U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the transition period from to
Commission file number 001-33216
OCULUS INNOVATIVE SCIENCES, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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68-0423298
(I.R.S Employer
Identification No.) |
1129 N. McDowell Blvd.
Petaluma, CA 94954
(Address of principal executive offices) (Zip code)
Registrants telephone number, including area code (707) 782-0792
Indicate by check 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 filings requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filter, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer in Rule 12b-2 of the Exchange Act
(Check One):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of November 1, 2007 the number of shares outstanding of the registrants common stock, $0.0001
par value, was 13,262,410.
OCULUS INNOVATIVE SCIENCES, INC.
Index
2
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
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September 30, |
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March 31, |
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2007 |
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2007 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
14,948 |
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$ |
19,050 |
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Restricted cash |
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2,000 |
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Accounts receivable, net |
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1,143 |
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1,364 |
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Inventories |
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290 |
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282 |
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Prepaid expenses and other current assets |
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861 |
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1,172 |
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Total current assets |
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17,242 |
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23,868 |
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Property and equipment, net |
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2,227 |
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2,207 |
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Restricted cash |
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53 |
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49 |
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Debt issue costs, net |
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518 |
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826 |
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Total assets |
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$ |
20,040 |
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$ |
26,950 |
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
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$ |
1,430 |
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$ |
2,551 |
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Accrued expenses and other current liabilities |
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1,970 |
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1,421 |
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Current portion of long-term debt |
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1,658 |
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6,045 |
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Current portion of capital lease obligations |
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17 |
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17 |
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Total current liabilities |
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5,075 |
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10,034 |
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Long-term debt, less current portion |
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1,200 |
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1,990 |
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Capital lease obligations, less current portion |
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16 |
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25 |
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Deferred revenue |
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350 |
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Total liabilities |
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6,641 |
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12,049 |
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Commitments and Contingencies |
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Stockholders Equity |
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Common stock, $0.0001 par value; 100,000,000
shares authorized, 13,247,410 and 11,844,411
shares issued and outstanding at September 30,
2007 (unaudited) and March 31, 2007,
respectively. |
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1 |
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1 |
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Additional paid-in capital |
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95,524 |
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85,751 |
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Accumulated other comprehensive loss |
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(1,079 |
) |
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(364 |
) |
Accumulated deficit |
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(81,047 |
) |
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(70,487 |
) |
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Total stockholders equity |
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13,399 |
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14,901 |
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Total liabilities and stockholders equity |
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$ |
20,040 |
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$ |
26,950 |
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See accompanying notes
3
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per
share data)
(unaudited)
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Three Months Ended |
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Six Months Ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenues |
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Product |
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$ |
670 |
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$ |
1,038 |
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$ |
1,302 |
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$ |
1,942 |
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Service |
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307 |
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214 |
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541 |
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388 |
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Total revenues |
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977 |
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1,252 |
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1,843 |
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2,330 |
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Cost of revenues |
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Product |
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403 |
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539 |
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779 |
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1,043 |
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Service |
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287 |
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221 |
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528 |
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422 |
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Total cost of revenues |
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690 |
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760 |
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1,307 |
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1,465 |
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Gross profit |
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287 |
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492 |
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536 |
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865 |
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Operating expenses |
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Research and development |
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2,283 |
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828 |
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4,490 |
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1,595 |
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Selling, general and administrative |
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3,683 |
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4,221 |
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7,141 |
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7,867 |
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Total operating expenses |
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5,966 |
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5,049 |
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11,631 |
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9,462 |
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Loss from operations |
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(5,679 |
) |
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(4,557 |
) |
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(11,095 |
) |
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(8,597 |
) |
Interest expense |
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(306 |
) |
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(222 |
) |
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(645 |
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(261 |
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Interest income |
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200 |
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42 |
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406 |
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100 |
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Other income (expense), net |
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243 |
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368 |
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774 |
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92 |
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Net loss |
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(5,542 |
) |
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(4,369 |
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(10,560 |
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(8,666 |
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Preferred stock dividends |
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(121 |
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(242 |
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Net loss available to common stockholders |
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$ |
(5,542 |
) |
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$ |
(4,490 |
) |
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$ |
(10,560 |
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$ |
(8,908 |
) |
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Net loss per common share: basic and diluted |
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$ |
(0.44 |
) |
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$ |
(1.06 |
) |
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$ |
(0.86 |
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$ |
(2.11 |
) |
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Weighted-average number of shares used in per common share calculations: |
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Basic and diluted |
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12,574 |
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4,223 |
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12,209 |
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4,221 |
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Other comprehensive loss, net of tax |
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Net loss |
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$ |
(5,542 |
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$ |
(4,369 |
) |
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$ |
(10,560 |
) |
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$ |
(8,666 |
) |
Foreign currency translation adjustments |
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(221 |
) |
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(357 |
) |
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(715 |
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(143 |
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Comprehensive loss |
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$ |
(5,763 |
) |
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$ |
(4,726 |
) |
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$ |
(11,275 |
) |
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$ |
(8,809 |
) |
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See accompanying notes
4
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
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Six Months Ended |
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September 30, |
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2007 |
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2006 |
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Cash flows from operating activities |
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Net loss |
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$ |
(10,560 |
) |
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$ |
(8,666 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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356 |
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328 |
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Stock-based compensation |
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509 |
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270 |
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Non-cash interest expense |
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308 |
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125 |
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Unrealized foreign exchange gain |
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(809 |
) |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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241 |
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(617 |
) |
Inventories |
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2 |
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(27 |
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Prepaid expenses and other current assets |
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319 |
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262 |
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Accounts payable |
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(1,131 |
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(494 |
) |
Accrued expenses and other liabilities |
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882 |
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106 |
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Net cash used in operating activities |
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(9,883 |
) |
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(8,713 |
) |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(247 |
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(585 |
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Changes in restricted cash |
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(2 |
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Net cash used in investing activities |
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(247 |
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(587 |
) |
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Cash flows from financing activities: |
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Deferred offering costs |
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(926 |
) |
Proceeds from the issuance of common stock, net of offering costs |
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9,134 |
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Proceeds from the issuance of common stock in connection with exercise
of stock options and warrants |
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130 |
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Proceeds from the issuance of convertible preferred stock |
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1,370 |
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Debt issue costs |
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(20 |
) |
Proceeds from the issuance of long-term debt |
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4,379 |
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Decrease in cash restricted for repayment of debt |
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2,000 |
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Principal payments on debt |
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(5,253 |
) |
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(515 |
) |
Payments on capital lease obligations |
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(10 |
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(7 |
) |
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Net cash provided by financing activities |
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6,001 |
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4,281 |
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Effect of exchange rate on cash and cash equivalents |
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27 |
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(160 |
) |
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Net decrease in cash and cash equivalents |
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(4,102 |
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(5,179 |
) |
Cash and equivalents, beginning of period |
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19,050 |
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7,448 |
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Cash and equivalents, end of period |
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$ |
14,948 |
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$ |
2,269 |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
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$ |
436 |
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$ |
136 |
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Fair value of warrants issued with line of credit |
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$ |
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$ |
1,047 |
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Financed equipment |
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$ |
76 |
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$ |
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See accompanying notes
5
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
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 eliminate infection
in acute and chronic wounds. The Companys platform technology, Microcyn, is a shelf stable,
non-irritating, proprietary solution containing oxychlorine compounds that is designed to eliminate
a wide range of bacteria, viruses, fungi, spores and drug resistant strains of bacteria such as
Methicillin-resistant Staphylococcus aureus, or MRSA, and Vancomycin-resistant Enterococcus, or
VRE, in wounds. The Company conducts its business worldwide, with significant operating
subsidiaries in Europe and Mexico.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of September 30,
2007 and for the three and six months then ended have been prepared on the same basis as the annual
audited consolidated financial statements. The unaudited condensed consolidated balance sheet as of
September 30, 2007, condensed consolidated statements of operations for the three and six months
ended September 30, 2007 and 2006, and the condensed consolidated statements of cash flows for the six
months ended September 30, 2007 and 2006 are unaudited, but include all adjustments, consisting
only of normal recurring adjustments, which the Company considers necessary for a fair presentation
of the financial position, operating results and cash flows for the periods presented. The results
for the three and six months ended September 30, 2007 are not necessarily indicative of results to
be expected for the year ending March 31, 2008 or for any future interim period. The condensed
consolidated balance sheet at March 31, 2007 has been derived from audited consolidated financial
statements. However, it does not include all of the information and notes required by accounting
principles generally accepted in the United States for complete consolidated financial statements.
The accompanying condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys Form 10-K/A, which
was filed with the Securities and Exchange Commission on July 27, 2007.
Significant Accounting Policies
In September 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. This Interpretation
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The Interpretation is effective for fiscal years
beginning after December 15, 2006. See Note 7 for further discussion of the impact of adoption of
this pronouncement on April 1, 2007.
Periodically the Company evaluates its application of all accounting policies. During the
three months ended September 30, 2007, the Company evaluated its application of Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 104 Revenue Recognition to certain
distributors purchasing product from its Mexico subsidiary. During the fourth quarter of fiscal
2007, the Company significantly reduced its direct sales force in Mexico while deciding to rely
more heavily on an expanded network of distributors. As a result of certain distributors inability
to provide inventory or product sell-through reports on a timely basis, and as a result of slow
payment on accounts receivable where distributors await payment from their customers prior to
payment, the Company determined the appropriate treatment for recognizing revenue for
those distributors 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. Accordingly, during
the three months ended September 30, 2007 the Company deferred $166,000 of product revenue to
customers which will be recognized when payment is received. Additionally, the Company will defer
recognition of cost of goods sold associated with these customers until payment is received. The
revenue and cost of goods sold deferral is included in accrued expenses and other current
liabilities in the accompanying September 30, 2007 condensed consolidated balance sheet.
6
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 condensed consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. Periodically the Company
evaluates and adjusts estimates accordingly. At September 30, 2007, the Company increased its
estimated allowance for future uncollectible accounts receivable by $53,000 which is included in
the accompanying three and six month ended September 30, 2007 condensed consolidated statements of
operations. The allowance for uncollectible accounts receivable balance amounted to $417,000 which
is included in accounts receivable in the accompanying September 30, 2007 condensed consolidated
balance sheet.
Foreign Currency Transactions
Foreign currency gains relate to working capital loans that the Company has made to its
foreign subsidiaries. The Company recorded foreign currency gains for the three and six months
ended September 30, 2007 of $204,000 and $809,000, respectively. The related gains were recorded in
other income (expense) in the accompanying consolidated statements of operations.
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 excludes potentially
dilutive securities because their inclusion would be anti-dilutive.
In addition to the above, the SEC (under SAB Topic 4D) requires new registrants to
retroactively include the dilutive effect of common stock or potential common stock issued for
nominal consideration during all periods presented in its computation of basic earnings (loss) per
share and diluted earnings (loss) per share as if they were, in substance, recapitalizations. The
Company evaluated all of its issuances of equity securities and determined that it had no nominal
issuances of common stock or common stock equivalents to include in its computation of loss per
share for any of the periods presented.
The following securities were excluded from basic and diluted net loss per share calculation
because their inclusion would be anti-dilutive (in thousands):
|
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|
|
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|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Anti-dilutive securities not included in basic and diluted net loss per share |
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
2,472 |
|
|
|
2,125 |
|
Restricted stock units |
|
|
60 |
|
|
|
|
|
Warrants to purchase common stock |
|
|
1,844 |
|
|
|
875 |
|
Convertible preferred stock (as if converted) |
|
|
|
|
|
|
4,068 |
|
Warrants to purchase convertible preferred stock (as if converted) |
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
4,376 |
|
|
|
7,156 |
|
|
|
|
|
|
|
|
As described in Note 5, on August 13, 2007 the Company closed a private placement of 1,262,500
shares of its common stock and warrants to purchase 416,622 shares of common stock. The Company
also issued a warrant to purchase 88,375 shares of common stock to the placement agent in
connection with the private placement. These warrants have the same terms, including exercise price
and registration rights, as the warrants issued in the private placement.
7
Common Stock Purchase Warrants and Other Derivative Financial Instruments
The Company accounts for the issuance of common stock purchase warrants issued and other
freestanding derivative financial instruments in accordance with the provisions of Emerging Issues
Task Force Issue (EITF) 00-19 Accounting for Derivative 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) give 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 completed a classification assessment of all of its freestanding derivative
financial instruments as of September 30, 2007 and determined that such instruments meet the
criteria for equity classification in accordance with EITF 00-19.
Recent Accounting Pronouncements
In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159, which includes
an amendment to Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115), permits entities the option to measure
many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The Company is in the process of determining the impact
that SFAS 159 will have on its financial condition, results of operations and cash flows.
Other accounting standards that have been issued or proposed by the FASB 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
2. Liquidity and Financial Condition
The
Company incurred a net loss of $5,542,000 and $10,560,000 for the
three and six months ended September 30, 2007, respectively. At
September 30, 2007 the Companys accumulated deficit amounted to
$81,047,000. During the six months ended September 30, 2007, net cash
used in operating activities amounted to $9,883,000.
The Company currently anticipates that its cash and cash equivalents, together with revenues it expects to generate and interest it expects to earn on invested funds, will be sufficient to meet its anticipated cash requirements through at least October 1, 2008. The Company has undertaken certain initiatives to reduce costs in an effort to conserve liquidity and to also redirect its efforts
on the longer term strategy of focusing on its clinical trials and related
research and development activities. The Company considers the
completion of Phase II and Phase III clinical trials to be
critical milestones in the development of the business. The Company
believes its Phase II clinical trials are substantially complete, but
the Phase III trials will require significant
spending. These clinical trials must also be completed in order for us to commercialize Microcyn as a drug
product in the United States. Commencement of the Phase III clinical trials will be delayed
until the Company raises additional capital or secures commitments
for additional capital in amounts sufficient to proceed with these
trials. The Company expects to continue incurring losses for the
foreseeable future and must raise additional capital during the next twelve
months to pursue its product development initiatives, fund clinical trials and penetrate markets for the sale of its products. The Company cannot provide any assurance that it will raise additional capital. If the Company is unable to raise additional capital, it will be required to curtail certain operating activities and implement additional cost reductions in an effort to conserve liquidity in amounts sufficient to sustain the business for the next twelve months.
Under these circumstances, the Companys Phase III clinical trials would be delayed for a period of time that is currently indeterminate.
As
described in Note 5, on August 13, 2007, the Company closed the
private placement of 1,262,500 shares of its common stock at a
purchase price of $8.00 per share, and warrants to purchase an
aggregate of 416,622 shares of common stock at an exercise price of
$9.50 per share for gross proceeds of $10,100,000 and net proceeds of
$9,134,000 (after deducting the placement agents commission and other offering expenses).
The Company expects to use the proceeds of this transaction to fund clinical
trials and related research; to fund expansion of its laboratory and
clinical facilities; and for unspecified working capital needs. The
Company expects to use approximately $700,000 to make normal
recurring payments on outstanding debt.
Additionally,
pursuant to Amendment No. 1 to the Burlingame loan agreement (Note
3), subsequent to the close of the private placement, the Company was
required to repay the $4,000,000 outstanding note balance and
interest. The note was originally scheduled to be repaid on November
7, 2007. The note was repaid in full by August 31, 2007
8
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 Company is unable to secure additional capital, it may be
required to curtail its research and development initiatives, delay clinical trials
and take additional measures to reduce costs in order to conserve its cash.
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.
Note 3. Condensed Consolidated Balance Sheet
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
September 30, |
|
|
|
2007 |
|
Raw materials |
|
$ |
293 |
|
Finished goods |
|
|
117 |
|
|
|
|
|
|
|
|
410 |
|
Less: inventory allowances |
|
|
(120 |
) |
|
|
|
|
|
|
$ |
290 |
|
|
|
|
|
Notes Payable
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, $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 are payable in 30 to 33 fixed monthly installments
with interest at rates ranging from 12.4% to 12.7% per annum, maturing at various times through
April 9, 2009. As of September 30, 2007, the Company has no unused availability under this credit
facility since amounts drawn under the working capital facility were based upon an initial
measurement of eligible accounts receivable.
In connection with the borrowings under this facility, the Company also issued to the lender
warrants to purchase up to 71,521 shares of its common stock at an exercise price of $18.00 per
share. The aggregate fair value of all warrants issued to the lender under this arrangement amounts
to $1,046,000. This amount was recorded as debt issue costs in the September 30, 2007 condensed
consolidated balance sheet and is being amortized as interest expense over the term of the credit
facility of 30 to 33 months.
Borrowings under the growth capital line are collateralized by certain assets of the Company.
Borrowings under the equipment line are collateralized by the underlying assets funded, and
borrowings under the working capital line are collateralized by eligible accounts receivable. On a
monthly basis, the Company must maintain a 1:1 ratio of borrowing under the working capital line to
eligible accounts receivable. The Company has 30 days from each measurement date to either increase
eligible accounts receivable or pay the excess principal in the event that the ratio is less than
1:1. No restrictive covenants exist for either the equipment line or the growth capital line. The
Company is not required to direct customer remittances to a lock box, nor does the credit agreement
provide for subjective acceleration of the loans.
On March 29, 2007, the Company entered into Amendment No. 1 to the loan agreement described
above. Pursuant to the amendment the lender and the Company agreed that the lenders security
interest in the Companys assets will not include the Companys intellectual property unless and
until the Companys cash and cash equivalents fall below 600% of the Companys average monthly
operating expenses less non-cash charges. At September 30, 2007, the Companys cash and cash equivalents
position was in excess of 600% of its average monthly operating expenses and therefore the lender did not
hold a security interest in the Companys intellectual property. On an ongoing basis, the Company
will periodically review and assess whether the lenders security interest should include the
Companys intellectual property. The Companys intellectual property is used only as collateral and
remains in the Companys control unless the lender takes action after an event of default by the
Company under the loan agreements.
9
In connection with the above notes, for the three and six months ended September 30, 2007, the
Company made $369,000 and $727,000 of principal payments, respectively. Additionally, for the
three and six months ended September 30, 2007, the Company made $89,000 and $189,000 of interest
payments in connection with these notes, respectively. Also, for the three and six months ended
September 30, 2007, the Company recorded $107,000 and $215,000 of non-cash interest expense related
to the amortization of debt issue costs, respectively. The aggregate remaining principal balance
under this facility amounted to $2,602,000, including $1,597,000 in the current portion of long
term debt in the accompanying condensed consolidated balance sheet at September 30, 2007.
On August 13, 2007 after the closure of the $10,100,000 million private placement of the
Companys common stock described in Note 5, the Company became obligated to repay outstanding
amounts under the terms of the Amendment No. 1 to the Burlingame loan agreement. The Company paid
$2,000,000 under the loan agreement on August 15, 2007, and the remaining $2,000,000 and accrued
interest on August 31, 2007. Additionally, in connection with this note, for the three and six
months ended September 30, 2007, the Company recorded $54,000 and $93,000, respectively, of
non-cash interest expense related to the amortization of the debt issue costs. During the three and
six months ended September 30, 2007, the Company paid $64,000 and $222,000 of interest expense
related to this note of which $109,000 was accrued at March 31, 2007.
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 % percent per annum. This note is payable in monthly
installments of $1,500 through April 2012. During the three and six months ended September 30,
2007, the Company made principal payments of $3,200 and $5,000, respectively. Additionally, during
the three and six months ended September 30, 2007, the Company made interest payments of $1,400 and
$3,000, respectively. The remaining balance of this note amounted to $71,000 at September 30, 2007,
including $13,000 in the current portion of long-term debt in the accompanying condensed
consolidated balance sheet.
Note 4. Commitments and Contingencies
Legal Matters
In November 2005, the Company identified a possible criminal misappropriation of its
technology in Mexico, and notified the Mexican Attorney Generals office of the matter. The Company
believes the Mexican Attorney General is currently conducting an investigation.
In March 2006, the Company filed suit in the U.S. District Court for the Northern District of
California against Nofil Corporation and Naoshi Kono, Chief Executive Officer of Nofil, for breach
of contract, misappropriation of trade secrets and trademark infringement. The Company believes
that Nofil Corporation violated key terms of both an exclusive purchase agreement and
non-disclosure agreement by contacting and working with a potential competitor in Mexico. In the
complaint, the Company is seeking damages of $3,500,000 and immediate injunctive relief. On
February 13, 2007, the Company received the defendants answer and cross-complaint. The
cross-complaint, which alleges fraudulent inducement to enter contracts, breach of non-disclosure
contract, trade secret misappropriation, conversion and violation under civil RICO statutes by the
Company, seeks damages in excess of $4,500,000. The Company believes that the cross-complaint, and
allegations therein, are without merit. Since filing the cross-complaint, the defendants counsel
has withdrawn and the defendants have failed to take any action to prosecute their claims. The
Company filed a motion to dismiss the cross-complaint in its entirety and a
motion for summary judgment seeking a pre-trial ruling granting all of the affirmative relief
requested in its complaint. If successful, this will result in a judgment against defendants and
the trial date, currently November 17, 2007, will be vacated. On November 9, 2007, the court granted the Companys motion to dismiss Nofils cross complaint..
The Company expects the court to rule on its motion for summary
judgment on November 14, 2007. While it is not possible to predict
the outcome of the Companys motion for summary judgment with certainty, the Company believes that it is unlikely that this
matter will result in a material loss or have a material adverse
effect on its financial condition
or operations.
The Company is currently in discussions regarding two trademark matters asserting confusion in
trademarks with respect to the Companys use of the name Microcyn60 in Mexico. The Company settled
one of the trademark matters in August 2006. Although the Company believes that the nature and
intended use of its products are different from those with the similar names, the Company has
agreed with one of the parties to market its product in Mexico under a different name. Although
such plaintiff referred the matter to the Mexico Trademark Office, the Company is not aware of a
claim for monetary damages. The Company is in discussions with the other party and believes that
the name change will satisfy an assertion of confusion; however, management believes that the
Company could incur a possible loss of up to $100,000 for the use of the name Microcyn60 during the
twelve month period following the date of settlement.
10
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 our financial position or results of operations.
In February 2007, the Companys Mexico subsidiary served Quimica Pasteur (QP), a former
distributor of the Companys products in Mexico, with a claim alleging breach of contract under a
note made by QP. A trial date has not yet been set.
The Company, from time to time, is involved in legal matters arising in the ordinary course of
its business. 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.
Property Lease Extension
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. Future lease payments pursuant to the amendment amount to $902,000 with
$123,000 to be paid in the remainder of the fiscal year ending March 31, 2008, $302,000 to be paid
in the fiscal year ending March 31, 2009, $315,000 to be paid in the fiscal year ending March 31,
2010 and $161,000 to be paid thereafter.
Recent
Commercial Agreements
On May 8, 2007, the Company entered into a five year agreement with a customer in China
granting the customer an exclusive right to sell the Companys products
into a specified region. The customer is required to maintain minimum levels of
purchases of the Companys products in order to maintain exclusivity.
The customer made a non-refundable up-front payment of $350,000 to the Company
in consideration for the exclusive right to sell the Companys products.
The Company recorded the $350,000 as non-current deferred revenue in the accompanying
condensed consolidated balance sheet at September 30, 2007. Once
product shipments commence to the customer, the Company will amortize
the deferred revenue balance over the remaining term of the
contract.
On
June 11, 2007, the Company entered into a ten year agreement with a
customer in United States granting the customer an exclusive right to
sell the Companys products. Subject to obtaining necessary
regulatory approvals, the customer is required to maintain minimum
levels of purchases of the Companys products in order to maintain exclusivity. The customer made a $150,000 refundable payment to
the Company at the execution of the agreement. The payment is fully refundable in the
event the Company does not meet certain deliverables requirements. The Company recorded the
$150,000 as a customer deposit in accrued liabilities in the accompanying condensed
consolidated balance sheet at September 30, 2007. In addition, the
customer has agreed to pay an additional non-refundable payment of
$125,000 if additional deliverables are met. Once product shipments
commence to the customer, the up-front payments will be amortized
over the remaining life of the contract.
Employment
Agreements
The
Company has entered into employment agreements with five of its key executives.
The agreements provide, among other things, for the payment of aggregate annual
salaries of approximately $1,065,000 and twelve to twenty four months of severance
compensation for terminations under certain circumstances. Aggregate
potential severance compensation amounted to $1,492,500 at September
30, 2007. Additionally, during the six months ended September 30,
2007, the Company added an additional member to the executive team
who will receive an annual salary of $242,000. The Company has not
undertaken severance payment obligations with respect to this
employee.
Other Matters
On September 16, 2005, the Company entered into a series of agreements with 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.
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.
11
Note 5. Stockholders Equity
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). Gross proceeds from the private placement were $10,100,000 and net
proceeds of $9,134,000 (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 on a Form
S-1 (File No. 333-145810), which was declared effective on September 12, 2007. If the Registration
Statement ceases to remain continuously effective, or the Holders of the Registrable Securities are
not 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 mandatory 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 securities issued in the private placement were issued pursuant to an exemption under
Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder.
The securities offered were not registered under the Securities Act of 1933 or any state securities
laws at the time of issuance and unless sold pursuant to the registration statement referenced
above, the securities may not be offered or sold in the United States (or to a U.S. person) except
pursuant to an exemption from, or in a transaction not subject to, the registration requirements of
the Securities Act of 1933 and applicable state securities laws. 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 below). The warrant has the same terms, including exercise price and
registration rights, as the warrants issued in the private placement.
Common Stock Purchase Warrants Issued in Financing Transactions
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 are exercisable 181 days after August 13, 2007, and have
a term of five years. 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. The securities that are
issuable upon exercise of the warrants were issued in the private placement were registered on a Form S-1 (File
No. 333-145810), which was declared effective on September 12, 2007.
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 warrants is exercisable 181 days after August 13, 2007, and has a term of five years.
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.
Common Stock and Common Stock Purchase Warrants Issued to Non-Employees for Services
During the six months ended September 30, 2007, the Company recorded $2,000 for certain
warrants with service conditions issued in prior periods. In April 2007, the Company terminated the
service agreements with the service providers and accelerated the vesting of the outstanding
warrants and extended the exercise period to two years. The non-vested portion of the warrants were
adjusted to fair value at the time of acceleration using the Black Scholes pricing model and the
following weighted average assumptions: Fair value of the underlying stock $5.92; risk-free
interest rate 4.87% percent; contractual life of 2 years; dividend yield of 0.00%; and volatility
of 70.00%.
12
On November 7, 2006, the Company entered into a two-year consulting agreement with its new
director, Robert Burlingame. Under the terms of the agreement, the Company issued the director a
warrant to purchase 75,000 shares of the Companys 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 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, which represented the expected mid-point of the IPO at the
December 31, 2006 reporting date; risk-free interest rate of 4.70% percent; contractual life of 5
years; dividend yield of 0%; and volatility of 70%. The fair value of the warrants amounted to
$416,000. Following the guidance enumerated in Issue 2 of EITF 96-18 Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, the Company is amortizing 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.
For the three and six months ended September 30, 2007, the amortized fair value of the warrant
amounted to $44,000 and $88,000, respectively, and was recorded as selling, general and
administrative expense in the accompanying condensed consolidated statements of operations.
Note 6. 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, (APB 25) and its related interpretations and applied the disclosure requirements of
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of
Statement of Financial Accounting Standard No. 123 Share-Based Payments (SFAS 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.
The Company recognized in salaries and related expense in the condensed consolidated
statements of operations $38,000 and $76,000 of stock-based compensation expense during the three
and six months ended September 30, 2007, 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. At September 30,
2007, there was $256,000 of unrecognized compensation cost related to options that the Company
accounted for under APB 25 through March 31, 2006. These costs are expected to be recognized over a
weighted average amortization period of 2.10 years.
Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standard
No. 123(R) Share Based Payment (SFAS 123(R)) using the prospective transition method, which
requires the fair value 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 condensed consolidated financial statements as of September 30, 2007 and for
the three and six months ended September 30, 2007 reflect the impact of SFAS 123(R). In accordance
with the prospective transition method, the Companys financial statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS 123(R).
The effect of recording stock-based compensation expense in accordance with the provisions of
SFAS 123(R) is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Cost of service revenue |
|
$ |
3 |
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
1 |
|
Research and development |
|
|
27 |
|
|
|
|
|
|
|
61 |
|
|
|
|
|
Selling, general and administrative |
|
|
186 |
|
|
|
41 |
|
|
|
272 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
216 |
|
|
$ |
42 |
|
|
$ |
336 |
|
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on basic and diluted net
loss per common share |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 implementation of SFAS 123(R) did
not have an impact on cash flows from financing activities during the three and six months ended
September 30, 2007.
13
The Company estimated the fair value of employee stock awards 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 period of the awards. The fair value of employee stock options was
estimated using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
September 30 |
|
September 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Expected life |
|
6.0 years |
|
6.0 years |
|
5.5 years |
|
6.0 years |
Risk-free interest rate |
|
|
4.68 |
% |
|
|
4.76 |
% |
|
|
4.90 |
% |
|
|
4.76 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Volatility |
|
|
70 |
% |
|
|
70 |
% |
|
|
70 |
% |
|
|
70 |
% |
The estimated expected life 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 for the three and six months ended September 30, 2007 was determined by
examining the historical volatilities for industry peers and using an average of the historical
volatilities of the Companys industry peers as the Company did not have any trading history for
its common stock. The Company will continue to analyze the historical stock price volatility and
expected term assumption as more historical data for the Companys common stock 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 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 based on historical experience. Prior to the adoption of SFAS 123(R),
the Company accounted for forfeitures as they occurred.
A summary of all option activity as of September 30, 2007 and changes during the six months
then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
Options |
|
(000) |
|
|
Price |
|
|
Term |
|
|
($000) |
|
Outstanding at April 1, 2007 |
|
|
2,020 |
|
|
$ |
4.91 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
644 |
|
|
|
7.41 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(111 |
) |
|
|
0.37 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(81 |
) |
|
|
4.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
2,472 |
|
|
$ |
5.78 |
|
|
|
7.09 |
|
|
$ |
6,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007 |
|
|
1,366 |
|
|
$ |
3.71 |
|
|
|
5.72 |
|
|
$ |
6,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ($7.50) for stock
options that were in-the-money as of September 30, 2007.
During the three and six months ended September 30, 2007, the Company granted stock options to
employees with a weighted-average grant date fair value of $5.59 and $4.67 per share, respectively.
At September 30, 2007, there was unrecognized compensation costs of $3,771,800 related to these
stock options. The cost is expected to be recognized over a weighted-average amortization period of
3.64 years.
On April 26, 2007, the Company modified a stock option grant to its Chief Financial Officer.
The Company cancelled the original stock option grant to purchase 60,000 shares of the Companys
common stock and replaced the grant with a restricted stock grant with
14
similar terms to the original grant. The modification of this award did not result in
incremental fair value or an additional charge to Companys condensed consolidated statements of
operations.
The Company issues new shares of common stock upon exercise of stock options.
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, 2007 by 592,220 shares (which number
constitutes 5% of the 11,844,411 outstanding shares on the last day of the fiscal year ended March
31, 2007). Remaining shares authorized for issuance from the 2006 Plan at September 30, 2007 was
1,075,719.
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 fair value of the stock
options granted was calculated using the Black-Scholes option-pricing model using the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2007 |
Estimated life |
|
2.58 years |
|
2.60 years |
Risk-free interest rate |
|
|
4.03 |
% |
|
|
4.50 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Volatility |
|
|
70 |
% |
|
|
70 |
% |
Stock-based compensation expense will fluctuate as the fair market value of the common stock
fluctuates. In April 2007, the Company accelerated the vesting of certain non-employee stock
options and extended the option exercise period to two years after termination of the underlying
agreement. During the three and six months ended September 30, 2007, the Company recorded $2,000
and $7,000 of stock-based compensation expense related to non-employees, respectively.
Note 7. Income Taxes
In July 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 January 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.
Utilization
of the Companys net operating loss (NOL)
carryforwards could become subject to potentially substantial annual limitations due to ownership change that could occur in the future as provided in Section 382 of the Internal Revenue Code of 1986, as
well as similar state and foreign provisions. These ownership changes
could limit the amount of NOL
and R&D tax credit carryforwards that can be utilized annually to offset future taxable income and
tax, respectively. In general, an ownership change, as defined by Section 382, results from
transactions increasing the ownership of certain shareholders or public groups in the stock of a
corporation by more than fifty percentage points over a three-year period. Since its formation, the
Company has raised capital through the issuance of capital stock which, combined with the
purchasing shareholders subsequent disposition of those shares, could result in a change of control in the future upon
subsequent disposition.
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 study concluded that no change in
control occurred for purposes of Section 382 and therefore no additional adjustments were recorded
or disclosed. Interest and penalties related to uncertain tax positions will be reflected in
income tax expense. If the Company experiences a change of control at any time, utilization of NOL or R&D tax
credit carryforwards would be subject to an annual limitation under Section 382. This
15
annual limitation is determined by first multiplying the value of the Companys stock at the
time of the ownership change by the applicable long-term tax-exempt rate, and could then be subject
to additional adjustments, as required. Any limitation may result in expiration of a portion of the
NOL or R&D tax credit carryforwards before utilization. As of September 30, 2007, the Company had not recorded any tax penalties or
interest in its condensed consolidated financial statements. All tax years since the Companys
inception remain subject to future examination by the major jurisdictions in which it is subject to
taxation.
Note 8. Segment and Geographic Information
The Company is organized primarily on the basis of operating units which are segregated by
geography.
The following tables present information about reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2007 |
|
U.S |
|
|
Europe |
|
|
Mexico |
|
|
Total |
|
Product revenues |
|
$ |
69 |
|
|
$ |
170 |
|
|
$ |
431 |
|
|
$ |
670 |
|
Service revenues |
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
376 |
|
|
|
170 |
|
|
|
431 |
|
|
|
977 |
|
Depreciation and amortization expense |
|
|
110 |
|
|
|
56 |
|
|
|
25 |
|
|
|
191 |
|
Loss from operations |
|
|
(4,881 |
) |
|
|
(384 |
) |
|
|
(414 |
) |
|
|
(5,679 |
) |
Interest expense |
|
|
(306 |
) |
|
|
|
|
|
|
|
|
|
|
(306 |
) |
Interest income |
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 |
|
U.S |
|
|
Europe |
|
|
Mexico |
|
|
Total |
|
Product revenues |
|
$ |
28 |
|
|
$ |
548 |
|
|
$ |
462 |
|
|
$ |
1,038 |
|
Service revenues |
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
242 |
|
|
|
548 |
|
|
|
462 |
|
|
|
1,252 |
|
Depreciation and amortization expense |
|
|
95 |
|
|
|
47 |
|
|
|
23 |
|
|
|
165 |
|
Loss from operations |
|
|
(3,126 |
) |
|
|
(425 |
) |
|
|
(1,006 |
) |
|
|
(4,557 |
) |
Interest expense |
|
|
(222 |
) |
|
|
|
|
|
|
|
|
|
|
(222 |
) |
Interest income |
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, 2007 |
|
U.S |
|
|
Europe |
|
|
Mexico |
|
|
Total |
|
Product revenues |
|
$ |
107 |
|
|
$ |
238 |
|
|
$ |
957 |
|
|
$ |
1,302 |
|
Service revenues |
|
|
541 |
|
|
|
|
|
|
|
|
|
|
|
541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
648 |
|
|
|
238 |
|
|
|
957 |
|
|
|
1,843 |
|
Depreciation and amortization expense |
|
|
201 |
|
|
|
111 |
|
|
|
44 |
|
|
|
356 |
|
Loss from operations |
|
|
(9,308 |
) |
|
|
(945 |
) |
|
|
(842 |
) |
|
|
(11,095 |
) |
Interest expense |
|
|
(645 |
) |
|
|
|
|
|
|
|
|
|
|
(645 |
) |
Interest income |
|
|
406 |
|
|
|
|
|
|
|
|
|
|
|
406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, 2006 |
|
U.S |
|
|
Europe |
|
|
Mexico |
|
|
Total |
|
Product revenues |
|
$ |
56 |
|
|
$ |
828 |
|
|
$ |
1,058 |
|
|
$ |
1,942 |
|
Service revenues |
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
444 |
|
|
|
828 |
|
|
|
1,058 |
|
|
|
2,330 |
|
Depreciation and amortization expense |
|
|
190 |
|
|
|
92 |
|
|
|
46 |
|
|
|
328 |
|
Loss from operations |
|
|
(5,715 |
) |
|
|
(1,053 |
) |
|
|
(1,829 |
) |
|
|
(8,597 |
) |
Interest expense |
|
|
(261 |
) |
|
|
|
|
|
|
|
|
|
|
(261 |
) |
Interest income |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
During the three months ended September 30, 2007 and 2006, sales to a customer in India were
$27,000 and $464,000, respectively. During the six months ended September 30, 2007 and 2006, sales
to a customer in India were $27,000 and $585,000, respectively. These sales were reported as part
of the Europe segment.
16
The following table shows property and equipment balances by segment (in thousands):
|
|
|
|
|
|
|
September 30, |
|
|
|
2007 |
|
U.S. |
|
$ |
1,066 |
|
Europe |
|
|
789 |
|
Mexico |
|
|
372 |
|
|
|
|
|
|
|
$ |
2,227 |
|
|
|
|
|
The following table shows total asset balances by segment (in thousands):
|
|
|
|
|
|
|
September 30, |
|
|
|
2007 |
|
U.S. |
|
$ |
16,822 |
|
Europe |
|
|
1,585 |
|
Mexico |
|
|
1,633 |
|
|
|
|
|
|
|
$ |
20,040 |
|
|
|
|
|
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read
in conjunction with the condensed consolidated financial statements and notes to those statements
included elsewhere in this Quarterly Report on Form 10-Q as of September 30, 2007 and our audited
consolidated financial statements for the year ended March 31, 2007 included in our 10K/A, which
was with the Securities and Exchange Commission on July 27, 2007.
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,
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 development of protocols for clinical studies; enrollment in clinical studies;
the progress and timing of clinical trials and physician studies; our expectations related to the
use of our cash reserves; our ability to manufacture sufficient amounts of our product candidates
for clinical trials and products for commercialization activities; 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; the ability of our products to meet existing or future
regulatory standards; the rate and causes of infection; the accuracy of our estimates of the size
and characteristics of the markets which may be addressed by our products; our expectations and
capabilities relating to the sales and marketing of our current products and our product
candidates; the execution of distribution agreements; the expansion of our sales force and
distribution network; the establishment of strategic partnerships for the development or sale of
products; the timing of commercializing our products; 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, employees and advisory board members; our relationship with Quimica
Pasteur; our ability to compete with other companies that are developing or selling products that
are competitive with our products; the ability of our products to become the standard of care for
controlling infection in chronic and acute wounds; our ability to expand to and commercialize
products in markets outside the wound care market; our estimates regarding future operating
performance, earnings and capital requirements;our ability to attract capital on terms acceptable
to us, if at all; our ability to control
and to reduce our costs; our expectations with respect to our microbiology contract testing
laboratory; our expectations relating to the concentration of our revenue from international sales;
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, those risks discussed below, as well as our ability to develop
17
and commercialize new products; the risks in obtaining patient enrollment for our studies; 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; the ability to compete against third parties; our ability to obtain capital when
needed; our history of operating losses; the risks associated with protecting our intellectual
property; and the risks set forth under Risks Related to our Business. These forward-looking
statements speak only as of the date hereof. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Companys expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is based.
In the section of this report entitled Managements Discussion and Analysis of Financial
Condition and Results of OperationsFactors that May Affect Results, all references to Oculus,
we, us, or our mean Oculus Innovative Sciences, Inc.
Business Overview
We have developed, and we manufacture and market, a family of products intended to prevent and
treat infections in chronic and acute wounds. 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 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, such as Methicillin-resistant
Staphylococcus aureus, or MRSA, and Vancomycin-resistant Enterococcus, or VRE, in wounds. 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. However, our device product is cleared for
sale in the United States as a medical device for wound cleaning, or debridement, lubricating,
moistening and dressing; is a device under CE Mark in Europe with anti-infective claims; and is
approved as a drug in India and as an antiseptic in Mexico.
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. These physician clinical studies suggest that our
Microcyn-based product is easy to use and complementary to most existing treatment methods in wound
care. Physician clinical studies 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
system-wide systemic (oral or injectable), antibiotics.
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 not be 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 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, or debridement, prevention and treatment of infections and wound healing.
We believe that Microcyn may be the first topical product that is effective against a broad range
of bacteria and other infectious microbes including antibiotic resistant strains such as MRSA and
VRE, without causing irritation of or damage to healthy tissue. 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 in treating infections. 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
and Mexico have conducted 20 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. 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 often did not include blinding, randomization, predefined
clinical end points, use of placebo and active control groups or U.S. good clinical practices
requirements.
18
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 the amount of bacteria
in wounds. We received the CE Mark in November 2004 and additional international approvals in
Canada, Mexico and India. Microcyn has also received three 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.
In the first fiscal quarter of 2008, we began enrolling patients in a Phase II randomized
open label, controlled clinical trial, which is designed to evaluate the effectiveness of Microcyn
in mildly infected diabetic foot ulcers with endpoints of clinical cure and improvement of
infection (resolution of signs and symptoms of infection) supported by microbiological response. We
are using 15 clinical sites targeting a total enrollment of 60 patients in the following three arms
of the study: Microcyn alone, Microcyn plus an oral antibiotic, and saline plus an oral antibiotic.
We expect to complete enrollment of our Phase II trial in the fourth
calendar quarter of 2007 and announce
results in the first calendar quarter of 2008. A well known contract research organization is coordinating,
monitoring and documenting results of this trial. Following the completion of this trial, we plan
to request a formal review meeting with the FDA. Depending on the outcome of those discussions, we
plan to continue our development program which is intended to provide the clinical basis for
submission to the FDA of a NDA for the treatment of mildly infected diabetic foot ulcers. In the
event that we 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, including respiratory, ophthalmology, dermatology, dental and
veterinary markets, and FDA or other governmental approvals may be required for any potential new
products or new indications. We have reduced expenses in our international operations in order to
focus our resources on our U.S. clinical trials.
We currently make Microcyn available under our 510(k) clearances in the United States
primarily through our website, one national distributor and several regional distributors. We plan
for a more aggressive commercialization and product launch in the event we obtain drug approval
from the FDA. Most of our current marketing efforts in the United States are designed to build
brand awareness and obtain market feedback. In Europe, we have limited sales through a few local
distributors. In Mexico, we sell Microcyn through a network of distributors and through a contract
sales force, including salespeople, nurses and clinical support staff. In India we sell through
Alkem, a large pharmaceutical company in India. In China, we recently signed a distribution
agreement with China Bao Tai, which intends to distribute Microcyn to hospitals, doctors and
clinics through Sinopharm, the largest pharmaceutical company in China, and to retail pharmacies
through Lianhua Supermarkets after required regulatory approval in China is obtained.
Financial Operations Overview
Second Quarter Developments
On August 13, 2007, we completed a private placement of 1,262,500 shares of the Companys
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, subject to adjustment in certain circumstances. The warrants are exercisable 181 days
after August 13, 2007, and have a term of five years. Gross proceeds from the private placement were
approximately $10.1 million, and net proceeds of $9.1 million
(after deducting the placement agents commission and other offering
expenses).
Comparison of Three Months Ended September 30, 2007 and 2006
Revenues
We experienced a decline in product revenues and growth in our services businesses resulting
in reported revenues of $977,000 in the three months ended September 30, 2007, a decline of 22%
from the prior year level of $1.3 million. The $368,000, or 35%, decline in product revenues was
due primarily to $437,000 in lower recurring sales to our customer Alkem Laboratories Limited, in
India. Sales to Alkem in the prior year were driven by orders to stock samples used during its
initial product launch. As the sample orders have not recurred in the subsequent year, the sales
volumes in India have decreased accordingly. Sales growth in Mexico and Europe has decreased with
the reduction in our direct sales forces in Mexico and Europe in the past year.
19
The following table shows our product revenues by country (in thousands); note that sales in
India are reported as part of our Europe business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended Sept 30, |
|
|
Increase |
|
|
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
U.S. |
|
$ |
69 |
|
|
$ |
28 |
|
|
$ |
41 |
|
Mexico |
|
|
431 |
|
|
|
462 |
|
|
|
(31 |
) |
India |
|
|
27 |
|
|
|
464 |
|
|
|
(437 |
) |
Europe |
|
|
143 |
|
|
|
84 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
670 |
|
|
$ |
1,038 |
|
|
$ |
(368 |
) |
|
|
|
|
|
|
|
|
|
|
The $93,000, or 43%, increase in service revenues was due primarily to an increase in the
volume of tests provided by our services business. We expect that our service revenues will
significantly decline in future periods, as we continue to implement our strategy of focusing
primarily on our Microcyn business.
Gross Profit / Loss
We reported gross profit from our Microcyn products of $267,000, or 40% of product revenues,
in the three months ended September 30, 2007, compared to a gross profit of $499,000, or 48%, in
the year ago period. This decrease is due primarily to the lower sales volumes in India, and the
relatively high fixed cost component in our European facility where this product is produced. The
reductions in our sales force internationally over the past year lead to lower sales in our
European and Mexican subsidiaries in accordance with our strategy of
shifting our focus to U.S. clinical trials. We reported a gross profit from our services
business of $20,000, or 7% of service revenues, in the three months ended September 30, 2007,
compared to the prior year reported gross loss of $7,000, or -3% of service revenues.
We expect gross profit to fluctuate as a percentage of sales in future periods as we continue
to experience irregular product revenues. As product revenues grow,
however, we expect our gross profit
to grow as a percentage of sales as our revenues exceed our relatively high fixed cost of
manufacturing, and as we move further away from our low margin services business.
Research and Development Expense
Research and development expense consists primarily of costs associated with personnel,
materials, and clinical trials within our product development, regulatory and clinical
organizations. Research and development expense increased $1.5 million, or 176%, to $2.3 million
for the three months ended September 30, 2007, from $828,000 for the three months ended September
30, 2006. This increase was primarily the result of $1.2 million in increased clinical development
costs which include $748,000 in contract research organization fees, related to our ongoing Phase
II clinical trial as well as preparation for two Phase III pivotal trials. Our other research and
development expenses increased as we grew the product development team, expanded the scope of our
new product development initiatives, and continued to enhance our cGMP manufacturing capabilities
at our U.S. research and development facility.
We expect research and development expenses to increase significantly in future periods as we
incur costs associated with our FDA trials for the treatment of diabetic foot ulcer infections, and
as we further expand the scope of our new product development programs.
Selling, General and Administrative Expense
Selling, general and administrative expenses consist primarily of costs for sales, marketing
and administrative personnel, as well as other corporate expenses such as legal, accounting, and
insurance. Selling, general and administrative expense decreased $538,000, or 13%, to $3.7 million
for the three months ended September 30, 2007, from $4.2 million for the three months ended
September 30, 2006. This decrease was primarily due to a $949,000 decrease in our selling, general
and administrative expenses in our Europe and Mexico subsidiaries resulting from our previous
expense reductions in those regions. This decrease was offset in part by increases in bonus
expense by $351,000, stock compensation charges by $93,000, and expenses related to being a public
company including $221,000 in legal and accounting fees and $82,000 in insurance expense.
We expect that selling, general and administrative costs will increase in future periods due
primarily to outside consulting fees associated with the required
compliance with Section 404 of the Sarbanes Oxley Act of 2002 during
the fiscal year ending March 31, 2008.
20
Interest income and expense and other income and expense
Interest expense increased $84,000 to $306,000 for the three months ended September 30, 2007,
from $222,000 in the year ago period, primarily due to the issuance of new debt since the year ago
period. During the three months ended September 30, 2007, $4.7 million of debt was paid down,
including the $4.0 million Burlingame note, reducing our total debt to $2.9 million at September
30, 2007, as compared to $4.6 million in the year ago period. Interest income increased $158,000
to $200,000 for the three months ended September 30, 2007, from $42,000 in the year ago period,
primarily due to the higher interest bearing cash balance in the current year.
Other income and expense decreased $125,000 to $243,000 for the three months
ended September 30, 2007, from $368,000 for the three months ended September 30,
2006. This account primarily consists of amounts due to the fluctuation of foreign exchange rates,
and the resulting gain or loss booked for the revaluation of our intercompany notes payable
denominated in non-local currencies. The other income, net, booked in the three months ended September 30,
2007 and 2006 are primarily due to the U.S. dollar weakening in relation to the Euro and
the Mexican Peso during those periods. The decrease in the charge in the current period as
compared to the year ago period is due both to the greater relative fluctuation in exchange rates,
and the increased size of the intercompany notes in the current year as compared to a year ago.
Due to the difficulty of predicting foreign currency fluctuations, we do not know the affect
that such fluctuations may have on our operating results in future periods.
Comparison of Six Months Ended September 30, 2007 and 2006
Revenues
We experienced a decline in product revenues and growth in our services businesses resulting
in reported revenues of $1.8 million in the six months ended September 30, 2007, a decline of 21%
from the prior year level of $2.3 million. The $640,000, or 33%, decline in product revenues was
due primarily to $558,000 lower recurring sales to our customer Alkem Laboratories Limited, in
India. Sales to Alkem in the prior year were driven by orders to stock samples used during their
initial product launch. As the sample orders have not recurred in the
current year, the sales
volumes in India have decreased accordingly. Sales growth in Mexico and Europe has decreased with
the reduction in our direct sales forces in Mexico and Europe in the past year.
The following table shows our product revenues by country (in thousands); note that sales in
India are reported as part of our Europe business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended Sept 30, |
|
|
Increase |
|
|
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
U.S. |
|
$ |
107 |
|
|
$ |
56 |
|
|
$ |
51 |
|
Mexico |
|
|
957 |
|
|
|
1,058 |
|
|
|
(101 |
) |
India |
|
|
27 |
|
|
|
585 |
|
|
|
(558 |
) |
Europe |
|
|
211 |
|
|
|
243 |
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,302 |
|
|
$ |
1,942 |
|
|
$ |
(640 |
) |
|
|
|
|
|
|
|
|
|
|
The $153,000, or 39%, increase in service revenues was due primarily to an increase in the
volume of tests provided by our services business.
Gross Profit / Loss
We reported gross profit from our Microcyn products of $523,000, or 40% of product revenues,
in the six months ended September 30, 2007, compared a gross profit of $899,000, or 46%, in the
year ago period. This decrease is due primarily to the lower sales volumes in India, and the
relatively high fixed cost component in our European facility where this product is produced. The
reductions in our direct sales force in Mexico and Europe in the past year lead to lower sales in
our European and Mexican subsidiaries. We reported a gross profit from our services business of
$12,000, or 2% of service revenues, in the six months ended September 30, 2007, compared to the
prior year reported gross loss of $34,000, or -9% of service revenues.
21
Research and Development Expense
Research and development expense increased $2.9 million, or 182%, to $4.5 million for the six
months ended September 30, 2007, from $1.6 million for the six months ended September 30, 2006.
This increase was primarily the result of $2.4 million higher clinical development costs which
include $1.2 million in contract research organization fees related to our ongoing Phase II
clinical trial, as well as preparation for two Phase III pivotal trials. In addition, our other
research and development expenses increased as we grew the product development team, expanded the
scope of our new product development initiatives, and continued to enhance our cGMP manufacturing
capabilities at our U.S. research and development facility.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased $726,000, or 9%, to $7.1 million for the
six months ended September 30, 2007, from $7.9 million for the six months ended September 30, 2006.
This decrease was primarily due to a $1.6 million decrease in selling, general and administrative
expenses in our Europe and Mexico subsidiaries resulting from our previous expense reductions in
those regions. This decrease was offset in part by increases in bonus expense by $451,000, stock
compensation charges by $157,000, and expenses related to being a public company including $491,000
in legal and accounting fees and $228,000 in insurance expense.
Interest income and expense and other income and expense
Interest expense increased $384,000 to $645,000 for the six months ended September 30, 2007,
from $261,000 in the year ago period, primarily due to the issuance of $2.9 million of new debt
over the prior year. During the six months ended September 30, 2007, $5.3 million of debt was paid
down, including the $4.0 million Burlingame note, reducing our total debt to $2.9 million at
September 30, 2007, as compared to $5.3 million a year ago. Interest income increased $306,000 to
$406,000 for the six months ended September 30, 2007, from $100,000 in the year ago period,
primarily due to the higher interest bearing cash balance in the current year.
Other income and expense increased $682,000 to $774,000 for the six months ended
September 30, 2007, from $92,000 for the six months ended September 30, 2006. This
account primarily consists of charges due to the fluctuation of foreign exchange rates, and the
resulting gain or loss booked for the revaluation of our intercompany notes payable denominated in
non-local currencies. The other income, net, booked in the six months ended September 30, 2007 and 2006
is primarily due to the weakening U.S. dollar in relation to the Euro and the Mexican Peso
during those periods. The increase in the other income, net in the current period as compared to the year ago
period is due both to the greater relative fluctuation in exchange rates, and the increased size of
the intercompany notes in the current year as compared to a year ago.
Liquidity and Capital Resources
Since our inception, we have incurred significant losses. As of September 30, 2007, we had an
accumulated deficit of approximately $81.0 million. We have not yet achieved profitability, and we
expect that our operating losses will continue to increase. As a result, we will need to raise
additional capital to sustain our business until such time that we are able to generate sufficient
product revenues to achieve profitability.
Sources of Liquidity
As of September 30, 2007, we had unrestricted cash and cash equivalents of $14.9 million.
Since our inception, substantially all of our operations have been financed through sales of equity
securities, including $10.1 million from our private placement in August 2007. We have also used
our revenues to date as a source of additional liquidity.
On August 13, 2007, we completed a private placement of 1,262,500 shares of our common stock
to certain accredited investors at a price of $8.00 per share pursuant to the terms of a securities
purchase agreement. In addition, the investors received warrants to purchase
an aggregate of 416,622 additional shares of our common stock at an exercise price of $9.50 per
share, subject to adjustment in certain circumstances. The warrants are exercisable 181 days after
August 13, 2007, and have a term of five years.
22
We have also received additional funding through loans, as described below.
In June 2006, we entered into a loan and security agreement with a financial institution to
borrow a maximum of $5.0 million. Under this facility we have borrowed $4.2 million, and have paid
back $852,000 in principal as of September 30, 2007. The terms of this facility include monthly
principal payments over three years, plus interest payments of 8.5% per annum. In conjunction with
this agreement, we issued warrants to purchase up to 75,000 shares of our Series B convertible
preferred stock at an exercise price of $18.00 per share. Warrants to purchase 53,750 shares were
issued and exercisable at execution of the agreement.
On November 7, 2006, we signed a loan agreement with Robert Burlingame, under which Mr.
Burlingame advanced to us $4.0 million, which funded on November 10, 2006, accruing interest at an
annual rate of 7%. The principal and all accrued interest under the loan agreement were to be paid
promptly after the closure of a private placement of securities, such as our private placement in
August 2007. In August 2007, we paid all principal and outstanding interest under this loan
agreement from cash, including $2.0 million of restricted cash.
Cash Flows
As of September 30, 2007, we had unrestricted cash and cash equivalents of $14.9 million,
compared to $19.1 million at March 31, 2007. Additionally, at March 31, 2007 we had $2.0 million of
restricted cash reserved for the repayment of the Burlingame loan.
Net cash used in operating activities was $9.8 million during the six months ended September
30, 2007, as compared to $8.7 million during the six months ended September 30, 2006. Net cash
used in the six months ended September 30, 2007 reflected primarily the $10.6 million net loss for
the period, and to a lesser extent the decrease in accounts payable due to the timing of payments
made to our vendors, particularly legal, accounting, and printing costs associated with our initial
public offering, an increase in accrued expenses due primarily to the expected discretionary
bonuses accrued during the fiscal year, and non-cash charges including stock-based compensation,
depreciation and non-cash interest expense. Net cash used in the six months ended September 30,
2006 reflected primarily the $8.7 million net loss for the period, and to a lesser extent a
decrease in accounts receivable due to the timing of payments made from our customers, a decrease
in accounts payable due to the timing of payments made to our vendors, and non-cash charges
including stock-based compensation, depreciation and non-cash interest expense.
Net cash used in investing activities was $247,000 during the six months ended September 30,
2007, as compared to $587,000 during the six months ended September 30, 2007 and 2006,
respectively. Net cash used during the six months ended September 30, 2007 was used primarily to
invest in fixed assets and to make other capital expenditures to support increased personnel and to
enhance our cGMP manufacturing capabilities at our U.S. research and development facility. During
the six months ended September 30, 2006, net cash was used primarily to invest in fixed assets to
support the expansion of our worldwide manufacturing capacity.
Net cash provided by financing activities was $6.0 million during the six months ended
September 30, 2007 primarily due to the gross $10.1 million private placement of our common stock
to certain accredited investors, which provided $9.1 million of net cash, less certain direct fees
and commissions. These amounts were offset by $5.3 million of principal payments on debt due
primarily to the $4.0 million Burlingame note that was paid off during the period. Net cash
provided by financing activities was $4.3 million for the six months ended September 30, 2006
primarily due to the addition of $4.4 million of new debt during the period.
Operating Capital and Capital Expenditure Requirements
We expect to continue to incur substantial operating losses in the future as we continue our
FDA clinical trials on our Microcyn technology to treat diabetic foot ulcers, and the subsequent
commercialization of any FDA approved drug. It may take several years to obtain the necessary
regulatory approvals to commercialize Microcyn as a drug in the United States.
We
have incurred net losses of $5.5 million and $10.6 million for the three and six months ended September 30, 2007. At
September 30, 2007 and March 31, 2007, the Companys accumulated deficit amounted to $81.0 million
and $70.5 million, respectively.
We currently anticipate that our cash and cash equivalents, together with revenues we expect to
generate and interest we expect to earn on invested funds, will be sufficient to meet our
anticipated cash requirements through at least October 1,2 008. We have undertaken certain
initiatives to reduce costs in an effort to conserve liquidity and also to redirect efforts on the
longer term strategy of focusing on our clinical trials and related research and development
activities. We consider the completion of Phase II and Phase III clinical trials to be critical
milestones in the development of our business. These clinical trials must also be completed in
order for us to commercialize Microcyn as a drug product in the United States. We believe Phase II
clinical trials are substantially complete, but the Phase III trials will require significant
expenditures. Commencement of the Phase III clinical trials will be delayed until we raise
additional capital or secure commitments for additional capital in amounts sufficient to proceed
with these trials. We expect to continue incurring losses for the foreseeable future and must raise
additional capital during the next twelve months to pursue our product development initiatives,
fund clinical trials and penetrate markets for the sale of our products. We cannot provide any
assurance that we will 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 liquidity in amounts sufficient to sustain the business for the next
twelve months. Under these circumstances, our Phase III clinical trials would be delayed for a
period of time that is currently indeterminate.
23
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 additional commitments 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 we are unable to secure
additional capital, we will be required to curtail our research and development initiatives, delay
clinical trials and take additional measures to reduce costs in order to conserve our 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.
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; |
|
|
|
|
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. |
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. 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our quantitative and qualitative disclosures about
market risk for the three and six-month ended September 30, 2007 from our Annual Report on Form
10-K/A for the year ended March 31, 2007. For further discussion of quantitative and qualitative
disclosures about market risk, reference is made to our Annual Report on Form 10-K/A for the year
then ended.
Item 4T. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934
(the Exchange Act), that are designed to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
24
reported within the time periods specified in Securities and Exchange Commission 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. In designing and evaluating our disclosure controls and procedures,
management recognized that disclosure controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. In response to comments from our auditors and our own
investigations, our disclosure controls and procedures have been designed to meet, and management
believes that they meet, reasonable assurance standards. Additionally, in designing disclosure
controls and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design
of any disclosure controls and procedures also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Based on their evaluation as of
the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer
and chief financial officer have concluded that, subject to the limitations noted above, our
disclosure controls and procedures were effective to ensure that material information relating to
us, including our consolidated subsidiaries, is made known to them by others within those entities,
particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.
(b) Changes in internal controls In connection with our implementation of the provisions of
Section 404 of Sarbanes-Oxley, we have made various improvements to our system of internal control.
We continue to review, revise and improve the effectiveness of our internal controls. There were no
significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) identified in connection with the evaluation described in Item 4(a) above
that occurred during our last fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Legal Matters
In November 2005, we identified a possible criminal misappropriation of our technology in
Mexico, and we notified the Mexican Attorney Generals office. We believe the Mexican Attorney
General is currently conducting an investigation.
On March 14, 2006, we filed suit in the U.S. District Court for the Northern District of
California against Nofil Corporation and Naoshi Kono, Chief Executive Officer of Nofil, for breach
of contract, misappropriation of trade secrets and trademark infringement. We believe that Nofil
Corporation violated key terms of both an exclusive purchase agreement and non-disclosure agreement
by contacting and working with a potential competitor in Mexico. In the complaint, we seek damages
of $3,500,000 and immediate injunctive relief. On February 13, 2007, we received the defendants
answer and cross-complaint. The cross-complaint, which alleges fraudulent inducement to enter
contracts, breach of non-disclosure contract, trade secret misappropriation, conversion and
violation under civil RICO statutes by the Company, seeks damages in excess of $4,500,000. We
believe that the cross-complaint, and allegations therein, are without merit. Since the
cross-complaint was filed, defendants counsel has withdrawn and defendants have failed to take any
action to prosecute their claims. We filed a motion to dismiss the cross-complaint in its
entirety and a motion for summary judgment seeking a
pre-trial ruling granting all of the affirmative relief requested in
our complaint. If successful,
this will result in a judgment against defendants and the trial date, currently November 17, 2007,
will be vacated. On November 9, 2007, the court granted our motion to dismiss Nofils cross complaint. We expect
the court to rule on our motion for summary judgment on November 14, 2007.
While it is not possible to predict the outcome of
our motion for summary judgment with certainty, we
believe that it is unlikely that this matter will result in a material loss or have a material
adverse effect on our financial condition or operations.
We are currently in discussions regarding two trademark matters asserting confusion in
trademarks with respect to our use of the name Microcyn60 in Mexico. We settled one of the
trademark matters in August 2006. Although we believe that the nature and intended use of our
products are different from those with the similar names, we have agreed with one of the parties to
change the name under which we market our products. Although such plaintiff referred the matter to
the Mexico Trademark Office, we are not aware of a claim for monetary damages. We are in
discussions with the other party and believe that the name change will satisfy an assertion of
confusion; however, our management believes that we could incur a possible loss of approximately
$100,000 for the use of the name Microcyn60 during the twelve month period following the date of
settlement.
25
In June 2006, we 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 us. The license agreement extends to our use of the technology in Japan
only. While we do not believe that the grantors revocation is valid under the terms of the license
agreement and no legal claim has been threatened to date, we cannot provide any assurance that the
grantor will not take legal action to restrict our use of the technology in the licensed territory.
While our 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 our financial position or results of operations.
In February 2007, our Mexico subsidiary served Quimica Pasteur (QP), a former distributor of
the Companys products in Mexico, with a claim alleging breach of contract under a note made by QP.
A trial date has not yet been set.
We are, from time to time, involved in legal matters arising in the ordinary course of its
business. While our 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 we are or could
become involved in litigation, will not have a material adverse effect on our business, financial
condition or results of operations.
Item 1A. Risk Factors
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 have incurred significant net losses in each fiscal year since our inception, including
losses of $19.8 million, $23.1 million and $16.5 million for the years ended March 31, 2007, 2006
and 2005, respectively and $10.6 million during the six months ended September 30, 2007. Our
accumulated deficit as of September 30, 2007 was $81.0 million. We have yet to demonstrate that we
can generate sufficient sales of our products to become profitable. The extent of our future
operating losses and the timing of profitability are highly uncertain, and we may never achieve
profitability. Even if we do generate significant revenues from our product sales, we expect that
increased operating expenses will result in significant operating losses in the near term as we,
among other things:
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conduct preclinical studies and clinical trials on our products and product candidates; |
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seek FDA clearance to market Microcyn as a drug in the United States; |
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increase our research and development efforts to enhance our existing products,
commercialize new products and develop new product candidates; |
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establish additional and expand existing manufacturing facilities; and |
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grow our sales and marketing capabilities in the United States and internationally. |
As a result of these activities, we will need to generate significant revenue in order to
achieve profitability and may never become profitable. We must also maintain specified cash
reserves in connection with our loan and security agreement which may limit our investment
opportunities. Failure to maintain these reserves could result in our secured lenders foreclosing
against our assets or imposing significant restrictions on our operations. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on an ongoing basis.
If we do not raise additional capital, we will need to curtail certain operational activities
in order to reduce costs. We cannot provide any assurance that we will secure any commitments for
new financing on acceptable terms, if at all.
26
Because all of our products are based on our Microcyn platform technology, we will need to generate
sufficient revenues from the sale of Microcyn to execute our business plan.
All of our products are based on our Microcyn platform technology, and we do not have any
non-Microcyn product candidates that will generate revenues in the foreseeable future. Accordingly,
we expect to derive substantially all of our future revenues from sales of our current Microcyn
products. We have only been selling our products since July 2004, and substantially all of our
historical product revenues have been from sales of Microcyn in Mexico. Although we began selling
in Europe in October 2004, in the United States in June 2005, and in India in July 2006, our
product revenues outside of Mexico were not significant prior to fiscal year 2007. For example,
product revenues from countries outside of Mexico were just 9% of our product revenues for the year
ended March 31, 2006. However, during the year ended March 31, 2007, the percentage of product
revenues from outside of Mexico increased to 32% and during the six months ended September 30, 2007
was 27%. Microcyn has not been adopted as a standard of care for wound treatment in any country and
may not gain acceptance among physicians, nurses, patients, third-party payors and the medical
community. Existing protocols for wound care are well established within the medical community and
tend to vary geographically, and healthcare providers may be reluctant to alter their protocols to
include the use of Microcyn. If Microcyn does not achieve an adequate level of acceptance, we will
not generate sufficient revenues to become profitable. We recently decreased our sales and
marketing activities in Europe and Mexico, which could materially affect our revenues in the
geographic areas in the future.
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 have entered into debt financing arrangements which are secured by all of our assets. 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. |
27
If we raise additional funds by issuing equity or convertible debt securities, dilution to our
stockholders could result. Any equity or convertible debt 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 equity securities below the then current
exercise price in certain
outstanding warrants, the issuance could trigger anti-dilution rights and result in additional dilution to you. If we raise additional funds by issuing debt securities, these debt securities
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 three 510(k) clearances in the United States that permit us to sell Microcyn
as a medical device to clean, moisten and debride wounds. However, we do not have the necessary
regulatory approvals to market Microcyn in the United States as a drug, which we will need to
obtain in order to execute our business plan. 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.
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 and Italy, 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 often did not include blinding,
randomization, predefined clinical endpoints, use of placebo and active control groups or U.S. good
clinical practice requirements. Consequently, the results of these physician clinical studies may
not be used by us 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.
The FDA approval process is expensive and uncertain, requires detailed and comprehensive
formulation scientific and other data and generally takes several years. Despite the time and
expense exerted, approval is never guaranteed. We do not know whether we will obtain favorable
results in our preclinical and clinical studies or whether we will obtain the necessary regulatory
approvals to market Microcyn as a drug in the United States. We anticipate that obtaining approval
for the use of Microcyn to treat infections in wounds in the United States will take several years.
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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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; |
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governmental regulations or administrative actions are changed; and |
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insufficient funds to continue our clinical trials. |
We do not know whether our existing or any 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. In addition, further studies and trials could show different results. For example,
after EPA review of our registration filing, including the results of disinfectant efficacy testing
conducted by an independent laboratory retained by us, we obtained EPA authorization, or
registration, for the distribution and sale of our Microcyn-based product, Cidalcyn, as a hospital
grade disinfectant, but the EPA conducted subsequent tests and informed us that Cidalcyn did not
meet efficacy standards when tested against three specific pathogens. In response to this test, we
voluntarily recalled samples of the product previously distributed and later entered into a Consent
Agreement and Final Order with the EPA, allowing us to amend our EPA registration and pay a $20,800
fine without admitting or denying any wrongdoing. In addition, in an independent physician study of
10 patients in which procedures were not fully delineated, published in February 2007, four
patients discontinued treatment with Demacyn due to pain, and beneficial change in wound
microbiology was found in only one of the six remaining patients. We will be required to conduct
additional clinical trials prior to seeking approval of Microcyn for additional indications. Our
failure to adequately demonstrate the safety and efficacy of our product candidates to the
satisfaction of the FDA will prevent our receipt of FDA approval for additional indications and,
ultimately, impact commercialization of our products in the United States. If we experience
significant delays or adverse results in clinical trials, our financial results and the commercial
prospects for products based on Microcyn will be harmed, our costs would increase and our ability
to generate revenue would be delayed.
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. In the United States, use of Microcyn to cleanse and debride a wound comes
within the medical device regulation framework, while use of Microcyn to treat infections in wounds
will require us to seek FDA approval of Microcyn as a drug in the United States.
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.
We do not know whether our products based on Microcyn will receive approval from the FDA as a
drug. The data from clinical studies of Microcyn conducted by physicians to date will not satisfy
the FDAs regulatory criteria for approval of an NDA. In order for us to seek approval for the use
of Microcyn as a drug in the treatment of infections in wounds, we will be required to conduct
additional preclinical and clinical trials and submit applications for approval to the FDA. For
example, we are currently conducting a Phase II study and are planning to conduct a pilot study of
Microcyn for the treatment of wound infections. We will need to conduct additional non-clinical
and well-controlled clinical trials in order to generate data to support FDA approval of Microcyn
for this indication.
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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.
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. |
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.
We have agreed to change the brand name of our product in Mexico, which may result in the loss of
any brand recognition that we have established with users of our products.
In accordance with the settlement of a trademark infringement lawsuit filed against us in
Mexico, we have agreed to change the name under which we market our products in Mexico. In
addition, in May 2006, a complaint was filed against us for trademark confusion in connection with
the same tradename, and we are in settlement negotiations concerning such claim. We have marketed
our products in Mexico under the brand name of Microcyn60 since 2004. During the six months ended
September 30, 2007 and the year ended March 31, 2007 the percentage of our product revenues derived
from Mexico were 73% and 68%, respectively. As a result of our agreement to change our product
name, we may lose the benefit of the brand name recognition we have generated in the region and our
product sales in Mexico could decline. In locations where we have distributed our products, we
believe that the brand names of those products have developed name recognition among consumers who
purchase them. Any change to the brand name of our other products may cause us to lose such name
recognition, which may lead to confusion in the marketplace and a decline in sales of our products.
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.
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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- 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 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 future 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.
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, one national distributor and several regional distributors. We plan
for a more aggressive commercialization and product launch in the event we obtain drug approval
from the FDA. 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.
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We depend on a contract sales force to sell our products in Mexico.
We currently depend on a contract sales force to sell Microcyn in Mexico. Our existing
agreement is short-term in duration and can be terminated by either party upon 30 days written
notice. If we are unable to retain our current agreement for any reason, we may need to build our
own internal sales force or find an alternate source for contract sales people. We may be unable to
find an alternate source, or the alternate sources sales force may not generate sufficient
revenue. If our current or future contract sales force does not perform adequately, we may not
realize long-term revenue growth in Mexico.
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 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. In August 2006, we received a show cause letter from the EPA, which stated that,
in tests conducted by the EPA, Cidalcyn was found to be ineffective in killing specified pathogens
when used according to label directions. We gathered records for review to determine if there might
have been any problems in production of the lot tested by the EPA. We have also quarantined all
remaining quantities of the production lot in question. 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 our clinical test 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.
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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. In
addition, we granted a security interest in our assets, including our intellectual property, under
two loan and security agreements. 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 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.
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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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. |
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, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in the United States.
For example, one of our former contract partners, Nofil Corporation, whom we relied upon to
manufacture our proprietary machines had access to our proprietary information and we believe
undertook the development and manufacture of the machines to be sold to third parties in violation
of our agreement with such company. We have brought a claim against Nofil Corporation in the U.S.
District Court for the Northern District of California. We believe that a former officer of our
Mexico subsidiary collaborated in these acts, misappropriated our trade secrets, and is currently
selling products in Mexico that are competitive with our products. In addition, we believe that,
through the licensor of the patents that we in-license and who has also assigned patents to us, a
company in Japan obtained one of our patent applications, translated it into Hangul and filed it
under such companys and the licensors name in South Korea. These and any other leak of
confidential data into the public domain or to third parties could allow our competitors to learn
our trade secrets.
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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. For example, in June 2006, we received written
notice from Coherent Technologies, the licensor of exclusive licenses to six issued Japanese
patents and five Japanese published pending patent applications, advising us that the patent
license was terminated, citing various reasons with which we disagree. Since that time, we have
engaged in discussions with Coherent Technologies concerning the license agreement and our
continued business relationship. Although we do not believe Coherent Technologies has grounds to
terminate the license, we may have to take legal action to preserve our rights under the license
and to enjoin Coherent Technologies from breaching its terms. Some claims received from third
parties may lead to litigation. We cannot assure you that we will prevail in these actions, or that
other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement
by us of third-party patents and trademarks or the validity of our patents, will not be asserted or
prosecuted against us. We may also initiate claims to defend our intellectual property. For
example, we brought a claim against Nofil Corporation for misappropriation of our trade secrets and
Nofil Corporation filed a cross-complaint against us in February 2007 claiming ownership of our
technology. 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 include the non-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.
In September 2005, a complaint was filed against us in Mexico claiming trademark infringement
with respect to our Microcyn60 mark. To settle this claim we have changed the name under which we
market our products in Mexico. A second unrelated claim was filed against us in Mexico in May
2006, claiming trademark infringement with respect to our Microcyn60 mark in Mexico. We are in
discussions with the claimant to settle the matter.
In addition to the infringement claims in Mexico, we are currently involved in several pending
trademark opposition proceedings in connection with our applications to register the marks
Microcyn, Oculus Microcyn and Dermacyn in the European Union, Argentina, Guatemala, Honduras,
Nicaragua and Paraguay. If we are unable to settle these disputes or prevail in these opposition
proceedings, we will not be able to obtain registrations for the Microcyn, Oculus Microcyn and
Dermacyn marks in those countries, and that may impair our ability to enforce our trademark rights
against infringers in those countries. Although no such legal proceedings have been brought or
threats of such legal proceedings have been made, we cannot rule out the possibility that any of
these opposing parties will also file a trademark infringement lawsuit seeking to prevent our use
and seek monetary damages based on our use of the Microcyn, Oculus Microcyn and Dermacyn marks in
the European Union, Argentina, Guatemala, Honduras, Nicaragua and Paraguay.
We have also entered into agreements with third parties to settle trademark opposition
proceedings in which we have agreed to certain restrictions on our use and registration of certain
marks. In March 2006, we entered into an agreement with an opposing party that places restrictions
on the manner in which we can use and register our Microcyn and Microcyn60 marks in countries where
the opposing party has superior rights, including in Europe and Singapore. These restrictions
include always using Microcyn along with the word technology and another distinctive trademark
such as Cidalcyn, Dermacyn and Vetericyn. In addition, we have entered into an agreement with an
opposing party in which we agreed to limit our use and registration of the Microcyn mark in Uruguay
to disinfectant, antiseptic and sterilizing agents. Moreover, we have entered into an agreement
with an opposing party in Europe in which we agreed to specifically exclude ophthalmologic products
for our Oculus Microcyn application in the European Union.
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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 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 six months ended September
30, 2007 65% of our total revenue was 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. |
We plan to continue to market and sell our products internationally to respond to customer
requirements and market opportunities. We currently have international manufacturing facilities in
Mexico and The Netherlands. 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 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 a member of our
Board of Directors 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.
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We may be unable to manage our future growth effectively, which would make it difficult to execute
our business strategy.
We may experience periods of rapid growth as we expand our business, which will likely place a
significant strain on our limited personnel and other resources. Any failure by us to manage our
growth effectively could have an adverse effect on our ability to achieve our commercialization
goals.
Furthermore, we conduct business in a number of geographic regions and are seeking to expand
to other regions. We have not established a physical presence in many of the international regions
in which we conduct or plan to conduct business, but rather we manage our business from our
headquarters in Northern California. As a result, we conduct business at all times of the day and
night with limited personnel. If we fail to appropriately target and increase our presence in these
geographic regions, we may not be able to effectively market and sell our Microcyn products in
these locations or we may not meet our customers needs in a timely manner, which could negatively
affect our operating results.
Future growth will also impose significant added responsibilities on management, including the
need to identify, recruit, train and integrate additional employees. In addition, rapid and
significant growth will place strain on our administrative and operational infrastructure,
including sales and marketing and clinical and regulatory personnel. Our ability to manage our
operations and growth will require us to continue to improve our operational, financial and
management controls, reporting systems and procedures. If we are unable to manage our growth
effectively, it may be difficult for us to execute our business strategy.
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.
The wound care industry is highly competitive and subject to rapid technological change. 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. |
As a result, we may not be able to successfully commercialize any future products.
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
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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.
We may acquire other businesses or form joint ventures that could harm our operating results,
dilute your ownership of us, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions of complementary businesses and
assets, as well as technology licensing arrangements. We also intend to pursue strategic alliances
that leverage our core technology and industry experience to expand our product offerings or
distribution. We have no experience with respect to acquiring other companies and limited
experience with respect to the formation of collaborations, strategic alliances and joint ventures.
If we make any acquisitions, we may not be able to integrate these acquisitions successfully into
our existing business, and we could assume unknown or contingent liabilities. Any future
acquisitions by us also could result in significant write-offs or the incurrence of debt and
contingent liabilities, any of which could harm our operating results. Integration of an acquired
company also may require management resources that otherwise would be available for ongoing
development of our existing business. We may not identify or complete these transactions in a
timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated
benefits of any acquisition, technology license, strategic alliance or joint venture.
To finance any acquisitions, we may choose to issue shares of our common stock as
consideration, which would dilute your ownership interest in us. If the price of our common stock
is low or volatile, we may not be able to acquire other companies for stock. Alternatively, it may
be necessary for us to raise additional funds for acquisitions through public or private
financings. Additional funds may not be available on terms that are favorable to us, or at all.
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.
We previously had agreements to pay compensation to our advisory board members and physicians
who conduct clinical trials or provide other services for us. Currently, these agreements have been
terminated. The agreements may be subject to challenge to the extent they do not fall within
relevant safe harbors under federal and similar state anti-kickback laws. If our past or present
operations, including, but not limited to, our consulting arrangements with our advisory board
members or physicians conducting clinical trials on
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our behalf, or our promotional or discount programs, are found to be in violation of these
laws, we or our officers may be subject to civil or criminal penalties, including large monetary
penalties, damages, fines, imprisonment and exclusion from government healthcare program
participation, including Medicare and Medicaid.
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 programs as a result of an
investigation arising out of such action. We cannot assure you that we will not 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 implement additional and expensive finance and accounting systems, procedures and controls
as we grow our business and organization and to satisfy new 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,
including expanded disclosures and accelerated reporting requirements and more complex accounting
rules for the reporting period ending March 31, 2008. Compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 and other requirements will increase our costs and require additional
management resources. In a letter following their dismissal, 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. Our current
independent auditors recommended certain changes in our internal controls, which we are working on?
implementing. We have upgraded our finance and 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 new reporting requirements. Specifically, our experience in entering into a
series of Agreements with Quimica Pasteur, or QP, a Mexico-based distributor of pharmaceutical
products to hospitals and health care entities owned or operated by the Mexican Ministry of Health,
or MOH, indicated that we need to better plan for complex transactions and the application of
complex accounting principles relating to those transactions and to better identify potentially
improper practices. As a result of these agreements, we were required to consolidate QPs
operations with our financial results for a portion of our year ended March 31, 2006. In connection
with our audit of QPs financial statements in late 2005, we were made aware of a number of facts
that suggested that QP or its principals may have engaged in some form of tax avoidance practice in
Mexico prior to the execution of the agreements between our company and QP, and we did not discover
these facts prior to our execution of these agreements or for several months thereafter. If we are
unable to complete the required Section 404 assessment as to the adequacy of our internal control
over financial reporting, if we fail to maintain or implement adequate controls, or if our
independent registered public accounting firm is unable to provide us with an unqualified report as
to the effectiveness of our internal control over financial reporting as of the date of our second
Annual Report on Form 10-K for which compliance is required and thereafter, our ability to obtain
additional financing could be impaired. In addition, investors
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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. Also, if we are unable to implement and maintain adequate internal controls, we
could be subject to fines and penalties. For example, although we do not believe that we are
responsible for any tax avoidance practices of QPs principals prior to June 16, 2005, the Mexican
taxing authority could make a claim against us or our Mexican subsidiary. We have been informed by
counsel in Mexico that the statute of limitations, including for action for fraud, is five years
from March 31, 2006.
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.
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. |
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 Global 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 initial offering price.
Prior to our initial public offering, there was no public market for our common stock.
Although we listed our common stock listed on the Nasdaq Global 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.
We do not expect to pay dividends in the foreseeable future. As a result, you must rely on stock
appreciation, if any, for a return on your investment.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any
payment of cash dividends will depend on our financial condition, results of operations, capital
requirements and other factors and will be at the discretion of our Board of Directors. In
addition, under two of our secured loans, we will not pay any dividends without our secured
lenders prior written consent for as long as we have any outstanding obligations to the secured
lenders. Accordingly, you will have to rely on appreciation in the price of our common stock, if
any, to earn a return on your investment in our common stock. Furthermore, we may in the future
become subject to contractual restrictions on, or prohibitions against, the payment of dividends.
We may allocate our cash and cash equivalents in ways with which you may not agree.
Our management has broad discretion in using our cash and cash equivalents and may use them in
ways with which you may disagree. You and other stockholders may not agree with our decisions about
the use of our reserves. Because we are not required to allocate our cash and cash equivalents to
any specific investment or transaction, you cannot determine at this time the value or propriety of
our application of our cash position. Moreover, you will not have the opportunity to evaluate the
economic, financial or other information on which we base our decisions on how to use our cash and
cash equivalents. As a result, we may use our cash and cash equivalents for corporate purposes that
do not immediately enhance our prospects for the future or increase the value of your investment.
Anti-takeover provisions in our charter, by-laws and Delaware law may make it more difficult for
you 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 an annual meeting 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 documents allow 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.
Item 2. Unregistered Sales of Securities and Use of Proceeds
On August 13, 2007, we completed a private placement of 1,262,500 shares of our 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,
subject to adjustment in certain circumstances. The warrants are exercisable 181 days after August
13, 2007, and have a term of five years. Gross proceeds from the private placement were
approximately $10.1 million and net proceeds of $9.1 million
(after deducting 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 on a Form S-1 (File No. 333-145810), which was declared effective on September 12, 2007.
The securities issued in the private placement were issued pursuant to an exemption under
Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder.
The securities offered were not registered under the Securities Act of 1933 or any state securities
laws at the time of issuance and unless sold pursuant to the registration statement referenced
above, the securities could not be offered or sold in the United States (or to a U.S. person) except
pursuant to an exemption from, or in a transaction not subject to, the registration requirements of
the Securities Act of 1933 and applicable state securities laws. The Company also issued a warrant
to purchase 88,375 shares of common stock to a placement agent in connection with the private
placement. The warrant has the same terms, including exercise price and registration rights, as the
warrants issued in the private placement.
On January 24, 2007, a Registration Statement on Form S-1 (File No. 333-135584) relating to
our initial public offering was declared effective by the SEC. The closing was January 30, 2007,
and on February 16, 2007, our underwriters exercised their option to sell over-allotment shares. In
total, the net offering proceeds to us including over-allotment shares were approximately $21.9
million (after deducting underwriting discounts, commissions and offering expenses). Through
September 30, 2007, $17.7 million of the net proceeds were used, including $6.3 million for
clinical trials and related research and development, $4.0 million for payment on the specified
loan from Robert Burlingame, $2.4 million for working capital and general corporate purposes, $3.6
million for sales and marketing activities worldwide, and $486,000 were used to expand facilities
and laboratory operations capacity and for information systems infrastructure. A portion of the net
proceeds may also be used to acquire or invest in complementary businesses, technologies, services
or products.
42
Item 4. Submission of Matters to a Vote of the Security Holders
We held an Annual Meeting of our Stockholders on September 30, 2007, at which the following
occurred:
ELECTION OF DIRECTORS TO THE BOARD OF DIRECTORS: The stockholders elected Hojabr Alimi, James
Schutz, Akihisa Akao, Jay Birnbaum, Edward Brown, Robert Burlingame, Richard Conley and Gregory
French as Directors. The votes on the matters were as follows:
|
|
|
|
|
Hojabr Alimi |
|
|
|
|
FOR |
|
|
7,229,420 |
|
WITHHELD |
|
|
81,492 |
|
|
|
|
|
|
James Schutz |
|
|
|
|
FOR |
|
|
7,233,337 |
|
WITHHELD |
|
|
77,575 |
|
|
|
|
|
|
Akihisa Akao |
|
|
|
|
FOR |
|
|
7,238,777 |
|
WITHHELD |
|
|
72,135 |
|
|
|
|
|
|
Jay Birnbaum |
|
|
|
|
FOR |
|
|
7,251,230 |
|
WITHHELD |
|
|
59,682 |
|
|
|
|
|
|
Edward Brown |
|
|
|
|
FOR |
|
|
7,251,230 |
|
WITHHELD |
|
|
59,682 |
|
|
|
|
|
|
Robert Burlingame |
|
|
|
|
FOR |
|
|
7,235,221 |
|
WITHHELD |
|
|
75,691 |
|
|
|
|
|
|
Richard Conley |
|
|
|
|
FOR |
|
|
7,251,470 |
|
WITHHELD |
|
|
59,442 |
|
|
|
|
|
|
Gregory French |
|
|
|
|
FOR |
|
|
7,251,470 |
|
WITHHELD |
|
|
59,442 |
|
43
APPROVAL OF AMENDED AND RESTATED 2006 STOCK INCENTIVE PLAN: The stockholders approved the
Amended and Restated 2006 Stock Incentive Plan. The vote on the matter was as follows:
|
|
|
|
|
FOR |
|
|
4,558,567 |
|
AGAINST |
|
|
357,627 |
|
ABSTAIN |
|
|
57,697 |
|
BROKER NON-VOTE |
|
|
2,336,751 |
|
RATIFICATION OF THE SELECTION BY THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF MARCUM & KLIEGMAN
LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS: The stockholders ratified the selection by
the Audit Committee of the Board of Directors of Marcum & Kliegman LLP as our independent
registered public accountants for the 2007 fiscal year. The vote on the matter was as follows:
|
|
|
|
|
FOR |
|
|
7,213,807 |
|
AGAINST |
|
|
62,699 |
|
ABSTAIN |
|
|
34,406 |
|
Item 5. Other Information
Adoption of 10b5-1 Plans
Mr. Hoji Alimi, our chief executive
officer and member of the Board of Directors, and Mr. Akihisa Akao, each intends to enter into a
plan to buy or sell common stock of the Company in accordance with Rule 10b5-1 of the Securities
Exchange Act of 1934. Under Rule 10b5-1, directors, officers and other persons who are not in
possession of material non-public information may adopt pre-arranged sales or purchase plans for
the Companys securities under specified terms and conditions. The rule allows individuals
adopting such plans to buy or sell shares as specified in the plan, even if subsequent material
and non-public information becomes available to them. The plans will be approved pursuant to our
insider trading policy, and transactions executed under the provisions of a purchase or sales
plan will be reported through Form 4 filings with the SEC. No purchases or sales will be made
under the plans prior to a date that is ninety days following the date of adoption of the plan.
Other directors, officers and other
persons may, from time to time, adopt purchase or sales plans in accordance with Rule 10b5-1.
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.1
|
|
Securities Purchase Agreement, dated as of August 7, 2007 (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed on August 13, 2007). |
|
|
|
10.2
|
|
Registration Rights Agreement, dated as of August 7, 2007 (incorporated by reference to Exhibit 10.2 to
the Companys Current Report on Form 8-K filed on August 13, 2007). |
|
|
|
10.3
|
|
Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.3 to the Companys Current
Report on Form 8-K filed on August 13, 2007). |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer. |
|
|
|
32.1#
|
|
Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
|
|
|
32.2#
|
|
Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
|
|
|
# |
|
In accordance with Item 601(b)(32)(ii) of Regulation SK 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-Q 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. |
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Oculus Innovative Sciences, Inc. |
|
|
|
|
|
Date: November 13, 2007
|
|
By:
|
|
/s/ Hojabr Alimi |
|
|
|
|
|
|
|
|
|
Hojabr Alimi |
|
|
Its:
|
|
Chairman of the Board of Directors |
|
|
|
|
and Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
Date: November 13, 2007
|
|
By:
|
|
/s/ Robert Miller |
|
|
|
|
|
|
|
|
|
Robert Miller |
|
|
Its:
|
|
Chief Financial Officer |
|
|
|
|
(Principal Financial Officer and |
|
|
|
|
Accounting Officer) |
45
Exhibit Index
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.1
|
|
Securities Purchase Agreement, dated as of August 7, 2007 (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed on August 13, 2007). |
|
|
|
10.2
|
|
Registration Rights Agreement, dated as of August 7, 2007 (incorporated by reference to Exhibit 10.2 to
the Companys Current Report on Form 8-K filed on August 13, 2007). |
|
|
|
10.3
|
|
Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.3 to the Companys Current
Report on Form 8-K filed on August 13, 2007). |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer. |
|
|
|
32.1#
|
|
Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
|
|
|
32.2#
|
|
Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
|
|
|
# |
|
In accordance with Item 601(b)(32)(ii) of Regulation SK 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-Q 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. |
46