UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
(Mark
One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended March 31, 2010
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
transition period from _________________
to _________________
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Commission
File Number: 001-33216
OCULUS
INNOVATIVE SCIENCES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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68-0423298
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(State
or other jurisdiction
of
incorporation or organization)
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(I.R.S.
Employer
Identification
No.)
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1129 N. McDowell
Blvd.
Petaluma,
California 94954
(Address
of principal executive offices) (Zip Code)
(707) 782-0792
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
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Name of Each Exchange on Which
Registered
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common
stock, $0.0001 par value
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data file required to be
submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 229.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller
reporting company þ
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(Do not check if
a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No þ
As of
September 30, 2009, the aggregate market value of voting and non-voting
common stock held by non-affiliates of the registrant was approximately
$28.0 million, based on the closing price of the common stock as reported
on the NASDAQ Global Market for that date.
There
were 26,241,863 shares of the registrant’s common stock issued and
outstanding on June 7, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Item 10
(as to directors and Section 16(a) Beneficial Ownership Reporting
Compliance), 11, 12, 13 and 14 of Part III incorporate by reference
information from the registrant’s proxy statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant’s 2010 Annual Meeting of Stockholders.
TABLE
OF CONTENTS
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Page
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PART I
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ITEM
1.
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Business
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3
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ITEM
1A.
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Risk
Factors
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24
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ITEM
2.
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Properties
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36
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ITEM
3.
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Legal
Proceedings
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37
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ITEM
4.
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(Removed
and Reserved)
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PART II
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ITEM
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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37
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ITEM
6.
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Selected
Financial Data
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38
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ITEM
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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38
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ITEM
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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44
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ITEM
8.
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Consolidated
Financial Statements and Supplementary Data
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45
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ITEM
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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74
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ITEM
9A(T).
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Controls
and Procedures
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74
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ITEM
9B.
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Other
Information
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74
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PART III
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ITEM
10.
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Directors,
Executive Officers and Corporate Governance
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75
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ITEM
11.
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Executive Compensation
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75
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ITEM
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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75
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ITEM
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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75
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ITEM
14.
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Principal
Accounting Fees and Services
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75
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PART IV
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ITEM
15.
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Exhibits,
Financial Statement Schedules
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76
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Signatures
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82
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PART I
This report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. When used in this report, the words “expects,” “anticipates,”
“suggests,” “believes,” “intends,” “estimates,” “plans,” “projects,” “continue,” “ongoing,”
“potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,”
“could,” “would” and similar expressions are intended to identify forward-looking
statements. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in the forward looking
statements due to numerous factors, including, but not limited to, our ability
to become profitable; the effect of the general decline in the economy on our
business; the progress and timing of our development programs
and regulatory approvals for our products; the benefits and effectiveness of our
products; the ability of our products to meet existing or future regulatory
standards; the progress and timing of clinical trials and physician studies; our
expectations related to the use of our cash reserves; our expectations and capabilities
relating to the sales and marketing of our current products and our product candidates;
our ability to gain sufficient reimbursement from third-party payors; our
ability to compete with other companies that are developing or selling products
that are competitive with our products; the establishment of strategic
partnerships for the development or sale of products; the risk our research and
development efforts do not lead to new products; the timing of commercializing our
products; our relationship with Quimica Pasteur; our ability to penetrate markets through
our sales force, distribution network, and strategic business partners to gain
a foothold in the market and generate attractive margins; the expansion of
our sales force and
distribution network; the ability to attain specified revenue goals within a specified time frame, if at
all, or to reduce costs; the outcome of discussions with the Federal Drug
Administration, or FDA, and other regulatory agencies; the content
and timing of submissions to, and decisions made
by, the FDA and other regulatory agencies, including demonstrating to the
satisfaction of the FDA the safety and efficacy of our products; our ability to manufacture
sufficient amounts of our product candidates for clinical trials and products for
commercialization activities; our ability to protect our intellectual property
and operate our business without infringing on the intellectual property of others; our
ability to continue to expand our intellectual property portfolio; our expectations
about the outcome of litigation and controversies with third parties;
the risk we may need to indemnify our distributors or other third parties; our
ability to attract and retain qualified directors, officers and employees;
our expectations relating to the concentration of our revenue from international
sales; our ability to expand to and commercialize products in markets outside the
wound care market; and the impact of the Sarbanes-Oxley Act of 2002 and any
future changes in accounting regulations or practices in general with respect to
public companies.
These forward-looking statements
speak only as of the date hereof. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations with regard thereto
or any change in events, conditions or circumstances on which any such
statement is based except as required by law.
ITEM 1. Business
Corporate
Information
We
incorporated under the laws of the State of California in April 1999 as Micromed
Laboratories, Inc. In August 2001, we changed our name to Oculus Innovative
Sciences, Inc. In December 2006, we reincorporated under the laws of the State
of Delaware. Our principal executive offices are located at
1129 N. McDowell Blvd., Petaluma, California, 94954, and our telephone
number is (707) 782-0792. We have two principal subsidiaries: Oculus
Technologies of Mexico, S.A. de C.V., organized in Mexico, and Oculus Innovative
Sciences Netherlands, B.V., organized in the Netherlands. On January 20,
2009, we dissolved our subsidiary, Oculus Innovative Sciences Japan, KK., which
was organized under Japanese law. Our fiscal year end is March 31. Our
website is www.oculusis.com. We do not
intend for information on our website to be incorporated into this
10-K.
Our
Business
We
develop, manufacture and market a family of tissue care products that cure
infections and, through a separate mechanism of action, enhance healing while
reducing the need for antibiotics. Infection is a serious potential
complication in both chronic and acute wounds, and controlling infection is a
critical step in wound healing. Our platform technology, called Microcyn®, is a proprietary solution of
electrically charged oxychlorine small molecules designed to treat a wide range
of organisms that cause disease (pathogens). These include viruses, fungi,
spores and antibiotic-resistant strains of bacteria, such as
methicillin-resistant Staphylococcus aureus, or
MRSA, and vancomycin-resistant Enterococcus, or VRE, in
wounds, as well as Clostridium
difficile (C. diff), a highly contagious bacteria spread by human
contact.
We do not
have the necessary regulatory approvals to market Microcyn in the United States
as a drug. In the United States our device product does, however, have six
clearances as a 510(k) medical device for the following summary
indications:
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moistening
and lubricating absorbent wound dressings for traumatic wounds requiring a
prescription;
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2)
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moistening
and debriding acute and chronic dermal lesions requiring a
prescription;
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3)
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moistening
absorbent wound dressings and cleaning minor cuts as an over-the-counter
product;
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4)
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management
of exuding wounds such as leg ulcers, pressure ulcers, diabetic ulcers and
for the management of mechanically or surgically debridement of wounds in
a gel form and required as a
prescription;
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5)
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debridement
of wounds, such as stage I-IV pressure ulcers, diabetic foot ulcers, post
surgical wounds, first and second degree burns, grafted and donor sites as
a preservative, which can kill listed bacteria such as MRSA & VRE
and required as a prescription;
and
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6)
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as
a hydrogel, for management of wounds including itch and pain relief
associated with dermal irritation, sores, injuries and ulcers of dermal
tissue as a prescription. As an over-the-counter product, the
hydrogel is intended to relieve itch and pain from minor skin irritations,
lacerations, abrasions and minor burns. It is also indicated for
management of irritation and pain from minor
sunburn.
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Outside
the United States our product has a CE Mark device approval in Europe for
debriding, irrigating and moistening acute and chronic wounds in comprehensive
wound treatment by reducing microbial load and creating a moist environment. In
Mexico, we are approved as a drug for antiseptic treatment of wounds and
infected areas. In India, our technology has a drug license for cleaning and
debriding in wound management while in China there is a medical device approval
by the State Food and Drug Administration for reducing the propagation of
microbes in wounds and creating a moist environment for wound
healing.
While in
the U.S. we do not have the necessary regulatory clearance for an antimicrobial
or wound healing indication, clinical and laboratory testing we conducted in
connection with our submissions to the FDA, as well as physician clinical
studies and scientific papers, suggest that our Microcyn Technology may help
reduce a wide range of pathogens from acute and chronic wounds while curing or
improving infection and concurrently enhancing wound healing through modes of
action unrelated to the treatment of infection. These physician clinical studies
suggest that our Microcyn is safe, easy to use and complementary to many
existing treatment methods in wound care. Physician clinical studies and usage
in the United States suggest that our 510(k) cleared products may shorten
hospital stays, lower aggregate patient care costs and, in certain cases, reduce
the need for systemic antibiotics. We are also pursuing the use of our Microcyn
platform technology in other markets outside of wound and skin care, including
the respiratory, ophthalmology, dental, dermatology, animal healthcare and
industrial markets.
In 2005,
chronic and acute wound care represented an aggregate of $9.6 billion in
global product sales, of which $3.3 billion was spent for the treatment of
skin ulcers, $1.6 billion to treat burns and $4.7 billion for the
treatment of surgical and trauma wounds, according to Kalorama Information, a
life sciences market research firm. In the Kalorama Information we believe the
markets most related to our product involve approximately $1.3 billion for
the treatment of skin ulcers, $300 million for the treatment of burns and
$700 million for the treatment of surgical and trauma wounds. Common
methods of controlling infection, including topical antiseptics and antibiotics,
have proven to be only moderately effective in combating infection in the wound
bed. However, topical antiseptics tend to inhibit the healing process due to
their toxicity and may require specialized preparation or handling. Antibiotics
can lead to the emergence of resistant bacteria, such as MRSA and VRE. Systemic
antibiotics may be less effective in controlling infection in patients with
disorders affecting circulation, such as diabetes, which are commonly associated
with chronic wounds. As a result, no single treatment is used across all types
of wounds and stages of healing.
We
believe the Microcyn Technology is the only known stable, anti-infective
therapeutic available in the world today that simultaneously cures or improves
infection while also promoting wound healing through increased blood flow to the
wound bed and reduction of inflammation. Also, we believe Microcyn provides
significant advantages over current methods of care in the treatment of a wide
range of chronic and acute wounds throughout all stages of treatment. These
stages include cleaning, debridement, prevention and treatment of infections and
wound healing. We believe that unlike antibiotics, antiseptics, growth
regulators and other advanced wound care products, Microcyn is the only stable
wound care solution that is safe as saline, and also cures infection while
simultaneously accelerating wound healing. Also, unlike most antibiotics, we
believe Microcyn does not target specific strains of bacteria, a practice which
has been shown to promote the development of resistant bacteria. In addition,
our products are shelf stable, non-toxic, require no special preparation and are
easy to use.
Our goal
is to become a worldwide leader as the standard of care in the treatment and
irrigation of open wounds and skin care. 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 Microcyn60™ in Mexico after
receiving approval from the Mexican Ministry of Health, for the use as an
antiseptic, disinfectant and sterilant. Since then, physicians in the United
States, Europe, India, Pakistan, China and Mexico have conducted more than 28
physician clinical studies assessing Microcyn Technology’s use in the treatment
of infections in a variety of wound types, including hard-to-treat wounds such
as diabetic ulcers and burns. Most of these studies were not intended to be
rigorously designed or controlled clinical trials and, as such, did not have all
of the controls required for clinical trials used to support a new drug
application submission to the FDA. A number of these studies did not include blinding, randomization, predefined clinical end points,
use of placebo and active control groups or U.S. good clinical practices
requirements. We used the data generated from some of these studies to support
our application for the CE Mark, or European Union certification, for wound
cleaning and reduction of microbial load. We received the CE Mark in November
2004 and additional international approvals in China, Canada, Mexico and India.
The Microcyn has also received six FDA 510(k) approvals for use as a medical
device in wound cleaning, or debridement, lubricating, moistening and dressing,
including traumatic wounds and acute and chronic dermal lesions. On May 27,
2009, we received a 510(k) approval from the FDA to market our Microcyn Skin and
Wound HydroGel™ as both a prescription and over-the-counter
formulation. Additionally, on June 4, 2009, we received an
expanded 510(k) label clearance from the FDA to market our Microcyn Skin and
Wound Care with preservatives as both a prescription and over-the-counter
formulation. The new prescription product is indicated for use by health care
professionals to manage the debridement of wounds such as stage I-IV pressure
ulcers, diabetic foot ulcers, post-surgical wounds, first- and second-degree
burns, grafted and donor sites. Most recently, on March 8, 2010, we
received a 510(k) clearance from the FDA to market our Microcyn Skin and Wound
HydroGel for management of dermal irritation, sores, injuries and ulcers of
dermal tissue including itch and pain relief as a prescription and as an
over-the-counter product intended to relieve itch and pain from minor skin
irritations, lacerations, abrasions and minor burns.
In the
fourth quarter of 2007, we completed a Phase II randomized clinical trial,
which was designed to evaluate the effectiveness of Microcyn in mildly infected
diabetic foot ulcers with the primary endpoint of clinical cure or improvement
in signs and symptoms of infection according to guidelines of Infectious Disease
Society of America. We used 15 clinical sites and enrolled 48 evaluable patients
in three arms, using Microcyn alone, Microcyn plus an oral antibiotic and saline
plus an oral antibiotic. We announced the results of our Phase II trial in
March 2008. In the clinically evaluable population of the study, the clinical
success rate at visit four (test of cure) for patients treated with Microcyn
alone was 93.3% compared to 56.3% for the Levofloxacin plus saline-treated
patients. This study was not statistically powered, but the high clinical
success rate (93.3%) and the p-value (0.033) would suggest the difference is
meaningfully positive for the Microcyn-treated patients. Also, for this set of
data, the 95.0% confidence interval for the Microcyn-only arm ranged from 80.7%
to 100.0% while the 95.0% confidence interval for the Levofloxacin and saline
arm ranged from 31.9% to 80.6%; the confidence intervals do not overlap, thus
indicating a favorable clinical success for Microcyn compared to Levofloxacin.
At visit three (end of treatment) the clinical success rate for patients treated
with Microcyn alone was 77.8% compared to 61.1% for the Levofloxacin plus
saline-treated patients.
We
conducted a review meeting with the FDA in August 2008 to discuss the results of
our Phase II trial and our future clinical program. Following a review of
the Phase II data on Microcyn Technology for the treatment of mildly
infected diabetic foot ulcers, the FDA agreed:
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We
may move forward into the pivotal phase of our U.S. clinical program
for Microcyn Technology.
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There
were no safety issues relative to moving into this next clinical phase
immediately, and carcinogenicity studies will not be required for product
approval; and
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Clinical
requirements for efficacy and safety for a new drug application will be
appropriately accounted for within the agreed upon pivotal trial
designs.
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Two
pivotal clinical trials must be completed for submission of a new drug
application to the FDA for the treatment of mildly infected diabetic foot
ulcers. Commencement of these trials will be dependent upon the support of a
strategic partner. In the event that we successfully complete clinical trials
and obtain drug approval from the FDA, we may seek clearance for treatment of
other types of wounds. We are currently pursuing strategic partnerships to
assess potential applications for Microcyn in several other markets and
therapeutic categories, including respiratory, ophthalmology, dermatology,
dental and veterinary markets. FDA or other governmental approvals will be
required for any potential new products or new
indications.
The FDA
requirements for device and drug approvals are discussed in greater detail under
Government
Regulation.
Market
Opportunity — Key Limitations of Existing Treatments
Commonly
used topical antiseptics and antibiotics have limitations and side effects that
may constrain their usage. For example:
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antibiotics
and antiseptics can kill bacteria and cure infection but do not
independently accelerate wound
healing;
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many
antiseptics, including Betadine, hydrogen peroxide and Dakin’s solution,
are toxic, can destroy human cells and tissue, may cause allergic
reactions and can impede the wound healing
process;
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silver-based
products are expensive and require precise dosage and close monitoring by
trained medical staff to minimize the potential for tissue toxicity,
allergic reactions and bacterial
resistance;
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the
increase in antibiotic-resistant bacterial strains, such as MRSA, VRE, and
C. diff have compromised the effectiveness of some widely used topical and
systemic antibiotics, including Neosporin and
Bacitracin;
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oral
and systemic antibiotics often are not effective in treating topical
infections especially if the patient does not have adequate blood flow to
the wound and they can also cause serious side
effects; and
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growth
regulators, skin substitutes and vacuum-assisted closure accelerate wound
healing but do not cure infection.
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Our
Solution
We
believe the Microcyn has potential advantages over current methods of care in
the treatment of chronic and acute wounds, including the following:
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Cures
Infection. Our Phase II results and several
physician-based studies suggest that Microcyn may be effective in curing
and improving the signs and symptoms of
infections.
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Accelerates Wound
Healing. Based on numerous physician-based studies and
usage feedback from doctors, we believe that Microcyn may accelerate the
wound healing process independently of the benefits of curing the
infection.
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Wound Care Solution.
Our FDA 510(k) approved products are cleared as a medical
device for sale in the United States in wound cleaning, or debridement,
lubricating, moistening and dressing. Laboratory testing and physician
clinical studies further suggest that our 510(k) Microcyn products are
effective against a wide range of bacteria that causes infection in a
variety of acute and chronic wounds. In addition, because of its mechanism
of action, we believe Microcyn does not target specific strains of
bacteria, the practice of which has been shown to promote the development
of resistant bacteria. In physician clinical studies, our 510(k)
Microcyn has been used in conjunction with other wound care
therapeutic products. Data from these studies suggest that patients
generally experienced less pain, improved mobility and physical activity
levels and better quality of life.
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Non-irritating.
Our 510(k) product labels states that our 510(k) product,
which is based on our Microcyn , is non-irritating and non-sensitizing to
the skin and eyes. Throughout all our clinical trials and physician
clinical studies to date and since our first commercial sale of Microcyn60
in Mexico in 2004, we have received no reports of serious adverse events
related to the use of Microcyn products when used according to label
instructions.
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Ease of Use.
Our 510(k) product labels states that our 510(k) products
require no special handling precautions. Our products require no
preparation before use or at time of disposal, and caregivers can use our
products without significant training. In addition, Microcyn can be stored
at room temperature. Unlike other oxychlorine solutions, which are
typically stable for not more than 48 hours, our laboratory tests
show that Microcyn has a shelf life ranging from one to two years
depending on the size and type of packaging. Our products are also
designed to be complementary to most advanced technologies to treat
serious wounds, such as negative-pressure wound therapy, jet lavage and
tissue-engineered skin
substitutes.
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Cost-Effectiveness.
The treatment of many wounds requires extended hospitalization
and care, including the use of expensive systemic antibiotics. Infection
prolongs the healing time and necessitates increased use of systemic
antibiotics. We believe that Microcyn has the potential to cure infection,
accelerate healing time and, in certain cases, may help reduce the need
for systemic antibiotics, reduce the need for amputation and lead to
earlier hospital discharge, thereby lowering overall patient
cost.
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Microcyn
Platform Technology
Mechanism
of Action
We
believe Microcyn ability to reduce the use of antibiotics through prevention and
treatment of infections while promoting wound healing is based on its uniquely
engineered chemistry. As a result of our patented manufacturing process,
Microcyn is a proprietary solution of oxychlorine compounds that, among other
things, interact with and inactivate surface proteins on cell walls and
membranes of microorganisms. The function of these proteins are varied and play
significant roles in cell communication, nutrient and waste transport and other
required functions for cell viability. Once Microcyn surrounds single cell
microorganisms, it damages these proteins, causing the cell membrane to rupture,
leading to cell death, which we believe is caused by increased membrane
permeability and induced osmotic pressure imbalance. We continue to study the
exact mechanisms by which protein and structural components of the bacterial
cell walls and membranes, and the protein shell that surrounds a virus, are
affected by Microcyn. This destruction of the cell appears to occur through a
fundamentally different process than that which occurs as a result of contact
with a bleach-based solution because experiments have demonstrated that Microcyn
kills bleach-resistant bacteria. However, we believe the solution remains
non-irritating to human tissues because human cells have unique protective
mechanisms, are interlocked, and prevent Microcyn from targeting and surrounding
single cells topically on the body. Our laboratory tests suggest that our
solution does not penetrate and kill multi-cellular organisms and does not
damage or affect human DNA.
In
laboratory tests, Microcyn has been shown to destroy certain biofilms. A biofilm
is a complex cluster of microorganisms or bacteria marked by the formation of a
protective shell, allowing the bacteria to collect and proliferate. It is
estimated that over 65% of microbial infections in the body involve bacteria
growing as a biofilm. Bacteria living in a biofilm typically have significantly
different properties from free-floating bacteria of the same species. One result
of this film environment is increased resistance to antibiotics and to the
body’s immune system. In chronic wounds, biofilms interfere with the normal
healing process and halt or slow wound closure. Bacteria growing in biofilms can
become up to 1000-fold more resistant to antibiotics and other biocides as
compared to their planktonic counterparts. As a result, biofilm
infections cannot be effectively treated with conventional antibiotic
therapy. In our laboratory studies, Microcyn was shown to destroy two
common biofilms after five minutes of exposure.
In
recently published studies, Microcyn has been shown to significantly increase
the dilation of capillaries in wounds as indicated by higher levels of oxygen at
a wound site after the application of our product and also reduce inflammation
by inhibiting certain inflammatory responses from allergy-producing mast cells.
It is widely accepted that reducing chronic inflammation surrounding an injury
or wound is beneficial to wound healing. Our laboratory research suggests that
Microcyn’s interference with these cells is selective to only the inflammatory
response and does not interfere with other functions of these
cells.
Microcyn
Technology has demonstrated antimicrobial activity against numerous bacterial,
viral and fungal pathogens, including antibiotic-resistant strains, as evidenced
by passing results in numerous standardized laboratory microbiology tests
conducted on our 510(k) approved technology by a variety of certified
independent testing laboratories. Some of the pathogens against which Microcyn
has demonstrated antimicrobial activity are listed below:
Pathogen
Antibiotic-Resistant
Bacteria
Vancomycin
Resistant Enterococcus
faecalis (VRE)
Methicillin
Resistant Staphylococcus
aureus (MRSA)
Clostridium
difficile (C. diff)
Other
Bacteria
Acinetobacter
baumanii
Aspergillus
niger
Escherichia
coli
Escherichia
coli O157:H7
Mycobacterium
bovis
Pseudomonas
aeruginosa
Salmonella
typhi
Viruses
Human
Coronavirus
Human
Immunodeficiency Virus Type 1 — HIV
Influenza
A
Influenza
A Type H1N1
Rhinovirus
Type 37
Fungi
Candida
albicans
Trichophyton
mentagrophytes
In
addition to the above mentioned independent laboratory microbiology tests, a
study was completed and published in the Journal of Hospital Infection
in 2005, that showed that Microcyn exerts a wide range of antimicrobial
activity (Landa-Solis, González-Espinosa D, Guzman B, Snyder M, Reyes-Terán G,
Torres K and Gutiérrez AA. Microcyn: a novel super-oxidized water with neutral
pH and disinfectant activity. J Hosp Infect (UK) 61: 291-299).
Current
Regulatory Approvals and Clearances
All of
our current products are based on our Microcyn Technology platform. We are able
to modify the chemistry of Microcyn by changing the oxidation-reduction
potential, pH level and concentrations of specific ions or chemicals, which
allows us to manufacture a variety of solutions, each specifically designed for
maximum efficacy and safety by indication. The indications for our products vary
from country to country due to different regulatory requirements and standards
from jurisdiction to jurisdiction. The indications below are summaries of the
indications approved by the regulatory authority or authorities in the listed
jurisdiction. The similarly named products have similar formulations; however,
they may not have identical specifications due to varying requirements in
different jurisdictions’ regulatory agencies. The following is a list of the
regulatory approvals and clearances that Microcyn-based products have received
for our most significant or potentially significant markets:
Region
|
|
Approval
or
Clearance Type
|
|
Year
of Approval
or Clearance
|
|
Summary Indication
|
|
|
|
|
|
|
|
United
States
|
|
510(k)
|
|
2005
|
|
Moistening
and lubricating absorbent wound dressings for traumatic
wounds.
|
|
|
|
|
|
|
|
|
|
510(k)
|
|
2005
|
|
Moistening
and debriding acute and chronic dermal lesions.
|
|
|
|
|
|
|
|
|
|
510(k)
|
|
2006
|
|
Moistening
absorbent wound dressings and cleaning minor cuts.
|
|
|
|
|
|
|
|
|
|
510(k)
|
|
2009
|
|
Management
of exuding wounds such as leg ulcers, pressure ulcers, diabetic ulcers and
for the management of mechanically or surgically debridement of
wounds.
|
|
|
|
|
|
|
|
|
|
510(k)
|
|
2009
|
|
Debridement
of wounds, such as stage I-IV pressure ulcers, diabetic foot ulcers, post
surgical wounds, first and second burns, grafted and donor
sites.
|
|
|
510(k)
|
|
2010
|
|
Management
of dermal irritation, sores, injuries and ulcers of dermal tissue
including itch and pain relief
|
|
|
|
|
|
|
|
European
Union
|
|
CE
Mark
|
|
2004
|
|
Debriding,
irrigating and moistening acute and chronic wounds in comprehensive wound
treatment by reducing microbial load and creating moist
environment.
|
|
|
|
|
|
|
|
Mexico
|
|
Product
Registration
|
|
2004
|
|
Antiseptic
treatment of wounds and infected areas.
|
|
|
|
|
|
|
|
|
|
Product
Registration
|
|
2003
|
|
Antiseptic
disinfection solution for high level disinfection of medical instruments,
and/or equipment and clean-rooms, areas of medical instruments, equipment
and clean room areas.
|
|
|
|
|
|
|
|
Canada
|
|
Class II
Medical Device
|
|
2004
|
|
Moistening,
irrigating, cleansing and debriding acute and chronic dermal lesions,
diabetic ulcers and post-surgical wounds.
|
|
|
|
|
|
|
|
India(1)
|
|
Drug
License
|
|
2006
|
|
Cleaning
and debriding in wound management.
|
|
|
|
|
|
|
|
China
|
|
Medical
Device
|
|
2008
|
|
Reduces
the propagation of microbes in wounds and creates a moist environment for
wound healing.
|
Notes
(1)
|
Drug
license held by Indian distributor as required by Indian
law.
|
|
|
Clinical
Trials
We have
completed a proof-of-concept Phase II trial in the U.S., which demonstrated
the effectiveness of Microcyn Technology in mildly infected diabetic foot ulcers
with the primary endpoint of clinical cure and improvement of infection. We used
15 clinical sites and enrolled 48 evaluable patients in three arms, using
Microcyn alone, Microcyn plus an oral antibiotic and saline plus an oral
antibiotic. We announced the results of our Phase II trial in March 2008.
In the clinically evaluable population of the study, the clinical success rate
at visit four (test of cure) for Microcyn-alone-treated patients was 93.3%
compared to 56.3% for the levofloxacin plus saline-treated patients. This study
was not statistically powered, but the high clinical success rate (93.3%) and
the p-value (0.033) suggests the difference is meaningfully positive for the
Microcyn-treated patients. Also, for this set of data, the 95.0% confidence
interval for the Microcyn only arm ranged from 80.7% to 100% while the 95.0%
confidence interval for the levofloxacin and saline arm ranged from 31.9% to
80.6%; the confidence intervals do not overlap, indicating a favorable clinical
success for Microcyn compared to levofloxacin. At visit 3 (end of treatment),
the clinical success rate for patients treated with Microcyn-alone was 77.8%
compared to 61.1% for the levofloxacin plus saline-treated
patients.
Physician
Clinical Studies
In
addition to the Phase II trial mentioned above, several physicians and
scientists have conducted more than 28 clinical studies of Microcyn generating
data suggesting that the technology is non-irritating to healthy tissue, reduces
microbial load, accelerates wound healing, reduces pain, shortens treatment time
and may have the potential to reduce costs to healthcare providers and patients.
We have sponsored many of the physicians performing these studies by supplying
Microcyn-based products, unrestricted research grants, paying expenses or
providing honoraria. In some cases, the physicians who performed these studies
also hold equity in our Company. The studies were performed in the United
States, Europe, India, Pakistan, China and Mexico, and used various endpoints,
methods and controls (for example, saline, antiseptics and antibiotics). These
studies were not intended to be rigorously designed or controlled clinical
trials and, as such, did not have all of the controls required for clinical
trials used to support a new drug application submission to the FDA in that they
did not necessarily include blinding, randomization, predefined clinical
endpoints, use of placebo and active control groups or U.S. good clinical
practice requirements.
In many
cases the physicians who led these studies have published articles on their
studies and results. The following table lists publications and presentations at
peer-reviewed meetings from physicians who have completed studies on the use of
Microcyn Technology for wound care and wound irrigation.
Physician
|
|
Country
|
|
Number of Patients
|
|
Publication
|
|
|
|
|
|
|
|
David
E. Allie, M.D.(1)
|
|
U.S.
|
|
40
|
|
Allie
D. Super-Oxidized Dermacyn in Lower-Extremity Wounds. Wounds, 2006, 18
(Suppl), 3-6.
|
|
|
|
|
|
|
|
Tom
Wolvos, M.D.(2)
|
|
U.S.
|
|
26
|
|
Wolvos
TA. Advanced Wound Care with Stable, Super-Oxidized Water. A look at how
combination therapy can optimize wound healing. Wounds, 2006, 18
(Suppl), 11-13.
|
|
|
|
|
|
|
|
Cheryl
Bongiovanni, Ph.D.(3)
|
|
U.S.
|
|
8
|
|
Bongiovanni
CM. Superoxidized Water Improves Wound Care Outcomes in Diabetic Patients.
Diabetic Microvascular
Complications Today, 2006, May-Jun: 11-14.
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Bongiovanni
CM. Nonsurgical Management of Chronic Wounds in Patients with Diabetes.
Journal of Vascular
Ultrasound, 2006, 30: 215-218,
|
|
|
|
|
|
|
|
Luca
Dalla Paola, M.D.(4)
|
|
Italy
|
|
218
|
|
Dalla
Paola L, Brocco E, Senesi, A, Merico M, De Vido D, Assaloni R, DaRos R.
Super-Oxidized Solution (SOS) Therapy for Infected Diabetic Foot Ulcers.
Wounds, 2006,
vol. 18: 262-270
Dalla
Paola, L. Treating diabetic foot ulcers with super-oxidized water. Wounds, 2006, 18
(Suppl), 14-16
|
|
|
|
|
|
|
|
Alberto
Piagessi, M.D.(5)
|
|
Italy
|
|
33
|
|
Goretti
C, Mazzurco S, Ambrosini Nobili L, Macchiarini S, Tedeschi A, Palumbo F,
Scatena A, Rizzo L and Piaggesi A. Clinical Outcomes of Wide Postsurgical
Lesions in the Infected Diabetic Foot Managed With 2 Different Local
Treatment Tegimes Compared Using a Quasi-Experimental Study Design: A
Preliminary Communication. Int. J. Lower Extremity Wounds, 2007
6: 22-27.
|
|
|
|
|
|
|
|
Ariel
Miranda, M.D.(5)
|
|
Mexico
|
|
64
|
|
Miranda-Altamirano
A. Reducing Bacterial Infectious Complications from Burn Wounds. A look at
the use of Oculus Microcyn60 to treat wounds in Mexico. Wounds, 2006, 18
(Suppl), 17-19.
|
|
|
|
|
|
|
|
Lenka
Veverkova, M.D.(3)
|
|
Czech
Republic
|
|
27
|
|
Veverkova
L, Jedlicka V, Vesely M, Tejkalova R, Zabranska S, Capov I,
Votava M. Methicilin-resistent Staphylococcus aureus — problem in
health care. J Wound
Healing 2005, 2:201-202.
|
|
|
|
|
|
|
|
Elia
Ricci M.D.(6)
|
|
Italy
|
|
40
|
|
Ricci
E, Astolfi S, Cassino R. Clinical results about an antimicrobial solution
(Dermacyn Wound Care) in the treatment of infected chronic wounds.
17th Conference. EWMA Meeting 2005. Glasgow, UK. May 2-4, 2007. In
preparation for publication.
|
|
|
|
|
|
|
|
Alfredo
Barrera MD(5)
|
|
Mexico
|
|
40
|
|
Barrera-Zavala
A, Guillen-Rojas M, Escobedo-Anzures J, Rendon J, Ayala O &
Gutiérrez AA. A pilot study on source control of peritonitis with a
neutral pH — super oxidized solution16th World Congress of the
International, Association of Surgeons and Gastroenterologists (IASG).
Madrid, Spain. 25th-27th May, 2006.
|
|
|
|
|
|
|
|
D
Peterson MD
|
|
U.S.
|
|
5
|
|
Peterson
D, Hermann K, Niezgoda J, Dermacyn Effective in Treatment of Chronic
Wounds with Extensive Bioburden While Reducing Local Pain Levels.
Symposium on Advanced Wound Care and Wound Healing Society, Tampa, FL,
April 28-May 1, 2007.
|
|
|
|
|
|
|
|
Steenvoorde,
P.M.D, Van
Doorn,
L.P., M.A.,
Jacobi,
C.E, PhD &
Oskam,
J., M.D., PhD.(3)
|
|
Netherlands
|
|
10
|
|
An
unexpected effect of Dermacyn on infected leg ulcers, J Wound Care 2007, 16:
60-61.
|
|
|
|
|
|
|
|
Fermin
Martinez M.D.
|
|
Mexico
|
|
45
|
|
Martínez-De
Jesús FR, Ramos-De la Medina A, Remes-Troche JM, Armstrong DG, Wu SC,
Lázaro Martínez JL, Beneit-Montesinos JV. Efficacy and safety of neutral
pH superoxidised solution in severe diabetic foot infections. Int Wound J. 2007,
4:353-362.
|
|
|
|
|
|
|
|
Hadi
SF MD(3)
|
|
Pakistan
|
|
100
|
|
Hadi
SF, Khaliq T, Bilal N, Sikandar I, Saaiq M, Zubair M, Aurangzeb S.
Treating infected diabetic wounds with superoxidized water as anti-septic
agent: a preliminary experience. J Coll Physicians Surg
Pak. 2007, 17:740-743.
|
|
|
|
|
|
|
|
BT
Monaghan DPM(3)
|
|
Ireland
|
|
10
|
|
Monaghan
BT & Cundell JH. Dermacyn as the Local Treatment for Infected
Diabetic Foot Wounds. A case series. 5th Int. Symp. On the Diabetic
Foot. Noordwijkerhout. 2007, The Netherlands. May 9-12,
2007.
|
|
|
|
|
|
|
|
Fernando
Uribe MD(6)
|
|
Mexico
|
|
80
|
|
Uribe
F. Effect of neutral pH Superoxidized solution in the healing of diabetic
foot ulcers. 47(th) ICAAC Meeting. Poster L-1144. Chicago, IL. USA. Sept
17-20, 2007.
|
|
|
|
|
|
|
|
Ning
Fanggang MD(3)
|
|
China
|
|
20
|
|
Fanggang
N, Guoan Z. The clinical efficacy of Dermacyn on deep partial thickness
burn wounds.
|
|
|
|
|
|
|
|
Amar
Pal Suri DPM(6)
|
|
India
|
|
100
|
|
Suri
AP. The Effectiveness of Stable Neutral Super-oxidized Solution for the
Treatment of Infected Diabetic Foot Wounds. Diabetic Foot Global
Conference. Hollywood, CA. 13-15 March. 2008.
Submitted
for publication Jan, 2008.
|
|
|
|
|
|
|
|
Alberto
Piaggesi M.D.(5)
|
|
Italy
|
|
40
|
|
Piaggesi
A et al. A Randomized Controlled Trial to Examine the Efficacy
and Safety of Microcyn® Technology on wide post-surgical lesions in the
infected diabetic foot. The International Journal of Lower Extremity
Wounds, March 9, 2010 .
|
|
|
|
|
|
|
|
Robert
G. Frykberg, DPM, MPH(6)
|
|
U.S.
|
|
23
|
|
RG.
Frykberg, RG, Tallis A, Tierney, E.: Wound Healing in Chronic Lower
Extremity Wounds Comparing Super-Oxidized Solution (SOS) vs. Saline.
Diabetic Foot Global Conference. Hollywood, Ca. 13-15 March.
2008.
|
Matthew
Regulski DPM(5)
|
|
U.S.
|
|
18
|
|
Regulski
M, Floros R, Petranto R, Migliori V, Alster H, Pfeiffer D. Efficacy
and Compatibility of Combination Therapy with Super-Oxidized Solution and
a Skin Substitute for Lower Extremity Wounds. Symposium on Advanced Wound
Care and Wound Healing Society, San Diego, CA, April 24-28,
2008.
|
|
|
|
|
|
|
|
Adam
Landsman DPM PhD,(5)
Andres
A Gutierrez MD PhD(1) &
Oculus
Collaborative Group
|
|
U.S.
|
|
48
|
|
Landsman
A, Blume P, Palladino M, Jordan D, Vayser DJ, Halperin G, Gutierrez AA and
Oculus Collaborative Group. An Open Label, Three Arm Study of the Safety
and Clinical Efficacy of Topical Wound Care vs. Oral Levofloxacin vs.
Combined Therapy for Mild Diabetic Foot Infections. Diabetic Foot Global
Conference. Hollywood, CA. 13-15 March. 2008.
|
|
|
|
|
|
|
|
Christopher
Gauland, DPM(3)
|
|
U.S.
|
|
5
|
|
Gauland
C., Sickle Cell Disease, Symposium on Advanced Wound Care and Wound
Healing Society, San Diego, CA, April 24-28, 2008.
|
|
|
|
|
|
|
|
Hadi,
SF
|
|
Pakistan
|
|
100
|
|
Hadi
SF, Khaliq T, Bilal N, Sikandar I, Saaiq M, Zubair M, Aurangzeb S.
Treating infected diabetic wounds with superoxidized water as anti-septic
agent J Coll Physicians
Surg Pak.
2007, 17:740-743.
|
|
|
|
|
|
|
|
Chittoria
RV
|
|
India
|
|
20
|
|
Chittoria
RK, Yootla M, Sampatrao LM, Raman SV. The role of super oxidized solution
in the management of diabetic foot ulcer: our
experience.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nepal Med Coll J. 2007,
9:125-128.
|
|
|
|
|
|
|
|
Anand
A
|
|
India
|
|
50
|
|
Anand,
AR Comparative Efficacy and Tolerability of Oxum against Povidone Iodine
Topical Application in the Post-caesarean Section Wound Management
Indian Medical Gazette
December 2007, 498-505.
|
|
|
|
|
|
|
|
Dharap
SB
|
|
India
|
|
30
|
|
Dharap
SB, Ghag GS, Kulkarni KP, Venkatesh V. Efficacy and safety of Oxum in the
treatment of the venous ulcer. J Indian Med Assoc
2008, 106:326-330.
|
|
|
|
|
|
|
|
Dhusia
H
|
|
India
|
|
41
|
|
Dhusia
H, Comparative Efficacy and Tolerability of Microcyn Superoxidized
Solution (Oxum) against Povidone Iodine Application in Orodental
Infections. Indian
Medical Gazette February 2008, 68-75.
|
|
|
|
|
|
|
|
Khairulasri
MG
|
|
Malaysia
|
|
178
|
|
Khairulasri
MG, Ramzisham ARM, Ooi JSM, Zamrin DM. Dermacyn irrigation in reducing
sternotomy wound infection following coronary artery bypass graft surgery
11th Scientific Conference. Kota Bharu, Malaysia
2008.
|
|
|
|
|
|
|
|
Christopher
J. Gauland DPM (3)
|
|
U.S.
|
|
16
|
|
Comparison
of Microcyn and Amerigel in the Podiatric Clinical
Setting
|
(1)
|
indicates
that the physician is a stockholder and was a member of our Medical and
Business Advisory Board that we dissolved in April 2007, and was a paid
consultant and received research grants, expense payments, honorarium and
Microcyn to complete the study.
|
(2)
|
indicates
that the physician was a paid consultant, received expenses in connection
with corporate development and licensing evaluations and is a warrant
holder.
|
(3)
|
indicates
that the physician received Microcyn to complete the
study.
|
(4)
|
indicates
that the physician is a paid consultant, was a member of our Medical and
Business Advisory Board, which we dissolved in April 2007, and received
expense payments and Microcyn to complete the
study.
|
(5)
|
indicates
that the physician received payments, expense payments and Microcyn to
complete the study.
|
(6)
|
indicates
that the physician received reimbursement of travel expenses and received
Microcyn to complete the study.
|
In
addition to the above articles and publications, several additional papers on
the basic science of the technology have been published or have been submitted
for peer review and publication, including:
Researchers
|
|
Country
|
|
Publication
|
Landa-Solis,
González-Espinosa D.,
Guzman
B, Snyder M, Reyes-Terán G.,
Torres
K, and Gutiérrez AA(1)
|
|
Mexico
|
|
Microcyn™
a novel super-oxidized water with neutral pH and disinfectant activity.
J Hosp Infect (UK) 2005, 61:
291-299.
|
|
|
|
|
|
Gutiérrez,
AA(1)
|
|
U.S.
|
|
The
science behind stable, super-oxidized water. Exploring the various
applications of super-oxidized solutions. Wounds, 2006, 18
(Suppl), 7-10.
|
|
|
|
|
|
Dalla
Paola L,Faglia E(2)
|
|
Italy
|
|
Treatment
of diabetic foot ulcer: an overview. Strategies for clinical approach.
Current Diabetes
Reviews, 2006, 2, 431-447 431.
|
|
|
|
|
|
González-Espinosa
D, Pérez-Romano L,
Guzman
Soriano B, Arias E,
Bongiovanni,
CM, Gutiérrez AA(1),(3)
|
|
Mexico,
U.S.
|
|
Effects
of neutral super-oxidized water on human dermal fibroblasts in vitro.
International Wound
Journal, 2007, 4: 241-250.
|
|
|
|
|
|
Medina-Tamayo
J, Balleza-Tapia H,
López,
X, Cid, ME,
González-Espinosa,
D, Gutiérrez AA,
González-Espinosa
C(1)
|
|
Mexico,
U.S.
|
|
Super-oxidized
water inhibits IgE-antigen- induced degranulation and cytokine release in
mast cells. International
Immunopharmacology 2007. 2007, 7:1013-1024.
|
|
|
|
|
|
Le
Duc Q
|
|
UK
|
|
Le
Duc Q, Breetveld M, Middelkoop E, Scheper RJ, Ulrich MMW, Gibbs S. A
cytotoxic analysis of antiseptic medication on skin substitutes and
autograft. Br J
Dermatology. 2007, 157:33-40.
|
|
|
|
|
|
McCurdy
B
|
|
U.S.
|
|
McCurdy
B. Emerging Innovations in Treatment. Podiatry Today 2006,
19: 40-48.
|
|
|
|
|
|
Zahumensky
E
|
|
Czech
Republic
|
|
Infections
and diabetic foot syndrome in field practice. Vnitr Lek.
2006;52:411-416.
|
|
|
|
|
|
Rose
R., Setlow B., Monroe A., Mallozzi
M.,
Driks A., Setlow P.(5)
|
|
U.S.
|
|
Comparison
of the properties of Bacillus subtilis spores made in liquid or on agar
plates. Submitted 2008.
|
|
|
|
|
|
Paul
M., Setlow B. and Setlow P.(5)
|
|
U.S.
|
|
The
killing of spores of Bacillus subtilis by
Microcyn(TM), a stable superoxided water. Submitted
2008.
|
|
|
|
|
|
Thatcher
E(4),AA
Gutierrez(1)
|
|
U.S.
|
|
The
Anti-Bacterial Efficacy of a New Super-Oxidized Solution. 47(th) ICAAC
Meeting. Chicago, IL. USA. Sept 17-20, 2007.
|
|
|
|
|
|
Michael
Taketa-Graham(5), Gutierrez
AA(1),
Thatcher E(4)
|
|
U.S.
|
|
The
Anti-Viral Efficacy of a New Super-Oxidized Solution.. 47th ICAAC
Meeting. Poster L-1144. Chicago, IL. USA. Sept 17-20,
2007.
|
|
|
|
|
|
Dardine
J, Martinez C, Thatcher E(4)
|
|
U.S.
|
|
Activity
of a pH Neutral Super-Oxidized Solution Against Bacteria Selected for
Sodium Hypochlorite Resistance. 47th ICAAC Meeting. Poster L-1144.
Chicago, IL. USA. Sept 17-20, 2007.
|
|
|
|
|
|
Sauer
K, Vazquez G, Thatcher E,
Northey
R & Gutierrez AA(1),(4),(5)
|
|
U.S.
|
|
Neutral
super-oxidized solution is effective in killing P. aeruginosa
biofilms. Biofouling, Vol 25, No. 1, January 2009,
45-54.
|
Notes
(1)
|
Dr. Gutierrez
was our Director of Medical Affairs and conducted the study during his
employment by our Company.
|
(2)
|
Dr. Dalla
Paola was a member of our Medical and Business Advisory Board, which we
dissolved in April 2007, and received expense payments and Microcyn to
complete the study.
|
(3)
|
Indicates
that investigator received Microcyn to complete the
study.
|
(4)
|
Dr. Thatcher
is a full-time consultant to us, is a stockholder, previously served on
our board of directors, and received Microcyn to complete the
study.
|
(5)
|
Dr. Northey
is our Director of Research and Development and conducted the study during
his employment by our Company.
|
Sales
and Marketing
Our
products are purchased by hospitals, physicians, nurses, and other healthcare
practitioners who are the primary caregivers to patients being treated for acute
or chronic wounds or undergoing surgical procedures. We currently
make Microcyn Technology available, both as prescription and over-the-counter
products, under our six 510(k) approvals in the United States, primarily through
a partnership with a combination of Advocos, a specialty U.S. contract
sales organization, and a commissioned sales force.
In the
quarter ending December 31, 2008, we initiated an aggressive
commercialization into the podiatry market in the United States. In the second
quarter of 2009, we expanded this sales effort to include wound care centers,
hospitals, nursing homes, urgent care clinics and home healthcare. Additionally,
we are in the process of introducing Microcyn-based consumer healthcare products
both in the United States and Mexico. Initially, these include animal and human
wound care.
On
January 26, 2009, we announced a strategic revenue-sharing partnership with
Vetericyn, Inc, now named Innovacyn, Inc., which is wholly-owned by
the Company’s former director, Robert Burlingame. Pursuant to this
agreement, we granted Innovacyn exclusive rights to market the Microcyn
Technology in the North American animal healthcare market. As part of this
agreement, we will not incur marketing or sales expenses, but will share in all
revenues. On May 13, 2010, Innovacyn received notice from Health Canada they can
market these products in the Canadian market.
Our
partner, Union Springs Pharmaceuticals, a subsidiary of the Drug Enhancement
Company of America, has marketed MyClyns, an over-the-counter “first responder”
pen application, with Microcyn in the United States since January
2008.
Our
prescription dental partner, OroScience, Inc. has the exclusive right to sell
prescription dental products in the United States and Europe subject to certain
annual minimum payments and has filed for 510(k) approval to market our product
for use as an oral rinse in liquid form and for oral mucositis in a gel
form.
We have
announced the commercialization of a Microcyn hydrogel for both wound care and
dermatology which received multiple 510(k) approvals in the U.S. We intend
to pursue additional approvals in Europe, China, India and Mexico and plan to
initiate commercialization upon obtaining these approvals.
We
currently rely on exclusive agreements with country-specific distributors for
the sale of Microcyn-based products in Europe in Italy, Netherlands, Germany,
Czech Republic, Sweden, Finland and Denmark.
In
Mexico, we market our products through our established distribution network and
direct sales organization. We have a dedicated contract sales force, including
salespeople, nurses and clinical support staff responsible for selling Microcyn
to private and public hospitals and to retail pharmacies.
In India,
we entered into an exclusive agreement with Alkem Laboratories, a large
pharmaceutical company in India, for the sale of Microcyn-based products in
India and Nepal.
In China,
we signed an exclusive distribution agreement with China Bao Tai, which in March
2008 secured marketing approval from the Chinese State Food and Drug
Administration. In April 2010 we terminated the distribution
agreement. We will continue to supply China Bao Tai with product on a
non-exclusive basis. We are currently in the process of setting up a
broader distribution network in China.
Throughout
the rest of the world, we intend to use strategic partners and distributors, who
have a significant sales, marketing and distribution presence in their
respective countries. We have established partners and distribution channels for
our wound care products in Bangladesh, Pakistan, Singapore, United Arab Emirates
and Saudi Arabia.
Manufacturing
We
manufacture Microcyn through a proprietary electrolysis process within a
multi-chamber system. We are able to control the passage of ions through
proprietary membranes, yielding electrolyzed water with only trace amounts of
chlorine. This process is fundamentally different from the processes for
manufacturing hydrogen peroxide and bleach and, we believe, is the basis for our
technology’s effectiveness and safety. Our manufacturing process produces very
little waste, which is disposed of as water after a simple non-toxic chemical
treatment.
We
manufacture our products in San Diego using a contract manufacturing
organization located in San Diego, California. We also manufacture our
products at our facility in Zapopan, Mexico and Petaluma, California where we
also conduct research and development. We have developed an automated
manufacturing process and conduct quality assurance testing on each production
batch in accordance with current U.S. Current Good Manufacturing Practice.
Our facilities are required to meet and maintain regulatory standards applicable
to the manufacture of pharmaceutical and medical device products. Our United
States facilities are certified and comply with U.S. Current Good
Manufacturing Practice medical device Quality Systems Regulation, and
International Organization for Standardization, or ISO, guidelines. Our Mexico
facility has been approved by the Ministry of Health and is also ISO
certified.
Our
machines are subjected to a series of tests, which is part of a validation
protocol mandated by U.S. Current Good Manufacturing Practice, Quality
Systems Regulation, and ISO requirements. This validation is designed to ensure
that the final product is consistently manufactured in accordance with product
specifications at all manufacturing sites. Certain materials and components used
in manufacturing our machines are proprietary to us.
We
believe we have a sufficient number of machines to produce an adequate amount of
Microcyn to meet anticipated future requirements for at least the next two
years. As we expand into new geographic markets, we may establish additional
manufacturing facilities to better serve those new markets.
Intellectual
Property
Our
success depends in part on our ability to obtain and maintain proprietary
protection for our product technology and know-how, to operate without
infringing proprietary rights of others, and to prevent others from infringing
our proprietary rights. We seek to protect our proprietary position by, among
other methods, filing, when possible, U.S. and foreign patent applications
relating to our technology, inventions and improvements that are important to
our business. We also rely on trade secrets, know-how, continuing technological
innovation, and in-licensing opportunities to develop and maintain our
proprietary position.
As of
May 20, 2010, we own two issued U.S. patents, one issued European
patents, one issued Japanese patent, 17 pending U.S. patent applications
and 86 foreign pending patent applications generally relating to electrolyzed
water. These applications include two provisional U.S. patent applications
for which the time to file non-provisional U.S. patent applications has not
expired and two international Patent Cooperation Treaty applications for which
the time to file counterpart national phase applications has not yet expired.
Our portfolio of issued and pending applications can be divided into two groups.
The first group includes two issued U.S. patents, one issued European
patents, one issued Japanese patent, two pending U.S. patent applications,
and four foreign patent applications that relate to early generation
electrolyzed water product, methods of using electrolyzed water, and aspects of
the method and apparatus for manufacturing electrolyzed water. The second group
includes 14 pending U.S. patent applications (including provisional
U.S. patent applications) and 82 foreign patent applications (including
international Patent Cooperation Treaty applications) that relate to Microcyn,
the method and apparatus for manufacturing Microcyn, and its uses. In
addition to our own patents and applications, we have licensed technology
developed in Japan relating to an electrolyzed water solution, methods of
manufacture and electrolytic cell designs. This license includes
eight issued Japanese patents.
Although
we work to protect our technology, we cannot assure you that any patent will be
issued from our currently pending patent applications or from future patent
applications. We also cannot assure you that the scope of any patent protection
will exclude competitors or provide competitive advantages to us, that any of
our patents will be held valid if subsequently challenged, or that others will
not claim rights in or ownership of our patents and proprietary rights.
Furthermore, we cannot assure you that others have not developed or will not
develop similar products, will not duplicate any of our products or design
around our patents.
We have
also filed for trademark protection for marks used with our Microcyn products in
each of the United States, Europe, Canada, certain countries in Central and
South America, including Mexico and Brazil, and certain countries in Asia,
including Japan, China, the Republic of Korea, India and Australia. In addition
to patents and trademarks, we rely on trade secret and other intellectual
property laws, nondisclosure agreements and other measures to protect our
intellectual property rights. We believe that in order to have a competitive
advantage, we must develop and maintain the proprietary aspects of our
technologies. We require our employees, consultants and advisors to execute
confidentiality agreements in connection with their employment, consulting or
advisory relationship with us. We also require our employees, consultants and
advisors whom we expect to work on our products to agree to disclose and assign
to us all inventions made in the course of our working relationship with them,
while using our property or which relate to our business. Despite any measures
taken to protect our intellectual property, unauthorized parties may attempt to
copy aspects of our products or to wrongfully obtain or use information that we
regard as proprietary.
Competition
The wound
and skin care market is highly competitive. We compete with a number of large,
well-established and well-funded companies that sell a broad range of wound care
products, including topical anti-infectives and antibiotics, as well as some
advanced wound technologies, such as skin substitutes, growth factors and
sophisticated delayed release silver-based dressings. We believe the principal
competitive factors in our target market include improved patient outcomes, such
as time in the hospital, healing time, adverse events, safety of products, ease
of use, stability, pathogen killing and cost effectiveness.
Our
products compete with a variety of products used for wound cleaning, debriding
and moistening, including sterile saline, and chlorhexadine-based products, and
they also compete with a large number of prescription and over-the-counter
products for the prevention and treatment of infections, including topical
anti-infectives, such as Betadine, silver sulfadiazine, hydrogen peroxide,
Dakin’s solution and hypochlorous acid, and topical antibiotics, such as
Neosporine, Mupirocin and Bacitracin. Currently, no single anti-infective
product dominates the chronic or acute wound markets because many of the
products have serious limitations or tend to inhibit the wound healing
process.
Our
products can replace the use of sterile saline for debriding and moistening a
dressing as well as for use as a complementary product with many advanced wound
care technologies, such as the VAC Therapy System from Kinetic Concepts Inc.,
skin substitute products from Smith & Nephew, Advanced BioHealing,
Integra Life Sciences, Life Cell, Organogenesis and Ortec International, and
ultrasound from Celleration. We believe that Microcyn Technology can enhance the
effectiveness of many of these advanced wound care technologies. Because
Microcyn is competitive with some of the large wound care companies’ products
and complementary to others, we may compete with such companies in some product
lines and complement such companies in other product lines.
While
many companies are able to produce oxychlorine formulations, their products,
unlike ours, typically become unstable after a relatively short period of time.
One such company, PuriCore, sells electrolysis machines used to manufacture
brine-based oxidized water primarily as a sterilant. Additionally, we believe
that the Microcyn Technology is the only stable anti-infective therapeutic
available in the world today that simultaneously cures or improves infection
while also accelerating wound healing through increased blood flow to the wound
bed and reduction of inflammation.
Some of
our competitors enjoy several competitive advantages, including:
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significantly
greater name recognition;
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established
relationships with healthcare professionals, patients and third-party
payors;
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established
distribution networks;
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additional
product lines and the ability to offer rebates or bundle products to offer
discounts or incentives;
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greater
experience in conducting research and development, manufacturing,
obtaining regulatory approval for products and
marketing; and
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greater
financial and human resources for product development, sales and marketing
and patient support.
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Government
Regulation
Government
authorities in the United States at the federal, state and local levels and
foreign countries extensively regulate, among other things, the research,
development, testing, manufacture, labeling, promotion, advertising,
distribution, sampling, marketing, and import and export of pharmaceutical
products, biologics and medical devices. All of our products in development will
require regulatory approval or clearance by government agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous pre-clinical and clinical trials and other approval procedures of the
FDA and similar regulatory authorities in foreign countries. Various federal,
state, local and foreign statutes and regulations also govern testing,
manufacturing, safety, labeling, storage, distribution and record-keeping
related to such products and their marketing. The process of obtaining these
approvals and clearances, and the subsequent process of maintaining substantial
compliance with appropriate federal, state, local, and foreign statutes and
regulations, require the expenditure of substantial time and financial
resources. In addition, statutes, rules, regulations and policies may change and
new legislation or regulations may be issued that could delay such
approvals.
Medical
Device Regulation
Microcyn
has received six 510(k) clearances for use as a medical device in wound care
management (cleaning, debridement, lubricating, moistening and dressing)
including for acute and chronic wounds. Any future product candidates or new
applications using Microcyn that are classified as medical devices will need
clearance by the FDA.
Medical
devices, such as Microcyn Wound Care, are subject to FDA clearance and extensive
regulation under the Federal Food Drug and Cosmetic Act. Under the Federal Food
Drug and Cosmetic Act, medical devices are classified into one of three classes:
Class I, Class II or Class III. The classification of a device
into one of these three classes generally depends on the degree of risk
associated with the medical device and the extent of control needed to ensure
safety and effectiveness. Devices may also be designated
unclassified. Unclassified devices are legally marketed pre-amendment device for
which a classification regulation has yet to be finalized and for which a
pre-market approval is not required.
Class I
devices are those for which safety and effectiveness can be assured by adherence
to a set of general controls. These general controls include compliance with the
applicable portions of the FDA’s Quality System Regulation, which sets forth
good manufacturing practice requirements; facility registration, device listing
and product reporting of adverse medical events; truthful and non-misleading
labeling; and promotion of the device only for its cleared or approved intended
uses. Class II devices are also subject to these general controls, and any
other special controls as deemed necessary by the FDA to ensure the safety and
effectiveness of the device. Review and clearance by the FDA for these devices
is typically accomplished through the 510(k) pre-market notification procedure.
When 510(k) clearance is sought, a sponsor must submit a pre-market notification
demonstrating that the proposed device is substantially equivalent to a legally
marketed device. If the FDA agrees that the proposed device is substantially
equivalent to the predicate device, then 510(k) clearance to market will be
granted. After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance or could
require a pre-market approval.
Clinical
trials are almost always required to support a pre-market approval application
and are sometimes required for a 510(k) pre-market notification. These trials
generally require submission of an application for an investigational device
exemption. An investigational device exemption must be supported by pre-clinical
data, such as animal and laboratory testing results, which show that the device
is safe to test in humans and that the study protocols are scientifically sound.
The investigational device exemption must be approved in advance by the FDA for
a specified number of patients, unless the product is deemed a non-significant
risk device and is eligible for more abbreviated investigational device
exemption requirements.
Both
before and after a medical device is commercially distributed, manufacturers and
marketers of the device have ongoing responsibilities under FDA regulations. The
FDA reviews design and manufacturing practices, labeling and record keeping, and
manufacturers’ required reports of adverse experiences and other information to
identify potential problems with marketed medical devices. Device manufacturers
are subject to periodic and unannounced inspection by the FDA for compliance
with the Quality System Regulation, which sets forth the Current Good
Manufacturing Practice requirements that govern the methods used in, and the
facilities and controls used for, the design, manufacture, packaging, servicing,
labeling, storage, installation and distribution of all finished medical devices
intended for human use.
FDA
regulations prohibit the advertising and promotion of a medical device for any
use outside the scope of a 510(k) clearance or pre-market approval or for
unsupported safety or effectiveness claims. Although the FDA does not regulate
physicians’ practice of medicine, the FDA does regulate manufacturer
communications with respect to off-label use.
If the
FDA finds that a manufacturer has failed to comply with FDA laws and regulations
or that a medical device is ineffective or poses an unreasonable health risk, it
can institute or seek a wide variety of enforcement actions and remedies,
ranging from a public warning letter to more severe actions such
as:
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fines,
injunctions and civil penalties;
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recall
or seizure of products;
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operating
restrictions, partial suspension or total shutdown of
production;
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refusing
requests for 510(k) clearance or pre-market approval approval of new
products;
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withdrawing
510(k) clearance or pre-market approval approvals already
granted; and
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The FDA
also has the authority to require repair, replacement or refund of the cost of
any medical device.
The FDA
also administers certain controls over the export of medical devices from the
United States, as international sales of medical devices that have not received
FDA clearance are subject to FDA export requirements. Additionally, each foreign
country subjects such medical devices to its own regulatory requirements. In the
European Union, a single regulatory approval process has been created, and
approval is represented by the CE Mark.
Combination
Products
Combination
products are therapeutic and diagnostic products that combine drugs, devices,
and/or biological products. Because combination products involve components that
would normally be regulated under different types of regulatory authorities, and
frequently by different FDA Centers, they raise challenging regulatory, policy,
and review management challenges. Differences in regulatory pathways for each
component can impact the regulatory processes for all aspects of product
development and management, including preclinical testing, clinical
investigation, marketing applications, manufacturing and quality control,
adverse event reporting, promotion and advertising, and post-approval
modifications
The FDA
has established an Office of Combination Products to address the challenges
associated with the review and regulation of combination products. The Office of
Combination Products assists in determining strategies for the approval of
drug/delivery combinations and assuring agreement within the FDA on review
responsibilities. To the extent permitted under the Federal Food Drug
and Cosmetic Act and current FDA policy, we may seek regulatory review for
potential device/drug combination products under the medical device provisions,
rather than under the new drug provisions, of the Federal Food Drug and Cosmetic
Act. We intend to pursue such strategies as permitted by the law and
as directed by the FDA either through guidance documents or
discussions.
If the
FDA concludes that any or all of our new combination products must be handled
under the new drug provisions of the Federal Food Drug and Cosmetic Act,
substantially greater regulatory requirements and approval times will be
imposed. Use of a modified new product with a previously unapproved new drug
likely will be handled as part of the new drug application for the new drug
itself. Under these circumstances, the device component will be handled as a
drug accessory and will be approved, if ever, only when the new drug application
itself is approved. In general, the drug requirements under the Federal Food
Drug and Cosmetic Act are more onerous than medical device requirements. These
requirements could have a substantial adverse impact on our ability to
commercialize our products and our operations.
Pharmaceutical
Product Regulation
Any
pharmaceutical product candidates that are regulated by the FDA will require
approval before we can market or sell them as drugs. Any future product
candidates or new applications using Microcyn that are classified as drugs will
need approval by the FDA.
In the
United States, the FDA regulates drugs under the Federal Food Drug and Cosmetic
Act and implementing regulations that are adopted under the Act. In the case of
biologics, the FDA regulates such products under the Public Health Service Act.
If we fail to comply with the applicable requirements under these laws and
regulations at any time during the product development process, approval
process, or after approval, we may become subject to administrative or judicial
sanctions. These sanctions could include the FDA’s refusal to approve pending
applications, withdrawals of approvals, clinical holds, warning letters, product
recalls, product seizures, total or partial suspension of our operations,
injunctions, fines, civil penalties or criminal prosecution. Any agency
enforcement action could have a material adverse effect on us. The FDA also
administers certain controls over the export of drugs and biologics from the
United States.
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Pre-Clinical
Phase. The pre-clinical phase involves the discovery,
characterization, product formulation and animal testing necessary to
prepare an investigational new drug application for submission to the FDA.
The investigational new drug application must be accepted by the FDA
before the drug can be tested in
humans.
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Clinical
Phase. The clinical phase of development follows a
successful investigational new drug submission and involves the activities
necessary to demonstrate the safety, tolerability, efficacy, and dosage of
the substance in humans, as well as the ability to produce the substance
in accordance with U.S. Current Good Manufacturing Practice
requirements. Data from these activities are compiled in a new drug
application,, or for biologic products a biologics license application,
for submission to the FDA requesting approval to market the
drug.
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Post-Approval
Phase. The post-approval phase follows FDA approval of
the new drug application or biologics license application, and involves
the production and continued analytical and clinical monitoring of the
product. The post-approval phase may also involve the development and
regulatory approval of product modifications and line extensions,
including improved dosage form, of the approved product, as well as for
generic versions of the approved drug, as the product approaches
expiration of patent or other exclusivity
protection.
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Each of
these three phases is discussed further below.
Pre-Clinical
Phase. The development of a new pharmaceutical agent begins
with the discovery or synthesis of a new molecule. These agents are screened for
pharmacological activity using various animal and tissue models, with the goal
of selecting a lead agent for further development. Additional studies are
conducted to confirm pharmacological activity, to generate safety data, and to
evaluate prototype dosage forms for appropriate release and activity
characteristics. Once the pharmaceutically active molecule is fully
characterized, an initial purity profile of the agent is established. During
this and subsequent stages of development, the agent is analyzed to confirm the
integrity and quality of material produced. In addition, development and
optimization of the initial dosage forms to be used in clinical trials are
completed, together with analytical models to determine product stability and
degradation. A bulk supply of the active ingredient to support the necessary
dosing in initial clinical trials must be secured. Upon successful completion of
pre-clinical safety and efficacy studies in animals, an investigational new drug
application submission is prepared and provided to the FDA for review prior to
commencement of human clinical trials. The investigational new drug application
consists of the initial chemistry, analytical, formulation and animal testing
data generated during the pre-clinical phase. The review period for an
investigational new drug application submission is 30 days, after which, if
no comments are made by the FDA, the product candidate can be studied in Phase I
clinical trials.
Clinical
Phase. Following successful submission of an investigational
new drug application, the sponsor is permitted to conduct clinical trials
involving the administration of the investigational product candidate to human
subjects under the supervision of qualified investigators in accordance with
good clinical practice. Clinical trials are conducted under protocols detailing,
among other things, the objectives of the study and the parameters to be used in
assessing the safety and the efficacy of the drug. Each protocol must be
submitted to the FDA as part of the investigational new drug application prior
to beginning the trial. Each trial must be reviewed, approved and conducted
under the auspices of an independent Institutional Review Board, and each trial,
with limited exceptions, must include the patient’s informed consent. Typically,
clinical evaluation involves the following time-consuming and costly three-phase
sequential process:
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Phase
I. Phase I human clinical trials are conducted on a
limited number of healthy individuals to determine the drug’s safety and
tolerability and include biological analyses to determine the availability
and metabolization of the active ingredient following administration. The
total number of subjects and patients included in Phase I clinical trials
varies, but is generally in the range of 20 to
80 people.
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Phase
II. Phase II clinical trials involve administering
the drug to individuals who suffer from the target disease or condition to
determine the drug’s potential efficacy and ideal dose. These clinical
trials are typically well controlled, closely monitored, and conducted in
a relatively small number of patients, usually involving no more than
several hundred subjects. These trials require scale up for manufacture of
increasingly larger batches of bulk chemical. These batches require
validation analysis to confirm the consistent composition of the
product.
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Phase
III. Phase III clinical trials are performed after
preliminary evidence suggesting effectiveness of a drug has been obtained
and safety (toxicity), tolerability, and an ideal dosing regimen have been
established. Phase III clinical trials are intended to gather
additional information about the effectiveness and safety that is needed
to evaluate the overall benefit-risk relationship of the drug and to
complete the information needed to provide adequate instructions for the
use of the drug. Phase III trials usually include from several
hundred to several thousand
subjects.
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Throughout
the clinical phase, samples of the product made in different batches are tested
for stability to establish shelf life constraints. In addition, large-scale
production protocols and written standard operating procedures for each aspect
of commercial manufacture and testing must be
developed. Phase I, II, and III testing may not be
completed successfully within any specified time period, if at all. The FDA
closely monitors the progress of each of the three phases of clinical trials
that are conducted under an investigational new drug application and may, at its
discretion, reevaluate, alter, suspend, or terminate the testing based upon the
data accumulated to that point and the FDA’s assessment of the risk/benefit
ratio to the patient. Clinical investigators and companies may be subject to
pre-approval, routine, or “for cause” inspections by the FDA for compliance with
Good Clinical Practice, and FDA regulations governing clinical investigations.
The FDA may suspend or terminate clinical trials, or a clinical investigator’s
participation in a clinical trial, at any time for various reasons, including a
finding that the subjects or patients are being exposed to an unacceptable
health risk. The FDA can also request additional clinical trials be conducted as
a condition of product approval. Additionally, new government requirements may
be established that could delay or prevent regulatory approval of our products
under development. Furthermore, institutional review boards, which are
independent entities constituted to protect human subjects in the institutions
in which clinical trials are being conducted, have the authority to suspend
clinical trials in their respective institutions at any time for a variety of
reasons, including safety issues.
Post-Approval
Phase. After approval, we are still subject to continuing
regulation by the FDA, including, but not limited to, record keeping
requirements, submitting periodic reports to the FDA, reporting of any adverse
experiences with the product, and complying with drug sampling and distribution
requirements. In addition, we are required to maintain and provide updated
safety and efficacy information to the FDA. We are also required to comply with
requirements concerning advertising and promotional labeling. In that regard,
our advertising and promotional materials must be truthful and not misleading.
We are also prohibited from promoting any non-FDA approved or “off-label”
indications of products. Failure to comply with those requirements could result
in significant enforcement action by the FDA, including warning letters, orders
to pull the promotional materials, and substantial fines. Also, quality control
and manufacturing procedures must continue to conform to U.S. Current Good
Manufacturing Practice after approval.
Drug and
biologics manufacturers and their subcontractors are required to register their
facilities and products manufactured annually with the FDA and certain state
agencies and are subject to periodic routine and unannounced inspections by the
FDA to assess compliance with U.S. Current Good Manufacturing Practice
regulations. Facilities may also be subject to inspections by other federal,
foreign, state, or local agencies. In addition, approved biological drug
products may be subject to lot-by-lot release testing by the FDA before these
products can be commercially distributed. Accordingly, manufacturers must
continue to expend time, money, and effort in the area of production and quality
control to maintain compliance with U.S. Current Good Manufacturing Practice and
other aspects of regulatory compliance. Future FDA inspections may identify
compliance issues at our facilities or at other facilities that may disrupt
production or distribution, or require substantial resources to
correct.
In
addition, following FDA approval of a product, discovery of problems with a
product or the failure to comply with requirements may result in restrictions on
a product, manufacturer, or holder of an approved marketing application,
including withdrawal or recall of the product from the market or other voluntary
or FDA-initiated action that could delay further marketing. Newly discovered or
developed safety or effectiveness data may require changes to a product’s
approved labeling, including the addition of new warnings and contraindications.
Also, the FDA may require post-market testing and surveillance to monitor the
product’s safety or efficacy, including additional clinical studies, known as
Phase IV trials, to evaluate long-term effects.
Other
Regulation in the United States
Health
Care Coverage and Reimbursement by Third-Party Payors
Commercial
success in marketing and selling our products depends, in part, on the
availability of adequate coverage and reimbursement from third-party health care
payors, such as government and private health insurers and managed care
organizations. Third-party payors are increasingly challenging the pricing of
medical products and services. Government and private sector initiatives to
limit the growth of health care costs, including price regulation, competitive
pricing, and managed-care arrangements, are continuing in many countries where
we do business, including the United States. These changes are causing the
marketplace to be more cost-conscious and focused on the delivery of more
cost-effective medical products. Government programs, including Medicare and
Medicaid, private health care insurance companies, and managed-care plans
control costs by limiting coverage and the amount of reimbursement for
particular procedures or treatments. This has created an increasing level of
price sensitivity among customers for our products. Some third-party payors also
require that a favorable coverage determination be made for new or innovative
medical devices or therapies before they will provide reimbursement of those
medical devices or therapies. Even though a new medical product may have been
cleared or approved for commercial distribution, we may find limited demand for
the product until adequate coverage and reimbursement have been obtained from
governmental and other third-party payors.
Fraud
and Abuse Laws
In the
United States, we are subject to various federal and state laws pertaining to
healthcare fraud and abuse, which, among other things, prohibit the offer or
acceptance of remuneration intended to induce or in exchange for the purchase of
products or services reimbursed under a federal healthcare program and the
submission of false or fraudulent claims with the government. These laws include
the federal Anti-Kickback Statute, the False Claim Act and comparable state
laws. These laws regulate the activities of entities involved in the healthcare
industry, such as us, by limiting the kinds of financial arrangements such
entities may have with healthcare providers who use or recommend the use of
medical products (including for example, sales and marketing programs, advisory
boards and research and educational grants). In addition, in order to ensure
that healthcare entities comply with healthcare laws, the Office of Inspector
General of the U.S. Department of Health and Human Services recommends that
healthcare entities institute effective compliance programs. To assist in the
development of effective compliance programs, the Office of Inspector General
has issued model Compliance Program Guidance, materials for a variety of
healthcare entities which, among other things, identify practices to avoid that
may implicate the federal Anti-Kickback Statute and other relevant laws and
describes elements of an effective compliance program. While compliance with the
Compliance Program Guidance materials is voluntary, a recent California law
requires pharmaceutical and devices manufacturers to initiate compliance
programs that incorporate the Compliance Program Guidance and the July 2002
Pharmaceuticals Research and Manufacturers of America Code on Interactions with
Healthcare Professionals.
Due to
the scope and breadth of the provisions of some of these laws, it is possible
that some of our practices might be challenged by the government under one or
more of these laws in the future. Violations of these laws, which are discussed
more fully below, can lead to civil and criminal penalties, damages,
imprisonment, fines, exclusion from participation in Medicare, Medicaid and
other federal health care programs, and the curtailment or restructuring of our
operations. Any such violations could have a material adverse effect on our
business, financial condition, results of operations or cash flows.
Anti-Kickback
Laws. Our operations are subject to federal and state
anti-kickback laws. The federal Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, receiving, offering or providing
remuneration directly or indirectly to induce either the referral of an
individual for a good or service reimbursed under a federal healthcare program,
or the furnishing, recommending, or arranging of a good or service, for which
payment may be made under a federal healthcare program, such as Medicare or
Medicaid. The definition of “remuneration” has been broadly interpreted to
include anything of value, including such items as gifts, discounts, the
furnishing of supplies or equipment, waiver of co-payments, and providing
anything at less than its fair market value. Because the Anti-Kickback Statute
makes illegal a wide variety of common (even beneficial) business arrangements,
the Office of Inspector General was tasked with issuing regulations, commonly
known as “safe harbors,” that describe arrangements where the risk of illegal
remuneration is minimal. As long as all of the requirements of a particular safe
harbor are strictly met, the entity engaging in that activity will not be
prosecuted under the federal Anti-Kickback Statute. The failure of a transaction
or arrangement to fit precisely within one or more safe harbors does not
necessarily mean that it is illegal or that prosecution will be pursued.
However, business arrangements that do not fully satisfy an applicable safe
harbor may result in increased scrutiny by government enforcement authorities,
such as the Office of Inspector General. Our agreements to pay compensation to
our advisory board members and physicians who conduct clinical trials or provide
other services for us may be subject to challenge to the extent they do not fall
within relevant safe harbors under state and federal anti-kickback laws. In
addition, many states have adopted laws similar to the federal Anti-Kickback
Statute which apply to the referral of patients for healthcare services
reimbursed by Medicaid, and some have adopted such laws with respect to private
insurance. Violations of the Anti-Kickback Statute are subject to significant
fines and penalties and may lead to a company being excluded from participating
in federal health care programs.
False Claims
Laws. The federal False Claims Act prohibits knowingly filing
a false claim, knowingly causing the filing of a false claim, or knowingly using
false statements to obtain payment from the federal government. Under the False
Claims Act, such suits are known as “qui tam” actions. Individuals may file suit
on behalf of the government share in any amounts received by the government
pursuant to a settlement. In addition, certain states have enacted laws modeled
after the federal False Claims Act under the Deficit Reduction Act of 2005,
where the federal government created financial incentives for states to enact
false claims laws consistent with the federal False Claims Act. As more states
enact such laws, we expect the number of qui tam lawsuits to increase. Qui tam
actions have increased significantly in recent years, causing greater numbers of
healthcare companies to have to defend a false claims action, pay fines or be
excluded from Medicare, Medicaid or other federal or state government healthcare
programs as a result of investigations arising out of such
actions.
HIPAA. Two federal
crimes were created under the Health Insurance Portability and Accountability
Act of 1996, or HIPAA: healthcare fraud and false statements relating to
healthcare matters. The healthcare fraud statute prohibits knowingly and
willfully executing a scheme to defraud any healthcare benefit program,
including private payors. The false statements statute prohibits knowingly and
willfully falsifying, concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in connection with the
delivery of or payment for healthcare benefits, items or services.
Health
Information Privacy and Security
Individually
identifiable health information is subject to an array of federal and state
regulation. Federal rules promulgated pursuant to HIPAA regulate the use and
disclosure of health information by “covered entities.” Covered entities include
individual and institutional health care providers from which we may receive
individually identifiable health information. These regulations govern, among
other things, the use and disclosure of health information for research
purposes, and require the covered entity to obtain the written authorization of
the individual before using or disclosing health information for research.
Failure of the covered entity to obtain such authorization could subject the
covered entity to civil and criminal penalties. We may experience delays and
complex negotiations as we deal with each entity’s differing interpretation of
the regulations and what is required for compliance. Also, where our customers
or contractors are covered entities, including hospitals, universities,
physicians or clinics, we may be required by the HIPAA regulations to enter into
“business associate” agreements that subject us to certain privacy and security
requirements. In addition, many states have laws that apply to the use and
disclosure of health information, and these laws could also affect the manner in
which we conduct our research and other aspects of our business. Such state laws
are not preempted by the federal privacy law where they afford greater privacy
protection to the individual. While activities to assure compliance with health
information privacy laws are a routine business practice, we are unable to
predict the extent to which our resources may be diverted in the event of an
investigation or enforcement action with respect to such laws.
Foreign
Regulation
Whether
or not we obtain FDA approval for a product, we must obtain approval of a
product by the applicable regulatory authorities of foreign countries before we
can commence clinical trials or marketing of the product in those countries. The
approval process varies from country to country, and the time may be longer or
shorter than that required for FDA approval. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement also
vary greatly from country to country. Although governed by the applicable
country, clinical trials conducted outside of the United States typically are
administered under a three-phase sequential process similar to that discussed
above for pharmaceutical products.
European
Union Regulation
Medical Device
Regulation. Our Dermacyn products are classified as medical
devices in the European Union. In order to sell our medical device products
within the European Union, we are required to comply with the requirements of
the Medical Devices Directive, and its national implementations, including
affixing CE Marks on our products. In order to comply with the Medical Devices
Directive, we must meet certain requirements relating to the safety and
performance of our products and, prior to marketing our products, we must
successfully undergo verification of our product’s regulatory compliance, or
conformity assessment.
Medical
devices are divided into three regulatory classes: Class I, Class IIb
and Class III. The nature of the conformity assessment procedures depends
on the regulatory class of the product. In order to comply with the examination,
we completed, among other things, a risk analysis and presented clinical data,
which demonstrated that our products met the performance specifications claimed
by us, provided sufficient evidence of adequate assessment of unwanted side
effects and demonstrated that the benefits to the patient outweigh the risks
associated with the device. We will be subject to continued supervision and will
be required to report any serious adverse incidents to the appropriate
authorities. We will also be required to comply with additional national
requirements that are beyond the scope of the Medical Devices
Directive.
We
received our CE certificate for Dermacyn Wound Care as a Class IIb medical
device in February 2005. We may not be able to maintain the requirements
established for CE Marks for any or all of our products or be able to produce
these products in a timely and profitable manner while complying with the
requirements of the Medical Devices Directive and other regulatory
requirements. The classification of Dermacyn as a Class IIb medical
device is under evaluation with the Notified Body. The classification may be
elevated to Class III as a result of post-market scientific information and
clinical observation.
Marketing Authorizations for
Drugs. In order to obtain marketing approval of any of our
drug products in Europe, we must submit for review an application similar to a
U.S. new drug application to the relevant authority. In contrast to the
United States, where the FDA is the only authority that administers and approves
new drug applications, in Europe there are multiple authorities that administer
and approve these applications. Marketing Authorizations in Europe expire after
five years but may be renewed.
We
believe that any drug candidate will be reviewed by the Committee for Medicinal
Products for Human Use, on behalf of the European Medicines Agency. Based upon
the review of the Committee for Medicinal Products for Human Use, the European
Medicines Agency provides an opinion to the European Commission on the safety,
quality and efficacy of the drug. The decision to grant or refuse an
authorization is made by the European Commission.
Approval
of Marketing Applications can take several months to several years, or may be
denied. This approval process can be affected by many of the same factors
relating to safety, quality and efficacy as in the approval process for new drug
applications in the United States. As in the United States, European drug
regulatory authorities can require us to perform additional non-clinical studies
and clinical trials. The need for such studies or trials, if imposed, may delay
marketing approval and involve unanticipated costs. Inspection of clinical
investigation sites by a competent authority may also be required as part of the
regulatory approval procedure. In addition, as a condition of marketing
approval, regulatory agencies in Europe may require post-marketing surveillance
to monitor for adverse effects, or other additional studies may be required as
deemed appropriate. The terms of any approval, including labeling content, may
be more restrictive than expected and could affect the marketability of a
product. In addition, after approval for the initial indication, further
clinical studies are usually necessary to gain approval for any additional
indications.
European Good Manufacturing
Process. In the European Union, the manufacture of
pharmaceutical products and clinical trial supplies is subject to good
manufacturing practice as set forth in the relevant laws and guidelines.
Compliance with good manufacturing practice is generally assessed by the
competent regulatory authorities. They may conduct inspections of relevant
facilities, and review manufacturing procedures, operating systems and personnel
qualifications. In addition to obtaining approval for each product, in many
cases each drug manufacturing facility must be approved. Further inspections may
occur over the life of the product.
Mexico. The
Ministry of Health is the authority in charge of sanitary controls in Mexico.
Sanitary controls are a group of practices related to the orientation,
education, testing, verification and application of security measures and
sanctions exercised by the Ministry of Health. The Ministry of Health acts by
virtue of the Federal Commission for the Protection against Sanitary Risks, or
COFEPRIS, a decentralized entity of the Ministry of Health whose mission is to
protect the population against sanitary risks, by means of centralized sanitary
regulations, controls and by raising public awareness.
The
Ministry of Health is responsible for the issuance of Official Mexican Standards
and specifications for drugs subject to the provisions of the General Health
Law, which govern the process and specifications of drugs, including the
obtaining, preparing, manufacturing, maintaining, mixing, conditioning,
packaging, handling, transporting, distributing, storing and supplying of
products to the public at large. In addition, a medical device is defined as a
device that may contain antiseptics or germicides used in surgical practice or
in the treatment of continuity solutions, skin injuries or its
attachments.
Regulations
applicable to medical devices and drugs are divided into two sections: the
business that manufactures the medical device or drug and the product
itself.
Manufacturing a Medical Device or
Drug. Under the General Health Law, a business that
manufactures drugs is either required to obtain a Sanitary Authorization or to
file an Operating Notice. Our Mexico subsidiary, Oculus Technologies of Mexico,
S.A. de C.V. is considered a business that manufactures medical devices and
therefore is not subject to a Sanitary Authorization, but rather only an
Operating Notice.
In
addition to its Operating Notice, our Mexico subsidiary has obtained a “Good
Processing Practices Certificate” issued by Mexican Federal Commission for the
Protection against Sanitary Risks, which demonstrates that the manufacturing of
Microcyn at the facility located in Zapopan, Mexico, operates in accordance with
the applicable official standards.
Commercialization of Drugs and
Medical Devices. Drugs and medical devices should be
commercialized in appropriate packaging containing labels printed in accordance
with specific official standards. For medical devices, there are no specific
standards or regulations related to the labeling of the product, but rather only
a general standard related to the labeling for all types of products to be
commercialized in Mexico. Advertising of medical devices is regulated in the
General Health Law and in the specific regulations of the General Health Law
related to advertising. Generally, the advertising of medical devices is subject
to a permit only in the case that such advertising is directed to the general
public.
Medical Devices and Drugs as a
Product. To produce, sell or distribute medical devices, a
Sanitary Registry is required in accordance with the General Health Law and the
Regulation for Drugs. Such registry is granted for a term of five years, and
this term may be extended. The Sanitary Registry may be revoked if the
interested party does not request the extension in the term or the product or
the manufacturer or the raw material is changed without the permission of the
Ministry of Health.
The
Ministry of Health classifies the medical devices in three classes:
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Class I. Devices
for which safety and effectiveness have been duly proved and are generally
not used inside the body;
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Class II. Devices
that may vary with respect to the material used for its fabrication or in
its concentration and generally used in the inside of the body for a
period no greater than
30 days; and
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Class III. New
devices or recently approved devices in the medical practice or those used
inside the body and which shall remain inside the body for a period
greater than 30 days.
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Violation
of these regulations may result in the revocation of the registrations or
approvals, and, in addition, economic fines. In some cases, such violations may
constitute criminal actions.
In
addition, regulatory approval of prices is required in most countries other than
the United States, which could result in lengthy negotiations delaying our
ability to commercialize our products. We face the risk that the prices which
result from the regulatory approval process would be insufficient to generate an
acceptable return.
Research
and Development
Research
and development expense consists primarily of personnel expenses, clinical and
regulatory services and supplies. For the years ended March 31, 2010 and
2009, research and development expense amounted to $1,996,000 and $6,252,000,
respectively. None of this expense was borne by our customers.
Our
Employees
As of
May 26, 2010, we had 43 full-time employees and 6 part-time
employees. We are not a party to any collective bargaining agreements. We
believe our relations with our employees are good.
Available
Information
Our
website is located at www.oculusis.com. We make available free of charge on our
website our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those
reports, as soon as reasonably practicable after we electronically file or
furnish such materials to the Securities and Exchange Commission. Our website
and the information contained therein or connected thereto are not intended to
be incorporated into this annual report on Form 10-K.
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
incurred net losses of $8,232,000 and $17,656,000 for the years ended
March 31, 2010 and 2009, respectively. At March 31, 2010, our
accumulated deficit amounted to $117,037,000. During the year ended
March 31, 2010, net cash used in operating activities amounted to
$6,639,000. At March 31, 2010, our working capital amounted to $6,315,000.
We expect to continue incurring losses for the foreseeable future and may raise
additional capital to pursue product development initiatives, penetrate markets
for the sale of our products and continue as a going concern. We believe that we
have access to capital resources through possible public or private equity
offerings, debt financings, corporate collaborations or other means. If the
economic climate in the U.S. does not improve or continues to deteriorate,
our ability to raise additional capital could be negatively impacted. If we are
unable to secure additional capital, we may be required to curtail our research
and development initiatives and take additional measures to reduce costs in
order to conserve our cash in amounts sufficient to sustain operations and meet
our obligations. These measures could cause significant delays in our efforts to
commercialize our products in the U.S., which is critical to the realization of
our business plan and to future operations.
Declining general
economic or business conditions may have a negative impact on our business.
Concerns
over inflation, energy costs, geopolitical issues, the availability and cost of
credit, the U.S. mortgage market and a declining real estate market in the
U.S. have contributed to increased volatility and diminished expectations
for the global economy and expectations of slower global economic growth going
forward. These factors, combined with volatile oil prices, declining business
and consumer confidence and increased unemployment, have precipitated a global
economic slowdown. If the economic climate in the U.S. does not improve or
continues to deteriorate, our business, including our patient population, our
suppliers and our third-party payors, could be negatively affected, resulting in
a negative impact on our business.
Our inability to
raise additional capital on acceptable terms in the future may cause
us to
curtail certain operational activities, including regulatory trials, sales
and marketing, and
international operations, in order to reduce costs and sustain the business, and
would have a material adverse effect on our business and financial condition.
We expect
capital outlays and operating expenditures to increase over the next several
years as we work to conduct regulatory trials, commercialize our products and
expand our infrastructure. We may need to raise additional capital to, among
other things:
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fund
our clinical trials and preclinical
studies;
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sustain
commercialization of our current products or new
products;
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expand
our manufacturing capabilities;
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increase
our sales and marketing efforts to drive market adoption and address
competitive developments;
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acquire
or license technologies; and
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finance
capital expenditures and our general and administrative
expenses.
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Our
present and future funding requirements will depend on many factors,
including:
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the
progress and timing of our clinical
trials;
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the
level of research and development investment required to maintain and
improve our technology position;
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cost
of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights;
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our
efforts to acquire or license complementary technologies or acquire
complementary businesses;
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changes
in product development plans needed to address any difficulties in
commercialization;
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competing
technological and market
developments; and
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changes
in regulatory policies or laws that affect our
operations.
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If we
raise additional funds by issuing equity securities, dilution to our
stockholders could result. Any equity securities issued also may provide for
rights, preferences or privileges senior to those of holders of our common
stock. If we raise additional funds by issuing debt securities, these debt
securities would have rights, preferences and privileges senior to those of
holders of our common stock, and the terms of the debt securities issued could
impose significant restrictions on our operations. If we raise additional funds
through collaborations and licensing arrangements, we might be required to
relinquish significant rights to our technologies or products, or grant licenses
on terms that are not favorable to us. A failure to obtain adequate funds may
cause us to curtail certain operational activities, including regulatory trials,
sales and marketing, and international operations, in order to reduce costs and
sustain the business, and would have a material adverse effect on our business
and financial condition.
We do not have
the necessary regulatory approvals to market Microcyn as a drug in the
United
States.
We have
obtained six 510(k) clearances in the United States that permit us to sell
Microcyn-based products as medical devices. 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 to the FDA and obtain FDA
approval.
The FDA
approval process is expensive and uncertain, requires detailed and comprehensive
scientific and other data and generally takes several years. Despite the time
and expense exerted, approval is never guaranteed. Even if we obtain FDA
approval to sell Microcyn as a drug, we may not be able to successfully
commercialize Microcyn as a drug in the United States and may never recover the
substantial costs we have invested in the development of our Microcyn-based
products.
Delays or adverse
results in clinical trials could result in increased costs to us and delay our
ability to generate revenue.
Clinical
trials can be long and expensive, and the outcome of clinical trials is
uncertain and subject to delays. It may take several years to complete clinical
trials, if at all, and a product candidate may fail at any stage of the clinical
trial process. The length of time required varies substantially according to the
type, complexity, novelty and intended use of the product candidate. Interim
results of a preclinical study or clinical trial do not necessarily predict
final results, and acceptable results in preclinical studies or early clinical
trials may not be repeatable in later subsequent clinical trials. The
commencement or completion of any of our clinical trials may be delayed or
halted for a variety of reasons, including the following:
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insufficient
funds to continue our clinical
trials;
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the
FDA requirements for approval, including requirements for testing efficacy
or safety, may change;
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the
FDA or other regulatory authorities do not approve a clinical trial
protocol;
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patients
do not enroll in clinical trials at the rate we
expect;
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delays
in reaching agreement on acceptable clinical trial agreement terms with
prospective sites;
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delays
in obtaining institutional review board approval to conduct a study at a
prospective site;
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third
party clinical investigators do not perform our clinical trials on our
anticipated schedule or consistent with the clinical trial protocol and
good clinical practices, or the third party organizations do not perform
data collection and analysis in a timely or accurate
manner; and
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governmental
regulations or administrative actions are
changed.
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We do not
know whether future clinical trials will demonstrate safety and efficacy
sufficiently to result in additional FDA approvals. While a number of physicians
have conducted clinical studies assessing the safety and efficacy of Microcyn
for various indications, the data from these studies is not sufficient to
support approval of Microcyn as a drug in the United States.
The FDA
and other regulatory bodies may also change standards and acceptable trial
procedures required for a showing of safety and efficacy. For example, until
recently, the FDA accepted non-inferiority clinical trials, or clinical trials
that show that a new treatment is equivalent to standard treatment, as the
standard for anti-infective drug approvals. On October 12, 2007, the FDA
released draft guidance entitled Antibacterial Drug Products: Use of
Non-inferiority 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.
The
developing, testing, manufacturing, marketing and selling of medical technology
products are subject to extensive regulation by numerous governmental
authorities in the United States and other countries. The process of obtaining
regulatory clearance and approval of medical technology products is costly and
time consuming. Even though the underlying product formulation may be the same
or similar, our products are subject to different regulations and approval
processes depending upon their intended use.
To obtain
regulatory approval of our products as drugs in the United States, we must first
show that our products are safe and effective for target indications through
preclinical studies (laboratory and animal testing) and clinical trials (human
testing). The FDA generally clears marketing of a medical device through the
510(k) pre-market clearance process if it is demonstrated that the new product
has the same intended use and the same or similar technological characteristics
as another legally marketed Class II device, such as a device already
cleared by the FDA through the 510(k) premarket notification process, and
otherwise meets the FDA’s requirements. Product modifications, including
labeling the product for a new intended use, may require the submission of a new
510(k) clearance and FDA approval before the modified product can be
marketed.
The
outcomes of clinical trials are inherently uncertain. In addition, we do not
know whether the necessary approvals or clearances will be granted or delayed
for future products. The FDA could request additional information, changes to
formulation or clinical testing that could adversely affect the time to market
and sale of products as drugs. If we do not obtain the requisite regulatory
clearances and approvals, we will be unable to commercialize our products as
drugs or devices and may never recover any of the substantial costs we have
invested in the development of Microcyn.
Distribution
of our products outside the United States is subject to extensive government
regulation. These regulations, including the requirements for approvals or
clearance to market, the time required for regulatory review and the sanctions
imposed for violations, vary from country to country. We do not know whether we
will obtain regulatory approvals in such countries or that we will not be
required to incur significant costs in obtaining or maintaining these regulatory
approvals. In addition, the export by us of certain of our products that have
not yet been cleared for domestic commercial distribution may be subject to FDA
export restrictions. Failure to obtain necessary regulatory approvals, the
restriction, suspension or revocation of existing approvals or any other failure
to comply with regulatory requirements would have a material adverse effect on
our future business, financial condition, and results of
operations.
If our products
do not gain market acceptance, our business will suffer because we might not be able
to fund future operations.
A number
of factors may affect the market acceptance of our products or any other
products we develop or acquire, including, among others:
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the
price of our products relative to other treatments for the same or similar
treatments;
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the
perception by patients, physicians and other members of the health care
community of the effectiveness and safety of our products for their
indicated applications and
treatments;
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our
ability to fund our sales and marketing
efforts; and
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the
effectiveness of our sales and marketing
efforts.
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If our
products do not gain market acceptance, we may not be able to fund future
operations, including developing, testing and obtaining regulatory approval for
new product candidates and expanding our sales and marketing efforts for our
approved products, which would cause our business to suffer.
If our
competitors develop products similar to Microcyn, we may need to modify
or alter our
business strategy, which may delay the achievement of our
goals.
Competitors
may develop products with similar characteristics to Microcyn. Such similar
products marketed by larger competitors can hinder our efforts to penetrate the
market. As a result, we may be forced to modify or alter our business and
regulatory strategy and sales and marketing plans, as a response to changes in
the market, competition and technology limitations, among others. Such
modifications may pose additional delays in achieving our
goals.
We intend to
license or collaborate with third parties in various potential markets,
and events
involving these strategic partners or any future collaboration 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 or maintaining a direct sales force in each market. We may incur
significant costs in the use of third parties to identify and assist in
establishing relationships with potential collaborators.
To
penetrate our target markets, we may need to enter into additional collaborative
agreements to assist in the development and commercialization of products. For
example, depending upon our analysis of the time and expense involved in
obtaining FDA approval to sell a product to treat open wounds, we may choose to
license our technology to a third party as opposed to pursuing commercialization
ourselves. Establishing strategic collaborations is difficult and
time-consuming. Potential collaborators may reject collaborations based upon
their assessment of our financial, regulatory or intellectual property position
and our internal capabilities. Our discussions with potential collaborators may
not lead to the establishment of new collaborations on favorable terms and may
have the potential to provide collaborators with access to our key intellectual
property filings and next generation formations. We have limited control over
the amount and timing of resources that our current collaborators or any future
collaborators devote to our collaborations or potential products. These
collaborators may breach or terminate their agreements with us or otherwise fail
to conduct their collaborative activities successfully and in a timely manner.
Further, our collaborators may not develop or commercialize products that arise
out of our collaborative arrangements or devote sufficient resources to the
development, manufacture, marketing or sale of these products. By entering into
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, and several regional distributors. We
plan for a more aggressive commercialization and product launch in the event we
obtain drug approval from the FDA or obtain other clearance or approval with
wound healing claims. Developing a sales force is expensive and time consuming,
and the lack of qualified sales personnel could delay or limit the success of
our product launch. Our domestic sales force, if established, will be competing
with the sales operations of our competitors, which are better funded and more
experienced. We may not be able to develop domestic sales capacity on a timely
basis or at all.
Our dependence on
a commission-based sales force and distributors for sales could limit or prevent
us from selling our products and from
realizing long-term revenue growth.
We
currently depend on a commission-based sales force and distributors to sell
Microcyn in the United States, Europe and other countries and intend to continue
to sell our products primarily through a commission-based sales force and
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 a
commission-based sales force and distributors to sell Microcyn. Our existing
commission-based sales force and distribution agreements are generally
short-term in duration, and we may need to pursue alternate partners if the
other parties to these agreements terminate or elect not to renew their
agreements. If we are unable to retain our current commission-based sales force
and distributors for any reason, we must replace them with alternate salespeople
and distributors experienced in supplying the wound care market, which could be
time-consuming and divert management’s attention from other operational matters.
In addition, we will need to attract additional distributors to expand the
geographic areas in which we sell Microcyn. Distributors may not commit the
necessary resources to market and sell our products to the level of our
expectations, which could harm our ability to generate revenues. In addition,
some of our distributors may also sell products that compete with ours. In some
countries, regulatory licenses must be held by residents of the country. For
example, the regulatory approval for one product in India is owned and held by
our Indian distributor. If the licenses are not in our name or under our
control, we might not have the power to ensure their ongoing effectiveness and
use by us. If current or future distributors do not perform adequately, or we
are unable to locate distributors in particular geographic areas, we may not
realize long-term revenue growth.
If we fail to
comply with ongoing regulatory requirements, or if we experience unanticipated
problems with our products, these products could be subject to restrictions or
withdrawal from the market.
Regulatory
approvals or clearances that we currently have and that we may receive in the
future are subject to limitations on the indicated uses for which the products
may be marketed, and any future approvals could contain requirements for
potentially costly post-marketing follow-up studies. If the FDA determines that
our promotional materials or activities constitute promotion of an unapproved
use or we otherwise fail to comply with FDA regulations, we may be subject to
regulatory enforcement actions, including a warning letter, injunction, seizure,
civil fine or criminal penalties. In addition, the manufacturing, labeling,
packaging, adverse event reporting, storing, advertising, promoting,
distributing 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,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 and, 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 Environmental Protection Agency, European notified
bodies, Mexican regulatory agencies and other foreign regulatory bodies, which
may result in lot failures or product recalls. If we are unable to obtain
quality internal and external components, mechanical and electrical parts, if
our software contains defects or is corrupted, or if we are unable to attract
and retain qualified technicians to manufacture our products, our manufacturing
output of Microcyn, or any other product candidate based on our platform that we
may develop, could fail to meet required standards, our regulatory approvals
could be delayed, denied or revoked, and commercialization of one or more of our
Microcyn-based products may be delayed or foregone. Manufacturing processes that
are used to produce the smaller quantities of Microcyn needed for clinical tests
and current commercial sales may not be successfully scaled up to allow
production of significant commercial quantities. Any failure to manufacture our
products to required standards on a commercial scale could result in reduced
revenues, delays in generating revenue and increased costs.
Our competitive
position depends on our ability to protect our intellectual property
and our
proprietary technologies.
Our
ability to compete and to achieve and maintain profitability depends on our
ability to protect our intellectual property and proprietary technologies. We
currently rely on a combination of patents, patent applications, trademarks,
trade secret laws, confidentiality agreements, license agreements and invention
assignment agreements to protect our intellectual property rights. We also rely
upon unpatented know-how and continuing technological innovation to develop and
maintain our competitive position. These measures may not be adequate to
safeguard our Microcyn Technology. In addition, we granted a security interest
in our assets, excluding our intellectual property under certain circumstances,
under a loan and security agreement. 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 two U.S. patents have 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 are issued may not be
sufficiently broad to prevent third parties from producing competing substitutes
and may be infringed, designed around, or invalidated by third parties. Even
issued patents may later be found to be invalid, or may be modified or revoked
in proceedings instituted by third parties before various patent offices or in
courts. For example, our European patent that was issued on May 30, 2007, was
revoked by the Opposition Division of the European Patent Office in December,
2009 following opposition proceedings instituted by a
competitor.
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.
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The
policies we use to protect our trade secrets may not be effective in preventing
misappropriation of our trade secrets by others. In addition, confidentiality
and invention assignment agreements executed by our employees, consultants and
advisors may not be enforceable or may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use
or disclosures. We cannot be certain that the steps we have taken will prevent
the misappropriation and use of our intellectual property in the United States,
or in foreign countries where the laws may not protect our proprietary rights as
fully as in the United States.
We may face
intellectual property infringement claims that could be time-consuming,
costly to
defend and could result in our loss of significant rights and, in the
case of patent
infringement claims, the assessment of treble damages.
On
occasion, we may receive notices of claims of infringement, misappropriation or
misuse of other parties’ proprietary rights. We may have disputes regarding
intellectual property rights with the parties that have licensed those rights to
us. We may also initiate claims to defend our intellectual property.
Intellectual property litigation, regardless of its outcome, is expensive and
time-consuming, could divert management’s 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 party’s patent) to the party claiming infringement,
develop non-infringing technology, stop selling our products or using technology
that contains the allegedly infringing intellectual property or enter into
royalty or license agreements that may not be available on acceptable or
commercially practical terms, if at all. Our failure to develop non-infringing
technologies or license the proprietary rights on a timely basis could harm our
business. In addition, modifying our products to exclude infringing technologies
could require us to seek re-approval or clearance from various regulatory bodies
for our products, which would be costly and time consuming. Also, we may be
unaware of pending patent applications that relate to our technology. Parties
making infringement claims on future issued patents may be able to obtain an
injunction that would prevent us from selling our products or using technology
that contains the allegedly infringing intellectual property, which could harm
our business.
Our ability to
generate revenue will be diminished if we are unable to obtain acceptable prices
or an adequate level of reimbursement from third-party payors of healthcare
costs.
The
continuing efforts of governmental and other third-party payors, including
managed care organizations such as health maintenance organizations, or HMOs, to
contain or reduce costs of health care may affect our future revenue and
profitability, and the future revenue and profitability of our potential
customers, suppliers and collaborative or license partners and the availability
of capital. For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, governmental and private payors have limited the growth of health care
costs through price regulation or controls, competitive pricing programs and
drug rebate programs. Our ability to commercialize our products successfully
will depend in part on the extent to which appropriate coverage and
reimbursement levels for the cost of our Microcyn products and related treatment
are obtained from governmental authorities, private health insurers and other
organizations, such as HMOs.
There is
significant uncertainty concerning third-party coverage and reimbursement of
newly approved medical products and drugs. Third-party payors are increasingly
challenging the prices charged for medical products and services. Also, the
trend toward managed healthcare in the United States and the concurrent growth
of organizations such as HMOs, as well as legislative proposals to reform
healthcare or reduce government insurance programs, may result in lower prices
for or rejection of our products. The cost containment measures that health care
payors and providers are instituting and the effect of any health care reform
could materially and adversely affect our ability to generate
revenues.
In
addition, given ongoing federal and state government initiatives directed at
lowering the total cost of health care, the United States Congress and state
legislatures will likely continue to focus on health care reform, the cost of
prescription pharmaceuticals and the reform of the Medicare and Medicaid payment
systems. While we cannot predict whether any proposed cost-containment measures
will be adopted, the announcement or adoption of these proposals could reduce
the price that we receive for our Microcyn products in the
future.
We could be
required to indemnify third parties for alleged infringement, which could
cause us to
incur significant costs.
Some of
our distribution agreements contain commitments to indemnify our distributors
against liability arising from infringement of third party intellectual property
such as patents. We may be required to indemnify our customers for claims made
against them or license fees they are required to pay. If we are forced to
indemnify for claims or to pay license fees, our business and financial
condition could be substantially harmed.
A significant
part of our business is conducted outside of the United States, exposing us to
additional risks that may not exist in the United States, which in turn could cause
our business and operating results to suffer.
We have
international operations in Mexico and Europe. During the years ended
March 31, 2010 and 2009, approximately 69% and 76% of our total revenues
were generated from sales outside of the United States. Our business is highly
regulated for the use, marketing and manufacturing of our Microcyn-based
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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lack
of experience in foreign markets;
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difficulties
and costs of staffing and managing operations in certain foreign
countries;
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work
stoppages or other changes in labor
conditions;
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difficulties
in collecting accounts receivables on a timely basis or at
all; and
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adverse
tax consequences or overlapping tax
structures.
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We plan
to continue to market and sell our products internationally to respond to
customer requirements and market opportunities. We currently have international
manufacturing facilities in Mexico and the United States. 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. 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.
We
rely on a number of key customers who may not consistently purchase our products
in the future and if we lose any one of these customers, our revenues may
decline.
Although
we have a significant number of customers in each of the geographic markets that
we operate in, we rely on certain key customers for a significant portion of our
sales. During the year ended March 31, 2010 three customers
represented 23% of sales, and during the year ended March 31, 2009, three
customers represented 21% of sales. In the future, a small number of
customers may continue to represent a significant portion of our total revenues
in any given period. These customers may not consistently purchase our products
at a particular rate over any subsequent period. A loss of any of these
customers could adversely affect our revenues.
Negative
economic conditions increase the risk that we could suffer unrecoverable losses
on our customers’ accounts receivable which would adversely affect our financial
results.
We grant
credit to our business customers, which are primarily located in Mexico, Europe
and the United States. Collateral is generally not required for trade
receivables. We maintain allowances for potential credit losses. Three
customers represented a total of 42% of our net accounts receivable balance at
March 31, 2010, and two customers represented 29% of our net accounts receivable
balance at March 31, 2009. While we believe we have a varied customer
base and have experienced strong collections in the past, if current economic
conditions disproportionately impact any one of our key customers, including
reductions in their purchasing commitments to us or their ability to pay their
obligations, it could have a material adverse effect on our revenues and
liquidity. We have not purchased insurance on our accounts receivable
balances.
The loss of key
members of our senior management team, one of our directors or our inability to
retain highly skilled scientists, technicians and salespeople could adversely affect
our business.
Our
success depends largely on the skills, experience and performance of key members
of our executive management team, including Hojabr Alimi, our Chief Executive
Officer and Robert Northey, our Director of Research and Development. The
efforts of these people will be critical to us as we continue to develop our
products and attempt to commercialize products in the wound and skin care
markets. 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. Alimi’s services.
The wound care
industry is highly competitive and subject to rapid technological change. If our
competitors are better able to develop and market products that are less expensive or
more effective than any products that we may develop, our commercial
opportunity will be reduced or eliminated.
Our
success depends, in part, upon our ability to stay at the forefront of
technological change and maintain a competitive position. We compete with large
healthcare, pharmaceutical and biotechnology companies, along with smaller or
early-stage companies that have collaborative arrangements with larger
pharmaceutical companies, academic institutions, government agencies and other
public and private research organizations. Many of our competitors have
significantly greater financial resources and expertise in research and
development, manufacturing, pre-clinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products than we do. Our
competitors may:
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develop
and patent processes or products earlier than we
will;
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develop
and commercialize products that are less expensive or more efficient than
any products that we may develop;
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obtain
regulatory approvals for competing products more rapidly than we
will; and
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improve
upon existing technological approaches or develop new or different
approaches that render our technology or products obsolete or
non-competitive.
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As a
result, we may not be able to successfully commercialize any future
products.
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 our drug candidates and 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 product
candidates. Because collaboration arrangements are complex to negotiate, we may
not be successful in our attempts to establish these arrangements. If we need
third party assistance in identifying and negotiating one or more acceptable
arrangements, it might be costly. Also, we may not have products that are
desirable to other parties, or we may be unwilling to license a potential
product because the party interested in it is a competitor. The terms of any
arrangements that we establish may not be favorable to us. Alternatively,
potential collaborators may decide against entering into an agreement with us
because of our financial, regulatory or intellectual property position or for
scientific, commercial or other reasons. If we are not able to establish
collaborative agreements, we may not be able to develop and commercialize new
products, which would adversely affect our business and our
revenues.
In order
for any of these collaboration or license arrangements to be successful, we must
first identify potential collaborators or licensees whose capabilities
complement and integrate well with ours. We may rely on these arrangements for
not only financial resources, but also for expertise or economies of scale that
we expect to need in the future relating to clinical trials, manufacturing,
sales and marketing, and for licenses to technology rights. However, it is
likely that we will not be able to control the amount and timing or resources
that our collaborators or licensees devote to our programs or potential
products. If our collaborators or licensees prove difficult to work with, are
less skilled than we originally expected, or do not devote adequate resources to
the program, the relationship will not be successful. If a business combination
involving a collaborator or licensee and a third party were to occur, the effect
could be to diminish, terminate or cause delays in development of a potential
product.
If we are unable
to comply with broad and complex federal and state fraud and abuse laws, including
state and federal anti-kickback laws, we could face substantial penalties and our
products could be excluded from government healthcare
programs.
We are
subject to various federal and state laws pertaining to healthcare fraud and
abuse, which include, among other things, “anti-kickback” laws that prohibit
payments to induce the referral of products and services, and “false claims”
statutes that prohibit the fraudulent billing of federal healthcare programs.
Our operations are subject to the Federal Anti-Kickback Statute, a criminal
statute that, subject to certain statutory exceptions, prohibits any person from
knowingly and willfully offering, paying, soliciting or receiving remuneration,
directly or indirectly, to induce or reward a person either (i) for
referring an individual for the furnishing of items or services for which
payment may be made in whole or in part by a government healthcare program such
as Medicare or Medicaid, or (ii) for purchasing, leasing, 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, was
authorized to adopt regulations setting forth additional exceptions to the
prohibitions of the statute commonly known as “safe harbors.” If all of the
elements of an applicable safe harbor are fully satisfied, an arrangement will
not be subject to prosecution under the federal anti-kickback
statute.
In
addition, if there is a change in law, regulation or administrative or judicial
interpretations of these laws, we may have to change our business practices or
our existing business practices could be challenged as unlawful, which could
have a negative effect on our business, financial condition and results of
operations.
Healthcare
fraud and abuse laws are complex, and even minor, inadvertent irregularities can
potentially give rise to claims that a statute or regulation has been violated.
The frequency of suits to enforce these laws has increased significantly in
recent years and has 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 management’s
attention from other aspects of our business. Similarly, if the physicians or
other providers or entities with which we do business are found to have violated
abuse laws, they may be subject to sanctions, which could also have a negative
impact on us.
Our efforts to
discover and develop potential products may not lead to the discovery,
development,
commercialization or marketing of actual drug products.
We are
currently engaged in a number of different approaches to discover and develop
new product applications and product candidates. At the present time, we have
one Microcyn-based drug candidate in clinical trials. We also have a
non-Microcyn-based compound in the research and development phase. We believe
this compound has potential applications in oncology. Discovery and development
of potential drug candidates are expensive and time-consuming, and we do not
know if our efforts will lead to discovery of any drug candidates that can be
successfully developed and marketed. If our efforts do not lead to the discovery
of a suitable drug candidate, we may be unable to grow our clinical pipeline or
we may be unable to enter into agreements with collaborators who are willing to
develop our drug candidates.
We must maintain
expensive finance and accounting systems, procedures and controls to
accommodate
growth of our business and organization and to satisfy public company
reporting
requirements, which will increase our costs and require additional management
resources.
As a
public reporting company, we are required to comply with the Sarbanes-Oxley Act
of 2002 and the related rules and regulations of the Securities and Exchange
Commission, or the Commission. Section 404 of the Sarbanes-Oxley Act of
2002, or Section 404, requires our management to perform an annual
assessment of our internal control over financial reporting. Compliance with
Section 404 and other requirements of doing business as a public company
have and will continue to increase our costs and require additional management
resources to implement an ongoing program to perform system and process
evaluation and testing of our internal controls. In the past, we entered into
transactions that resulted in accounting consequences that we did not identify
at the time of the transactions. As a result, our prior independent auditors
informed us that we did not have the appropriate financial management and
reporting structure in place to meet the demands of a public company and that
our accounting and financial personnel lacked the appropriate level of
accounting knowledge, experience and training. In calendar year 2006, our
current independent auditors recommended certain changes which, in addition to
other changes in our financial reporting and management structure, have been
implemented at additional cost. We have upgraded our accounting systems,
procedures and controls and will need to continue to implement additional
finance and accounting systems, procedures and controls as we grow our business
and organization, enter into complex business transactions and take actions
designed to satisfy reporting requirements. As of our second report on
Form 10-K, our management concluded that our internal controls were
adequate to meet the required Section 404 assessment. If we are unable to
complete the required Section 404 assessment as to adequacy of our internal
control over financial reporting in future Form 10-K filings, our ability
to obtain additional financing could be impaired. In addition, investors could
lose confidence in the reliability of our internal control over financial
reporting and in the accuracy of our periodic reports filed under the Securities
Exchange Act of 1934. A lack of investor confidence in the reliability and
accuracy of our public reporting could cause our stock price to
decline.
We may not be
able to maintain sufficient product liability insurance to cover claims
against
us.
Product
liability insurance for the healthcare industry is generally expensive to the
extent it is available at all. We may not be able to maintain such insurance on
acceptable terms or be able to secure increased coverage if the
commercialization of our products progresses, nor can we be sure that existing
or future claims against us will be covered by our product liability insurance.
Moreover, the existing coverage of our insurance policy or any rights of
indemnification and contribution that we may have may not be sufficient to
offset existing or future claims. A successful claim against us with respect to
uninsured liabilities or in excess of insurance coverage and not subject to any
indemnification or contribution could have a material adverse effect on our
future business, financial condition, and results of
operations.
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-based
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-based 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;
|
|
•
|
failure
to meet analyst expectations regarding our operating
results;
|
|
•
|
additions
or departures of key
personnel; and
|
|
•
|
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 Capital
Market, in general, and the market for life sciences companies, in particular,
have experienced significant price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of those
companies.
If an active,
liquid trading market for our common stock does not develop, you may
not be able
to sell your shares quickly or at or above the price you paid for
it.
Although
our common stock is listed on the NASDAQ Capital Market, an active and liquid
trading market for our common stock has not yet and may not ever develop or be
sustained. You may not be able to sell your shares quickly or at or above the
price you paid for our stock if trading in our stock is not active.
Anti-takeover
provisions in our charter and by-laws and under Delaware law may make
it more
difficult for stockholders to change our management and may also make a
takeover
difficult.
Our
corporate documents and Delaware law contain provisions that limit the ability
of stockholders to change our management and may also enable our management to
resist a takeover. These provisions include:
|
•
|
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;
|
|
•
|
limitations
on persons authorized to call a special meeting of
stockholders; and
|
|
•
|
advance
notice procedures required for stockholders to make nominations of
candidates for election as directors or to bring matters before meetings
of stockholders.
|
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 or other securities convertible into
common stock.
Our
charter allows us to issue up to 100,000,000 shares of our common stock and
to issue and designate the rights of, without stockholder approval, up to
5,000,000 shares of convertible preferred stock. In the event we issue
additional shares of our capital stock, dilution to our stockholders could
result. In addition, if we issue and designate a class of convertible preferred
stock, these securities may provide for rights, preferences or privileges senior
to those of holders of our common stock.
ITEM 2.
Properties
We
currently lease approximately 12,000 square feet of office, research and
manufacturing space in Petaluma, California, which serves as our principal
executive offices. We also leased 8,534 square feet of office space in an
adjacent building for research and development. The lease was scheduled to
expire on September 30, 2007. On September 13, 2007, we entered into
Amendment No. 4 to the property lease agreement for our facility in
Petaluma, California. The amendment extended the lease expiration date to
September 30, 2010. On May 18, 2009, we entered into Amendment
No. 5 for our facility in Petaluma, California. Pursuant to the amendment,
we agreed to surrender 8,534 square feet of office space and extended the
lease expiration on the remaining lease to September 30,
2011.
We lease
approximately 12,000 square feet of office and manufacturing space and
approximately 5,000 square feet of warehouse space in Zapopan, Mexico,
under leases that were set to expire in April 2011 and April 2010, respectively.
On May 1, 2010, we extended the lease on the office and manufacturing space to
April 2013, and on May 1, 2010, we extended the lease on the warehouse space to
April 2011. We lease approximately 5,000 square feet of office space
and approximately 14,000 square feet of manufacturing and warehouse space
in Sittard, the Netherlands, under a lease that was scheduled to expire on
January 31, 2009. On February 15, 2008, we extended this lease to
January 2011 and on February 1, 2009 we amended this lease to expire on
September 1, 2009. On August 17, 2009, we entered into a one year lease for
800 square feet of sales office space in Herten, the Netherlands. The
lease will automatically renew on August 17, 2010. As we expand, we may
need to establish manufacturing facilities in other countries.
We
believe that our properties will be adequate to meet our needs through March 31,
2011.
ITEM 3. Legal
Proceedings
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 grantor’s 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.
From time
to time, we are involved in legal matters arising in the ordinary course of
business including matters involving proprietary technology. While we believe
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.
PART II
ITEM 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market
Information
Our
common stock is traded on the NASDAQ Capital Market under the symbol “OCLS” and
has been trading since our initial public offering on January 25, 2007. The
following table sets forth the range of high and low sales prices for our common
stock, based on the last daily sale, in each of the quarters since our stock
began trading:
|
|
Year Ended March 31, 2010
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Stock
price-high
|
|
$ |
4.91 |
|
|
$ |
3.45 |
|
|
$ |
2.33 |
|
|
$ |
2.69 |
|
Stock
price-low
|
|
$ |
1.01 |
|
|
$ |
3.02 |
|
|
$ |
1.39 |
|
|
$ |
1.75 |
|
|
|
Year Ended March 31, 2009
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Stock
price-high
|
|
$ |
5.18 |
|
|
$ |
3.24 |
|
|
$ |
1.74 |
|
|
$ |
1.74 |
|
Stock
price-low
|
|
$ |
2.41 |
|
|
$ |
1.70 |
|
|
$ |
0.40 |
|
|
$ |
0.90 |
|
Holders
As of May
26, 2010, we had approximately 613 holders of record of our common stock.
Holders of record include nominees who may hold shares on behalf of multiple
owners.
Dividends
We have
never declared or paid any cash dividends on our capital stock, and we do not
currently intend to pay any cash dividends on our common stock in the
foreseeable future.
Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
During
the three months ended March 31, 2010, we did not sell equity securities
that were not registered under the Securities Act.
ITEM 6. Selected Financial
Data
As a
Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and
in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure
reporting obligations and therefore are not required to provide the information
requested by this Item.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Business
Overview
We are a
commercial, health care company that develops, manufactures and markets a family
of tissue care products, based on our platform called Microcyn Technology,
intended to prevent and treat infections in open wounds and in skin care
and through a unique and separate mechanism of action, enhance healing while
reducing the need for antiobiotics. Microcyn Technology is a
non-irritating oxychlorine compound designed to treat a wide range of pathogens,
including antibiotic-resistant strains of bacteria, viruses, fungi and
spores.
Critical
Accounting Policies
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to exercise its judgment. We exercise considerable judgment with
respect to establishing sound accounting policies and in making estimates and
assumptions that affect the reported amounts of our assets and liabilities, our
recognition of revenues and expenses, and disclosure of commitments and
contingencies at the date of the consolidated financial statements.
On an
ongoing basis, we evaluate our estimates and judgments. Areas in which we
exercise significant judgment include, but are not necessarily limited to, our
valuation of accounts receivable, inventory, income taxes, equity transactions
(compensatory and financing) and contingencies. We have also adopted certain
polices with respect to our recognition of revenue that we believe are
consistent with the guidance provided under Securities and Exchange Commission
Staff Accounting Bulletin No. 104.
We base
our estimates and judgments on a variety of factors including our historical
experience, knowledge of our business and industry, current and expected
economic conditions, the attributes of our products, regulatory environment, and
in certain cases, the results of outside appraisals. We periodically re-evaluate
our estimates and assumptions with respect to these judgments and modify our
approach when circumstances indicate that modifications are
necessary.
While we
believe that the factors we evaluate provide us with a meaningful basis for
establishing and applying sound accounting policies, we cannot guarantee that
the results will always be accurate. Since the determination of these estimates
requires the exercise of judgment, actual results could differ from such
estimates.
A
description of significant accounting policies that require us to make estimates
and assumptions in the preparation of our consolidated financial statements is
as follows:
Stock-based
Compensation
We
account for share-based awards exchanged for employee services at the estimated
grant date fair value of the award. We estimate the fair value of employee stock
awards using the Black-Scholes option pricing model. We amortize the fair value
of employee stock options on a straight-line basis over the requisite service
period of the awards. Compensation expense includes the impact of an
estimate for forfeitures for all stock options.
We
account for equity instruments issued to non-employees at their fair value on
the measurement date. The measurement of stock-based compensation is subject to
periodic adjustment as the underlying equity instrument vests or becomes
non-forfeitable. Non-employee stock-based compensation charges are amortized
over the vesting period or as earned.
Revenue
Recognition and Accounts Receivable
We
generate product revenues from sales of our products to hospitals, medical
centers, doctors, pharmacies, distributors and strategic partners. We sell our
products directly to third parties and to distributors through various
cancelable distribution agreements. We have also entered into an agreement to
license our products.
We record
revenues when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability of the sale is
reasonably assured.
We
require all of our product sales to be supported by evidence of a sale
transaction that clearly indicates the selling price to the customer, shipping
terms and payment terms. Evidence of an arrangement generally consists of a
contract or purchase order approved by the customer. We have ongoing
relationships with certain customers from which we customarily accept orders by
telephone in lieu of a purchase order.
We
recognize revenues at the time in which we receive a confirmation that the goods
were either tendered at their destination when shipped “FOB destination,” or
transferred to a shipping agent when shipped “FOB shipping point.” Delivery to
the customer is deemed to have occurred when the customer takes title to the
product. Generally, title passes to the customer upon shipment, but could occur
when the customer receives the product based on the terms of the agreement with
the customer.
While we
have a policy of investigating the creditworthiness of our customers, we have,
under certain circumstances, shipped goods in the past and deferred the
recognition of revenues when available information indicates that collection is
in doubt. We establish allowances for doubtful accounts when available
information causes us to believe that a credit loss is probable.
Our
treatment for recognizing revenue related to distributors that have the
inability to provide inventory or product sell-through reports on a timely
basis, is to defer and recognize revenue when payment is received. We
believe the receipt of payment is the best indication of product
sell-through. We have entered into distribution agreements in Europe.
Recognition of revenue and related cost of revenue from product sales is
deferred until the product is sold from the distributors to their
customers.
Service
revenues are recorded upon performance of the service contracts. Revenues
generated from testing contracts are recorded when the test is completed and the
final report is sent to the customer.
Inventory
Inventories
are stated at the lower of cost, cost being determined on a standard cost basis
(which approximates actual cost on a first-in, first-out basis), or
market. Due to changing market conditions, estimated future requirements,
age of the inventories on hand and production of new products, we regularly
reviews inventory quantities on hand and records a provision to write down
excess and obsolete inventory to its estimated net realizable
value.
Income
Taxes
We are
required to determine the aggregate amount of income tax expense or loss based
upon tax statutes in jurisdictions in which we conduct business. In making these
estimates, we adjust our results determined in accordance with generally
accepted accounting principles for items that are treated differently by the
applicable taxing authorities. Deferred tax assets and liabilities resulting
from these differences, are reflected on our balance sheet for temporary
differences in loss and credit carryforwards that will reverse in subsequent
years. We also establish a valuation allowance against deferred tax assets when
it is more likely than not that some or all of the deferred tax assets will not
be realized. Valuation allowances are based, in part, on predictions that
management must make as to our results in future periods. The outcome of events
could differ over time which would require that we make changes in our valuation
allowance.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the dates of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from these
estimates. These estimates and assumptions include reserves and write-downs
related to receivables and inventories, the recoverability of long-term assets,
deferred taxes and related valuation allowances and valuation of equity
instruments.
Recent
Accounting Pronouncements
In
December 2008, the Financial Accounting Standards Board, or FASB, issued
Accounting Standards Codification or ASC 815-40 “Contracts in Entity’s own
Equity.” This issue addresses the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock. This issue is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. We have included the impact
of ASC 815-40 in our consolidated financial statements for the year ended
March 31, 2010.
In April
2009, the FASB issued ASC 820-10-65 “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” Based on the guidance, if an
entity determines that the level of activity for an asset or liability has
significantly decreased and that a transaction is not orderly, further analysis
of transactions or quoted prices is needed, and a significant adjustment to the
transaction or quoted prices may be necessary to estimate fair value in
accordance with Statement of Financial Accounting Standards ASC 820-10 “Fair
Value Measurements”. This is to be applied prospectively and is effective for
interim and annual periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009. The adoption has no impact on
our consolidated financial statements.
In April
2009, the FASB issued ASC 825, “Financial Instruments.” This standard extends
the disclosure requirements concerning the fair value of financial instruments
to interim financial statements of publicly traded companies. This guidance is
effective for interim or annual financial periods ending after June 15, 2009,
and as such, became effective in the quarter ended June 30, 2009. The adoption
of ASC 825 had no material impact on our consolidated financial position,
results of operations or cash flows.
In May
2009, the FASB issued guidance now codified as ASC Topic 855, “Subsequent
Events.” ASC Topic 855 establishes standards for the disclosure of events that
occur after the balance sheet date, but before financial statements are issued
or are available to be issued. ASC Topic 855 introduces the concept of financial
statements being “available to be issued.” It requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date. The disclosure should alert all users of financial statements that an
entity has not evaluated subsequent events after that date in the set of
financial statements being presented. We adopted ASC Topic 855 for the period
ended June 30, 2009. The adoption of ASC Topic 855 had no impact on our
consolidated financial position, results of operations or cash
flows.
In
January 2010, the FASB issued Accounting Standards Update, or ASU No. 2010-6,
“Improving Disclosures About Fair Value Measurements,” which requires reporting
entities to make new disclosures about recurring or nonrecurring fair-value
measurements including significant transfers into and out of Level 1 and Level 2
fair-value measurements and information on purchases, sales, issuances, and
settlements on a gross basis in the reconciliation of Level 3 fair- value
measurements. ASU 2010-6 is effective for fiscal years beginning after
December 15, 2009. The adoption of this ASU will not have an impact
on our consolidated financial position, results of operations or cash
flows.
In
February 2010, the FASB issued ASU No. 2010-09, "Subsequent Events (Topic 855) -
Amendments to Certain Recognition and Disclosure Requirements." ASU 2010-09
requires an entity that is an SEC filer to evaluate subsequent events through
the date that the financial statements are issued and removes the requirement
that an SEC filer disclose the date through which subsequent events have been
evaluated. ASC 2010-09 was effective upon issuance. The adoption of this
standard had no effect on our consolidated financial position or results of
operations.
In March
2010, the FASB issued ASU No. 2010-17, Revenue Recognition— Milestone Method
(Topic 605): Milestone Method of Revenue Recognition.This standard
provides that the milestone method is a valid application of the proportional
performance model for revenue recognition if the milestones are substantive and
there is substantive uncertainty about whether the milestones will be achieved.
Determining whether a milestone is substantive requires judgment that should be
made at the inception of the arrangement. To meet the definition of a
substantive milestone, the consideration earned by achieving the milestone
(1) would have to be commensurate with either the level of effort required
to achieve the milestone or the enhancement in the value of the item delivered,
(2) would have to relate solely to past performance, and (3) should be
reasonable relative to all deliverables and payment terms in the arrangement. No
bifurcation of an individual milestone is allowed and there can be more than one
milestone in an arrangement. The new standard is effective for interim and
annual periods beginning on or after June 15, 2010. Early adoption is
permitted. The adoption of this standard did not have any impact on the
Company’s consolidated financial position and results of
operations.
Other
accounting standards that have been issued or proposed by the FASB, the Emerging
Issues Task Force, the SEC and or other standards-setting bodies that do not
require adoption until a future date are not expected to have a material impact
on the consolidated financial statements upon adoption.
Comparison
of the Year Ended March 31, 2010 and 2009
Revenues
Total
revenues were $7,364,000 during the year ended March 31, 2010, up 37%, compared
to $5,388,000 in the prior year period. Product revenue increased $1,883,000, or
43%, compared to the same period last year primarily due to higher sales in the
U.S., Europe, Mexico, China, Middle East and India. Adjusted for the 10%
drop in the value of the peso during the year ended March 31, 2010, product
growth in Mexico would have been 30% and worldwide product growth would have
been 51%. Increased revenue related to the sale of our 240-milliliter
presentation in Mexico, sold primarily to pharmacies, was the result of
increased demand from the swine flu epidemic in Mexico and normal sales
growth. Unit sales of our 240-milliliter presentation in Mexico for the
year ended March 31, 2010, increased 25% to a monthly average of 40,000 units,
up from 32,000 in the same period last year; unit sales of our 5-liter
presentation increased 12%, partially offset by lower selling prices.
Europe/Rest of World revenue increased $378,000, up 45%, over the prior year
with higher sales from China, India, Netherlands, Slovakia, Singapore and Middle
East. Product revenue in the U.S. in the year ended March 31, 2010
increased $898,000 with strong increases in human and animal wound care,
primarily related to television advertising and other sales initiatives
sponsored by our strategic partner Innovacyn, Inc. and payments from Union
Springs Pharmaceuticals for sales related to MyClyns, a first-responder, germ
protection spray.
The
following table shows our product revenues by geographic region (in
thousands):
|
|
Year
Ended March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase
|
|
|
Increase
|
|
U.S.
|
|
$ |
1,196,000 |
|
|
$ |
298,000 |
|
|
$ |
898,000 |
|
|
|
301 |
% |
Europe/Rest
of World
|
|
|
1,222,000 |
|
|
|
844,000 |
|
|
|
378,000 |
|
|
|
45 |
% |
Mexico
|
|
|
3,880,000 |
|
|
|
3,273,000 |
|
|
|
607,000 |
|
|
|
19 |
% |
Total
|
|
$ |
6,298,000 |
|
|
$ |
4,415,000 |
|
|
$ |
1,883,000 |
|
|
|
43 |
% |
Service
revenue was $93,000 higher when compared to the same period last year due to an
increase in the number of tests provided by our services business.
Gross
Profit
We
reported gross profit from our Microcyn-based products business of $3,665,000,
or 58% of product revenues, during the year ended March 31, 2010, compared to a
gross profit of $2,742,000, or 62%, in the prior year period. Our margins in
Mexico improved to 79% during the year ended March 31, 2009, compared to 75% in
the prior year period with a higher unit volume in the first quarter of fiscal
year 2010 due to increased sales related to the swine flu epidemic. During the
year ended March 31, 2010, gross margins in Europe and U.S. were relatively low
as we have been transferring our manufacturing from Europe to the U.S.,
sustaining costs in multiple locations, and incurring severance and higher
shipping costs in the European cost of goods sold.
Research
and Development Expense
Research
and development expense declined $4,256,000, or 68%, to $1,996,000 for the year
ended March 31, 2010, compared to $6,252,000 in the prior year period. Most of
the decrease was attributed to the elimination of the larger clinical team and
related expenses during the year ended March 31, 2009, which supported the
completion of the Phase II clinical trial. As a result of shifting our
strategy to commercializing and growing our product revenues, we significantly
reduced the number of people in research and development and clinical
activities.
Selling,
General and Administrative Expense
Selling,
general and administrative expense decreased $3,959,000, or 29%, to $9,898,000
during the year ended March 31, 2010, from $13,857,000 during the year ended
March 31, 2009. Primarily, this decrease was due to an $833,000 reduction in
stock compensation charges, lower legal and accounting fees and an overall
reduction in headcount and related expenses. These decreases were partially
offset by higher sales and marketing expenses associated with our wound care
product launches in the U.S. and Mexico.
Interest
income and expense and other income and expense, net
Interest
expense decreased $428,000 to $9,000 for the year ended March 31, 2010, from
$437,000 in the prior year period, due to the decreased interest payments on
debt over the prior year period and $304,000 related to the amortization of debt
issue costs in the prior year period. Total outstanding debt decreased to
$314,000 at March 31, 2010, from $329,000 at March 31, 2009. Interest
income decreased $150,000 from the prior year period, primarily due to a decline
in our interest bearing cash balances.
Other
income and expense, net decreased $4,000 to net other expense of $60,000 for the
year ended March 31, 2010, from other expense of $64,000 for the same period
last year.
Derivative
liability
During
the year ended March 31, 2010 we incurred an increase in the fair value of our
derivative liabilities of $149,000 and as a result we recorded this amount as a
loss for the period. For the year ended March 31, 2009 we did not record a
loss or gain related to derivative liabilities.
Net
Loss
Net loss
for the year ended March 31, 2010 was $8,232,000, down $9,424,000 from
$17,656,000 for the same period in the prior year. Stock compensation expense
for the year ended March 31, 2010 and 2009 was $1,432,000 and $2,263,000,
respectively. Also, our loss on our derivative instruments of
$149,000 was a non-cash charge.
Liquidity
and Capital Resources
We
incurred a net loss of $8,232,000 for the year ended March 31, 2010. At
March 31, 2010, our accumulated deficit amounted to $117,037,000. We had
working capital of $6,315,000 as of March 31, 2010. In the future, we may
raise additional capital from external sources in order to continue the longer
term efforts contemplated under our business plan. We expect to continue
incurring losses for the foreseeable future and may raise additional capital to
pursue our product development initiatives, penetrate markets for the sale of
our products and continue as a going concern. We cannot provide any assurance
that we will raise additional capital. Our management believes that we have
access to capital resources through possible public or private equity offerings,
debt financings, corporate collaborations or other means; however, we have not
secured any commitment for new financing at this time.
Sources
of Liquidity
As of
March 31, 2010, we had cash and cash equivalents of $6,258,000. Since our
inception, substantially all of our operations have been financed through sales
of equity securities. Other sources of financing that we have used to date
include our revenues, as well as various loans.
Since our
inception, substantially all of our operations have been financed through the
sale of $114,440,000 (net proceeds) of our common and convertible preferred
stock. This includes:
|
·
|
net proceeds $21,936,000 raised
in our initial public offering on January 30,
2007;
|
|
·
|
net proceeds of $9,124,000 raised
in a private placement of common shares on August 13,
2007;
|
|
·
|
net proceeds of $12,613,000
raised through a registered direct placement from March 31, 2008 to
April 1, 2008;
|
|
·
|
net proceeds of $1,514,000 raised
through a private placement on February 6,
2009;
|
|
·
|
net proceeds of $948,000 from a
private placement on February 24,
2009;
|
|
·
|
net proceeds of $2,000,000 from a
private placement on June 1,
2009;
|
|
·
|
net proceeds of $5,411,000 from a
registered direct offering on July 30, 2009;
and
|
|
·
|
$4,223,000
received from the exercise of common stock purchase warrants and options
during the year ended March 31,
2010.
|
In June
2006, we entered into a loan and security agreement with a financial institution
to borrow a maximum of $5,000,000. Under this facility we borrowed $4,182,000,
of which $1,829,000 was paid in the year ended March 31, 2009. The loan was
repaid in full at March 31, 2009.
On May 1,
2010, we entered into a loan and security agreement with a financial institution
to borrow a maximum of $3,000,000. On May 3, 2010, we borrowed $2,000,000
under this facility.
Cash
Flows
As of
March 31, 2010, we had unrestricted cash and cash equivalents of $6,258,000
compared to $1,921,000 at March 31, 2009.
Net cash
used in operating activities during the year ended March 31, 2010 was
$6,639,000, primarily due to the $8,232,000 net loss for the period along
with increases in accounts receivables and inventory, offset in part by non-cash
charges, including $149,000 loss on the fair value of derivative instruments,
$1,432,000 of stock-based compensation, and $433,000 of depreciation and
amortization.
Net cash
used in operating activities during the year ended March 31, 2009 was
$16,832,000, primarily due to the $17,656,000 net loss for the period, and
to a $1,332,000 decrease in accounts payable, primarily the result of payments
made for the placement agent fee related to our registered direct offering in
March 2008 that were paid subsequent to March 31, 2008, and a $1,588,000
decrease in accrued expenses, related mostly to accrued bonuses earned during
the fiscal year ended March 31, 2008. These uses of cash were offset in
part by non-cash charges during the year ended March 31, 2009, including
$2,263,000 of stock-based compensation, $768,000 of depreciation and
amortization, $304,000 of non-cash interest expense, and $235,000 of loss on the
disposal of capital equipment.
Net cash
used in investing activities was $184,000 and $424,000 for the year ended March
31, 2010 and 2009, respectively, primarily for the purchase of
equipment.
Net cash
provided by financing activities was $11,084,000 for the year ended March 31,
2010. We received net proceeds from the sale of common stock during this period
of $7,155,000. Additionally, we received proceeds of $4,223,000 related to
the exercise of common stock purchase warrants and stock options. Net cash
provided by financing activities was $376,000 for the year ended March 31,
2009. Common stock was issued resulting in net proceeds of $2,499,000 and
outstanding debt in the amount of $2,119,000 was paid during the year ended
March 31, 2009.
Contractual
Obligations
As of
March 31, 2010, we had contractual obligations as follows (long-term debt
and capital lease amounts include principal payments only) (in
thousands):
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
1-3
Years
|
|
|
After
3 Years
|
|
Long-term
debt
|
|
$ |
314 |
|
|
$ |
204 |
|
|
$ |
95 |
|
|
$ |
15 |
|
Operating
leases
|
|
|
397 |
|
|
|
289 |
|
|
|
108 |
|
|
|
— |
|
Total
|
|
$ |
711 |
|
|
$ |
493 |
|
|
$ |
203 |
|
|
$ |
15 |
|
On May 1,
2010, we entered into a Loan and Security Agreement and a Supplement to the Loan
and Security Agreement with Venture Lending & Leasing , Inc. to borrow up to
an aggregate of $3,000,000 (collectively, the “Agreements”). On May 3,
2010, we borrowed $2,000,000.
We lease
approximately 12,000 square feet of office and manufacturing space and
approximately 5,000 square feet of warehouse space in Zapopan, Mexico,
under leases that were set to expire in April 2011 and April 2010, respectively.
On May 1, 2010, we extended the lease on the office and manufacturing space to
April 2013, and on May 1, 2010, we extended the lease on the warehouse space to
April 2011. In connection with the lease extensions, we will incur
additional payments of $211,000, of which $22,000 will be paid in less than one
year and $189,000 will be paid in years one to three.
Future
principal payments related to the loan and payments related to the lease
extension are as follows:
|
|
PaymentsDue by Period
|
|
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
1-3
Years
|
|
Long-term
debt
|
|
$ |
2,000 |
|
|
$ |
358 |
|
|
$ |
1,642 |
|
Operating
leases
|
|
|
211 |
|
|
|
22 |
|
|
|
189 |
|
Total
|
|
$ |
2,211 |
|
|
$ |
380 |
|
|
$ |
1,831 |
|
Operating
Capital and Capital Expenditure Requirements
We
incurred a net loss of $8,232,000 for the year ended March 31, 2010. At
March 31, 2010 and 2009, our accumulated deficit amounted to $117,037,000
and $108,482,000, respectively. At March 31, 2010, our working capital
amounted to $6,315,000.
We may
raise additional capital from external sources in order to continue the longer
term efforts contemplated under our business plan. We expect to continue
incurring losses for the foreseeable future and may raise additional capital to
pursue our product development initiatives, to penetrate markets for the sale of
our products.
We have
undertaken initiatives to reduce costs in an effort to conserve liquidity.
Future pivotal trials will require the selection of a partner and must also be
completed in order for us to commercialize Microcyn as a drug product in the
United States. Commencement of the pivotal clinical trials will be delayed until
we find a strategic partner to fund these trials. Without a strategic partner or
additional capital, our pivotal clinical trials will be delayed for a period of
time that is currently indeterminate.
Our
future funding requirements will depend on many factors, including:
|
•
|
the
scope, rate of progress and cost of our clinical trials and other research
and development activities;
|
|
•
|
future
clinical trial results;
|
|
•
|
the
terms and timing of any collaborative, licensing and other arrangements
that we may establish;
|
|
•
|
the
cost and timing of regulatory
approvals;
|
|
•
|
the
cost and delays in product development as a result of any changes in
regulatory oversight applicable to our
products;
|
|
•
|
the
cost and timing of establishing sales, marketing and distribution
capabilities;
|
|
•
|
the
effect of competing technological and market
developments;
|
|
•
|
the
cost of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property
rights; and
|
|
•
|
the
extent to which we acquire or invest in businesses, products and
technologies.
|
Off-Balance
Sheet Transactions
We
currently have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
ITEM 7A. Quantitative and Qualitative
Disclosures About Market Risk
As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and
in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure
reporting obligations and therefore are not required to provide the information
requested by this Item.
ITEM 8. Financial Statements and
Supplementary Data
Oculus
Innovative Sciences, Inc.
Index
to Consolidated Financial Statements
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
46
|
Consolidated
Balance Sheets as of March 31, 2010 and 2009
|
47
|
Consolidated
Statements of Operations and Comprehensive Loss for the years ended
March 31, 2010 and 2009
|
48
|
Consolidated
Statements of Stockholders’ Equity for the years ended March 31, 2010
and 2009
|
49
|
Consolidated
Statements of Cash Flows for the years ended March 31, 2010 and
2009
|
50
|
Notes
to Consolidated Financial Statements
|
51
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Audit Committee of the
Board of
Directors and Shareholders
of Oculus
Innovative Sciences, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Oculus Innovative
Sciences, Inc. and Subsidiaries (the “Company”) as of March 31, 2010 and 2009,
and the related consolidated statements of operations, comprehensive loss,
changes in stockholders’ equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Oculus Innovative Sciences, Inc.
and Subsidiaries, as of March 31, 2010 and 2009, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
/s/
Marcum LLP
New York,
NY
June 8,
2010
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share
and per share amounts)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
6,258 |
|
|
$ |
1,921 |
|
Accounts
receivable, net
|
|
|
1,416 |
|
|
|
923 |
|
Inventory,
net
|
|
|
565 |
|
|
|
340 |
|
Prepaid
expenses and other current assets
|
|
|
811 |
|
|
|
758 |
|
Total
current assets
|
|
|
9,050 |
|
|
|
3,942 |
|
Property
and equipment, net
|
|
|
1,108 |
|
|
|
1,432 |
|
Other
assets
|
|
|
60 |
|
|
|
73 |
|
Total
assets
|
|
$ |
10,218 |
|
|
$ |
5,447 |
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
981 |
|
|
$ |
1,565 |
|
Accrued
expenses and other current liabilities
|
|
|
1,078 |
|
|
|
853 |
|
Current
portion of long-term debt
|
|
|
204 |
|
|
|
255 |
|
Current
portion of capital lease obligations
|
|
|
— |
|
|
|
6 |
|
Derivative
liability
|
|
|
472 |
|
|
|
— |
|
Total
current liabilities
|
|
|
2,735 |
|
|
|
2,679 |
|
Deferred
revenue
|
|
|
328 |
|
|
|
425 |
|
Long-term
debt, less current portion
|
|
|
110 |
|
|
|
74 |
|
Total
liabilities
|
|
|
3,173 |
|
|
|
3,178 |
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $0.0001 par value; 5,000,000 shares authorized,
none issued and outstanding at March 31, 2010 and
2009
|
|
|
— |
|
|
|
— |
|
Common
stock, $0.0001 par value; 100,000,000 shares authorized,
26,161,428 and 18,402,820 shares issued and outstanding at
March 31, 2010 and 2009, respectively
|
|
|
3 |
|
|
|
2 |
|
Additional
paid-in capital
|
|
|
127,067 |
|
|
|
113,803 |
|
Accumulated
other comprehensive loss
|
|
|
(2,988 |
) |
|
|
(3,054 |
) |
Accumulated
deficit
|
|
|
(117,037 |
) |
|
|
(108,482 |
) |
Total
stockholders’ equity
|
|
|
7,045 |
|
|
|
2,269 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
10,218 |
|
|
$ |
5,447 |
|
The
accompanying footnotes are an integral part of these consolidated financial
statements.
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
Year Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share amounts)
|
|
Revenues
|
|
|
|
|
|
|
Product
|
|
$ |
6,298 |
|
|
$ |
4,415 |
|
Service
|
|
|
1,066 |
|
|
|
973 |
|
Total
revenues
|
|
|
7,364 |
|
|
|
5,388 |
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
Product
|
|
|
2,633 |
|
|
|
1,673 |
|
Service
|
|
|
853 |
|
|
|
913 |
|
Total
cost of revenues
|
|
|
3,486 |
|
|
|
2,586 |
|
Gross
profit
|
|
|
3,878 |
|
|
|
2,802 |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,996 |
|
|
|
6,252 |
|
Selling,
general and administrative
|
|
|
9,898 |
|
|
|
13,857 |
|
Total
operating expenses
|
|
|
11,894 |
|
|
|
20,109 |
|
Loss
from operations
|
|
|
(8,016 |
) |
|
|
(17,307 |
) |
Interest
expense
|
|
|
(9 |
) |
|
|
(437 |
) |
Interest
income
|
|
|
2 |
|
|
|
152 |
|
Loss
due to change in fair value of derivative instruments
|
|
|
(149 |
) |
|
|
— |
|
Other
income (expense), net
|
|
|
(60 |
) |
|
|
(64 |
) |
Net
loss
|
|
$ |
(8,232 |
) |
|
$ |
(17,656 |
) |
Net
loss per common share: basic and diluted
|
|
$ |
(0.36 |
) |
|
$ |
(1.09 |
) |
Weighted-average
number of shares used in per common share calculations:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
22,993 |
|
|
|
16,221 |
|
Other
comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(8,232 |
) |
|
$ |
(17,656 |
) |
Foreign
currency translation adjustments
|
|
|
66 |
|
|
|
(279 |
) |
Comprehensive
loss
|
|
$ |
(8,166 |
) |
|
$ |
(17,935 |
) |
The
accompanying footnotes are an integral part of these consolidated financial
statements.
OCULUS
INNOVATIVE SCIENCES, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
($0.0001 par Value)
|
|
|
Paid in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(In thousands, except share and per share amounts)
|
|
Balance,
March 31, 2008
|
|
|
15,905,613 |
|
|
$ |
2 |
|
|
$ |
109,027 |
|
|
$ |
(2,775 |
) |
|
$ |
(90,826 |
) |
|
$ |
15,428 |
|
Issuance
of common stock in connection with April 1, 2008 closing of offering,
net of commissions, expenses and other offering costs
|
|
|
18,095 |
|
|
|
— |
|
|
|
36 |
|
|
|
— |
|
|
|
— |
|
|
|
36 |
|
Issuance
of common stock in connection with February 6, 2009 offering, net of
commissions, expenses and other offering costs
|
|
|
1,499,411 |
|
|
|
— |
|
|
|
1,514 |
|
|
|
— |
|
|
|
— |
|
|
|
1,514 |
|
Issuance
of common stock in connection with February 24, 2009 offering, net of
commissions, expenses and other offering costs
|
|
|
854,701 |
|
|
|
— |
|
|
|
948 |
|
|
|
— |
|
|
|
— |
|
|
|
948 |
|
Issuance
of common stock in connection with exercise of stock
options
|
|
|
105,000 |
|
|
|
— |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
Issuance
of common stock for services
|
|
|
20,000 |
|
|
|
— |
|
|
|
21 |
|
|
|
— |
|
|
|
— |
|
|
|
21 |
|
Employee
stock-based compensation expense, net of forfeitures
|
|
|
— |
|
|
|
— |
|
|
|
2,136 |
|
|
|
— |
|
|
|
— |
|
|
|
2,136 |
|
Fair
value of common stock purchase warrants issued to
non-employees
|
|
|
— |
|
|
|
— |
|
|
|
106 |
|
|
|
— |
|
|
|
— |
|
|
|
106 |
|
Foreign
currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(279 |
) |
|
|
— |
|
|
|
(279 |
) |
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17,656 |
) |
|
|
(17,656 |
) |
Balance,
March 31, 2009
|
|
|
18,402,820 |
|
|
$ |
2 |
|
|
$ |
113,803 |
|
|
$ |
(3,054 |
) |
|
$ |
(108,482 |
) |
|
$ |
2,269 |
|
Issuance
of common stock in connection with June 1, 2009 closing of offering,
net of commissions, expenses and other offering costs
|
|
|
1,709,402 |
|
|
|
— |
|
|
|
2,000 |
|
|
|
— |
|
|
|
— |
|
|
|
2,000 |
|
Issuance
of common stock in connection with July 30, 2009 offering, net of
commissions, expenses and other offering costs
|
|
|
2,454,000 |
|
|
|
1 |
|
|
|
5,154 |
|
|
|
— |
|
|
|
— |
|
|
|
5,155 |
|
Issuance
of common stock in connection with exercise of stock purchase
warrants
|
|
|
2,193,959 |
|
|
|
— |
|
|
|
3,975 |
|
|
|
— |
|
|
|
— |
|
|
|
3,975 |
|
Issuance
of common stock in connection with exercise of stock
options
|
|
|
663,592 |
|
|
|
— |
|
|
|
248 |
|
|
|
— |
|
|
|
— |
|
|
|
248 |
|
Issuance
of common stock for accounts payable obligations
|
|
|
230,602 |
|
|
|
— |
|
|
|
455 |
|
|
|
— |
|
|
|
— |
|
|
|
455 |
|
Issuance
of common stock for services
|
|
|
491,096 |
|
|
|
— |
|
|
|
567 |
|
|
|
— |
|
|
|
— |
|
|
|
567 |
|
Issuance
of restricted stock units from the 2006 Stock Incentive
Plan
|
|
|
15,957 |
|
|
|
— |
|
|
|
29 |
|
|
|
— |
|
|
|
— |
|
|
|
29 |
|
Employee
stock-based compensation expense, net of forfeitures
|
|
|
— |
|
|
|
— |
|
|
|
836 |
|
|
|
— |
|
|
|
— |
|
|
|
836 |
|
Foreign
currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
66 |
|
|
|
— |
|
|
|
66 |
|
Cumulative
effect adjustment to retained earnings related to derivative
liabilities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(323 |
) |
|
|
(323 |
) |
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,232 |
) |
|
|
(8,232 |
) |
Balance,
March 31, 2010
|
|
|
26,161,428 |
|
|
$ |
3 |
|
|
$ |
127,067 |
|
|
$ |
(2,988 |
) |
|
$ |
(117,037 |
) |
|
$ |
7,045 |
|
The
accompanying footnotes are an integral part of these consolidated financial
statements.
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(8,232 |
) |
|
$ |
(17,656 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
433 |
|
|
|
768 |
|
Provision
for doubtful accounts
|
|
|
61 |
|
|
|
29 |
|
Provision
for obsolete inventory
|
|
|
184 |
|
|
|
39 |
|
Stock-based
compensation
|
|
|
1,432 |
|
|
|
2,263 |
|
Change
in fair value of derivative liability
|
|
|
149 |
|
|
|
— |
|
Non-cash
interest expense
|
|
|
— |
|
|
|
304 |
|
Foreign
currency transaction (gains) losses
|
|
|
(97 |
) |
|
|
64 |
|
Loss
on disposal of assets
|
|
|
169 |
|
|
|
235 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(453 |
) |
|
|
(379 |
) |
Inventories
|
|
|
(388 |
) |
|
|
(177 |
) |
Prepaid
expenses and other current assets
|
|
|
190 |
|
|
|
598 |
|
Accounts
payable
|
|
|
(163 |
) |
|
|
(1,332 |
) |
Accrued
expenses and other liabilities
|
|
|
76 |
|
|
|
(1,588 |
) |
Net
cash used in operating activities
|
|
|
(6,639 |
) |
|
|
(16,832 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(141 |
) |
|
|
(393 |
) |
Long-term
deposits
|
|
|
(43 |
) |
|
|
(31 |
) |
Net
cash used in investing activities
|
|
|
(184 |
) |
|
|
(424 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock, net of offering costs
|
|
|
7,155 |
|
|
|
2,499 |
|
Proceeds
from issuance of common stock upon exercise of stock options and
warrants
|
|
|
4,223 |
|
|
|
15 |
|
Principal
payments on debt
|
|
|
(288 |
) |
|
|
(2,119 |
) |
Payments
on capital lease obligations
|
|
|
(6 |
) |
|
|
(19 |
) |
Net
cash provided by financing activities
|
|
|
11,084 |
|
|
|
376 |
|
Effect
of exchange rate on cash and cash equivalents
|
|
|
76 |
|
|
|
(22 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
4,337 |
|
|
|
(16,902 |
) |
Cash
and cash equivalents, beginning of year
|
|
|
1,921 |
|
|
|
18,823 |
|
Cash
and cash equivalents, end of year
|
|
$ |
6,258 |
|
|
$ |
1,921 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
9 |
|
|
$ |
154 |
|
Obligations
settled with common stock
|
|
$ |
455 |
|
|
$ |
—
|
|
Non-cash
operating and financing activities:
|
|
|
|
|
|
|
|
|
Insurance
premiums financed
|
|
$ |
184 |
|
|
$ |
250 |
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Equipment
financed
|
|
$ |
157 |
|
|
$ |
—
|
|
The
accompanying footnotes are an integral part of these consolidated financial
statements.
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 —
The Company
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 Company’s principal office is located in
Petaluma, California. The Company develops, manufactures and markets a
family of tissue care products to treat infections and, through a separate
mechanism of action, enhance healing while reducing the need for
antibiotics. The Company’s platform technology, called Microcyn®, is a proprietary solution of
electrically charged oxychlorine small molecules designed to treat a wide range
of organisms that cause disease (pathogens).
NOTE 2 —
Liquidity and Financial Condition
The
Company incurred a net loss of $8,232,000 for the year ended March 31,
2010. At March 31, 2010, the Company’s accumulated deficit amounted to
$117,037,000. The Company had working capital of $6,315,000 as of March 31,
2010. The Company may raise additional capital from external sources in order to
continue the longer term efforts contemplated under its business plan. The
Company expects to continue incurring losses for the foreseeable future and may
raise additional capital to pursue its product development initiatives,
penetrate markets for the sale of its products and continue as a going
concern.
On June
1, 2009, the Company issued the final tranche from the February 24, 2009 private
placement (Note 13). The issuance comprised of an aggregate of 1,709,402 shares
of common stock at a purchase price of $1.17 per share, Series A Warrants to
purchase an aggregate of 1,000,000 shares of common stock and Series B Warrants
to purchase an aggregate of 1,333,333 shares of common stock to the Investors
pro rata to the investment amount of each Investor. The Company received
$2,000,000 in connection with this transaction.
On July
30, 2009, the Company closed a registered direct placement of 2,454,000 shares
of its common stock at a purchase price of $2.45 per share, and warrants to
purchase an aggregate of 1,226,991 shares of common stock at an exercise price
of $3.3875 per share for gross proceeds of $6,012,000 (net proceeds of
$5,155,000 after deducting the placement agent’s commissions and other offering
costs).
During
the year ended March 31, 2010, the Company received $4,223,000 in connection
with the exercise of 2,193,959 common stock purchase warrants and the exercise
of 663,592 employee stock options.
On May 1,
2010, the Company entered into a Loan and Security Agreement and a Supplement to
the Loan and Security Agreement with Venture Lending & Leasing , Inc. to
borrow up to an aggregate of $3,000,000 (collectively, the “Agreements”).
The Agreements provide for a first tranche of $2,000,000 and, upon meeting
certain milestones, the Company may borrow a second tranche of
$1,000,000. The loan is secured by the all assets of the Company excluding
intellectual property under certain circumstances. On May 3, 2010, the Company
borrowed $2,000,000 on the first tranche. The cash interest or “streaming” rate
on the loan is 10%. For the first eight payments, the Company will make monthly
payments of interest only set at $16,660 through December 1, 2010. Thereafter,
the Company will make interest and principal payments of $75,000 per month
through June 1, 2013. Additionally, the Company will make a final balloon
payment of $132,340 on June 1, 2013 (Note 18).
The
Company currently anticipates that its cash and cash equivalents will be
sufficient to meet its working capital requirements to continue its sales and
marketing and research and development through at least April 1, 2011. However,
in order to execute the Company’s long-term Microcyn product development
strategy and to penetrate new and existing markets, the Company may need to
raise additional funds, through public or private equity offerings, debt
financings, corporate collaborations or other means. The Company may raise
additional capital to pursue its product development initiatives and penetrate
markets for the sale of its products.
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 needed. If the Company is
unable to secure additional capital, it may be required to curtail its research
and development initiatives and take additional measures to reduce costs in
order to conserve its cash.
NOTE 3 —
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Aquamed Technologies, Inc., Oculus
Technologies of Mexico S.A. de C.V. (“OTM”), Oculus Innovative Sciences
Netherlands, B.V. (“OIS Europe”), and Oculus Innovative Sciences K.K. (“OIS
Japan”). On January 20, 2009, the Company dissolved OIS Japan. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent liabilities at the dates of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from these
estimates. Significant estimates and assumptions include reserves and
write-downs related to receivables and inventories, deferred taxes and related
valuation allowances and valuation of equity and derivative
instruments.
Revenue
Recognition
The
Company generates revenue from sales of its products to hospitals, medical
centers, doctors, pharmacies, and distributors. The Company sells its products
directly to third parties and to distributors through various cancelable
distribution agreements. The Company has also entered into agreements to license
its technology.
The
Company also provides regulatory compliance testing and quality assurance
services to medical device and pharmaceutical companies.
The
Company records revenue when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the fee is fixed or
determinable, and (iv) collectability of the sale is reasonably
assured.
The
Company requires all of its product sales to be supported by evidence of a sale
transaction that clearly indicates the selling price to the customer, shipping
terms and payment terms. Evidence of an arrangement generally consists of a
contract or purchase order approved by the customer. The Company has ongoing
relationships with certain customers from which it customarily accepts orders by
telephone in lieu of purchase orders.
The
Company recognizes revenue at the time in which it receives a confirmation that
the goods were either tendered at their destination when shipped “FOB
destination,” or transferred to a shipping agent when shipped “FOB shipping
point.” Delivery to the customer is deemed to have occurred when the customer
takes title to the product. Generally, title passes to the customer upon
shipment, but could occur when the customer receives the product based on the
terms of the agreement with the customer.
The
selling prices of all goods that the Company sells are fixed, and agreed to with
the customer, prior to shipment. Selling prices are generally based on
established list prices. The Company does not customarily permit its customers
to return any of its products for monetary refunds or credit against completed
or future sales. The Company, from time to time, may replace expired goods on a
discretionary basis. The Company records these types of adjustments, when made,
as a reduction of revenue. Sales adjustments were insignificant during the years
ended March 31, 2010 and 2009.
The
Company evaluates the creditworthiness of new customers and monitors the
creditworthiness of its existing customers to determine whether events or
changes in their financial circumstances would raise doubt as to the
collectability of a sale at the time in which a sale is made. Payment terms on
sales made in the United States are generally 30 days and internationally,
generally range from 30 days to 90 days.
In the
event a sale is made to a customer under circumstances in which collectability
is not reasonably assured, the Company either requires the customer to remit
payment prior to shipment or defers recognition of the revenue until payment is
received. The Company maintains a reserve for amounts which may not be
collectible due to risk of credit losses.
Additionally,
the Company’s treatment for recognizing revenue related to distributors’ that
have the inability to provide inventory or product sell-through reports on a
timely basis, is to defer and recognize revenue when payment is received. The
Company believes the receipt of payment is the best indication of product
sell-through.
The
Company has entered into distribution agreements in Europe. Recognition of
revenue and related cost of revenue from product sales is deferred until the
product is sold from the distributors to their customers.
When the
Company receives letters of credit and the terms of the sale provide for no
right of return except to replace defective product, revenue is recognized when
the letter of credit becomes effective and the product is shipped.
License
revenue is generated through agreements with strategic partners for the
commercialization of Microcyn products. The terms of the agreements sometimes
include non-refundable upfront fees. The Company analyzes multiple element
arrangements to determine whether the elements can be separated. Analysis is
performed at the inception of the arrangement and as each product is delivered.
If a product or service is not separable, the combined deliverables are
accounted for as a single unit of accounting and recognized over the performance
obligation period.
Assuming
the elements meet the criteria for separation and all other revenue requirements
for recognition, the revenue recognition methodology prescribed for each unit of
accounting is summarized below:
When
appropriate, the Company defers recognition of non-refundable upfront fees. If
it has continuing performance obligations then such up-front fees are deferred
and recognized over the period of continuing involvement.
The
Company recognizes royalty revenues from licensed products upon the sale of the
related products.
Revenue
from consulting contracts is recognized as services are provided. Revenue from
testing contracts is recognized as tests are completed and a final report is
sent to the customer.
Sales
Tax and Value Added Taxes
The
Company accounts for sales taxes and value added taxes imposed on its goods and
services on a net basis.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents. Cash equivalents may
be invested in money market funds, commercial paper, variable rate demand
instruments, and certificates of deposits.
Concentration
of Credit Risk and Major Customers
Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash, cash equivalents and accounts receivable. Cash and
cash equivalents are maintained in financial institutions in the United States,
Mexico and the Netherlands. The Company is exposed to credit risk in the event
of default by these financial institutions for amounts in excess of the Federal
Deposit Insurance Corporation insured limits. Cash and cash equivalents held in
foreign banks are intentionally kept at minimal levels, and therefore have
minimal credit risk associated with them.
The
Company grants credit to its business customers, which are primarily located in
Mexico, Europe and the United States. Collateral is generally not required for
trade receivables. The Company maintains allowances for potential credit losses.
Three customers represented a total of 42% of the net accounts receivable
balance, and two customers represented 29% of the net accounts receivable
balance at March 31, 2010 and 2009, respectively. During the years ended
March 31, 2010 and 2009, three customers represented 23% of sales, and
three customers represented 21% of sales, respectively, of which two out of
three customers were the same in both years
Accounts
Receivable
Trade
accounts receivable are recorded net of allowances for cash discounts for prompt
payment, doubtful accounts, and sales returns. Estimates for cash discounts and
sales returns are based on analysis of contractual terms and historical
trends.
The
Company’s policy is to reserve for uncollectible accounts based on its best
estimate of the amount of probable credit losses in its existing accounts
receivable. The Company periodically reviews its accounts receivable to
determine whether an allowance for doubtful accounts is necessary based on an
analysis of past due accounts and other factors that may indicate that the
realization of an account may be in doubt. Other factors that the Company
considers include its existing contractual obligations, historical payment
patterns of its customers and individual customer circumstances, an analysis of
days sales outstanding by customer and geographic region, and a review of the
local economic environment and its potential impact on government funding and
reimbursement practices. Account balances deemed to be uncollectible are charged
to the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. The allowance for doubtful accounts
at March 31, 2010 and 2009 represents probable credit losses in the amounts
of $96,000 and $51,000, respectively.
Inventories
Inventories
are stated at the lower of cost, cost being determined on a standard cost basis
(which approximates actual cost on a first-in, first-out basis), or
market.
Due to
changing market conditions, estimated future requirements, age of the
inventories on hand and production of new products, the Company regularly
reviews inventory quantities on hand and records a provision to write down
excess and obsolete inventory to its estimated net realizable value. The Company
recorded reserves to reduce the carrying amounts of inventories to their net
realizable value in the amounts of $143,000 and $71,000 at March 31, 2010
and 2009, respectively.
Fair
Value of Financial Assets and Liabilities
Financial
instruments, including cash and cash equivalents, accounts payable and accrued
liabilities are carried at cost, which management believes approximates fair
value due to the short-term nature of these instruments. The fair value of
capital lease obligations and equipment loans approximates its carrying amounts
as a market rate of interest is attached to their repayment.
The
Company measures the fair value of financial assets and liabilities based on the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. The Company maximizes the use of observable inputs and
minimizes the use of unobservable inputs when measuring fair value. The Company
uses three levels of inputs that may be used to measure fair value:
Level 1 —
quoted prices in active markets for identical assets or liabilities
Level 2 —
quoted prices for similar assets and liabilities in active markets or inputs
that are observable
Level 3 —
inputs that are unobservable (for example cash flow modeling inputs based on
assumptions)
Financial
liabilities measured at fair value on a recurring basis are summarized
below:
|
|
Fair Value Measurements at March 31, 2010 Using
|
|
|
|
March 31,
2010
|
|
|
Quoted
prices in
active
markets for
identical
assets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
other
unobservable
inputs
(Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability - warrants
|
|
$ |
472 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
472 |
|
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the respective assets. Depreciation of
leasehold improvements is computed using the straight-line method over the
lesser of the estimated useful life of the improvement or the remaining term of
the lease. Estimated useful asset life by classification is as
follows:
|
|
Years
|
|
Office
equipment
|
|
3
|
|
Manufacturing,
lab and other equipment
|
|
5
|
|
Furniture
and fixtures
|
|
7
|
|
Upon
retirement or sale, the cost and related accumulated depreciation are removed
from the consolidated balance sheet and the resulting gain or loss is reflected
in operations. Maintenance and repairs are charged to operations as
incurred.
Impairment
of Long-Lived Assets
The
Company periodically reviews the carrying values of its long lived assets in
accordance when events or changes in circumstances would indicate that it is
more likely than not that their carrying values may exceed their realizable
values, and records impairment charges when considered necessary. Specific
potential indicators of impairment include, but are not necessarily limited
to:
|
•
|
a
significant decrease in the fair value of an
asset;
|
|
•
|
a
significant change in the extent or manner in which an asset is used or a
significant physical change in an
asset;
|
|
•
|
a
significant adverse change in legal factors or in the business climate
that affects the value of an asset;
|
|
•
|
an
adverse action or assessment by the U.S. Food and Drug Administration
or another regulator;
|
|
•
|
an
accumulation of costs significantly in excess of the amount originally
expected to acquire or construct an asset; and operating or cash flow
losses combined with a history of operating or cash flow losses or a
projection or forecast that demonstrates continuing losses associated with
an income-producing asset.
|
When
circumstances indicate that an impairment may have occurred, the Company tests
such assets for recoverability by comparing the estimated undiscounted future
cash flows expected to result from the use of such assets and their eventual
disposition to their carrying amounts. In estimating these future cash flows,
assets and liabilities are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows generated
by other such groups. If the undiscounted future cash flows are less than the
carrying amount of the asset, an impairment loss, measured as the excess of the
carrying value of the asset over its estimated fair value, will be recognized.
The cash flow estimates used in such calculations are based on estimates and
assumptions, using all available information that management believes is
reasonable. During the years ended March 31, 2010 and 2009, the Company
had noted no indicators of impairment.
Research
and Development
Research
and development expense is charged to operations as incurred and consists
primarily of personnel expenses, clinical and regulatory services and supplies.
For the years ended March 31, 2010 and 2009, research and development
expense amounted to $1,996,000 and $6,252,000, respectively.
Advertising
Costs
Advertising
costs are expensed are incurred. Advertising costs amounted to $246,000 and
$170,000, for the years ended March 31, 2010 and 2009, respectively.
Advertising costs are included in selling, general and administrative expenses
in the accompanying consolidated statements of operations.
Shipping
and Handling Costs
The
Company classifies amounts billed to customers related to shipping and handling
in sale transactions as revenue. Shipping and handling costs incurred are
recorded in cost of product revenues. For the years ended March 31, 2010
and 2009, the Company recorded revenue related to shipping and handling costs of
$47,000 and $24,000, respectively.
Foreign
Currency Reporting
The
Company’s subsidiary, OTM uses the local currency (Mexican Pesos) as its
functional currency, OIS Europe uses the local currency (Euro) as its functional
currency and OIS Japan used the local currency (Yen) as its functional currency.
Assets and liabilities are translated at exchange rates in effect at the balance
sheet date, and revenue and expense accounts are translated at average exchange
rates during the period. Resulting translation adjustments were recorded in
accumulated other comprehensive loss in the accompanying consolidated balance
sheets at March 31, 2010 and March 31, 2009. On January 20, 2009,
the Company dissolved OIS Japan. This transaction resulted in a reclassification
adjustment of $96,000 from other comprehensive loss to other income and expense,
net, in the accompanying statement of operations for the year ended
March 31, 2009.
Foreign
currency transaction gains (losses) relate primarily to working capital loans
that the Company has made to its subsidiary OIS Japan and trade payables and
receivables between subsidiaries OTM and OIS Europe. These transactions are
expected to be settled in the foreseeable future. The Company recorded foreign
currency transaction gains (losses) of $97,000 and $(64,000) for the years ended
March 31, 2010 and 2009, respectively. The related gains (losses) were
recorded in other income and expense, net, in the accompanying consolidated
statements of operations.
Stock-Based
Compensation
The
Company accounts for share-based awards exchanged for employee services at the
estimated grant date fair value of the award. The Company estimates the fair
value of employee stock awards using the Black-Scholes option pricing model. The
Company amortizes the fair value of employee stock options on a straight-line
basis over the requisite service period of the awards. Compensation
expense includes the impact of an estimate for forfeitures for all stock
options.
The
Company accounts for equity instruments issued to non-employees at their fair
value on the measurement date. The measurement of stock-based compensation is
subject to periodic adjustment as the underlying equity instrument vests or
becomes non-forfeitable. Non-employee stock-based compensation charges are
amortized over the vesting period or as earned.
For the
years ended March 31, 2010 and 2009, the Company recognized stock-based
compensation expense in the accompanying consolidated statements of operations
of $1,432,000 and $2,263,000, respectively.
Income
Taxes
Deferred
tax assets and liabilities are determined based on the differences between the
financial reporting and tax bases of assets and liabilities and net operating
loss and credit carryforwards using enacted tax rates in effect for the year in
which the differences are expected to impact taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Tax
benefits claimed or expected to be claimed on a tax return are recorded in the
Company’s consolidated financial statements. A tax benefit from an uncertain tax
position is only recognized 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. Uncertain tax positions have had no impact on the Company’s
consolidated financial condition, results of operations or cash
flows.
Comprehensive
Loss
Other
comprehensive loss includes all changes in stockholders’ equity during a period
from non-owner sources and is reported in the consolidated statement of
stockholders’ equity. To date, other comprehensive loss consists of changes in
accumulated foreign currency translation adjustments. Accumulated other
comprehensive losses at March 31, 2010 and 2009 were $2,988,000 and
$3,054,000, respectively.
Net
Loss Per Share
The
Company computes basic net loss per share by dividing net loss per share
available to common stockholders by the weighted average number of common shares
outstanding for the period and excludes the effects of any potentially dilutive
securities. Diluted earnings per share, if presented, would include the dilution
that would occur upon the exercise or conversion of all potentially dilutive
securities into common stock using the “treasury stock” and/or “if converted”
methods as applicable. The computation of basic loss per share for the years
ended March 31, 2010 and 2009, excludes potentially dilutive securities
because their inclusion would be anti-dilutive.
|
|
Year Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Anti-dilutive
securities excluded from the computation of basic and diluted net loss per
share are as follows:
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
3,987 |
|
|
|
3,964 |
|
Restricted
stock units
|
|
|
— |
|
|
|
30 |
|
Warrants
to purchase common stock
|
|
|
9,144 |
|
|
|
7,056 |
|
|
|
|
13,131 |
|
|
|
11,050 |
|
Common
Stock Purchase Warrants and Other Derivative Financial Instruments
The
Company classifies common stock purchase warrants and other free standing
derivative financial instruments in classifies as equity if the contracts
(i) require physical settlement or net-share settlement or (ii) gives
the Company a choice of net-cash settlement or settlement in its own shares
(physical settlement or net-share settlement). The Company classifies as assets
or liabilities any contracts that (i) require net-cash settlement
(including a requirement to net cash settle the contract if an event occurs and
if that event is outside the control of the Company) or (ii) gives the
counterparty a choice of net-cash settlement or settlement in shares (physical
settlement or net-share settlement). The Company assesses classification of its
freestanding derivatives at each reporting date to determine whether a change in
classification between assets and liabilities is required. The Company
determined that its freestanding derivatives, which principally consist of
warrants to purchase common stock, satisfied the criteria for classification as
equity instruments at March 31, 2010 other than certain warrants that contain
reset provisions that the Company classified as derivative liabilities as more
fully described in Note 11.
Subsequent
Events
Management
has evaluated subsequent events or transactions occurring through the date these
consolidated financial statements were issued.
Recent
Accounting Pronouncements
In
December 2008, the FASB issued Accounting Standards Codification or ASC 815-40
“Contracts in Entity’s own Equity.” This issue addresses the determination of
whether an instrument (or an embedded feature) is indexed to an entity’s own
stock.. This issue is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The Company has included the impact of ASC 815-40 in its March 31, 2010
consolidated financial statements (Note 11).
In April
2009, the FASB issued ASC 820-10-65 “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” Based on the guidance, if an
entity determines that the level of activity for an asset or liability has
significantly decreased and that a transaction is not orderly, further analysis
of transactions or quoted prices is needed, and a significant adjustment to the
transaction or quoted prices may be necessary to estimate fair value in
accordance with Statement of Financial Accounting Standards ASC 820-10 “Fair
Value Measurements”. This is to be applied prospectively and is effective for
interim and annual periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009. The Company adopted this
guidance for its quarter ended June 30, 2009. The adoption has no impact on the
Company’s consolidated financial statements.
In April
2009, the FASB issued ASC 825, “Financial Instruments.” This standard extends
the disclosure requirements concerning the fair value of financial instruments
to interim financial statements of publicly traded companies. This guidance is
effective for interim or annual financial periods ending after June 15, 2009,
and as such, became effective for the Company in the quarter ended June 30,
2009. The adoption of ASC 825 had no material impact on the Company’s
consolidated financial position, results of operations or cash
flows.
In May
2009, the FASB issued guidance now codified as ASC Topic 855, “Subsequent
Events.” ASC Topic 855 establishes standards for the disclosure of events that
occur after the balance sheet date, but before financial statements are issued
or are available to be issued. ASC Topic 855 introduces the concept of financial
statements being “available to be issued.” It requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date. The disclosure should alert all users of financial statements that an
entity has not evaluated subsequent events after that date in the set of
financial statements being presented. The Company adopted ASC Topic 855 for the
period ended June 30, 2009. The adoption of ASC Topic 855 had no impact on the
Company’s consolidated financial position, results of operations or cash
flows.
In
January 2010, the FASB issued Accounting Standards Update or ASU No. 2010-6,
“Improving Disclosures About Fair Value Measurements,” which requires reporting
entities to make new disclosures about recurring or nonrecurring fair-value
measurements including significant transfers into and out of Level 1 and Level 2
fair-value measurements and information on purchases, sales, issuances, and
settlements on a gross basis in the reconciliation of Level 3 fair- value
measurements. ASU No. 2010-6 is effective for fiscal years beginning after
December 15, 2009. The adoption of this ASU will not have an
impact on the Company’s results of operations.
In
February 2010, the FASB issued ASU No. 2010-09, "Subsequent Events (Topic 855) -
Amendments to Certain Recognition and Disclosure Requirements." ASU No. 2010-09
requires an entity that is an SEC filer to evaluate subsequent events through
the date that the financial statements are issued and removes the requirement
that an SEC filer disclose the date through which subsequent events have been
evaluated. ASC No. 2010-09 was effective upon issuance. The adoption of this
standard had no effect on the Company’s consolidated financial position or
results of operations.
In March
2010, the FASB issued ASU No. 2010-17, “Revenue Recognition— Milestone Method
(Topic 605): Milestone Method of Revenue Recognition”. This
standard provides that the milestone method is a valid application of
the proportional performance model for revenue recognition if the milestones are
substantive and there is substantive uncertainty about whether the milestones
will be achieved. Determining whether a milestone is substantive requires
judgment that should be made at the inception of the arrangement. To meet the
definition of a substantive milestone, the consideration earned by achieving the
milestone (1) would have to be commensurate with either the level of effort
required to achieve the milestone or the enhancement in the value of the item
delivered, (2) would have to relate solely to past performance, and
(3) should be reasonable relative to all deliverables and payment terms in
the arrangement. No bifurcation of an individual milestone is allowed and there
can be more than one milestone in an arrangement. The new standard is effective
for interim and annual periods beginning on or after June 15, 2010. Early
adoption is permitted. The adoption of this standard will not have any impact on
the Company’s consolidated financial position and results of
operations.
Other
accounting standards that have been issued or proposed by the FASB, the EITF,
the SEC and or other standards-setting bodies that do not require adoption until
a future date are not expected to have a material impact on the consolidated
financial statements upon adoption.
NOTE 4 —
Accounts Receivable
Accounts
receivable consists of the following (in thousands):
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Accounts
receivable
|
|
$ |
1,512 |
|
|
$ |
974 |
|
Less:
allowance for doubtful accounts
|
|
|
(96 |
) |
|
|
(51 |
) |
|
|
$ |
1,416 |
|
|
$ |
923 |
|
Allowance
for doubtful accounts activities are as follows (in thousands):
Year Ended March 31
|
|
Balance at
Beginning
of Year
|
|
|
Additions
Charged to
Operations
|
|
|
Deductions
Write-Offs
|
|
|
Balance at
End of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
31 |
|
|
$ |
29 |
|
|
$ |
(9 |
) |
|
$ |
51 |
|
2010
|
|
$ |
51 |
|
|
$ |
61 |
|
|
$ |
(16 |
) |
|
$ |
96 |
|
NOTE 5 —
Inventories
Inventories
consist of the following (in thousands):
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Raw
materials
|
|
$ |
406 |
|
|
$ |
277 |
|
Finished
goods
|
|
|
302 |
|
|
|
134 |
|
|
|
|
708 |
|
|
|
411 |
|
Less:
inventory allowances
|
|
|
(143 |
) |
|
|
(71 |
) |
|
|
$ |
565 |
|
|
$ |
340 |
|
Reserve
for obsolete inventories activities are as follows (in thousands):
Year Ended March 31
|
|
Balance at
Beginning
of Year
|
|
|
Additions
Charged to
Cost of
Product
Revenues
|
|
|
Deductions
Write-Offs
|
|
|
Balance at
End of Year
|
|
2009
|
|
$ |
208 |
|
|
$ |
39 |
|
|
$ |
(176 |
) |
|
$ |
71 |
|
2010
|
|
$ |
71 |
|
|
$ |
184 |
|
|
$ |
(112 |
) |
|
$ |
143 |
|
NOTE 6 —
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consist of the following (in
thousands):
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Prepaid
expenses
|
|
$ |
590 |
|
|
$ |
657 |
|
Value
Added Tax receivable
|
|
|
31 |
|
|
|
23 |
|
Other
current assets
|
|
|
190 |
|
|
|
78 |
|
|
|
$ |
811 |
|
|
$ |
758 |
|
NOTE 7 —
Property and Equipment
Property
and equipment consists of the following (in thousands):
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Manufacturing,
lab, and other equipment
|
|
$ |
2,470 |
|
|
$ |
3,067 |
|
Office
equipment
|
|
|
388 |
|
|
|
421 |
|
Furniture
and fixtures
|
|
|
52 |
|
|
|
60 |
|
Leasehold
improvements
|
|
|
275 |
|
|
|
252 |
|
|
|
|
3,185 |
|
|
|
3,800 |
|
Less:
accumulated depreciation and amortization
|
|
|
(2,077 |
) |
|
|
(2,368 |
) |
|
|
$ |
1,108 |
|
|
$ |
1,432 |
|
Property
and equipment includes $118,000 and $186,000 of equipment purchases that were
financed under capital lease obligations as of March 31, 2010 and 2009,
respectively (Note 10). The accumulated amortization on these assets
amounted to $115,000 and $181,000 as of March 31, 2010 and 2009,
respectively.
Depreciation
and amortization expense (including amortization of leased assets) amounted to
$433,000 and $768,000 for the years ended March 31, 2010 and 2009,
respectively.
During
the years ended March 31, 2010 and 2009, the Company incurred losses on the
disposal of assets in the amount of $169,000 and $235,000,
respectively. These amounts are recorded as operating expenses in the
accompanying consolidated statements of operations.
NOTE 8 —
Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consist of the following (in
thousands):
|
|
March 31
|
|
|
|
2010
|
|
|
2009
|
|
Salaries
and related costs
|
|
$ |
467 |
|
|
$ |
394 |
|
Professional
fees
|
|
|
143 |
|
|
|
90 |
|
Value
Added Tax payable
|
|
|
140 |
|
|
|
90 |
|
Deferred
revenue
|
|
|
318 |
|
|
|
272 |
|
Other
|
|
|
10 |
|
|
|
7 |
|
|
|
$ |
1,078 |
|
|
$ |
853 |
|
NOTE 9 —
Long-Term Debt
On
May 1, 1999, the Company issued a note payable in the amount of $64,000
with interest at 8% per annum. The final payment in the amount of
$23,000 was paid on January 5, 2010.
From
February 2005 to March 2006, the Company issued various notes for aggregate
principal amounting to $182,000 with interest rates ranging from 6.25% to 14.44%
per annum. The proceeds of these notes were used to purchase automobiles and
software. The Company made principal payments on these notes of $28,000 and
$48,000, during the years ended March 31, 2010 and 2009, respectively.
Aggregate interest expense under these obligations amounted to $2,000 and $6,000
for the years ended March 31, 2010 and 2009, respectively. These notes were
payable in aggregate monthly installments of $3,700 including interest through
March 14, 2011. The remaining balance of these notes amounted to $10,000 at
March 31, 2010, which is included in the current portion of long-term debt
in the accompanying consolidated balance sheet.
On
June 14, 2006, the Company entered into a credit facility providing it with
up to $5,000,000 of available credit. The facility permitted the Company to
borrow up to a maximum of $2,750,000 for growth capital, $1,250,000 for working
capital based on eligible accounts receivable and $1,000,000 in equipment
financing. In June 2006, the Company drew an aggregate of $4,182,000 of
borrowings under this facility. These borrowings were payable in 30 to 33 fixed
monthly installments with interest at rates ranging from 12.4% to 12.7% per
annum, with the final due payment on March 31, 2009. The Company issued the
lender warrants to purchase up to 71,521 shares of its Series B
convertible preferred stock upon originating the loan which automatically
converted into warrants to purchase 71,521 shares of the Company’s common
stock at the closing of the Company’s initial public offering on
January 30, 2007. The aggregate fair value of all warrants issued to the
lender under this arrangement amounted to $1,046,000 (Note 13). This amount
was recorded as debt issuance costs and was amortized as interest expense over
the term of the credit facility. For the year ended March 31, 2009, the
Company recorded $304,000 of non-cash interest expense related to the
amortization of debt issuance costs. In connection with these notes, for the
year ended March 31, 2009, the Company made principal payments of
$1,829,000. Additionally, for the year ended March 31, 2009, the Company
made interest payments of $133,000. The final payment was made in connection
with this facility on March 31, 2009. This facility is expired and
therefore the Company does not have the ability to borrow against this facility
in the future.
On
May 21, 2006, the Company entered into a note agreement for $69,000 with
interest at the rate of 7.94% per annum. This note is related to the purchase of
an automobile. This note is payable in sixty monthly installments of $1,200. The
Company made principal payments of $14,000 and $10,800 during the years ended
March 31, 2010 and 2009, respectively. Additionally, the Company made
interest payments of $1,000 and $3,700 during the years ended March 31,
2010 and 2009, respectively. On October 7, 2009, the remaining note
balance of $27,000 was terminated in connection with a trade-in transaction on a
new vehicle.
On
April 12, 2007, the Company entered into a note agreement to purchase an
automobile for $75,800 with interest at the rate of 7.75% per annum. This note
is payable in monthly installments of $1,500. During the years ended
March 31, 2010 and 2009, the Company made principal payments of $12,000 and
$13,900, respectively. Additionally, during the years ended March 31, 2010
and 2009, the Company made interest payments of $1,000 and $4,500,
respectively. On August 29, 2009, the remaining note balance of
$39,000 was terminated in connection with a trade-in transaction on a new
vehicle.
On
March 1, 2008, the Company entered into a note agreement for $176,600 with
an interest rate of 5.6% per annum. The note was used to finance insurance
premiums. The note was payable in monthly installments of $14,800 through
January 1, 2009. During the year ended March 31, 2009, the Company
made interest payments of $4,500. During the year ended March 31, 2009, the
Company made principal payments of $143,000. The final payment on this note was
made on January 1, 2009.
On
January 25, 2009 and February 16, 2009, the Company entered into a
note agreement for $250,000 with an interest rate of 4.0% per annum. The notes
were used to finance insurance premiums. The notes were payable in monthly
installments of $25,500. During the years ended March 31, 2010 and 2009,
the Company made interest payments of $2,000 and $1,200, respectively. During
the years ended March 31, 2010 and 2009, the Company made principal
payments of $176,000 and $74,000. The final payment on these notes was made on
October 2, 2009.
On August
29, 2009, the Company entered into a note agreement for principal amounting to
$100,000 with an interest rate of 2.90% per annum. This note is associated with
financing an automobile. The note is payable in monthly installments of $1,800
through August 29, 2014. During the year ended March 31, 2010, the
Company made principal and interest payments related to this note in the amounts
of $11,000 and $2,000, respectively. The remaining balance of this note amounted
to $90,000 at March 31, 2010 of which $19,000 is included in the current portion
of long-term debt in the accompanying consolidated balance sheet.
On
October 7, 2009, the Company entered into a note agreement for principal
amounting to $57,000 with an interest rate of 1.0% per annum. This instrument is
in connection with financing an automobile. The note is payable in monthly
installments of $900 through October 26, 2014. During the year ended
March 31, 2010, the Company made principal payments related to this note in the
amount of $4,000. During the year ended March 31, 2010, interest payments
related to this note were negligible. The remaining balance of this
note amounted to $50,000 at March 31, 2010 of which $11,000 is included in the
current portion of long-term debt in the accompanying consolidated balance
sheet.
On March
16, 2010, the Company entered into a note agreement for $184,000 with an
interest rate of 4.0% per annum. The note was used to finance insurance
premiums. The note is payable in monthly installments of $20,800 through
November 16, 2010. During the year ended March 31, 2010, the Company made
principal and interest payments of $20,000 and $1,000,
respectively. The remaining balance of this note amounted to $164,000
at March 31, 2010 which is included in the current portion of long-term debt in
the accompanying consolidated balance sheet.
A summary
of principal payments due in years subsequent to March 31, 2010 is as
follows (in thousands):
For Years Ending March 31,
|
|
|
|
2011
|
|
$ |
204 |
|
2012
|
|
|
31 |
|
2013
|
|
|
31 |
|
2014
|
|
|
33 |
|
2015
|
|
|
15 |
|
Total
principal payments
|
|
|
314 |
|
Less:
current portion
|
|
|
(204 |
) |
Long-term
portion
|
|
$ |
110 |
|
NOTE 10 —
Capital Lease Obligations
On
November 10, 2004, the Company entered into a capital lease under which the
present value of the minimum lease payments amounted to $37,000. The present
value of the minimum lease payments was calculated using a discount rate of 10%.
Lease payments, including amounts representing interest, amounted to $6,000 and
$9,000 for the years ended March 31, 2010 and 2009, respectively. The
capital leases were paid in full during the year ended March 31,
2010.
The
Company recorded interest expense in connection with these lease agreements in
the amounts of $1,000 and $1,700 for the years ended March 31, 2010 and
2009, respectively.
NOTE
11 — Derivative Liability
The
Company deems financial instruments which do not have fixed settlement
provisions to be derivative instruments. The common stock warrants issued with
the Company’s August 13, 2007 private placement, and the common stock warrants
issued to the placement agent in the transaction, do not have fixed settlement
provisions because their exercise prices may be lowered if the Company issues
securities at lower prices in the future. The Company was required to include
the reset provisions in order to protect the warrant holders from the potential
dilution associated with future financings. At issuance, the warrants were
recognized as derivative instruments and have since been re-characterized as
derivative liabilities. Accordingly, the fair value of these liabilities are
re-measured at the end of every reporting period with the change in value
reported in the statement of operations.
The
derivative liabilities were valued using the Black-Scholes option valuation
model and the following assumptions on the following dates:
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2010
|
|
|
2009
|
|
Expected
Term
|
|
2.37
yrs
|
|
|
3.37
yrs
|
|
Risk-free
interest rate
|
|
|
1.02 |
% |
|
|
1.15 |
% |
Dividend
yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
Volatility
|
|
|
84.0 |
% |
|
|
84.0 |
% |
Warrants
outstanding
|
|
|
724,188 |
|
|
|
953,752 |
|
Fair
value of warrants
|
|
$ |
472,000 |
|
|
$ |
323,000 |
|
Effective
April 1, 2009 the Company reclassified the fair value of these common stock
purchase warrants from stockholders’ equity to liabilities as if these warrants
were treated as derivative liabilities since their date of issue. On April 1,
2009, the Company recorded a $323,000 derivative liability and a corresponding
charge to its accumulated deficit to recognize the cumulative effects of the
transaction. The fair value of the derivative liability increased to $472,000 at
March 31, 2010 from $323,000 at April 1, 2009. Accordingly, the Company
increased the derivative liability by $149,000 to reflect the change in fair
value at March 31, 2010. This amount is included as a change in the fair value
of derivative instruments in the accompanying consolidated statement of
operations for the year ended March 31, 2010.
NOTE 12 —
Commitments and Contingencies
Lease
Commitments
The
Company has entered into various non-cancelable operating leases, primarily for
office facility space, that expire at various times through September 30,
2011.
On
September 13, 2007, the Company entered into Amendment No. 4 to the
property lease agreement for its facility in Petaluma, California. The amendment
extends the lease expiration date to September 30, 2010. On
February 1, 2009, the Company amended its property lease agreement for its
facility in Sittard, the Netherlands. The amendment shortens the lease period
from January 31, 2011 to September 1, 2009. Pursuant to the amendment,
by March 31, 2009, the Company agreed to prepay the property owner $96,000
which represented the lease payments for the period of April 1, 2009 to
September 1, 2009. On May 1, 2009, the Company amended its lease
for its facility in Petaluma which resulted in a reduction of the Company’s
monthly lease payment. Pursuant to the amendment, the Company agreed to
surrender 8,534 square feet of office space, extended the lease expiration on
the remaining lease to September 30, 2011, provided the property owner with a
$50,000 cash payment, and on August 28, 2009 issued the property owner 53,847
shares of the Company’s common stock with a fair value of $70,000 (Note
13). The Company will amortize the cash payment and the fair value of
the common stock issued on a straight-line basis over the remaining term of the
lease, or September 30, 2011.
Minimum
lease payments for non-cancelable operating leases, including the effects of the
lease extension described above, are as follows (in thousands):
For Years Ending March 31,
|
|
|
|
2011
|
|
$ |
289 |
|
2012
|
|
|
108 |
|
Total
minimum lease payments
|
|
$ |
397 |
|
Rent
expense amounted to $499,000 and $628,000 for the years ended March 31,
2010 and 2009, respectively.
Legal
Matters
In June
2006, the Company received a written communication from the grantor of a license
to an earlier version of its technology indicating that such license was
terminated due to an alleged breach of the license agreement by the Company. The
license agreement extends to the Company’s use of the technology in Japan only.
While the Company does not believe that the grantor’s 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 Company’s use of the technology in the licensed
territory. While the Company’s management does not anticipate that the outcome
of this matter is likely to result in a material loss, there can be no assurance
that if the grantor pursues legal action, such legal action would not have a
material adverse effect on the Company’s financial position or results of
operations.
The
Company, from time to time, is involved in legal matters arising in the ordinary
course of its business including matters involving proprietary technology. While
management believes that such matters are currently not material, there can be
no assurance that matters arising in the ordinary course of business for which
the Company is or could become involved in litigation, will not have a material
adverse effect on its business, financial condition or results of
operations.
Other
Matters
On
September 16, 2005, the Company entered into a series of agreements with
Quimica Pasteur S.A. de C.V. (“QP”), a Mexico-based company engaged in the
business of distributing pharmaceutical products to hospitals and health care
entities owned or operated by the Mexican Ministry of Health. These agreements
provided, among other things, for QP to act as the Company’s 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 QP’s attainment of certain financial milestones. The Company’s
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
Company’s subordinated financial and management support. Accordingly, QP was
deemed to be a variable interest entity and its results were consolidated with
the Company’s 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 Company’s 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 QP’s 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 Company’s 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 Company’s management and the audit
committee of the board of directors do not believe that the Company is likely to
experience any loss with respect to this matter. However, there can be no
assurance that the Mexican tax authorities will not pursue this matter and, if
pursued, that it would not result in a material loss to the
Company.
Employment
Agreements
As of
March 31, 2010, the Company had employment agreements in place with five of its
key executives. The agreements provide, among other things, for the payment of
nine to twenty-four months of severance compensation for terminations under
certain circumstances. With respect to these agreements, at March 31, 2010,
potential severance amounted to $1,913,000 and aggregated annual salaries
amounted to $1,350,000.
On
September 4, 2008, the employment agreement of Mr. Mike Wokasch, the
Company’s former Chief Operating Officer, was terminated, effective
September 5, 2008. In connection with the termination, the Company was
required to provide Mr. Wokasch with a lump sum severance payment of
$275,000, which was equivalent to one year of his salary. Additionally, pursuant
to the employment agreement, upon termination, all non-vested options that were
outstanding at the termination date became immediately exercisable. The Company
recorded $1,168,000 of stock compensation expense related to the acceleration of
the vesting. The options expired one year from the date of termination, on
September 5, 2009. The severance and stock compensation expense was
recorded as a selling, general and administrative expense in the accompanying
consolidated statements of operations for the year ended March 31, 2009.
The Company paid the severance on October 10, 2008.
Board
Compensation
On April
26, 2007, the Company’s board of directors adopted a Non-Employee Director
Compensation Package (the “Compensation Package”) to provide members of the
board and its committees with regular compensation. The Compensation Package
provides for cash compensation in the amount of $25,000 to each non-employee
member of the board of directors, and annual payments ranging from $2,000 to
$5,000 for participation on board committees. Employee directors do not receive
any form of compensation for their board participation. Additionally, on an
annual basis the board members are automatically granted 15,000 stock options.
The Company intends to issue stock options to the board members in lieu of cash
installments. In connection with the annual awards, on
January 5, 2010, the Company granted 15,000 options to each of five
non-employee directors at an exercise price of $1.75 per share which was the
closing price of the Company’s common stock on the date of grant.
Related
Party Agreements
On
January 26, 2009, the Company entered into a commercial agreement with
Vetericyn, Inc., a California corporation wholly-owned by the Company’s former
director, Robert Burlingame, to market and sells its Vetericyn products.
Vetericyn, Inc. later changed its name to V&M Industries and then to
Innovacyn, Inc. (“Innovacyn”), which remains wholly-owned by Mr. Burlingame.
Additionally, Mr. Burlingame holds a significant position in the Company’s
common stock. This agreement was amended on February 24, 2009 and on July 24,
2009. Pursuant to the agreement, the Company provides Innovacyn with bulk
product and Innovacyn bottles, packages, and sells Vetericyn products. The
Company receives a fixed amount for each bottle of Vetericyn sold by Innovacyn.
On September 15, 2009, Innovacyn and the Company again amended this agreement
whereby the Company granted Innovacyn a non-exclusive right to market the
Company’s Microcyn over-the-counter (“OTC”) liquid and hydrogel
products. The Company manufactures the Microcyn OTC products and will
continue to bear all inventory and collection risks related to these sales.
Accordingly, the Company records this revenue on the gross basis and records
expenses related to Innovacyn’s marketing efforts in selling, general and
administrative expenses. In addition, once certain milestones are met by
Innovacyn, the Company will share revenue generated by Innovacyn related to
Vetericyn and Microcyn OTC sales. During the years ended March 31, 2010 and
2009, the Company recorded revenue related to these agreements in the amounts
of $519,000 and $5,000, respectively. The revenue is recorded in product
revenues in the accompanying consolidated statements of
operations. At March 31, 2010, the Company had an accounts receivable
balance of $105,000 related to Innovacyn.
On April
1, 2009, the Company entered into a six month agreement with a former member of
its Board of Directors, Mr. Robert Burlingame. Pursuant to the agreement, Mr.
Burlingame agreed to provide the Company with sales and marketing expertise and
services as part of another revenue sharing agreement. In consideration for his
services, the Company issued Mr. Burlingame 435,897 unregistered shares of its
common stock. The Company issued the shares on June 12, 2009. The shares were
fully vested and non-forfeitable at the time of issuance. The fair value of the
common stock was more readily determinable than the fair value of the services
rendered. The Company amortized the fair value of the warrants over
the six month term of the consulting agreement which is consistent with its
treatment of similar cash transactions. Accordingly, the Company recorded
$476,000 of stock compensation expense related to this agreement which was
recognized on a straight-line basis over the six month term of the agreement
from April 1, 2009 to October 1, 2009. The expense was recorded as selling,
general and administrative expense in the accompanying consolidated statement of
operations for the year ended March 31, 2010.
Commercial
Agreements
On
May 8, 2007 and June 11, 2007, the Company entered into separate
commercial agreements with two unrelated customers granting such customers the
exclusive right to sell the Company’s products in specified territories or for
specific uses. Both customers are required to maintain certain minimum levels of
purchases of the Company’s products in order to maintain exclusivity. Up-front
payments amounting to $625,000 paid under these agreements have been recorded as
deferred revenue of which $328,000 is classified as long-term deferred revenue
in the accompanying consolidated balance sheet at March 31, 2010. The
up-front fees will be amortized on a straight-line basis over the terms of the
underlying agreements. The Company amortized $97,000 of deferred revenue which
is included in product revenue in the accompanying consolidated statement of
operations for each of the years ended March 31, 2010 and 2009,
respectively. Additionally, on March 17, 2010, one of the customers
made a $200,000 payment to the Company related to a minimum payment obligation
for the year. This amount is included in product revenue in the
consolidated statement of operations for the year ended March 31,
2010.
NOTE 13 —
Stockholders’ Equity
Authorized
Capital
The
Company is authorized to issue up to 100,000,000 shares of common stock
with a par value of $0.0001 per share and 5,000,000 shares of convertible
preferred stock with a par value of $0.0001 per share.
Description
of Common Stock
Each
share of common stock has the right to one vote. The holders of common stock are
entitled to dividends when funds are legally available and when declared by the
board of directors.
Registered
Direct Offering
On
March 31, 2008, the Company closed the registered direct placement of
2,634,578 shares of its common stock at a purchase price of $5.25 per
share, and warrants to purchase an aggregate of 1,317,278 shares of common
stock at an exercise price of $6.85 per share for gross proceeds of $13,297,000
and net proceeds of $12,613,000 (after deducting the placement agent’s
commission and other offering expenses). On April 1, 2008, the Company had
a second closing of an additional 18,095 shares of its common stock at a
purchase price of $5.25 per share, and warrants to purchase an aggregate of
9,047 shares of common stock at an exercise price of $6.85 per share for
gross proceeds of $95,000 and net proceeds of $36,000 (after deducting the
placement agent’s commission and other offering expenses). Both closings were
part of the same offering. Additionally, the Company issued a warrant to
purchase 130,000 shares of common stock at an exercise price of $6.30 per
share to the placement agent related to this offering.
Common
Stock Issued in Private Placement
On
February 6, 2009, the Company entered into Purchase Agreements with a group
of accredited investors whereby it raised $1,752,803 in gross proceeds (net
proceeds of $1,514,000 after deducting the placement agent’s commission and
other offering expenses) through a private placement of
1,499,411 shares.
For each
$116.90 invested, an investor received one hundred shares of common stock, par
value $0.0001 per share; a Series A Warrant to purchase fifty-eight shares
of common stock at an exercise price of $1.87 per share which are exercisable
after six months and have a five year term; a Series B Warrant to purchase
seventy-eight shares of common stock at an exercise price of $1.13 per share
which are exercisable after six months and have a three year term; and for every
two shares of common stock the investor purchases upon exercise of a
Series B Warrant, the investor will receive an additional Series C
Warrant to purchase one share of common stock. The Series C Warrant shall
be exercisable after six months and will have an exercise price of $1.94 per
share and a five year term.
The
Company issued an aggregate of 1,499,411 shares of common stock,
Series A warrants to purchase 869,658 shares of common stock and
Series B warrants to purchase 1,169,544 shares of common stock. If all
Series B warrants are exercised, the Company may issue Series C
warrants to purchase up to 584,772 shares of common stock. During the year
ended March 31, 2010, Series B warrants to purchase 780,000 shares of common
stock were exercised resulting in proceeds of $881,000. The Company
issued 390,000 Series C warrants as the result of the exercise of
Series B warrants. As compensation for services rendered as the
exclusive placement agent for the offering, the placement agent received
$122,696 in cash plus warrants to purchase 104,958 shares of common stock
at an exercise price of $1.56 per share, exercisable upon the closing date of
the transaction for a five year term,.
Common
Stock Issued in Private Placement to a Related Party
On
February 24, 2009, the Company entered into a Purchase Agreement with
Robert Burlingame, a director of the Company at the time of the transaction, and
an accredited investor. Pursuant to the terms of the Purchase Agreement, the
investors agreed to make a $3,000,000 investment in the Company. The investors
paid $1,000,000 (net proceeds of $948,000 after deducting offering expenses) for
854,701 shares of common stock on February 24, 2009 and paid
$2,000,000 for 1,709,402 shares of common stock on June 1, 2009. In
addition, the Company issued to the investors Series A Warrants to purchase
a total of 1,500,000 shares of common stock pro rata to the number of
shares of common stock issued on each closing date at an exercise price of $1.87
per share. The Series A Warrants became exercisable after six months and
have a five year term. The Company also issued to the investors Series B
Warrants to purchase a total of 2,000,000 shares of common stock pro rata
to the number of shares of common stock issued on each closing date at an
exercise price of $1.13 per share. The Series B Warrants became exercisable
after six months and have a three year term. In addition, for every two shares
of common stock the investor purchases upon exercise of a Series B Warrant,
the investor will receive an additional Series C Warrant to purchase one
share of common stock. The Series C Warrant shall be exercisable after six
months and will have an exercise price of $1.94 per share and a five year term.
The Company will only be obligated to issue Series C Warrants to purchase
up to 1,000,000 shares of common stock.
Registered
Direct Offering
On July
30, 2009, the Company closed a registered direct placement of Units of its
common stock to certain accredited investors. For each Unit purchased in this
offering, the investors received one share of the Company’s common stock and a
warrant to purchase one half of one share of common stock. The offering price of
each Unit was $2.45 per Unit. The Company sold 2,454,000 Units consisting of
2,454,000 shares of common stock and 1,226,991 warrants to purchase common
stock. The exercise price of each warrant is $3.3875 per share, the warrants
become exercisable six months following the close of the offering and expire
five years following the close of the offering. The Company received gross
proceeds of $6,012,000 (net proceeds of $5,155,000 after deducting the placement
agent’s commissions and other offering costs) from this
offering. Additionally, the Company issued warrants to purchase
245,400 shares of common to the placement agents involved in this
transaction. The placement agent warrants have similar terms to the
investor warrants.
Common
Stock and Common Stock Purchase Warrants Issued to Non-Employees For
Services
On
November 10, 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 to the director a warrant to purchase 75,000 shares of its
common stock, exercisable at a price equal to the Company’s common stock in its
initial public offering in consideration of corporate advisory services. The
warrants were fully exercisable and non-forfeitable at their date of issuance.
The warrants were valued using the Black-Scholes option pricing model.
Assumptions used were as follows: Fair value of the underlying stock of $9.00,
risk-free interest rate of 4.70%; contractual life of 5 years; dividend
yield of 0%; and volatility of 70%. The adjusted fair value of the warrant
amounted to $350,000. The Company treats upfront issuances of equity securities
similarly to the way it treats issuances of cash
payments. Accordingly, the Company amortized the fair value of the
warrants over the two year term of the consulting agreement which is consistent
with its treatment of similar cash transactions. The amortized fair value of the
warrants amounted to $106,000 which was recorded as selling, general and
administrative expense in the accompanying consolidated statement of operations
for the year ended March 31, 2009. The fair value was fully amortized in the
year ended March 31, 2009.
On
March 5, 2009, the Company issued 10,000 shares of common stock to
Spot Savvy LLC pursuant to the terms of a Consulting Agreement dated
February 26, 2009. The fair value of the underlying stock on the date of
issuance was at $1.06 per share. The shares were fully vested and
non-forfeitable at the time of issuance. The shares were issued as compensation
for providing product marketing services. The Company determined the fair value
of the common stock was more readily determinable than the fair value of the
services rendered. For the year ended March 31, 2009, the Company recorded
$10,600 of expense in the accompanying consolidated statement of
operations.
On
March 5, 2009, the Company issued 10,000 shares of common stock to
Michael Salman Teymouri pursuant to the terms of a Consulting Agreement dated
February 26, 2009. The fair value of the underlying stock on the date of
issuance was at $1.06 per share. The shares were fully vested and
non-forfeitable at the time of issuance. The shares were issued as compensation
for providing product marketing services. The Company determined the fair value
of the common stock was more readily determinable than the fair value of the
services rendered. For the year ended March 31, 2009, the Company recorded
$10,600 of expense in the accompanying consolidated statement of
operations.
On April
1, 2009, the Company entered into a six month agreement with a former member of
its Board of Directors, Mr. Bob Burlingame. Pursuant to the agreement, Mr.
Burlingame provided the Company with sales and marketing expertise and services
as part of another revenue sharing agreement. In consideration of his services,
on June 12, 2009, the Company issued Mr. Burlingame 435,897 unregistered shares
of its common stock. The Company issued the shares on June 12, 2009. The shares
were fully vested and non-forfeitable at the time of issuance. The fair value of
the common stock was more readily determinable than the fair value of the
services rendered. The Company has amortized the fair value of the
warrants over the six month term of the consulting agreement which is consistent
with its treatment of similar cash transactions. Accordingly, the Company
recorded $476,000 of stock compensation expense related to this agreement which
was recognized on a straight-line basis over the six month term of the agreement
(April 1, 2009 to October 1, 2009). The Company recorded $476,000 of
compensation expense related to this agreement. The expense was recorded as
selling, general and administrative expense in the accompanying consolidated
statement of operations for the year ended March 31, 2010.
On April
24, 2009, the Company entered into an agreement with a contract sales
organization that will serve as the Company’s sales force for the sale of wound
care products in the United States. Pursuant to the agreement, the Company
agreed to pay the contract sales organization a monthly fee and potential
bonuses that will be based on the achievement of certain levels of sales. The
Company agreed to issue the contract sales organization shares of common stock
each month as compensation for its services. During the year ended March 31,
2010, the Company issued 50,654 shares of common stock, respectively, in
connection with this agreement. The Company has determined the fair value of the
common stock, which was calculated as shares were issued, was more readily
determinable than the fair value of the services rendered. Accordingly, the
Company recorded the fair market value of the stock as compensation expense.
During the year ended March 31, 2010, the Company recorded $81,000 of stock
compensation expense. The expense was recorded as selling, general and
administrative expense in the accompanying consolidated statements of
operations.
On
October 27, 2009, the Company entered into an agreement with a consultant that
provides services relating to assisting the Company with raising capital.
Pursuant to the agreement, the Company agreed to pay the consultant a cash fee
of $41,000 and 4,545 shares of common stock with a fair value of
$10,000. On October 7, 2009, the Company issued the shares of common
stock. The Company determined the fair value of the common stock was
more readily determinable than the fair value of the services rendered.
Accordingly, the Company recorded the fair market value of the stock as
compensation expense. The Company recorded $51,000 of expense related to this
agreement which was recorded as selling, general and administrative expense in
the accompanying consolidated statement of operations for the year ended March
31, 2010.
Common
Stock Issued to Settle Obligations
During
the year ended March 31, 2010, the Company issued shares of common stock to
various vendors to settle outstanding accounts payables. The Company entered
into settlement agreements with these vendors and issued a total of 176,755
shares with a fair value equal to the outstanding payables or $385,000.
Additionally, the Company issued the property owner of its Petaluma, CA facility
53,847 shares with a fair value of $70,000. These shares were issued as partial
settlement in connection with the renegotiation of the lease (Note
12). The fair value of the shares will be amortized on a
straight-line basis over the remaining term of the lease which expires on
September 30, 2011.
Common
Stock Purchase Warrants Issued in Financing Transactions
On
June 14, 2006, the Company issued warrants to purchase 71,521 shares
of Series B convertible preferred stock at an exercise price of $18.00 per
share in connection with a financing facility. These warrants were automatically
converted to warrants to purchase 71,521 shares of common stock at the
closing of the Company’s IPO on January 30, 2007. The warrants were valued
using the Black-Scholes pricing model. Assumptions used were as follows: Fair
value of the underlying stock $18.00; risk-free interest rate 5.15% percent;
contractual life of 10 years;
dividend yield of 0%; and volatility of 70%. The fair value of the warrants,
which amounted to $1,046,000, was recorded as deferred debt issuance costs and
is being amortized as interest expense over the term of the credit facility.
Amortization of these costs amounted to $133,000 for the year ended
March 31, 2009.
On
February 6, 2009, the Company issued the following warrants in connection
with a private placement. The Company issued Series A warrants to purchase
869,658 shares of common stock at an exercise price of $1.87 per share and
Series B warrants to purchase 1,169,544 shares of common stock at an
exercise price of $1.13 per share. If all Series B warrants are exercised,
the Company will issue Series C warrants to purchase up to
584,772 shares of common stock at an exercise price of $1.94 per share. For
every two shares of common stock purchased upon exercise of a Series B
Warrant, an additional Series C Warrant to purchase one share of common
stock will be issued. During the year ended March 31, 2010, Series B warrants to
purchase 780,000 shares of common stock were exercised resulting in proceeds of
$881,000. The Company issued 390,000 Series C warrants as the
result of the exercise of Series B warrants. As compensation for services
rendered as the exclusive placement agent, the Company issued the placement
agent a warrant to purchase 104,958 shares of common stock at an exercise
price of $1.56 per share, exercisable upon the closing date of the transaction
for a five year term. The Company originally classified the warrants as
equity.
On
February 24, 2009, the Company issued the following warrants in connection with
the February 24, 2009 private placement. The Company issued
Series A warrants to purchase 500,000 shares of common stock at an
exercise price of $1.87 per share and Series B warrants to purchase
666,667 shares of common stock at an exercise price of $1.13 per share. On
June 1, 2009, the Company issued Series A warrants to purchase
1,000,000 shares of common stock at an exercise price of $1.87 per share
and Series B warrants to purchase 1,333,333 shares of common stock at
an exercise price of $1.13 per share. If all Series B warrants
are exercised, the Company will issue Series C warrants to purchase up to
1,000,000 shares of common stock at $1.94 per share. For every two shares
of common stock the investor purchases upon exercise of a Series B Warrant,
the investor will receive an additional Series C Warrant to purchase one
share of common stock. The Company has not issued any Series C warrants as
of March 31, 2010 because no Series B warrants have been exercised.
The Series A Warrants became exercisable after six months and have a five
year term. The Series B Warrants became exercisable after six months and
have a three year term. The Company classified the warrants as
equity.
On July
30, 2009, the Company issued the following warrants in connection with a
registered direct offering. The Company issued 1,226,991 warrants to purchase
common stock to the investors in the transaction. The exercise price of each
warrant is $3.3875 per share, the warrants become exercisable six months
following the close of the offering and expire five years following the close of
the offering. Additionally, the Company issued warrants to purchase
245,400 shares of common stock to the placement agents involved in this
transaction. The placement agent warrants have similar terms to the
investor warrants.
On
March 4, 2009, the Company issued an advisor, Dayl Crow, a Series A
Warrant exercisable for a five-year term, to purchase 50,000 shares of our
common stock at an exercise price of $1.87 per share. These warrants were issued
in connection with consulting services.
Anti-dilution
Adjustments
Pursuant
to an anti-dilution provision contained in the August 13, 2007 private placement
investor and a placement agent warrant agreement, for various financing
transactions and common stock issuances during the years ended March 31, 2010
and 2009, the Company was required to adjust the exercise price and the number
of warrants held by each warrant holder under these agreements. The
exercise price for the warrants has been adjusted from $9.50 to $4.34 and an
additional 600,505 warrants have been issued of which 151,750 were issued in the
year ended March 31, 2010. At March 31, 2010, there were 724,188
warrants outstanding that contain this anti-dilution provision. The
warrants were classified as derivative liabilities in the March 31, 2010,
consolidated balance sheet (Note 11).
Modification
of Common Stock Purchase Warrants
During
the year ended March 31, 2010, the Company extended two separate offers to
certain warrant holders by which the exercise price of the warrants was reduced
in return for immediate exercise of the warrants. On December 9,
2009, the Company made an offer to reduce the exercise price of certain warrants
from $4.34 per share to $1.70 per share. Related to this offer,
295,692 warrants were exercised resulting in $504,000 in proceeds to the
Company. On March 10, 2010, the Company made a second offer to reduce
the exercise price of certain warrants to $2.40 per share. Related to
this offer, the exercise price of 85,622 warrants was reduced from $4.34 per
share to $2.40 per share and the exercise price of 993,709 warrants was reduced
from $6.85 per share to $2.40 per share. The second offer resulted in
$2,590,000 of proceeds to the Company. The modification of the
warrants did not result in incremental fair value or an additional charge to
Company’s consolidated statement of operations for the year ended March 31,
2010 as the reduction in exercise price offer was available for only one
day.
Cashless
Common Stock Purchase Warrant Exercise
On March
15, 2010, the Company issued 38,936 shares of common stock in connection with a
net-share exercise of 104,958 common stock purchase warrants. The
warrant holder did not pay an exercise price for the shares in exchange for
receiving a lower number of shares of common stock in the transaction. The
warrant holder surrendered 66,022 warrants in connection with this
transaction.
NOTE 14 —
Stock-Based Compensation
1999,
2000, 2003 and 2004 Stock Option Plans
The 1999,
2000, 2003 and 2004 Stock Option Plans became effective May 1999, June 2000,
July 2003 and July 2004, respectively. The Plans provide for grants of both
incentive stock options (ISOs) and non-qualified stock options (NSOs) to
employees, consultants and directors.
In
accordance with the Plans, the stated exercise price may not be less than 100%
and 85% of the estimated fair market value of the Company’s common stock on the
date of grant for ISOs and NSOs, respectively, as determined by the board of
directors at the date of grant. With respect to any 10% shareholder, the
exercise price of an ISO or NSO was not to exceed 110% of the estimated fair
market value per share on the date of grant.
Options
issued under the Plans generally have a ten-year term and generally became
exercisable over a five-year period.
On
June 29, 2006, the compensation committee of the Company’s board of
directors resolved that it would not approve any further grants under its 1999,
2000 and 2003 Plans. Additionally, in connection with the Delaware
reincorporation on December 15, 2006, no future options will be granted
under the 2004 Plan.
2006
Stock Plan
On
November 7, 2006, the board authorized and reserved 1,250,000 shares
for issuance under the Company’s 2006 Stock Incentive Plan, as amended (the
“2006 Plan”), which was previously adopted by the board of directors in August
2006. On December 14, 2006, the stockholders approved the Company’s 2006
Plan which became effective at the close of the Company’s initial public
offering. The 2006 Plan was amended by resolution of the board on April 26,
2007, and the amendments were subsequently approved by the
stockholders. On September 10, 2009, the Company’s shareholders
approved another amendment of the 2006 Plan. This amendment
authorized and reserved an additional 1,000,000 shares for issuance under the
2006 Plan.
The 2006
Plan provides for the granting of incentive stock options to employees and the
granting of nonstatutory stock options to employees, non-employee directors,
advisors and consultants. The 2006 Plan also provides for grants of restricted
stock, stock appreciation rights and stock unit awards to employees,
non-employee directors, advisors and consultants.
In
accordance with the 2006 Plan, the stated exercise price may not be less than
100% and 85% of the estimated fair market value of common stock on the date of
grant for ISOs and NSOs, respectively, as determined by the board of directors
at the date of grant. With respect to any 10% stockholder, the exercise price of
an ISO or NSO shall not be less than 110% of the estimated fair market value per
share on the date of grant.
Options
issued under the 2006 Plan generally have a ten-year term and generally become
exercisable over a five-year period.
Shares
subject to awards that expire unexercised or are forfeited or terminated will
again become available for issuance under the 2006 Plan. No participant in the
2006 Plan can receive option grants, restricted shares, stock appreciation
rights or stock units for more than 750,000 shares in the aggregate in any
calendar year.
As
provided under the 2006 Plan, the aggregate number of shares authorized for
issuance as awards under the 2006 Plan automatically increases on April 1
of each year by 5% of the number of shares outstanding on March
31. On April 1, 2008, and 2009, the number of shares available for
issuance under the 2006 Plan increased by 795,280 shares and 920,141
shares, respectively.
As
described above, the number of shares authorized for issuance will be subject to
adjustment on April 1, 2010 (Note 18).
Options
and restricted stock units outstanding at March 31, 2010 under the various
plans is as follows (in thousands):
Plan
|
|
Number of
Options
|
|
|
Total
Number of
Options and
Restricted
Stock Units
Outstanding
in Plan
|
|
1999
Plan
|
|
|
6 |
|
|
|
6 |
|
2000
Plan
|
|
|
40 |
|
|
|
40 |
|
2003
Plan
|
|
|
162 |
|
|
|
162 |
|
2004
Plan
|
|
|
543 |
|
|
|
543 |
|
2006
Plan
|
|
|
3,236 |
|
|
|
3,236 |
|
|
|
|
3,987 |
|
|
|
3,987 |
|
A summary
of activity under all option Plans for the years ended March 31, 2010 and
2009 is presented below (in thousands, except per share data):
|
|
Number of
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Contractual Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at March 31, 2008
|
|
|
2,624 |
|
|
$ |
5.67 |
|
|
|
|
|
|
|
Options
granted
|
|
|
2,035 |
|
|
|
0.97 |
|
|
|
|
|
|
|
Options
exercised
|
|
|
(105 |
) |
|
|
0.14 |
|
|
|
|
|
|
|
Options
forfeited or expired
|
|
|
(590 |
) |
|
|
6.45 |
|
|
|
|
|
|
|
Outstanding
at March 31, 2009
|
|
|
3,964 |
|
|
|
3.28 |
|
|
|
|
|
|
|
Options
granted
|
|
|
1,140 |
|
|
|
1.89 |
|
|
|
|
|
|
|
Options
exercised
|
|
|
(664 |
) |
|
|
0.37 |
|
|
|
|
|
|
|
Options
forfeited or expired
|
|
|
(453 |
) |
|
|
6.93 |
|
|
|
|
|
|
|
Outstanding
at March 31, 2010
|
|
|
3,987 |
|
|
$ |
2.96 |
|
|
|
7.72 |
|
|
$ |
2,376 |
|
Exercisable
at March 31, 2010
|
|
|
1,677 |
|
|
$ |
4.55 |
|
|
|
5.76 |
|
|
$ |
695 |
|
Options
available for grant as of March 31, 2010
|
|
|
1,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying stock options and the fair value of the Company’s common
stock ($2.12) for stock options.
Stock-Based
Compensation
The
Company accounts for share-based awards exchanged for employee services at the
estimated grant date fair value of the award. The Company amortizes the fair
value of employee stock options on a straight-line basis over the requisite
service period of the awards. Compensation expense includes the
impact of an estimate for forfeitures for all stock options.
Employees
stock-based compensation expense is as follows (in thousands, except per share
amounts):
|
|
Employee
Stock-based
Compensation
for the Year Ended
March 31,
2010
|
|
|
Employee
Stock-based
Compensation
for the Year Ended
March 31,
2009
|
|
Cost of revenues service
|
|
$ |
22 |
|
|
$ |
18 |
|
Research
and development
|
|
|
97 |
|
|
|
82 |
|
Selling,
general and administrative
|
|
|
746 |
|
|
|
1,935 |
|
Total
stock-based compensation
|
|
$ |
865 |
|
|
$ |
2,035 |
|
No income
tax benefit has been recognized relating to stock-based compensation expense and
no tax benefits have been realized from exercised stock options.
The
Company estimated the fair value of employee stock options using the
Black-Scholes option pricing model. The fair value of employee stock options is
being amortized on a straight-line basis over the requisite service periods of
the respective awards. The fair value of employee stock options was estimated
using the following weighted-average assumptions:
|
|
Year Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Fair
value of common stock
|
|
$ |
1.89 |
|
|
$ |
3.42 |
|
Expected
Term
|
|
5.90
yrs
|
|
|
5.97
yrs
|
|
Risk-free
interest rate
|
|
|
2.45 |
% |
|
|
1.89 |
% |
Dividend
yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
Volatility
|
|
|
84.2 |
% |
|
|
83.0 |
% |
The
weighted-average fair values of options granted during the years ended
March 31, 2010 and 2009 were $1.35 and $0.68, respectively.
The
expected term of stock options represents the average period the stock options
are expected to remain outstanding and is based on the expected term calculated
using the approach prescribed by SAB 107 for “plain vanilla” options. The
expected stock price volatility for the Company’s stock options was determined
by examining the historical volatilities for industry peers and using an average
of the historical volatilities of the Company’s industry peers as well as the
trading history for the Company’s common stock. The Company will continue to
analyze the stock price volatility and expected term assumptions as more data
for the Company’s common stock and exercise patterns becomes available. The
risk-free interest rate assumption is based on the U.S. Treasury
instruments whose term was consistent with the expected term of the Company’s
stock options. The expected dividend assumption is based on the Company’s
history and expectation of dividend payouts.
The
Company estimates forfeitures based on historical experience and reduces
compensation expense accordingly. The estimated forfeiture rates used
during the year ended March 31, 2010 ranged from 5.0% to 7.6%.
At
March 31, 2010, there were unrecognized compensation costs of $2,145,000
related to stock options which is expected to be recognized over a
weighted-average amortization period of 2.11 years.
In
addition to the above option activity, on April 26, 2007, an award of
60,000 stock units was issued to an officer of the Company. Each stock unit
represents the right to receive a share of the Company’s common stock, in
consideration of past services rendered and the payment by the officer of $3.00
per share, upon the settlement of the stock unit on a fixed date in the future.
One half of the stock units, representing 30,000 shares, was forfeited on
January 15, 2009 and the remaining 30,000 were forfeited on
January 15, 2010. Additionally, on March 30, 2010, the Company
issued 15,957 stock units to an outside consultant. The stock units
were fully vested and non-forfeitable on the date of issuance and resulted in
compensation expense of $29,000 which is included in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the year ended March 31, 2010.
The
Company did not capitalize any cost associated with stock-based
compensation.
The
Company issues new shares of common stock upon exercise of stock
options.
NOTE 15 —
Income Taxes
The
Company has the following net deferred tax assets (in thousands):
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$ |
33,477 |
|
|
$ |
31,205 |
|
Research
and development tax credit carryforwards
|
|
|
1,335 |
|
|
|
1,262 |
|
Stock-based
compensation
|
|
|
2,713 |
|
|
|
2,419 |
|
Reserves
and accruals
|
|
|
2,267 |
|
|
|
1,553 |
|
Other
deferred tax assets
|
|
|
19 |
|
|
|
18 |
|
Total
deferred tax assets
|
|
$ |
39,811 |
|
|
$ |
36,457 |
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Basis
difference in assets
|
|
|
(35 |
) |
|
|
(26 |
) |
Net
deferred tax asset
|
|
|
39,776 |
|
|
|
36,431 |
|
Valuation
allowance
|
|
|
(39,776 |
) |
|
|
(36,431 |
) |
Net
deferred tax asset
|
|
$ |
— |
|
|
$ |
— |
|
The
Company’s recorded income tax benefit, net of the change in the valuation
allowance, for each of the periods presented is as follows:
|
|
Years Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Income
tax benefit
|
|
$ |
3,345 |
|
|
$ |
5,164 |
|
Change
in valuation allowance
|
|
|
(3,345 |
) |
|
|
(5,164 |
) |
Net
income tax benefit
|
|
$ |
— |
|
|
$ |
— |
|
A
reconciliation of the statutory federal income tax rate to the Company’s
effective tax rate is as follows:
|
|
Years Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Expected
federal statutory rate
|
|
|
(34.0 |
)% |
|
|
(34.0 |
)% |
State
income taxes, net of federal benefit
|
|
|
(5.8 |
)% |
|
|
(5.8 |
)% |
Research
and development credit
|
|
|
(0.8 |
)% |
|
|
(1.9 |
)% |
Foreign
earnings taxed at different rates
|
|
|
0.9 |
% |
|
|
0.8 |
% |
Recognition
of change in estimate of state and foreign NOL carryforward
benefits
|
|
|
(2.5 |
)% |
|
|
9.6 |
% |
Effect
of permanent differences
|
|
|
1.5 |
% |
|
|
2.2 |
% |
|
|
|
(40.7 |
)% |
|
|
(29.1 |
)% |
Change
in valuation allowance
|
|
|
40.7 |
% |
|
|
29.1 |
% |
Totals
|
|
|
0.0 |
% |
|
|
0.0 |
% |
At
March 31, 2010, the Company had net operating loss carryforwards for
federal, state and foreign income tax purposes of approximately $72,903,000,
$60,826,000 and $19,400,000, respectively. The carryforwards expire at various
times beginning March 31, 2010. At March 31, 2010, $1,598,000 of the
carryforwards have expired. The Company also had, at March 31,
2010, federal and state research and development credit carryforwards of
approximately $673,000 and $662,000, respectively. The federal credits expire
beginning March 31, 2024 and the state credits do not expire.
The
Company has completed a study to assess whether a change in control has occurred
or whether there have been multiple changes of control since the Company’s
formation. The Company determined, based on the results of the study, that no
change in control occurred for purposes of Internal Revenue Code
section 382. The Company, after considering all available evidence, fully
reserved for these and its other deferred tax assets since it is more likely
than not such benefits will not be realized in future periods. The Company has
incurred losses for both financial reporting and income tax purposes for the
year ended March 31, 2010. Accordingly, the Company is continuing to fully
reserve for its deferred tax assets. The Company will continue to evaluate its
deferred tax assets to determine whether any changes in circumstances could
affect the realization of their future benefit. If it is determined in future
periods that portions of the Company’s deferred income tax assets satisfy the
realization standards, the valuation allowance will be reduced
accordingly.
The
Company only recognizes tax benefits from an uncertain tax position 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. To date, the Company has
not recognized such tax benefits in its financial statements.
The
Company has identified its federal tax return and its state tax return in
California as major tax jurisdictions. The Company is also subject to certain
other foreign jurisdictions, principally Mexico and The Netherlands. The
Company’s evaluation of uncertain tax matters was performed for tax years ended
through March 31, 2010. Generally, the Company is subject to audit for the
years ended March 31, 2009, 2008 and 2007 and may be subject to audit for
amounts relating to net operating loss carryforwards generated in periods prior
to March 31, 2007. The Company has elected to retain its existing
accounting policy with respect to the treatment of interest and penalties
attributable to income taxes, and continues to reflect interest and penalties
attributable to income taxes, to the extent they arise, as a component of its
income tax provision or benefit as well as its outstanding income tax assets and
liabilities. The Company believes that its income tax positions and deductions
would be sustained on audit and does not anticipate any adjustments, other than
those identified above that would result in a material change to its financial
position.
NOTE 16 —
Employee Benefit Plan
The
Company has a program to contribute and administer individual Simple IRA
accounts for regular full time employees. Under the plan, the Company matches
employee contributions to the plan up to 3% of the employee’s salary. The
Company contributed $67,000 and $91,000 to the program for the years ended
March 31, 2010 and 2009, respectively.
NOTE 17 —
Segment and Geographic Information
The
Company generates revenues from wound care products which are sold into the
human and animal health care markets and the Company generates revenues from
laboratory testing services which are provided to medical device manufacturers.
The Company consolidated certain of its
facilities and reorganized it’s operations during the fiscal year ended March
31, 2010 in order to streamline the business and reduce operating costs. As a
result, the Company now operates a single segment business which consists of
three geographical sales territories as follows (in
thousands):
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
U.S.
|
|
$ |
1,196 |
|
|
$ |
298 |
|
Mexico
|
|
|
3,880 |
|
|
|
3,273 |
|
Europe
and other
|
|
|
1,222 |
|
|
|
844 |
|
|
|
$ |
6,298 |
|
|
$ |
4,415 |
|
The
Company’s service revenues amounted to $1,066,000 and $973,000 for the years
ended March 31, 2010 and 2009.
NOTE 18 —
Subsequent Events
Increase
in Number of Shares Authorized in the 2006 Plan
As
provided under the 2006 Plan, the aggregate number of shares authorized for
issuance as awards under the 2006 Plan automatically increased on April 1,
2010 by 1,308,071 shares (which number constitutes 5% of the outstanding
shares on the last day of the year ended March 31, 2010). Total shares
authorized for issuance subsequent to the increase is 2,387,782.
Key
Employee Bonus
On April
2, 2010, we granted a cash bonus of $100,000 to Hojabr Alimi, our Chairman
of the Board of Directors and Chief Executive Officer.
Loan
and Security Agreement
On May 1,
2010, the Company entered into a Loan and Security Agreement and a Supplement to
the Loan and Security Agreement with Venture Lending & Leasing V, Inc. to
borrow up to an aggregate of $3,000,000 (collectively, the
“Agreements”). The Agreements provide for a first tranche of
$2,000,000 and, upon meeting certain milestones, the Company may borrow a second
tranche of $1 million. The loan is secured by the assets of the Company. On
May 3, 2010, the Company borrowed $2,000,000 on the first tranche. The cash
interest or “streaming” rate on the loan is 10%. For the first eight payments,
the Company will make monthly interest only payments set at $16,660 through
December 1, 2010. Thereafter, the Company will make interest and principal
payments of $75,000 per month through June 1, 2013. Additionally, the Company
will make a final balloon payment of $132,340 on June 1, 2013, resulting in an
effective interest rate of 13%. If the Company becomes
eligible to draw the second tranche, and borrows additional funds pursuant to
the second tranche, The Company will make interest-only payments for 6 months
following the commencement of the second tranche. Following the interest only
period, the second tranche will be amortized over 30 months, with a
final payment due equal to 6.617% of the original principal
balance.
Additionally,
in connection with the Agreements, the Company issued a warrant to Venture
Lending & Leasing V, Inc. for the purchase of 166,667 shares of the
Company’s common stock. If the Company becomes eligible to
draw the second tranche of the loan, and borrows additional funds pursuant to
the second tranche, the Company will be obliged to issue a second
warrant for the purchase of an additional 83,333 shares of our common stock
(collectively, the “Warrants”). The Warrants may be exercised for a
cash payment of $2.00 per share of common stock, subject to adjustment.
The Warrants also have a cashless exercise feature. The Warrants
expire on November 30, 2017. The Warrants may be put back to the
Company for $500,000 cash, plus an additional $250,000 if the Company becomes
eligible and draws the second tranche of the loan. The put feature is
available to the holder for 60 days after the first of the following to occur:
i) a change of control of our Company, ii) the closing of at least $15 million
of additional equity financing, or iii) March 31, 2014.
Common
Stock Issued to Company Service Providers
On May
19, 2010, the Company issued 10,255 shares its contract sales organization,
issued 50,000 shares to a company that provides recruiting and other services
and issued 20,000 shares to a firm that provides the Company with financial
advisory services.
Lease
Extensions
On May 1,
2010, the Company extended its lease on its office and manufacturing space in
Zapopan, Mexico, from an expiration date of April 30, 2011 to an expiration date
of April 30, 2013. Additionally, on May 1, 2010, the Company extended
its lease on its warehouse in Zapopan, Mexico, from an expiration date of April
30, 2010 to an expiration date of April 30, 2011. Related to the
lease extensions, the Company will incur total payments of $211,000, of which
$22,000 will be paid in the year ended March 31, 2011, $89,000 will be paid in
the year ended March 31, 2012, $85,000 will be paid in the year ended March 31,
2013, and $15,000 will be paid in the year ended March 31, 2014.
Option Grants to
Company Executives
Pursuant
to the Company's 2010 Bonus Plan, on June 7, 2010, the Compensation Committee of
the Board of Directors approved option grants to four of the Company’s
executives. In connection with the grants, the Company issued a total of 500,000
options with an exercise price of $1.97 per share and a ten year term.
287,500
of the options vest on the day of the grant and 212,500 of the options vest
monthly in equal amounts over the 48 months following the grant
date.
ITEM 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
None.
ITEM 9A(T). Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of our most recent fiscal year. Based upon this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of March 31,
2010.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act
Rule 13a-15(f). Our management conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the framework in
Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
our management concluded that our internal control over financial reporting was
effective as of March 31, 2010. This annual report on Form 10-K does
not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our independent registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report on Form 10-K.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the fiscal quarter ended March 31, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. Other
Information
Option Grants to
Company Executives
Pursuant
to the Company's 2010 Bonus Plan, on June 7, 2010, the Compensation Committee of
the Board of Directors approved option grants to certain of our executive
officers as follows:
|
·
|
150,000
options to Hoji Alimi. 75,000 of the options vest immediately
and 75,000 of the options vest monthly in equal amounts over the 48 months
following the grant date.
|
|
·
|
187,500
options to Robert Miller. 100,000 of the options vest
immediately and 87,500 of the options vest monthly in equal amounts over
the 48 months following the grant
date.
|
|
·
|
62,500
options to Jim Schutz. All of the options vest
immediately.
|
The
options have an exercise price of $1.97 per share and a ten year term.
PART III
ITEM 10. Directors, Executive
Officers and Corporate Governance
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after the end of our
fiscal year ended March 31, 2010 (the “2010 Proxy Statement”).
Item 405
of Regulation S-K calls for disclosure of any known late filing or failure
by an insider to file a report required by 16(a) of the Exchange Act. This
disclosure is contained in the section entitled “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement.
We have
adopted a Code of Business Conduct that applies to all of our officers and
employees, including our chief executive officer, president, chief operating
officer, chief financial officer and other employees who perform financial or
accounting functions. The Code of Business Conduct sets forth the basic
principles that guide the business conduct of our employees. We have also
adopted a Senior Financial Officers’ Code of Ethics that specifically applies to
our chief executive officer, president and chief operating officer, chief
financial officer, and key management employees. Stockholders may request a free
copy of our Code of Business Conduct and Ethics and our Senior Financial
Officers’ Code of Ethics by contacting Oculus Innovative Sciences, Inc.,
Attention: Chief Financial Officer, 1129 N. McDowell Blvd., Petaluma,
California 94954.
To date,
there have been no waivers under our Code of Business Conduct and Ethics or
Senior Financial Officers’ Code of Ethics. We intend to disclose future
amendments to certain provisions of our Code of Business Conduct and Ethics or
Senior Officers’ Code of Ethics or any waivers, if and when granted, of our Code
of Business Conduct and Ethics or Senior Officers’ Code of Ethics on our website
at http://www.oculusis.com within four business
days following the date of such amendment or waiver.
Our board
of directors has appointed an audit committee, comprised of Mr. Richard
Conley, as chairman, Mr. Jay Birnbaum and Mr. Gregg Alton. The board
of directors has determined that Mr. Conley qualifies as an audit committee
financial expert under the definition outlined by the Securities and Exchange
Commission. In addition, Mr. Conley, Mr. Birnbaum and Mr. Alton
each qualify as “independent directors” under the current NASDAQ Marketplace
rules and Securities and Exchange Commission rules and regulations.
ITEM 11. Executive
Compensation
The
information required by this Item is incorporated by reference to the 2010 Proxy
Statement.
ITEM 12. Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
information required by this Item is incorporated by reference to the 2010 Proxy
Statement.
Information
about securities authorized for issuance under our equity compensation plans
appears under the caption “Equity Compensation Plan Information” in the Proxy
Statement. That portion of the Proxy Statement is incorporated by reference into
this report.
ITEM 13. Certain
Relationships, Related Transactions, and Director Independence
The
information required by this Item is incorporated by reference to the 2010 Proxy
Statement.
ITEM 14. Principal Accounting
Fees and Services
The
information required by this Item is incorporated by reference to the 2010 Proxy
Statement.
PART IV
ITEM 15. Exhibits, Financial
Statement Schedules
(a) Documents
filed as part of this report
(1) Financial
Statements
Reference
is made to the Index to Consolidated Financial Statements of Oculus Innovative
Sciences, Inc. under Item 8 of Part II hereof.
(2) Financial Statement
Schedules
Financial
statement schedules have been omitted that are not applicable or not required or
because the information is included elsewhere in the Consolidated Financial
Statements or the Notes thereto.
(b) Exhibits
Exhibit Index
Exhibit
Number
|
|
Description
|
|
|
|
3.1(i)
|
|
Restated
Certificate of Incorporation of Registrant (incorporated by reference to
the exhibit of the same number filed with the Company’s Annual Report on
Form 10-K for the year ended March 31, 2007).
|
|
|
|
3.1(ii)
|
|
Amended
and Restated Bylaws of Registrant, as amended effective on June 11,
2008 (incorporated by reference to the exhibit of the same number filed
with the Company’s Annual Report on Form 10-K for the year ended
March 31, 2008).
|
|
|
|
4.1
|
|
Specimen
Common Stock Certificate (incorporated by reference to the exhibit of the
same number filed with Registration Statement on Form S-1 (File
No. 333-135584), as amended, declared effective on January 24,
2007).
|
|
|
|
4.2
|
|
Warrant
to Purchase Series A Preferred Stock of Registrant by and between
Registrant and Venture Lending & Leasing III, Inc., dated
April 21, 2004 (incorporated by reference to the exhibit of the same
number filed with Registration Statement on Form S-1 (File
No. 333-135584), as amended, declared effective on January 24,
2007).
|
|
|
|
4.3
|
|
Warrant
to Purchase Series B Preferred Stock of Registrant by and between
Registrant and Venture Lending & Leasing IV, Inc., dated
June 14, 2006 (incorporated by reference to the exhibit of the same
number filed with Registration Statement on Form S-1 (File
No. 333-135584), as amended, declared effective on January 24,
2007).
|
|
|
|
4.4
|
|
Form
of Warrant to Purchase Common Stock of Registrant (incorporated by
reference to the exhibit of the same number filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
4.5
|
|
Form
of Warrant to Purchase Common Stock of Registrant (incorporated by
reference to the exhibit of the same number filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
4.6
|
|
Amended
and Restated Investors Rights Agreement, effective as of
September 14, 2006 (incorporated by reference to the exhibit of the
same number filed with Registration Statement on Form S-1 (File
No. 333-135584), as amended, declared effective on January 24,
2007).
|
|
|
|
4.7
|
|
Form
of Promissory Note issued to Venture Lending & Leasing III, Inc.
(incorporated by reference to the exhibit of the same number filed with
Registration Statement on Form S-1 (File No. 333-135584), as
amended, declared effective on January 24, 2007).
|
|
|
|
4.8
|
|
Form
of Promissory Note (Equipment and Soft Cost Loans) issued to Venture
Lending & Leasing IV, Inc. (incorporated by reference to the
exhibit of the same number filed with Registration Statement on
Form S-1 (File No. 333-135584), as amended, declared effective
on January 24, 2007).
|
|
|
|
4.9
|
|
Form
of Promissory Note (Growth Capital Loans) issued to Venture
Lending & Leasing IV, Inc. (incorporated by reference to the
exhibit of the same number filed with Registration Statement on
Form S-1 (File No. 333-135584), as amended, declared effective
on January 24,
2007).
|
4.10
|
|
Form
of Promissory Note (Working Capital Loans) issued to Venture
Lending & Leasing IV, Inc. (incorporated by reference to the
exhibit of the same number filed with Registration Statement on
Form S-1 (File No. 333-135584), as amended, declared effective
on January 24, 2007).
|
|
|
|
4.11
|
|
Form
of Warrant to Purchase Common Stock of Registrant (incorporated by
reference to the exhibit of the same number filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
4.12
|
|
Form
of Warrant to Purchase Common Stock of Registrant (incorporated by
reference to the exhibit of the same number filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
4.13
|
|
Form
of Warrant to Purchase Common Stock of Registrant (incorporated by
reference to exhibit 10.3 to the Company’s Current Report on
Form 8-K filed August 13, 2007).
|
|
|
|
4.14
|
|
Form
of Warrant to Purchase Common Stock of Registrant (incorporated by
reference to exhibit 4.1 to the Company’s Current Report on
Form 8-K filed March 28, 2008).
|
|
|
|
4.15
|
|
Form
of Common Stock Purchase Warrant for April 2009 offering (incorporated by
reference to exhibit 4.15 to the Company’s Registration Statement on
Form S-1 (File No. 333-158539) declared effective on July 24,
2009, and incorporated herein by reference).
|
|
|
|
4.16*
|
|
Warrant
issued to Dayl Crow, dated March 4, 2009 (included as Exhibit 4.16 to
the Form 10-K filed on June 11, 2009 and incorporated herein by
reference).
|
|
|
|
4.17*
|
|
Form
of Common Stock Purchase Warrant for July 2009 offering, (included as
Exhibit 4.15 to the Registration Statement on Form S-1 (File No.
333-158539), as amended, declared effective on July 24,
2009)
|
|
|
|
10.1
|
|
Form
of Indemnification Agreement between Registrant and its officers and
directors (incorporated by reference to the exhibit of the same number
filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.2
|
|
1999
Stock Plan and related form stock option plan agreements (incorporated by
reference to the exhibit of the same number filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
10.3
|
|
2000
Stock Plan and related form stock option plan agreements (incorporated by
reference to the exhibit of the same number filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
10.4
|
|
2003
Stock Plan and related form stock option plan agreements (incorporated by
reference to the exhibit of the same number filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
10.5
|
|
2004
Stock Plan and related form stock option plan agreements (incorporated by
reference to the exhibit of the same number filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
10.6
|
|
Form
of 2006 Stock Incentive Plan and related form stock option plan agreements
(incorporated by reference to the exhibit of the same number filed with
Registration Statement on Form S-1 (File No. 333-135584),
as amended, declared effective on January 24,
2007).
|
|
|
|
10.7
|
|
2006
Stock Incentive Plan Notice of Stock Unit Award and Stock and Stock Unit
Agreement issued to Robert Miller (incorporated by reference to the
exhibit of the same number filed with the Company’s Annual Report on
Form 10-K for the year ended March 31, 2007).
|
|
|
|
10.8
|
|
Office
Lease Agreement, dated October 26, 1999, between Registrant and RNM
Lakeville, L.P. (incorporated by reference to exhibit 10.7 filed with
Registration Statement on Form S-1 (File No. 333-135584),
as amended, declared effective on January 24,
2007).
|
|
|
|
10.9
|
|
Amendment
to Office Lease No. 1, dated September 15, 2000, between
Registrant and RNM Lakeville L.P. (incorporated by reference to
exhibit 10.8 filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.10
|
|
Amendment
to Office Lease No. 2, dated July 29, 2005, between Registrant
and RNM Lakeville L.P. (incorporated by reference to exhibit 10.9
filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
10.11
|
|
Amendment
No. 3 to Lease, dated August 23, 2006, between Registrant and
RNM Lakeville L.P. (incorporated by reference to exhibit 10.23 filed
with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.12
|
|
Office
Lease Agreement, dated May 15, 2005, between Oculus Technologies of
Mexico, S.A. de C.V. and Antonio Sergio Arturo Fernandez Valenzuela
(translated from Spanish) (incorporated by reference to exhibit 10.10
filed with Registration Statement on Form S-1 (File
No. 333-135584), as amended, declared effective on January 24,
2007).
|
|
|
|
10.13
|
|
Office
Lease Agreement, dated July 2003, between Oculus Innovative Sciences, B.V.
and Artikona Holding B.V. (translated from Dutch) (incorporated by
reference to exhibit 10.11 filed with Registration Statement on
Form S-1 (File No. 333-135584), as amended, declared effective
on January 24, 2007).
|
|
|
|
10.14
|
|
Loan
and Security Agreement, dated March 25, 2004, between Registrant and
Venture Lending & Leasing III, Inc. (incorporated by reference to
exhibit 10.12 filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.15
|
|
Loan
and Security Agreement, dated June 14, 2006, between Registrant and
Venture Lending & Leasing IV, Inc. (incorporated by reference to
exhibit 10.13 filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.16
|
|
Amendment
No. 1 to Supplement to Loan and Security Agreement, dated
March 29, 2007, between Registrant and Venture Lending &
Leasing IV, Inc. (incorporated by reference to the exhibit of the same
number filed with the Company’s Annual Report on Form 10-K for the
year ended March 31, 2007).
|
|
|
|
10.17
|
|
Employment
Agreement, dated January 1, 2004, between Registrant and Hojabr Alimi
(incorporated by reference to exhibit 10.14 filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
10.18
|
|
Employment
Agreement, dated January 1, 2004, between Registrant and Jim Schutz
(incorporated by reference to exhibit 10.15 filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
10.19
|
|
Employment
Agreement, dated June 1, 2004, between Registrant and Robert Miller
(incorporated by reference to exhibit 10.16 filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
10.20
|
|
Employment
Agreement, dated June 1, 2005, between Registrant and Bruce Thornton
(incorporated by reference to exhibit 10.17 filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
10.21
|
|
Employment
Agreement, dated June 10, 2006, between Registrant and Mike Wokasch
(incorporated by reference to exhibit 10.19 filed with Registration
Statement on Form S-1 (File No. 333-135584), as amended,
declared effective on January 24, 2007).
|
|
|
|
10.22
|
|
Form
of Director Agreement (incorporated by reference to exhibit 10.20
filed with Registration Statement on Form S-1 (File
No. 333-135584), as amended, declared effective on January 24,
2007).
|
|
|
|
10.23
|
|
Consultant
Agreement, dated October 1, 2005, by and between Registrant and White
Moon Medical (incorporated by reference to exhibit 10.21 filed with
Registration Statement on Form S-1 (File No. 333-135584),
as amended, declared effective on January 24,
2007).
|
|
|
|
10.24
|
|
Leasing
Agreement, dated May 5, 2006, by and between Mr. Jose Alfonzo I.
Orozco Perez and Oculus Technologies of Mexico, S.A. de C.V. (incorporated
by reference to exhibit 10.22 filed with Registration Statement on
Form S-1 (File No. 333-135584), as amended, declared effective
on January 24, 2007).
|
|
|
|
10.25
|
|
Stock
Purchase Agreement, dated June 16, 2005, by and between Registrant,
Quimica Pasteur, S de R.L., Francisco Javier Orozco Gutierrez and Jorge
Paulino Hermosillo Martin (incorporated by reference to exhibit 10.24
filed with Registration Statement on Form S-1 (File
No. 333-135584), as amended, declared effective on January 24,
2007).
|
|
|
|
10.26
|
|
Framework
Agreement, dated June 16, 2005, by and among Javier Orozco Gutierrez,
Quimica Pasteur, S de R.L., Jorge Paulino Hermosillo Martin, Registrant
and Oculus Technologies de Mexico, S.A. de C.V. (incorporated by reference
to exhibit 10.25 filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
10.27
|
|
Mercantile
Consignment Agreement, dated June 16, 2005, between Oculus
Technologies de Mexico, S.A. de C.V., Quimica Pasteur, S de R.L. and
Francisco Javier Orozco Gutierrez (incorporated by reference to
exhibit 10.26 filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.28
|
|
Partnership
Interest Purchase Option Agreement, dated June 16, 2005, by and
between Registrant and Javier Orozco Gutierrez (incorporated by reference
to exhibit 10.27 filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.29
|
|
Termination
of Registrant and Oculus Technologies de Mexico, S.A. de C.V. Agreements
with Quimica Pasteur, S de R.L. by Jorge Paulino Hermosillo Martin
(translated from Spanish) (incorporated by reference to exhibit 10.28
filed with Registration Statement on Form S-1 (File
No. 333-135584), as amended, declared effective on January 24,
2007).
|
|
|
|
10.30
|
|
Termination
of Registrant and Oculus Technologies de Mexico, S.A. de C.V. Agreements
with Quimica Pasteur, S de R.L. by Francisco Javier Orozco Gutierrez
(translated from Spanish) (incorporated by reference to exhibit 10.29
filed with Registration Statement on Form S-1 (File
No. 333-135584), as amended, declared effective on January 24,
2007).
|
|
|
|
10.31
|
|
Loan
and Security Agreement, dated November 7, 2006, by and between
Registrant and Robert Burlingame (incorporated by reference to
exhibit 10.30 filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.32
|
|
Non-Negotiable
Secured Promissory Note, dated November 10, 2006, by and between
Registrant and Robert Burlingame (incorporated by reference to
exhibit 10.31 filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.33
|
|
Amendment
No. 1 to Non-Negotiable Secured Promissory Note, dated March 29,
2007, by and between Registrant and Robert Burlingame (incorporated by
reference to the exhibit of the same number filed with the Company’s
Annual Report on Form 10-K for the year ended March 31,
2007).
|
|
|
|
10.34
|
|
Subordination
Agreement, dated November 7, 2006, by and among Registrant, Robert
Burlingame, Venture Lending & Leasing III, LLC, and Venture
Lending & Leasing IV, LLC (incorporated by reference to
exhibit 10.32 filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.35
|
|
Amendment
No. 1 to Subordination Agreement, dated March 29, 2007, by and
among Registrant, Robert Burlingame, Venture Lending & Leasing
III, LLC, and Venture Lending & Leasing IV, LLC. (incorporated by
reference to the exhibit of the same number filed with the Company’s
Annual Report on Form 10-K for the year ended March 31,
2007).
|
|
|
|
10.36
|
|
Consulting
Agreement, effective November 9, 2006, by and between Registrant and
Robert Burlingame (incorporated by reference to exhibit 10.33 filed
with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.37
|
|
Director
Agreement, dated November 8, 2006, by and between Registrant and
Robert Burlingame (incorporated by reference to exhibit 10.34 filed
with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.38†
|
|
Exclusive
Marketing Agreement, dated December 5, 2005, by and between
Registrant and Alkem Laboratories Ltd (incorporated by reference to
exhibit 10.35 filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.39
|
|
Settlement
Agreement, effective September 21, 2006, by and among Registrant and
Messrs. Jorge Ahumada Ayala and Fernando Ahumada Ayala (incorporated
by reference to exhibit 10.36 filed with Registration Statement on
Form S-1 (File No. 333-135584), as amended, declared effective
on January 24, 2007).
|
|
|
|
10.40
|
|
Settlement
Agreement, dated October 25, 2006, by and between Registrant and
Mr. Kim Kelderman (incorporated by reference to exhibit 10.37
filed with Registration Statement on Form S-1
(File No. 333-135584), as amended, declared effective on
January 24, 2007).
|
|
|
|
10.41
|
|
Securities
Purchase Agreement, dated August 7, 2007, by and between Registrant
and purchasers identified on the signatures pages thereto (incorporated by
reference to exhibit 10.1 to the Company’s Current Report on
Form 8-K filed August 13, 2007).
|
|
|
|
10.42
|
|
Registration
Rights Agreement, dated August 7, 2007, by and between Registrant and
purchasers identified on signatures pages thereto (incorporated by
reference to exhibit 10.2 to the Company’s Current Report on
Form 8-K filed August 13,
2007).
|
10.43
|
|
Amendment
No. 4 to Lease, dated September 13, 2007, by and between
Registrant and RNM Lakeville L.P. (incorporated by reference to the
exhibit of the same number filed with the Company’s Annual Report on
Form 10-K for the year ended March 31, 2008).
|
|
|
|
10.44
|
|
Amendment
to Office Lease Agreement, effective February 15, 2008, by and
between Oculus Innovative Sciences Netherlands B.V. and Artikona Holding
B.V. (translated from Dutch) (incorporated by reference to the exhibit of
the same number filed with the Company’s Annual Report on Form 10-K
for the year ended March 31, 2007).
|
|
|
|
10.45
|
|
Form
of Securities Purchase Agreement, dated March 27, 2008, by and
between Registrant and each investor signatory thereto (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed March 28, 2008).
|
|
|
|
10.46
|
|
Purchase
Agreement by and between Registrant and Robert Burlingame, dated
January 26, 2009 (included as Exhibit 10.1 to the Form 8-K
filed January 29, 2009 and incorporated herein by
reference).
|
|
|
|
10.47
|
|
Purchase
Agreement by and between Registrant and Non-Affiliated Investors, dated
January 26, 2009 (included as Exhibit 10.2 to the Form 8-K
filed January 29, 2009 and incorporated herein by
reference).
|
|
|
|
10.48
|
|
Revenue
Sharing Distribution Agreement by and between Registrant and VetCure,
Inc., dated January 26, 2009 (included as Exhibit 10.3 to the
Form 8-K filed January 29, 2009 and incorporated herein by
reference).
|
|
|
|
10.49
|
|
Purchase
Agreement by and between Registrant and accredited investors, dated
February 6, 2009 (included as Exhibit 10.1 to the Form 8-K
filed February 9, 2009 and incorporated herein by
reference).
|
|
|
|
10.50
|
|
Purchase
Agreement by and between Registrant, Robert Burlingame and Seamus
Burlingame, dated February 24, 2009 (included as Exhibit 10.4 to
the Form 8-K filed February 27, 2009 and incorporated herein by
reference).
|
|
|
|
10.51
|
|
Amendment
to Revenue Sharing Distribution Agreement by and between Registrant and
Vetericyn, Inc., dated February 24, 2009 (included as
Exhibit 10.5 to the Form 8-K filed February 27, 2009 and
incorporated herein by reference).
|
|
|
|
10.52*
|
|
Agreement
by and between Registrant and Robert C. Burlingame, dated April 1,
2009 (included as Exhibit 10.52 to the Form 10-K filed on June 11, 2009
and incorporated herein by reference).
|
|
|
|
10.53*
|
|
Microcyn
U.S. Commercial Launch Agreement, by and between Registrant and Advocos,
dated April 24, 2009 (included as Exhibit 10.53 to the Form 10-K
filed on June 11, 2009 and incorporated herein by
reference).
|
|
|
|
10.54*
|
|
Amendment
No. 5 to Lease by and between Registrant and RNM Lakeville, LLC,
dated May 18, 2009 (included as Exhibit 10.54 to the Form 10-K filed
on June 11, 2009 and incorporated herein by reference).
|
|
|
|
10.55
|
|
Engagement
Agreement by and between Registrant and Dawson James Securities, Inc.,
dated April 10, 2009, (included as Exhibit 10.55 to the Registration
Statement on Form S-1 (File No. 333-158539), as amended, declared
effective on July 24, 2009)
|
|
|
|
10.56
|
|
Letter
Agreement by and between Registrant and Dawson James Securities, Inc.,
dated July 2, 2009, (included as Exhibit 10.56 to the Registration
Statement on Form S-1 (File No. 333-158539), as amended, declared
effective on July 24, 2009)
|
|
|
|
10.57
|
|
Letter
Agreement by and between Registrant and Dawson James Securities, Inc.,
dated July 10, 2009, (included as Exhibit 10.57 to the Registration
Statement on Form S-1 (File No. 333-158539), as amended, declared
effective on July 24, 2009)
|
|
|
|
10.58
|
|
Warrant
Purchase Agreement by and between Registrant and Dawson James Securities,
Inc., dated July 13, 2009, (included as Exhibit 10.58 to the Registration
Statement on Form S-1 (File No. 333-158539), as amended, declared
effective on July 24, 2009)
|
|
|
|
10.59
|
|
Loan
and Security Agreement, dated May 1, 2010 between Oculus Innovative
Sciences, Inc. and Venture Lending & Leasing V., Inc., (Included as
Exhibit 10.1 to the Form 8-K filed on May 6, 2010, and incorporated herein
by reference.)
|
|
|
|
10.60
|
|
Supplement
to the Loan and Security Agreement, dated as of May 1, 2010 between Oculus
Innovative Sciences, Inc., and Venture Lending & Leasing V, Inc.,
(Included as Exhibit 10.2 to the Form 8-K filed on May 6, 2010, and
incorporated herein by reference.)
|
|
|
|
10.61
|
|
Warrant
to Purchase Shares of Common Stock of Oculus Innovative Sciences, Inc.,
(Included as Exhibit 10.3 to the Form 8-K filed on May 6, 2010, and
incorporated herein by reference.)
|
|
|
|
21.1
|
|
List
of Subsidiaries (incorporated by reference to the exhibit of the same
number filed with the Company’s Annual Report on Form 10-K (File
No. 001-3216) for the year ended March 31,
2007).
|
|
|
|
23.1*
|
|
Consent
of Marcum LLP, independent registered public accounting
firm.
|
|
|
|
31.1*
|
|
Certification
of Chief Executive Officer pursuant to Securities Exchange Act
Rule 13a — 14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of
2002.
|
31.2*
|
|
Certification
of Chief Financial Officer pursuant to Securities Exchange Act
Rule 13a — 14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1**
|
|
Certification
of Officers pursuant to 18 U.S.C. Section 1250, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
**
|
In
accordance with Item 60(b)(32)(ii) of Regulation S-K and SEC
Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on
Internal Control Over Financial Reporting and Certification of Disclosure
in Exchange Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this
Form 10-K and will not be deemed “filed” for purposes of
Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the Company
specifically incorporates it by
reference.
|
†
|
Confidential
treatment has been granted with respect to certain portions of this
agreement.
|
Copies of
above exhibits not contained herein are available to any stockholder, upon
payment of a reasonable per page fee, upon written request to: Chief Financial
Officer, Oculus Innovative Sciences, Inc., 1129 N. McDowell Blvd.,
Petaluma, California 94954.
(c) Financial
Statements and Schedules
Reference
is made to Item 15(a)(2) above.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
OCULUS
INNOVATIVE SCIENCES, INC.
|
|
|
|
|
|
|
By:
|
/s/ Hojabr Alimi
|
|
|
|
Hojabr
Alimi
|
|
|
|
President,
Chief Executive Officer and
|
|
|
|
Chairman
of the Board
|
|
|
|
(Principal
Executive Officer)
|
|
Date:
June 8, 2010
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Hojabr Alimi and James J. Schutz, and each of them, his
true and lawful attorneys-in-fact, each with full power of substitution, for him
or her in any and all capacities, to sign any amendments to this report on
Form 10-K and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Hojabr Alimi
|
|
President,
Chief Executive Officer and
|
|
June
8, 2010
|
Hojabr
Alimi
|
|
Chairman
of the Board
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/ Robert E.
Miller
|
|
Chief
Financial Officer
|
|
|
Robert
E. Miller
|
|
(Principal
Financial Officer and
|
|
|
|
|
Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Gregg Alton
|
|
Director
|
|
|
Gregg
Alton
|
|
|
|
|
|
|
|
|
|
/s/ Jay Edward
Birnbaum
|
|
Director
|
|
|
Jay
Edward Birnbaum
|
|
|
|
|
|
|
|
|
|
/s/ Robert
Burlingame
|
|
Director
|
|
|
Robert
Burlingame
|
|
|
|
|
|
|
|
|
|
/s/ Richard
Conley
|
|
Director
|
|
|
Richard
Conley
|
|
|
|
|
|
|
|
|
|
/s/ Gregory M.
French
|
|
Director
|
|
|
Gregory
M. French
|
|
|
|
|
|
|
|
|
|
/s/ James Schutz
|
|
Director
|
|
|
James
Schutz
|
|
|
|
|