenvoorde, P.M.D, Van
Doorn, L.P., M.A.,
Jacobi, C.E, PhD &
Oskam, J., M.D., PhD.(3)
|
|
Netherlands
|
|
|
10
|
|
|
An unexpected effect of Dermacyn on infected leg ulcers, J
Wound Care 2007, 16:
60-61.
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Physician
|
|
Country
|
|
Patients
|
|
Publication
|
|
Fermin Martinez M.D.
|
|
Mexico
|
|
|
45
|
|
|
Martínez-De Jesús FR, Ramos-De la Medina A,
Remes-Troche JM, Armstrong DG, Wu SC, Lázaro Martínez
JL, Beneit-Montesinos JV. Efficacy and safety of neutral pH
superoxidised solution in severe diabetic foot infections.
Int Wound J. 2007, 4:353-362.
|
Hadi SF MD(3)
|
|
Pakistan
|
|
|
100
|
|
|
Hadi SF, Khaliq T, Bilal N, Sikandar I, Saaiq M, Zubair M,
Aurangzeb S. Treating infected diabetic wounds with
superoxidized water as anti-septic agent: a preliminary
experience. J Coll Physicians Surg Pak. 2007,
17:740-743.
|
BT Monaghan DPM(3)
|
|
Ireland
|
|
|
10
|
|
|
Monaghan BT & Cundell JH. Dermacyn as the Local
Treatment for Infected Diabetic Foot Wounds. A case series.
5th Int. Symp. On the Diabetic Foot. Noordwijkerhout. 2007,
The Netherlands. May 9-12, 2007.
|
Fernando Uribe MD(6)
|
|
Mexico
|
|
|
80
|
|
|
Uribe F. Effect of neutral pH Superoxidized solution in the
healing of diabetic foot ulcers. 47(th) ICAAC Meeting. Poster
L-1144. Chicago, IL. USA. Sept
17-20, 2007.
|
Ning Fanggang MD(3)
|
|
China
|
|
|
20
|
|
|
Fanggang N, Guoan Z. The clinical efficacy of Dermacyn on deep
partial thickness burn wounds.
|
Amar Pal Suri DPM(6)
|
|
India
|
|
|
100
|
|
|
Suri AP. The Effectiveness of Stable Neutral Super-oxidized
Solution for the Treatment of Infected Diabetic Foot Wounds.
Diabetic Foot Global Conference. Hollywood, CA.
13-15 March.
2008.
Submitted for publication Jan, 2008.
|
Alberto Piaggesi M.D.(5)
|
|
Italy
|
|
|
40
|
|
|
Piaggesi A et al. Efficacy and safety of
microcyn®
technology in wide post-surgical lesions in the infected
diabetic foot. Diabetic Foot Global Conference. Hollywood, Ca.
13-15 March.
2008.
|
Robert G. Frykberg, DPM,
MPH(6)
|
|
U.S.
|
|
|
23
|
|
|
RG. Frykberg, RG, Tallis A, Tierney, E.: Wound Healing in
Chronic Lower Extremity Wounds Comparing Super-Oxidized Solution
(SOS) vs. Saline. Diabetic Foot Global Conference. Hollywood,
Ca.
13-15 March.
2008.
|
Matthew Regulski
DPM(5)
|
|
U.S.
|
|
|
18
|
|
|
Regulski M, Floros R, Petranto R, Migliori V, Alster H,
Pfeiffer D. Efficacy and Compatibility of Combination Therapy
with Super-Oxidized Solution and a Skin Substitute for Lower
Extremity Wounds. Symposium on Advanced Wound Care and Wound
Healing Society, San Diego, CA, April
24-28, 2008.
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Physician
|
|
Country
|
|
Patients
|
|
Publication
|
|
Adam Landsman DPM
PhD,(5)
Andres A Gutierrez MD
PhD(1) &
Oculus Collaborative Group
|
|
U.S.
|
|
|
48
|
|
|
Landsman A, Blume P, Palladino M, Jordan D, Vayser DJ, Halperin
G, Gutierrez AA and Oculus Collaborative Group. An Open Label,
Three Arm Study of the Safety and Clinical Efficacy of Topical
Wound Care vs. Oral Levofloxacin vs. Combined Therapy for Mild
Diabetic Foot Infections. Diabetic Foot Global Conference.
Hollywood, CA.
13-15 March.
2008.
|
Christopher Gauland,
DPM(3)
|
|
U.S.
|
|
|
5
|
|
|
Gauland C., Sickle Cell Disease, Symposium on Advanced Wound
Care and Wound Healing Society, San Diego, CA, April
24-28, 2008.
|
Hadi, SF
|
|
Pakistan
|
|
|
100
|
|
|
Hadi SF, Khaliq T, Bilal N, Sikandar I, Saaiq M, Zubair M,
Aurangzeb S. Treating infected diabetic wounds with
superoxidized water as anti-septic agent J Coll Physicians
Surg Pak. 2007, 17:740-743.
|
Chittoria RV
|
|
India
|
|
|
20
|
|
|
Chittoria RK, Yootla M, Sampatrao LM, Raman SV. The role of
super oxidized solution in the management of diabetic foot
ulcer: our experience.
|
|
|
|
|
|
|
|
|
Nepal Med Coll J. 2007, 9:125-128.
|
Anand A
|
|
India
|
|
|
50
|
|
|
Anand, AR Comparative Efficacy and Tolerability of Oxum against
Povidone Iodine Topical Application in the Post-caesarean
Section Wound Management Indian Medical Gazette
December 2007,
498-505.
|
Dharap SB
|
|
India
|
|
|
30
|
|
|
Dharap SB, Ghag GS, Kulkarni KP, Venkatesh V. Efficacy and
safety of Oxum in the treatment of the venous ulcer. J Indian
Med Assoc 2008, 106:326-330.
|
Dhusia H
|
|
India
|
|
|
41
|
|
|
Dhusia H, Comparative Efficacy and Tolerability of Microcyn
Superoxidized Solution (Oxum) against Povidone Iodine
Application in Orodental Infections. Indian Medical Gazette
February 2008,
68-75.
|
Khairulasri MG
|
|
Malaysia
|
|
|
178
|
|
|
Khairulasri MG, Ramzisham ARM, Ooi JSM, Zamrin DM. Dermacyn
irrigation in reducing sternotomy wound infection following
coronary artery bypass graft surgery 11th Scientific
Conference. Kota Bharu, Malaysia 2008.
|
Notes
|
|
|
(1) |
|
indicates that the physician is a stockholder and was a member
of our Medical and Business Advisory Board that we dissolved in
April 2007, and was a paid consultant and received research
grants, expense payments, honorarium and Microcyn to complete
the study. |
|
(2) |
|
indicates that the physician was a paid consultant, received
expenses in connection with corporate development and licensing
evaluations and is a warrant holder. |
|
(3) |
|
indicates that the physician received Microcyn to complete the
study. |
|
(4) |
|
indicates that the physician is a paid consultant, was a member
of our Medical and Business Advisory Board, which we dissolved
in April 2007, and received expense payments and Microcyn to
complete the study. |
13
|
|
|
(5) |
|
indicates that the physician received payments, expense payments
and Microcyn to complete the study. |
|
(6) |
|
indicates that the physician received reimbursement of travel
expenses and received Microcyn to complete the study. |
In addition to the above articles and publications, several
additional papers on the basic science of the technology have
been published or have been submitted for peer review and
publication, including:
|
|
|
|
|
Researchers
|
|
Country
|
|
Publication
|
|
Landa-Solis, González-Espinosa D., Guzman B, Snyder M,
Reyes-Terán G., Torres K. and Gutiérrez A.A.(1)
|
|
Mexico
|
|
Microcyn(tm) a
novel super-oxidized water with neutral pH and disinfectant
activity. J Hosp Infect (UK) 2005, 61: 291-299.
|
Gutiérrez, A.A.(1)
|
|
U.S.
|
|
The science behind stable, super-oxidized water. Exploring the
various applications of super-oxidized solutions. Wounds,
2006, 18 (Suppl), 7-10.
|
Dalla Paola L. and Faglia E.(2)
|
|
Italy
|
|
Treatment of diabetic foot ulcer: an overview. Strategies for
clinical approach. Current Diabetes Reviews, 2006, 2,
431-447 431.
|
González-Espinosa D., Pérez-Romano L., Guzman Soriano
B., Arias E., Bongiovanni, C.M. & Gutiérrez A.A.(1),(3)
|
|
Mexico, U.S.
|
|
Effects of neutral super-oxidized water on human dermal
fibroblasts in vitro. International Wound Journal, 2007,
4: 241-250.
|
Medina-Tamayo J., Balleza-Tapia H., López, X., Cid, M.E.,
González-Espinosa, D. Gutiérrez A.A., and
González-Espinosa C.(1)
|
|
Mexico, U.S.
|
|
Super-oxidized water inhibits IgE-antigen- induced degranulation
and cytokine release in mast cells. International
Immunopharmacology 2007. 2007, 7:1013-1024.
|
Q LeDuc.
|
|
UK
|
|
Le Duc Q, Breetveld M, Middelkoop E, Scheper RJ, Ulrich MMW,
Gibbs S. A cytotoxic analysis of antiseptic medication on skin
substitutes and autograft. Br J Dermatology. 2007,
157:33-40.
|
B McCurdy
|
|
U.S.
|
|
McCurdy B. Emerging Innovations in Treatment. Podiatry Today
2006, 19: 40-48.
|
Zahumensky E.
|
|
Czech Republic
|
|
Infections and diabetic foot syndrome in field practice.
Vnitr Lek. 2006;52:411-416.
|
Rose R., Setlow B., Monroe A., Mallozzi M., Driks A., Setlow
P.(5)
|
|
U.S.
|
|
Comparison of the properties of Bacillus subtilis spores made in
liquid or on agar plates. Submitted 2008.
|
Paul M., Setlow B. and Setlow P.(5)
|
|
U.S.
|
|
The killing of spores of Bacillus subtilis by
Microcyn(tm),
a stable superoxided water. Submitted 2008.
|
Eileen Thatcher(4) & Andres A Gutierrez(1)
|
|
U.S.
|
|
Thatcher E & Gutiérrez AA. The Anti-Bacterial Efficacy
of a New Super-Oxidized Solution. 47(th) ICAAC Meeting. Chicago,
IL. USA. Sept 17-20, 2007.
|
Michael Taketa-Graham(5), Gutierrez AA(1), Thatcher E.(4)
|
|
U.S.
|
|
Taketa-Graham M, Gutierrez AA, Thatcher E. The Anti-Viral
Efficacy of a New Super-Oxidized Solution.. 47th ICAAC
Meeting. Poster L-1144. Chicago, IL. USA. Sept 17-20, 2007.
|
14
|
|
|
|
|
Researchers
|
|
Country
|
|
Publication
|
|
Dardine J, Martinez C, & Thatcher E.(4)
|
|
U.S.
|
|
Dardine J, Martinez C, & Thatcher E. Activity of a pH
Neutral Super-Oxidized Solution Against Bacteria Selected for
Sodium Hypochlorite Resistance. 47th ICAAC Meeting. Poster
L-1144. Chicago, IL. USA. Sept 17-20, 2007.
|
Sauer K, Vazquez G., Thatcher E., Northey R. and Gutierrez
A.A.(1),(4),(5)
|
|
U.S.
|
|
Neutral super-oxidized solution is effective in killing P.
aeruginosa biofilms. Submitted 2007.
|
Notes
|
|
|
(1) |
|
Dr. Gutierrez was our Director of Medical Affairs and
conducted the study during his employment by our Company. |
|
(2) |
|
Dr. Dalla Paola was a member of our Medical and Business
Advisory Board, which we dissolved in April 2007, and received
expense payments and Microcyn to complete the study. |
|
(3) |
|
Dr. Bongiovanni received Microcyn to complete the study. |
|
(4) |
|
Dr. Thatcher is a full-time consultant to us, is a
stockholder, previously served on our board of directors, and
received Microcyn to complete the study. |
|
(5) |
|
Dr. Northey is our Director of Research and Development and
conducted the study during his employment by our Company. |
Sales and
Marketing
Our products are purchased by hospitals, physicians, nurses and
other healthcare practitioners who are the primary caregivers to
patients being treated for acute or chronic woundsor undergoing
surgical procedures. We currently make Microcyn available under
our five 510(k) clearances in the United States, primarily
through a partnership with Advocos, a specialty
U.S. contract sales organization. In the quarter ended
December 31, 2008, we initiated commercialization into the
podiatry market in the United States. In the Spring of 2009, we
expanded this sales effort to include wound care centers,
hospitals, nursing homes, urgent care clinics and home
healthcare. Additionally, we are in the process of introducing
Microcyn-based consumer healthcare products both in the
United States and abroad. Initially, these will include an
oral care rinse, nasal care wash and a skin care hydrogel.
In January 2009, we announced a strategic revenue-sharing
partnership with Vetericyn, Inc. whereby we granted Vetericyn,
Inc., exclusive rights to market the Microcyn Technology in the
North American animal healthcare market. As part of this
agreement, we will not incur marketing or sales expenses, but
will share in all revenues.
Our partner, Union Springs Pharmaceuticals, a subsidiary of the
Drug Enhancement Company of America, or DECA, has marketed
MyClyns, an over-the-counter first responder pen
application, with Microcyn in the United States since
January 2008.
In Europe, we currently have distribution agreements with
distributors in the Netherlands, Italy, and the Czech Republic
for distribution of our Microcyn-based products in those
countries.
In Mexico, we market our products through our established
distribution network and direct sales organization. We have a
dedicated contract sales force, including salespeople, nurses
and clinical support staff responsible for selling Microcyn to
private and public hospitals and to retail pharmacies.
In India, we entered into an exclusive agreement with Alkem
Laboratories, a large pharmaceutical company in India, for the
sale of Microcyn-based products in India and Nepal.
In China, we signed a distribution agreement with China Bao Tai,
which in March 2008 secured marketing approval from the Chinese
State Food and Drug Administration, or SFDA. China Bao Tai and
Sinopharm, the
15
largest pharmaceutical group in China, are providing free
samples of Microcyn-based products to hospitals, doctors and
clinics in anticipation of a product launch after price
registration is obtained.
Throughout the rest of the world, we intend to use strategic
partners and distributors, who have a significant sales,
marketing and distribution presence in their respective
countries. We have established partners and distribution
channels for our wound care products in Bangladesh, Pakistan,
Singapore, United Arab Emirates and Saudi Arabia.
Manufacturing
We manufacture Microcyn through a proprietary electrolysis
process within a multi-chamber system. We are able to control
the passage of ions through proprietary membranes, yielding
electrolyzed water with only trace amounts of chlorine. This
process is fundamentally different from the processes for
manufacturing hydrogen peroxide and bleach and, we believe, is
the basis for our technologys effectiveness and safety.
Our manufacturing process produces very little waste, which is
disposed of as water after a simple non-toxic chemical treatment.
We manufacture our products in San Diego using a contract
manufacturing organization located in San Diego,
California. We also manufacture our products at our facility in
Zapopan, Mexico and we have a research and development pilot
plant in Petaluma, California. We have developed an automated
manufacturing process and conduct quality assurance testing on
each production batch in accordance with current
U.S. Current Good Manufacturing Practice, or cGMP. Our
facilities are required to meet and maintain regulatory
standards applicable to the manufacture pharmaceutical and
medical device products. Our United States facilities are
certified and comply with cGMP medical device Quality Systems
Regulation, or QSR, and International Organization for
Standardization, or ISO, guidelines. Our Mexico facility has
been approved by the MOH and is also ISO certified.
Our machines are subjected to a series of tests, which is part
of a validation protocol mandated by cGMP, QSR and ISO
requirements. This validation is designed to ensure that the
final product is consistently manufactured in accordance with
product specifications at all manufacturing sites. Certain
materials and components used in manufacturing our machines are
proprietary to us.
We believe we have a sufficient number of machines to produce an
adequate amount of Microcyn to meet anticipated future
requirements for at least the next two years. As we expand into
new geographic markets, we may establish additional
manufacturing facilities to better serve those new markets.
Intellectual
Property
Our success depends in part on our ability to obtain and
maintain proprietary protection for our product technology and
know-how, to operate without infringing proprietary rights of
others, and to prevent others from infringing our proprietary
rights. We seek to protect our proprietary position by, among
other methods, filing, when possible, U.S. and foreign
patent applications relating to our technology, inventions and
improvements that are important to our business. We also rely on
trade secrets, know-how, continuing technological innovation,
and in-licensing opportunities to develop and maintain our
proprietary position.
As of May 1, 2009, we own two issued U.S. patents, two
issued European patents, one issued Japanese patent, 13 pending
U.S. patent applications and 69 foreign pending patent
applications generally relating to electrolyzed water. These
applications include two provisional U.S. patent
applications for which the time to file non-provisional
U.S. patent applications has not expired and one
international PCT application for which the time to file
counterpart national phase applications has not yet expired. Our
portfolio of issued and pending applications can be divided into
two groups. The first group includes two issued
U.S. patents, two issued European patents, one issued
Japanese patent, two pending U.S. patent applications, and
four foreign patent applications that relate to early generation
electrolyzed water product, methods of using electrolyzed water,
and aspects of the method and apparatus for manufacturing
electrolyzed water. The second group includes 13 pending
U.S. patent applications (including provisional
U.S. patent applications) and 65 foreign patent
applications (including international PCT applications) that
relate to Microcyn, the method and apparatus for manufacturing
Microcyn, and its uses.
Although we work to protect our technology, we cannot assure you
that any patent will issue from currently pending patent
applications or from future patent applications. We also cannot
assure you that the scope of any
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patent protection will exclude competitors or provide
competitive advantages to us, that any of our patents will be
held valid if subsequently challenged, or that others will not
claim rights in or ownership of our patents and proprietary
rights. Furthermore, we cannot assure you that others have not
developed or will develop similar products, duplicate any of our
products or design around our patents.
We have also filed for trademark protection for marks used with
our Microcyn products in each of the United States, Europe,
Canada, certain countries in Central and South America,
including Mexico and Brazil, and certain countries in Asia,
including Japan, China, the Republic of Korea, India and
Australia. In addition to patents and trademarks, we rely on
trade secret and other intellectual property laws, nondisclosure
agreements and other measures to protect our intellectual
property rights. We believe that in order to have a competitive
advantage, we must develop and maintain the proprietary aspects
of our technologies. We require our employees, consultants and
advisors to execute confidentiality agreements in connection
with their employment, consulting or advisory relationship with
us. We also require our employees, consultants and advisors whom
we expect to work on our products to agree to disclose and
assign to us all inventions made in the course of our working
relationship with them, while using our property or which relate
to our business. Despite any measures taken to protect our
intellectual property, unauthorized parties may attempt to copy
aspects of our products or to wrongfully obtain or use
information that we regard as proprietary.
Competition
The wound care market is highly competitive. We compete with a
number of large, well-established and well-funded companies that
sell a broad range of wound care products, including topical
anti-infectives and antibiotics, as well as some advanced wound
technologies, such as skin substitutes, growth factors and
sophisticated delayed release silver-based dressings. We believe
the principal competitive factors in our target market include
improved patient outcomes, such as time in the hospital, healing
time, adverse events, safety of products, ease of use,
stability, pathogen killing and cost effectiveness.
Our products compete with a variety of products used for wound
cleaning, debriding and moistening, including sterile saline,
and chlorhexadine-based products, and they also compete with a
large number of prescription and over-the-counter products for
the prevention and treatment of infections, including topical
anti-infectives, such as Betadine, silver sulfadiazine, hydrogen
peroxide, Dakins solution and hypochlorous acid, and
topical antibiotics, such as Neosporine, Mupirocin and
Bacitracin. Currently, no single anti-infective product
dominates the chronic or acute wound markets because many of the
products have serious limitations or tend to inhibit the wound
healing process.
Our products can replace the use of sterile saline for debriding
and moistening a dressing as well as for use as a complementary
product with many advanced wound care technologies, such as the
VAC Therapy System from Kinetic Concepts Inc., skin substitute
products from Smith & Nephew, Integra Life Sciences,
Life Cell, Organogenesis and Ortec International, and ultrasound
from Celleration. We believe that Microcyn can enhance the
effectiveness of many of these advanced wound care technologies.
Because Microcyn is competitive with some of the large wound
care companies products and complementary to others, we
may compete with such companies in some product lines and
complement such companies in other product lines.
While many companies are able to produce oxychlorine
formulations, their products, unlike ours, typically become
unstable after 48 hours. One such company, PuriCore, sells
electrolysis machines used to manufacture brine-based oxidized
water primarily as a sterilant. Additionally, we believe that
Microcyn is the only stable anti-infective therapeutic available
in the world today that simultaneously cures or improves
infection while also accelerating wound healing through
increased blood flow to the wound bed and reduction of
inflammation.
Some of our competitors enjoy several competitive advantages,
including:
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significantly greater name recognition;
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established relationships with healthcare professionals,
patients and third-party payors;
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established distribution networks;
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additional product lines and the ability to offer rebates or
bundle products to offer discounts or incentives;
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greater experience in conducting research and development,
manufacturing, obtaining regulatory approval for products and
marketing; and
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greater financial and human resources for product development,
sales and marketing and patient support.
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Government
Regulation
Government authorities in the United States at the federal,
state and local levels and foreign countries extensively
regulate, among other things, the research, development,
testing, manufacture, labeling, promotion, advertising,
distribution, sampling, marketing, and import and export of
pharmaceutical products, biologics and medical devices. All of
our products in development will require regulatory approval or
clearance by government agencies prior to commercialization. In
particular, human therapeutic products are subject to rigorous
pre-clinical and clinical trials and other approval procedures
of the FDA and similar regulatory authorities in foreign
countries. Various federal, state, local and foreign statutes
and regulations also govern testing, manufacturing, safety,
labeling, storage, distribution and record-keeping related to
such products and their marketing. The process of obtaining
these approvals and clearances, and the subsequent process of
maintaining substantial compliance with appropriate federal,
state, local, and foreign statutes and regulations, require the
expenditure of substantial time and financial resources. In
addition, statutes, rules, regulations and policies may change
and new legislation or regulations may be issued that could
delay such approvals.
Before we are permitted to sell Microcyn as a drug in the United
States, we must, among other things, successfully complete
additional preclinical studies and well-controlled clinical
trials, submit a New Drug Application, or NDA, to the FDA and
obtain FDA approval. In July 2006, we completed a controlled
clinical trial for pre-operative skin preparation. After
completion of this trial, the FDA advised us that it is
considering adopting new heightened performance requirements for
evaluating efficacy of products designed to be used in
pre-operative skin preparation such as ours. In discussions with
the FDA, the FDA has not provided us with the definitive timing
for, or parameters of, any such requirements, and has informally
stated that it is uncertain during what time frame it will be
able to do so. We plan to continue our discussions with the FDA
regarding the possible timing and parameters of any new
guidelines for evaluating efficacy for pre-operative skin
preparations. Depending on the ultimate position of the FDA
regarding performance criteria for pre-operative skin
preparations, we may reassess our priorities, clinical timelines
and schedules for pursuing a pre-operative skin preparation
indication or may decide not to pursue this indication. We also
intend to seek FDA approval for the use of Microcyn to treat
infections in wounds.
We have sponsored the majority of physicians performing
physician clinical studies of Microcyn and in some cases, the
physicians who performed these studies also hold equity in our
Company. The physician clinical studies were performed in the
United States, Mexico, Europe, Pakistan, India and China, and
used various endpoints, methods and controls. These studies were
not intended to be rigorously designed or controlled clinical
trials and, as such, did not have all of the controls required
for clinical trials used to support an NDA submission to the FDA
in that they did not include blinding, randomization, predefined
clinical endpoints, use of placebo and active control groups or
U.S. good clinical practice requirements. Consequently, we
may not use the results of these physician clinical studies to
support an NDA submission for Microcyn to the FDA. In addition,
any results obtained from clinical trials designed to support an
NDA submission for Microcyn to the FDA may not be as favorable
as results from such physician clinical studies and otherwise
may not be sufficient to support an NDA submission or FDA
approval of any Microcyn NDA.
Medical
Device Regulation
Microcyn has received five 510(k) clearances for use as a
medical device in wound cleaning, or debridement, lubricating,
moistening and dressing, including traumatic wounds and acute
and chronic dermal lesions. Any future product candidates or new
applications using Microcyn that are classified as medical
devices will need clearance by the FDA.
New medical devices, such as Microcyn, are subject to FDA
clearance and extensive regulation under the Federal Food Drug
and Cosmetic Act, or FDCA. Under the FDCA, medical devices are
classified into one of three classes: Class I,
Class II or Class III. The classification of a device
into one of these three classes generally depends
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on the degree of risk associated with the medical device and the
extent of control needed to ensure safety and effectiveness.
Class I devices are those for which safety and
effectiveness can be assured by adherence to a set of general
controls. These general controls include compliance with the
applicable portions of the FDAs Quality System Regulation,
which sets forth good manufacturing practice requirements;
facility registration, device listing and product reporting of
adverse medical events; truthful and non-misleading labeling;
and promotion of the device only for its cleared or approved
intended uses. Class II devices are also subject to these
general controls, and any other special controls as deemed
necessary by the FDA to ensure the safety and effectiveness of
the device. Review and clearance by the FDA for these devices is
typically accomplished through the so-called 510(k) pre-market
notification procedure. When 510(k) clearance is sought, a
sponsor must submit a pre-market notification demonstrating that
the proposed device is substantially equivalent to a legally
marketed Class II device (for example, a device previously
cleared through the 510(k) premarket notification process). If
the FDA agrees that the proposed device is substantially
equivalent to the predicate device, then 510(k) clearance to
market will be granted. After a device receives 510(k)
clearance, any modification that could significantly affect its
safety or effectiveness, or that would constitute a major change
in its intended use, requires a new 510(k) clearance or could
require pre-market approval, or PMA.
Clinical trials are almost always required to support a PMA
application and are sometimes required for a 510(k) pre-market
notification. These trials generally require submission of an
application for an investigational device exemption, or IDE. An
IDE must be supported by pre-clinical data, such as animal and
laboratory testing results, which show that the device is safe
to test in humans and that the study protocols are
scientifically sound. The IDE must be approved in advance by the
FDA for a specified number of patients, unless the product is
deemed a non-significant risk device and is eligible for more
abbreviated investigational device exemption requirements.
Both before and after a medical device is commercially
distributed, manufacturers and marketers of the device have
ongoing responsibilities under FDA regulations. The FDA reviews
design and manufacturing practices, labeling and record keeping,
and manufacturers required reports of adverse experiences
and other information to identify potential problems with
marketed medical devices. Device manufacturers are subject to
periodic and unannounced inspection by the FDA for compliance
with the Quality System Regulation, which sets forth the current
good manufacturing practice requirements that govern the methods
used in, and the facilities and controls used for, the design,
manufacture, packaging, servicing, labeling, storage,
installation and distribution of all finished medical devices
intended for human use.
FDA regulations prohibit the advertising and promotion of a
medical device for any use outside the scope of a 510(k)
clearance or PMA approval or for unsupported safety or
effectiveness claims. Although the FDA does not regulate
physicians practice of medicine, the FDA does regulate
manufacturer communications with respect to off-label use.
If the FDA finds that a manufacturer has failed to comply with
FDA laws and regulations or that a medical device is ineffective
or poses an unreasonable health risk, it can institute or seek a
wide variety of enforcement actions and remedies, ranging from a
public warning letter to more severe actions such as:
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fines, injunctions and civil penalties;
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recall or seizure of products;
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operating restrictions, partial suspension or total shutdown of
production;
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refusing requests for 510(k) clearance or PMA approval of new
products;
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withdrawing 510(k) clearance or PMA approvals already
granted; and
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criminal prosecution.
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The FDA also has the authority to require repair, replacement or
refund of the cost of any medical device.
The FDA also administers certain controls over the export of
medical devices from the United States, as international sales
of medical devices that have not received FDA clearance are
subject to FDA export requirements.
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Additionally, each foreign country subjects such medical devices
to its own regulatory requirements. In the European Union, a
single regulatory approval process has been created, and
approval is represented by the CE Mark.
Pharmaceutical
Product Regulation
We have two pharmaceutical product candidates that are regulated
by the FDA and will require approval before we can market or
sell them as drugs. Any future product candidates or new
applications using Microcyn that are classified as drugs will
need approval by the FDA.
In the United States, the FDA regulates drugs under the FDCA and
implementing regulations that are adopted under the FDCA. In the
case of biologics, the FDA regulates such products under the
Public Health Service Act. If we fail to comply with the
applicable requirements under these laws and regulations at any
time during the product development process, approval process,
or after approval, we may become subject to administrative or
judicial sanctions. These sanctions could include the FDAs
refusal to approve pending applications, withdrawals of
approvals, clinical holds, warning letters, product recalls,
product seizures, total or partial suspension of our operations,
injunctions, fines, civil penalties or criminal prosecution. Any
agency enforcement action could have a material adverse effect
on us. The FDA also administers certain controls over the export
of drugs and biologics from the United States.
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Pre-Clinical Phase. The pre-clinical phase
involves the discovery, characterization, product formulation
and animal testing necessary to prepare an Investigational New
Drug application, or IND, for submission to the FDA. The IND
must be accepted by the FDA before the drug can be tested in
humans.
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Clinical Phase. The clinical phase of
development follows a successful IND submission and involves the
activities necessary to demonstrate the safety, tolerability,
efficacy, and dosage of the substance in humans, as well as the
ability to produce the substance in accordance with cGMP
requirements. Data from these activities are compiled in a New
Drug Application, or NDA, or for biologic products a Biologics
License Application, or BLA, for submission to the FDA
requesting approval to market the drug.
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Post-Approval Phase. The post-approval phase
follows FDA approval of the NDA or BLA, and involves the
production and continued analytical and clinical monitoring of
the product. The post-approval phase may also involve the
development and regulatory approval of product modifications and
line extensions, including improved dosage forms, of the
approved product, as well as for generic versions of the
approved drug, as the product approaches expiration of patent or
other exclusivity protection.
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Each of these three phases is discussed further below.
Pre-Clinical Phase. The development of a new
pharmaceutical agent begins with the discovery or synthesis of a
new molecule. These agents are screened for pharmacological
activity using various animal and tissue models, with the goal
of selecting a lead agent for further development. Additional
studies are conducted to confirm pharmacological activity, to
generate safety data, and to evaluate prototype dosage forms for
appropriate release and activity characteristics. Once the
pharmaceutically active molecule is fully characterized, an
initial purity profile of the agent is established. During this
and subsequent stages of development, the agent is analyzed to
confirm the integrity and quality of material produced. In
addition, development and optimization of the initial dosage
forms to be used in clinical trials are completed, together with
analytical models to determine product stability and
degradation. A bulk supply of the active ingredient to support
the necessary dosing in initial clinical trials must be secured.
Upon successful completion of pre-clinical safety and efficacy
studies in animals, an IND submission is prepared and provided
to the FDA for review prior to commencement of human clinical
trials. The IND consists of the initial chemistry, analytical,
formulation and animal testing data generated during the
pre-clinical phase. The review period for an IND submission is
30 days, after which, if no comments are made by the FDA,
the product candidate can be studied in Phase I clinical trials.
Clinical Phase. Following successful
submission of an IND, the sponsor is permitted to conduct
clinical trials involving the administration of the
investigational product candidate to human subjects under the
supervision of qualified investigators in accordance with Good
Clinical Practice, or GCP,. Clinical trials are conducted under
protocols detailing, among other things, the objectives of the
study and the parameters to be used in assessing the
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safety and the efficacy of the drug. Each protocol must be
submitted to the FDA as part of the IND prior to beginning the
trial. Each trial must be reviewed, approved and conducted under
the auspices of an independent Institutional Review Board, and
each trial, with limited exceptions, must include the
patients informed consent. Typically, clinical evaluation
involves the following time-consuming and costly three-phase
sequential process:
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Phase I. Phase I human clinical trials are
conducted on a limited number of healthy individuals to
determine the drugs safety and tolerability and include
biological analyses to determine the availability and
metabolization of the active ingredient following
administration. The total number of subjects and patients
included in Phase I clinical trials varies, but is generally in
the range of 20 to 80 people.
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Phase II. Phase II clinical trials
involve administering the drug to individuals who suffer from
the target disease or condition to determine the drugs
potential efficacy and ideal dose. These clinical trials are
typically well controlled, closely monitored, and conducted in a
relatively small number of patients, usually involving no more
than several hundred subjects. These trials require scale up for
manufacture of increasingly larger batches of bulk chemical.
These batches require validation analysis to confirm the
consistent composition of the product.
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Phase III. Phase III clinical trials are
performed after preliminary evidence suggesting effectiveness of
a drug has been obtained and safety (toxicity), tolerability,
and an ideal dosing regimen have been established.
Phase III clinical trials are intended to gather additional
information about the effectiveness and safety that is needed to
evaluate the overall benefit-risk relationship of the drug and
to complete the information needed to provide adequate
instructions for the use of the drug. Phase III trials
usually include from several hundred to several thousand
subjects.
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Throughout the clinical phase, samples of the product made in
different batches are tested for stability to establish shelf
life constraints. In addition, large-scale production protocols
and written standard operating procedures for each aspect of
commercial manufacture and testing must be
developePhase I, II, and III testing may not be
completed successfully within any specified time period, if at
all. The FDA closely monitors the progress of each of the three
phases of clinical trials that are conducted under an IND and
may, at its discretion, reevaluate, alter, suspend, or terminate
the testing based upon the data accumulated to that point and
the FDAs assessment of the risk/benefit ratio to the
patient. Clinical investigators, or IRBs, and companies may be
subject to pre-approval, routine, or for cause
inspections by the FDA for compliance with GCPs, and FDA
regulations governing clinical investigations. The FDA may
suspend or terminate clinical trials, or a clinical
investigators participation in a clinical trial, at any
time for various reasons, including a finding that the subjects
or patients are being exposed to an unacceptable health risk.
The FDA can also request additional clinical trials be conducted
as a condition to product approval. Additionally, new government
requirements may be established that could delay or prevent
regulatory approval of our products under development.
Furthermore, institutional review boards, which are independent
entities constituted to protect human subjects in the
institutions in which clinical trials are being conducted, have
the authority to suspend clinical trials in their respective
institutions at any time for a variety of reasons, including
safety issues.
Post-Approval Phase. After approval, we are
still subject to continuing regulation by the FDA, including,
but not limited to, record keeping requirements, submitting
periodic reports to the FDA, reporting of any adverse
experiences with the product, and complying with drug sampling
and distribution requirements. In addition, we are required to
maintain and provide updated safety and efficacy information to
the FDA. We are also required to comply with requirements
concerning advertising and promotional labeling. In that regard,
our advertising and promotional materials must be truthful and
not misleading. We are also prohibited from promoting any
non-FDA approved or off-label indications of
products. Failure to comply with those requirements could result
in significant enforcement action by the FDA, including warning
letters, orders to pull the promotional materials, and
substantial fines. Also, quality control and manufacturing
procedures must continue to conform to cGMP after approval.
Drug and biologics manufacturers and their subcontractors are
required to register their facilities and products manufactured
annually with the FDA and certain state agencies and are subject
to periodic routine and unannounced inspections by the FDA to
assess compliance with cGMP regulations. Facilities may also be
subject to inspections by other federal, foreign, state, or
local agencies. In addition, approved biological drug products
may be subject to
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lot-by-lot
release testing by the FDA before these products can be
commercially distributed. Accordingly, manufacturers must
continue to expend time, money, and effort in the area of
production and quality control to maintain compliance with cGMP
and other aspects of regulatory compliance. Future FDA
inspections may identify compliance issues at our facilities or
at the facilities that may disrupt production or distribution,
or require substantial resources to correct.
In addition, following FDA approval of a product, discovery of
problems with a product or the failure to comply with
requirements may result in restrictions on a product,
manufacturer, or holder of an approved marketing application,
including withdrawal or recall of the product from the market or
other voluntary or FDA-initiated action that could delay further
marketing. Newly discovered or developed safety or effectiveness
data may require changes to a products approved labeling,
including the addition of new warnings and contraindications.
Also, the FDA may require post-market testing and surveillance
to monitor the products safety or efficacy, including
additional clinical studies, known as Phase IV trials, to
evaluate long-term effects.
Regulation
of Disinfectants
In the United States, the EPA regulates disinfectants as
antimicrobial pesticides under the Federal Insecticide,
Fungicide and Rodenticide Act, or FIFRA, and the implementing
regulations that the EPA has adopted under FIFRA. Before
marketing a disinfectant in the United States, we must satisfy
the EPAs pesticide registration requirements. That
registration process requires us to demonstrate the
disinfectants efficacy and to determine the potential
human and ecological risks associated with use of the
disinfectant. The testing and registration process could be
lengthy and could be expensive. We may not be able to satisfy
all of the pesticide registration requirements for a particular
proposed new disinfectant product. Once we satisfy the FIFRA
registration requirements for an individual disinfectant,
additional FIFRA regulations will apply to our various business
activities, including marketing, related to that EPA-registered
product.
Failure to comply with FIFRAs requirements could expose us
to various enforcement actions. FIFRA empowers the EPA to seek
administrative or judicial sanctions against those who violate
FIFRA. Among the potential FIFRA penalties are civil
administrative penalties, stop sale orders, cancellation of our
registration, seizures, injunctions and criminal sanctions. If
EPA were to initiate a FIFRA enforcement action against us, it
could have a material adverse effect on us.
Other
Regulation in the United States
Health
Care Coverage and Reimbursement by Third-Party Payors
Commercial success in marketing and selling our products
depends, in part, on the availability of adequate coverage and
reimbursement from third-party health care payors, such as
government and private health insurers and managed care
organizations. Third-party payers are increasingly challenging
the pricing of medical products and services. Government and
private sector initiatives to limit the growth of health care
costs, including price regulation, competitive pricing, and
managed-care arrangements, are continuing in many countries
where we do business, including the United States. These changes
are causing the marketplace to be more cost-conscious and
focused on the delivery of more cost-effective medical products.
Government programs, including Medicare and Medicaid, private
health care insurance companies, and managed-care plans control
costs by limiting coverage and the amount of reimbursement for
particular procedures or treatments. This has created an
increasing level of price sensitivity among customers for our
products. Some third-party payors also require that a favorable
coverage determination be made for new or innovative medical
devices or therapies before they will provide reimbursement of
those medical devices or therapies. Even though a new medical
product may have been cleared or approved for commercial
distribution, we may find limited demand for the product until
adequate coverage and reimbursement have been obtained from
governmental and other third-party payors.
Fraud and
Abuse Laws
In the United States, we are subject to various federal and
state laws pertaining to healthcare fraud and abuse, which,
among other things, prohibit the offer or acceptance of
remuneration intended to induce or in exchange for the purchase
of products or services reimbursed under a federal healthcare
program and the submission of false or
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fraudulent claims with the government. These laws include the
federal Anti-Kickback Statute, the False Claim Act and
comparable state laws. These laws regulate the activities of
entities involved in the healthcare industry, such as us, by
limiting the kinds of financial arrangements such entities may
have with healthcare providers who use or recommend the use of
medical products (including for example, sales and marketing
programs, advisory boards and research and educational grants).
In addition, in order to ensure that healthcare entities comply
with healthcare laws, the Office of Inspector General, or OIG,
of the U.S. Department of Health and Human Services
recommends that healthcare entities institute effective
compliance programs. To assist in the development of effective
compliance programs, the OIG has issued model Compliance Program
Guidance, or CPG, materials for a variety of healthcare entities
which, among other things, identify practices to avoid that may
implicate the federal Anti-Kickback Statute and other relevant
laws and describes elements of an effective compliance program.
While compliance with the CPG materials is voluntary, a recent
California law requires pharmaceutical and devices manufacturers
to initiate compliance programs that incorporate the CPG and the
July 2002 Pharmaceuticals Research and Manufacturers of America
Code on Interactions with Healthcare Professionals.
Due to the scope and breadth of the provisions of some of these
laws, it is possible that some of our practices might be
challenged by the government under one or more of these laws in
the future. Violations of these laws, which are discussed more
fully below, can lead to civil and criminal penalties, damages,
imprisonment, fines, exclusion from participation in Medicare,
Medicaid and other federal health care programs, and the
curtailment or restructuring of our operations. Any such
violations could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
Anti-Kickback Laws. Our operations are subject
to federal and state anti-kickback laws. The federal
Anti-Kickback Statute prohibits persons from knowingly and
willfully soliciting, receiving, offering or providing
remuneration directly or indirectly to induce either the
referral of an individual for a good or service reimbursed under
a federal healthcare program, or the furnishing, recommending,
or arranging of a good or service, for which payment may be made
under a federal healthcare program, such as Medicare or
Medicaid. The definition of remuneration has been
broadly interpreted to include anything of value, including such
items as gifts, discounts, the furnishing of supplies or
equipment, waiver of co-payments, and providing anything at less
than its fair market value. Because the Anti-Kickback Statute
makes illegal a wide variety of common (even beneficial)
business arrangements, the OIG was tasked with issuing
regulations, commonly known as safe harbors, that
describe arrangements where the risk of illegal remuneration is
minimal. As long as all of the requirements of a particular safe
harbor are strictly met, the entity engaging in that activity
will not be prosecuted under the federal Anti-Kickback Statute.
The failure of a transaction or arrangement to fit precisely
within one or more safe harbors does not necessarily mean that
it is illegal or that prosecution will be pursued. However,
business arrangements that do not fully satisfy an applicable
safe harbor may result in increased scrutiny by government
enforcement authorities, such as the OIG. Our agreements to pay
compensation to our advisory board members and physicians who
conduct clinical trials or provide other services for us may be
subject to challenge to the extent they do not fall within
relevant safe harbors under state and federal anti-kickback
laws. In addition, many states have adopted laws similar to the
federal Anti-Kickback Statute which apply to the referral of
patients for healthcare services reimbursed by Medicaid, and
some have adopted such laws with respect to private insurance.
Violations of the Anti-Kickback Statute are subject to
significant fines and penalties and may lead to a company being
excluded from participating in federal health care programs.
False Claims Laws. The federal False Claims
Act prohibits knowingly filing a false claim, knowingly causing
the filing of a false claim, or knowingly using false statements
to obtain payment from the federal government. Under the False
Claims Act, such suits are known as qui tam actions,
and those who bring such suits. Individuals may file suit on
behalf of the government share in any amounts received by the
government pursuant to a settlement. In addition, certain states
have enacted laws modeled after the federal False Claims Act
under the Deficit Reduction Act of 2005, the federal government
created financial incentives for states to enact false claims
laws consistent with the federal False Claims Act. As more
states enact such laws, we expect the number of qui tam lawsuits
to increase. Qui tam actions have increased significantly in
recent years, causing greater numbers of healthcare companies to
have to defend a false claims action, pay fines or be excluded
from Medicare, Medicaid or other federal or state government
healthcare programs as a result of investigations arising out of
such actions.
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HIPAA. Two federal crimes were created under
the Health Insurance Portability and Accountability Act of 1996,
or HIPAA: healthcare fraud and false statements relating to
healthcare matters. The healthcare fraud statute prohibits
knowingly and willfully executing a scheme to defraud any
healthcare benefit program, including private payors. The false
statements statute prohibits knowingly and willfully falsifying,
concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare
benefits, items or services.
Health
Information Privacy and Security
Individually identifiable health information is subject to an
array of federal and state regulation. Federal rules promulgated
pursuant to HIPAA regulate the use and disclosure of health
information by covered entities. Covered entities
include individual and institutional health care providers from
which we may receive individually identifiable health
information. These regulations govern, among other things, the
use and disclosure of health information for research purposes,
and require the covered entity to obtain the written
authorization of the individual before using or disclosing
health information for research. Failure of the covered entity
to obtain such authorization could subject the covered entity to
civil and criminal penalties. We may experience delays and
complex negotiations as we deal with each entitys
differing interpretation of the regulations and what is required
for compliance. Also, where our customers or contractors are
covered entities, including hospitals, universities, physicians
or clinics, we may be required by the HIPAA regulations to enter
into business associate agreements that subject us
to certain privacy and security requirements. In addition, many
states have laws that apply to the use and disclosure of health
information, and these laws could also affect the manner in
which we conduct our research and other aspects of our business.
Such state laws are not preempted by the federal privacy law
where they afford greater privacy protection to the individual.
While activities to assure compliance with health information
privacy laws are a routine business practice, we are unable to
predict the extent to which our resources may be diverted in the
event of an investigation or enforcement action with respect to
such laws.
Foreign
Regulation
Whether or not we obtain FDA approval for a product, we must
obtain approval of a product by the applicable regulatory
authorities of foreign countries before we can commence clinical
trials or marketing of the product in those countries. The
approval process varies from country to country, and the time
may be longer or shorter than that required for FDA approval.
The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement also vary greatly
from country to country. Although governed by the applicable
country, clinical trials conducted outside of the United States
typically are administered under a three-phase sequential
process similar to that discussed above for pharmaceutical
products.
European
Union Regulation
Medical Device Regulation. Our Microcyn
products are classified as medical devices in the European
Union. In order to sell our medical device products within the
European Union, we are required to comply with the requirements
of the Medical Devices Directive, or MDD, and its national
implementations, including affixing CE Marks on our products. In
order to comply with the MDD, we must meet certain requirements
relating to the safety and performance of our products and,
prior to marketing our products, we must successfully undergo
verification of our products regulatory compliance, or
conformity assessment.
Medical devices are divided into three regulatory classes:
Class I, Class IIb and Class III. The nature of
the conformity assessment procedures depends on the regulatory
class of the product. We executed the conformity assessment for
production quality assurance for Class IIb products for
Dermacyn Wound Care. Compliance with production quality
assurance is audited every year by a private entity certified by
government regulators. In order to comply with the examination,
we completed, among other things, a risk analysis and presented
clinical data, which demonstrated that our products met the
performance specifications claimed by us, provided sufficient
evidence of adequate assessment of unwanted side effects and
demonstrated that the benefits to the patient outweigh the risks
associated with the device. We will be subject to continued
supervision and will be required to report any serious adverse
incidents to the appropriate authorities. We will also be
required to comply with additional national requirements that
are beyond the scope of the MDD.
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We received our CE certificate for Dermacyn Wound Care as a
Class IIb medical device in February 2005. We may not be
able to maintain the requirements established for CE Marks for
any or all of our products or be able to produce these products
in a timely and profitable manner while complying with the
requirements of the MDD and other regulatory requirements.
Marketing Authorizations for Drugs. In order
to obtain marketing approval of any of our drug products in
Europe, we must submit for review an application similar to a
U.S. NDA to the relevant authority. In contrast to the
United States, where the FDA is the only authority that
administers and approves NDAs, in Europe there are multiple
authorities that administer and approve these applications.
Marketing authorizations in Europe expire after five years but
may be renewed.
We believe that our Microcyn-based drugs will be reviewed by the
Committee for Medicinal Products for Human Use, or CHMP, on
behalf of the European Medicines Agency, or EMEA. Based upon the
review of the CHMP, the EMEA provides an opinion to the European
Commission on the safety, quality and efficacy of the drug. The
decision to grant or refuse an authorization is made by the
European Commission.
Approval of applications can take several months to several
years, or may be denied. This approval process can be affected
by many of the same factors relating to safety, quality and
efficacy as in the approval process for NDAs in the United
States. As in the United States, European drug regulatory
authorities can require us to perform additional non-clinical
studies and clinical trials. The need for such studies or
trials, if imposed, may delay marketing approval and involve
unanticipated costs. Inspection of clinical investigation sites
by a competent authority may also be required as part of the
regulatory approval procedure. In addition, as a condition of
marketing approval, regulatory agencies in Europe may require
post-marketing surveillance to monitor for adverse effects, or
other additional studies as deemed appropriate. The terms of any
approval, including labeling content, may be more restrictive
than expected and could affect the marketability of a product.
In addition, after approval for the initial indication, further
clinical studies are usually necessary to gain approval for any
additional indications.
European GMP. In the European Union, the
manufacture of pharmaceutical products and clinical trial
supplies is subject to good manufacturing practice, or GMP, as
set forth in the relevant laws and guidelines. Compliance with
GMP is generally assessed by the competent regulatory
authorities. They may conduct inspections of relevant
facilities, and review manufacturing procedures, operating
systems and personnel qualifications. In addition to obtaining
approval for each product, in many cases each drug manufacturing
facility must be approved. Further inspections may occur over
the life of the product.
Mexico. The MOH is the authority in charge of
sanitary controls in Mexico. Sanitary controls are a group of
practices related to the orientation, education, testing,
verification and application of security measures and sanctions
exercised by the MOH. The MOH acts by virtue of the Federal
Commission for the Protection against Sanitary Risks, or
COFEPRIS, a decentralized entity of the MOH whose mission is to
protect the population against sanitary risks, by means of
centralized sanitary regulations, controls and by raising public
awareness.
The MOH is responsible for the issuance of Official Mexican
Standards and specifications for drugs subject to the provisions
of the General Health Law, which govern the process and
specifications of drugs, including the obtaining, preparation,
manufacturing, maintenance, mixture, conditioning, packaging,
handling, transport, distribution, storage and supply of
products to the public at large. In addition, a medical device
is defined as a device that may contain antiseptics or
germicides used in surgical practice or in the treatment of
continuity solutions, skin injuries or its attachments.
Regulations applicable to medical devices and drugs are divided
into two sections: the business that manufactures the medical
device or drug and the product itself.
Manufacturing a Medical Device or Drug. Under
the General Health Law, a business that manufactures drugs is
either required to obtain a Sanitary Authorization or to file an
Operating Notice. Our Mexico subsidiary, Oculus Technologies of
Mexico, S.A. de C.V. is considered a business that manufactures
medical devices and therefore is not subject to a Sanitary
Authorization, but rather only an Operating Notice.
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In addition to its Operating Notice, our Mexico subsidiary has
obtained a Good Processing Practices Certificate
issued by COFEPRIS, which demonstrates that the manufacturing of
Microcyn at the facility located in Zapopan, Mexico, operates in
accordance with the applicable official standards.
Commercialization of Drugs and Medical
Devices. Drugs and medical devices should be
commercialized in appropriate packaging containing labels
printed in accordance with specific official standards. For
medical devices, there are no specific standards or regulations
related to the labeling of the product, but rather only a
general standard related to the labeling for all types of
products to be commercialized in Mexico. Advertising of medical
devices is regulated in the General Health Law and in the
specific regulations of the General Health Law related to
advertising. Generally, the advertising of medical devices is
subject to a permit only in the case that such advertising is
directed to the general public.
Medical Devices and Drugs as a Product. To
produce, sell or distribute medical devices, a Sanitary Registry
is required in accordance with the General Health Law and the
Regulation for Drugs. Such registry is granted for a term of
five years, and this term may be extended. The Sanitary Registry
may be revoked if the interested party does not request the
extension in the term or the product or the manufacturer or the
raw material is changed without the permission of the MOH.
The MOH classifies the medical devices in three classes:
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Class I. Devices for which safety and
effectiveness have been duly proved and are generally not used
inside the body;
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Class II. Devices that may vary with
respect to the material used for its fabrication or in its
concentration and generally used in the inside of the body for a
period no greater than 30 days; and
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Class III. New devices or recently
approved devices in the medical practice or those used inside
the body and which shall remain inside the body for a period
greater than 30 days.
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Violation of these regulations may result in the revocation of
the registrations or approvals, and, in addition, economic
fines. In some cases, such violations may constitute criminal
actions.
In addition, regulatory approval of prices is required in most
countries other than the United States, which could result in
lengthy negotiations delaying our ability to commercialize our
products. We face the risk that the prices which result from the
regulatory approval process would be insufficient to generate an
acceptable return.
Research
and Development
Research and development expense consists primarily of personnel
expenses, clinical and regulatory services and supplies. For the
years ended March 31, 2009 and 2008, research and
development expense amounted to $6,252,000 and $9,778,000,
respectively. None of this expense was borne by our customers.
Our
Employees
As of May 21, 2009, we had 44 full-time employees and
4 part-time employees. We are not a party to any collective
bargaining agreements. We believe our relations with our
employees are good.
Available
Information
Our website is located at www.oculusis.com. We make available
free of charge on our website our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such
materials to the Securities and Exchange Commission. Our website
and the information contained therein or connected thereto are
not intended to be incorporated into this annual report on
Form 10-K.
26
Factors
that May Affect Results
Risks
Related to Our Business
We
have a history of losses, we expect to continue to incur losses
and we may never achieve profitability.
We incurred a net loss of $17,656,000 and $20,339,000 for the
years ended March 31, 2009 and 2008, respectively. At
March 31, 2009, our accumulated deficit amounted to
$108,482,000. During the year ended March 31, 2009, net
cash used in operating activities amounted to $16,832,000. At
March 31, 2009, our working capital amounted to $1,263,000.
We need to raise additional capital from external sources in
order to sustain our operations while continuing the longer term
efforts contemplated under our business plan. We expect to
continue incurring losses for the foreseeable future and must
raise additional capital to pursue product development
initiatives, penetrate markets for the sale of our products and
continue as a going concern. We may not raise additional
capital. We believe that we have access to capital resources
through possible public or private equity offerings, debt
financings, corporate collaborations or other means. If the
economic climate in the U.S. does not improve or continues
to deteriorate, our ability to raise additional capital could be
negatively impacted. If we are unable to secure additional
capital, we may be required to curtail our research and
development initiatives and take additional measures to reduce
costs in order to conserve our cash in amounts sufficient to
sustain operations and meet our obligations. These measures
could cause significant delays in our efforts to commercialize
our products in the U.S., which is critical to the realization
of our business plan and the future operations. These matters
raise substantial doubt about our ability to continue as a going
concern.
Declining
general economic or business conditions may have a negative
impact on our business.
Concerns over inflation, energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market
and a declining real estate market in the U.S. have
contributed to increased volatility and diminished expectations
for the global economy and expectations of slower global
economic growth going forward. These factors, combined with
volatile oil prices, declining business and consumer confidence
and increased unemployment, have precipitated a global economic
slowdown. If the economic climate in the U.S. does not
improve or continues to deteriorate, our business, including our
patient population, our suppliers and our third-party payors,
could be negatively affected, resulting in a negative impact on
our business.
Our
inability to raise additional capital on acceptable terms in the
future may cause us to curtail certain operational activities,
including regulatory trials, sales and marketing, and
international operations, in order to reduce costs and sustain
the business, and would have a material adverse effect on our
business and financial condition.
We expect capital outlays and operating expenditures to increase
over the next several years as we work to conduct regulatory
trials, commercialize our products and expand our
infrastructure. We may need to raise additional capital to,
among other things:
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fund our clinical trials and preclinical studies;
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sustain commercialization of our current products or new
products;
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expand our manufacturing capabilities;
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increase our sales and marketing efforts to drive market
adoption and address competitive developments;
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acquire or license technologies; and
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finance capital expenditures and our general and administrative
expenses.
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Our present and future funding requirements will depend on many
factors, including:
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the progress and timing of our clinical trials;
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the level of research and development investment required to
maintain and improve our technology position;
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cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
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our efforts to acquire or license complementary technologies or
acquire complementary businesses;
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changes in product development plans needed to address any
difficulties in commercialization;
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competing technological and market developments; and
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changes in regulatory policies or laws that affect our
operations.
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If we raise additional funds by issuing equity securities,
dilution to our stockholders could result. Any equity securities
issued also may provide for rights, preferences or privileges
senior to those of holders of our common stock. If we raise
additional funds by issuing debt securities, these debt
securities would have rights, preferences and privileges senior
to those of holders of our common stock, and the terms of the
debt securities issued could impose significant restrictions on
our operations. If we raise additional funds through
collaborations and licensing arrangements, we might be required
to relinquish significant rights to our technologies or
products, or grant licenses on terms that are not favorable to
us. A failure to obtain adequate funds may cause us to curtail
certain operational activities, including regulatory trials,
sales and marketing, and international operations, in order to
reduce costs and sustain the business, and would have a material
adverse effect on our business and financial condition.
We do
not have the necessary regulatory approvals to market Microcyn
as a drug in the United States.
We have obtained five 510(k) clearances in the United States
that permit us to sell Microcyn as a medical device to clean,
moisten and debride wounds. Before we are permitted to sell
Microcyn as a drug in the United States, we must, among
other things, successfully complete additional preclinical
studies and well-controlled clinical trials, submit a New Drug
Application, or NDA, to the FDA and obtain FDA approval.
The FDA approval process is expensive and uncertain, requires
detailed and comprehensive scientific and other data and
generally takes several years. Despite the time and expense
exerted, approval is never guaranteed. Even if we obtain FDA
approval to sell Microcyn as a drug, we may not be able to
successfully commercialize Microcyn as a drug in the United
States and may never recover the substantial costs we have
invested in the development of our Microcyn products.
Delays
or adverse results in clinical trials could result in increased
costs to us and delay our ability to generate
revenue.
Clinical trials can be long and expensive, and the outcome of
clinical trials is uncertain and subject to delays. It may take
several years to complete clinical trials, if at all, and a
product candidate may fail at any stage of the clinical trial
process. The length of time required varies substantially
according to the type, complexity, novelty and intended use of
the product candidate. Interim results of a preclinical study or
clinical trial do not necessarily predict final results, and
acceptable results in preclinical studies or early clinical
trials may not be repeatable in later subsequent clinical
trials. The commencement or completion of any of our clinical
trials may be delayed or halted for a variety of reasons,
including the following:
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insufficient funds to continue our clinical trials;
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the FDA requirements for approval, including requirements for
testing efficacy or safety, may change;
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the FDA or other regulatory authorities do not approve a
clinical trial protocol;
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patients do not enroll in clinical trials at the rate we expect;
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delays in reaching agreement on acceptable clinical trial
agreement terms with prospective sites;
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delays in obtaining institutional review board approval to
conduct a study at a prospective site;
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third party clinical investigators do not perform our clinical
trials on our anticipated schedule or consistent with the
clinical trial protocol and good clinical practices, or the
third party organizations do not perform data collection and
analysis in a timely or accurate manner; and
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governmental regulations or administrative actions are changed.
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We do not know whether future clinical trials will demonstrate
safety and efficacy sufficiently to result in additional FDA
approvals. While a number of physicians have conducted clinical
studies assessing the safety and efficacy of Microcyn for
various indications, the data from these studies is not
sufficient to support approval of Microcyn as a drug in the
United States.
The FDA and other regulatory bodies may also change standards
and acceptable trial procedures required for a showing of safety
and efficacy. For example, until recently, the FDA accepted
non-inferiority clinical trials, or clinical trials that show
that a new treatment is equivalent to standard treatment, as the
standard for anti-infective drug approvals. On October 12,
2007, the FDA released draft guidance entitled Antibacterial
Drug Products: Use of Noninferiority Studies to Support
Approval. This new agency guidance requires either
placebo-controlled or superiority trial designs, which are
designed to test whether, and to what extent, a new treatment is
better than the placebo. The uncertainty of clinical trial
protocols and changes within FDA guidelines could have a
negative impact on the timelines and milestones for our clinical
program.
If we
fail to obtain, or experience significant delays in obtaining,
additional regulatory clearances or approvals to market our
current or future products, we may be unable to commercialize
these products.
Developing, testing, manufacturing, marketing and selling of
medical technology products are subject to extensive regulation
by numerous governmental authorities in the United States and
other countries. The process of obtaining regulatory clearance
and approval of medical technology products is costly and time
consuming. Even though the underlying product formulation may be
the same or similar, our products are subject to different
regulations and approval processes depending upon their intended
use.
To obtain regulatory approval of our products as drugs in the
United States, we must first show that our products are safe and
effective for target indications through preclinical studies
(laboratory and animal testing) and clinical trials (human
testing). The FDA generally clears marketing of a medical device
through the 510(k) pre-market clearance process if it is
demonstrated that the new product has the same intended use and
the same or similar technological characteristics as another
legally marketed Class II device, such as a device already
cleared by the FDA through the 510(k) premarket notification
process, and otherwise meets the FDAs requirements.
Product modifications, including labeling the product for a new
intended use, may require the submission of a new 510(k)
clearance and FDA approval before the modified product can be
marketed.
The outcomes of clinical trials are inherently uncertain. In
addition, we do not know whether the necessary approvals or
clearances will be granted or delayed for future products. The
FDA could request additional information, changes to formulation
or clinical testing that could adversely affect the time to
market and sale of products as drugs. If we do not obtain the
requisite regulatory clearances and approvals, we will be unable
to commercialize our products as drugs or devices and may never
recover any of the substantial costs we have invested in the
development of Microcyn.
Distribution of our products outside the United States is
subject to extensive government regulation. These regulations,
including the requirements for approvals or clearance to market,
the time required for regulatory review and the sanctions
imposed for violations, vary from country to country. We do not
know whether we will obtain regulatory approvals in such
countries or that we will not be required to incur significant
costs in obtaining or maintaining these regulatory approvals. In
addition, the export by us of certain of our products that have
not yet been cleared for domestic commercial distribution may be
subject to FDA export restrictions. Failure to obtain necessary
regulatory approvals, the restriction, suspension or revocation
of existing approvals or any other failure to comply with
regulatory requirements would have a material adverse effect on
our future business, financial condition, and results of
operations.
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If our
products do not gain market acceptance, our business will suffer
because we might not be able to fund future
operations.
A number of factors may affect the market acceptance of our
products or any other products we develop or acquire, including,
among others:
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the price of our products relative to other treatments for the
same or similar treatments;
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the perception by patients, physicians and other members of the
health care community of the effectiveness and safety of our
products for their indicated applications and treatments;
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our ability to fund our sales and marketing efforts; and
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the effectiveness of our sales and marketing efforts.
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If our products do not gain market acceptance, we may not be
able to fund future operations, including developing, testing
and obtaining regulatory approval for new product candidates and
expanding our sales and marketing efforts for our approved
products, which would cause our business to suffer.
If our
competitors develop products similar to Microcyn, we may need to
modify or alter our business strategy, which may delay the
achievement of our goals.
Competitors may develop products with similar characteristics as
Microcyn. Such similar products marketed by larger competitors
can hinder our efforts to penetrate the market. As a result, we
may be forced to modify or alter our business and regulatory
strategy and sales and marketing plans, as a response to changes
in the market, competition and technology limitations, among
others. Such modifications may pose additional delays in
achieving our goals.
We
intend to license or collaborate with third parties in various
potential markets, and events involving these strategic partners
or any future collaborations could delay or prevent us from
developing or commercializing products.
Our business strategy and our short-term and long-term operating
results will depend in part on our ability to execute on
existing strategic collaborations and to license or partner with
new strategic partners. We believe collaborations allow us to
leverage our resources and technologies and to access markets
that are compatible with our own core areas of expertise while
avoiding the cost of establishing or maintaining a direct sales
force in each market. We may incur significant costs in the use
of third parties to identify and assist in establishing
relationships with potential collaborators.
To penetrate our target markets, we may need to enter into
additional collaborative agreements to assist in the development
and commercialization of products. For example, depending upon
our analysis of the time and expense involved in obtaining FDA
approval to sell a product to treat open wounds, we may choose
to license our technology to a third party as opposed to
pursuing commercialization ourselves. Establishing strategic
collaborations is difficult and time-consuming. Potential
collaborators may reject collaborations based upon their
assessment of our financial, regulatory or intellectual property
position and our internal capabilities. Our discussions with
potential collaborators may not lead to the establishment of new
collaborations on favorable terms and may have the potential to
provide collaborators with access to our key intellectual
property filings and next generation formations. We have limited
control over the amount and timing of resources that our current
collaborators or any future collaborators devote to our
collaborations or potential products. These collaborators may
breach or terminate their agreements with us or otherwise fail
to conduct their collaborative activities successfully and in a
timely manner. Further, our collaborators may not develop or
commercialize products that arise out of our collaborative
arrangements or devote sufficient resources to the development,
manufacture, marketing or sale of these products. By entering
into a collaboration, we may preclude opportunities to
collaborate with other third parties who do not wish to
associate with our existing third party strategic partners.
Moreover, in the event of termination of a collaboration
agreement, termination negotiations may result in less favorable
terms.
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If we
are unable to expand our direct domestic sales force, we may not
be able to successfully sell our products in the United
States.
We have very limited commercialization capability and make
Microcyn-based products available primarily through our website,
and several regional distributors. We plan for a more aggressive
commercialization and product launch in the event we obtain drug
approval from the FDA or obtain other clearance or approval with
wound healing claims. Developing a sales force is expensive and
time consuming, and the lack of qualified sales personnel could
delay or limit the success of our product launch. Our domestic
sales force, if established, will be competing with the sales
operations of our competitors, which are better funded and more
experienced. We may not be able to develop domestic sales
capacity on a timely basis or at all.
Our
dependence on distributors for sales could limit or prevent us
from selling our products and from realizing long-term revenue
growth.
We currently depend on distributors to sell Microcyn in the
United States, Europe and other countries and intend to continue
to sell our products primarily through distributors in Europe
and the United States for the foreseeable future. If we are
unable to expand our direct sales force, we will continue to
rely on distributors to sell Microcyn. Our existing distribution
agreements are generally short-term in duration, and we may need
to pursue alternate distributors if the other parties to these
agreements terminate or elect not to renew their agreements. If
we are unable to retain our current distributors for any reason,
we must replace them with alternate distributors experienced in
supplying the wound care market, which could be time-consuming
and divert managements attention from other operational
matters. In addition, we will need to attract additional
distributors to expand the geographic areas in which we sell
Microcyn. Distributors may not commit the necessary resources to
market and sell our products to the level of our expectations,
which could harm our ability to generate revenues. In addition,
some of our distributors may also sell products that compete
with ours. In some countries, regulatory licenses must be held
by residents of the country. For example, the regulatory
approval for one product in India is owned and held by our
Indian distributor. If the licenses are not in our name or under
our control, we might not have the power to ensure their ongoing
effectiveness and use by us. If current or future distributors
do not perform adequately, or we are unable to locate
distributors in particular geographic areas, we may not realize
long-term revenue growth.
If we
fail to comply with ongoing regulatory requirements, or if we
experience unanticipated problems with our products, these
products could be subject to restrictions or withdrawal from the
market.
Regulatory approvals or clearances that we currently have and
that we may receive in the future are subject to limitations on
the indicated uses for which the products may be marketed, and
any future approvals could contain requirements for potentially
costly post-marketing
follow-up
studies. If the FDA determines that our promotional materials or
activities constitute promotion of an unapproved use or we
otherwise fail to comply with FDA regulations, we may be subject
to regulatory enforcement actions, including a warning letter,
injunction, seizure, civil fine or criminal penalties. In
addition, the manufacturing, labeling, packaging, adverse event
reporting, storage, advertising, promotion, distribution and
record-keeping for approved products are subject to extensive
regulation. Our manufacturing facilities, processes and
specifications are subject to periodic inspection by the FDA,
European and other regulatory authorities and from time to time,
we may receive notices of deficiencies from these agencies as a
result of such inspections. Our failure to continue to meet
regulatory standards or to remedy any deficiencies could result
in restrictions being imposed on products or manufacturing
processes, fines, suspension or loss of regulatory approvals or
clearances, product recalls, termination of distribution or
product seizures or the need to invest substantial resources to
comply with various existing and new requirements. In the more
egregious cases, criminal sanctions, civil penalties,
disgorgement of profits or closure of our manufacturing
facilities are possible. The subsequent discovery of previously
unknown problems with Microcyn, including adverse events of
unanticipated severity or frequency, may result in restrictions
on the marketing of our products, and could include voluntary or
mandatory recall or withdrawal of products from the market.
New government regulations may be enacted and changes in FDA
policies and regulations, their interpretation and enforcement,
could prevent or delay regulatory approval of our products. We
cannot predict the likelihood, nature or extent of adverse
government regulation that may arise from future legislation or
administrative action, either in the United States or abroad.
Therefore, we do not know whether we will be able to continue to
comply with
31
any regulations or that the costs of such compliance will not
have a material adverse effect on our future business, financial
condition, and results of operations. If we are not able to
maintain regulatory compliance, we will not be permitted to
market our products and our business would suffer.
We may
experience difficulties in manufacturing Microcyn, which could
prevent us from commercializing one or more of our
products.
The machines used to manufacture our Microcyn-based products are
complex, use complicated software and must be monitored by
highly trained engineers. Slight deviations anywhere in our
manufacturing process, including quality control, labeling and
packaging, could lead to a failure to meet the specifications
required by the FDA, the EPA, European notified bodies, Mexican
regulatory agencies and other foreign regulatory bodies, which
may result in lot failures or product recalls. If we are unable
to obtain quality internal and external components, mechanical
and electrical parts, if our software contains defects or is
corrupted, or if we are unable to attract and retain qualified
technicians to manufacture our products, our manufacturing
output of Microcyn, or any other product candidate based on our
platform that we may develop, could fail to meet required
standards, our regulatory approvals could be delayed, denied or
revoked, and commercialization of one or more of our
Microcyn-based products may be delayed or foregone.
Manufacturing processes that are used to produce the smaller
quantities of Microcyn needed for clinical tests and current
commercial sales may not be successfully scaled up to allow
production of significant commercial quantities. Any failure to
manufacture our products to required standards on a commercial
scale could result in reduced revenues, delays in generating
revenue and increased costs.
Our
competitive position depends on our ability to protect our
intellectual property and our proprietary
technologies.
Our ability to compete and to achieve and maintain profitability
depends on our ability to protect our intellectual property and
proprietary technologies. We currently rely on a combination of
patents, patent applications, trademarks, trade secret laws,
confidentiality agreements, license agreements and invention
assignment agreements to protect our intellectual property
rights. We also rely upon unpatented know-how and continuing
technological innovation to develop and maintain our competitive
position. These measures may not be adequate to safeguard our
Microcyn technology. If we do not protect our rights adequately,
third parties could use our technology, and our ability to
compete in the market would be reduced.
Although we have filed U.S. and foreign patent applications
related to our Microcyn based products, the manufacturing
technology for making the products, and their uses, only one
U.S. patent has been issued from these applications to date.
Our pending patent applications and any patent applications we
may file in the future may not result in issued patents, and we
do not know whether any of our in-licensed patents or any
additional patents that might ultimately be issued by the
U.S. Patent and Trademark Office or foreign regulatory body
will protect our Microcyn technology. Any claims that issue may
not be sufficiently broad to prevent third parties from
producing competing substitutes and may be infringed, designed
around, or invalidated by third parties. Even issued patents may
later be found to be invalid, or may be modified or revoked in
proceedings instituted by third parties before various patent
offices or in courts. For example, a competitor filed a Notice
of Opposition with the Opposition Division of the European
Patent Office in February 2008 opposing our recently issued
European patent.
The degree of future protection for our proprietary rights is
more uncertain in part because legal means afford only limited
protection and may not adequately protect our rights, and we
will not be able to ensure that:
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we were the first to invent the inventions described in patent
applications;
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we were the first to file patent applications for inventions;
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others will not independently develop similar or alternative
technologies or duplicate our products without infringing our
intellectual property rights;
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any patents licensed or issued to us will provide us with any
competitive advantages;
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32
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we will develop proprietary technologies that are
patentable; or
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the patents of others will not have an adverse effect on our
ability to do business.
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The policies we use to protect our trade secrets may not be
effective in preventing misappropriation of our trade secrets by
others. In addition, confidentiality and invention assignment
agreements executed by our employees, consultants and advisors
may not be enforceable or may not provide meaningful protection
for our trade secrets or other proprietary information in the
event of unauthorized use or disclosures. We cannot be certain
that the steps we have taken will prevent the misappropriation
and use of our intellectual property in the United States, or in
foreign countries where the laws may not protect our proprietary
rights as fully as in the United States.
We may
face intellectual property infringement claims that could be
time-consuming, costly to defend and could result in our loss of
significant rights and, in the case of patent infringement
claims, the assessment of treble damages.
On occasion, we may receive notices of claims of infringement,
misappropriation or misuse of other parties proprietary
rights. We may have disputes regarding intellectual property
rights with the parties that have licensed those rights to us.
We may also initiate claims to defend our intellectual property.
Intellectual property litigation, regardless of outcome, is
expensive and time-consuming, could divert managements
attention from our business and have a material negative effect
on our business, operating results or financial condition. In
addition, the outcome of such litigation may be unpredictable.
If there is a successful claim of infringement against us, we
may be required to pay substantial damages (including treble
damages if we were to be found to have willfully infringed a
third partys patent) to the party claiming infringement,
develop non-infringing technology, stop selling our products or
using technology that contains the allegedly infringing
intellectual property or enter into royalty or license
agreements that may not be available on acceptable or
commercially practical terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on
a timely basis could harm our business. In addition, modifying
our products to exclude infringing technologies could require us
to seek re-approval or clearance from various regulatory bodies
for our products, which would be costly and time consuming.
Also, we may be unaware of pending patent applications that
relate to our technology. Parties making infringement claims on
future issued patents may be able to obtain an injunction that
would prevent us from selling our products or using technology
that contains the allegedly infringing intellectual property,
which could harm our business.
Our
ability to generate revenue will be diminished if we are unable
to obtain acceptable prices or an adequate level of
reimbursement from third-party payors of healthcare
costs.
The continuing efforts of governmental and other third-party
payors, including managed care organizations such as health
maintenance organizations, or HMOs, to contain or reduce costs
of health care may affect our future revenue and profitability,
and the future revenue and profitability of our potential
customers, suppliers and collaborative or license partners and
the availability of capital. For example, in certain foreign
markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United
States, governmental and private payors have limited the growth
of health care costs through price regulation or controls,
competitive pricing programs and drug rebate programs. Our
ability to commercialize our products successfully will depend
in part on the extent to which appropriate coverage and
reimbursement levels for the cost of our Microcyn products and
related treatment are obtained from governmental authorities,
private health insurers and other organizations, such as HMOs.
There is significant uncertainty concerning third-party coverage
and reimbursement of newly approved medical products and drugs.
Third-party payors are increasingly challenging the prices
charged for medical products and services. Also, the trend
toward managed healthcare in the United States and the
concurrent growth of organizations such as HMOs, as well as
legislative proposals to reform healthcare or reduce government
insurance programs, may result in lower prices for or rejection
of our products. The cost containment measures that health care
payors and providers are instituting and the effect of any
health care reform could materially and adversely affect our
ability to generate revenues.
In addition, given ongoing federal and state government
initiatives directed at lowering the total cost of health care,
the United States Congress and state legislatures will likely
continue to focus on health care reform, the cost of
33
prescription pharmaceuticals and the reform of the Medicare and
Medicaid payment systems. While we cannot predict whether any
proposed cost-containment measures will be adopted, the
announcement or adoption of these proposals could reduce the
price that we receive for our Microcyn products in the future.
We
could be required to indemnify third parties for alleged
infringement, which could cause us to incur significant
costs.
Some of our distribution agreements contain commitments to
indemnify our distributors against liability arising from
infringement of third party intellectual property such as
patents. We may be required to indemnify our customers for
claims made against them or license fees they are required to
pay. If we are forced to indemnify for claims or to pay license
fees, our business and financial condition could be
substantially harmed.
A
significant part of our business is conducted outside of the
United States, exposing us to additional risks that may not
exist in the United States, which in turn could cause our
business and operating results to suffer.
We have international operations in Mexico and Europe. During
the years ended March 31, 2009 and 2008, approximately 76%
and 70% of our total revenues were generated from sales outside
of the United States. Our business is highly regulated for the
use, marketing and manufacturing of our Microcyn products both
domestically and internationally. Our international operations
are subject to risks, including:
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local political or economic instability;
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changes in governmental regulation;
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changes in import/export duties;
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trade restrictions;
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lack of experience in foreign markets;
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difficulties and costs of staffing and managing operations in
certain foreign countries;
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work stoppages or other changes in labor conditions;
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difficulties in collecting accounts receivables on a timely
basis or at all; and
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adverse tax consequences or overlapping tax structures.
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We plan to continue to market and sell our products
internationally to respond to customer requirements and market
opportunities. Establishing operations in any foreign country or
region presents risks such as those described above as well as
risks specific to the particular country or region. In addition,
until a payment history is established over time with customers
in a new geography or region, the likelihood of collecting
receivables generated by such operations could be less than our
expectations. As a result, there is a greater risk that reserves
set with respect to the collection of such receivables may be
inadequate. If our operations in any foreign country are
unsuccessful, we could incur significant losses and we may not
achieve profitability.
In addition, changes in policies or laws of the United States or
foreign governments resulting in, among other things, changes in
regulations and the approval process, higher taxation, currency
conversion limitations, restrictions on fund transfers or the
expropriation of private enterprises, could reduce the
anticipated benefits of our international expansion. If we fail
to realize the anticipated revenue growth of our future
international operations, our business and operating results
could suffer.
Our
sales in international markets subject us to foreign currency
exchange and other risks and costs which could harm our
business.
A substantial portion of our revenues are derived from outside
the United States; primarily from Mexico. We anticipate that
revenues from international customers will continue to represent
a substantial portion of our revenues for the foreseeable
future. Because we generate revenues in foreign currencies, we
are subject to the effects of exchange rate fluctuations. The
functional currency of our Mexican subsidiary is the Mexican
Peso, and the
34
functional currency of our subsidiary in the Netherlands is the
Euro. For the preparation of our consolidated financial
statements, the financial results of our foreign subsidiaries
are translated into U.S. dollars on average exchange rates
during the applicable period. If the U.S. dollar
appreciates against the Mexican Peso or the Euro, as applicable,
the revenues we recognize from sales by our subsidiaries will be
adversely impacted. Foreign exchange gains or losses as a result
of exchange rate fluctuations in any given period could harm our
operating results and negatively impact our revenues.
Additionally, if the effective price of our products were to
increase as a result of fluctuations in foreign currency
exchange rates, demand for our products could decline and
adversely affect our results of operations and financial
condition.
The
loss of key members of our senior management team, one of our
directors or our inability to retain highly skilled scientists,
technicians and salespeople could adversely affect our
business.
Our success depends largely on the skills, experience and
performance of key members of our executive management team,
including Hojabr Alimi, our Chief Executive Officer and Robert
Northey, our Director of Research and Development. The efforts
of these people will be critical to us as we continue to develop
our products and attempt to commercialize products in the
chronic and acute wound care market. If we were to lose one or
more of these individuals, we may experience difficulties in
competing effectively, developing our technologies and
implementing our business strategies.
Our research and development programs depend on our ability to
attract and retain highly skilled scientists and technicians. We
may not be able to attract or retain qualified scientists and
technicians in the future due to the intense competition for
qualified personnel among medical technology businesses,
particularly in the San Francisco Bay Area. We also face
competition from universities and public and private research
institutions in recruiting and retaining highly qualified
personnel. In addition, our success depends on our ability to
attract and retain salespeople with extensive experience in
wound care and close relationships with the medical community,
including physicians and other medical staff. We may have
difficulties locating, recruiting or retaining qualified
salespeople, which could cause a delay or decline in the rate of
adoption of our products. If we are not able to attract and
retain the necessary personnel to accomplish our business
objectives, we may experience constraints that will adversely
affect our ability to support our research, development and
sales programs.
We maintain key-person life insurance only on Mr. Alimi. We
may discontinue this insurance in the future, it may not
continue to be available on commercially reasonable terms or, if
continued, it may prove inadequate to compensate us for the loss
of Mr. Alimis services.
The
wound care industry is highly competitive and subject to rapid
technological change. If our competitors are better able to
develop and market products that are less expensive or more
effective than any products that we may develop, our commercial
opportunity will be reduced or eliminated.
Our success depends, in part, upon our ability to stay at the
forefront of technological change and maintain a competitive
position. We compete with large healthcare, pharmaceutical and
biotechnology companies, along with smaller or early-stage
companies that have collaborative arrangements with larger
pharmaceutical companies, academic institutions, government
agencies and other public and private research organizations.
Many of our competitors have significantly greater financial
resources and expertise in research and development,
manufacturing, pre-clinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products
than we do. Our competitors may:
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develop and patent processes or products earlier than we will;
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develop and commercialize products that are less expensive or
more efficient than any products that we may develop;
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obtain regulatory approvals for competing products more rapidly
than we will; and
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improve upon existing technological approaches or develop new or
different approaches that render our technology or products
obsolete or non-competitive.
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As a result, we may not be able to successfully commercialize
any future products.
35
The
success of our research and development efforts may depend on
our ability to find suitable collaborators to fully exploit our
capabilities. If we are unable to establish collaborations or if
these future collaborations are unsuccessful, our research and
development efforts may be unsuccessful, which could adversely
affect our results of operations and financial
condition.
An important element of our business strategy will be to enter
into collaborative or license arrangements under which we
license our Microcyn technology to other parties for development
and commercialization. We expect that while we may initially
seek to conduct initial clinical trials on our drug candidates,
we may need to seek collaborators for a number of our potential
products because of the expense, effort and expertise required
to conduct additional clinical trials and further develop those
potential products candidates. Because collaboration
arrangements are complex to negotiate, we may not be successful
in our attempts to establish these arrangements. If we need
third party assistance in identifying and negotiating one or
more acceptable arrangements, it might be costly. Also, we may
not have products that are desirable to other parties, or we may
be unwilling to license a potential product because the party
interested in it is a competitor. The terms of any arrangements
that we establish may not be favorable to us. Alternatively,
potential collaborators may decide against entering into an
agreement with us because of our financial, regulatory or
intellectual property position or for scientific, commercial or
other reasons. If we are not able to establish collaborative
agreements, we may not be able to develop and commercialize new
products, which would adversely affect our business and our
revenues.
In order for any of these collaboration or license arrangements
to be successful, we must first identify potential collaborators
or licensees whose capabilities complement and integrate well
with ours. We may rely on these arrangements for not only
financial resources, but also for expertise or economies of
scale that we expect to need in the future relating to clinical
trials, manufacturing, sales and marketing, and for licenses to
technology rights. However, it is likely that we will not be
able to control the amount and timing of resources that our
collaborators or licensees devote to our programs or potential
products. If our collaborators or licensees prove difficult to
work with, are less skilled than we originally expected, or do
not devote adequate resources to the program, the relationship
will not be successful. If a business combination involving a
collaborator or licensee and a third party were to occur, the
effect could be to diminish, terminate or cause delays in
development of a potential product.
If we
are unable to comply with broad and complex federal and state
fraud and abuse laws, including state and federal anti-kickback
laws, we could face substantial penalties and our products could
be excluded from government healthcare programs.
We are subject to various federal and state laws pertaining to
healthcare fraud and abuse, which include, among other things,
anti-kickback laws that prohibit payments to induce
the referral of products and services, and false
claims statutes that prohibit the fraudulent billing of
federal healthcare programs. Our operations are subject to the
federal anti-kickback statute, a criminal statute that, subject
to certain statutory exceptions, prohibits any person from
knowingly and willfully offering, paying, soliciting or
receiving remuneration, directly or indirectly, to induce or
reward a person either (i) for referring an individual for
the furnishing of items or services for which payment may be
made in whole or in part by a government healthcare program such
as Medicare or Medicaid, or (ii) for purchasing, leasing,
or ordering or arranging for or recommending the purchasing,
leasing or ordering of an item or service for which payment may
be made under a government healthcare program. Because of the
breadth of the federal anti-kickback statute, the Office of
Inspector General of the U.S. Department of Health and
Human Services, or the OIG, was authorized to adopt regulations
setting forth additional exceptions to the prohibitions of the
statute commonly known as safe harbors. If all of
the elements of an applicable safe harbor are fully satisfied,
an arrangement will not be subject to prosecution under the
federal anti-kickback statute.
In addition, if there is a change in law, regulation or
administrative or judicial interpretations of these laws, we may
have to change our business practices or our existing business
practices could be challenged as unlawful, which could have a
negative effect on our business, financial condition and results
of operations.
Healthcare fraud and abuse laws are complex, and even minor,
inadvertent irregularities can potentially give rise to claims
that a statute or regulation has been violated. The frequency of
suits to enforce these laws have increased significantly in
recent years and have increased the risk that a healthcare
company will have to defend a false claim action, pay fines or
be excluded from the Medicare, Medicaid or other federal and
state healthcare
36
programs as a result of an investigation arising out of such
action. We may become subject to such litigation. Any violations
of these laws, or any action against us for violation of these
laws, even if we successfully defend against it, could harm our
reputation, be costly to defend and divert managements
attention from other aspects of our business. Similarly, if the
physicians or other providers or entities with whom we do
business are found to have violated abuse laws, they may be
subject to sanctions, which could also have a negative impact on
us.
Our
efforts to discover and develop potential products may not lead
to the discovery, development, commercialization or marketing of
actual drug products.
We are currently engaged in a number of different approaches to
discover and develop new product applications and product
candidates. At the present time, we have one Microcyn-based drug
candidate in clinical trials. We also have a non-Microcyn-based
compound in the research and development phase. We believe this
compound has potential applications in oncology. Discovery and
development of potential drug candidates are expensive and
time-consuming, and we do not know if our efforts will lead to
discovery of any drug candidates that can be successfully
developed and marketed. If our efforts do not lead to the
discovery of a suitable drug candidate, we may be unable to grow
our clinical pipeline or we may be unable to enter into
agreements with collaborators who are willing to develop our
drug candidates.
We
must maintain expensive finance and accounting systems,
procedures and controls to accommodate growth of our business
and organization and to satisfy public company reporting
requirements, which will increase our costs and require
additional management resources.
As a public reporting company, we are required to comply with
the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the Securities and Exchange Commission, or the
Commission. Section 404 of the Sarbanes-Oxley Act of 2002,
or Section 404, requires our management to perform an
annual assessment of our internal control over financial
reporting. Compliance with Section 404 and other
requirements of doing business as a public company have and will
continue to increase our costs and require additional management
resources to implement an ongoing program to perform system and
process evaluation and testing of our internal controls. In the
past, we entered into transactions that resulted in accounting
consequences that we did not identify at the time of the
transactions. As a result, our prior independent auditors
informed us that we did not have the appropriate financial
management and reporting structure in place to meet the demands
of a public company and that our accounting and financial
personnel lacked the appropriate level of accounting knowledge,
experience and training. In calendar year 2006, our current
independent auditors recommended certain changes which, in
addition to other changes in our financial reporting and
management structure, have been implemented at additional cost.
We have upgraded our accounting systems, procedures and controls
and will need to continue to implement additional finance and
accounting systems, procedures and controls as we grow our
business and organization, enter into complex business
transactions and take actions designed to satisfy reporting
requirements. As of our second report on
Form 10-K,
our management concluded that our internal controls were
adequate to meet the required Section 404 assessment. If we
are unable to complete the required Section 404 assessment
as to the adequacy of our internal control over financial
reporting in future
Form 10-K
filings, our ability to obtain additional financing could be
impaired. In addition, investors could lose confidence in the
reliability of our internal control over financial reporting and
in the accuracy of our periodic reports filed under the
Securities Exchange Act of 1934. A lack of investor confidence
in the reliability and accuracy of our public reporting could
cause our stock price to decline.
We may
not be able to maintain sufficient product liability insurance
to cover claims against us.
Product liability insurance for the healthcare industry is
generally expensive to the extent it is available at all. We may
not be able to maintain such insurance on acceptable terms or be
able to secure increased coverage if the commercialization of
our products progresses, nor can we be sure that existing or
future claims against us will be covered by our product
liability insurance. Moreover, the existing coverage of our
insurance policy or any rights of indemnification and
contribution that we may have may not be sufficient to offset
existing or future claims. A successful claim against us with
respect to uninsured liabilities or in excess of insurance
coverage and not subject to any indemnification or contribution
could have a material adverse effect on our future business,
financial condition, and results of operations.
37
Risks
Related to Our Common Stock
Our
operating results may fluctuate, which could cause our stock
price to decrease.
Fluctuations in our operating results may lead to fluctuations,
including declines, in our share price. Our operating results
and our share price may fluctuate from period to period due to a
variety of factors, including:
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demand by physicians, other medical staff and patients for our
Microcyn products;
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reimbursement decisions by third-party payors and announcements
of those decisions;
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clinical trial results and publication of results in
peer-reviewed journals or the presentation at medical
conferences;
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the inclusion or exclusion of our Microcyn products in large
clinical trials conducted by others;
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actual and anticipated fluctuations in our quarterly financial
and operating results;
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developments or disputes concerning our intellectual property or
other proprietary rights;
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issues in manufacturing our product candidates or products;
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new or less expensive products and services or new technology
introduced or offered by our competitors or us;
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the development and commercialization of product enhancements;
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changes in the regulatory environment;
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delays in establishing new strategic relationships;
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costs associated with collaborations and new product candidates;
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introduction of technological innovations or new commercial
products by us or our competitors;
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litigation or public concern about the safety of our product
candidates or products;
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changes in recommendations of securities analysts or lack of
analyst coverage;
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failure to meet analyst expectations regarding our operating
results;
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additions or departures of key personnel; and
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general market conditions.
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Variations in the timing of our future revenues and expenses
could also cause significant fluctuations in our operating
results from period to period and may result in unanticipated
earning shortfalls or losses. In addition, the NASDAQ Capital
Market, in general, and the market for life sciences companies,
in particular, have experienced significant price and volume
fluctuations that have often been unrelated or disproportionate
to the operating performance of those companies.
If an
active, liquid trading market for our common stock does not
develop, you may not be able to sell your shares quickly or at
or above the price you paid for it.
Although our common stock is listed on the NASDAQ Capital
Market, an active and liquid trading market for our common stock
has not yet and may not ever develop or be sustained. You may
not be able to sell your shares quickly or at or above the price
you paid for our stock if trading in our stock is not active.
38
Anti-takeover
provisions in our charter and by-laws and under Delaware law may
make it more difficult for stockholders to change our management
and may also make a takeover difficult.
Our corporate documents and Delaware law contain provisions that
limit the ability of stockholders to change our management and
may also enable our management to resist a takeover. These
provisions include:
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the ability of our board of directors to issue and designate the
rights of, without stockholder approval, up to
5,000,000 shares of convertible preferred stock, which
rights could be senior to those of common stock;
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limitations on persons authorized to call a special meeting of
stockholders; and
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advance notice procedures required for stockholders to make
nominations of candidates for election as directors or to bring
matters before meetings of stockholders.
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These provisions might discourage, delay or prevent a change of
control in our management. These provisions could also
discourage proxy contests and make it more difficult for you and
other stockholders to elect directors and cause us to take other
corporate actions. In addition, the existence of these
provisions, together with Delaware law, might hinder or delay an
attempted takeover other than through negotiations with our
board of directors.
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 100,000,000 shares of
our common stock and to issue and designate the rights of,
without stockholder approval, up to 5,000,000 shares of
convertible 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
convertible preferred stock, these securities may provide for
rights, preferences or privileges senior to those of holders of
our common stock.
We currently lease approximately 12,000 square feet of
office, research and manufacturing space in Petaluma,
California, which serves as our principal executive offices. We
also lease approximately 28,000 square feet of office space
in an adjacent building for research and development under the
lease agreement. The lease was scheduled to expire on
September 30, 2007. On September 13, 2007, we entered
into Amendment No. 4 to the property lease agreement for
our facility in Petaluma, California. The amendment extended the
lease expiration date to September 30, 2010. On
May 18, 2009, we entered into Amendment No. 5 for our
facility in Petaluma, California. Pursuant to the amendment, we
agreed to surrender 8,534 square feet of office space and
extended the lease expiration on the remaining lease to
September 30, 2011.
We lease approximately 12,000 square feet of office and
manufacturing space and approximately 5,000 square feet of
warehouse space in Zapopan, Mexico, under leases that expire in
April 2009 and April 2011, respectively. We believe the portion
of the lease that expired in April 2009 will be renewed on
similar terms. We lease approximately 5,000 square feet of
office space and approximately 14,000 square feet of
manufacturing and warehouse space in Sittard, the Netherlands,
under a lease that was scheduled to expire on January 31,
2009. On February 15, 2008, we extended this lease to
January 2011. On February 1, 2009 we amended this lease to
expire on September 1, 2009. As we expand, we may need to
establish manufacturing facilities in other countries.
We believe that our properties will be adequate to meet our
needs through March 2010.
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ITEM 3.
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Legal
Proceedings
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We may be involved from time to time in ordinary litigation,
negotiation and settlement matters that will not have a material
effect on our operations or finances. We are not aware of any
pending or threatened litigation against us or our officers and
directors in their capacity as such that could have a material
impact on our operations or finances.
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ITEM 4.
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Submission
of Matters to a Vote of Security Holders
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No matter was submitted to a vote of our security holders during
the fourth quarter ended March 31, 2009.
39
PART II
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ITEM 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Market
Information
Our common stock is traded on the NASDAQ Capital Market under
the symbol OCLS and has been trading since our
initial public offering on January 25, 2007. The following
table sets forth the range of high and low sales prices for our
common stock, based on the last daily sale, in each of the
quarters since our stock began trading:
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Year Ended March 31, 2009
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First
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Second
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Third
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Fourth
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Quarter
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Quarter
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Quarter
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Quarter
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Stock price-high
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$
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5.18
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$
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3.24
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$
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1.74
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$
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1.74
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Stock price-low
|
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$
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2.41
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$
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1.70
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$
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0.40
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$
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0.90
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Year Ended March 31, 2008
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First
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Second
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Third
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Fourth
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Quarter
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Quarter
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Quarter
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Quarter
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Stock price-high
|
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$
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8.75
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|
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$
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11.48
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$
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7.86
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$
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7.29
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Stock price-low
|
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$
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5.66
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$
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4.84
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$
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3.71
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$
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3.20
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Holders
As of May 20, 2009, we had approximately 577 holders of
record of our common stock. Holders of record include nominees
who may hold shares on behalf of multiple owners.
Dividends
We have never declared or paid any cash dividends on our capital
stock, and we do not currently intend to pay any cash dividends
on our common stock in the foreseeable future.
Recent
Sales of Unregistered Securities; Use of Proceeds from
Registered Securities
During the three months ended March 31, 2009, we sold
equity securities that were not registered under the Securities
Act. On February 6, 2009, we closed a private placement of
units with a group of accredited investors whereby we sold
1,499,411 shares of our common stock at a purchase price of
$116.90 per unit. In exchange for each $116.90 invested, the
investors received 100 shares of our common stock, a
Series A Warrant exercisable after six months for a five
year term, to purchase 58 shares of our common stock at an
exercise price of $1.87 per share and a Series B Warrant,
exercisable after six months for a three year term, to purchase
78 shares of our common stock at an exercise price of $1.13
per share. Gross proceeds from the private placement totaled
approximately $1,752,803. In connection with this sale, we paid
Merriman Curhan Ford and Co., as placement agent, $122,696 in
commissions plus warrants, exercisable upon the closing date of
the transaction for a five year term, to purchase
104,958 shares of our common stock at an exercise price of
$1.56 per share.
On February 24, 2009, we entered into a Purchase Agreement
with Robert Burlingame, our director, and an accredited investor
(the Investors). Pursuant to the terms of the
Purchase Agreement, the Investors agreed to make a $3,000,000
investment. The Investors paid $1,000,000 on February 24,
2009 and paid the remaining $2,000,000 on June 1, 2009. In
exchange for this investment, we issued to the Investors a total
of 2,564,103 shares of our common stock in two tranches,
pro rata to the investment amounts paid by the Investor on each
date the Investor provided funds. In connection with this
offering, we issued 854,701 shares of our common stock on
February 27, 2009 and 1,709,402 shares of our common
stock on June 1, 2009. In addition, we issued to the
Investors Series A Warrants, exercisable after six months
for a five year term, to purchase a total of
1,500,000 shares of our common stock at an exercise price
of $1.87 per share and Series B Warrants, exercisable after
six months for a three year term, to purchase a total of
2,000,000 shares of our common stock at an exercise price
of $1.13 per share. Both the Series A and Series B
Warrants are exercisable in tranches, pro rata to the investment
amounts paid by the Investors
40
on the closing dates. In connection with this placement, we paid
Merriman Curhan Ford and Co. a fee of $50,000 for their
assistance with the transaction.
On March 4, 2009, we issued Dayl Crow a Series A
Warrant exercisable for a five year term, to purchase
50,000 shares of our common stock at an exercise price of
$1.87 per share. These shares were issued in connection with
consulting services.
On March 5, 2009, we issued 10,000 shares of common
stock to Spot Savvy LLC pursuant to the terms of a Consulting
Agreement dated February 26, 2009. The 10,000 shares
were issued as compensation for providing product marketing
services valued at $10,600. Also on March 5, 2009, we
issued 10,000 shares of common stock to Michael Salman
Teymori pursuant to the terms of a Consulting Agreement dated
February 26, 2009. The 10,000 shares were issued as
compensation for marketing services valued at $10,600.
On May 27, 2009, we issued 24,500 shares of common
stock to Advocos in connection with an agreement whereby Advocos
will provide product sales services.
In June 2009, we plan to issue Robert Burlingame, a member of
our board of directors, 435,897 shares of our common stock
pursuant to a consulting agreement entered into on April 1,
2009, whereby Mr. Burlingame provides us with sales and
marketing expertise and services.
With respect to the issuances of our securities described above,
we relied on the Section 4(2) exemption from securities
registration under the federal securities laws for transactions
not involving any public offering. No advertising or general
solicitation was employed in offering the securities. The
securities were issued to accredited investors. The securities
were offered for investment purposes only and not for the
purpose of resale or distribution and the transfer thereof was
appropriately restricted by us.
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ITEM 6.
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Selected
Financial Data
|
As a Smaller Reporting Company, as defined by
Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of
Regulation S-K,
we are electing scaled disclosure reporting obligations and
therefore are not required to provide the information requested
by this Item.
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ITEM 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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Business
Overview
We are a biopharmaceutical company that develops, manufactures
and markets a family of products, based on our platform
technology called Microcyn, intended to help prevent and treat
infections in chronic and acute wounds. Microcyn is a
non-irritating oxychlorine compound designed to treat a wide
range of pathogens, including antibiotic-resistant strains of
bacteria, viruses, fungi and spores.
Critical
Accounting Policies
The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to exercise its judgment. We
exercise considerable judgment with respect to establishing
sound accounting polices and in making estimates and assumptions
that affect the reported amounts of our assets and liabilities,
our recognition of revenues and expenses, and disclosure of
commitments and contingencies at the date of the consolidated
financial statements.
On an ongoing basis, we evaluate our estimates and judgments.
Areas in which we exercise significant judgment include, but are
not necessarily limited to, our valuation of accounts
receivable, inventory, income taxes, equity transactions
(compensatory and financing) and contingencies. We have also
adopted certain polices with respect to our recognition of
revenue that we believe are consistent with the guidance
provided under Securities and Exchange Commission Staff
Accounting Bulletin No. 104.
We base our estimates and judgments on a variety of factors
including our historical experience, knowledge of our business
and industry, current and expected economic conditions, the
attributes of our products, regulatory environment, and in
certain cases, the results of outside appraisals. We
periodically re-evaluate our estimates and
41
assumptions with respect to these judgments and modify our
approach when circumstances indicate that modifications are
necessary.
While we believe that the factors we evaluate provide us with a
meaningful basis for establishing and applying sound accounting
policies, we cannot guarantee that the results will always be
accurate. Since the determination of these estimates requires
the exercise of judgment, actual results could differ from such
estimates.
A description of significant accounting polices that require us
to make estimates and assumptions in the preparation of our
consolidated financial statements is as follows:
Stock-based
Compensation
Prior to April 1, 2006, we accounted for stock-based
employee compensation arrangements in accordance with the
provisions of APB No. 25, Accounting for Stock Issued
to Employees, and its related interpretations and applied
the disclosure requirements of SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123.
We used the minimum value method to measure the fair value of
awards issued prior to April 1, 2006 with respect to our
application of the disclosure requirements under
SFAS No. 123.
Effective April 1, 2006, we adopted
SFAS No. 123(R) Share Based Payment
(SFAS 123(R)) using the prospective method.
This statement is a revision of SFAS No. 123, and
supersedes APB Opinion No. 25, and its related
implementation guidance. SFAS 123(R) addresses all forms of
share based payment, or SBP, awards including shares issued
under employee stock purchase plans, stock options, restricted
stock and stock appreciation rights. Under SFAS 123(R), SBP
awards result in a cost that will be measured at fair value on
the awards grant date, based on the estimated number of
awards that are expected to vest and will result in a charge to
operations.
We had a choice of two attribution methods for allocating
compensation costs under SFAS 123(R): the
straight-line method, which allocates expense on a
straight-line basis over the requisite service period of the
last separately vesting portion of an award, or the graded
vesting attribution method, which allocates expense on a
straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in
substance, multiple awards. We chose the former method and
amortized the fair value of each option on a straight-line basis
over the requisite period of the last separately vesting portion
of each award.
Revenue
Recognition and Accounts Receivable
We generate product revenues from sales of our products to
hospitals, medical centers, doctors, pharmacies, distributors
and strategic partners. We sell our products directly to third
parties and to distributors through various cancelable
distribution agreements. We have also entered into an agreement
to license our products.
We apply the revenue recognition principles set forth in
Securities and Exchange Commission Staff Accounting Bulletin, or
SAB, 104 Revenue Recognition, with respect to all of
our revenues. Accordingly, we record revenues when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed or determinable, and collectability of the sale is
reasonably assured.
We require all of our product sales to be supported by evidence
of a sale transaction that clearly indicates the selling price
to the customer, shipping terms and payment terms. Evidence of
an arrangement generally consists of a contract or purchase
order approved by the customer. We have ongoing relationships
with certain customers from which we customarily accept orders
by telephone in lieu of a purchase order.
We recognize revenues at the time in which we receive a
confirmation that the goods were either tendered at their
destination when shipped FOB destination, or
transferred to a shipping agent when shipped FOB shipping
point. Delivery to the customer is deemed to have occurred
when the customer takes title to the product. Generally, title
passes to the customer upon shipment, but could occur when the
customer receives the product based on the terms of the
agreement with the customer.
While we have a policy of investigating the creditworthiness of
our customers, we have, under certain circumstances, shipped
goods in the past and deferred the recognition of revenues when
available information
42
indicates that collection is in doubt. We establish allowances
for doubtful accounts when available information causes us to
believe that a credit loss is probable.
We market a substantial portion of our goods through
distributors. In Europe, we defer recognition of
distributor-generated revenues until the time we confirm that
distributors have sold these goods. Although our terms provide
for no right of return, our products have a finite shelf life
and we may, at our discretion, accommodate distributors by
accepting returns to avoid the distribution of expired goods.
Service revenues are recorded upon performance of the service
contracts. Revenues generated from testing contracts are
recorded when the test is completed and the final report is sent
to the customer.
Inventory
and Cost of Revenues
We state our inventory at the lower of cost, determined using
the
first-in,
first-out method, or market, based on standard costs.
Establishing standard manufacturing costs requires us to make
estimates and assumptions as to the quantities and costs of
materials, labor and overhead that are required to produce a
finished good. Cost of service revenues is expensed when
incurred.
Income
Taxes
We are required to determine the aggregate amount of income tax
expense or loss based upon tax statutes in jurisdictions in
which we conduct business. In making these estimates, we adjust
our results determined in accordance with generally accepted
accounting principles for items that are treated differently by
the applicable taxing authorities. Deferred tax assets and
liabilities, as a result of these differences, are reflected on
our balance sheet for temporary differences in loss and credit
carryforwards that will reverse in subsequent years. We also
establish a valuation allowance against deferred tax assets when
it is more likely than not that some or all of the deferred tax
assets will not be realized. Valuation allowances are based, in
part, on predictions that management must make as to our results
in future periods. The outcome of events could differ over time
which would require that we make changes in our valuation
allowance.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the dates of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual
results could differ from these estimates. These estimates and
assumptions include reserves and write-downs related to
receivables and inventories, the recoverability of long-term
assets, deferred taxes and related valuation allowances and
valuation of equity instruments.
Recent
Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board
(FASB) issued Statement of Accounting
Standard No. 162 (SFAS 162), The
Hierarchy of Generally Accepted Accounting Principles.
SFAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial
statements that are presented in conformity with
U.S. generally accepted accounting principles. The guidance
in SFAS 162 replaces that prescribed in Statement on
Auditing Standards No. 69, The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles,
and becomes effective 60 days following the SECs
approval of the Public Company Accounting Oversight Boards
auditing amendments to AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. The adoption of SFAS 162 will not have an
impact on our consolidated financial position, results of
operations or cash flows.
In May 2008, the FASB issued FASB Staff Position
(FSP) APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement). This FSP clarifies that convertible debt
instruments that may be settled in cash upon conversion
(including partial cash settlement) are
43
not addressed by paragraph 12 of APB Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants. Additionally, this FSP specifies that
issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect
the entitys nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. This FSP is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. We are in the process of determining
the impact FSP APB
14-1 will
have on our consolidated financial statements. We are in the
process of determining the impact APB
14-1 will
have on our consolidated financial statements. We will apply
this standard prospectively to convertible debt instruments
issued after March 31, 2009.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. This
FSP addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, need to be included in the earnings allocation in
computing earnings per share (EPS) under the two-class method
described in paragraphs 60 and 61 of FASB Statement
No. 128, Earnings per Share. FSP
EITF 03-6-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those years. We are in the process of determining the
impact FSP
EITF 03-6-1
will have on our consolidated financial statements. We are is in
the process of determining the impact
EITF 03-6-1
will have on our consolidated financial statements.
In October 2008, the FASB issued FASB Staff Position (FSP)
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. The FSP clarifies the
application of FASB Statement No. 157, Fair Value
Measurements, in a market that is not active and provides an
example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial
asset is not active. The FSP is effective October 10, 2008,
and for prior periods for which financial statements have not
been issued. Revisions resulting from a change in the valuation
technique or its application should be accounted for as a change
in accounting estimate following the guidance in FASB Statement
No. 154, Accounting Changes and Error Corrections.
The adoption
FAS 157-3
did not have an impact on our consolidated financial statements.
In December 2008, the FASB ratified EITF Issue
No. 07-5,
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock. This issue
addresses the determination of whether an instrument (or an
embedded feature) is indexed to an entitys own stock,
which is the first part of the scope exception in
paragraph 11(a) of Statement 133. This issue is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal
years. We are in the process of determining the impact
EITF 07-5
will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements (SFAS 157).
SFAS 157 clarifies the definition of fair value,
establishes a framework for measurement of fair value and
expands disclosure about fair value measurements. SFAS 157
is effective for fiscal years beginning after November 15,
2007, except as amended by FASB Staff Position (FSP)
SFAS 157-2
which is effective for fiscal years beginning after
November 15, 2008. FSP
SFAS 157-2
allows partial adoption relating to fair value measurements for
non-financial assets and liabilities that are not measured at
fair value on a recurring basis. The Company adopted
SFAS 157 effective April 1, 2009, except as it applies
to the non-financial assets and non-financial liabilities
subject to FSP
SFAS 157-2.
The Company will adopt the remaining provisions of SFAS 157
in the first quarter of fiscal 2010 and is currently evaluating
the impact adoption may have on its consolidated financial
statements. SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure of
fair value measurements. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. SFAS 157 applies to all financial
instruments that are measured and reported on a fair value basis.
Other accounting standards that have been issued or proposed by
the FASB, the EITF, the SEC and or other standards-setting
bodies that do not require adoption until a future date are not
expected to have a material impact on our consolidated financial
statements upon adoption.
44
Comparison
of Fiscal Years Ended March 31, 2009 and 2008
Revenues
We experienced a 53% growth in product revenues and a 2% growth
in our services business, resulting in total revenues of
$5,388,000 during the twelve months ended March 31, 2009
compared to $3,835,000 in the prior year period. The $1,534,000
increase in product revenues was due primarily to $1,155,000
higher sales in Mexico despite a 11% drop in the value of the
peso. Mexico sales increased 55% on higher unit volumes of our
Microcyn wound care product to hospitals and pharmacies, as well
as higher average selling prices in both our 5-liter and our
240-milliliter presentations. If the peso had not declined, the
growth in Mexico sales would have been 71% compared to the prior
year. Sales of 240-milliliter units in Mexico increased 27% on
improvements to both units sold and higher average selling
prices as compared to the prior year period. Additionally, sales
to hospitals in Mexico increased 144% on both higher unit
shipments and selling prices. Europe/ROW sales increased
$277,000, up 49%, over the prior year due to initial sales to
China Bao Tai in China, as well as strong sales growth to our
customers in India, Singapore, Middle East and Slovakia.
The following table shows our product revenues by geographic
region (in thousands):
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|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
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|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
Increase
|
|
|
U.S.
|
|
$
|
298
|
|
|
$
|
197
|
|
|
$
|
101
|
|
|
|
51
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%
|
Europe/ROW
|
|
|
844
|
|
|
|
566
|
|
|
|
278
|
|
|
|
49
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%
|
Mexico
|
|
|
3,273
|
|
|
|
2,118
|
|
|
|
1,155
|
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,415
|
|
|
$
|
2,881
|
|
|
$
|
1,534
|
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $19,000 increase in service revenues was due to an increase
in the number of tests provided by our services business.
Gross
Profit/Loss
We reported gross profit from our Microcyn products business of
$2,742,000, or 62% of product revenues, during the
12 months ended March 31, 2009, compared a gross
profit of $1,107,000, or 38%, in the prior year period. This
increase was primarily due to lower costs in Europe and the
improvements in our Mexico operations, which have improved
margins to 75% during the twelve months ended March 31,
2009, compared to 69% in the prior year period. Lower costs in
Europe have put our European operation in a positive gross
margin position during the twelve months ended March 31,
2009, compared to a gross loss position in the prior year
period. Our services business continues to be at or near
breakeven as it was in the prior year period.
Research
and Development Expense
Research and development expense declined $3,526,000, or 36%, to
$6,252,000 for the twelve months ended March 31, 2009,
compared to $9,778,000 in the prior year period. Most of the
decrease was attributable to outside clinical expenses, which
were $2,400,000 higher than it was in the prior year period,
which were related the costs of the Phase II clinical trial
last year. During the first part of the current fiscal year, we
increased our personnel, while in the later part of the second
and third fiscal quarters, we significantly reduced the number
of people in research and development, so that the net cost of
personnel was lower for the year. This expense also includes a
$219,000 net loss on the disposal of certain research and
development manufacturing equipment and severance costs of
$290,000.
We expect that our research and development expense will remain
fairly flat since most of the reductions have been reflected in
the quarter ended March 31, 2009.
Selling,
General and Administrative Expense
Selling, general and administrative expense increased $126,000,
or 1%, to $13,857,000 during the twelve months ended
March 31, 2009, from $13,731,000 during the twelve months
ended March 31, 2008. Primarily, this increase was due to a
$995,000 increase in non-cash stock compensation expense. In
addition, there was $479,000
45
of severance expense associated with terminations during the
period. Sales and marketing fees were also higher by
$670,000 primarily associated with our U.S. Microcyn
wound care product launch. These increases were offset in large
part by $965,000 lower bonus expense, by $572,000 lower legal
and accounting fees and an overall reduction in headcount and
related expenses
We expect these expenses to grow in future periods as we spend
more money on expanding the sales in the U.S. market.
Interest
income and expense and other income and expense
Interest expense decreased $579,000, or 57%, to $437,000 for the
twelve months ended March 31, 2009, from $1,016,000 in the
prior year period, due to the payments made on debt over the
prior year. Total outstanding debt decreased $1,889,000 to
$335,000 at March 31, 2009, from $2,224,000 at
March 31, 2008. Interest income decreased $478,000, to
$152,000 for the twelve months ended March 31, 2009, from
$630,000 in the prior year period, primarily due to the decrease
in our interest bearing cash balance over the past year.
Other income and expense decreased $2,536,000 to net other
expense of $64,000 for the twelve months ended March 31,
2009, from net other income of $2,472,000 for the twelve months
ended March 31, 2009. Primarily this decrease was due to
our intercompany notes to Europe and Mexico being reclassified
in our second fiscal quarter as long term, and therefore no
foreign currency adjustment was required to revalue the notes
after the second fiscal quarter. In prior periods, this account
consisted of charges due to the fluctuation of foreign exchange
rates, and the resulting gain or loss recognized for the
revaluation of our intercompany notes payable denominated in
non-local currencies.
Net
Loss
Net loss for the twelve months ended March 31, 2009 was
$17,656,000, down $2,683,000 from $20,339,000 for the same
period in the prior year. Stock compensation expense for the
fiscal years ended March 31, 2009 and 2008 were $2,263,000
and $1,339,000, respectively. The total severance cost for this
fiscal year was $795,000.
Liquidity
and Capital Resources
We incurred net losses of $17,656,000 for the year ended
March 31, 2009. At March 31, 2009, our accumulated
deficit amounted to $108,482,000. We had working capital of
$1,263,000 as of March 31, 2009. We need to raise
additional capital from external sources in order to sustain our
operations while continuing the longer term efforts contemplated
under our business plan. We expect to continue incurring losses
for the foreseeable future and must raise additional capital to
pursue our product development initiatives, penetrate markets
for the sale of our products and continue as a going concern. We
cannot provide any assurance that it will raise additional
capital. We believe that we have access to capital resources
through possible public or private equity offerings, debt
financings, corporate collaborations or other means; however, we
have not secured any commitment for new financing at this time
nor can we provide any assurance that new financing will be
available on commercially acceptable terms, if at all. If the
economic climate in the U.S. does not improve or continues
to deteriorate, our ability to raise additional capital could be
negatively impacted. If we are unable to secure additional
capital, we may be required to curtail our research and
development initiatives and take additional measures to reduce
costs in order to conserve our cash in amounts sufficient to
sustain operations and meet our obligations. These measures
could cause significant delays in our efforts to commercialize
our products in the United States, which is critical to the
realization of our business plan and the future operations.
These matters raise substantial doubt about our ability to
continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that may be
necessary should the we be unable to continue as a going concern.
Sources
of Liquidity
As of March 31, 2009, we had unrestricted cash and cash
equivalents of $1,921,000. Since our inception, substantially
all of our operations have been financed through sales of equity
securities. Other sources of financing that we have used to date
include our revenues, as well as various loans.
46
Since our inception, substantially all of our operations have
been financed through the sale of $102,565,000 (net proceeds) of
our common and convertible preferred stock. This includes, net
proceeds $21,936,000 raised in our initial public offering on
January 30, 2007, net proceeds of $9,124,000 raised in a
private placement of common shares on August 13, 2007, net
proceeds of $12,613,000 raised through a registered direct
placement from March 31, 2008 to April 1, 2008, net
proceeds of $1,514,000 raised through a private placement on
February 6, 2009 and net proceeds of $948,000 from a
private placement on February 24, 2009 and proceeds of
$2,000,000 from a private placement on June 1, 2009.
In June 2006, we entered into a loan and security agreement with
a financial institution to borrow a maximum of $5,000,000. Under
this facility we borrowed $4,182,000, of which $1,829,000 was
paid in the year ended March 31, 2009. The loan was repaid
in full at March 31, 2009.
Cash
Flows
As of March 31, 2009, we had unrestricted cash and cash
equivalents of $1,921,000, compared to $18,823,000 at
March 31, 2008.
Net cash used in operating activities during the twelve months
ended March 31, 2009 was $16,832,000, primarily due to the
$17,656,000 net loss for the period, and to a $1,332,000
decrease in accounts payable, primarily the result of payments
made for the placement agent fee related to our registered
direct offering in March 2008 that were paid subsequent to
March 31, 2008, and a $1,588,000 decrease in accrued
expenses, related mostly to accrued bonuses earned during the
fiscal year ended March 31, 2008. These uses of cash were
offset in part by non-cash charges during the year ended
March 31, 2009, including $2,263,000 of stock-based
compensation, $768,000 of depreciation and amortization,
$304,000 of non-cash interest expense, and $235,000 of loss on
the disposal of capital equipment. Net cash used in operating
activities during the year ended March 31, 2008 was
$17,446,000, primarily due to the $20,339,000 net loss for
the period, and to a lesser extent a $989,000 increase in
accrued bonuses during the year and $2,594,000 of foreign
currency gain. These uses of cash were offset in part by
non-cash charges during the year ended March 31, 2008,
including $1,339,000 of stock-based compensation, $740,000 of
depreciation and amortization, $522,000 of non-cash interest
expense and $1,519,000 increase in accrued expenses.
Net cash used in investing activities was $424,000 and $617,000
for the twelve months ended March 31, 2009 and 2008,
respectively. Primarily this cash was used during the periods
for purchasing lab and manufacturing equipment.
Net cash provided by financing activities was $376,000 for the
twelve months ended March 31, 2009. Stock was issued for
$2,499,000 and $2,119,000 of outstanding debt was paid off
during the period. Net cash provided by financing activities was
$17,832,000 for the twelve months ended March 31, 2008.
This involved debt payments totaling $6,090,000, which included
the full payment on a $4.0 million note payable to Robert
Burlingame and $21,737,000 of net funds received in connection
with the issuance of common stock.
Contractual
Obligations
As of March 31, 2009, we had contractual obligations as
follows (long-term debt and capital lease amounts include
principal payments only) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
3 Years
|
|
|
Long-term debt
|
|
$
|
329
|
|
|
$
|
255
|
|
|
$
|
74
|
|
|
$
|
|
|
Capital leases
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
628
|
|
|
|
387
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
963
|
|
|
$
|
648
|
|
|
$
|
315
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We currently lease approximately 12,000 square feet of
office, research and manufacturing space in Petaluma,
California, which serves as our principal executive offices. We
also lease approximately 28,000 square feet of office space
in an adjacent building for research and development under the
lease agreement. The lease was scheduled to
47
expire on September 30, 2007. On September 13, 2007,
we entered into Amendment No. 4 to the property lease
agreement for our facility in Petaluma, California. The
amendment extended the lease expiration date to
September 30, 2010. On May 18, 2009, we entered into
Amendment No. 5 to the property lease agreement for our
facility in Petaluma, California. Pursuant to the amendment, we
agreed to surrender 8,534 square feet of office space and
extended the lease expiration on the remaining lease to
September 30, 2011.
We lease approximately 12,000 square feet of office and
manufacturing space and approximately 5,000 square feet of
warehouse space in Zapopan, Mexico, under a lease that expires
in April 2009 and April 2011.
We lease approximately 5,000 square feet of office space
and approximately 14,000 square feet of manufacturing and
warehouse space in Sittard, the Netherlands, under a lease that
was scheduled to expire on January 31, 2009. On
February 15, 2008, we extended this lease to January 2011.
On February 1, 2009, the we amended this lease agreement.
The amendment shortens the lease period from January 31,
2011 to September 1, 2009. As we expand, we may need to
establish manufacturing facilities in other countries.
Operating
Capital and Capital Expenditure Requirements
We incurred a net loss of $17,656,000 for the twelve months
ended March 31, 2009. At March 31, 2009 and 2008, our
accumulated deficit amounted to $108,482,000 and $90,826,000,
respectively. At March 31, 2009, our working capital
amounted to $1,263,000.
We need to raise additional capital from external sources in
order to sustain our operations while continuing the longer term
efforts contemplated under our business plan. We expect to
continue incurring losses for the foreseeable future and must
raise additional capital to pursue our product development
initiatives, to penetrate markets for the sale of our products
and for us to continue as a going concern. We may not raise
additional capital. If we are unable to raise additional
capital, we will be required to curtail certain operating
activities, and implement additional cost reductions in an
effort to conserve capital in amounts sufficient to sustain
operations and meet our obligations for the next twelve months.
These matters raise substantial doubt about our ability to
continue as a going concern. We believe that we have access to
capital resources through public or private equity offerings,
debt financings, corporate collaborations or other means;
however, we have not secured any commitment for new financing at
this time and new financing may not be available on commercially
acceptable terms, if at all. If we are unable to secure
additional capital, we may be required to curtail our research
and development initiatives and take additional measures to
reduce costs in order to conserve cash. These measures could
cause significant delays in our efforts to commercialize our
products in the United States, which is critical to the
realization of our business plan and our future operations.
We have undertaken initiatives to reduce costs in an effort to
conserve liquidity. Future pivotal trials will require the
selection of a partner and must also be completed in order for
us to commercialize Microcyn as a drug product in the United
States. Commencement of the pivotal clinical trials will be
delayed until we find a strategic partner to fund these trials.
Without a strategic partner or additional capital, our pivotal
clinical trials will be delayed for a period of time that is
currently indeterminate.
Our future funding requirements will depend on many factors,
including:
|
|
|
|
|
the scope, rate of progress and cost of our clinical trials and
other research and development activities;
|
|
|
|
future clinical trial results;
|
|
|
|
the terms and timing of any collaborative, licensing and other
arrangements that we may establish;
|
|
|
|
the cost and timing of regulatory approvals;
|
|
|
|
the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our products;
|
|
|
|
the cost and timing of establishing sales, marketing and
distribution capabilities;
|
|
|
|
the effect of competing technological and market developments;
|
48
|
|
|
|
|
the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights; and
|
|
|
|
the extent to which we acquire or invest in businesses, products
and technologies.
|
Off-Balance
Sheet Transactions
We currently have no off-balance sheet arrangements that have or
are reasonably likely to have a current or future material
effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
As a Smaller Reporting Company as defined by
Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of
Regulation S-K,
we are electing scaled disclosure reporting obligations and
therefore are not required to provide the information requested
by this Item.
49
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data
|
Oculus
Innovative Sciences, Inc.
Index to
Consolidated Financial Statements
50
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Shareholders
of Oculus Innovative Sciences, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Oculus Innovative Sciences, Inc. and Subsidiaries (the
Company) as of March 31, 2009 and 2008, and the
related consolidated statements of operations, comprehensive
loss, changes in stockholders equity and cash flows for
the years then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these 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 audit 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 Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 financial statements referred to above
present fairly, in all material respects, the financial position
of Oculus Innovative Sciences, Inc. and Subsidiaries, as of
March 31, 2009 and 2008, and the results of its operations
and its cash flows for the years then ended 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 2 to the consolidated
financial statements, the Company incurred a $17,656,000 loss
and used $16,832,000 of cash in its operating activities for the
year ended March 31, 2009. The Company has limited capital
resources and must raise additional capital in order to sustain
operations. These matters raise substantial doubt about the
Companys ability to continue as a going concern.
Managements plans with respect to these matters are also
discussed in Note 2 to the consolidated financial
statements. The consolidated financial statements do not include
any adjustments that might be necessary should the Company be
unable to continue as a going concern.
/s/ Marcum LLP
New York, NY
June 10, 2009
51
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,921
|
|
|
$
|
18,823
|
|
Accounts receivable, net
|
|
|
923
|
|
|
|
770
|
|
Inventory, net
|
|
|
340
|
|
|
|
259
|
|
Prepaid expenses and other current assets
|
|
|
758
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,942
|
|
|
|
20,950
|
|
Property and equipment, net
|
|
|
1,432
|
|
|
|
2,303
|
|
Debt issuance costs, net
|
|
|
|
|
|
|
304
|
|
Other assets
|
|
|
73
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,447
|
|
|
$
|
23,612
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,565
|
|
|
$
|
2,977
|
|
Accrued expenses and other current liabilities
|
|
|
853
|
|
|
|
2,460
|
|
Current portion of long-term debt
|
|
|
255
|
|
|
|
1,994
|
|
Current portion of capital lease obligations
|
|
|
6
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,679
|
|
|
|
7,450
|
|
Deferred revenue
|
|
|
425
|
|
|
|
523
|
|
Long-term debt, less current portion
|
|
|
74
|
|
|
|
205
|
|
Capital lease obligations, less current portion
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,178
|
|
|
|
8,184
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value;
5,000,000 shares authorized, none issued and outstanding at
March 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 100,000,000 shares
authorized, 18,402,820 and 15,905,613 shares issued and
outstanding at March 31, 2009 and 2008, respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
113,803
|
|
|
|
109,027
|
|
Accumulated other comprehensive loss
|
|
|
(3,054
|
)
|
|
|
(2,775
|
)
|
Accumulated deficit
|
|
|
(108,482
|
)
|
|
|
(90,826
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,269
|
|
|
|
15,428
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
5,447
|
|
|
$
|
23,612
|
|
|
|
|
|
|
|
|
|
|
The accompanying footnotes are an integral part of these
consolidated financial statements.
52
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
4,415
|
|
|
$
|
2,881
|
|
Service
|
|
|
973
|
|
|
|
954
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
5,388
|
|
|
|
3,835
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
Product
|
|
|
1,673
|
|
|
|
1,774
|
|
Service
|
|
|
913
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
2,586
|
|
|
|
2,751
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,802
|
|
|
|
1,084
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,252
|
|
|
|
9,778
|
|
Selling, general and administrative
|
|
|
13,857
|
|
|
|
13,731
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,109
|
|
|
|
23,509
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,307
|
)
|
|
|
(22,425
|
)
|
Interest expense
|
|
|
(437
|
)
|
|
|
(1,016
|
)
|
Interest income
|
|
|
152
|
|
|
|
630
|
|
Other income (expense), net
|
|
|
(64
|
)
|
|
|
2,472
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(17,656
|
)
|
|
$
|
(20,339
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share: basic and diluted
|
|
$
|
(1.09
|
)
|
|
$
|
(1.60
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in per common share
calculations:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
16,221
|
|
|
|
12,737
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,656
|
)
|
|
$
|
(20,339
|
)
|
Foreign currency translation adjustments
|
|
|
(279
|
)
|
|
|
(2,411
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(17,935
|
)
|
|
$
|
(22,750
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying footnotes are an integral part of these
consolidated financial statements.
53
OCULUS
INNOVATIVE SCIENCES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
($0.0001 par Value)
|
|
|
Paid in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Balance, April 1, 2007
|
|
|
11,844,411
|
|
|
$
|
1
|
|
|
$
|
85,751
|
|
|
$
|
(364
|
)
|
|
$
|
(70,487
|
)
|
|
$
|
14,901
|
|
Issuance of common stock in connection with August 13, 2007
offering, net of commissions, expenses and other offering costs
|
|
|
1,262,500
|
|
|
|
|
|
|
|
9,124
|
|
|
|
|
|
|
|
|
|
|
|
9,124
|
|
Issuance of common stock in connection with March 31, 2008
offering, net of commissions, expenses and other offering costs
|
|
|
2,634,578
|
|
|
|
|
|
|
|
12,613
|
|
|
|
|
|
|
|
|
|
|
|
12,613
|
|
Issuance of common stock in connection with exercise of stock
options
|
|
|
119,375
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
Issuance of common stock in connection with exercise of warrants
|
|
|
44,749
|
|
|
|
1
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
135
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Employee stock-based compensation expense recognized under
SFAS No. 123R, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
1,006
|
|
|
|
|
|
|
|
|
|
|
|
1,006
|
|
Fair value of common stock purchase warrants issued to
non-employees
|
|
|
|
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
177
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,411
|
)
|
|
|
|
|
|
|
(2,411
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,339
|
)
|
|
|
(20,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008
|
|
|
15,905,613
|
|
|
$
|
2
|
|
|
$
|
109,027
|
|
|
$
|
(2,775
|
)
|
|
$
|
(90,826
|
)
|
|
$
|
15,428
|
|
Issuance of common stock in connection with April 1, 2008
closing of offering, net of commissions, expenses and other
offering costs
|
|
|
18,095
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Issuance of common stock in connection with February 6,
2009 offering, net of commissions, expenses and other offering
costs
|
|
|
1,499,411
|
|
|
|
|
|
|
|
1,514
|
|
|
|
|
|
|
|
|
|
|
|
1,514
|
|
Issuance of common stock in connection with February 24,
2009 offering, net of commissions, expenses and other offering
costs
|
|
|
854,701
|
|
|
|
|
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
|
948
|
|
Issuance of common stock in connection with exercise of stock
options
|
|
|
105,000
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Issuance of common stock for services
|
|
|
20,000
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Employee stock-based compensation expense recognized under
SFAS No. 123R, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
2,035
|
|
|
|
|
|
|
|
|
|
|
|
2,035
|
|
Fair value of common stock purchase warrants issued to
non-employees
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(279
|
)
|
|
|
|
|
|
|
(279
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,656
|
)
|
|
|
(17,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009
|
|
|
18,402,820
|
|
|
$
|
2
|
|
|
$
|
113,803
|
|
|
$
|
(3,054
|
)
|
|
$
|
(108,482
|
)
|
|
$
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying footnotes are an integral part of these
consolidated financial statements.
54
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss from operations
|
|
$
|
(17,656
|
)
|
|
$
|
(20,339
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
768
|
|
|
|
740
|
|
Provision for doubtful accounts
|
|
|
29
|
|
|
|
57
|
|
Provision for obsolete inventory
|
|
|
39
|
|
|
|
230
|
|
Stock-based compensation
|
|
|
2,263
|
|
|
|
1,339
|
|
Non-cash interest expense
|
|
|
304
|
|
|
|
522
|
|
Foreign currency transaction losses (gains)
|
|
|
64
|
|
|
|
(2,594
|
)
|
Loss on disposal of assets
|
|
|
235
|
|
|
|
5
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(379
|
)
|
|
|
580
|
|
Inventories
|
|
|
(177
|
)
|
|
|
(180
|
)
|
Prepaid expenses and other current assets
|
|
|
598
|
|
|
|
282
|
|
Accounts payable
|
|
|
(1,332
|
)
|
|
|
393
|
|
Accrued expenses and other liabilities
|
|
|
(1,588
|
)
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(16,832
|
)
|
|
|
(17,446
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(393
|
)
|
|
|
(617
|
)
|
Long-term deposits
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(424
|
)
|
|
|
(617
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
2,499
|
|
|
|
21,737
|
|
Proceeds from issuance of common stock upon exercise of stock
options and warrants
|
|
|
15
|
|
|
|
202
|
|
Cash restricted for repayment of debt
|
|
|
|
|
|
|
2,000
|
|
Principal payments on debt
|
|
|
(2,119
|
)
|
|
|
(6,090
|
)
|
Payments on capital lease obligations
|
|
|
(19
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
376
|
|
|
|
17,832
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
(22
|
)
|
|
|
4
|
|
Net decrease in cash and cash equivalents
|
|
|
(16,902
|
)
|
|
|
(227
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
18,823
|
|
|
|
19,050
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
1,921
|
|
|
$
|
18,823
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
154
|
|
|
$
|
591
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Equipment and insurance premiums financed
|
|
$
|
249
|
|
|
$
|
253
|
|
|
|
|
|
|
|
|
|
|
The accompanying footnotes are an integral part of these
consolidated financial statements.
55
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
Organization
Oculus Innovative Sciences, Inc. (the Company) was
incorporated under the laws of the State of California in April
1999 and was reincorporated under the laws of the State of
Delaware in December 2006. The Companys principal office
is located in Petaluma, California. The Company develops,
manufactures and markets a family of products intended to
prevent and treat infections in chronic and acute wounds. The
Companys platform technology, called Microcyn, is a
proprietary oxychlorine small molecule formulation that is
designed to treat a wide range of organisms that cause disease,
or pathogens, including viruses, fungi, spores and antibiotic
resistant strains of bacteria. The Company conducts its business
worldwide, with significant subsidiaries in Europe and Mexico.
|
|
NOTE 2
|
Going
Concern, Liquidity and Financial Condition
|
The Company incurred net losses of $17,656,000 for the year
ended March 31, 2009. At March 31, 2009, the
Companys accumulated deficit amounted to $108,482,000. The
Company had working capital of $1,263,000 as of March 31,
2009. The Company needs to raise additional capital from
external sources in order to sustain its operations while
continuing the longer term efforts contemplated under its
business plan. The Company expects to continue incurring losses
for the foreseeable future and must raise additional capital to
pursue its product development initiatives, penetrate markets
for the sale of its products and continue as a going concern.
The Company cannot provide any assurance that it will raise
additional capital. Management believes that the Company has
access to capital resources through possible public or private
equity offerings, debt financings, corporate collaborations or
other means; however, the Company has not secured any commitment
for new financing at this time nor can it provide any assurance
that new financing will be available on commercially acceptable
terms, if at all. If the economic climate in the U.S. does
not improve or continues to deteriorate, the Companys
ability to raise additional capital could be negatively
impacted. If the Company is unable to secure additional capital,
it may be required to curtail its research and development
initiatives and take additional measures to reduce costs in
order to conserve its cash in amounts sufficient to sustain
operations and meet it obligations. These measures could cause
significant delays in the Companys efforts to
commercialize its products in the United States, which is
critical to the realization of its business plan and the future
operations of the Company. These matters raise substantial doubt
about the Companys ability to continue as a going concern.
The accompanying consolidated financial statements do not
include any adjustments that may be necessary should the Company
be unable to continue as a going concern.
As described in Note 13, on April 1, 2008, the Company
conducted a closing of 18,095 shares of its common stock at
a purchase price of $5.25 per share, and warrants to purchase an
aggregate of 9,047 shares of common stock at an exercise
price of $6.85 per share for gross proceeds of $95,000 (net
proceeds of $36,000 after deducting the placement agents
commission and other offering expenses).
As described in Note 13, on February 6, 2009, the
Company entered into Purchase Agreements with a group of
accredited investors whereby it raised $1,752,803 in gross
proceeds (net proceeds of $1,514,000 after deducting the
placement agents commission and other offering expenses)
through a private placement of 1,499,411 shares.
As described in Note 13, on February 24, 2009, the
Company entered into a Purchase Agreement with Robert
Burlingame, a director of the Company, and an accredited
investor. Pursuant to the terms of the Purchase Agreement, the
investors agreed to make a $3,000,000 investment in the Company.
The investors paid $1,000,000 (net proceeds of $948,000 after
deducting offering expenses) for 854,701 shares of common
stock on February 24, 2009 and agreed to purchase
1,709,402 shares of common stock for $2,000,000 no later
than August 1, 2009.
On June 1, 2009, the Company issued the remaining
securities related to the February 24, 2009 private
placement (Note 13). The issuance comprised of an aggregate
of 1,709,402 shares of common stock, Series A Warrants
to purchase an aggregate of 1,000,000 shares of common
stock and Series B Warrants to purchase an
56
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
aggregate of 1,333,333 shares of common stock to the
Investors pro rata to the investment amount of each Investor.
The Company received $2,000,000 in connection with this
transaction. (Note 18).
The Company has used, or intends to use, the proceeds from the
offerings described above principally for general corporate
purposes, including working capital.
|
|
NOTE 3
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries,
Aquamed Technologies, Inc., Oculus Technologies of Mexico S.A.
de C.V. (OTM), Oculus Innovative Sciences
Netherlands, B.V. (OIS Europe), and Oculus
Innovative Sciences K.K. (OIS Japan). On
January 20, 2009, the Company dissolved OIS Japan. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the
dates of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting periods.
Actual results could differ from these estimates. Significant
estimates and assumptions include reserves and write-downs
related to receivables and inventories, deferred taxes and
related valuation allowances and valuation of equity instruments.
Revenue
Recognition
The Company generates revenue from sales of its products to
hospitals, medical centers, doctors, pharmacies, and
distributors. The Company sells its products directly to third
parties and to distributors through various cancelable
distribution agreements. The Company has also entered into
agreements to license its technology.
The Company also provides regulatory compliance testing and
quality assurance services to medical device and pharmaceutical
companies.
The Company applies the revenue recognition principles set forth
in Securities and Exchange Commission Staff Accounting Bulletin
(SAB) 104 Revenue Recognition with
respect to all of its revenue. Accordingly, the Company records
revenue when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the fee is
fixed or determinable, and (iv) collectability of the sale
is reasonably assured.
The Company requires all of its product sales to be supported by
evidence of a sale transaction that clearly indicates the
selling price to the customer, shipping terms and payment terms.
Evidence of an arrangement generally consists of a contract or
purchase order approved by the customer. The Company has ongoing
relationships with certain customers from which it customarily
accepts orders by telephone in lieu of purchase orders.
The Company recognizes revenue at the time in which it receives
a confirmation that the goods were either tendered at their
destination when shipped FOB destination, or
transferred to a shipping agent when shipped FOB shipping
point. Delivery to the customer is deemed to have occurred
when the customer takes title to the product. Generally, title
passes to the customer upon shipment, but could occur when the
customer receives the product based on the terms of the
agreement with the customer.
The selling prices of all goods that the Company sells are
fixed, and agreed to with the customer, prior to shipment.
Selling prices are generally based on established list prices.
The Company does not customarily permit its customers to return
any of its products for monetary refunds or credit against
completed or future sales. The
57
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Company, from time to time, may replace expired goods on a
discretionary basis. The Company records these types of
adjustments, when made, as a reduction of revenue. Sales
adjustments were insignificant during the years ended
March 31, 2009 and 2008.
The Company evaluates the creditworthiness of new customers and
monitors the creditworthiness of its existing customers to
determine whether events or changes in their financial
circumstances would raise doubt as to the collectability of a
sale at the time in which a sale is made. Payment terms on sales
made in the United States are generally 30 days and
internationally, generally range from 30 days to
90 days.
In the event a sale is made to a customer under circumstances in
which collectability is not reasonably assured, the Company
either requires the customer to remit payment prior to shipment
or defers recognition of the revenue until payment is received.
The Company maintains a reserve for amounts which may not be
collectible due to risk of credit losses.
Additionally, the Companys treatment for recognizing
revenue related to distributors that have the inability to
provide inventory or product sell-through reports on a timely
basis, is to defer and recognize revenue when payment is
received. The Company believes the receipt of payment is the
best indication of product sell-through.
The Company has entered into distribution agreements in Europe.
Recognition of revenue and related cost of revenue from product
sales is deferred until the product is sold from the
distributors to their customers.
When the Company receives letters of credit and the terms of the
sale provide for no right of return except to replace defective
product, revenue is recognized when the letter of credit becomes
effective and the product is shipped.
License revenue is generated through agreements with strategic
partners for the commercialization of Microcyn products. The
terms of the agreements typically include non-refundable upfront
fees. In accordance with Emerging Issues Task Force
(EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, the
Company analyzes multiple element arrangements to determine
whether the elements can be separated. Analysis is performed at
the inception of the arrangement and as each product is
delivered. If a product or service is not separable, the
combined deliverables are accounted for as a single unit of
accounting and recognized over the performance obligation period.
Assuming the elements meet the EITF
No. 00-21
criteria for separation and the SAB 104 requirements for
recognition, the revenue recognition methodology prescribed for
each unit of accounting is summarized below:
When appropriate, the Company defers recognition of
non-refundable upfront fees. If it has continuing performance
obligations then such up-front fees are deferred and recognized
over the period of continuing involvement.
The Company recognizes royalty revenues from licensed products
upon the sale of the related products.
Revenue from consulting contracts is recognized as services are
provided. Revenue from testing contracts is recognized as tests
are completed and a final report is sent to the customer.
Sales
Tax and Value Added Taxes
In accordance with the guidance of EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement, the Company accounts for sales taxes and value
added taxes imposed on its goods and services on a net basis in
the consolidated statement of operations.
58
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Cash
and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less when purchased to be
cash equivalents. Cash equivalents may be invested in money
market funds, commercial paper, variable rate demand
instruments, and certificates of deposits.
Restricted
Cash
In connection with the Companys building lease agreement
for its Netherlands facility (Note 12), the Company is
required to maintain a security deposit in a restricted cash
account. On February 1, 2009, the Company and the property
owner entered into a lease termination agreement. Pursuant to
the agreement, the lease expiration date was changed from
January 31, 2011 to September 1, 2009. Accordingly,
the Company recorded $26,000 of restricted cash in prepaid
expenses and other current assets in the March 31, 2009
accompanying consolidated balance sheet. Addiitonally, the
Company recorded $55,000 of restricted cash in other long-term
assets in the March 31, 2008 accompanying consolidated
balance sheet.
Concentration
of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash, cash
equivalents and accounts receivable. Cash and cash equivalents
are maintained in financial institutions in the United States,
Mexico and the Netherlands. The Company is exposed to credit
risk in the event of default by these financial institutions for
amounts in excess of the Federal Deposit Insurance Corporation
insured limits. Cash and cash equivalents held in foreign banks
are intentionally kept at minimal levels, and therefore have
minimal credit risk associated with them.
The Company grants credit to its business customers, which are
primarily located in Mexico, Europe and the United States.
Collateral is generally not required for trade receivables. The
Company maintains allowances for potential credit losses. Two
customers represented a total of 29% and two customer
represented 28% of the net accounts receivable balance at
March 31, 2009 and 2008, respectively. During the years
ended March 31, 2009 and 2008, three customers represented
21% and three customers represented 23% of sales, respectively.
Accounts
Receivable
Trade accounts receivable are recorded net of allowances for
cash discounts for prompt payment, doubtful accounts, and sales
returns. Estimates for cash discounts and sales returns are
based on analysis of contractual terms and historical trends.
With respect to government chargebacks, the Mexican Ministry of
Healths (MOH) policy is to levy penalties on
its vendors for product received after scheduled delivery times.
The Company has not incurred any such chargebacks to date;
however, such penalties (if incurred) would be recorded as a
reduction of revenue and the related accounts receivable balance.
The Companys policy is to reserve for uncollectible
accounts based on its best estimate of the amount of probable
credit losses in its existing accounts receivable. The Company
periodically reviews its accounts receivable to determine
whether an allowance for doubtful accounts is necessary based on
an analysis of past due accounts and other factors that may
indicate that the realization of an account may be in doubt.
Other factors that the Company considers include its existing
contractual obligations, historical payment patterns of its
customers and individual customer circumstances, an analysis of
days sales outstanding by customer and geographic region, and a
review of the local economic environment and its potential
impact on government funding and reimbursement practices.
Account balances deemed to be uncollectible are charged to the
allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. The allowance
for doubtful accounts at March 31, 2009 and 2008 represents
probable credit losses in the amounts of $51,000 and $31,000,
respectively.
59
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories
Inventories are stated at the lower of cost, cost being
determined on a standard cost basis (which approximates actual
cost on a
first-in,
first-out basis), or market.
Due to changing market conditions, estimated future
requirements, age of the inventories on hand and production of
new products, the Company regularly reviews inventory quantities
on hand and records a provision to write down excess and
obsolete inventory to its estimated net realizable value. The
Company recorded reserves to reduce the carrying amounts of
inventories to their net realizable value in the amounts of
$71,000 and $208,000 for the years ended March 31, 2009 and
2008, respectively.
Fair
Value of Financial Assets and Liabilities
Financial instruments, including cash and cash equivalents,
accounts payable and accrued liabilities are carried at cost,
which management believes approximates fair value due to the
short-term nature of these instruments. The fair value of
capital lease obligations and equipment loans approximates its
carrying amounts as a market rate of interest is attached to
their repayment.
The Company measures the fair value of financial assets and
liabilities based on the guidance of Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(Statement No. 157) which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. Effective
April 1, 2008, the Company adopted the provisions of
Statement No. 157 for financial assets and liabilities, as
well as for any other assets and liabilities that are carried at
fair value on a recurring basis. The adoption of the provisions
of Statement No. 157 did not materially impact the
Companys consolidated financial position and results of
operations.
Statement No. 157 defines fair value as the exchange price
that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction
between market participants on the measurement date. Statement
No. 157 also establishes a fair value hierarchy, which
requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value. Statement No. 157 describes three levels of inputs
that may be used to measure fair value:
Level 1 quoted prices in active markets for
identical assets or liabilities
Level 2 quoted prices for similar assets and
liabilities in active markets or inputs that are observable
Level 3 inputs that are unobservable (for
example cash flow modeling inputs based on assumptions)
At March 31, 2009 there were no assets or liabilities
subject to additional disclosure under
Statement No. 157.
Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation of property and
equipment is computed using the straight-line method over the
estimated useful lives of the respective assets. Depreciation of
leasehold improvements is computed using the straight-line
method over the lesser of the estimated useful life of the
improvement or the remaining term of the lease. Estimated useful
asset life by classification is as follows:
|
|
|
|
|
|
|
Years
|
|
|
Office equipment
|
|
|
3
|
|
Manufacturing, lab and other equipment
|
|
|
5
|
|
Furniture and fixtures
|
|
|
7
|
|
60
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Upon retirement or sale, the cost and related accumulated
depreciation are removed from the consolidated balance sheet and
the resulting gain or loss is reflected in operations.
Maintenance and repairs are charged to operations as incurred.
Impairment
of Long-Lived Assets
The Company periodically reviews the carrying values of its long
lived assets in accordance with SFAS 144 Long Lived
Assets when events or changes in circumstances would
indicate that it is more likely than not that their carrying
values may exceed their realizable values, and records
impairment charges when considered necessary. Specific potential
indicators of impairment include, but are not necessarily
limited to:
|
|
|
|
|
a significant decrease in the fair value of an asset;
|
|
|
|
a significant change in the extent or manner in which an asset
is used or a significant physical change in an asset;
|
|
|
|
a significant adverse change in legal factors or in the business
climate that affects the value of an asset;
|
|
|
|
an adverse action or assessment by the U.S. Food and Drug
Administration or another regulator;
|
|
|
|
an accumulation of costs significantly in excess of the amount
originally expected to acquire or construct an asset; and
operating or cash flow losses combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with an
income-producing asset.
|
When circumstances indicate that an impairment may have
occurred, the Company tests such assets for recoverability by
comparing the estimated undiscounted future cash flows expected
to result from the use of such assets and their eventual
disposition to their carrying amounts. In estimating these
future cash flows, assets and liabilities are grouped at the
lowest level for which there are identifiable cash flows that
are largely independent of the cash flows generated by other
such groups. If the undiscounted future cash flows are less than
the carrying amount of the asset, an impairment loss, measured
as the excess of the carrying value of the asset over its
estimated fair value, will be recognized. The cash flow
estimates used in such calculations are based on estimates and
assumptions, using all available information that management
believes is reasonable.
Research
and Development
Research and development expense is charged to operations as
incurred and consists primarily of personnel expenses, clinical
and regulatory services and supplies. For the years ended
March 31, 2009 and 2008, research and development expense
amounted to $6,252,000 and $9,778,000, respectively.
Advertising
Costs
Advertising costs are expenses are incurred. Advertising costs
amounted to $170,000 and $130,000, for the years ended
March 31, 2009 and 2008, respectively. Advertising costs
are included in selling, general and administrative expenses in
the accompanying consolidated statements of operations.
Shipping
and Handling Costs
The Company applies the guidelines enumerated in Emerging Issues
Task Force Issue (EITF)
00-10
Accounting for Shipping and Handling Fees and Costs
with respect to its shipping and handling costs. Accordingly,
the Company classifies amounts billed to customers related to
shipping and handling in sale transactions as revenue. Shipping
and handling costs incurred are recorded in cost of product
revenues. For the years ended March 31, 2009 and 2008, the
Company recorded shipping and handling costs of $24,000 and
$20,000, respectively.
61
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Foreign
Currency Reporting
The consolidated financial statements are presented in United
States Dollars in accordance with Statement of Financial
Accounting Standard (SFAS) No. 52,
Foreign Currency Translation
(SFAS 52). Accordingly, the Companys
subsidiary, OTM uses the local currency (Mexican Pesos) as its
functional currency, OIS Europe uses the local currency (Euro)
as its functional currency and OIS Japan uses the local currency
(Yen) as its functional currency. Assets and liabilities are
translated at exchange rates in effect at the balance sheet
date, and revenue and expense accounts are translated at average
exchange rates during the period. Resulting translation
adjustments were recorded in accumulated other comprehensive
loss in the accompanying consolidated balance sheets at
March 31, 2009 and March 31, 2008. On January 20,
2009 the Company dissolved OIS Japan. This transaction resulted
in a reclassification adjustment of $96,000 from other
comprehensive loss to other income in the accompanying statement
of operations for the year ended March 31, 2009.
Foreign currency transaction gains (losses) relate primarily to
working capital loans that the Company has made to its
subsidiary OIS Japan and trade payables and receivables between
subsidiaries OTM and OIS Europe. These transactions are expected
to be settled in the foreseeable future. The Company recorded
foreign currency transaction gains (losses) of $(64,000) and
$2,594,000 for the years ended March 31, 2009 and 2008,
respectively. The related gains (losses) were recorded in other
income (expense) in the accompanying consolidated statements of
operations.
The Company and its OTM and OIS Europe subsidiaries periodically
re-evaluate the operating plans and liquidity circumstances of
each operating subsidiaries. The Company and its Mexico and
Netherlands subsidiaries determined that the subsidiaries lack
the ability to repay the outstanding balances of their
respective intercompany loans in the foreseeable future. As a
result, the Company renegotiated the terms of its notes with its
Mexico and Netherlands subsidiaries. The Companys board of
directors memorialized the working capital loan agreements. The
terms of the new loan agreements extend the maturity date of the
loans plus all accrued interest for an additional five years to
April 1, 2013. In the event the loans cannot be settled at
the maturity date, the parties may agree that the loans will be
renewed for periods of three years. The Company and its
subsidiaries have agreed that interest will accrue at the
initial rate of 4.65% and shall be adjusted upward to the
applicable federal rate, or AFR, for mid-term debt established
by the U.S. Internal Revenue Service if the AFR for
mid-term debt is higher than the initial rate on the first day
of each calendar quarter.
Due to the renegotiation of the loans and the lack of ability to
predict if the loans will be settled in the foreseeable future,
the Company believes it was appropriate to evaluate its
treatment of foreign exchange gains and losses resulting from
the translation of the loans from local currency to
U.S. Dollars. In accordance with the provisions of
SFAS 52, if it is determined that an intercompany loan will
not be repaid in the foreseeable future, foreign exchange gains
and losses related to the translation of the loans from local
currency to U.S. Dollars should be classified as other
comprehensive income and loss. The Company believes that given
the inability to foresee settlement of the loans, it is
appropriate to record the exchange gains and losses related to
these loans in other comprehensive income and loss.
Stock-Based
Compensation
Prior to April 1, 2006, the Company accounted for
stock-based employee compensation arrangements in accordance
with the provisions of APB No. 25, Accounting for
Stock Issued to Employees, and its related interpretations
and applied the disclosure requirements of
SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123. The Company used the minimum value
method to measure the fair value of awards issued prior to
April 1, 2006 with respect to its application of the
disclosure requirements under SFAS No. 123.
Effective April 1, 2006, the Company adopted
SFAS No. 123(R) Share Based Payment
(SFAS 123(R)). This statement is a revision of
SFAS No. 123, and supersedes APB Opinion No. 25,
and its related implementation
62
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
guidance. SFAS 123(R) addresses all forms of share based
payment (SBP) awards including shares issued under
employee stock purchase plans, stock options, restricted stock
and stock appreciation rights. Under SFAS 123(R), SBP
awards result in a cost that will be measured at fair value on
the awards grant date, based on the estimated number of
awards that are expected to vest and will result in a charge to
operations.
The Company had a choice of two attribution methods for
allocating compensation costs under SFAS 123(R): the
straight-line method, which allocates expense on a
straight-line basis over the requisite service period of the
last separately vesting portion of an award, or the graded
vesting attribution method, which allocates expense on a
straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in
substance, multiple awards. The Company chose the former method
and amortized the fair value of each option on a straight-line
basis over the requisite period of the last separately vesting
portion of each award.
Under SFAS 123(R), nonpublic entities, including those that
become public entities after June 15, 2005, that used the
minimum value method of measuring equity share options and
similar instruments for either recognition or pro forma
disclosure purposes under SFAS No. 123 are required to
apply SFAS 123(R) prospectively to new awards and to awards
modified, repurchased, or cancelled after the date of adoption.
In addition, SFAS 123(R), requires such entities to
continue accounting for any portion of awards outstanding at the
date of initial application using the accounting principles
originally applied to those awards. Accordingly, stock-based
compensation expense relating to awards granted prior to
April 1, 2006 that are expected to vest in periods ending
after April 1, 2006 were being recorded in accordance with
the provisions of APB 25 and its related interpretive guidance.
The Company has adopted the prospective method with respect to
accounting for its transition to SFAS 123(R). Accordingly,
the Company recognized in salaries and related expense in the
accompanying consolidated statements of operations $101,000 and
$148,000 of stock-based compensation expense during the years
ended March 31, 2009 and 2008, respectively, which
represents the intrinsic value amortization of options granted
prior to April 1, 2006 that the Company is continuing to
account for using the recognition and measurement principles
prescribed under APB 25. The Company also recognized in salaries
and related expense in the accompanying consolidated statements
of operations $2,035,000 and $1,006,000 of stock-based
compensation expense during the years ended March 31, 2009
and 2008, respectively, which represents the amortization of the
fair value of options granted subsequent to adoption of
SFAS 123(R).
Non-Employee
Stock-Based Compensation
The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of
SFAS No. 123(R) and EITF Issue
No. 96-18,
Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services,
(EITF 96-18)
which requires that such equity instruments are recorded at
their fair value on the measurement date. The measurement of
stock-based compensation is subject to periodic adjustment as
the underlying equity instrument vests. Non-employee stock-based
compensation charges are amortized over the vesting period.
Income
Taxes
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes
(SFAS No. 109). Under
SFAS No. 109, deferred tax assets and liabilities are
determined based on the differences between the financial
reporting and tax bases of assets and liabilities and net
operating loss and credit carryforwards using enacted tax rates
in effect for the year in which the differences are expected to
impact taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected
to be realized.
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation 48, Accounting
for Uncertainty in Income Taxes (FIN 48),
which became effective for the Company beginning April 1,
2007. FIN 48 addresses how tax benefits claimed or expected
to be claimed on a tax return should be recorded in the
63
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
financial statements. Under FIN 48, the tax benefit from an
uncertain tax position can be recognized only if it is more
likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the
financial statements from such a position are measured based on
the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate resolution. The
adoption of FIN 48 had no impact on the Companys
financial condition, results of operations or cash flows.
Comprehensive
Loss
Other comprehensive loss includes all changes in
stockholders equity during a period from non-owner sources
and is reported in the consolidated statement of
stockholders equity. To date, other comprehensive loss
consists of changes in accumulated foreign currency translation
adjustments. Accumulated other comprehensive (loss) at
March 31, 2009 and 2008 was $(3,054,000) and $(2,775,000),
respectively.
Net
Loss Per Share
The Company computes net loss per share in accordance with
SFAS No. 128 Earnings Per Share and has
applied the guidance enumerated in Staff Accounting
Bulletin No. 98 (SAB Topic 4D) with
respect to evaluating its issuances of equity securities during
all periods presented.
Under SFAS No. 128, basic net loss per share is
computed by dividing net loss per share available to common
stockholders by the weighted average number of common shares
outstanding for the period and excludes the effects of any
potentially dilutive securities. Diluted earnings per share, if
presented, would include the dilution that would occur upon the
exercise or conversion of all potentially dilutive securities
into common stock using the treasury stock
and/or
if converted methods as applicable. The computation
of basic loss per share for the years ended March 31, 2009
and 2008, excludes potentially dilutive securities because their
inclusion would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Anti-dilutive securities excluded from the computation of
basic and diluted net loss per share are as follows:
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
3,964
|
|
|
|
2,624
|
|
Restricted stock units
|
|
|
30
|
|
|
|
60
|
|
Warrants to purchase common stock
|
|
|
7,056
|
|
|
|
3,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,050
|
|
|
|
6,011
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of Financial Instruments
Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial
Instruments requires that the Company disclose estimated
fair values of financial instruments. The carrying amounts
reported in the consolidated balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value based on the short-term maturity
of these instruments. The carrying amounts of the Companys
line of credit obligation and other long term obligations
approximate fair value as such instruments feature contractual
interest rates or have effective yields that are consistent with
instruments of similar risk.
Common
Stock Purchase Warrants and Other Derivative Financial
Instruments
The Company accounts for the issuance of common stock purchase
warrants issued and other free standing derivative financial
instruments in accordance with the provisions of
EITF 00-19
Accounting for Derivative
64
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock
(EITF 00-19).
Based on the provisions of
EITF 00-19,
the Company classifies as equity any contracts that
(i) require physical settlement or net-share settlement or
(ii) gives the Company a choice of net-cash settlement or
settlement in its own shares (physical settlement or net-share
settlement). The Company classifies as assets or liabilities any
contracts that (i) require net-cash settlement (including a
requirement to net cash settle the contract if an event occurs
and if that event is outside the control of the Company) or
(ii) gives the counterparty a choice of net-cash settlement
or settlement in shares (physical settlement or net-share
settlement). The Company assesses classification of its
freestanding derivatives at each reporting date to determine
whether a change in classification between assets and
liabilities is required. The Company determined that its
freestanding derivatives, which principally consists of warrants
to purchase common stock, satisfied the criteria for
classification as equity instruments at March 31, 2009 and
2008.
Recent
Accounting Pronouncements
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 is intended to improve
financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in
preparing financial statements that are presented in conformity
with U.S. generally accepted accounting principles. The
guidance in SFAS 162 replaces that prescribed in Statement
on Auditing Standards No. 69, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting
Principles, and becomes effective 60 days following the
SECs approval of the Public Company Accounting Oversight
Boards auditing amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles. The adoption of SFAS 162 will
not have an impact on the Companys consolidated financial
position, results of operations or cash flows.
In May 2008, the FASB issued FASB Staff Position
(FSP) APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement). This FSP clarifies that convertible debt
instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by
paragraph 12 of APB Opinion No. 14, Accounting for
Convertible Debt and Debt Issued with Stock Purchase
Warrants. Additionally, this FSP specifies that issuers of
such instruments should separately account for the liability and
equity components in a manner that will reflect the
entitys nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. This FSP is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal
years. The Company will apply this Standard prospectively to
convertible debt instruments issued after March 31, 2009.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. This
FSP addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, need to be included in the earnings allocation in
computing earnings per share (EPS) under the two-class method
described in paragraphs 60 and 61 of FASB Statement
No. 128, Earnings per Share. FSP
EITF 03-6-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those years. The Company is in the process of determining
the impact FSP
EITF 03-6-1
will have on its consolidated financial statements. The Company
is in the process of determining the impact
EITF 03-6-1
will have on its consolidated financial statements.
In December 2008, the FASB ratified EITF Issue
No. 07-5,
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock. This issue
addresses the determination of whether an instrument (or an
embedded feature) is indexed to an entitys own stock,
which is the first part of the scope exception in
paragraph 11(a) of Statement 133. This issue is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal
years. The Company is in the process of determining the impact
EITF 07-5
will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements (SFAS 157).
SFAS 157 clarifies the definition of fair value,
establishes a framework for measurement of fair value and
expands disclosure
65
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, except as
amended by FASB Staff Position (FSP)
SFAS 157-2
which is effective for fiscal years beginning after
November 15, 2008. FSP
SFAS 157-2
allows partial adoption relating to fair value measurements for
non-financial assets and liabilities that are not measured at
fair value on a recurring basis. The Company adopted
SFAS 157 effective April 1, 2008, except as it applies
to the non-financial assets and non-financial liabilities
subject to FSP
SFAS 157-2.
The Company will adopt the remaining provisions of SFAS 157
in the first quarter of fiscal 2010 and is currently evaluating
the impact adoption may have on its consolidated financial
statements. SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure of
fair value measurements. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. SFAS 157 applies to all financial
instruments that are measured and reported on a fair value basis.
In October 2008, the FASB issued FASB Staff Position (FSP)
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. The FSP clarifies the
application of FASB Statement No. 157, Fair Value
Measurements, in a market that is not active and provides an
example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial
asset is not active. The FSP is effective October 10, 2008,
and for prior periods for which financial statements have not
been issued. Revisions resulting from a change in the valuation
technique or its application should be accounted for as a change
in accounting estimate following the guidance in FASB Statement
No. 154, Accounting Changes and Error Corrections.
The adoption
FAS 157-3
did not have an impact on the Companys consolidated
financial statements.
Other accounting standards that have been issued or proposed by
the FASB, the EITF, the SEC and or other standards-setting
bodies that do not require adoption until a future date are not
expected to have a material impact on the consolidated financial
statements upon adoption.
|
|
NOTE 4
|
Accounts
Receivable
|
Accounts receivable consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accounts receivable
|
|
$
|
974
|
|
|
$
|
801
|
|
Less: allowance for doubtful accounts
|
|
|
(51
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
923
|
|
|
$
|
770
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts activities are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Operating
|
|
|
Deductions
|
|
|
Balance at
|
|
Year Ended March 31
|
|
of Year
|
|
|
Expenses
|
|
|
Write-Offs
|
|
|
End of Year
|
|
|
2008
|
|
$
|
207
|
|
|
$
|
57
|
|
|
$
|
(233
|
)
|
|
$
|
31
|
|
2009
|
|
$
|
31
|
|
|
$
|
29
|
|
|
$
|
(9
|
)
|
|
$
|
51
|
|
66
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
277
|
|
|
$
|
361
|
|
Finished goods
|
|
|
134
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
411
|
|
|
|
467
|
|
Less: inventory allowances
|
|
|
(71
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
340
|
|
|
$
|
259
|
|
|
|
|
|
|
|
|
|
|
Reserve for obsolete inventories activities are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Cost of
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Product
|
|
|
Deductions
|
|
|
Balance at
|
|
Year Ended March 31
|
|
of Year
|
|
|
Revenues
|
|
|
Write-Offs
|
|
|
End of Year
|
|
|
2008
|
|
$
|
94
|
|
|
$
|
230
|
|
|
$
|
(116
|
)
|
|
$
|
208
|
|
2009
|
|
$
|
208
|
|
|
$
|
39
|
|
|
$
|
(176
|
)
|
|
$
|
71
|
|
|
|
NOTE 6
|
Prepaid
Expenses and Other Current Assets
|
Prepaid expenses and other current assets consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Prepaid expenses
|
|
$
|
657
|
|
|
$
|
691
|
|
Value Added Tax receivable
|
|
|
23
|
|
|
|
32
|
|
Other current assets
|
|
|
78
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
758
|
|
|
$
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7
|
Debt
Issuance Costs
|
Debt issuance costs consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Fair value of common stock purchase warrants issued in
connection with a Line of Credit (Note 10)
|
|
$
|
1,046
|
|
|
$
|
1,046
|
|
Cash paid for debt offering expenses
|
|
|
28
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,074
|
|
|
|
1,074
|
|
Less: accumulated amortization
|
|
|
(1,074
|
)
|
|
|
(770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
304
|
|
|
|
|
|
|
|
|
|
|
During the years ended March 31, 2009 and 2008, the Company
recorded $304,000 and $522,000 of non-cash interest expense
related to the amortization of debt issue costs, respectively.
These amounts are included in interest expense in the
accompanying consolidated statements of operations.
67
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NOTE 8
|
Property
and Equipment
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Manufacturing, lab, and other equipment
|
|
$
|
3,067
|
|
|
$
|
3,387
|
|
Office equipment
|
|
|
421
|
|
|
|
555
|
|
Furniture and fixtures
|
|
|
60
|
|
|
|
201
|
|
Leasehold improvements
|
|
|
252
|
|
|
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,800
|
|
|
|
4,579
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,368
|
)
|
|
|
(2,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,432
|
|
|
$
|
2,303
|
|
|
|
|
|
|
|
|
|
|
Property and equipment includes $186,000 of equipment purchases
that were financed under capital lease obligations as of
March 31, 2009 and 2008 (Note 11). The accumulated
amortization on these assets amounted to $181,000 and $168,000
as of March 31, 2009 and 2008, respectively.
Depreciation and amortization expense (including amortization of
leased assets) amounted to $768,000 and $740,000 for the years
ended March 31, 2009 and 2008, respectively.
|
|
NOTE 9
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Salaries and related costs
|
|
$
|
394
|
|
|
$
|
1,339
|
|
Professional fees
|
|
|
90
|
|
|
|
592
|
|
Deferred revenue
|
|
|
272
|
|
|
|
359
|
|
Other
|
|
|
97
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
853
|
|
|
$
|
2,460
|
|
|
|
|
|
|
|
|
|
|
On May 1, 1999, the Company issued a note payable in the
amount of $64,000 with interest at 8% per annum and a final
payment due on December 31, 2009. The remaining balance on
this obligation, which amounts to $23,000 including accrued
interest, is included in the current portion of long-term debt
in the accompanying consolidated balance sheet at March 31,
2009.
From February 2005 to March 2006, the Company issued various
notes for aggregate principal amounting to $182,000 with
interest rates ranging from 6.25% to 14.44% per annum. The
proceeds of these notes were used to purchase automobiles and
software. The Company made principal payments on these notes of
$48,000 and $36,000, during the years ended March 31, 2009
and 2008, respectively. Aggregate interest expense under these
obligations amounted to $6,000 and $8,100 for the years ended
March 31, 2009 and 2008, respectively. These notes are
payable in aggregate monthly installments of $3,700 including
interest through March 14, 2011. The remaining balance of
these notes amounted to $39,000 at March 31, 2009, of which
$28,000 is included in the current portion of long-term debt in
the accompanying consolidated balance sheet.
On June 14, 2006, the Company entered into a credit
facility providing it with up to $5,000,000 of available credit.
The facility permitted the Company to borrow up to a maximum of
$2,750,000 for growth capital,
68
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
$1,250,000 for working capital based on eligible accounts
receivable and $1,000,000 in equipment financing. In June 2006,
the Company drew an aggregate of $4,182,000 of borrowings under
this facility. These borrowings were payable in 30 to 33 fixed
monthly installments with interest at rates ranging from 12.4%
to 12.7% per annum, with the final due payment on March 31,
2009. The Company issued the lender warrants to purchase up to
71,521 shares of its Series B convertible preferred
stock upon originating the loan which automatically converted
into warrants to purchase 71,521 shares of the
Companys common stock at the closing of the Companys
initial public offering on January 30, 2007. The aggregate
fair value of all warrants issued to the lender under this
arrangement amounted to $1,046,000 (Note 13). This amount
was recorded as debt issuance costs and was amortized as
interest expense over the term of the credit facility. For the
years ended March 31, 2009 and 2008, the Company recorded
$304,000 and $429,000 of non-cash interest expense related to
the amortization of debt issue costs, respectively. In
connection with these notes, for the years ended March 31,
2009 and 2008, the Company made principal payments of $1,829,000
and $1,501,000, respectively. Additionally, for the years ended
March 31, 2009 and 2008, the Company made interest payments
of $133,000 and $331,000, respectively. The final payment was
made in connection with this facility on March 31, 2009.
The Company does not have the ability to borrow against this
facility in the future.
On May 5, 2006, the Company entered into a note agreement
for $69,000 with interest at the rate of 7.94% per annum. This
note is related to the purchase of an automobile. This note is
payable in sixty monthly installments of $1,200 through May
2012. The Company made principal payments of $10,800 and $9,800
during the year ended March 31, 2009 and 2008,
respectively. Additionally, the Company made interest payments
of $3,700 and $4,700 during the years ended March 31, 2009
and 2008, respectively. The remaining balance of this note
amounted to $41,000 at March 31, 2009, including $11,800 in
the current portion of long-term debt in the accompanying
consolidated balance sheet.
From July 1, 2006 to March 25, 2007, the Company
entered into note agreements for $805,000 with interest rates
ranging from 5.6% to 9.7% per annum. These notes were used to
finance insurance premiums. These notes were payable in
aggregate monthly installments of $66,000 through
November 25, 2007. During the year ended March 31,
2008, the Company made principal payments of $480,000.
Additionally, during the year ended March 31, 2008, the
Company made interest payments of $15,000. On July 3, 2007,
the Company paid all outstanding principal and interest under
these financings.
On November 7, 2006, the Company signed a loan agreement
with Robert Burlingame, one of the Companys directors, in
the amount of $4,000,000, which was funded on November 10,
2006 and accrued interest at an annual rate of 7%. Concurrently,
Mr. Burlingame became a consultant to the Company under a
two-year consulting agreement, and was appointed to fill a
vacancy on the Companys board of directors. At the time
the principal was advanced to the Company, a broker who acted as
the agent in this transaction, was paid a fee of $50,000 and was
granted a warrant to purchase 25,000 shares of the
Companys common stock at an exercise price of $18.00 per
share. The aggregate fair value of all warrants issued to the
agent under this arrangement amounted to $104,000
(Note 13). This amount in addition to the $50,000 cash
payment was recorded as debt issuance costs and was amortized as
interest expense over the term of the credit facility. During
the year ended March 31, 2008, the Company recorded $93,000
of non-cash interest expense related to the amortization of the
debt issuance costs. The Company paid principal of $2,000,000 on
August 15, 2007, and paid the remaining $2,000,000 and
accrued interest on August 31, 2007. During the year ended
March 31, 2008, the Company paid $222,000 of interest
expense related to this note.
On April 12, 2007, the Company entered into a note
agreement to purchase an automobile for $75,800 with interest at
the rate of 7.75% per annum. This note is payable in monthly
installments of $1,500 through April 2012. During the year ended
March 31, 2009 and 2008, the Company made principal
payments of $13,900 and $11,600, respectively. Additionally,
during the year ended March 31, 2009 and 2008, the Company
made interest payments of $4,500 and $5,300, respectively. The
remaining balance of this note amounted to $49,000 at
March 31, 2009, including $15,000 in the current portion of
long-term debt in the accompanying consolidated balance sheet.
69
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On March 1, 2008, the Company entered into a note agreement
for $176,600 with an interest rate of 5.6% per annum. The note
was used to finance insurance premiums. The note was payable in
monthly installments of $14,800 through January 1, 2009.
During the year ended March 31, 2009 and 2008, the Company
made interest payments of $4,500 and $0, respectively. During
the year ended March 31, 2009 and 2008, the Company made
principal payments of $142,800 and $33,800, respectively. The
final payment on this note was made on January 1, 2009.
On January 25, 2009 and February 16, 2009, the Company
entered into a note agreements for $249,000 with an interest
rate of 4.0% per annum. The notes were used to finance insurance
premiums. The notes are payable in monthly installments of
$25,500 through November 25, 2009. During the year ended
March 31, 2009, the Company made interest payments of
$1,200. During the year ended March 31, 2009, the Company
made principal payments of $73,800. The remaining balance of
this note amounted to $176,500 at March 31, 2009 which is
included in the current portion of long-term debt in the
accompanying consolidated balance sheet.
A summary of principal payments due in years subsequent to
March 31, 2009 is as follows (in thousands):
|
|
|
|
|
For Years Ending March 31,
|
|
|
|
|
2010
|
|
$
|
255
|
|
2011
|
|
|
39
|
|
2012
|
|
|
31
|
|
2013
|
|
|
4
|
|
|
|
|
|
|
Total principal payments
|
|
|
329
|
|
Less: current portion
|
|
|
(255
|
)
|
|
|
|
|
|
Long-term portion
|
|
$
|
74
|
|
|
|
|
|
|
|
|
NOTE 11
|
Capital
Lease Obligations
|
During the period from September 1, 2003 through
October 1, 2003, the Company entered into various capital
leases under which the aggregate present value of the minimum
lease payments amounted to $40,000. The present value of the
minimum lease payments was calculated using discount rates
ranging from 13% to 18%. Lease payments, including amounts
representing interest, amounted to $11,300 and $12,000 for the
years ended March 31, 2009 and 2008, respectively. The
final payment was made on these capital leases on
September 1, 2008.
On November 10, 2004, the Company entered into a capital
lease under which the present value of the minimum lease
payments amounted to $37,000. The present value of the minimum
lease payments was calculated using a discount rate of 10%.
Lease payments, including amounts representing interest,
amounted to $9,000 and $9,000 for the years ended March 31,
2009 and 2008, respectively. The remaining principal balance on
this obligation amounted to $6,000 at March 31, 2009, which
is included in the current portion of capital lease obligations
in the accompanying consolidated balance sheets.
The Company recorded interest expense in connection with these
lease agreements in the amounts of $1,700 and $4,500 for the
years ended March 31, 2009 and 2008, respectively.
|
|
NOTE 12
|
Commitments
and Contingencies
|
Lease
Commitments
The Company has entered into various non-cancelable operating
leases, primarily for office facility space, that expire at
various times through April 2012.
On September 13, 2007, the Company entered into Amendment
No. 4 to the property lease agreement for its facility in
Petaluma, California. The amendment extends the lease expiration
date to September 30, 2010. On February 1, 2009, the
Company amended its property lease agreement for its facility in
Sittard, the Netherlands. The
70
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
amendment shortens the lease period from January 31, 2011
to September 1, 2009. Pursuant to the amendment, by
March 31, 2009, the Company agreed to prepay the property
owner $96,000 which represents the lease payments for the period
of April 1, 2009 to September 1, 2009.
Minimum lease payments for non-cancelable operating leases,
including the effects of the lease extension described above,
are as follows (in thousands):
|
|
|
|
|
For Years Ending March 31,
|
|
|
|
|
2010
|
|
$
|
387
|
|
2011
|
|
|
235
|
|
2012
|
|
|
6
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
628
|
|
|
|
|
|
|
Rent expense amounted to $628,000 and $676,000 for the years
ended March 31, 2009 and 2008, respectively.
Legal
Matters
In June 2006, the Company received a written communication from
the grantor of a license to an earlier version of its technology
indicating that such license was terminated due to an alleged
breach of the license agreement by the Company. The license
agreement extends to the Companys use of the technology in
Japan only. While the Company does not believe that the
grantors revocation is valid under the terms of the
license agreement and no legal claim has been threatened to
date, the Company cannot provide any assurance that the grantor
will not take legal action to restrict the Companys use of
the technology in the licensed territory. While the
Companys management does not anticipate that the outcome
of this matter is likely to result in a material loss, there can
be no assurance that if the grantor pursues legal action, such
legal action would not have a material adverse effect on the
Companys financial position or results of operations.
The Company, from time to time, is involved in legal matters
arising in the ordinary course of its business including matters
involving proprietary technology. While management believes that
such matters are currently not material, there can be no
assurance that matters arising in the ordinary course of
business for which the Company is or could become involved in
litigation, will not have a material adverse effect on its
business, financial condition or results of operations.
Other
Matters
On September 16, 2005, the Company entered into a series of
agreements with Quimica Pasteur S.A. de C.V. (QP), a
Mexico-based company engaged in the business of distributing
pharmaceutical products to hospitals and health care entities
owned or operated by the Mexican Ministry of Health. These
agreements provided, among other things, for QP to act as the
Companys exclusive distributor of Microcyn to the Mexican
Ministry of Health for a period of three years. In connection
with these agreements, the Company was concurrently granted an
option to acquire all except a minority share of the equity of
QP directly from its principals in exchange for
150,000 shares of common stock, contingent upon QPs
attainment of certain financial milestones. The Companys
distribution and related agreements were cancelable by the
Company on thirty days notice without cause and included
certain provisions to hold the Company harmless from debts
incurred by QP outside the scope of the distribution and related
agreements. The Company terminated these agreements on
March 26, 2006 without having exercised the option.
Due to its liquidity circumstances, QP was unable to sustain
operations without the Companys subordinated financial and
management support. Accordingly, QP was deemed to be a variable
interest entity in accordance with FIN 46(R) and its
results were consolidated with the Companys consolidated
financial statements for the period of September 16, 2005
through March 26, 2006, the effective termination date of
the distribution and related agreement, without such option
having been exercised.
71
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Subsequent to having entered into the agreements with QP, the
Company became aware of an alleged tax avoidance scheme
involving the principals of QP. The audit committee of the
Companys board of directors engaged an independent
counsel, as well as tax counsel in Mexico to investigate this
matter. The audit committee of the board of directors was
advised that QPs principals could be liable for up to
$7,000,000 of unpaid taxes; however, the Company is unlikely to
have any loss exposure with respect to this matter because the
alleged tax omission occurred prior to the Companys
involvement with QP. The Company has not received any
communications to date from Mexican tax authorities with respect
to this matter. Based on an opinion of Mexico counsel, the
Companys management and the audit committee of the board
of directors do not believe that the Company is likely to
experience any loss with respect to this matter. However, there
can be no assurance that the Mexican tax authorities will not
pursue this matter and, if pursued, that it would not result in
a material loss to the Company.
Employment
Agreements
As of March 31, 2009, the Company has entered into
employment agreements with five of its key executives. The
agreements provide, among other things, for the payment of six
to twenty-four months of severance compensation for terminations
under certain circumstances. With respect to these agreements,
at March 31, 2009, aggregated potential severance amounted
to $1,840,000 and aggregated annual salaries amount to
$1,305,000.
On September 4, 2008, the employment agreement of
Mr. Mike Wokasch, the Companys Chief Operating
Officer, was terminated, effective September 5, 2008. In
connection with the termination, the Company was required to
provide Mr. Wokasch with a lump sum severance payment of
$275,000, which is equivalent to twelve months of his salary.
Additionally, pursuant to the employment agreement, upon
termination, all non-vested options that were outstanding at the
termination date became immediately exercisable. The Company
recorded $1,168,000 of stock compensation expense related to the
acceleration of the vesting. The options will expire twelve
months from the date of termination, on September 5, 2009.
The severance and stock compensation expense was recorded as a
selling, general and administrative expense in the accompanying
condensed consolidated statements of operations for the year
ended March 31, 2009. The Company paid the severance on
October 10, 2008.
Board
Compensation
On April 26, 2007, the Companys board of directors
adopted a Non-Employee Director Compensation Package (the
Compensation Package) to provide members of the
board and its committees with regular compensation. The
Compensation Package provides for cash payments of $25,000 in
two equal installments to each of the non-employee members of
the board of directors. Directors who are members (but not the
chairperson) of the audit committee receive an additional $5,000
per year. Directors who are members (but not the chairperson) of
the compensation committee receive an additional $2,000 per
year. The chairperson of the board of directors receives $15,000
annually, the lead director (if different from the chair person)
receives $10,000 annually, the chairperson of the audit
committee receives $10,000 annually, and the chairperson of each
other committee receives $5,000 annually. Upon mutual agreement
between the compensation committee and the non-employee
directors, the Company may issue stock options in lieu of cash
payments. Additionally, the Compensation Package provides for
the grant of options to each non-employee director under the
2006 Restated Stock Incentive Plan. Each new director will
receive an initial option grant to purchase 50,000 shares
of the Companys common stock, which will vest over three
years, and each non-employee director will receive an automatic
annual grant of an option to purchase 15,000 shares of the
Companys common stock, which will vest monthly over a
period of one year. The annual option grants were granted to
non-employee directors following the annual stockholders meeting
on August 27, 2008. In connection with the annual awards,
on September 2, 2008, the Company granted 15,000 options to
each of four non-employee directors at an exercise price of
$2.82 per share which was the closing price of the
Companys common stock on the date of grant. Additionally,
on December 9, 2008, the Company issued 25,000 options at
$0.40 per share to each of three non-employee directors in lieu
of cash payments that were due on November 1, 2008. One
non-employee director received a cash payment of $12,500.
72
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Consulting
Agreements
On October 1, 2005, the Company entered into a consulting
agreement with White Moon Medical. Akihisa Akao, a former member
of the board of directors, is the sole stockholder of White Moon
Medical. Under the terms of the agreement, the individual was
compensated for services provided outside his normal board
duties. The Company paid and recorded expense related to this
agreement in the amount of $85,000 and $146,000 which is
included in selling, general and administrative expense in the
consolidated statements of operations for the years ended
March 31, 2009 and 2008, respectively. This agreement was
terminated on October 1, 2008.
On November 7, 2006, the Company entered into a two year
consulting agreement with Mr. Robert Burlingame, one of the
Companys directors who also provided the Company with a
$4,000,000 Bridge Loan (Note 10). In connection with this
agreement, the director received 75,000 common stock purchase
warrants at an exercise price of $8.00 per share. During the
years ended March 31, 2009 and 2008, the amortized fair
value of the warrants amounted to $106,000 and $175,000 and was
recorded as selling, general and administrative expense in the
accompanying consolidated statements of operations
(Note 13).
Commercial
Agreements
On May 8, 2007 and June 11, 2007, the Company entered
into separate commercial agreements with two unrelated customers
granting such customers the exclusive right to sell the
Companys products in specified territories or for specific
uses. Both customers are required to maintain certain minimum
levels of purchases of the Companys products in order to
maintain exclusivity. Up-front payments amounting to $625,000
paid under these agreements have been recorded as deferred
revenue of which $425,000 is classified as long-term deferred
revenue in the accompanying consolidated balance sheet at
March 31, 2009. The up-front fees will be amortized on a
straight-line basis over the terms of the underlying agreements.
The Company amortized $98,000 and $5,000 of deferred revenue
which is included in product revenue in the accompanying
consolidated statement of operations for the years ended
March 31, 2009 and 2008, respectively.
|
|
NOTE 13
|
Stockholders
Equity
|
Authorized
Capital
The Company is authorized to issue up to 100,000,000 shares
of common stock with a par value of $0.0001 per share and
5,000,000 shares of convertible preferred stock with a par
value of $0.0001 per share.
Description
of Common Stock
Each share of common stock has the right to one vote. The
holders of common stock are entitled to dividends when funds are
legally available and when declared by the board of directors.
Common
Stock Issued in Private Placement
On August 13, 2007, the Company completed a private
placement of 1,262,500 shares of common stock to certain
accredited investors at a price of $8.00 per share pursuant to
the terms of a Securities Purchase Agreement, dated
August 7, 2007. In addition, the investors received
warrants to purchase an aggregate of 416,622 additional shares
of common stock at an exercise price of $9.50 per share
(described below). The exercise price for the investor warrants
was adjusted to $8.63 in March 2008, after the anti-dilution
provisions of the warrants were triggered by our registered
direct offering. The investor warrants are now exercisable for
an additional 41,977 shares. Gross proceeds from the
private placement were $10,100,000 and net proceeds were
$9,124,000 (after the placement agents commission and
other offering expenses). Pursuant to the terms of a
Registration Rights Agreement, dated August 7, 2007, the
shares of common stock issued to the investors in the private
placement and the shares of common stock to be issued upon the
exercise of the warrants issued in the private placement were
registered. If the registration statement ceases to remain
continuously effective, or the holders of the registrable
securities are not
73
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
permitted to utilize the related prospectus to resell the
securities registered under the registration statement for more
than ten consecutive calendar days, or more than a total of
fifteen calendar days in any twelve month period, the Company
will be required to pay the security holders, until cured,
partial liquidated damages in cash equal to 1% monthly, up to a
maximum of 15%, of the aggregate purchase price paid pursuant to
the terms of the Securities Purchase Agreement. If the Company
is required to pay liquidated damages and payments are not made
seven days from the due date, the holders will become entitled
to interest payments of 18% per annum on the amount due. The
Company, after having evaluated the registration payment
arrangement, has determined that it is unlikely to incur any
liability based on its past experience in filing registration
statements. Accordingly, the Company does not believe it is
necessary to record any reserves for contingent transfer of
consideration in accordance with EITF
FSP 00-19-2,
Accounting for Registration Payment Arrangements.
The Company also issued a warrant to purchase 88,375 shares
of common stock to a placement agent in connection with the
private placement (described above). The warrant has the same
terms, including exercise price and registration rights, as the
warrants issued in the private placement. The exercise price for
the warrants was adjusted to $8.63 on March 31, 2008, after
the anti-dilution provisions of the warrants was triggered by
the Companies registered direct offering. Additionally, the
placement agent warrants are now exercisable for an additional
8,909 shares.
Registered
Direct Offering
On February 13, 2008, the Company filed a shelf
registration statement on
Form S-3
(File
No. 333-149223),
which was declared effective on February 26, 2008. In
connection with this
S-3, the
Company may from time to time, offer and sell preferred stock,
either separately or represented by depositary shares, common
stock or warrants, either separately or in units, in one or more
offerings. The preferred stock and warrants may be convertible
into or exercisable or exchangeable for common or preferred
stock. The aggregate initial offering price of all securities
sold under the shelf registration statement will not exceed
$75,000,000. The Company may offer these securities
independently or together in any combination for sale directly
to investors or through underwriters, dealers or agents. The
Company will set forth the names of any underwriters, dealers or
agents and their compensation in a prospectus or prospectus
supplement.
On March 31, 2008, the Company closed the registered direct
placement of 2,634,578 shares of its common stock at a
purchase price of $5.25 per share, and warrants to purchase an
aggregate of 1,317,278 shares of common stock at an
exercise price of $6.85 per share for gross proceeds of
$13,297,000 and net proceeds of $12,613,000 (after deducting the
placement agents commission and other offering expenses).
On April 1, 2008, the Company had a second closing of an
additional 18,095 shares of its common stock at a purchase
price of $5.25 per share, and warrants to purchase an aggregate
of 9,047 shares of common stock at an exercise price of
$6.85 per share for gross proceeds of $95,000 and net proceeds
of $36,000 (after deducting the placement agents
commission and other offering expenses). Both closings were part
of the same offering. Additionally, the Company issued a warrant
to purchase 130,000 shares of common stock at an exercise
price of $6.30 per share to the placement agent related to this
offering.
Common
Stock Issued in Private Placement
On February 6, 2009, the Company entered into Purchase
Agreements with a group of accredited investors whereby it
raised $1,752,803 in gross proceeds (net proceeds of $1,514,000
after deducting the placement agents commission and other
offering expenses) through a private placement of
1,499,411 shares.
74
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For each $116.90 invested, an investor received one hundred
shares of common stock, par value $0.0001 per share; a
Series A Warrant to purchase fifty-eight shares of common
stock at an exercise price of $1.87 per share which are
exercisable after six months and have a five year term; a
Series B Warrant to purchase seventy-eight shares of common
stock at an exercise price of $1.13 per share which are
exercisable after six months and have a three year term; and for
every two shares of common stock the investor purchases upon
exercise of a Series B Warrant, the investor will receive
an additional Series C Warrant to purchase one share of
common stock. The Series C Warrant shall be exercisable
after six months and will have an exercise price of $1.94 per
share and a five year term.
The Company issued an aggregate of 1,499,411 shares of
common stock, Series A warrants to purchase
869,658 shares of common stock and Series B warrants
to purchase 1,169,544 shares of common stock. The Company
has not issued any Series C warrants as of March 31,
2009 because no Series B warrants have been exercised.
However, if all Series B warrants are exercised, the
Company may issue Series C warrants to purchase up to
584,772 shares of common stock. As compensation for
services rendered as the exclusive placement agent for the
offering, the placement agent received $122,696 in cash plus
warrants, exercisable upon the closing date of the transaction
for a five year term, to purchase 104,958 shares of common
stock at an exercise price of $1.56 per share.
Common
Stock Issued in Private Placement to a Related
Party
On February 24, 2009, the Company entered into a Purchase
Agreement with Robert Burlingame, a director of the Company, and
an accredited investor. Pursuant to the terms of the Purchase
Agreement, the investors agreed to make a $3,000,000 investment
in the Company. The investors paid $1,000,000 (net proceeds of
$948,000 after deducting offering expenses) for
854,701 shares of common stock on February 24, 2009
and agreed to pay $2,000,000 for 1,709,402 shares of common
stock no later than August 1, 2009. In addition, the
Company agreed to issue to the investors Series A Warrants
to purchase a total of 1,500,000 shares of common stock pro
rata to the number of shares of common stock issued on each
closing date at an exercise price of $1.87 per share. The
Series A Warrants will be exercisable after six months and
will have a five year term. The Company also agreed to issue to
the investors Series B Warrants to purchase a total of
2,000,000 shares of common stock pro rata to the number of
shares of common stock issued on each closing date at an
exercise price of $1.13 per share. The Series B Warrants
will be exercisable after six months and will have a three year
term. In addition, for every two shares of common stock the
investor purchases upon exercise of a Series B Warrant, the
investor will receive an additional Series C Warrant to
purchase one share of common stock. The Series C Warrant
shall be exercisable after six months and will have an exercise
price of $1.94 per share and a five year term. The Company will
only be obligated to issue Series C Warrants to purchase up
to 1,000,000 shares of common stock.
Common
Stock Issued to Consultants for Services Rendered
On March 5, 2009, the Company issued 10,000 shares of
common stock to Spot Savvy LLC pursuant to the terms of a
Consulting Agreement dated February 26, 2009. The fair
value of the underlying stock on the date of issuance was at
$1.06 per share. The shares are fully vested and non-forfeitable
at the time of issuance. The shares were issued as compensation
for providing product marketing services. The Company determined
the fair value of the common stock was more readily determinable
than the fair value of the services rendered. For the year ended
March 31, 2009, the Company recorded $10,600 of expense in
the accompanying consolidated statement of operations.
Also on March 5, 2009, the Company issued
10,000 shares of common stock to Michael Salman Teymouri
pursuant to the terms of a Consulting Agreement dated
February 26, 2009. The fair value of the underlying stock
on the date of issuance was at $1.06 per share. The shares are
fully vested and non-forfeitable at the time of issuance. The
shares were issued as compensation for providing product
marketing services. The Company determined the fair value of the
common stock was more readily determinable than the fair value
of the services rendered. For the
75
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
year ended March 31, 2009, the Company recorded $10,600 of
expense in the accompanying consolidated statement of operations.
Stock
Purchase Warrants Issued in Financing Transactions
On June 14, 2006, the Company issued warrants to purchase
71,521 shares of Series B convertible preferred stock
at an exercise price of $18.00 per share in connection with a
financing facility described in Note 10. These warrants
were automatically converted to warrants to purchase
71,521 shares of common stock at the closing of the
Companys IPO on January 30, 2007. The warrants were
valued using the Black-Scholes pricing model. Assumptions used
were as follows: Fair value of the underlying stock $18.00;
risk-free interest rate 5.15% percent; contractual life of
10 years; dividend yield of 0%; and
volatility of 70%. The fair value of the warrants, which
amounted to $1,046,000, was recorded as deferred debt issuance
costs and is being amortized as interest expense over the term
of the credit facility. Amortization of these costs amounted to
$133,000 and $331,000 and is included as a component of interest
expense in the accompanying consolidated statement of operations
for the year ended March 31, 2009 and 2008, respectively.
On November 10, 2006, Brookstreet Securities Corporation
was granted a warrant to purchase 25,000 shares of the
Companys common stock at an exercise price of $18.00 per
share in connection with a finders fee for the Robert
Burlingame Bridge Loan, which funded on November 10, 2006
(Note 10). The warrants were valued using the Black-Scholes
pricing model using the following assumptions: Fair value of the
underlying stock $18.00; risk-free interest rate 4.70% percent;
contractual life of 5 years; dividend yield of 0%; and
volatility of 70%. The fair value of the warrants, which
amounted to $104,000 was recorded as debt issue costs. The
Company amortized $62,000 of interest expense related to the
warrants during the year ended March 31, 2008.
On August 13, 2007, the Company issued warrants to purchase
416,622 shares of common stock at an exercise price of
$9.50 per share to investors in conjunction with the private
placement of common stock described above. The warrants became
exercisable on February 8, 2008, and have a term of five
years. The exercise price for the investor warrants was adjusted
to $8.63 on March 31, 2008, after the anti-dilution
provisions of the warrants were triggered by our registered
direct offering. The warrantholder received an additional 41,997
warrants as a result of this transaction. Additionally, the
exercise price for the investor warrants was adjusted to $5.03
in February 2009, after the anti-dilution provisions of the
warrants were triggered by the Companys February 6,
2009 and February 24, 2009 private placement offerings. The
investor warrants are now exercisable for an additional
328,247 shares. At March 31, 2009 there were 786,846
investor warrants outstanding related to this transaction. The
warrants are subject to adjustment in certain circumstances and
require settlement in shares of the Companys common stock.
The Company accounted for the issuance of the common stock
purchase warrants in accordance with the provisions of
EITF 00-19.
Based on the provisions of
EITF 00-19,
the Company classified the warrants as equity.
On August 20, 2007, the Company issued a warrant to
purchase 88,375 shares of common stock at an exercise price
of $9.50 per share to the placement agent for the private
placement described above. The warrant became exercisable on
February 8, 2008, and has a term of five years. The warrant
was adjusted to $8.63 on March 31, 2008, after the
anti-dilution provisions of the warrant was triggered by the
Companys registered direct offering. The warrantholder
received an additional warrant to purchase 8,909 shares of
common stock as a result of this adjustment. Additionally, the
exercise price for the placement agent warrant was adjusted to
$5.02 in February 2009, after the anti-dilution provisions of
the warrants were triggered by our February 6, 2009 and
February 24, 2009 private placement offerings. The
warrantholder received a warrant to purchase an additional
69,622 shares of common stock as a result of this
transaction. At March 31, 2009 the placement agent had a
warrant to purchase 166,906 shares of common stock. The
warrant has the same terms as the warrants issued in the private
placement and was accounted for in accordance with the
provisions of
EITF 00-19.
The securities underlying the warrant were registered on the
same registration statement.
76
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On March 31, 2008, the Company issued warrants to purchase
1,317,278 shares of common stock at an exercise price of
$6.85 per share to investors in conjunction with the registered
direct placement of common stock described above. The warrants
become exercisable on September 28, 2008, and have a term
of five years. The Company accounted for the issuance of the
common stock purchase warrants in accordance with the provisions
of
EITF 00-19.
Based on the provisions of
EITF 00-19,
the Company classified the warrants as equity.
On March 31, 2008, the Company issued a warrant to purchase
130,000 shares of common stock at an exercise price of
$6.30 per share to the placement agent for the private placement
described above. The warrant has the same terms as the warrants
issued to investors in the registered direct placement described
above and were accounted for in accordance with the provisions
of
EITF 00-19.
Based on the provisions of
EITF 00-19,
the Company classified the warrants as equity.
On February 6, 2009, the Company issued the following
warrants in connection with a private placement. The Company
issued Series A warrants to purchase 869,658 shares of
common stock at an exercise price of $1.87 per share and
Series B warrants to purchase 1,169,544 shares of
common stock at an exercise price of $1.13 per share. If all
Series B warrants are exercised, the Company may issue
Series C warrants to purchase up to 584,772 shares of
common stock at an exercise price of $1.94 per share. For every
two shares of common stock the purchased upon exercise of a
Series B Warrant, an additional Series C Warrant to
purchase one share of common stock will be issued. The Company
has not issued any Series C warrants as of March 31,
2009 because no Series B warrants have been exercised. As
compensation for services rendered as the exclusive placement
agent, the Company issued the placement agent a warrant to
purchase 104,958 shares of common stock at an exercise
price of $1.56 per share, exercisable upon the closing date of
the transaction for a five year term. The Company accounted for
the issuance of the common stock purchase warrants in accordance
with the provisions of
EITF 00-19.
Based on the provisions of
EITF 00-19,
the Company classified the warrants as equity.
On February 24, 2009, the Company issued the following
warrants in connection with a private placement. The Company
issued Series A warrants to purchase 500,000 shares of
common stock at an exercise price of $1.87 per share and
Series B warrants to purchase 666,667 shares of common
stock at an exercise price of $1.13 per share. If all
Series B warrants are exercised, the Company may issue
Series C warrants to purchase up to 1,000,000 shares
of common stock at $1.94 per share. For every two shares of
common stock the investor purchases upon exercise of a
Series B Warrant, the investor will receive an additional
Series C Warrant to purchase one share of common stock. The
Company has not issued any Series C warrants as of
March 31, 2009 because no Series B warrants have been
exercised. The Series A Warrants will be exercisable after
six months and will have a five year term. The Series B
Warrants will be exercisable after six months and will have a
three year term. The Company accounted for the issuance of the
common stock purchase warrants in accordance with the provisions
of
EITF 00-19.
Based on the provisions of
EITF 00-19,
the Company classified the warrants as equity.
On March 4, 2009, the Company issued an advisor, Dayl Crow,
a Series A Warrant exercisable for a five year term, to
purchase 50,000 shares of our common stock at an exercise
price of $1.87 per share. These warrants were issued in
connection with consulting services
Anti-dilution
adjustment
Pursuant to the anti-dilution provisions contained in the
private placement investor and placement agent warrant
agreements, following the close of the registered direct
offering on March 31, 2008, the Company adjusted the
conversion price of the private placement warrants. As a result,
the exercise price for the warrants was adjusted from $9.50 to
$8.63. Additionally, as a result of this transaction, an
additional 50,886 warrants were issued.
Following the close of the February 6, 2009 private
placement offering and following the close of the
February 24, 2009 private placement offering, the Company
again adjusted the conversion price of the warrants related to
the August 7, 2007 private placement. The exercise price
for the warrants was adjusted from $8.63 to $5.02 per share.
Additionally, as a result of this transaction, an additional
397,869 warrants were issued. At
77
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2009, 953,752 warrants were outstanding that
related to the August 7, 2007 private placement transaction.
Common
Stock and Common Stock Purchase Warrants Issued to Non-Employees
For Services
On November 10, 2006, the Company entered into a
2 year consulting agreement with its new director, Robert
Burlingame. Under the terms of the agreement, the Company issued
to the director a warrant to purchase 75,000 shares of its
common stock, exercisable at a price equal to the Companys
common stock in its initial public offering in consideration of
corporate advisory services. The warrants were fully exercisable
and non-forfeitable at their date of issuance. The warrants were
valued using the Black-Scholes option pricing model. Assumptions
used were as follows: Fair value of the underlying stock of
$9.00, risk-free interest rate of 4.70%; contractual life of
5 years; dividend yield of 0%; and volatility of 70%. The
adjusted fair value of the warrant amounted to $350,000.
Following the guidance enumerated in Issue 2 of
EITF 96-18,
the Company amortized the fair value of the warrants over the
two year term of the consulting agreement which is consistent
with its treatment of similar cash transactions. During the
years ended March 31, 2009 and 2008, the amortized fair
value of the warrants amounted to $106,000 and $175,000,
respectively, and was recorded as selling, general and
administrative expense in the accompanying consolidated
statements of operations. The fair value was fully amortized in
the year ended March 31, 2009.
The Company accounted for its issuance of stock-based
compensation to non-employees for services using the measurement
date guidelines enumerated in SFAS 123(R) and
EITF 96-18.
Accordingly, the value of any awards that were fully vested and
non forfeitable at their date of issuance were measured based on
the fair value of the equity instruments at the date of
issuance. The non-vested portion of awards that are subject to
the future performance of the counterparty are adjusted at each
reporting date to their fair values based upon the then current
market value of the Companys stock and other assumptions
that management believes are reasonable.
On April 5, 2007, the Company terminated certain advisory
consulting contracts and made all unvested warrants issued to
the consultants available for immediate exercise. In addition,
the Company extended the exercise period through April 13,
2009. For the year ended March 31, 2008, the Company
recorded $2,000 of expense for the incremental fair value
related to the modification of these warrants. The warrants were
adjusted to fair value using the following weighted average
assumptions: Risk-free interest rate of 4.03%; contractual life
of 2.66 years; dividend yield of 0%; and volatility of 70%.
|
|
NOTE 14
|
Stock-Based
Compensation
|
1999,
2000, 2003 and 2004 Stock Option Plans
The 1999, 2000, 2003 and 2004 Stock Option Plans became
effective May 1999, June 2000, July 2003 and July 2004,
respectively. The Plans provide for grants of both incentive
stock options (ISOs) and non-qualified stock options (NSOs) to
employees, consultants and directors.
78
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In accordance with the Plans, stated exercise price may not be
less than 100% and 85% of the estimated fair market value of the
Companys common stock on the date of grant for ISOs and
NSOs, respectively, as determined by the board of directors at
the date of grant. With respect to any 10% shareholder, the
exercise price of an ISO or NSO was not to exceed 110% of the
estimated fair market value per share on the date of grant.
Options issued under the Plans generally have a ten-year term
and generally became exercisable over a five-year period.
On June 29, 2006, the compensation committee of the
Companys board of directors resolved that it would not
approve any further grants under its 1999, 2000 and 2003 Plans.
Additionally, in connection with the Delaware reincorporation on
December 15, 2006, no future options will be granted under
the 2004 Plan.
2006
Stock Plan
On November 7, 2006, the board authorized and reserved
1,250,000 shares for issuance of options that may be
granted under the Companys 2006 Stock Incentive Plan (the
2006 Plan), which was previously adopted by the
board of directors in August 2006. On December 14, 2006,
the stockholders approved the Companys 2006 Plan which
became effective at the close of the Companys initial
public offering. The Plan was amended by resolution of the board
on April 26, 2007, and the amendments were subsequently
approved by the stockholders.
The 2006 Plan provides for the granting of incentive stock
options to employees and the granting of nonstatutory stock
options to employees, non-employee directors, advisors and
consultants. The 2006 Plan also provides for grants of
restricted stock, stock appreciation rights and stock unit
awards to employees, non-employee directors, advisors and
consultants.
In accordance with the 2006 Plan, the stated exercise price may
not be less than 100% and 85% of the estimated fair market value
of common stock on the date of grant for ISOs and NSOs,
respectively, as determined by the board of directors at the
date of grant. With respect to any 10% stockholder, the exercise
price of an ISO or NSO shall not be less than 110% of the
estimated fair market value per share on the date of grant.
Options issued under the 2006 Plan generally have a ten-year
term and generally become exercisable over a five-year period.
Shares subject to awards that expire unexercised or are
forfeited or terminated will again become available for issuance
under the 2006 Plan. No participant in the 2006 Plan can receive
option grants, restricted shares, stock appreciation rights or
stock units for more than 750,000 shares in the aggregate
in any calendar year.
As provided under the 2006 Plan, the aggregate number of shares
authorized for issuance as awards under the 2006 Plan
automatically increased on April 1, 2008 by
795,280 shares (which number constitutes 5% of the
outstanding shares on the last day of the year ended
March 31, 2008).
As described above, the number of shares authorized for issuance
will be subject to adjustment on April 1, 2009
(Note 18).
79
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Options and restricted stock units outstanding at March 31,
2009 under the various plans is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Options and
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
|
|
|
Number of
|
|
|
Stock Units
|
|
|
|
Number of
|
|
|
Restricted
|
|
|
Outstanding
|
|
Plan
|
|
Options
|
|
|
Stock Units
|
|
|
in Plan
|
|
|
1999 Plan
|
|
|
207
|
|
|
|
|
|
|
|
207
|
|
2000 Plan
|
|
|
40
|
|
|
|
|
|
|
|
40
|
|
2003 Plan
|
|
|
162
|
|
|
|
|
|
|
|
162
|
|
2004 Plan
|
|
|
683
|
|
|
|
|
|
|
|
683
|
|
2006 Plan
|
|
|
2,572
|
|
|
|
30
|
|
|
|
2,602
|
|
Granted Outside Plans
|
|
|
300
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,964
|
|
|
|
30
|
|
|
|
3,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of activity under all option Plans for the years ended
March 31, 2009 and 2008 is presented below (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value
|
|
|
Outstanding at March 31, 2007
|
|
|
2,020
|
|
|
$
|
4.91
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
912
|
|
|
|
6.97
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(119
|
)
|
|
|
0.56
|
|
|
|
|
|
|
|
|
|
Options forfeited or expired
|
|
|
(189
|
)
|
|
|
7.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
2,624
|
|
|
|
5.67
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
2,035
|
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(105
|
)
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
Options forfeited or expired
|
|
|
(590
|
)
|
|
|
6.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009
|
|
|
3,964
|
|
|
$
|
3.28
|
|
|
|
7.10
|
|
|
$
|
1,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2009
|
|
|
1,888
|
|
|
$
|
4.81
|
|
|
|
4.50
|
|
|
$
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for grant as of March 31, 2009
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference
between the exercise price of the underlying stock options and
the fair value of the Companys common stock ($1.26) for
stock options.
Stock-Based
Compensation Before Adoption of
SFAS No. 123(R)
Prior to April 1, 2006, the Company accounted for
stock-based employee compensation arrangements in accordance
with the provisions of APB No. 25, Accounting for
Stock Issued to Employees, and its related interpretations
and applied the disclosure requirements of
SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123. The Company used the minimum value
method to measure the fair value of awards issued prior to
April 1, 2006 with respect to its application of the
disclosure requirements under SFAS 123.
80
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the years ended March 31, 2009 and 2008, the Company
recorded $101,000 and $148,000, respectively, of stock-based
compensation expense related to options that the Company
accounted for under APB 25 through March 31, 2006.
Additionally, there was $25,000 of unrecognized compensation
cost related to these options at March 31, 2009. These
costs are expected to be recognized over a weighted average
amortization period of 0.41 years.
Stock-Based
Compensation After Adoption of SFAS 123(R)
Effective April 1, 2006, the Company adopted
SFAS No. 123(R), Share-Based Payment, using the
prospective transition method, which requires the measurement
and recognition of compensation expense for all share-based
payment awards granted, modified and settled to the
Companys employees and directors after April 1, 2006.
The Companys consolidated financial statements as of and
for the years ended March 31, 2009 and 2008 reflect the
impact of SFAS No. 123(R). In accordance with the
prospective transition method, the Companys consolidated
financial statements for prior periods have not been restated to
reflect, and do not include, the impact of
SFAS No. 123(R).
Stock-based compensation expense recorded in accordance with the
provisions of SFAS No. 123(R) is as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Impact from
|
|
|
Impact from
|
|
|
|
SFAS No. 123(R)
|
|
|
SFAS No. 123(R)
|
|
|
|
Provisions for
|
|
|
Provisions for
|
|
|
|
the Year Ended
|
|
|
the Year Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cost of revenues service
|
|
$
|
18
|
|
|
$
|
10
|
|
Research and development
|
|
|
82
|
|
|
|
145
|
|
Selling, general and administrative
|
|
|
1,935
|
|
|
|
851
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
2,035
|
|
|
$
|
1,006
|
|
|
|
|
|
|
|
|
|
|
No income tax benefit has been recognized relating to
stock-based compensation expense and no tax benefits have been
realized from exercised stock options.
The Company estimated the fair value of employee stock options
using the Black-Scholes option pricing model. The fair value of
employee stock options is being amortized on a straight-line
basis over the requisite service periods of the respective
awards. The fair value of employee stock options was estimated
using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Fair value of common stock
|
|
$
|
3.42
|
|
|
$
|
6.97
|
|
Expected Term
|
|
|
5.97
|
yrs
|
|
|
5.67
|
yrs
|
Risk-free interest rate
|
|
|
1.89
|
%
|
|
|
4.51
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility
|
|
|
83.0
|
%
|
|
|
73.0
|
%
|
The weighted-average fair values of options granted during the
years ended March 31, 2009 and 2008 were $0.68 and $4.53,
respectively.
81
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The expected term of stock options represents the average period
the stock options are expected to remain outstanding and is
based on the expected term calculated using the approach
prescribed by SAB 107 for plain vanilla
options. The Company used this approach as it did not have
sufficient historical information to develop reasonable
expectations about future exercise patterns and post-vesting
employment termination behavior. The expected stock price
volatility for the Companys stock options was determined
by examining the historical volatilities for industry peers and
using an average of the historical volatilities of the
Companys industry peers as well as the trading history for
the Companys common stock. The Company will continue to
analyze the stock price volatility and expected term assumptions
as more data for the Companys common stock and exercise
patterns becomes available. The risk-free interest rate
assumption is based on the U.S. Treasury instruments whose
term was consistent with the expected term of the Companys
stock options. The expected dividend assumption is based on the
Companys history and expectation of dividend payouts.
In addition, SFAS No. 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated at 5% based on historical
experience. Prior to the adoption of SFAS No. 123(R),
the Company accounted for forfeitures as they occurred.
At March 31, 2009, there was unrecognized compensation
costs of $3,179,000 related to stock options accounted for in
accordance with the provisions of SFAS 123(R). The cost is
expected to be recognized over a weighted-average amortization
period of 2.78 years.
In addition to the above option activity, on April 26,
2007, an award of 60,000 stock units was issued to an officer of
the Company. Each stock unit represents the right to receive a
share of the Companys common stock, in consideration of
past services rendered and the payment by the officer of $3.00
per share, upon the settlement of the stock unit on a fixed date
in the future. Half of the stock units, representing
30,000 shares, were forfeited on January 15, 2009 and
the remaining 30,000 will either be settled or forfeited on
January 15, 2010. The modification of this award did not
result in incremental fair value or an additional charge to
Companys consolidated statements of operations for the
year ended March 31, 2008.
The Company did not capitalize any cost associated with
stock-based compensation.
The Company issues new shares of common stock upon exercise of
stock options.
Non-Employee
Options
The Company believes that the fair value of the stock options
issued to non-employees is more reliably measurable than the
fair value of the services received. The stock-based
compensation expense will fluctuate as the fair market value of
the common stock fluctuates. In connection with stock options
granted to non-employees, the Company recorded $7,000 during the
year ended March 31, 2008. The Company did not record any
stock compensation related to non-employee stock options during
the year ended March 31, 2009. The fair value of the stock
options was calculated using the Black-Scholes option-pricing
model as prescribed by SFAS No. 123 using the
following weighted-average assumptions: Risk-free interest rate
of 4.03%; contractual life of 2.58 years; dividend yield of
0%; and volatility of 70%.
82
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has the following net deferred tax assets (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
31,205
|
|
|
$
|
28,124
|
|
Research and development tax credit carryforwards
|
|
|
1,262
|
|
|
|
858
|
|
Stock-based compensation
|
|
|
2,419
|
|
|
|
1,960
|
|
Reserves and accruals
|
|
|
1,553
|
|
|
|
349
|
|
Other deferred tax assets
|
|
|
18
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
36,457
|
|
|
$
|
31,294
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Basis difference in assets
|
|
|
(26
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
36,431
|
|
|
|
31,267
|
|
Valuation allowance
|
|
|
(36,431
|
)
|
|
|
(31,267
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Companys recorded income tax benefit, net of the
change in the valuation allowance, for each of the periods
presented is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Income tax benefit
|
|
$
|
5,164
|
|
|
$
|
6,535
|
|
Change in valuation allowance
|
|
|
(5,164
|
)
|
|
|
(6,535
|
)
|
|
|
|
|
|
|
|
|
|
Net income tax benefit
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate to the
Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Expected federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State income taxes, net of federal benefit
|
|
|
(5.8
|
)%
|
|
|
(5.8
|
)%
|
Research and Development Credit
|
|
|
(1.9
|
)%
|
|
|
(1.7
|
)%
|
Foreign earnings taxed at different rates
|
|
|
0.8
|
%
|
|
|
1.5
|
%
|
Recognition of change in estimate of State and Foreign NOL
Carryforwards Benefits
|
|
|
9.6
|
%
|
|
|
7.0
|
%
|
Effect of permanent differences
|
|
|
2.2
|
%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(29.1
|
)%
|
|
|
(32.1
|
)%
|
Change in valuation allowance
|
|
|
29.1
|
%
|
|
|
32.1
|
%
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
At March 31, 2009, the Company had net operating loss
carryforwards for federal, state and foreign income tax purposes
of approximately $67,077,000, $57,143,000 and $19,842,000,
respectively. The carryforwards expire at various times
beginning March 31, 2020. The Company also had, at
March 31, 2009, federal and state research and
83
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
development credit carryforwards of approximately $653,000 and
$609,000, respectively. The federal credits expire beginning
March 31, 2024 and the state credits do not expire.
The Company has completed a study to assess whether a change in
control has occurred or whether there have been multiple changes
of control since the Companys formation. The Company
determined, based on the results of the study, that no change in
control occurred for purposes of Internal Revenue Code
section 382. The Company, after considering all available
evidence, fully reserved for these and its other deferred tax
assets since it is more likely than not such benefits will not
be realized in future periods. The Company has incurred losses
for both financial reporting and income tax purposes for the
year ended March 31, 2009. Accordingly, the Company is
continuing to fully reserve for its deferred tax assets. The
Company will continue to evaluate its deferred tax assets to
determine whether any changes in circumstances could affect the
realization of their future benefit. If it is determined in
future periods that portions of the Companys deferred
income tax assets satisfy the realization standard of
SFAS No. 109, the valuation allowance will be reduced
accordingly.
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation 48, Accounting
for Uncertainty in Income Taxes (FIN 48),
which became effective for the Company beginning April 1,
2007. FIN 48 addresses how tax benefits claimed or expected
to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the tax benefit from an
uncertain tax position can be recognized only if it is more
likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the
financial statements from such a position are measured based on
the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate resolution. The
adoption of FIN 48 had no impact on the Companys
financial condition, results of operations or cash flows.
The Company has identified its federal tax return and its state
tax return in California as major tax jurisdictions. The Company
is also subject to certain other foreign jurisdictions,
principally Mexico and The Netherlands. The Companys
evaluation of FIN 48 tax matters was performed for tax
years ended through March 31, 2009. Generally, the Company
is subject to audit for the years ended March 31, 2008,
2007 and 2006 and may be subject to audit for amounts relating
to net operating loss carryforwards generated in periods prior
to March 31, 2006. The Company has elected to retain its
existing accounting policy with respect to the treatment of
interest and penalties attributable to income taxes in
accordance with FIN 48, and continues to reflect interest
and penalties attributable to income taxes, to the extent they
arise, as a component of its income tax provision or benefit as
well as its outstanding income tax assets and liabilities. The
Company believes that its income tax positions and deductions
would be sustained on audit and does not anticipate any
adjustments, other than those identified above that would result
in a material change to its financial position.
|
|
NOTE 16
|
Employee
Benefit Plan
|
The Company has a program to contribute and administer
individual Simple IRA accounts for regular full time employees.
Under the plan, the Company matches employee contributions to
the plan up to 3% of the employees salary. The Company
contributed $91,000 and $79,000 to the program for the years
ended March 31, 2009 and 2008, respectively.
|
|
NOTE 17
|
Segment
and Geographic Information
|
In accordance with SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information
(SFAS 131), operating segments are identified
as components of an enterprise for which separate and discreet
financial information is available and is used by the chief
operating decision maker, or decision-making group, in making
decisions on how to allocate resources and assess performance.
The Companys chief decision-makers, as defined by
SFAS 131, are the Chief Executive Officer and his direct
reports.
84
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Companys chief decision-makers review financial
information presented on a consolidated basis, accompanied by
disaggregated information about revenue and operating profit by
operating unit. This information is used for purposes of
allocating resources and evaluating financial performance.
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting
Policies. Segment data includes segment revenue, segment
operating profitability, and total assets by segment. Shared
corporate operating expenses are reported in the
U.S. segment.
The Company is organized primarily on the basis of operating
units which are segregated by geography, United States
(U.S.), Europe and Rest of the World
(Europe/ROW) and Mexico. Oculus Japan is
insignificant with respect to the Companys consolidated
operating results for the year ended March 31, 2009 and
2008 and therefore has been included in the U.S. segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe/
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
ROW
|
|
|
Mexico
|
|
|
Total
|
|
|
Year Ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
298
|
|
|
$
|
844
|
|
|
$
|
3,273
|
|
|
$
|
4,415
|
|
Service revenues
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,271
|
|
|
|
844
|
|
|
|
3,273
|
|
|
|
5,388
|
|
Depreciation and amortization expense
|
|
|
394
|
|
|
|
213
|
|
|
|
161
|
|
|
|
768
|
|
Loss from operations
|
|
|
(16,666
|
)
|
|
|
(556
|
)
|
|
|
(85
|
)
|
|
|
(17,307
|
)
|
Interest expense
|
|
|
(437
|
)
|
|
|
|
|
|
|
|
|
|
|
(437
|
)
|
Interest income
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe/
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
ROW
|
|
|
Mexico
|
|
|
Total
|
|
|
Year Ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
197
|
|
|
$
|
566
|
|
|
$
|
2,118
|
|
|
$
|
2,881
|
|
Service revenues
|
|
|
954
|
|
|
|
|
|
|
|
|
|
|
|
954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,151
|
|
|
|
566
|
|
|
|
2,118
|
|
|
|
3,835
|
|
Depreciation and amortization expense
|
|
|
420
|
|
|
|
227
|
|
|
|
93
|
|
|
|
740
|
|
Loss from operations
|
|
|
(19,567
|
)
|
|
|
(1,586
|
)
|
|
|
(1,272
|
)
|
|
|
(22,425
|
)
|
Interest expense
|
|
|
(1,016
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,016
|
)
|
Interest income
|
|
|
630
|
|
|
|
|
|
|
|
|
|
|
|
630
|
|
Sales by geography reported in the Europe/ROW segment is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
India
|
|
$
|
116
|
|
|
$
|
83
|
|
China
|
|
|
159
|
|
|
|
|
|
Europe and other
|
|
|
569
|
|
|
|
483
|
|
|
|
|
|
|
|
|
|
|
Total Europe/ROW
|
|
$
|
844
|
|
|
$
|
566
|
|
|
|
|
|
|
|
|
|
|
85
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table shows property and equipment balances by
segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
U.S
|
|
$
|
931
|
|
|
$
|
1,193
|
|
Europe/ROW
|
|
|
322
|
|
|
|
754
|
|
Mexico
|
|
|
179
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,432
|
|
|
$
|
2,303
|
|
|
|
|
|
|
|
|
|
|
The following table shows total asset balances by segment (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
U.S
|
|
$
|
3,543
|
|
|
$
|
20,974
|
|
Europe/ROW
|
|
|
841
|
|
|
|
1,271
|
|
Mexico
|
|
|
1,063
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,447
|
|
|
$
|
23,612
|
|
|
|
|
|
|
|
|
|
|
NOTE 18
Subsequent Events
Increase
in Number of Shares Authorized in the 2006
Plan
As provided under the 2006 Plan, the aggregate number of shares
authorized for issuance as awards under the 2006 Plan
automatically increased on April 1, 2009 by
920,141 shares (which number constitutes 5% of the
outstanding shares on the last day of the year ended
March 31, 2009). Total shares authorized for issuance
subsequent to the increase is 955,999.
Consulting
Agreement with Member of Board of Directors
On April 1, 2009, the Company entered into a six month
consulting agreement with a member of its Board of Directors,
Mr. Bob Burlingame. Pursuant to the agreement,
Mr. Burlingame will provide the Company with sales and
marketing expertise and services. In consideration of his
services, the Company agreed to issue Mr. Burlingame
435,897 unregistered shares of its common stock. The Company
intends to issue the shares in June 2009. The shares are to be
non-forfeitable at the time of issuance. The Company has
determined the fair value of the common stock is more readily
determinable than the fair value of the services rendered.
Accordingly, the Company will record $475,000 of stock
compensation expense related to this agreement. The expense will
be recognized on a straight-line basis over the six month term
of the agreement (April 1, 2009 to October 1, 2009).
Contract
Sales Agreement
On April 24, 2009, the Company entered into an agreement
with a contract sales organization (CSO) that will
serve as the Companys sales force for the sale of wound
care products in the United States. Pursuant to the agreement,
the Company agreed to pay the CSO a monthly fee that may
increase based on achievement of certain levels of sales. The
Company may also pay bonuses in the event certain levels of
sales are achieved. Additionally, the Company agreed to issue
the CSO 7,000 shares of common stock each month as
compensation for their services. On May 27, 2009, the
Company issued 24,500 shares of common stock in connection
with this agreement that represents compensation through
July 31, 2009. The Company has determined the fair value of
the common stock, which will be calculated as shares are issued,
will be more readily determinable than the fair value of the
services rendered. Accordingly, the Company will record the fair
market value of the stock as compensation expense. The expense
will be recognized as the shares of stock are earned.
86
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Amendment
to Petaluma Building Lease
On May 18, 2009, the Company amended its lease for its
facility in Petaluma which resulted in a reduction of the
Companys monthly lease payment. Pursuant to the amendment,
the Company agreed to surrender 8,534 square feet of office
space and extended the lease expiration on the remaining lease
to September 30, 2011. The Company also agreed to provide
the property owner a cash payment of $50,000 no later than
August 14, 2009. Additionally, at the option of the
Company, no later than August 17, 2009, the property owner
will either receive 53,847 shares of the Companys
common stock or a $70,000 cash payment.
Sale
of Unregistered Securities
On June 1, 2009, the Company issued the remaining
securities related to the February 24, 2009 private
placement (Note 13). The issuance comprised of an aggregate
of 1,709,402 shares of common stock, Series A Warrants
to purchase an aggregate of 1,000,000 shares of common
stock and Series B Warrants to purchase an aggregate of
1,333,333 shares of common stock to the Investors pro rata
to the investment amount of each Investor. The Company received
$2,000,000 in connection with this transaction.
87
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financials Disclosure
|
None.
|
|
ITEM 9A(T).
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed 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 SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of our most recent fiscal
year. Based upon this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of March 31, 2009.
Managements
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 Exchange Act
Rule 13a-15(f).
Our management 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 this evaluation, our management
concluded that our internal control over financial reporting was
effective as of March 31, 2009. This annual report on
Form 10-K
does not include an attestation report of our independent
registered public accounting firm regarding internal control
over financial reporting. Managements report was not
subject to attestation by our independent registered public
accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only
managements report in this annual report on
Form 10-K.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the fiscal quarter ended
March 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
Other
Information
|
Entry
Into Material Definitive Agreements
Consulting
Agreement with Member of Board of Directors
On April 1, 2009, we entered into a six month consulting
agreement with a member of our Board of Directors, Robert
Burlingame. Pursuant to the agreement, Mr. Burlingame will
provide us with sales and marketing expertise and services. In
consideration of his services, we agreed to issue
Mr. Burlingame 435,897 unregistered shares of our common
stock. We intend to issue the shares in June 2009.
Contract
Sales Agreement
On April 24, 2009, we entered into a two-year agreement
with Advocos, a contract sales organization, or CSO, that will
serve as our sales force for product sales, specifically of
Microcyn as permitted to be marketed and sold in the United
States. We may terminate the agreement with 30 days
notice and the agreement will automatically renew for an
additional one year term if no notice of termination is provided
prior to the end of the term. Pursuant to the agreement, we
agreed to pay Advocos a monthly fee that may increase based on
achievement of certain levels of sales. We may also pay bonuses
in the event certain levels of sales are achieved. Additionally,
we agreed to issue
88
Advocos 3,500 shares of common stock initially, and
7,000 shares of common stock each month as compensation for
their services. On May 27, 2009, we issued
24,500 shares of common stock in connection with this
agreement.
Amendment
to Petaluma Building Lease
On May 18, 2009, we amended our lease for our facility in
Petaluma which resulted in a reduction of our monthly lease
payment. Pursuant to the amendment, we agreed to surrender
8,534 square feet of office space and extended the lease
expiration on the remaining lease to September 30, 2011. We
also agreed to provide the property owner a cash payment of
$50,000 no later than August 14, 2009. Additionally, at our
option, no later than August 17, 2009, we will either pay
the property owner 53,847 shares of our common stock or a
$70,000 cash payment.
Receipt
of FDA Approvals
On May 27, 2009, we received a 510(k) clearance from the
FDA to market our Microcyn Skin and Wound Gel as both a
prescription and
over-the-counter
formulation. Additionally, on June 4, 2009, we received an
expanded 510(k) label clearance from the FDA to market our
Microcyn Skin and Wound Cleanser with preservatives as both a
prescription and
over-the-counter
formulation. The new prescription product is indicated for use
by health care professionals to manage the debridement of wounds
such as stage I-IV pressure ulcers, diabetic foot ulcers,
post-surgical wounds, first- and second-degree wounds, grafted
and donor sites.
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item is incorporated by
reference to the definitive proxy statement for our 2009 Annual
Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days after the end of our
fiscal year ended March 31, 2009 (the 2008 Proxy
Statement).
Item 405 of
Regulation S-K
calls for disclosure of any known late filing or failure by an
insider to file a report required by 16(a) of the Exchange Act.
This disclosure is contained in the section entitled
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement.
We have adopted a Code of Business Conduct that applies to all
of our officers and employees, including our chief executive
officer, president, chief operating officer, chief financial
officer and other employees who perform financial or accounting
functions. The Code of Business Conduct sets forth the basic
principles that guide the business conduct of our employees. We
have also adopted a Senior Financial Officers Code of
Ethics that specifically applies to our chief executive officer,
president and chief operating officer, chief financial officer,
and key management employees. Stockholders may request a free
copy of our Code of Business Conduct and Ethics and our Senior
Financial Officers Code of Ethics by contacting Oculus
Innovative Sciences, Inc., Attention: Chief Financial Officer,
1129 N. McDowell Blvd., Petaluma, California 94954.
To date, there have been no waivers under our Code of Business
Conduct and Ethics or Senior Financial Officers Code of
Ethics. We intend to disclose future amendments to certain
provisions of our Code of Business Conduct and Ethics or Senior
Officers Code of Ethics or any waivers, if and when
granted, of our Code of Business Conduct and Ethics or Senior
Officers Code of Ethics on our website at
http://www.oculusis.com
within four business days following the date of such
amendment or waiver.
Our board of directors has appointed an audit committee,
comprised of Mr. Richard Conley, as chairman, Mr. Jay
Birnbaum and Mr. Gregg Alton. The board of directors has
determined that Mr. Conley qualifies as an audit committee
financial expert under the definition outlined by the Securities
and Exchange Commission. In addition, Mr. Conley,
Mr. Birnbaum and Mr. Alton each qualifies as an
independent director under the current NASDAQ
Marketplace rules and Securities and Exchange Commission rules
and regulations.
|
|
ITEM 11.
|
Executive
Compensation
|
The information required by this Item is incorporated by
reference to the 2009 Proxy Statement.
89
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this Item is incorporated by
reference to the 2009 Proxy Statement.
Information about securities authorized for issuance under our
equity compensation plans appears under the caption Equity
Compensation Plan Information in the Proxy Statement. That
portion of the Proxy Statement is incorporated by reference into
this report.
|
|
ITEM 13.
|
Certain
Relationships, Related Transactions, and Director
Independence
|
The information required by this Item is incorporated by
reference to the 2009 Proxy Statement.
|
|
ITEM 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item is incorporated by
reference to the 2009 Proxy Statement.
PART IV
|
|
ITEM 15.
|
Exhibits,
Financial Statement Schedules
|
|
|
(a)
|
Documents
filed as part of this report
|
(1) Financial
Statements
Reference is made to the Index to Consolidated Financial
Statements of Oculus Innovative Sciences, Inc. under Item 8
of Part II hereof.
(2) Financial
Statement Schedules
Financial statement schedules have been omitted that are not
applicable or not required or because the information is
included elsewhere in the Consolidated Financial Statements or
the Notes thereto.
(3) Exhibits
See Item 15(b) below.
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1(i)
|
|
Restated Certificate of Incorporation of Registrant
(incorporated by reference to the exhibit of the same number
filed with the Companys Annual Report on
Form 10-K
(File
No. 001-3216)
for the year ended March 31, 2007).
|
|
3
|
.1(ii)
|
|
Amended and Restated Bylaws of Registrant, as amended effective
on June 11, 2008 (incorporated by reference to the exhibit
of the same number filed with the Companys Annual Report
on
Form 10-K
(File
No. 001-3216)
for the year ended March 31, 2007).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
the exhibit of the same number filed with Registration Statement
on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.2
|
|
Warrant to Purchase Series A Preferred Stock of Registrant
by and between Registrant and Venture Lending &
Leasing III, Inc., dated April 21, 2004 (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
90
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.3
|
|
Warrant to Purchase Series B Preferred Stock of Registrant
by and between Registrant and Venture Lending &
Leasing IV, Inc., dated June 14, 2006 (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.4
|
|
Form of Warrant to Purchase Common Stock of Registrant
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.5
|
|
Form of Warrant to Purchase Common Stock of Registrant
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.6
|
|
Amended and Restated Investors Rights Agreement, effective as of
September 14, 2006 (incorporated by reference to the
exhibit of the same number filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.7
|
|
Form of Promissory Note issued to Venture Lending &
Leasing III, Inc. (incorporated by reference to the exhibit of
the same number filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.8
|
|
Form of Promissory Note (Equipment and Soft Cost Loans) issued
to Venture Lending & Leasing IV, Inc. (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.9
|
|
Form of Promissory Note (Growth Capital Loans) issued to Venture
Lending & Leasing IV, Inc. (incorporated by reference
to the exhibit of the same number filed with Registration
Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.10
|
|
Form of Promissory Note (Working Capital Loans) issued to
Venture Lending & Leasing IV, Inc. (incorporated by
reference to the exhibit of the same number filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.11
|
|
Form of Warrant to Purchase Common Stock of Registrant
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.12
|
|
Form of Warrant to Purchase Common Stock of Registrant
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
4
|
.13
|
|
Form of Warrant to Purchase Common Stock of Registrant
(incorporated by reference to exhibit 10.3 to the
Companys Current Report on
Form 8-K
filed August 13, 2007).
|
|
4
|
.14
|
|
Form of Warrant to Purchase Common Stock of Registrant
(incorporated by reference to exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed March 28, 2008).
|
|
4
|
.15
|
|
Form of Common Stock Purchase Warrant for April 2009 offering
(incorporated by reference to exhibit 4.15 to the
Companys Registration Statement on
Form S-1
(File
No. 333-158539
filed April 10, 2009 and incorporated herein by reference).
|
|
4
|
.16*
|
|
Warrant issued to Dayl Crow, dated March 4, 2009.
|
|
10
|
.1
|
|
Form of Indemnification Agreement between Registrant and its
officers and directors (incorporated by reference to the exhibit
of the same number filed with Registration Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.2
|
|
1999 Stock Plan and related form stock option plan agreements
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.3
|
|
2000 Stock Plan and related form stock option plan agreements
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.4
|
|
2003 Stock Plan and related form stock option plan agreements
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
91
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.5
|
|
2004 Stock Plan and related form stock option plan agreements
(incorporated by reference to the exhibit of the same number
filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.6
|
|
Form of 2006 Stock Incentive Plan and related form stock option
plan agreements (incorporated by reference to the exhibit of the
same number filed with Registration Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.7
|
|
2006 Stock Incentive Plan Notice of Stock Unit Award and Stock
and Stock Unit Agreement issued to Robert Miller (incorporated
by reference to the exhibit of the same number filed with the
Companys Annual Report on
Form 10-K
(File
No. 001-3216)
for the year ended March 31, 2007).
|
|
10
|
.8
|
|
Office Lease Agreement, dated October 26, 1999, between
Registrant and RNM Lakeville, L.P. (incorporated by reference to
exhibit 10.7 filed with Registration Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.9
|
|
Amendment to Office Lease No. 1, dated September 15,
2000, between Registrant and RNM Lakeville L.P. (incorporated by
reference to exhibit 10.8 filed with Registration Statement
on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.10
|
|
Amendment to Office Lease No. 2, dated July 29, 2005,
between Registrant and RNM Lakeville L.P. (incorporated by
reference to exhibit 10.9 filed with Registration Statement
on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.11
|
|
Amendment No. 3 to Lease, dated August 23, 2006,
between Registrant and RNM Lakeville L.P. (incorporated by
reference to exhibit 10.23 filed with Registration
Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.12
|
|
Office Lease Agreement, dated May 15, 2005, between Oculus
Technologies of Mexico, S.A. de C.V. and Antonio Sergio Arturo
Fernandez Valenzuela (translated from Spanish) (incorporated by
reference to exhibit 10.10 filed with Registration
Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.13
|
|
Office Lease Agreement, dated July 2003, between Oculus
Innovative Sciences, B.V. and Artikona Holding B.V. (translated
from Dutch) (incorporated by reference to exhibit 10.11
filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.14
|
|
Loan and Security Agreement, dated March 25, 2004, between
Registrant and Venture Lending & Leasing III, Inc.
(incorporated by reference to exhibit 10.12 filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.15
|
|
Loan and Security Agreement, dated June 14, 2006, between
Registrant and Venture Lending & Leasing IV, Inc.
(incorporated by reference to exhibit 10.13 filed with
Registration Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.16
|
|
Amendment No. 1 to Supplement to Loan and Security
Agreement, dated March 29, 2007, between Registrant and
Venture Lending & Leasing IV, Inc. (incorporated by
reference to the exhibit of the same number filed with the
Companys Annual Report on
Form 10-K
(File
No. 001-3216)
for the year ended March 31, 2007).
|
|
10
|
.17
|
|
Employment Agreement, dated January 1, 2004, between
Registrant and Hojabr Alimi (incorporated by reference to
exhibit 10.14 filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.18
|
|
Employment Agreement, dated January 1, 2004, between
Registrant and Jim Schutz (incorporated by reference to
exhibit 10.15 filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.19
|
|
Employment Agreement, dated June 1, 2004, between
Registrant and Robert Miller (incorporated by reference to
exhibit 10.16 filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.20
|
|
Employment Agreement, dated June 1, 2005, between
Registrant and Bruce Thornton (incorporated by reference to
exhibit 10.17 filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
92
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.21
|
|
Employment Agreement, dated June 10, 2006, between
Registrant and Mike Wokasch (incorporated by reference to
exhibit 10.19 filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.22
|
|
Form of Director Agreement (incorporated by reference to
exhibit 10.20 filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.23
|
|
Consultant Agreement, dated October 1, 2005, by and between
Registrant and White Moon Medical (incorporated by reference to
exhibit 10.21 filed with Registration Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.24
|
|
Leasing Agreement, dated May 5, 2006, by and between
Mr. Jose Alfonzo I. Orozco Perez and Oculus Technologies of
Mexico, S.A. de C.V. (incorporated by reference to
exhibit 10.22 filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.25
|
|
Stock Purchase Agreement, dated June 16, 2005, by and
between Registrant, Quimica Pasteur, S de R.L., Francisco Javier
Orozco Gutierrez and Jorge Paulino Hermosillo Martin
(incorporated by reference to exhibit 10.24 filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.26
|
|
Framework Agreement, dated June 16, 2005, by and among
Javier Orozco Gutierrez, Quimica Pasteur, S de R.L., Jorge
Paulino Hermosillo Martin, Registrant and Oculus Technologies de
Mexico, S.A. de C.V. (incorporated by reference to
exhibit 10.25 filed with Registration Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.27
|
|
Mercantile Consignment Agreement, dated June 16, 2005,
between Oculus Technologies de Mexico, S.A. de C.V., Quimica
Pasteur, S de R.L. and Francisco Javier Orozco Gutierrez
(incorporated by reference to exhibit 10.26 filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.28
|
|
Partnership Interest Purchase Option Agreement, dated
June 16, 2005, by and between Registrant and Javier Orozco
Gutierrez (incorporated by reference to exhibit 10.27 filed
with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.29
|
|
Termination of Registrant and Oculus Technologies de Mexico,
S.A. de C.V. Agreements with Quimica Pasteur, S de R.L. by Jorge
Paulino Hermosillo Martin (translated from Spanish)
(incorporated by reference to exhibit 10.28 filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.30
|
|
Termination of Registrant and Oculus Technologies de Mexico,
S.A. de C.V. Agreements with Quimica Pasteur, S de R.L. by
Francisco Javier Orozco Gutierrez (translated from Spanish)
(incorporated by reference to exhibit 10.29 filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.31
|
|
Loan and Security Agreement, dated November 7, 2006, by and
between Registrant and Robert Burlingame (incorporated by
reference to exhibit 10.30 filed with Registration
Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.32
|
|
Non-Negotiable Secured Promissory Note, dated November 10,
2006, by and between Registrant and Robert Burlingame
(incorporated by reference to exhibit 10.31 filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.33
|
|
Amendment No. 1 to Non-Negotiable Secured Promissory Note,
dated March 29, 2007, by and between Registrant and Robert
Burlingame (incorporated by reference to the exhibit of the same
number filed with the Companys Annual Report on
Form 10-K
(File
No. 001-3216)
for the year ended March 31, 2007).
|
|
10
|
.34
|
|
Subordination Agreement, dated November 7, 2006, by and
among Registrant, Robert Burlingame, Venture Lending &
Leasing III, LLC, and Venture Lending & Leasing IV,
LLC (incorporated by reference to exhibit 10.32 filed with
Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.35
|
|
Amendment No. 1 to Subordination Agreement, dated
March 29, 2007, by and among Registrant, Robert Burlingame,
Venture Lending & Leasing III, LLC, and Venture
Lending & Leasing IV, LLC. (incorporated by reference
to the exhibit of the same number filed with the Companys
Annual Report on
Form 10-K
(File
No. 001-3216)
for the year ended March 31, 2007).
|
93
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.36
|
|
Consulting Agreement, effective November 9, 2006, by and
between Registrant and Robert Burlingame (incorporated by
reference to exhibit 10.33 filed with Registration
Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.37
|
|
Director Agreement, dated November 8, 2006, by and between
Registrant and Robert Burlingame (incorporated by reference to
exhibit 10.34 filed with Registration Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.38
|
|
Exclusive Marketing Agreement, dated December 5, 2005, by
and between Registrant and Alkem Laboratories Ltd (incorporated
by reference to exhibit 10.35 filed with Registration
Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.39
|
|
Settlement Agreement, effective September 21, 2006, by and
among Registrant and Messrs. Jorge Ahumada Ayala and
Fernando Ahumada Ayala (incorporated by reference to
exhibit 10.36 filed with Registration Statement on
Form S-1
(File
No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.40
|
|
Settlement Agreement, dated October 25, 2006, by and
between Registrant and Mr. Kim Kelderman (incorporated by
reference to exhibit 10.37 filed with Registration
Statement on
Form S-1
(File No. 333-135584),
as amended, declared effective on January 24, 2007).
|
|
10
|
.41
|
|
Securities Purchase Agreement, dated August 7, 2007, by and
between Registrant and purchasers identified on the signatures
pages thereto (incorporated by reference to exhibit 10.1 to
the Companys Current Report on
Form 8-K
filed August 13, 2007).
|
|
10
|
.42
|
|
Registration Rights Agreement, dated August 7, 2007, by and
between Registrant and purchasers identified on signatures pages
thereto (incorporated by reference to exhibit 10.2 to the
Companys Current Report on
Form 8-K
filed August 13, 2007).
|
|
10
|
.43
|
|
Amendment No. 4 to Lease, dated September 13, 2007, by
and between Registrant and RNM Lakeville L.P. (incorporated by
reference to the exhibit of the same number filed with the
Companys Annual Report on
Form 10-K
(File
No. 001-3216)
for the year ended March 31, 2007).
|
|
10
|
.44
|
|
Amendment to Office Lease Agreement, effective February 15,
2008, by and between Oculus Innovative Sciences Netherlands B.V.
and Artikona Holding B.V. (translated from Dutch) (incorporated
by reference to the exhibit of the same number filed with the
Companys Annual Report on
Form 10-K
(File
No. 001-3216)
for the year ended March 31, 2007).
|
|
10
|
.45
|
|
Form of Securities Purchase Agreement, dated March 27,
2008, by and between Registrant and each investor signatory
thereto (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed March 23, 2008).
|
|
10
|
.46
|
|
Purchase Agreement by and between Registrant and Robert
Burlingame, dated January 26, 2009 (included as
Exhibit 10.1 to the
Form 8-K
filed January 29, 2009 and incorporated herein by
reference).
|
|
10
|
.47
|
|
Purchase Agreement by and between Registrant and Non-Affiliated
Investors, dated January 26, 2009 (included as
Exhibit 10.2 to the
Form 8-K
filed January 29, 2009 and incorporated herein by
reference).
|
|
10
|
.48
|
|
Revenue Sharing Distribution Agreement by and between Registrant
and VetCure, Inc., dated January 26, 2009 (included as
Exhibit 10.3 to the
Form 8-K
filed January 29, 2009 and incorporated herein by
reference).
|
|
10
|
.49
|
|
Purchase Agreement by and between Registrant and accredited
investors, dated February 6, 2009 (included as
Exhibit 10.1 to the
Form 8-K
filed February 9, 2009 and incorporated herein by
reference).
|
|
10
|
.50
|
|
Purchase Agreement by and between Registrant, Robert Burlingame
and Seamus Burlingame, dated February 24, 2009 (included as
Exhibit 10.4 to the
Form 8-K
filed February 27, 2009 and incorporated herein by
reference).
|
|
10
|
.51
|
|
Amendment to Revenue Sharing Distribution Agreement by and
between Registrant and Vetericyn, Inc., dated February 24,
2009 (included as Exhibit 10.5 to the
Form 8-K
filed February 27, 2009 and incorporated herein by
reference).
|
|
10
|
.52*
|
|
Consultant Agreement by and between Registrant and Robert C.
Burlingame, dated April 1, 2009.
|
94
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.53*
|
|
Microcyn U.S. Commercial Launch Agreement, by and between
Registrant and Advocos, dated April 24, 2009.
|
|
10
|
.54*
|
|
Amendment No. 5 to Lease by and between Registrant and RNM
Lakeville, LLC, dated May 18, 2009.
|
|
21
|
.1
|
|
List of Subsidiaries (incorporated by reference to the exhibit
of the same number filed with the Companys Annual Report
on
Form 10-K
(File
No. 001-3216)
for the year ended March 31, 2007).
|
|
23
|
.1*
|
|
Consent of Marcum & Kliegman LLP, independent
registered public accounting firm.
|
|
24
|
.1*
|
|
Power of Attorney (included on page 96).
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rule 13a 14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rule 13a 14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1**
|
|
Certification of Officers pursuant to 18 U.S.C.
Section 1250, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
In accordance with Item 60(b)(32)(ii) of
Regulation S-K
and SEC Release Nos.
33-8238 and
34-47986,
Final Rule: Managements Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange
Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this
Form 10-K
and will not be deemed filed for purposes of
Section 18 of the Exchange Act. Such certifications will
not be deemed to be incorporated by reference into any filing
under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by
reference. |
|
|
|
Confidential treatment has been granted with respect to certain
portions of this agreement. |
Copies of above exhibits not contained herein are available to
any stockholder, upon payment of a reasonable per page fee, upon
written request to: Chief Financial Officer, Oculus Innovative
Sciences, Inc., 1129 N. McDowell Blvd., Petaluma,
California 94954.
|
|
(c)
|
Financial
Statements and Schedules
|
Reference is made to Item 15(a)(2) above.
95
SIGNATURES
Pursuant 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 authorized.
OCULUS INNOVATIVE SCIENCES, INC.
Hojabr Alimi
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: June 11, 2009
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Hojabr Alimi
and James J. Schutz, and each of them, his true and lawful
attorneys-in-fact, each with full power of substitution, for him
or her in any and all capacities, to sign any amendments to this
report on
Form 10-K
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact or their substitute or substitutes may do
or cause to be done by virtue hereof.
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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Hojabr
Alimi
Hojabr
Alimi
|
|
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
|
|
June 11, 2009
|
|
|
|
|
|
/s/ Robert
E. Miller
Robert
E. Miller
|
|
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
June 11, 2009
|
|
|
|
|
|
/s/ Gregg
Alton
Gregg
Alton
|
|
Director
|