rate of 7%. The principal and all accrued interest under the loan agreement, and is available to us as working capital, will become due and payable in full on the earlier of November 10, 2007 or five days after the completion of an initial public offering of our common stock resulting in gross proceeds to us of at least $30.0 million. The loan is secured by all of our assets, other than our intellectual property, but is subordinate to the security interest held by our secured lender. Brookstreet was paid a fee in the amount of $50,000 and granted a warrant to purchase 25,000 shares of our common stock at an exercise price of $18.00 per share in connection with this loan.
As of September 30, 2006, we had cash and cash equivalents of $2.3 million, compared to $7.4 million at March 31, 2006 and $3.3 million at March 31, 2005.
Net cash used in operating activities was $5.6 million, $13.5 million and $19.7 million in the years ended March 31, 2004, 2005 and 2006, respectively, and $8.7 million for the six months ended September 30, 2006. Net cash used in each of these periods primarily reflects net loss for these periods, offset in part by non-cash charges in operating assets and liabilities, non-cash stock-based compensation and depreciation.
Net cash used in investing activities was $1.0 million, $1.1 million and $419,000 for the years ended March 31, 2004, 2005 and 2006, respectively, and $587,000 for the six months ended September 30, 2006. Cash was used primarily to invest in fixed assets and other capital expenditures to support increased personnel and manufacturing facility expansion in Europe and Mexico during the years ended March 31, 2004 and 2005. We expect to continue to make significant investments in the purchase of property and equipment to support our expanding operations.
Net cash provided by financing activities for the years ended March 31, 2004, 2005 and 2006 was $7.3 million, $17.2 million and $26.1 million, respectively, and $4.3 million for the six months ended September 30, 2006. The net cash provided by financing activities for the year end periods was primarily attributable to the sale of convertible preferred stock, which generated $6.6 million, $16.7 million and $27.0 million for the years ended March 31, 2004, 2005 and 2006, respectively. In addition, net proceeds from debt financing added $574,000, $1.2 million and $257,000 for the years ended March 31, 2004, 2005 and 2006, respectively, and $4.4 million for the six months ended September 30, 2006. Debt financing consisted primarily of notes payable to individuals and secured notes issued to finance the purchase of capital equipment, corporate insurance premiums and general operations.
2009. Assuming the results of the Phase IIb trial supports further development of our product for treatment of open wounds, the results of this Phase IIb trial will be used to determine the design and sample sizes for subsequent Phase III trials. These Phase IIb and Phase III clinical trials are intended to provide the clinical basis for submission to the FDA of an NDA for the treatment of open wounds.
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Physician Clinical Studies
In addition to our clinical trials, several physicians have conducted twelve clinical studies of Microcyn generating data suggesting that our 510(k) Microcyn product is safe,non-irritating to healthy tissue, reduces microbial load, shortens treatment time and may have the potential to reduce costs to healthcare providers and patients. We have sponsored the majority of physicians performing these studies by supplying Microcyn, unrestricted research grants and paying expenses and honoraria. In some cases, the physicians who performed these studies also hold equity in our company. The studies were performed in the United States, Mexico and Italy, and used various endpoints, methods and controls (for example, saline, antiseptics and antibiotics). These studies were not intended to be rigorously designed or controlled clinical trials and, as such, did not have all of the controls required for clinical trials used to support an NDA submission to the FDA in that they did not 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 a selection of articles and publications from physicians who have completed studies on the use of Microcyn for wound care and wound irrigation.
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Physician | | Country | | Number of Patients | | Publication |
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David E. Allie, M.D.(1) | | U.S. | | 40 | | Allie D. Super-Oxidized Dermacyn in Lower-Extremity Wounds.Wounds, 2006, Jan (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, Jan (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 |
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, Jan (Suppl), 14-16 |
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, Jan (Suppl), 17-19 |
Notes
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(1) | | indicates that the physician is a member of our Medical and Business Advisory Board, a paid consultant, an investor and received research grants, expense payments, honorarium and Microcyn to complete the study |
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(2) | | indicates that the physician is a paid consultant and a warrant holder |
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(3) | | indicates that the doctor received Microcyn to complete the study |
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(4) | | indicates that the physician is a member of our Medical and Business Advisory Board and received expense payments and Microcyn to complete the study |
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(5) | | indicates that the physician received payments, expense payments and Microcyn to complete the study |
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In addition to the above articles and publications, several additional journal articles have been submitted for peer review and publication. There are also several ongoing and planned physician clinical studies in the United States, Europe and India to assess Microcyn’s effectiveness in helping to prevent and treat infections in wounds. For example, we are supporting a study by Dr. David Armstrong of the Scholl College of Podiatric Medicine in Chicago, Illinois and Dr. Andrew Boulton, Head of the Manchester Diabetes Center at the Manchester Royal Infirmary in the United Kingdom. This is a study of diabetic foot ulcers using the VersaJet, and aggressive debridement system, in two groups of 20 patients each, one utilizing Microcyn and the other utilizing saline. The endpoints are microbial load reduction and time to complete wound healing.
Dr. Dalla Paola is conducting a second study, in addition to the above publication, involving 100 patients comparing Microcyn to another antimicrobial agent in the treatment of diabetic foot necrobiosis, with time to wound healing the primary endpoint. We have given Dr. Tom Wolvos, a board certified surgeon who is the Medical Director at the Scottsdale Healthcare Wound Management Center in Arizona, an unrestricted research grant to conduct a 40-patient study comparing Microcyn to saline solution with the VAC, a negative pressure wound therapy system, in the treatment of a variety of wounds. Lastly, Cheryl Bongiovanni, Ph.D., Director of the Lake Wound Clinics in Lakeview, Oregon, is conducting two patient studies, one focusing on the potential cost savings from the use of Microcyn in treating a variety of wounds, and one 20-patient study comparing Microcyn with saline solution in the treatment of leg ulcers. We provided each of these doctors with Microcyn and may pay their expenses, including travel, hotels and meals, to attend medical conferences to present their findings. We have also paid consulting fees and expenses to Dr. Wolvos in connection with corporate development and licensing evaluations.
Sales and Marketing
We are developing distribution and sales networks to market our products domestically and in a number of countries outside the United States. We expect to expand our existing sales force in the United States, Europe and Mexico as we obtain additional regulatory claims. 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, as well as those patients undergoing surgical procedures.
Our strategy is to enter into agreements with established regional distributors, provide ongoing sales support and utilize clinical studies and key opinion leader programs to accelerate product adoption. Implementation of our strategy includes the development of relationships with wound care specialists through targeted direct marketing and communications programs and through sponsorship of physician presentations at medical conferences and seminars.
In the United States, we currently distribute our products through one national and five regional distributors who are supported by our commercial team and clinical support staff. In addition to our distributors, we employ medical and clinical professionals, with marketing contacts in leading wound care clinics, hospitals and health care agencies that provide wound care services. Our U.S. commercial team is initiating a focused sales strategy that will allow us to increase the awareness of Microcyn to healthcare providers. This strategy involves sampling and customer education efforts in a major metropolitan area. Based on the success of this initial roll-out, we intend to target other metropolitan areas in 2007 and 2008. We intend to hire additional salespeople in the United States in the event we receive FDA approval of our product for additional indications.
In Europe, we have arrangements with distributors in Germany, Italy, Sweden and the Czech Republic who are supported by our sales team. We are actively pursuing additional distribution arrangements in other
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European countries. We currently have a small direct sales force in our European regional sales office in The Netherlands, and intend to hire additional direct sales people to support our distributors.
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 independent pharmacies.
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We have established distribution channels for our disinfectant and wound care products in India, Bangladesh, Pakistan, Singapore, United Arab Emirates and Saudi Arabia. In December 2005, we entered into an agreement with Alkem Laboratories, a large pharmaceutical company in India, which employs more than 800 salespeople servicing the Indian healthcare market. We commenced sales to Alkem Laboratories in April 2006. Under the terms of this agreement, Alkem has exclusive rights to market, distribute and sell our Microcyn-based products in the Republic of India and the Kingdom of Nepal. During the term of this agreement, Alkem is entitled to use our patents, trade secrets, trademarks and other intellectual property rights as to our Microcyn-based products. However, we will remain the owner of and reserve such patents, trade secrets, trademarks and other intellectual property rights. In the event we fail to timely deliver the ordered quantities, we will be subject to certain penalties. In addition, if either party fails to fulfill their respective obligations under the agreement for a period of 180 days, which is not remediated within 30 days of receiving notice, the other party may terminate the agreement. The agreement has a five year term and may be renewed after its initial term for such additional term as the parties agree to in writing.
Other Market Opportunities
We are also conducting laboratory and animal testing to assess potential applications in several other markets and if these tests yield promising results, we will determine whether to seek regulatory clearance. We may pursue access to these markets through strategic partnerships. Some of these market opportunities include:
Respiratory
Our nasal product candidate is an anti-microbial solution designed to be self-administered into a patient’s nasal cavity for the treatment of chronic rhinosinusitis, or inflammation of the nasal sinuses. In animal studies, Microcyn has been shown to kill the bacteria that causes rhinosinusitis. We are currently conducting pre-clinical animal studies seeking to support the efficacy and safety of this product candidate.
Rhinosinusitis affects an estimated 35 million people in the United States. There is no FDA-approved therapy for chronic rhinosinusitis. Most treatment methods have focused on the symptoms of the disease and include the use of antibiotics, antihistamines, corticosteroids and sinus surgery.
Dermatology
We believe that our Microcyn technology can be used to develop products to treat various fungal and bacterial skin infections. Laboratory and clinical test data support that our technology may be effective in treating these bacterial and fungal infections.
Dental and Oral Care
We believe that our Microcyn technology may be used both as a mouthwash and a dental rinse, and that early data from physician studies support its safe use in oral surgery.
Veterinary Medicine
Our animal wound care product based on Microcyn technology, Vetericyn, was launched in late 2004 and is currently available for purchase by veterinarians through MWI Veterinary Supply, Inc., a distributor of animal health products. However, we have not generated meaningful revenue from this agreement. Vetericyn has uses in a variety of applications, including the treatment of hard-to-heal wounds in horses and other companion animals.
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Research and Product Development
The main goals of our research and product development program are to design, develop and produce products to treat acute and chronic wounds, and to identify new applications for our technology. Our research
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and product development efforts with our Microcyn-based products are divided into three areas: science, new product development and engineering.
Our scientists work to continually improve our product performance by evaluating variations of the formulations and chemical structures of our products. For example, we are evaluating alterations to Microcyn to increase the speed at which it kills certain bacteria and viruses.
The focus of our current development efforts is new formulations, applications and delivery systems for Microcyn, including the following:
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| • | an intravenous bag and spikeable bottle for use with compatible wound care systems; |
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| • | various formulations and delivery systems that extend the stability of the product; |
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| • | a surgical irrigant to control infections during and after surgery; and |
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| • | a fine mist to treat chronic rhinosinusitis. |
Our engineers seek to optimize our manufacturing process by reducing costs and increasing yield. For example, we have significantly decreased the waste product resulting from our manufacturing process, and we continue to experiment to find ways of decreasing it further.
Our technology may have application in other non-medical markets. We intend to pursue opportunities in these markets with third parties. Our director of research and development coordinates all research and product development activities. We plan to increase our research and product development staff in the future to address market demands identified in our market research and commercial practice.
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 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 Petaluma, California, Sittard, The Netherlands and Zapopan, Mexico. We have developed an automated manufacturing process and conduct quality assurance testing on each production batch in accordance with current U.S. Good Manufacturing Practices, or cGMP. Our facilities are required to meet and maintain regulatory standards applicable to the manufacture pharmaceutical and medical device products. Our United States and Netherlands facilities are certified and comply with cGMP medical device Quality Systems Regulation or QSR, and International Organization for Standardization, or ISO, guidelines. Our Mexico facility has been approved by the MOH.
Our machines are subjected to a series of tests, which is part of a validation protocol mandated by cGMP, QSR and ISO requirements. This validation is designed to ensure that the final product is consistently manufactured in accordance with product specifications at all manufacturing sites. Certain materials and components used in manufacturing our machines are proprietary to us.
We believe we have a sufficient number of machines to produce an adequate amount of Microcyn to meet anticipated future requirements for at least the next two years. As we expand into new geographic markets, we may establish additional manufacturing facilities to better serve those new markets.
Intellectual Property
Our success depends in part on our ability to obtain and maintain proprietary protection for our product technology and know-how, to operate without infringing proprietary rights of others, and to prevent others
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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
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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 October 30, 2006, we own one issued U.S. patent, 12 pending U.S. patent applications and 18 foreign pending patent applications generally relating to super-oxidized water. These applications include three U.S. provisional applications for which the one-year period to file a non-provisional application has not yet expired as well as three international PCT applications that have not yet reached the deadline to file counterpart phase applications. We filed the provisional U.S. patent applications as a way of deferring the payment of U.S. and foreign patent office fees while we decide whether the invention merits a full examination based on the development of the market for the product. In addition, a provisional patent application gives us the opportunity to continue to develop the inventive concepts further before filing further U.S. and foreign patent applications that are subject to examination. Our portfolio of pending applications can be divided into two groups. The first group includes one U.S. issued patent and three pending U.S. patent applications and seven foreign patent applications that relate to early generation super-oxidized water product, methods of using super-oxidized water, and aspects of the method and apparatus for manufacturing super-oxidized water. The second group includes nine pending U.S. patent applications, including three provisional applications, and 11 foreign patent applications that relate to Microcyn, the method and apparatus for manufacturing Microcyn, and its uses.
In March 2003, we obtained an exclusive license to six issued Japanese patents and five Japanese published pending patent applications owned by Coherent Technologies, or Coherent. The issued Japanese patents and pending Japanese patent applications relate to an early generation of unstable, super-oxidized water product and aspects of the method and apparatus for producing super-oxidized water and will expire between 2011 and 2014. In June 2006, we received written notice via email from Coherent advising us that the patent license was terminated, citing various reasons with which we disagree. Although we do not believe Coherent has grounds to terminate the license, we may have to take legal action to preserve our rights under the license and to enjoin Coherent from breaching its terms. We do not know whether we would prevail in any such action, which would be costly and time consuming, and we could lose our rights under the license, which could have a material adverse impact on our business opportunities in Japan. In addition, we may have to defend ourselves against infringement claims from Coherent in Japan based on their position on termination of the license. We do not believe the Japanese patents disclose or cover certain innovations in our products, which we developed independently and are the subject of our own patent applications. Neither party has sought legal remedy to this issue. In fact, we maintain an ongoing dialogue with Coherent. To date, we have not commercialized any products or generated any revenue in Japan.
Although we work to protect our technology, we cannot assure you that any patent will issue from currently pending patent applications or from future patent applications. We also cannot assure you that the scope of any patent protection will exclude competitors or provide competitive advantages to us, that any of our patents will be held valid if subsequently challenged, or that others will not claim rights in or ownership of our patents and proprietary rights. Furthermore, we cannot assure you that others have not developed or will develop similar products, duplicate any of our products or design around our patents.
We have also filed for trademark protection for marks used with our Microcyn products in each of the United States, Europe, certain countries in Central and South America, including Mexico and Brazil, Latin America, certain countries in Asia, including Japan, China and the Republic of Korea, 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 who 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
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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
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proprietary. For more information, please see “Risk Factors,” “Our competitive position depends on our ability to protect our intellectual property and our proprietary technologies.”
Competition
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, spore killing and cost effectiveness. The medical device industry, and in particular the wound care market, is highly competitive. We compete with a number of large well-established and well-funded companies that sell a broad range of wound care products, including topical anti-infectives and antibiotics, as well as some advanced wound technologies, such as skin substitutes, growth factors and sophisticated delayed release silver-based dressings.
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 andover-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 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 also 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 from Kinetic Concepts Inc., skin substitute products from Smith & Nephew, Integra Life Sciences, Life Cell, Organogenesis and Ortec International, and ultrasound from Celleration. We believe that Microcyn can enhance the effectiveness of many of these advanced wound care technologies. Because Microcyn is competitive with some of the large wound care companies’ products and complementary to others, we may compete with such companies in some product lines and complement other product lines.
While many companies are able to produce oxidized water, their products, unlike ours, typically become unstable after 48 hours, and we believe they have a much higher chlorine content that may not be suitable for treatment of infections in wounds. One such company, PuriCore, sells electrolysis machines used to manufacture brine-based oxidized water primarily as a sterilant.
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. |
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 by government agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous pre-clinicalpre-
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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,
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manufacturing, safety, labeling, storage, distribution and record-keeping related to such products and their marketing. The process of obtaining these approvals 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
In 2005, Microcyn received 510(k) clearance as a medical device for wound cleaning, or debridement, lubricating, moistening and dressing. Any future product candidates or new applications using Microcyn that are classified as medical devices will need approval or clearance by the FDA.
New medical devices, such as Microcyn, are subject to FDA approval and extensive regulation under the Federal Food Drug and Cosmetic Act, or FDCA. Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III. The classification of a device into one of these three classes generally depends on the degree of risk associated with the medical device and the extent of control needed to ensure safety and effectiveness.
Class I devices are those for which safety and effectiveness can be assured by adherence to a set of general controls. These general controls include compliance with the applicable portions of the 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 so-called 510(k) pre-market notification procedure. When 510(k) clearance is sought, a sponsor must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to a legally marketed Class II device (for example, a device previously cleared through the 510(k) premarket notification process). If the FDA agrees that the proposed device is substantially equivalent to the predicate device, then 510(k) clearance to market will be granted. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require pre-market approval, or PMA.
Clinical trials are almost always required to support a PMA application and are sometimes required for a 510(k) pre-market notification. These trials generally require submission of an application for an investigational device exemption, or IDE. An IDE must be supported by pre-clinical data, such as animal and laboratory testing results, which show that the device is safe to test in humans and that the study protocols are scientifically sound. The IDE must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and is eligible for more abbreviated investigational device exemption requirements.
Both before and after a medical device is commercially distributed, manufacturers and marketers of the device have ongoing responsibilities under FDA regulations. The FDA reviews design and manufacturing practices, labeling and record keeping, and manufacturers’ required reports of adverse experiences and other information to identify potential problems with marketed medical devices. Device manufacturers are subject to periodic and unannounced inspection by the FDA for compliance with the Quality System Regulation, which sets forth the current good manufacturing practice requirements that govern the methods used in, and the facilities and controls used for, the design, manufacture, packaging, servicing, labeling, storage, installation and distribution of all finished medical devices intended for human use.
FDA regulations prohibit the advertising and promotion of a medical device for any use outside the scope of a 510(k) clearance or PMA approval or for unsupported safety or effectiveness claims. Although the FDA does not regulate physicians’ practice of medicine, the FDA does regulate manufacturer communications with respect to off-label use.
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If the FDA finds that a manufacturer has failed to comply with FDA laws and regulations or that a medical device is ineffective or poses an unreasonable health risk, it can institute or seek a wide variety of enforcement actions and remedies, ranging from a public warning letter to more severe actions such as:
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| • | fines, injunctions and civil penalties; |
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| • | recall or seizure of products; |
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| • | operating restrictions, partial suspension or total shutdown of production; |
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| • | refusing requests for 510(k) clearance or PMA approval of new products; |
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| • | withdrawing 510(k) clearance or PMA approvals already granted; and |
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| • | criminal prosecution. |
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 approval 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.
Pharmaceutical Product Regulation
We have two pharmaceutical product candidates that are regulated by the FDA and will require approval before we can market or sell them as drugs. Any future product candidates or new applications using Microcyn that are classified as drugs will need approval by the FDA.
In the United States, the FDA regulates drugs under the FDCA and implementing regulations that are adopted under the FDCA. In the case of biologics, the FDA regulates such products under the Public Health Service Act. If we fail to comply with the applicable requirements under these laws and regulations at any time during the product development process, approval process, or after approval, we may become subject to administrative or judicial sanctions. These sanctions could include the 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.
Under the United States regulatory scheme, the development process for new pharmaceutical products can be divided into three distinct phases:
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| • | Pre-Clinical Phase. The pre-clinical phase involves the discovery, characterization, product formulation and animal testing necessary to prepare an Investigational New Drug application, or IND, for submission to the FDA. The IND must be accepted by the FDA before the drug can be tested in humans. |
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| • | Clinical Phase. The clinical phase of development follows a successful IND submission and involves the activities necessary to demonstrate the safety, tolerability, efficacy, and dosage of the substance in humans, as well as the ability to produce the substance in accordance with cGMP requirements. Data from these activities are compiled in a New Drug Application, or NDA, or for biologic products a Biologics License Application, or BLA, for submission to the FDA requesting approval to market the drug. |
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| • | Post-Approval Phase. The post-approval phase follows FDA approval of the NDA or BLA, and involves the production and continued analytical and clinical monitoring of the product. The post- approval phase may also involve the development and regulatory approval of product modifications and line extensions, including improved dosage forms, of the approved product, as well as for generic |
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| | versions of the approved drug, as the product approaches expiration of patent or other exclusivity protection. |
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Each of these three phases is discussed further below.
Pre-Clinical Phase. The development of a new pharmaceutical agent begins with the discovery or synthesis of a new molecule. These agents are screened for pharmacological activity using various animal and tissue models, with the goal of selecting a lead agent for further development. Additional studies are conducted to confirm pharmacological activity, to generate safety data, and to evaluate prototype dosage forms for appropriate release and activity characteristics. Once the pharmaceutically active molecule is fully characterized, an initial purity profile of the agent is established. During this and subsequent stages of development, the agent is analyzed to confirm the integrity and quality of material produced. In addition, development and optimization of the initial dosage forms to be used in clinical trials are completed, together with analytical models to determine product stability and degradation. A bulk supply of the active ingredient to support the necessary dosing in initial clinical trials must be secured. Upon successful completion of pre-clinical safety and efficacy studies in animals, an IND submission is prepared and provided to the FDA for review prior to commencement of human clinical trials. The IND consists of the initial chemistry, analytical, formulation, and animal testing data generated during the pre-clinical phase. The review period for an IND submission is 30 days, after which, if no comments are made by the FDA, the product candidate can be studied in Phase I clinical trials.
Clinical Phase. Following successful submission of an IND, the sponsor is permitted to conduct clinical trials involving the administration of the investigational product candidate to human subjects under the supervision of qualified investigators in accordance with good clinical practice. 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 IND prior to beginning the trial. Each trial must be reviewed, approved and conducted under the auspices of an independent Institutional Review Board, and each trial, with limited exceptions, must include the 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 in 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. |
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 IND and may, at its discretion, reevaluate, alter, suspend, or terminate the testing based upon the data
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accumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient. Clinical investigators, or IRBs, and companies may be subject to pre-approval, routine, or “for cause” inspections by
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the FDA for compliance with Good Clinical Practices, or GCPs, 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 to product approval. Additionally, new government requirements may be established that could delay or prevent regulatory approval of our products under development. Furthermore, institutional review boards, which are independent entities constituted to protect human subjects in the institutions in which clinical trials are being conducted, have the authority to suspend clinical trials in their respective institutions at any time for a variety of reasons, including safety issues.
Post-Approval Phase. After approval, we are still subject to continuing regulation by the FDA, including, but not limited to, record keeping requirements, submitting periodic reports to the FDA, reporting of any adverse experiences with the product, and complying with drug sampling and distribution requirements. In addition, we are required to maintain and provide updated safety and efficacy information to the FDA. We are also required to comply with requirements concerning advertising and promotional labeling. In that regard, our advertising and promotional materials must be truthful and not misleading. We are also prohibited from promoting any non-FDA approved or “off-label” indications of products. Failure to comply with those requirements could result in significant enforcement action by the FDA, including warning letters, orders to pull the promotional materials, and substantial fines. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval.
Drug and biologics manufacturers and their subcontractors are required to register their facilities and products manufactured annually with the FDA and certain state agencies and are subject to periodic routine and unannounced inspections by the FDA to assess compliance with cGMP regulations. Facilities may also be subject to inspections by other federal, foreign, state, or local agencies. In addition, approved biological drug products may be subject tolot-by-lot release testing by the FDA before these products can be commercially distributed. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance. Future FDA inspections may identify compliance issues at our facilities or at the facilities that may disrupt production or distribution, or require substantial resources to correct.
In addition, following FDA approval of a product, discovery of problems with a product or the failure to comply with requirements may result in restrictions on a product, manufacturer, or holder of an approved marketing application, including withdrawal or recall of the product from the market or other voluntary or FDA-initiated action that could delay further marketing. Newly discovered or developed safety or effectiveness data may require changes to a 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.
Regulation of Disinfectants
In October 2004, we obtained EPA authorization, or registration for the distribution and sale of our Microcyn based product as a hospital grade disinfectant. In August 2006, we received a “show cause” letter from the EPA stating that it was prepared to file a civil administrative complaint against us for violation of federal pesticide legislation in connection with the sale or distribution of a pesticide that did not meet the label’s efficacy claims unless and until we provide new information to support the original label claims as a hospital grade disinfectant to the EPA, there will not be any sales or other distributions of the product in the United States as a hospital grade disinfectant.
In the United States, the EPA regulates disinfectants as antimicrobial pesticides under the Federal Insecticide, Fungicide and Rodenticide Act, or FIFRA, and the implementing regulations that the EPA has adopted under FIFRA. Before marketing a disinfectant in the United States, we must satisfy the EPA’s pesticide registration requirements. That registration process requires us to demonstrate the disinfectant’s
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efficacy and to determine the potential human and ecological risks associated with use of the disinfectant. The testing and registration process could be lengthy and could be expensive. There is no assurance, however, that we will be able to satisfy all of the pesticide registration requirements for a particular proposed new disinfectant product. Once we satisfy the FIFRA registration requirements for an individual disinfectant, additional FIFRA regulations will apply to our various business activities, including marketing, related to that EPA-registered product.
Failure to comply with FIFRA’s requirements could expose us to various enforcement actions. FIFRA empowers the EPA to seek administrative or judicial sanctions against those who violate FIFRA. Among the potential FIFRA penalties are civil administrative penalties, stop sale orders, cancellation of our registration,
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seizures, injunctions and criminal sanctions. If EPA were to initiate a FIFRA enforcement action against us, it could have a material adverse effect on us.
Other Regulation in the United States
Health Care Coverage and Reimbursement by Third-Party Payors
Commercial success in marketing and selling our products depends, in part, on the availability of adequate coverage and reimbursement from third-party health care payors, such as government and private health insurers and managed care organizations. Third-party payers are increasingly challenging the pricing of medical products and services. Government and private sector initiatives to limit the growth of health care costs, including price regulation, competitive pricing, and managed-care arrangements, are continuing in many countries where we do business, including the United States. These changes are causing the marketplace to be more cost-conscious and focused on the delivery of more cost-effective medical products. Government programs, including Medicare and Medicaid, private health care insurance companies, and managed-care plans control costs by limiting coverage and the amount of reimbursement for particular procedures or treatments. This has created an increasing level of price sensitivity among customers for our products. Some third-party payors also require that a favorable coverage determination be made for new or innovative medical devices or therapies before they will provide reimbursement of those medical devices or therapies. Even though a new medical product may have been cleared or approved for commercial distribution, we may find limited demand for the product until adequate coverage and reimbursement have been obtained from governmental and other third-party payors.
Fraud and Abuse Laws
In the United States, we are subject to various federal and state laws pertaining to healthcare fraud and abuse, which, among other things, prohibit the offer or acceptance of remuneration intended to induce or in exchange for the purchase of products or services reimbursed under a federal healthcare program and the submission of false or fraudulent claims with the government. These laws include the federal Anti-Kickback Statute, the False Claim Act and comparable state laws. These laws regulate the activities of entities involved in the healthcare industry, such as us, by limiting the kinds of financial arrangements such entities may have with healthcare providers who use or recommend the use of medical products (including for example, sales and marketing programs, advisory boards and research and educational grants). In addition, in order to ensure that healthcare entities comply with healthcare laws, the Office of Inspector General, or OIG, of the U.S. Department of Health and Human Services recommends that healthcare entities institute effective compliance programs. To assist in the development of effective compliance programs, the OIG has issued model Compliance Program Guidance, or CPG, materials for a variety of healthcare entities which, among other things, identify practices to avoid that may implicate the federal Anti-Kickback Statute and other relevant laws and describes elements of an effective compliance program. While compliance with the CPG materials is voluntary, a recent California law requires pharmaceutical and devices manufacturers to initiate compliance programs that incorporate the CPG and the July 2002 Pharmaceuticals Research and Manufacturers of America Code on Interactions with Healthcare Professionals.
Due to the scope and breadth of the provisions of some of these laws, it is possible that some of our practices might be challenged by the government under one or more of these laws in the future. Violations of
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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.
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The definition of “remuneration” has been broadly interpreted to include anything of value, including such items as gifts, discounts, the furnishing of supplies or equipment, waiver of co-payments, and providing anything at less than its fair market value. Because the Anti-Kickback Statute makes illegal a wide variety of common (even beneficial) business arrangements, the OIG was tasked with issuing regulations, commonly known as “safe harbors,” that describe arrangements where the risk of illegal remuneration is minimal. As long as all of the requirements of a particular safe harbor are strictly met, the entity engaging in that activity will not be prosecuted under the federal Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, business arrangements that do not fully satisfy an applicable safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG. Our agreements to pay compensation to our advisory board members and physicians who conduct clinical trials or provide other services for us may be subject to challenge to the extent they do not fall within relevant safe harbors under state and federal anti-kickback laws. In addition, many states have adopted laws similar to the federal Anti-Kickback Statute which apply to the referral of patients for healthcare services reimbursed by Medicaid, and some have adopted such laws with respect to private insurance. Violations of the Anti-Kickback Statute are subject to significant fines and penalties and may lead to a company being excluded from participating in federal health care programs.
False Claims Laws. The federal False Claims Act prohibits knowingly filing a false claim, knowingly causing the filing of a false claim, or knowingly using false statements to obtain payment from the federal government. Under the False Claims Act, such suits are known as “qui tam” actions, and those who bring such suits. Individuals may file suit on behalf of the government share in any amounts received by the government pursuant to a settlement. In addition, certain states have enacted laws modeled after the federal False Claims Act under the Deficit Reduction Act of 2005, the federal government created financial incentives for states to enact false claims laws consistent with the federal False Claims Act. As more states enact such laws, we expect the number of qui tam lawsuits to increase. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claims action, pay fines or be excluded from Medicare, Medicaid or other federal or state government healthcare programs as a result of investigations arising out of such actions.
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
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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
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unable to predict the extent to which our resources may be diverted in the event of an investigation or enforcement action with respect to such laws.
Foreign Regulation
Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the applicable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing, and reimbursement also vary greatly from country to country. Although governed by the applicable country, clinical trials conducted outside of the United States typically are administered under a three-phase sequential process similar to that discussed above for pharmaceutical products.
European Union Regulation
Medical Device Regulation. Our Microcyn products are classified as medical devices in the European Union. In order to sell our medical device products within the European Union, we are required to comply with the requirements of the Medical Devices Directive, or MDD, and its national implementations, including affixing CE Marks on our products. In order to comply with the MDD, we must meet certain requirements relating to the safety and performance of our products and, prior to marketing our products, we must successfully undergo verification of our 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. We executed the conformity assessment for production quality assurance for Class IIb products for Dermacyn Wound Care. Compliance with production quality assurance is audited every year by a private entity certified by government regulators. In order to comply with the examination, we completed, among other things, a risk analysis and presented clinical data, which demonstrated that our products met the performance specifications claimed by us, provided sufficient evidence of adequate assessment of unwanted side effects and demonstrated that the benefits to the patient outweigh the risks associated with the device. We will be subject to continued supervision and will be required to report any serious adverse incidents to the appropriate authorities. We will also be required to comply with additional national requirements that are beyond the scope of the MDD.
We received our CE certificate for Dermacyn Wound Care as a Class IIb medical device in February 2005. There can be no assurance that we will be able to maintain the requirements established for CE Marks for any or all of our products or that we will be able to produce these products in a timely and profitable manner while complying with the requirements of the MDD and other regulatory requirements.
Marketing Authorizations for Drugs. In order to obtain marketing approval of any of our drug products in Europe, we must submit for review an application similar to a U.S. NDA to the relevant authority. In contrast to the United States, where the FDA is the only authority that administers and approves NDAs, in Europe there are multiple authorities that administer and approve these applications. Marketing authorizations in Europe expire after five years but may be renewed.
We believe that our Microcyn based drugs will be reviewed by the Committee for Medicinal Products for Human Use, or CHMP, on behalf of the European Medicines Agency, or EMEA. Based upon the review of the
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CHMP, the EMEA provides an opinion to the European Commission on the safety, quality and efficacy of the drug. The decision to grant or refuse an authorization is made by the European Commission.
Approval of applications can take several months to several years, or may be denied. This approval process can be affected by many of the same factors relating to safety, quality and efficacy as in the approval process for NDAs in the United States. As in the United States, European drug regulatory authorities can require us to perform additional non-clinical studies and clinical trials. The need for such studies or trials, if imposed, may delay marketing approval and involve unanticipated costs. Inspection of clinical investigation sites by a competent authority may also be required as part of the regulatory approval procedure. In addition,
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as a condition of marketing approval, regulatory agencies in Europe may require post-marketing surveillance to monitor for adverse effects, or other additional studies as deemed appropriate. The terms of any approval, including labeling content, may be more restrictive than expected and could affect the marketability of a product. In addition, after approval for the initial indication, further clinical studies are usually necessary to gain approval for any additional indications.
European GMP. In the European Union, the manufacture of pharmaceutical products and clinical trial supplies is subject to good manufacturing practice, or GMP, as set forth in the relevant laws and guidelines. Compliance with GMP is generally assessed by the competent regulatory authorities. They may conduct inspections of relevant facilities, and review manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining approval for each product, in many cases each drug manufacturing facility must be approved. Further inspections may occur over the life of the product.
Mexico
The MOH is the authority in charge of sanitary controls in Mexico. Sanitary controls are a group of practices related to the orientation, education, testing, verification and application of security measures and sanctions exercised by the MOH. The MOH acts by virtue of the Federal Commission for the Protection against Sanitary Risks, or COFEPRIS, a decentralized entity of the MOH whose mission is to protect the population against sanitary risks, by means of centralized sanitary regulations, controls and by raising public awareness.
The MOH is responsible for the issuance of Official Mexican Standards and specifications for drugs subject to the provisions of the General Health Law, which govern the process and specifications of drugs, including the obtaining, preparation, manufacturing, maintenance, mixture, conditioning, packaging, handling, transport, distribution, storage and supply of products to the public at large. In addition, a medical device is defined as a device that may contain antiseptics or germicides used in surgical practice or in the treatment of continuity solutions, skin injuries or its attachments.
Regulations applicable to medical devices and drugs are divided into two sections: the business that manufacture 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 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 COFEPRIS, which demonstrates that the manufacturing of Microcyn at the facility located in Zapopan, Mexico, operates in accordance with the applicable official standards.
Commercialization of Drugs and Medical Devices. Drugs and medical devices should be commercialized in appropriate packaging containing labels printed in accordance with specific official standards. For medical devices, there are no specific standards or regulations related to the labeling of the product, but rather only a general standard related to the labeling for all types of products to be commercialized in Mexico. Advertising of medical devices is regulated in the General Health Law and in the specific regulations of the General Health Law related to advertising. Generally, the advertising of medical devices is subject to a permit only in the case that such advertising is directed to the general public.
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Medical Devices and Drugs as a Product. To produce, sell or distribute medical devices, a Sanitary Registry is required in accordance with the General Health Law and the Regulation for Drugs. Such registry is granted for a term of five years, and this term may be extended. The Sanitary Registry may be revoked if the interested party does not request the extension in the term or the product or the manufacturer or the raw material is changed without the permission of the MOH.
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The MOH classifies the medical devices in three classes:
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| • | Class I. Devices for which safety and effectiveness have been duly proved and are generally not used inside the body; |
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| • | Class II. Devices that may vary with respect to the material used for its fabrication or in its concentration and generally used in the inside of the body for a period no greater than 30 days; and |
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| • | Class III. New devices or recently approved devices in the medical practice or those used inside the body and which shall remain inside the body for a period greater than 30 days. |
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.
Employees
As of September 30, 2006, we had 76 full-time employees, including 19 in manufacturing, eight in research and development, five in regulatory and clinical, 17 in sales and marketing and 13 in executive or administrative functions in the U.S., four in administrative functions in Europe, eight in administrative functions in Mexico, and two in information technology function. In early 2007, we plan to add additional sales and marketing personnel to support our various markets and opportunities. We also plan to hire additional clinical support personnel to work with key opinion leaders, and to provide educational services and technical support our distribution channels. None of our employees is covered by collective bargaining arrangements, and we consider our relationship with our employees to be good.
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 lease approximately 28,000 square feet of office space in an adjacent building for manufacturing and research and development. Both leases expire in September 2007.
We lease approximately 4,000 square feet of office space and approximately 14,000 square feet of manufacturing and warehouse space in Zapopan, Mexico, under a lease that expires in 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 leases that expire in January 2009. As we expand, we may need to establish manufacturing facilities in other countries.
We believe our properties are adequate to meet our needs through September 2007.
Legal Proceedings
In March 2006, we filed suit in the U.S. District Court for the Northern District of California against Nofil Corporation and Naoshi Kono, its Chief Executive Officer, for breach of contract, misappropriation of trade secrets and trademark infringement. We believe that Nofil Corporation violated key terms of both an exclusive purchase agreement and non-disclosure agreement by contacting and working with a potential
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competitor in Mexico. In the complaint, we seek damages of $3.5 million and immediate injunctive relief. No trial date has been set.
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In September 2005, a complaint was filed against us in Mexico claiming trademark infringement with respect to our Microcyn60 mark. To settle this claim we have agreed to cease marketing our product in Mexico under the name Microcyn60 in Mexico by September 2007. A second unrelated claim was filed against us in Mexico in May 2006, claiming trademark infringement with respect to our Microcyn60 mark in Mexico. We are in discussions with the claimant to settle the matter.
In September 2006, a consulting firm in Mexico City contacted us threatening legal action in Mexico, alleging breach of contract and claiming damages of $225,000. We entered into a settlement agreement with the consulting firm in December 2006 which provides for the payment of $115,000 for the dismissal of their claim and waiver of any previous claims against us.
In April 2005, a former director and Chief Operating Officer of our company filed an action in the Superior Court of the State of California, Sonoma County, alleging breach of employment contract. In the complaint, the plaintiff claims $300,000 and the right to purchase approximately 150,000 shares of our common stock at $3.00 per share. We entered into a settlement agreement with the plaintiff in November 2006 which provides for the payment of $250,000 and the issuance of a warrant to purchase 50,000 shares of our common stock exercisable at $3.00 per share. The issuance of warrants is subject to our obtaining appropriate waivers from our preferred stockholders, which were received on December 14, 2006, and the cash payment is subject to the closing of an equity financing resulting in gross proceeds to us of $10 million or more on the completion of our initial public offering. The estimated expense of $550,000 will be recorded as a general and administrative expense in the period the warrants are issued. Under the terms of the agreement, the plaintiff has agreed to dismiss his claim and waived any other previous claims against us. If the claims are litigated, we may incur considerable litigation costs. We expect our insurance carrier to cover a portion of the claim.
Except for the foregoing, we are not a party to any material legal proceedings, and, except as set forth above, management is not aware of any threatened legal proceedings that it believes could cause a material adverse impact on our business, financial condition or results of operations. From time to time, we may be party to lawsuits in the ordinary course of business.
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GLOSSARY OF TECHNICAL, MEDICAL AND INDUSTRY TERMS
The following technical, medical, and industry-specific terms used in this prospectus have the following meanings:
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Anti-infective | | Capable of killing infectious agents or of preventing them from spreading and causing infection. |
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Antimicrobial | | Capable of destroying or inhibiting the growth of micro-organisms. |
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Antiseptic | | A germicide used on skin or living tissue for the purpose of inhibiting or destroying microorganisms (for example, alcohol, chlorhexidine, chlorine, hexachlorophene, iodine, chloroxylenol PCMX, quaternary ammonium compounds, and triclosan). |
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Disinfection | | Destruction of pathogenic and other kinds of microorganisms by physical or chemical means. Disinfection is less lethal than sterilization, because it destroys the majority of recognized pathogenic microorganisms, but not necessarily all microbial forms (for example, bacterial spores). Disinfection does not ensure the degree of safety associated with sterilization processes. |
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Germicide | | An agent that destroys microorganisms, especially pathogenic organisms. Terms with the same suffix (e.g., virucide, fungicide, bactericide, tuberculocide, and sporicide) indicate agents that destroy the specific microorganism identified by the prefix. Germicides can be used to inactivate microorganisms in or on living tissue (antiseptics), or on environmental surfaces (disinfectants). |
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Microbial load | | Number of viable organisms in or on an object or surface or organic material on a surface or object before decontamination or sterilization. |
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Pathogen | | A specific causative agent of disease, such as a bacteria, virus or fungus. |
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Spore | | A small, usually single-celled reproductive body that is highly resistant to desiccation and heat and is capable of growing into a new organism, produced especially by certain bacteria, fungi, algae, and nonflowering plants. A dormant nonreproductive body formed by certain bacteria in response to adverse environmental conditions. |
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Wound debridement | | Surgical removal of dead, devitalized or contaminated tissue and removal of foreign matter from a wound. |
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MANAGEMENT
Executive Officers, Key Employees and Directors
The following table shows information about our executive officers, key employees and directors as of October 31, 2006:
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Name | | Age | | Position(s) |
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Hojabr Alimi | | | 46 | | | Chief Executive Officer, President and Chairman of the Board |
Michael Wokasch | | | 55 | | | Chief Operating Officer |
Robert Miller | | | 64 | | | Chief Financial Officer |
James Schutz | | | 43 | | | Vice President of Corporate Development, General Counsel, Corporate Secretary and Director |
Theresa Mitchell(1) | | | 56 | | | Vice President of Regulatory, Clinical Affairs, Quality Assurance and Research and Development |
Bruce Thornton | | | 42 | | | Vice President of International Operations and Sales |
Robert Northey, Ph.D. | | | 49 | | | Director of Research and Development |
Andres Gutiérrez, M.D., Ph.D. | | | 45 | | | Director of Medical Affairs |
Gerard de Nies | | | 42 | | | Director of Marketing and Sales-Europe, Middle East and Africa of Oculus Innovative Sciences Netherlands |
Sergio Caleti | | | 41 | | | Commercial Director of Oculus Technologies of Mexico |
Akihisa Akao | | | 52 | | | Director |
Edward Brown(4) | | | 42 | | | Director |
Robert Burlingame | | | 72 | | | Director |
Richard Conley(2)(3)(4) | | | 56 | | | Director |
Gregory French(2)(3)(4) | | | 45 | | | Director |
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(1) | | Resignation tendered effective January 2, 2007, at which time we anticipate that Ms. Mitchell will transition to a consulting role with us, the terms of which are yet to be determined. |
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(2) | | Member of the audit committee |
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(3) | | Member of the compensation committee |
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(4) | | Member of the nominating and corporate governance committee |
Hojabr Alimi, one of our founders, has served as our Chief Executive Officer, President and director since 1999 and was appointed as Chairman of the board of directors in June 2006. Prior to co-founding our company with his spouse in 1999, Mr. Alimi was a Corporate Microbiologist for Arterial Vascular Engineering. Mr. Alimi received a B.A. in biology from Sonoma State University.
Michael Wokaschhas served as our Chief Operating Officer since June 2006. From July 2004 to May 2006, Mr. Wokasch served as Senior Vice President Global Commercial Operations for the Biopharmaceuticals division of Chiron Corporation, a biotechnology company. He served as Chief Operating Officer of Impax Laboratories, a pharmaceutical company, from January 2003 to June 2004. Prior to Impax, Mr. Wokasch served as President of PanVera Corporation and then Aurora Biosciences Corporation, both drug discovery subsidiary companies of Vertex Pharmaceuticals, from July 2001 to December 2002, and as Chief Executive Officer of Gala Design, a biotechnology company, from June 2000 to July 2001. Prior to this, Mr. Wokasch also served as a President and Corporate Senior Vice President at Covance from 1997 to 1999, a contract research organization. In this capacity, Mr. Wokasch managed the global Early Development operations at Covance responsible for providing drug development services including preclinical toxicology, bioanalytical chemistry, regulatory, and Phase I clinical services to pharmaceutical and biotechnology companies. Prior to
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this, he held sales and marketing positions at Abbott Laboratories, Merck & Co., and Miles Inc. Mr. Wokasch received a B.S. from the University of Minnesota, College of Pharmacy.
Robert Millerhas served as our Chief Financial Officer since June 2004 and was a consultant to us from March 2003 to May 2004. Mr. Miller has served as a director of Scanis, Inc. since 1998 and served as acting Chief Financial Officer from 1998 to June 2006. He was a Chief Financial Officer consultant to Evit Labs from June 2003 to December 2004, Wildlife International Network from October 2002 to December 2005, Endoscopic Technologies from November 2002 to March 2004, Biolog from January 2000 to December 2002 and Webware from August 2000 to August 2002. Prior to this, Mr. Miller was the Chief Financial Officer for GAF Corporation, Penwest Ltd. and Bugle Boy and Treasurer of Mead Corporation. He received a B.A. in economics from Stanford University and an M.B.A. in finance from Columbia University.
James Schutzhas served as our Vice President of Corporate Development and General Counsel since August 2003, as a director since May 2004 and Corporate Secretary since June 2006. From August 2001 to August 2003, Mr. Schutz served as General Counsel at Jomed (formerly EndoSonic Corp.), an international medical device company. From 1999 to July 2001, Mr. Schutz served as in-house counsel at Urban Media Communications Corporation, an Internet/telecom company based in Palo Alto, California. Mr. Schutz received a B.A. in economics from the University of California, San Diego and a J.D. from the University of San Francisco School of Law.
Theresa Mitchellhas served as our Vice President of Regulatory, Clinical Affairs, Quality Assurance and Research and Development since March 2005. Ms. Mitchell has tendered her resignation effective January 2, 2007, at which time we anticipate that she will transition to a consulting role with us on terms that are not yet determined. Prior to joining us, Ms. Mitchell took a sabbatical following her service as Vice President, Regulatory and Clinical Affairs and Quality Assurance at Oratec Interventions, Inc., a medical device company, from December 1998 to December 2003. She has held senior regulatory and clinical positions at Target Therapeutics, Fidus Medical, General Surgical Innovations and Advanced Cardiovascular Systems. Ms. Mitchell received a B.A. in experimental psychology/biostatistics and an M.A. in liberal arts from California State University, San Francisco.
Bruce Thorntonhas served as our Vice President of International Operations and Sales since June 2005. Mr. Thornton served as our General Manager for U.S. Operations from March 2004 to July 2005. He served as Vice President of Operations for Jomed (formerly EndoSonic Corp.) from January 1999 to September 2003, and as Vice President of Manufacturing for Volcano Therapeutics, an international medical device company, following its acquisition of Jomed, until March 2004. Mr. Thornton received a B.S. in aeronautical science from Embry-Riddle Aeronautical University and an M.B.A. from National University.
Robert Northey, Ph.D.has served as our Director of Research and Development since July 2005. Dr. Northey served as a consultant to us from May 2001 to June 2005. From August 1998 until June 2005, he was an Assistant Professor in the Paper Science and Engineering Department at the University of Washington. Dr. Northey received a B.S. in wood and fiber science and a Ph.D. in wood chemistry, each from the University of Washington.
Andres Gutiérrez, M.D., Ph.D.has served as our Director of Medical Affairs since August 2005. Dr. Gutiérrez served as a consultant to us from April 2003 to July 2005. He served as the Head of the Cell Therapy Unit at the National Institute of Rehabilitation in Mexico City from September 2000 to July 2005 and as a consulting physician with the Department of Medicine at Hospital Angeles del Pederegal in Mexico City from 1996 to July 2005. He received an M.D. with a specialty in internal medicine, and a Ph.D. in biomedical sciences, each from the National University of Mexico in Mexico City.
Gerard de Nieshas served as Director of Marketing and Sales - Europe, Middle East and Africa of our Netherlands subsidiary, since August 2005. Mr. de Nies held a similar position in Kimberly-Clark for the Scientific & Industrial division, where he was responsible for sales and marketing in Europe from July 1999 through August 2005. He was the Sales Manager in the Ethicon Endo-Surgery division of Johnson & Johnson from June 1993 to July 1999. Mr. de Nies received a Bachelor of nursing and of healthcare management, each from the University of Amsterdam, The Netherlands.
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Sergio Caletihas served as Commercial Director for our Mexican subsidiary since February 2005. Mr. Caleti served as the Mexico National Sales Manager of Darier Laboratories, a dermatological laboratory, from July 2003 to January 2005. He served as the Regional Sales Manager, Hospital Products Division for the central region for Abbott Laboratories from 1999 until June 2003. Mr. Caleti received an engineering degree from the Engineering School of Universidad Iberoamericana, Mexico.
Akihisa Akaohas served as a director since 1999 and as a consultant since October 2005. Mr. Akao has served as President for White Moon Medical, Inc., a consulting company that provides advice to early-stage companies seeking to enter the Japanese medical products market. He served as the general manager in Japan at PowerMedical Interventions Inc., a medical device company, from January 2001 to September 2005. He also served as President ofE-Med Japan, an application service provider for medical professionals and consumers, from 1999 to July 2000. Mr. Akao received a B.A. in electronic engineering from Doshisha University, Kyoto, Japan.
Edward Brownhas served as a director since September 2005. Mr. Brown is co-founder of Healthcare Investment Partners, or HIP, a private equity buyout fund focused exclusively on healthcare, and has served as a Managing Director of HIP since June 2004. Before joining HIP, Mr. Brown was a Managing Director in the Healthcare Group of Credit Suisse First Boston, where he led the firm’s West Coast healthcare effort and was one of the senior partners responsible for the firm’s global life sciences practice, from August 2000 to June 2004. Mr. Brown serves on the board of directors of Angiotech Pharmaceuticals, Inc. Mr. Brown received an A.B. in English from Middlebury College.
Robert Burlingamehas served as a director since November 2006. Mr. Burlingame is the Chief Executive Officer and Chairman of the Board of Burlingame Industries, Inc., a manufacturer of automated equipment specializing in the concrete rooftile industry, which he founded in 1969. He has held various senior management positions at several rooftile companies, including California Tile and Lifetile Corporation. Mr. Burlingame received a B.S. in business from Michigan State University and was a pilot in the U.S. Navy.
Richard Conleyhas served as a director since 1999, and served as our Secretary from July 2002 to June 2006. Since April 2001, Mr. Conley has served as Executive Vice President and Chief Operating Officer at Don Sebastiani & Sons International Wine Negociants, a branded wine marketing company. From 1994 to March 2001, he served as Senior Vice President and Chief Operating Officer at Sebastiani Vineyards, a California wine producer, where he was originally hired as Chief Financial Officer in 1994. Mr. Conley received a B.S. in finance and accounting from Western Carolina University and an M.B.A. from St. Mary’s University.
Gregory Frenchhas served as a director since 2000. Mr. French is owner and Chairman of the Board of G&C Enterprises LLC, a real estate and investment company, which he founded in 1999. He held various engineering and senior management positions at several medical device companies, including Advanced Cardiovascular Systems, Peripheral Systems Group and Arterial Vascular Engineering. Mr. French received a B.S.I.E. from the California State Polytechnic University, San Luis Obispo.
Board of Directors
Our board of directors currently consists of seven members. We are actively seeking two additional independent board members, in order to achieve a majority of independent directors on our board of directors. All directors are elected to hold office until their successors have been elected and qualified or until the earlier of death, resignation or removal. The authorized number of directors may be changed by resolution duly adopted by the board of directors. Vacancies on the board can be filled by resolution of the board of directors. Each of Messrs. Brown, Conley and French are independent directors as defined by Rule 4200(a)(15) of the National Association of Securities Dealers listing standards.
Board Committees
Our board of directors currently has an audit committee, compensation committee and nominating and corporate governance committee, which have the composition and responsibilities described below. As of the
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completion of this offering, we expect that all of the members of our committees will be independent directors under the rules of the SEC and the Nasdaq Stock Market.
Audit Committee. The audit committee provides assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by:
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| • | appointing, retaining, determining compensation and overseeing our independent accountants; |
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| • | ensuring that our accountants are independent from management; |
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| • | approving the services performed by our independent accountants; |
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| • | reviewing our independent accountants’ reports regarding our accounting policies and systems of internal controls; |
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| • | reviewing compliance with legal and regulatory requirements; and |
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| • | ensuring the integrity of our financial statements. |
Our audit committee presently consists of Messrs. Conley and French. Following this offering, we expect that our audit committee will consist of Messrs. Conley and French and one additional independent director, with Mr. Conley serving as Chairman of the Committee. Each member of the audit committee is able to read and understand fundamental financial statements, including our balance sheet, income statement and cash flow statements. Our board of directors has determined that Mr. Conley is an audit committee financial expert as currently defined under the rules of the SEC. We believe that the composition of our audit committee meets the criteria for independence under, and the functioning of our audit committee complies with the requirements of, the Sarbanes Oxley Act of 2002, the rules of the Nasdaq Stock Market and SEC rules and regulations. Our board of directors has approved and adopted a written charter for the audit committee.
Compensation Committee. The compensation committee performs the following functions, among others, as set forth in its committee charter:
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| • | determining our general compensation policies and the compensation of our directors and officers; |
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| • | reviewing and approving bonuses for our officers and other employees; |
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| • | reviewing and determining equity based compensation for our directors, officers, employees and consultants; |
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| • | administering our stock option plans and employee stock purchase plans; |
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| • | reviewing corporate goals and objectives relative to executive compensation; and |
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| • | evaluating our chief executive officer’s performance and setting our chief executive officer’s compensation. |
The compensation committee historically has established our chief executive officer compensation. Our compensation committee presently consists of Messrs. Conley and French. Following this offering, we expect that our compensation committee will be comprised of Messrs. Conley and French and one additional independent director, with Mr. French serving as Chairman of the Committee. Each member is and will be an outside director as currently defined in Section 162(m) of the Internal Revenue Code of 1986 and a non-employee director within the current meaning ofRule 16b-3 as promulgated under the Securities Exchange Act of 1934. We believe that the composition of our compensation committee meets the criteria for independence under, and the functioning of our compensation committee complies with the applicable requirements of, the Nasdaq Stock Market.
Nominating and Corporate Governance Committee. The nominating and corporate governance committee performs the following functions, among others, as set forth in its committee charter:
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| • | evaluating and recommending to the full board of directors candidates for directorship and the size and composition of the board; |
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| • | recommending members of the board of directors to serve on the various committees of the board of directors; |
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| • | overseeing our corporate governance guidelines; |
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| • | developing plans for chief executive officer succession; and |
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| • | reporting and making recommendations to the board concerning corporate governance matters and recommending a code of conduct for our directors, officers and employees. |
Our nominating and corporate governance committee consists of Messrs. Brown, Conley and French, with Mr. Brown serving as Chairman of the Committee. We believe that the composition of our nominating and corporate governance committee meets the criteria for independence under the rules of the Nasdaq Stock Market and SEC rules and regulations.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is presently nor at any time has been one of our executive officers or employees. Mr. Conley served as our Secretary from July 2002 until June 2006 but he was not compensated for such service, other than as a member of our board of directors. No interlocking relationship exists, or has existed in the past, between our board or compensation committee and the board or compensation committee of any company other than with a wholly owned subsidiary.
Director Compensation
We have agreements with each of our directors, including our employee directors, which provide for the grant of stock options as compensation for service on our board of directors. Pursuant to our agreements with each of Messrs. Alimi, Akao, Conley and French, we granted to each of these directors an option to purchase 19,570 shares of our common stock, which represented 0.5% of the then outstanding shares of our common stock, and granted Mr. Schutz an option to purchase 6,250 shares of our common stock, each with an exercise price of $3.00 per share. We granted an option to purchase 50,000 shares of our common stock to Mr. Brown pursuant to his agreement with an exercise price of $10.16 per share. All unvested shares underlying the options mentioned above will vest in full upon completion of this offering. We also granted Messrs. Alimi and Schutz options to purchase 12,500 shares and 6,250 shares, respectively, of our common stock with an exercise price of $10.16 per share. The director options granted to Messrs. Alimi and Schutz vest as to 20% of the shares on each of the first five anniversaries of the grant date. In addition, we reimburse our non-employee directors for reasonableout-of-pocket expenses incurred on our behalf. Mr. Brown’s option vests as to 20% of the shares on the first anniversary of the grant date and as to1/60 each month thereafter until fully vested. We also granted an option to purchase 75,000 shares of our common stock to Mr. Burlingame, with an exercise price of $13.00 per share, which was fully vested upon grant.
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Executive Compensation
The following table summarizes all compensation paid to our chief executive officer and to our four other most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 for all services rendered in all capacities to us during the fiscal year ended March 31, 2006. We refer to these individuals as our named executive officers. The compensation described in this table does not include medical, group life insurance or other benefits which are generally available to all of our salaried employees.
Summary Compensation Table
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| | | | Long-Term
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| | | | | | Compensation | | |
| | Annual Compensation | | Shares Underlying
| | All Other
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Name and Position(s) | | Salary ($) | | Bonus ($) | | Options (#) | | Compensation ($) |
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Hojabr Alimi | | $ | 262,885 | | | $ | 26,250 | | | | 12,500 | | | $ | 4,517 | (1) |
President and Chief Executive Officer | | | | | | | | | | | | | | | | |
Robert Miller | | | 183,038 | | | | 1,250 | | | | 6,250 | | | | — | |
Chief Financial Officer | | | | | | | | | | | | | | | | |
James Schutz | | | 185,961 | | | | 1,250 | | | | 6,250 | | | | 6,246 | (2) |
Vice President of Corporate Development, General Counsel and Corporate Secretary | | | | | | | | | | | | | | | | |
Theresa Mitchell | | | 170,077 | | | | 6,250 | | | | 100,624 | | | | — | |
Vice President of Regulatory, Clinical Affairs, Quality Assurance and Research and Development | | | | | | | | | | | | | | | | |
Bruce Thornton | | | 171,851 | | | | 1,250 | | | | 90,624 | | | | 5,042 | (3) |
Vice President of International Operations and Sales | | | | | | | | | | | | | | | | |
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(1) | | Consists of $350 for IRA contributions and $4,167 for life insurance premiums. |
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(2) | | Consists of $5,486 for IRA contributions and $760 for life insurance premiums. |
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(3) | | Consists of IRA contributions. |
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(4) | | Resignation tendered effective January 2, 2007, at which time it is anticipated that Ms. Mitchell will transition to a consulting role with us on terms which are not yet determined. |
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Options/SAR Grants Table
The following table set forth certain information for the year ended March 31, 2006 with respect to stock options granted to our named executive officers. The percentage of total options granted is based on an aggregate of 629,498 options granted to employees in the year ended March 31, 2006.
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| | | | | | Potential
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| | | | | | Realizable Value
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| | Individual Grants | | | | at Assumed
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| | Number of
| | % of Total
| | | | | | Annual Rates of
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| | Shares
| | Options
| | | | | | Stock Price
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| | Underlying
| | Granted to
| | | | | | Appreciation for
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| | Options
| | Employees in
| | Exercise Price
| | Expiration
| | Option Term(4) |
Name | | Granted(1) | | 2006 | | Per Share(2) | | Date(3) | | 5% ($) | | 10% ($) |
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Hojabr Alimi | | | 12,500 | | | | 2.0 | % | | $ | 10.16 | | | | 10/1/2015 | | | $ | 131,437 | | | $ | 275,236 | |
Robert Miller | | | 6,250 | | | | 1.0 | | | | 10.16 | | | | 10/1/2015 | | | | 65,719 | | | | 137,618 | |
James Schutz | | | 6,250 | | | | 1.0 | | | | 10.16 | | | | 10/1/2015 | | | | 65,719 | | | | 137,618 | |
Theresa Mitchell | | | 50,000 | | | | 7.9 | | | | 4.40 | | | | 4/1/2015 | | | | 788,768 | | | | 1,313,867 | |
| | | 50,624 | | | | 8.0 | | | | 10.16 | | | | 10/1/2015 | | | | 532,310 | | | | 1,114,683 | |
Bruce Thornton | | | 20,000 | | | | 3.2 | | | | 4.40 | | | | 5/6/2015 | | | | 317,399 | | | | 531,180 | |
| | | 70,624 | | | | 11.2 | | | | 10.16 | | | | 10/1/2015 | | | | 742,609 | | | | 1,555,061 | |
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(1) | | The options become exercisable as to 20% of the shares on each of the first five anniversaries of the grant date. |
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(2) | | The exercise price is the fair market value of our common stock on the date of grant, as determined by our board of directors. |
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(3) | | The options have a term of ten years, subject to earlier termination upon the occurrence of certain events related to termination of service or employment. Vesting of the options is subject to acceleration under certain circumstances described under “Director Compensation” and “Employment, Severance and Change of Control Arrangements.” |
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(4) | | The 5% and 10% assumed rates of appreciation are required by the rules of the SEC and do not represent our estimate or projection of the future common stock price. There can be no assurance that any of the values reflected in the table will be achieved. |
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Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
The following table shows information concerning the number and value of unexercised options held by each of the named executive officers at March 31, 2006. There was no public trading market for our common stock as of March 31, 2006. Accordingly, as permitted by the rules of the Commission, we have calculated the value of unexercisedin-the-money options at fiscal year-end assuming that the fair market value of our common stock as of March 31, 2006 was equal to the initial public offering price of $13.00, which is the midpoint of the range set forth on the cover of the prospectus, less the aggregate exercise price.
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| | | | | | | | Number of Securities
| | | Value of Unexercised
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| | | | | | | | Underlying Unexercised
| | | In-the-Money
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| | Shares
| | | | | | Options at
| | | Options/SARs
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| | Acquired
| | | Value
| | | Fiscal Year-End (#) | | | at Fiscal Year-End ($) | |
Name | | on Exercise | | | Realized | | | Exercisable | | | Unexercisable | | | Exercisable | | | Unexercisable | |
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Hojabr Alimi | | | — | | | | — | | | | 414,828 | | | | 27,242 | | | $ | 5,287,230 | | | $ | 182,920 | |
Robert Miller | | | 60,000 | | | | — | | | | 73,814 | | | | 6,250 | | | | 738,140 | | | | 17,750 | |
James Schutz | | | — | | | | — | | | | 48,750 | | | | 101,250 | | | | 487,500 | | | | 967,750 | |
Theresa Mitchell | | | — | | | | — | | | | 10,000 | | | | 90,624 | | | | 86,000 | | | | 487,772 | |
Bruce Thornton | | | — | | | | — | | | | 4,000 | | | | 96,624 | | | | 40,000 | | | | 432,572 | |
Employment, Severance and Change of Control Arrangements
We have entered into employment agreements with each of Hojabr Alimi, Michael Wokasch, Robert Miller, James Schutz, Theresa Mitchell and Bruce Thornton. In the event Mr. Alimi, Mr. Wokasch, Mr. Miller or Mr. Schutz is terminated without cause or resigns for good reason, upon satisfaction of certain requirements, including executing a general release of claims against us, the officer is entitled to accrued but unpaid salary (including vacation pay), reimbursement of any outstanding business expenses, a lump severance payment equal to 12 times in the case of Mr. Wokasch, 18 times in the case of Mr. Miller and Mr. Schutz, or 24 times in the case of Mr. Alimi, the average monthly base salary paid to the officer over the preceding 12 months (or for the term of the officer’s employment if less than 12 months), automatic vesting of all unvested options and other equity awards, the extension of exercisability of all options and other equity awards to at least 12 months following the date the officer terminates employment or, if earlier, until the option expires, up to one year reimbursement for health care premiums and a full gross up of any excise taxes payable by the officer under Section 4999 of the Internal Revenue Code because of the foregoing payments and acceleration (including the reimbursement of any additional federal, state and local taxes payable as a result of the gross up). If any officer terminates his or her employment for any reason, he or she must give us at least 30 days’, or in the case of Mr. Alimi, at least 60 days’ prior written notice.
Hojabr Alimi. Our agreement with Mr. Alimi, dated January 1, 2004, provides for an annual salary of $225,000, which amount may be increased by our board of directors. Separately, we granted Mr. Alimi an option to purchase 19,570 shares of our common stock for service as a director at an exercise price of $3.00 per share, which vests at a rate of 20% per year from the date of grant with accelerated vesting in full upon completion of this offering.
Michael Wokasch. Our agreement with Mr. Wokasch, dated June 10, 2006, provides for an annual salary of $200,000. In connection with Mr. Wokasch’s agreement, we granted him an option to purchase 125,000 shares of our common stock on July 27, 2006, at an exercise price of $12.00 per share, which will vest over five years from the date of grant. We will also grant Mr. Wokasch an annual bonus of $100,000 upon meeting certain milestones. Separate from this agreement, we paid Mr. Wokasch a one-time signing bonus of $25,000.
Robert Miller. Our agreement with Mr. Miller, dated June 1, 2004, provides for an annual salary of $165,000. In connection with this agreement, we granted Mr. Miller an option to purchase 94,633 shares of our common stock, which vested immediately based on Mr. Miller’s prior consultant work for us, and an option to purchase an additional 39,181 shares of our common stock, which vests based on Mr. Miller’s hours
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of service. Upon completion of this offering, we will grant Mr. Miller an additional fully-vested option to purchase 60,000 shares of our common stock. All of these options have, or will have, an exercise price of $3.00 per share.
James Schutz. Our agreement with Mr. Schutz, dated January 1, 2004, provides for an annual salary of $165,000, which amount may be increased by our board of directors, and an option to purchase 37,500 shares of our common stock at an exercise price of $3.00 per share, which vests in five equal annual installments from the date of grant. Separately, we granted Mr. Schutz an option to purchase 6,250 shares of our common stock for service as a director, at an exercise price of $3.00 per share, which vests at a rate of 20% per year from the date of grant with accelerated vesting in full upon completion of this offering.
Theresa Mitchell. Our agreement with Ms. Mitchell, dated March 23, 2005, provides for a salary of $165,000, which amount may be increased by our board of directors. In connection with Ms. Mitchell’s agreement, we also granted her an option to purchase 50,000 shares of our common stock, at an exercise price of $4.40 per share, which vests in five equal annual installments from the date of grant. We must provide her with 12 months’ notice if she is terminated without cause. During this 12-month period, we may provide Ms. Mitchell with continued salary payments as severance. In the event of a change of control of Oculus, if Ms. Mitchell is terminated, she is entitled to a lump sum severance payment equal to 12 months of her then base salary and all unvested options and other equity awards will immediately vest in full and remain exercisable for at least 12 months following her termination or, if earlier, the date the option or other equity award expires. Ms. Mitchell’s agreement also provides her a full gross up of any excise taxes payable by Ms. Mitchell under Section 4999 of the Internal Revenue Code because of the foregoing payments and acceleration (including the reimbursement of any additional federal, state and local taxes payable as a result of the gross up). Ms. Mitchell has tendered her resignation effective January 2, 2007, at which time we anticipate she will assume a consulting role with us on terms not yet determined.
Bruce Thornton. Our agreement with Mr. Thornton, entered in June 2005, provides an annual salary of $160,000, which amount may be increased by our board of directors. In connection with his agreement, we also granted him an option to purchase 20,000 shares of our common stock, at an exercise price of $4.40 per share, which vests ratably over five years from the date of grant. We must provide him with six months’ notice if he is terminated without cause. During this six-month period, we may provide Mr. Thornton with continued salary payments as severance. In the event of a change of control of Oculus, if Mr. Thornton is terminated, he is entitled to a lump sum severance payment equal to 12 months of his then base salary, and all unvested options and other equity awards will immediately vest in full and remain exercisable for at least 12 months following his termination or, if earlier, the date the option or other equity award expires. Mr. Thornton’s agreement also provides him a full gross up of any excise taxes payable by Mr. Thornton under Section 4999 of the Internal Revenue Code because of the foregoing payments and acceleration (including the reimbursement of any additional federal, state and local taxes payable as a result of the gross up).
Equity Compensation Plans
1999 Stock Plan
General. Our 1999 stock plan was adopted by our board of directors and approved by our shareholders in May 1999.
Administration. The compensation committee of our board of directors administers the 1999 stock plan. The 1999 stock plan provides for the granting of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, or Section 422, to employees, officers and employee directors and the granting of nonstatutory stock options and stock purchase rights to employees, officers, directors (including non-employee directors) and consultants. The administrator determines to whom to grant options or stock purchase rights, the number of shares under the options or stock purchase rights, the exercise or purchase price, the fair market value of our common stock, the term of options, which is prohibited from exceeding 10 years (five years in the case of an incentive stock option granted to a shareholder holding more than 10% of the voting shares of our company, or 10% holders) and other terms and conditions. Under our 1999 stock plan, incentive stock options must be granted with an exercise price of at least 100% of the fair market value of our common stock on the date of grant, and
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nonstatutory options must be granted with an exercise price of at least 85% of the fair market value of our common stock on the date of grant. Incentive stock options and nonstatutory stock options granted to 10% holders must have an exercise price of at least 110% of the fair market value of our common stock on the date of grant. To the extent an optionee would have the right in any calendar year to exercise for the first time one or more incentive stock options for shares having an aggregate fair market value in excess of $100,000, any such excess options would be treated as nonstatutory stock options.
Authorized Shares. Under our 1999 Plan, we reserved 1,151,250 shares of our common stock for issuance. As of September 30, 2006, 473,650 shares of common stock remained available for future issuance under our 1999 stock plan. As of September 30, 2006, options to purchase a total of 418,500 shares of common stock were outstanding under the 1999 stock plan at a weighted average exercise price of $0.44 per share. In June 2006, our board determined that no additional grants would be made under our 1999 stock plan.
Plan Features. Options granted under the 1999 stock plan generally vest at the rate of 20% of the total number of shares subject to the options on each anniversary of the vesting commencement date. No option may be transferred by the optionee other than by will or the laws of descent or distribution. Each option may be exercised during the lifetime of the optionee only by such optionee. Generally, options granted under the 1999 stock plan remain exercisable for 12 months following the termination of service of an optionee by reason of death or disability and remain exercisable for 3 months upon a termination of service for any other reason. The 1999 stock plan provides that in the event of a recapitalization, stock split or similar capital transaction, we will make appropriate adjustments in order to preserve the benefits of options outstanding under the plan. If we are involved in a merger or consolidation, options granted under the 1999 stock plan will fully vest immediately prior to the effective date of such transaction, unless the surviving or acquiring company assumes or substitutes an equivalent option or right for them.
2000 Stock Plan
General. Our 2000 stock plan was adopted by our board of directors in March 2000 and was subsequently approved by our shareholders in June 2000.
Administration. The compensation committee of our board of directors administers the 2000 stock plan. The 2000 stock plan provides for the granting of incentive stock options within the meaning of Section 422 to employees, officers and employee directors and the granting of nonstatutory stock options and stock purchase rights to employees, officers, directors (including non-employee directors) and consultants. The administrator determines to whom to grant options or stock purchase rights, the number of shares under the options or stock purchase rights, the exercise or purchase price, the fair market value of our common stock, the term of options, which is prohibited from exceeding 10 years (five years in the case of an incentive stock option granted to 10% holders) and other terms and conditions. Under our 2000 stock plan, incentive stock options must be granted with an exercise price of at least 100% of the fair market value of our common stock on the date of grant, and nonstatutory options must be granted with an exercise price of at least 85% of the fair market value of our common stock on the date of grant. Incentive stock options and nonstatutory stock options granted to 10% holders must have an exercise price of at least 110% of the fair market value of our common stock on the date of grant. To the extent an optionee would have the right in any calendar year to exercise for the first time one or more incentive stock options for shares having an aggregate fair market value in excess of $100,000, any such excess options would be treated as nonstatutory stock options.
Authorized Shares. Under our 2000 stock plan, we reserved 348,750 shares of our common stock for issuance. As of September 30, 2006, 305,950 shares of common stock remained available for future issuance under our 2000 stock plan. As of September 30, 2006, options to purchase a total of 39,500 shares of common stock were outstanding under the 2000 stock plan at a weighted average exercise price of $2.50 per share. In June 2006, our board determined that no additional grants would be made under our 2000 stock plan.
Plan Features. Options granted under the 2000 stock plan generally vest at the rate of 20% of the total number of shares subject to the options on each anniversary of the vesting commencement date. No option may be transferred by the optionee other than by will or the laws of descent or distribution. Each option may be exercised during the lifetime of the optionee only by such optionee. Generally, options granted under the
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2000 stock plan remain exercisable for 12 months following the termination of service of an optionee by reason of death or disability and remain exercisable for 3 months upon a termination of service for any other reason. The 2000 stock plan provides that in the event of a recapitalization, stock split or similar capital transaction, we will make appropriate adjustments in order to preserve the benefits of options outstanding under the plan. If we are involved in a merger or consolidation, options granted under the 2000 stock plan will fully vest immediately prior to the effective date of such transaction, unless the surviving or acquiring company assumes or substitutes an equivalent option or right for them.
2003 Stock Plan
General. Our 2003 stock plan was adopted by our board of directors and approved by our shareholders in July 2003.
Administration. The compensation committee of our board of directors administers the 2003 stock plan. The 2003 stock plan provides for the granting of incentive stock options within the meaning of Section 422 to employees, officers and employee directors and the granting of nonstatutory stock options and stock purchase rights to employees, officers, directors (including non-employee directors) and consultants. The administrator determines to whom to grant options or stock purchase rights, the number of shares under the options or stock purchase rights, the exercise or purchase price, the fair market value of our common stock, the term of options, which is prohibited from exceeding 10 years (five years in the case of an incentive stock option granted to 10% holders) and other terms and conditions. Under our 2003 stock plan, incentive stock options must be granted with an exercise price of at least 100% of the fair market value of our common stock on the date of grant, and nonstatutory options must be granted with an exercise price of at least 85% of the fair market value of our common stock on the date of grant. Incentive stock options and nonstatutory stock options granted to 10% holders must have an exercise price of at least 110% of the fair market value of our common stock on the date of grant. To the extent an optionee would have the right in any calendar year to exercise for the first time one or more incentive stock options for shares having an aggregate fair market value in excess of $100,000, any such excess options would be treated as nonstatutory stock options.
Authorized Shares. Under our 2003 stock plan, we have reserved 1,000,000 shares of our common stock for issuance. As of September 30, 2006, 656,720 shares of common stock remained available for future issuance under our 2003 stock plan. As of September 30, 2006, options to purchase a total of 321,452 shares of common stock were outstanding under the 2003 stock plan at a weighted average exercise price of $3.00 per share. In June 2006, our board determined that no additional grants would be made under our 2003 stock plan.
Plan Features. Options granted under the 2003 stock plan generally vest at the rate of 20% of the total number of shares subject to the options on each anniversary of the vesting commencement date. No option may be transferred by the optionee other than by will or the laws of descent or distribution. Each option may be exercised during the lifetime of the optionee only by such optionee. Generally, options granted under the 2003 stock plan remain exercisable for 12 months following the termination of service of an optionee by reason of death or disability and remain exercisable for 3 months upon a termination of service for any other reason. The 2003 stock plan provides that in the event of a recapitalization, stock split or similar capital transaction, we will make appropriate adjustments in order to preserve the benefits of options outstanding under the plan. If we are involved in a merger or consolidation, options granted under the 2003 stock plan will fully vest immediately prior to the effective date of such transaction, unless the surviving or acquiring company assumes or substitutes an equivalent option or right for them.
2004 Stock Plan
General. Our 2004 stock plan was adopted by our board of directors and approved by our shareholders in July 2004.
Administration. The compensation committee of our board of directors administers the 2004 stock plan. The 2004 stock plan provides for the granting of incentive stock options within the meaning of Section 422 to employees, officers and employee directors and the granting of nonstatutory stock options to employees, officers, directors (including non-employee directors) and consultants. The administrator determines to whom
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to grant options, the number of shares under the options, the fair market value of our common stock, the term of options, which is prohibited from exceeding 10 years (five years in the case of an incentive stock option granted to 10% holders) and other terms and conditions. Under our 2004 stock plan, incentive stock options must be granted with an exercise price of at least 100% of the fair market value of our common stock on the date of grant, and nonstatutory options must be granted with an exercise price of at least 85% of the fair market value of our common stock on the date of grant. Incentive stock options and nonstatutory stock options granted to 10% holders must have an exercise price of at least 110% of the fair market value of our common stock on the date of grant. No incentive stock option can be granted to an employee if as a result of the grant, the employee would have the right in any calendar year to exercise for the first time one or more incentive stock options for shares having an aggregate fair market value in excess of $100,000.
Authorized Shares. Under our 2004 stock plan, we reserved 1,500,000 shares of our common stock for issuance. As of September 30, 2006, 394,189 shares of common stock remained available for future issuance under our 2004 stock plan. As of September 30, 2006, options to purchase a total of 1,045,811 shares of common stock were outstanding under the 2004 stock plan at a weighted average exercise price of $8.54 per share. Our board determined that no additional grants under the 2004 stock plan will be made following the completion of this offering.
Plan Features. Options granted under the 2004 stock plan generally vest at the rate of 20% of the total number of shares subject to the options on each anniversary of the vesting commencement date. No option may be transferred by the optionee other than by will or the laws of descent or distribution. Each option may be exercised during the lifetime of the optionee only by such optionee. Generally, options granted under the 2004 stock plan remain exercisable for 6 months following the termination of service of an optionee by reason of death or disability and remain exercisable for between 30 days and 3 months upon a termination of service for any other reason. The exercise period for nonstatutory stock options may be extended for 6 months. An optionee must execute a shareholders agreement with us prior to the receipt of shares pursuant to the exercise of options granted under our 2004 stock plan. The 2004 stock plan provides that in the event of a recapitalization, stock split or similar capital transaction, we will make appropriate adjustments in order to preserve the benefits of options outstanding under the plan. If we are involved in a merger or consolidation, options granted under the 2004 stock plan will fully vest immediately prior to the effective date of such transaction, unless the surviving or acquiring company assumes or substitutes an equivalent option for them.
2006 Stock Incentive Plan
General. Our 2006 stock incentive plan was adopted by our board of directors in August 2006, and by our stockholders in December 2006, and will become effective upon the completion of this offering.
The 2006 stock plan provides for the granting of incentive stock options within the meaning of Section 422 to employees and the granting of nonstatutory stock options to employees, non-employee directors, advisors, and consultants. The 2006 stock incentive plan also provides for grants of restricted stock, stock appreciation rights and stock units awards to employees, non-employee directors, advisors and consultants.
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| • | Stock Options. The compensation committee, a plan administrator, determines to whom to grant awards, the number of shares under the awards, the fair market value of our common stock, the term of options, which is prohibited from exceeding 10 years (five years in the case of an incentive stock option granted to 10% holders) and other terms and conditions. Under our 2006 stock plan, incentive stock options must be granted with an exercise price of at least 100% of the fair market value of our common stock on the date of grant, and nonstatutory options must be granted with an exercise price of at least 85% of the fair market value of our common stock on the date of grant. Incentive stock options and nonstatutory stock options granted 10% holders must have an exercise price of at least 110% of the fair market value of our common stock on the date of grant. No incentive stock option can be granted to an employee if as a result of the grant, the employee would have the right in any calendar year to exercise for the first time one or more incentive stock options for shares having an aggregate fair market value in excess of $100,000. The exercise price for the shares of common stock subject to option grants made under our 2006 stock plan may be paid in cash or in shares of our common stock held by the optionee. The option may be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the administrator may provide |
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| | financial assistance to an optionee, provided such optionee is not an executive officer or board member, in the exercise of the optionee’s outstanding options by allowing such individual to deliver a full-recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise. |
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| • | Restricted Stock. Participants who are granted restricted stock awards generally have all of the rights of a stockholder with respect to such stock. Restricted stock may generally be subject to a repurchase right by us in the event the recipient ceases to be employed. Restricted stock may be issued for consideration determined by the compensation committee, including cash, promissory notes and past or future services. Restricted stock may be subject to vesting over time or upon achievement of milestones. |
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| • | Stock Units. Stock units are denominated in unit equivalent of shares of our common stock. They are typically awarded to participants without payment of consideration, but are subject to vesting conditions based upon a vesting schedule or performance criteria established by the plan administrator. Unlike restricted stock, the stock underlying stock units will not be issued until the stock units have vested, and recipients of stock units generally will have no voting or dividend rights prior to the time the vesting conditions are satisfied. |
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| • | Stock Appreciation Rights. Stock appreciation rights may be granted independently or in consideration of a reduction in the recipient’s compensation. Stock appreciation rights typically will provide for payments to the holder based upon increases in the price of our common stock over the exercise price of the related option. The exercise price of a stock appreciation right will be determined by the committee and may vary in accordance with a predetermined formula while the stock appreciation right is outstanding. The plan administrator may elect to pay stock appreciation rights in cash or in common stock or in a combination of cash and common stock. |
Administration. The compensation committee of our board of directors will administer the 2006 stock plan. Our board of directors may appoint one or more separate committees of our board of directors, each consisting of one or more members of our board of directors, to administer our 2006 stock plan with respect to participants other than employees who are subject to Section 16 of the Exchange Act. Our board of directors may also authorize one or more officers to designate employees, other than employees who are subject to Section 16 of the Exchange Act, to receive awards under our 2006 stock planand/or to determine the number of such awards to be received by such employees subject to limits specified by our board of directors.
Authorized Shares. Under our 2006 stock plan, 1,250,000 shares of our common stock have been authorized for issuance. Shares subject to awards that expire unexercised or are forfeited or terminated will again become available for issuance under the 2006 stock plan. No participant in the 2006 stock 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.
Plan Features. Under the 2006 stock plan:
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| • | Generally, if we merge with or into another corporation, we may accelerate the vesting or exercisability of outstanding options and terminate any unexercised options unless they are assumed or substituted for by any surviving entity or a parent or subsidiary of the surviving entity. |
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| • | The administrator may permit or require a participant to have cash otherwise payable to a participant on exercise of a stock appreciation right or settlement of stock units credited to a deferred compensation account, have shares that would otherwise be deliverable to a participant on exercise of an option or stock appreciation right converted into an equal number of stock units or have shares otherwise deliverable upon exercise of an option or stock appreciation right or settlement of stock units converted into amounts credited to a deferred compensation account. |
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| • | Awards under our 2006 stock plan may provide that the number of shares of our common stock or other benefits granted, issued, retained or vested under the award are subject to the attainment of performance criteria including cash flow, earnings per share, earnings before interest, taxes and amortization, return on equity, total stockholder return, share price performance, return on capital, return on assets or net assets, revenue, income or net income, operating income or net operating income, operating profit or net operating profit, operating margin or profit shares. The administrator |
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| | may structure such awards to be qualified performance-based compensation under Section 162(m) of the Code. |
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| • | The 2006 stock plan terminates ten years after its initial adoption, unless terminated earlier by the board. The board of directors may amend or terminate the plan at any time, subject to stockholder approval where required by applicable law. Any amendment or termination may not impair the rights of holders of outstanding awards without their consent. |
SIMPLE IRA Plan
We sponsor a SIMPLE IRA plan under which employees may choose to make salary reduction contributions, and we make matching contributions up to 3% of the employee’s compensation for the year. All contributions are made directly to an individual retirement account established for each employee.
Indemnification Agreements
We plan to enter into agreements to indemnify our directors and executive officers. We believe that these agreements are necessary to attract and retain qualified persons as directors and executive officers. Our certificate of incorporation and our bylaws contain provisions that limit the liability of our directors and executive officers to the fullest extent permitted by Delaware law. A description of these provisions is contained under the heading “Description of Common Stock — Limitation of Liability and Indemnification Matters.”
We have an insurance policy covering our directors and officers with respect to specified liabilities, including liabilities arising under the Securities Act, or otherwise. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to cover directors, officers and persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Advisory Boards
We have two advisory boards: Medical and Business Advisory Board and Clinical Investigational Board. We rely extensively on our physician advisors to advise on marketing and research and development efforts and provide information and data on the clinical use of our products. At least once per year we meet with each advisory board and each member is available to us as needed.
Our Medical and Business Advisory Board assists us in the following:
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| • | prioritizing medical markets in terms of where our product can be the most effective, the speed with which they can be introduced and the scope of the problem in the market; |
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| • | prioritizing physician clinical studies; |
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| • | identifying clinical studies to be pursued; |
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| • | providing introductions to wound care specialists in the United States and Europe; |
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| • | advising regarding the success of our products in various market segments; |
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| • | reviewing and commenting on the specific protocols being considered; |
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| • | providing guidance on how best to educate and encourage the medical community to adopt our product as the standard of care in wound management; |
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| • | providing input to potential collaborators on the application and effectiveness of our products; and |
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| • | participating in physician clinical studies and presenting the results to other physicians. |
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Our Medical and Business Advisory Board is currently comprised of the following individuals:
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Name | | Specialty | | Position |
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Don C. Wukasch, M.D. | | Cardiovascular Surgery | | Fellow, American College of Surgeons and American College of Cardiology |
Barnett L. Cline, M.D. M.P.H., Ph.D. | | Tropical Medicine | | Tulane University Professor of Tropical Medicine, Emeritus; member, Armed Forces Epidemiological Board |
Paul L. Schnur, M.D. | | Plastic and Reconstructive Surgery | | Consultant, Plastic Surgery Division, Mayo Clinic Scottsdale; Associate Professor, University of Arizona, College of Medicine |
Bruce C. Wilson, M.D., F.A.C.C. | | Cardiology | | Fellow, American College of Cardiology; Chairman, Heart Hospital of Milwaukee; Assistant Professor of Medicine, Medical College of Wisconsin |
Gerald L. Woolam, M.D. | | General Surgery | | Professor of Surgery, Texas Tech University |
Philip J. Kearney | | Legal | | Assistant United States Attorney |
David E. Allie, M.D. | | Cardiothoracic and Endovascular Surgery | | Chief of Cardiothoracic and Endovascular Surgery, Cardiovascular Institute of the South Lafayette; Director, Vascular Surgery and Noninvasive Vascular Labs Houma |
Luca Dalla Paola, M.D. | | Endocrinologist and Surgery | | Chief of the Diabetic Foot Unit of Presidio Ospedaliero Abano Terme Hospital; Professor, Bologna University School of Medicine |
Our Clinical Investigational Board assists us by introducing us to practicing physicians and key opinion leaders in our target markets and reviewing physician clinical studies. The Clinical Investigational Board is currently comprised of the following individuals:
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Name | | Specialty | | Position |
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Gerald Keusch, M.D. | | Infectious Disease | | Associate Dean of Global Health, Professor of Medicine, Boston University |
Richard Marks, M.D. | | Foot and Ankle Surgery | | Associate Professor of Orthopedic Surgery, Medical College of Wisconsin |
Akito Ohmura, M.D., Ph.D. | | Anesthesiology | | Head of Medical ISO Committee Japan; Dean, Teikyo University School of Medicine |
All of our physician advisors serve one or five-year terms. All of our physician advisors are employed by employers other than us and may have commitments or consulting arrangements with other companies, including our competitors, that may limit their availability to consult for us. Although these advisors may contribute significantly to our affairs, we generally do not expect them to devote more than a small portion of their time to us.
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Advisory Board Compensation
In consideration of the services provided, we pay each of the members on the Medical and Business Advisory Board a quarterly stipend, except for Dr. Allie and Mr. Kearney. Drs. Cline, Schnur, Woolam, Dalla Paola and Wilson each receive $3,000 per quarter and Dr. Wukasch receives $6,000 per quarter. We also have a consulting agreement with Dr. Wilson and pay him an additional $12,000 per quarter pursuant to this agreement. Although Dr. Allie does not receive a quarterly stipend, we paid Dr. Allie $10,000 and issued him 12,500 shares of our common stock as payment for our participation in the 2005 New Cardiovascular Horizons Conference, of which Dr. Allie served as conference co-chairman. In addition, we granted each of our
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physician advisors, except for Dr. Dalla Paola, warrants to purchase shares of our common stock with a conversion price of $18.00 per share. Dr. Allie has a warrant to purchase 2,500 shares, Drs. Cline, Schnur, Wilson and Woolam each have a warrant to purchase 3,750 shares, and Dr. Wukasch has a warrant to purchase 6,250 shares. We also compensate our Medical Advisory Board members for physician clinical studies they conduct for us.
We do not provide cash compensation to members of our Clinical Investigation Board. However, we granted Drs. Keusch and Marks each a warrant to purchase 2,500 shares with a conversion price of $18.00 per share. We also granted Dr. Ohmura an option to purchase 2,500 shares of our common stock with an exercise price of $3.00 per share. This option will not vest fully until October 2008.
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RELATED PARTY TRANSACTIONS
We issued promissory notes to Akihisa Akao, one of our directors, in May 1999, December 1999 and February 2003 in the amount of $15,000 bearing interest at a rate of 8% per annum, $200,000 bearing interest at a rate of 8% per annum, and $40,000 bearing interest at a rate of 10% per annum, respectively. These obligations were repaid in October 2004.
We entered into a consulting agreement with White Moon Medical, a company formed under the laws of Japan, in October 2005, which was renewed for an additional one-year term expiring in October 2007. Mr. Akihisa Akao is the sole stockholder of White Moon Medical. Under the terms of the agreement, White Moon Medical provides us with merger and acquisition strategy and technology support in Asia, particularly in Japan. We have agreed to pay White Moon Medical an annual consulting fee of $146,000, and White Moon Medical is also eligible for additional bonuses. This agreement may be terminated by either party upon 30 days’ written notice. Payments to White Moon Medical through September 30, 2006 amounted to $146,000.
We entered into a consulting agreement with Mr. Robert Burlingame, one of our directors, in November 2006. Under the terms of the agreement, Mr. Burlingame provides us with consulting services relating to global planning and implementation of key performance indicators to track progress of company-wide projects. In return for his services, we have issued to Mr. Burlingame a warrant to purchase 75,000 shares of our common stock at an exercise price of $13.00 per share.
We issued a promissory note to Richard Conley, one of our directors, in February 2003 in the amount of $40,000 bearing interest at a rate of 10% per annum. This note was convertible at any time by Mr. Conley into 10,000 shares of either our common stock or Series A preferred stock. On June 30, 2005, Mr. Conley converted this note into an aggregate of 10,000 shares of our Series A preferred stock at a conversion price of $4.00 per share.
We issued a promissory note to Mr. Burlingame, one of our directors, in November 2006 in the amount of $4.0 million, bearing interest at a rate of 7% per annum. This obligation matures on the earlier of November 10, 2007 or five days after the consummation of our initial public offering resulting in gross proceeds to us of at least $30.0 million. The loan is secured by all of our assets, other than our intellectual property, but is subordinate to the security interest held by our secured lender.
In accordance with the terms of the underlying option agreements, the vesting of options to purchase 75,062 shares of our common stock granted to our directors will be accelerated upon completion of this offering. Please see “Management — Director Compensation” for information on options granted to our directors.
In connection with the termination of Robert Miller’s prior consulting agreement, we have agreed to grant him a fully-vested option to purchase 60,000 shares of our common stock at $3.00 per share upon completion of this offering. Assuming an initial public offering price of $13.00, we would recognize approximately $600,000 of stock-based compensation expense related to this option grant.
Brookstreet also acted as managing dealer in the sale of our Series A convertible preferred stock and our Series B convertible preferred stock. In connection with the Series A convertible preferred stock offering, we paid Brookstreet $1,123,746 in commissions and issued Brookstreet and its affiliates warrants to purchase an aggregate of 433,774 shares of our common stock, at an exercise price of $3.00 per share. In connection with the Series B convertible preferred stock offering, we paid Brookstreet $3,413,818 in commissions and issued Brookstreet and its affiliates warrants to purchase an aggregate of 329,471 shares of our common stock at an exercise price of $18.00 per share.
We entered into a managing dealer agreement, as amended, with Brookstreet, a holder of more than 5% of our voting securities in May 2006, pursuant to which Brookstreet acted as managing dealer, on a best-efforts basis, for the sale of units of our securities. Each unit consisted of one share of our Series C convertible preferred stock, and a warrant to purchase that number of shares of our common stock equal to one-fifth of the number of Series C shares underlying the unit, at an exercise price of $18.00 per share. In connection with
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the Series C Financing, we paid to Brookstreet $347,444 in commissions and issued to Brookstreet fully vested warrants to purchase an aggregate of 24,127 shares of our common stock, at an exercise price of $18.00 per share. In addition, we paid Brookstreet $10,000 upon the execution of a term sheet regarding the terms of this offering, and an additional $10,000 on May 31, 2006, to defray the costs associated with the solicitation of stockholder approval.
Brookstreet also acted as a finder in connection with the Bridge Loan, which we entered into in November 2006. At the time the principal was advanced to us in November 2006, Brookstreet was paid a fee in the amount of $50,000 and was granted a warrant to purchase 25,000 shares of our common stock at an exercise price of $18.00 per share.
Please see “Management — Executive Compensation” for additional information on compensation of our executive officers and “Management — Employment, Severance and Change of Control Arrangements” for additional information regarding employment arrangements with our executive officers.
Our certificate of incorporation provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, we intend to enter into indemnification agreements with our directors and executive officers. Please see “Description of Common Stock — Limitations of Liability and Indemnification Matters” for further details.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information as of November 30, 2006 regarding the number of shares and the percentage of common stock beneficially owned before and after the completion of this offering by:
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| • | each of our directors and named executive officers listed above in the summary compensation table; and |
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| • | all of our directors and executive officers as a group. |
We are not aware of any owners of more than 5% of our common stock other than Messrs. Alimi and Akao and Brookstreet Securities Corporation. We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.
For purposes of the table below, we have 8,399,209 shares of common stock issued and outstanding prior to the completion of this offering, assuming the conversion of all outstanding shares of preferred stock into 4,176,478 shares of common stock, and 11,476,132 shares of common stock issued and outstanding upon completion of this offering. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to all derivative securities held by that person that are currently exercisable or exercisable within 60 days of November 30, 2006 and shares of common stock subject to options that vest upon completion of this offering. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.
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| | Number of Shares
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Name of Beneficial Owner(1) | | Beneficially Owned | | | Before the Offering | | | After the Offering | |
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5% Stockholders: | | | | | | | | | | | | |
Brookstreet Securities Corporation and related parties(2) | | | 812,372 | | | | 8.8 | % | | | 6.6 | % |
Executive Officers and Directors: | | | | | | | | | | | | |
Hojabr Alimi(3) | | | 1,439,445 | | | | 16.3 | % | | | 12.1 | % |
Robert Miller(4) | | | 195,376 | | | | 2.3 | % | | | 1.7 | % |
James Schutz(5) | | | 82,812 | | | | 1.0 | % | | | * | |
Theresa Mitchell(6) | | | 22,656 | | | | * | | | | * | |
Bruce Thornton(7) | | | 28,322 | | | | * | | | | * | |
Akihisa Akao(8) | | | 541,320 | | | | 6.4 | % | | | 4.7 | % |
Robert Burlingame(9) | | | 216,666 | | | | 2.5 | % | | | 1.9 | % |
Edward Brown(10) | | | 50,000 | | | | * | | | | * | |
Richard Conley(11) | | | 188,820 | | | | 2.2 | % | | | 1.6 | % |
Gregory French(12) | | | 75,382 | | | | * | | | | * | |
All directors and executive officers as a group (10 persons)(13) | | | 2,840,799 | | | | 29.9 | % | | | 22.6 | % |
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* | | Represents beneficial ownership of less than 1%. |
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(1) | | Unless otherwise noted, the address of each beneficial owner listed in the table is: c/o Oculus Innovative Sciences, Inc., 1129 N. McDowell Boulevard, Petaluma, California 94954. |
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(2) | | Principal address is 2361 Campus Drive, Suite 210, Irvine, California 92612. Consists of shares issuable under warrants that are immediately exercisable. Stan Brooks, trustee of the Brooks Family Trust, has voting or investment power for the shares held by Brookstreet Securities Corporation. |
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(3) | | Includes 422,867 shares issuable upon exercise of options that are exercisable within 60 days of November 30, 2006 and 7,828 shares issuable upon exercise of options that will become exercisable upon completion of this offering. |
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(4) | | Includes 75,376 shares issuable upon exercise of options that are exercisable within 60 days of November 30, 2006, 60,000 shares issuable upon exercise of options to be granted upon completion of this offering and 50,000 shares held by The Miller 2005 Grandchildren’s Trust, for which Mr. Miller is a trustee. |
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(5) | | Includes 79,062 shares issuable upon exercise of options that are exercisable within 60 days of November 30, 2006 and 3,750 shares issuable upon exercise of options that will become exercisable upon completion of this offering. |
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(6) | | Includes 22,656 shares issuable upon exercise of options that are exercisable within 60 days of November 30, 2006. |
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(7) | | Includes 28,322 shares issuable upon exercise of options that are exercisable within 60 days of November 30, 2006. |
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(8) | | Includes 11,078 shares issuable upon exercise of options that are exercisable within 60 days of November 30, 2006 and 7,828 shares issuable upon exercise of options that will become exercisable upon completion of this offering. |
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(9) | | Includes 75,000 shares issuable upon exercise of options that are exercisable within 60 days of November 30, 2006 and 75,000 shares issuable upon exercise of warrants that are exercisable within 60 days of November 30, 2006. |
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(10) | | Includes 10,000 shares issuable upon exercise of options that are exercisable within 60 days of November 30, 2006, and 40,000 shares issued upon exercise of options that will become exercisable upon completion of this offering. |
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(11) | | Includes 140,992 shares issuable upon exercise of options that are exercisable within 60 days of November 30, 2006 and 7,828 shares issuable upon exercise of options that will become exercisable upon completion of this offering. |
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(12) | | Includes 31,890 shares issuable upon exercise of options that are exercisable within 60 days of November 30, 2006, 7,828 shares issuable upon exercise of options that will become exercisable upon completion of this offering, and 18,750 shares held by the French Living Trust UTA 4/10/96. |
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(13) | | Includes 972,243 shares issuable upon exercise of options and warrants that are exercisable within 60 days of November 30, 2006 and 135,062 shares issuable upon exercise of options that will become exercisable upon completion of this offering. |
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DESCRIPTION OF CAPITAL STOCK
General
The following describes our common stock and preferred stock and certain provisions of our certificate of incorporation and our bylaws as will be in effect upon the completion of this offering. This description is only a summary. You should also refer to the certificate of incorporation and bylaws, which have been filed as exhibits to our registration statement, of which this prospectus forms a part. Upon completion of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000 shares of preferred stock, $0.0001 par value per share.
Common Stock
As of November 30, 2006, there were 8,399,209 shares of common stock outstanding held by approximately 623 stockholders of record, assuming the automatic conversion of each outstanding share of preferred stock upon the closing of this offering.
Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. We have not provided for cumulative voting for the election of directors in our certificate of incorporation. This means that the holders of a majority of the shares voted can elect all of the directors then standing for election. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available at the times and in the amounts that our board of directors may determine from time to time.
Holders of common stock have no preemptive subscription, redemption or conversion rights or other subscription rights. Upon our liquidation, dissolution or winding-up, the holders of common stock are entitled to share in all assets remaining after payment of all liabilities and the liquidation preferences of any outstanding preferred stock. Each outstanding share of common stock is, and all shares of common stock to be issued in this offering, when they are paid for will be, fully paid and nonassessable.
Preferred Stock
At the closing of this offering, each share of our preferred stock issued and outstanding will convert into one share of our common stock, for an aggregate of 4,176,478 shares of common stock. As a result, upon the closing of this offering, there will be no shares of preferred stock outstanding.
At the closing of this offering, our certificate of incorporation will be amended to delete all reference to the prior series of preferred stock and our board of directors will be authorized, subject to limitations imposed by Delaware law, to issue up to a total of 5,000,000 shares of preferred stock in one or more series, without stockholder approval. Our board is authorized to establish from time to time the number of shares to be included in each series, and to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. Our board can also increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by the stockholders.
The board may authorize the issuance of preferred stock with voting or conversion rights that could harm the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of us and might harm the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock.
Registration Rights
In accordance with the terms of the Amended and Restated Investors Rights Agreement, or the Investors Rights Agreement, effective as of September 14, 2006, among us and certain stockholders referred to in the
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Investors Rights Agreement, upon completion of this offering, the holders of 381,530 shares of common stock issued upon conversion of the preferred stock will be entitled to contractual rights to require us to register those shares under the Securities Act. If we propose to register any of our securities under the Securities Act for our own account or the account of a security holder, other than on aForm S-8, holders of those shares are entitled to include their shares in our registration, provided, among other conditions, that the underwriters of any such offering have the right to limit the number of shares included in the registration. Six months after the effective date of the registration statement of which this prospectus is a part, and subject to limitations and conditions specified in the investor rights agreement with the holders, holders of a majority of the shares of common stock issued upon conversion of the preferred stock may require us to prepare and file a registration statement under the Securities Act at our expense covering those shares. We are not obligated to effect more than one of these stockholder-initiated registrations.
In accordance with the terms of the Investors Rights Agreement and certain outstanding warrants, upon completion of this offering, the holders of 432,940 shares of common stock issued upon the exercise of warrants will be entitled to contractual rights to require us to register those shares under the Securities Act. If we propose to register any of our securities under the Securities Act for our own account, holders of those shares are entitled to include their shares in our registration, provided, among other conditions, that the underwriters of any such offering have the right to limit the number of shares included in the registration.
Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws
Certain provisions of Delaware law, our certificate of incorporation and our bylaws described below may have the effect of delaying, deferring or discouraging another party from acquiring control of us.
Delaware Law
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or Delaware law, regulating corporate takeovers. In general, these provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:
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| • | either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder is approved by our board of directors before the date the interested stockholder attained that status; |
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| • | upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (i) by persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
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| • | on or after that date, the business combination is approved by our board of directors and authorized at a meeting of stockholders, and not by written consent, by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. |
Section 203 defines “business combination” to include the following:
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| • | any merger or consolidation involving the corporation and the interested stockholder; |
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| • | any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; |
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| • | subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder: |
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| • | any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or |
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| • | the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. |
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons.
A Delaware corporation may opt out of this provision either with an express provision in its original certificate of incorporation or in an amendment to its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out of this provision. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.
Certificate of Incorporation and Bylaws
Following the completion of this offering, our certificate of incorporation and bylaws will provide that:
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| • | no action can be taken by stockholders except at an annual or special meeting of the stockholders called in accordance with our bylaws, and stockholders may not act by written consent; |
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| • | our board of directors will be expressly authorized to make, alter or repeal our bylaws; |
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| • | except as otherwise required by law, special meetings of the stockholders may only be called by the Chairman of the Board, the Chief Executive Officer or by majority of the board of directors; |
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| • | except as otherwise provided for in the certificate of incorporation with respect to any series of preferred stock, vacancies on the board of directors may only be filled by a majority of the board of directors then in office; |
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| • | stockholders will need to comply with advanced notice procedures to make nominations of candidates for election as directors or to bring matters before an annual stockholder meeting; |
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| • | our board of directors will be authorized to issue preferred stock without stockholder approval; and |
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| • | we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. |
Limitation of Liability and Indemnification Matters
Our certificate of incorporation and bylaws limit the liability of our directors for monetary damages for breach of their fiduciary duty as directors, except for liability that cannot be eliminated under Delaware law. Under Delaware law, our directors have a fiduciary duty to us which will not be eliminated by this provision in our certificate of incorporation. In addition, each of our directors will continue to be subject to liability under Delaware law for breach of the director’s duty of loyalty to us for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or which involve intentional misconduct or knowing violations of law for actions leading to improper personal benefit to the director and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law. This provision does not affect the directors’ responsibilities under any other laws, such as the Federal securities laws.
Delaware law permits a corporation to not hold its directors personally liable for monetary damages for breach of their fiduciary duty as directors, except for liability for the following:
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| • | any breach of the director’s duty of loyalty to the corporation or its stockholders; |
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| • | acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
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| • | voting for or assenting to unlawful payment of dividends or unlawful stock repurchases or redemptions; or |
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| • | any transaction from which the director derived an improper personal benefit. |
This limitation of liability does not apply to liabilities arising under the federal or state securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Any amendment or repeal of these provisions requires the approval of the holders of shares representing at least two-thirds of our shares entitled to vote in the election of directors, voting as one class.
Delaware law provides that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under our bylaws, any agreement, and a vote of stockholders or otherwise. Our certificate of incorporation and bylaws eliminate the personal liability of directors to the maximum extent permitted by Delaware law. In addition, our certificate of incorporation and bylaws provide that we may fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was one of our directors, officers, employees or other agents, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding.
We plan to enter into separate indemnification agreements with our directors and executive officers that could require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. We believe that the limitation of liability provision in our certificate of incorporation and the indemnification agreements will facilitate our ability to continue to attract and retain qualified individuals to serve as directors and officers. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions, regardless of whether Delaware law would permit indemnification. We have purchased liability insurance for our officers and directors.
At present, there is no pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification will be required or permitted under our certificate of incorporation. We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.
Nasdaq Symbol
We have applied
Our common stock has been approved for quotation of our common stock on the Nasdaq Global Market under the symbol “OCLS.”
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Mellon Investor Services LLC.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after the restrictions lapse, or the perception that those sales may occur, could cause the prevailing market price to decrease or to be lower than it might be in the absence of those sales of perceptions and could impair our ability to obtain future capital.
Sale of Restricted Shares
Upon completion of this offering, we will have outstanding 11,476,132 shares of common stock, assuming outstanding options or warrants are not exercised prior to the completion of this offering. Of these outstanding shares, all of the 3,076,923 shares of common stock being sold in this offering will be freely tradable, other than by any of our “affiliates” as defined in Rule 144(a) under the Securities Act, without restriction or registration under the Securities Act. All of the remaining shares were issued and sold by us in private transactions and are eligible for public sale only if registered under the Securities Act or sold in accordance with Rule 144 or Rule 701 under the Securities Act. These remaining shares are “restricted shares” within the meaning of Rule 144 under the Securities Act and will also be subject to the 180-day lock-up period described below.
Lock-Up Agreements
Our directors and executive officers and certain of our other stockholders, option holders and warrant holders who collectively hold at least 90% of our outstanding common stock, in the aggregate and on a fully diluted basis, are subject to restrictions on transfer or have, or will have, agreed that they will not sell, offer, contract or grant any option to sell, pledge, transfer, establish an open put equivalent position or otherwise dispose of, any shares of our common stock, securities convertible into or exercisable or exchangeable for shares of our common stock or any interest therein, or any capital stock of our subsidiaries for a period of at least 180 days after the date of this prospectus. Roth Capital Partners may in its sole discretion, and subject to certain limited exceptions, at any time and without notice, release for sale in the public market all or any portion of the shares subject to thelock-up agreements to which it is a party. To the extent shares are released before the expiration of thelock-up period and these shares are sold into the market, the market price of our common stock could decline. As a result of the transfer restrictions andlock-up agreements described above and the provisions of Rules 144, 144(k) and 701, the restricted shares will be available for sale in the public market as follows:
• 229,025 shares will be eligible for sale immediately following the date of this prospectus;
• 7,976,604 shares will be eligible for sale upon the expiration of thelock-up agreements, described above, beginning 180 days after the date of this prospectus; and
• 193,580 shares will be eligible for sale upon the exercise of vested options, beginning 180 days after the date of this prospectus.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who beneficially owns shares for at least one year, unless Rule 144(k) is available as described below, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
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| • | 1% of the then outstanding shares of common stock, or approximately 80,101 shares immediately after this offering, assuming no exercise of the underwriters’ over-allotment option; and |
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| • | the average weekly trading volume of the common stock on the Nasdaq Global Market during the four calendar weeks preceding the date on which notice of the sale on Form 144 is filed with the SEC. |
Sales under Rule 144, however, are subject to specific manner of sale provisions, notice requirements and the availability of current public information about our company. We cannot estimate the number of shares of common stock our existing stockholders will sell under Rule 144 as this will depend on the market price of our common stock, the personal circumstances of the stockholders and other factors.
Rule 144(k)
Under Rule 144(k), in general, a stockholder who has beneficially owned shares of our common stock for at least two years and who is not deemed to have been an affiliate of our company at any time during the immediately preceding 90 days may sell shares without complying with the manner of sale provisions, notice requirements, public information requirements or volume limitations of Rule 144.
Rule 701
Subject to various limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from us by our employees, directors, officers, consultants or advisers prior to the completion of this offering, pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the SEC has indicated that Rule 701 will apply to stock options granted by us before this offering, along with the shares acquired upon exercise of those options. Securities issued in reliance on Rule 701 are deemed to be restricted shares and, beginning 90 days after the date of this prospectus, unless subject to the contractual restrictions described above, shares may be sold by such persons other than affiliates, subject only to the manner of sale provisions of Rule 144; however, no shares may be sold by affiliates under Rule 144 without compliance with the one-year minimum holding period requirements.
Stock Options
We intend to file a registration statement onForm S-8 under the Securities Act covering approximately 1,250,000 shares of common stock reserved for issuance under our 2006 Stock Incentive Plan. Accordingly, the shares of common stock registered under this registration statement will be available for sale in the open market upon exercise by the holders, unless those shares are subject to vesting restrictions with us or the contractual restrictions described above.
Registration Rights
In addition, in accordance with the terms of the Amended and Restated Investors Rights Agreement, upon completion of this offering, the holders of approximately 381,530 shares of common stock and warrants to purchase 432,940 shares of our common stock or preferred stock will be entitled to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares, other than shares purchased by our affiliates, becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. See “Description of Capital Stock — Registration Rights.”
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among us and the underwriters, each underwriter has agreed to purchase from us the following respective number of shares of common stock at the offering price less the underwriting discount set forth on the cover page of this prospectus.
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Underwriter | | Shares |
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Roth Capital Partners | | | | |
Brookstreet Securities Corporation | | | | |
Maxim Group LLC | | | | |
Total | | | | |
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions precedent and that the underwriters will purchase all such shares of common stock if any of these shares are purchased. The underwriters are obligated to take and pay for all of the shares of common stock offered hereby, other than those covered by the over-allotment option described below, if any are taken.
The underwriters have advised us that they propose to offer the shares of common stock to the public at the offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. If all of the shares are not sold at the initial offering price, the underwriters may change the offering price and other selling terms.
Pursuant to the underwriting agreement, we have granted to the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of 461,539 additional shares of common stock from us, at the offering price, less the underwriting discount set forth on the cover page of this prospectus, solely to cover over-allotments.
To the extent that the underwriters exercise such option, the underwriters will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to the underwriter’s name in the preceding table bears to the total number of shares in the table, and we will be obligated, pursuant to the option, to sell such shares to the underwriters.
The following table summarizes the discounts and commissions to be paid to the underwriters by us in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of common stock.
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| | Total | |
| | No Exercise | | | Full Exercise | |
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Per Share | | $ | | | | $ | | |
Total | | $ | | | | $ | | |
We expect to incur expenses, exclusive of the underwriting discount and commission, of approximately $3.2 million in connection with this offering. We have agreed to pay to Roth Capital Partners and Brookstreet Securities Corporation a non-accountable expense allowance equal to 1% of the gross proceeds to us in the offering. An electronic prospectus is available on the websites maintained by the underwriters and may also be made available on websites maintained by selected dealers and selling group members participating in this offering. No form of prospectus other than print and electronic forms, which will be printable, will be used in connection with this offering.
In connection with the offering, we have agreed to sell to the underwriters, for nominal consideration, underwriter warrants entitling the underwriters, or their assigns, to purchase up to an aggregate of 7% of the total number of shares sold in this offering at a price equal to 165% of the public offering price per share. The underwriter warrants will be exercisable for five years from the closing date of the offering and will contain cashless exercise provisions and customary anti-dilution provisions. The underwriter warrants grant the
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underwriters, or their assigns, “piggyback” registration rights with respect to the common stock issuable upon exercise of the underwriter warrants for the five-year period during which the underwriter warrants are exercisable.
In addition, within 180 days prior to the effective date of this offering, we have issued to Brookstreet Securities Corporation warrants to purchase an aggregate of 24,127 shares of our common stock, at an exercise price of $18.00 per share, for its services as the managing dealer in connection with our Series C Financing and warrants to purchase 25,000 shares of our common stock, at an exercise price of $18.00 per share, for its services as a finder in connection with our Bridge Loan.
The underwriter warrants and the warrants issued to Brookstreet in connection with our Series C Financing and Bridge Loan are deemed compensation by the National Association of Securities Dealers, or NASD, and may not be sold, transferred, pledged, hypothecated or assigned for a period of180-days following the effective date of the offering pursuant to Rule 2710(g)(1) of the NASD Conduct Rules.
We, our directors and executive officers and certain of our other stockholders, option holders and warrant holders are subject to certain restrictions on transfer or have, or will have, agreed that during the180-day period after the date of this prospectus, subject to limited exceptions, we and they will not, without prior written consent from Roth Capital Partners, directly or indirectly, issue, sell, offer, agree to sell, grant any option or contract for the sale of, pledge, make any short sale of, maintain any short position with respect to, establish or maintain a “put equivalent option” (within the meaning ofRule 16a-1(h) under the Exchange Act) with respect to, enter into any swap, derivative transaction or other arrangement (whether any such transaction is to be settled by delivery of common stock, other securities, cash or other consideration) that transfers to another, in whole or in part, any of the economic consequences of ownership, or otherwise dispose of, any shares of our common stock, or any securities convertible into, exercisable or exchangeable for, our common stock or any interest therein or any capital stock of our subsidiaries). These transfer restrictions andlock-up agreements will cover approximately 90% of our outstanding common stock in the aggregate and on a fully-diluted basis. Roth Capital Partners may, in its sole discretion and subject to certain limited exceptions, allow any party subject to the lock-up agreements to which it is a party to dispose of common stock or other securities prior to the expiration of the180-day period; no agreements between Roth Capital Partners and the parties allow them to do so as of the date of this prospectus.
The180-day restricted period contained in thelock-up agreements described above is subject to extension such that, in the event that either (1) during the last 17 days of the 180-day period, we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of the180-day restricted period, we announce that we will release earnings results during the16-day period beginning on the last day of the180-day period, the “lock-up” restrictions described above will, subject to limited exceptions, continue to apply until the date that is 15 calendar days plus three business days after the date of issuance of the earnings release or the occurrence of the material news or material event.
Prior to the offering, there has been no public market for the common stock. The initial public offering price for the shares of common stock included in this offering will be determined by negotiation among us and Roth Capital Partners. Among the factors considered in determining the price were:
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| • | the history of and prospects for our business and the industry in which we operate; |
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| • | an assessment of our management; |
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| • | our past and present revenues and earnings; |
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| • | the prospects for growth of our revenues and earnings; and |
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| • | currently prevailing conditions in the securities markets, including current market valuations of publicly traded companies which are comparable to us. |
Each of the underwriters has advised us that it does not intend to confirm sales to any account over which it exercises discretionary authority.
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We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.
Until the distribution of the common stock is completed, rules of the Commission may limit the ability of the underwriters and certain selling group members to bid for and purchase the common stock. As an exception to these rules, the underwriters are permitted to engage in certain transactions that stabilize, maintain or otherwise affect the price of the common stock.
In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act.
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| • | Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. |
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| • | Over-allotment transactions involve sales by the underwriters of the shares of common stock in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment. The underwriters may close out any short position by exercising their over-allotment optionand/or purchasing shares of common stock in the open market. |
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| • | Syndicate covering transactions involve purchases of the shares of common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of the shares of common stock to close out the short position, the underwriters will consider, among other things, the price of shares of common stock available for purchase in the open market as compared to the price at which they may purchase shares of common stock through the over-allotment option. If the underwriters sell more shares of common stock than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares of common stock in the open market after pricing that could adversely affect investors who purchase in the offering. |
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| • | Penalty bids permit representatives to reclaim a selling concession from a syndicate member when the shares of common stock originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of the shares of common stock or preventing or retarding a decline in the market price of the shares of common stock. As a result, the price of the shares of common stock may be higher than the price that might otherwise exist in the open market.
The underwriters will deliver a prospectus to all purchasers of shares of common stock in the short sales. The purchases of shares of common stock in short sales are entitled to the same remedies under the federal securities laws as any other purchaser of shares of common stock covered by this prospectus.
Passive market making may stabilize or maintain the market price of our common stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time.
The underwriters are not obligated to engage in any of the transactions described above. If they do engage in any of these transactions, they may discontinue them at any time.
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We have applied to list the common stock on the Nasdaq Global Market under the symbol “OCLS.”
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From time to time in the ordinary course of their respective businesses, the underwriters and their affiliates may in the future engage in commercial banking or investment banking transactions with our affiliates and us.
Selling Restrictions
The distribution of this document and the offering and sale of shares in certain non-US jurisdictions may be restricted by law and therefore persons into whose possession this document comes should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of securities law of any such jurisdiction.
Purchasers of the shares offered by this prospectus may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price on the cover page of this prospectus.
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LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus will be passed upon for us by Pillsbury Winthrop Shaw Pittman LLP, Palo Alto, California. Selected legal matters relating to the offering will be passed upon for the underwriters by Stradling Yocca Carlson & Rauth, a professional corporation, Newport Beach, California.
EXPERTS
Our consolidated financial statements as of March 31, 2005 and 2006 and for each of the three years in the period ended March 31, 2006 included in this prospectus have been so included in reliance on the report of Marcum & Kliegman LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
Valuation Research Corporation issued our July 2005 and June 2006 valuation reports.
CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On April 12, 2006, the Audit Committee of our board of directors approved the dismissal of PricewaterhouseCoopers LLP, or PWC, as our independent registered public accounting firm and subsequently appointed Marcum & Kliegman LLP, or M&K, effective April 12, 2006. We did not consult with M&K on any accounting or financial reporting matters prior to M&K’s appointment.
We engaged PWC on June 14, 2005, to perform an audit of our financial statements for our fiscal years ended March 31, 2003, 2004 and 2005. PWC did not issue a report on our financial statements for the years ended March 31, 2004 or 2005, or through April 12, 2006. For the years ended March 31, 2003, 2004 and 2005, and through April 12, 2006, there were no disagreements with PWC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to PWC’s satisfaction, would have caused PWC to make reference thereto in their report on the financial statements for such years if they had delivered a report. In March 2006, and prior to its dismissal, PWC advised our Audit Committee orally of the following:
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| • | the absence of financial accounting personnel with sufficient skills and experience to effectively evaluate and determine the appropriate accounting for non-routineand/or complex accounting transactions consistent with accounting principles generally accepted in the United States, which resulted in a number of material audit adjustments to the financial statements during the course of audit procedures; |
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| • | the failure to maintain effective controls to ensure the identification of accounting issues related to and the proper accounting for stock options with the right of rescission that were granted under certain stock option plans that required registration or qualification under federal and state securities laws primarily due to insufficient oversight and lack of personnel in the accounting and finance organization with the appropriate level of accounting knowledge, experience and training; |
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| • | the failure to maintain an effective anti-fraud program designed to detect and prevent fraudulent activities in QP; |
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| • | the need to expand significantly the scope of the audit of QP to assess the impact of identified fraudulent activities on the our financial statements, in which regard PWC advised our audit committee that the results of the fraud investigation may cause PWC to be unwilling to be associated with our financial statements; |
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| • | the “tone at the top” set by our senior management does not appear to encourage an attitude within our company that controls are important and that established controls cannot be circumvented; |
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| • | we did not have the appropriate financial management and reporting infrastructure in place to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act of 2002, and that we will be unable to report our financial results accurately or in a timely manner; and |
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| • | significant control deficiencies, when considered in the aggregate, constituted a material weakness over financial reporting. |
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We have authorized PWC to respond fully to the inquiries of M&K concerning the foregoing. We have taken the following steps designed to address PWC’s concerns and to implement the recommendations made by our special counsel to our audit committee in connection with its investigation of QP:
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| • | we have implemented a training program to continue to educate our finance personnel on accounting developments and the application of accounting principles to complex transactions, emerging and higher-risk areas and the application of significant accounting policies and judgments; |
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| • | we have implemented programs so that all employees in finance responsible for overseeing the consolidation of financial results of any subsidiary, foreign or domestic, have the requisite knowledge to understand the potential issues that are peculiarly important in dealing with our operations, including the potential for fraud; |
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| • | we will continue engaging outside consultants to provide accounting, tax and Sarbanes-Oxley advice to our finance personnel; |
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| • | with regard to any future material acquisition or partnership that does not involve a well-known entity, management will present a written report to our board of directors concerning the proposed transaction, including a vetting of the management team or practices of the third party; |
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| • | we are continuing our efforts to streamline our monthly closing and reporting processes and have implemented financial statement review procedures with the Audit Committee; |
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| • | we have adopted a code of ethics for all directors, employees and advisors in compliance with Nasdaq regulations; |
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| • | we have adopted a whistleblower policy and are implementing procedures that will allow for anonymous reporting of any potential violations of law; and |
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| • | we have hired an experienced Chief Operating Officer to oversee ourday-to-day operations, further strengthening our commitment to ensure accurate financial reporting, as well as compliance with laws and regulations. |
Under the oversight of our audit committee, we are continuing to review our processes and procedures to strengthen and improve our internal controls, with the goals of ensuring accurate financial reporting and complying with laws and regulations applicable to us.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Commission a registration statement under the Securities Act with respect to the common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Please refer to the registration statement, exhibits and schedules for further information with respect to the common stock offered by this prospectus. Statements contained in this prospectus regarding the contents of any contract or other documents are not necessarily complete. With respect to any contract or document filed as an exhibit to the registration statement, you should refer to the exhibit for a copy of the contract or document, and each statement in this prospectus regarding that contract or document is qualified by reference to the exhibit. A copy of the registration statement and its exhibits and schedules may be inspected without charge at the Commission’s public reference room, located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-202-551-8090 for further information on the public reference room. Our Commission filings, including the registration statement, are also available to the public on the Commission’s website at www.sec.gov.
Upon completion of this offering, we will be subject to the information and reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the Commission. Such periodic reports, proxy statements and other information will be available for inspection at the public reference room and website of the Commission referred to above.
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OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
Contents
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| | | F-10 | |
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F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders 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, 2005 and 2006, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended March 31, 2006. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the 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, 2005 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2006 in conformity with United States generally accepted accounting principles.
New York, New York
June 21, 2006, except for
Note 18, as to which the date is December 15, 2006
F-2
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
(In thousands, except share amounts)
| | | | | | | | | | | | |
| | March 31, | | | September 30,
| |
| | 2005 | | | 2006 | | | 2006 | |
| | | | | | | | (unaudited) | |
|
ASSETS |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 3,287 | | | $ | 7,448 | | | $ | 2,269 | |
Accounts receivable, net | | | 227 | | | | 1,076 | | | | 1,701 | |
Inventories | | | 868 | | | | 317 | | | | 355 | |
Prepaid expenses and other current assets | | | 499 | | | | 1,386 | | | | 1,108 | |
| | | | | | | | | | | | |
Total current assets | | | 4,881 | | | | 10,227 | | | | 5,433 | |
Property and equipment, net | | | 1,959 | | | | 1,940 | | | | 2,224 | |
Notes receivable | | | 55 | | | | — | | | | — | |
Restricted cash | | | 45 | | | | 44 | | | | 46 | |
Deferred offering costs | | | — | | | | 478 | | | | 1,405 | |
Debt issue costs | | | — | | | | — | | | | 948 | |
| | | | | | | | | | | | |
Total assets | | $ | 6,940 | | | $ | 12,689 | | | $ | 10,056 | |
| | | | | | | | | | | | |
|
LIABILITIES |
Current liabilities: | | | | | | | | | | | | |
Accounts payable | | $ | 906 | | | $ | 2,774 | | | $ | 2,286 | |
Accrued expenses and other current liabilities | | | 2,335 | | | | 1,686 | | | | 1,805 | |
Dividend payable | | | — | | | | 121 | | | | 363 | |
Current portion of long-term debt | | | 950 | | | | 504 | | | | 1,760 | |
Current portion of capital lease obligations | | | 27 | | | | 15 | | | | 16 | |
| | | | | | | | | | | | |
Total current liabilities | | | 4,218 | | | | 5,100 | | | | 6,230 | |
Long-term debt, less current portion | | | 460 | | | | 210 | | | | 2,818 | |
Capital lease obligations, less current portion | | | 60 | | | | 41 | | | | 34 | |
| | | | | | | | | | | | |
Total liabilities | | | 4,738 | | | | 5,351 | | | | 9,082 | |
| | | | | | | | | | | | |
Commitments, Contingencies and Other Matters | | | | | | | | | | | | |
Stockholders’ Equity (Note 12) | | | | | | | | | | | | |
Convertible preferred stock, $0.0001 par value; 30,000,000 shares authorized, | | | | | | | | | | | | |
Series A 1,337,709 shares issued and outstanding at March 31, 2005 and 1,347,709 shares issued and outstanding at March 31, 2006 and September 30, 2006 (unaudited) | | | 6,628 | | | | 6,668 | | | | 6,668 | |
Series B 1,014,093 shares issued and outstanding at March 31, 2005 and 2,635,744 shares issued and outstanding at March 31, 2006 and September 30, 2006 (unaudited) | | | 16,696 | | | | 43,722 | | | | 43,722 | |
Series C 84,539 shares issued and outstanding at September 30, 2006 (unaudited) | | | — | | | | — | | | | 1,370 | |
Common stock, $0.0001 par value; 100,000,000 shares authorized, 3,914,653 and 4,218,981 and 4,222,731 shares issued and outstanding at March 31, 2005 and 2006 and September 30, 2006 (unaudited), respectively | | | 3,101 | | | | 3,399 | | | | 3,399 | |
Additional paid-in capital | | | 3,674 | | | | 4,644 | | | | 5,163 | |
Deferred compensation | | | (676 | ) | | | (798 | ) | | | — | |
Accumulated other comprehensive (loss) income | | | (141 | ) | | | 3 | | | | (140 | ) |
Accumulated deficit | | | (27,080 | ) | | | (50,300 | ) | | | (59,208 | ) |
| | | | | | | | | | | | |
Total stockholders’ equity | | | 2,202 | | | | 7,338 | | | | 974 | |
| | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 6,940 | | | $ | 12,689 | | | $ | 10,056 | |
| | | | | | | | | | | | |
The accompanying footnotes are an integral part of these consolidated financial statements.
F-3
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | | | | Six Months Ended
| |
| | Year Ended March 31, | | | September 30, | |
| | 2004 | | | 2005 | | | 2006 | | | 2005 | | | 2006 | |
| | | | | | | | | | | (unaudited) | |
|
Revenues | | | | | | | | | | | | | | | | | | | | |
Product | | $ | 95 | | | $ | 473 | | | $ | 1,966 | | | $ | 807 | | | $ | 1,942 | |
Service | | | 807 | | | | 883 | | | | 618 | | | | 275 | | | | 388 | |
| | | | | | | | | | | | | | | | | | | | |
Total revenues | | | 902 | | | | 1,356 | | | | 2,584 | | | | 1,082 | | | | 2,330 | |
| | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | | | | | | | | | | | | | | | | | | |
Product | | | 1,403 | | | | 2,211 | | | | 3,899 | | | | 1,350 | | | | 1,043 | |
Service | | | 1,265 | | | | 1,311 | | | | 1,003 | | | | 497 | | | | 422 | |
| | | | | | | | | | | | | | | | | | | | |
Total cost of revenues | | | 2,668 | | | | 3,522 | | | | 4,902 | | | | 1,847 | | | | 1,465 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit (loss) | | | (1,766 | ) | | | (2,166 | ) | | | (2,318 | ) | | | (765 | ) | | | 865 | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | |
Research and development | | | 1,413 | | | | 1,654 | | | | 2,600 | | | | 965 | | | | 1,595 | |
Selling, general and administrative | | | 3,918 | | | | 12,492 | | | | 15,933 | | | | 7,704 | | | | 7,867 | |
| | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 5,331 | | | | 14,146 | | | | 18,533 | | | | 8,669 | | | | 9,462 | |
| | | | | | | | | | | | | | | | | | | | |
Loss from operations | | | (7,097 | ) | | | (16,312 | ) | | | (20,851 | ) | | | (9,434 | ) | | | (8,597 | ) |
Interest expense | | | (178 | ) | | | (372 | ) | | | (172 | ) | | | (103 | ) | | | (261 | ) |
Interest income | | | 3 | | | | 8 | | | | 282 | | | | 68 | | | | 100 | |
Other income (expense), net | | | (26 | ) | | | 146 | | | | (377 | ) | | | (101 | ) | | | 92 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss from continuing operations | | | (7,298 | ) | | | (16,530 | ) | | | (21,118 | ) | | | (9,570 | ) | | | (8,666 | ) |
| | | | | | | | | | | | | | | | | | | | |
Discontinued operations | | | | | | | | | | | | | | | | | | | | |
Loss from operations of discontinued business | | | — | | | | — | | | | (818 | ) | | | (174 | ) | | | — | |
Loss on disposal of discontinued business | | | — | | | | — | | | | (1,163 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Loss on discontinued operations | | | — | | | | — | | | | (1,981 | ) | | | (174 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | | (7,298 | ) | | | (16,530 | ) | | | (23,099 | ) | | | (9,744 | ) | | | (8,666 | ) |
Preferred stock dividends | | | — | | | | — | | | | (121 | ) | | | — | | | | (242 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss available to common stockholders | | $ | (7,298 | ) | | $ | (16,530 | ) | | $ | (23,220 | ) | | $ | (9,744 | ) | | $ | (8,908 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss per common share: basic and diluted | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (1.87 | ) | | $ | (4.22 | ) | | $ | (5.12 | ) | | $ | (2.34 | ) | | $ | (2.11 | ) |
Discontinued operations | | | — | | | | — | | | | (0.48 | ) | | | (0.04 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | (1.87 | ) | | $ | (4.22 | ) | | $ | (5.60 | ) | | $ | (2.38 | ) | | $ | (2.11 | ) |
| | | | | | | | | | | | | | | | | | | | |
Weighted-average number of shares used in per common share calculations: | | | | | | | | | | | | | | | | | | | | |
Basic and diluted | | | 3,911 | | | | 3,914 | | | | 4,150 | | | | 4,086 | | | | 4,221 | |
| | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (7,298 | ) | | $ | (16,530 | ) | | $ | (23,099 | ) | | $ | (9,744 | ) | | $ | (8,965 | ) |
Foreign currency translation adjustments | | | (14 | ) | | | (127 | ) | | | 144 | | | | 22 | | | | (143 | ) |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | $ | (7,312 | ) | | $ | (16,657 | ) | | $ | (22,955 | ) | | $ | (9,722 | ) | | $ | (9,108 | ) |
| | | | | | | | | | | | | | | | | | | | |
The accompanying footnotes are an integral part of these consolidated financial statements.
F-4
OCULUS INNOVATIVE SCIENCES, INC.
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Accumu-
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumu-
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | Deferred
| | lated
| | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred
| | lated
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | Stock-
| | Other
| | | | | | | | | | | | | | | | | | | | | | | | | | | Stock-
| | Other
| | | | | | | |
| | Convertible Preferred Stock | | | | | | Additional
| | Based
| | Compre-
| | Accum-
| | | | | | | Convertible Preferred Stock | | | | | | Additional
| | Based
| | Compre-
| | Accum-
| | | | | |
| | Series A ($.0001 par value) | | Series B ($.0001 par value) | | Series C ($.0001 par value) | | Common Stock ($.0001 par value) | | Paid in
| | Compen-
| | hensive
| | ulated
| | | | | | | Series A ($.0001 par value) | | Series B ($.0001 par value) | | Series C ($.0001 par value) | | Common Stock ($.0001 par value) | | Paid in
| | Compen-
| | hensive
| | ulated
| | | | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | sation | | Income | | Deficit | | Total | | | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | sation | | Income | | Deficit | | Total | | | |
|
Balance, April 1, 2003 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,858,778 | | | $ | 2,892 | | | $ | 286 | | | $ | (5 | ) | | | — | | | $ | (3,252 | ) | | $ | (79 | ) | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,858,778 | | | $ | 2,892 | | | $ | 286 | | | $ | (5 | ) | | | — | | | $ | (3,252 | ) | | $ | (79 | ) | | | | |
Issuance of common stock, net of offering costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25,375 | | | | 203 | | | | — | | | | | | | | — | | | | — | | | | 203 | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25,375 | | | | 203 | | | | — | | | | | | | | — | | | | — | | | | 203 | | | | | |
Issuance of common stock upon exercise of stock options | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 30,500 | | | | 6 | | | | | | | | | | | | — | | | | — | | | | 6 | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 30,500 | | | | 6 | | | | | | | | | | | | — | | | | — | | | | 6 | | | | | |
Deferred stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 233 | | | | (233 | ) | | | — | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 233 | | | | (233 | ) | | | — | | | | — | | | | — | | | | | |
Amortization of stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 30 | | | | — | | | | — | | | | 30 | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 30 | | | | — | | | | — | | | | 30 | | | | | |
Non-employee stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | 7 | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | 7 | | | | | |
Issuance of common stock warrants in exchange for services | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 44 | | | | — | | | | — | | | | — | | | | 44 | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 44 | | | | — | | | | — | | | | — | | | | 44 | | | | | |
Reclassification of options subject to cash settlement | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | 3 | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | 3 | | | | | |
Issuance of common stock warrants in connection with debt financing | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 88 | | | | — | | | | — | | | | — | | | | 88 | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 88 | | | | — | | | | — | | | | — | | | | 88 | | | | | |
Issuance of Series A convertible preferred stock, net of offering costs | | | 1,337,709 | | | $ | 6,628 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6,628 | | | | | | | | 1,337,709 | | | $ | 6,628 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6,628 | | | | | |
Translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (14 | ) | | | — | | | | (14 | ) | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (14 | ) | | | — | | | | (14 | ) | | | | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7,298 | ) | | | (7,298 | ) | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7,298 | ) | | | (7,298 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2004 | | | 1,337,709 | | | | 6,628 | | | | | | | | | | | | — | | | | — | | | | 3,914,653 | | | | 3,101 | | | | 661 | | | | (208 | ) | | | (14 | ) | | | (10,550 | ) | | | (382 | ) | | | | | | | 1,337,709 | | | | 6,628 | | | | | | | | | | | | — | | | | — | | | | 3,914,653 | | | | 3,101 | | | | 661 | | | | (208 | ) | | | (14 | ) | | | (10,550 | ) | | | (382 | ) | | | | |
Issuance of common stock upon exercise of stock options | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | |
Deferred stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,765 | | | | (2,765 | ) | | | — | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,765 | | | | (2,765 | ) | | | — | | | | — | | | | — | | | | | |
Amortization of stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,297 | | | | — | | | | — | | | | 2,297 | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,297 | | | | — | | | | — | | | | 2,297 | | | | | |
Non-employee stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 30 | | | | — | | | | — | | | | — | | | | 30 | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 30 | | | | — | | | | — | | | | — | | | | 30 | | | | | |
F-5
| | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumu-
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred
| | | lated
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock-
| | | Other
| | | | | | | | | | |
| | Convertible Preferred Stock | | | | | | | | | Additional
| | | Based
| | | Compre-
| | | Accum-
| | | | | | | |
| | Series A ($.0001 par value) | | | Series B ($.0001 par value) | | | Series C ($.0001 par value) | | | Common Stock ($.0001 par value) | | | Paid in
| | | Compen-
| | | hensive
| | | ulated
| | | | | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | sation | | | Income | | | Deficit | | | Total | | | | |
|
Reclassification of options subject to cash settlement | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 113 | | | | — | | | | — | | | | — | | | | 113 | | | | | |
Issuance of common stock warrants in connection with debt financing | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 28 | | | | — | | | | — | | | | — | | | | 28 | | | | | |
Issuance of Series A convertible preferred stock warrants in connection with debt financing | | | — | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | | | | 77 | | | | — | | | | — | | | | — | | | | 77 | | | | | |
F-6
OCULUS INNOVATIVE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumu-
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred
| | | lated
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock-
| | | Other
| | | | | | | |
| | Convertible Preferred Stock | | | | | | | | | Additional
| | | Based
| | | Compre-
| | | Accum-
| | | | |
| | Series A ($.0001 par value) | | | Series B ($.0001 par value) | | | Series C ($.0001 par value) | | | Common Stock ($.0001 par value) | | | Paid in
| | | Compen-
| | | hensive
| | | ulated
| | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | sation | | | Income | | | Deficit | | | Total | |
|
Issuance of Series B convertible preferred stock, net of offering costs | | | — | | | | — | | | | 1,014,093 | | | | 16,696 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 16,696 | |
Translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (127 | ) | | | — | | | | (127 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (16,530 | ) | | | (16,530 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances, March 31, 2005 | | | 1,337,709 | | | $ | 6,628 | | | | 1,014,093 | | | $ | 16,696 | | | | — | | | | — | | | | 3,914,653 | | | $ | 3,101 | | | $ | 3,674 | | | $ | (676 | ) | | $ | (141 | ) | | $ | (27,080 | ) | | $ | 2,202 | |
Issuance of common stock upon exercise of stock options | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 291,828 | | | | 298 | | | | — | | | | — | | | | — | | | | — | | | | 298 | |
Deferred stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 401 | | | | (401 | ) | | | — | | | | — | | | | — | |
Amortization of stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 279 | | | | — | | | | — | | | | 279 | |
Non-employee stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 32 | | | | — | | | | — | | | | — | | | | 32 | |
Fair value adjustment related to common stock warrants with service conditions | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 153 | | | | — | | | | — | | | | — | | | | 153 | |
Issuance of common stock in exchange for services | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12,500 | | | | — | | | | 127 | | | | — | | | | — | | | | — | | | | 127 | |
Reclassification of options subject to cash settlement | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 257 | | | | — | | | | — | | | | — | | | | 257 | |
Issuance of Series B convertible preferred stock, net of offering costs | | | — | | | | — | | | | 1,621,651 | | | | 27,026 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 27,026 | |
F-7
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumu-
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred
| | | lated
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock-
| | | Other
| | | | | | | |
| | Convertible Preferred Stock | | | | | | | | | Additional
| | | Based
| | | Compre-
| | | Accum-
| | | | |
| | Series A ($.0001 par value) | | | Series B ($.0001 par value) | | | Series C ($.0001 par value) | | | Common Stock ($.0001 par value) | | | Paid in
| | | Compen-
| | | hensive
| | | ulated
| | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | sation | | | Income | | | Deficit | | | Total | |
|
Issuance of Series A convertible preferred stock in connections with convertible debt | | | 10,000 | | | | 40 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 40 | |
Dividend payable to Series A preferred stockholders | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (121 | ) | | | (121 | ) |
Translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 144 | | | | — | | | | 144 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (23,099 | ) | | | (23,099 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2006 | | | 1,347,709 | | | $ | 6,668 | | | | 2,635,744 | | | $ | 43,722 | | | | — | | | | — | | | | 4,218,981 | | | $ | 3,399 | | | $ | 4,644 | | | $ | (798 | ) | | $ | 3 | | | $ | (50,300 | ) | | | $7,338 | |
The accompanying footnotes are an integral part of these consolidated financial statements.
F-8
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumu-
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred
| | | lated
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock-
| | | Other
| | | | | | | |
| | Convertible Preferred Stock | | | | | | | | | Additional
| | | Based
| | | Compre-
| | | Accum-
| | | | |
| | Series A ($.0001 par value) | | | Series B ($.0001 par value) | | | Series C ($.0001 par value) | | | Common Stock ($.0001 par value) | | | Paid in
| | | Compen-
| | | hensive
| | | ulated
| | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | sation | | | Income | | | Deficit | | | Total | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2006 | | | 1,347,709 | | | $ | 6,668 | | | | 2,635,744 | | | $ | 43,722 | | | | — | | | | — | | | | 4,218,981 | | | $ | 3,399 | | | $ | 4,644 | | | $ | (798 | ) | | $ | 3 | | | $ | (50,300 | ) | | $ | 7,338 | |
Deferred stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (96 | ) | | | 96 | | | | — | | | | — | | | | — | |
Amortization of stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 104 | | | | — | | | | — | | | | 104 | |
Non-employee stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11 | | | | — | | | | — | | | | — | | | | 11 | |
Fair value related to common warrant adjustment with services conditions | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 70 | | | | — | | | | — | | | | — | | | | 70 | |
Issuance of common stock in exchange for services | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,750 | | | | — | | | | 43 | | | | — | | | | — | | | | — | | | | 43 | |
Issuance of common warrants in connection with line of credit | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,047 | | | | — | | | | — | | | | — | | | | 1,047 | |
Issuance of Series C convertible preferred stock net of offering costs | | | — | | | | — | | | | — | | | | — | | | | 84,539 | | | $ | 1,370 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,370 | |
Employee stock-based compensation expense recognized under SFAS No. 123R, net of forfeitures | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 42 | | | | — | | | | — | | | | — | | | | 42 | |
Dividend payable to Series A preferred stockholders | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (242 | ) | | | (242 | ) |
Reclassification of deferred stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (598 | ) | | | 598 | | | | | | | | | | | | | |
Translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (143 | ) | | | — | | | | (143 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (8,666 | ) | | | (8,666 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2006 (unaudited) | | | 1,347,709 | | | $ | 6,668 | | | | 2,635,744 | | | $ | 43,722 | | | | 84,539 | | | $ | 1,370 | | | | 4,222,731 | | | $ | 3,399 | | | $ | 5,163 | | | $ | — | | | $ | (140 | ) | | $ | (59,208 | ) | | $ | 974 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying footnotes are an integral part of these consolidated financial statements.
F-9
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | Six Months Ended September 30, | |
| | 2004 | | | 2005 | | | 2006 | | | 2005 | | | 2006 | |
| | | | | | | | | | | (unaudited) | |
|
| | | | | | | | | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | |
Net loss from continuing operations | | $ | (7,298 | ) | | $ | (16,530 | ) | | $ | (21,118 | ) | | $ | (9,570 | ) | | $ | (8,666 | ) |
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 163 | | | | 434 | | | | 651 | | | | 307 | | | | 328 | |
Stock-based compensation | | | 424 | | | | 2,349 | | | | 597 | | | | 266 | | | | 270 | |
Non-cash interest expense | | | 37 | | | | 131 | | | | 21 | | | | 21 | | | | 125 | |
Loss on disposal of assets | | | 10 | | | | 2 | | | | 113 | | | | — | | | | — | |
Changes in operating assets and liabilities | | | | | | | | | | | | | | | | | | | | |
Accounts receivable, net of doubtful accounts | | | (195 | ) | | | 217 | | | | (849 | ) | | | (119 | ) | | | (617 | ) |
Inventory | | | (119 | ) | | | (748 | ) | | | 551 | | | | (81 | ) | | | (27 | ) |
Prepaid expenses and other current assets | | | (163 | ) | | | (278 | ) | | | (887 | ) | | | (585 | ) | | | 262 | |
Accounts payable | | | 857 | | | | (165 | ) | | | 1,868 | | | | 1,028 | | | | (494 | ) |
Accrued expenses and other current liabilities | | | 726 | | | | 1,055 | | | | (649 | ) | | | (828 | ) | | | 106 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash used in operating activities | | | (5,558 | ) | | | (13,533 | ) | | | (19,702 | ) | | | (9,561 | ) | | | (8,713 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (982 | ) | | | (1,042 | ) | | | (475 | ) | | | (166 | ) | | | (585 | ) |
Issuance of note receivable | | | — | | | | (55 | ) | | | 55 | | | | (2 | ) | | | — | |
Changes in restricted cash | | | (25 | ) | | | (21 | ) | | | 1 | | | | — | | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (1,007 | ) | | | (1,118 | ) | | | (419 | ) | | | (168 | ) | | | (587 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Proceeds from the issuance of common stock | | | 203 | | | | — | | | | — | | | | — | | | | — | |
Deferred offering costs | | | — | | | | — | | | | (478 | ) | | | (342 | ) | | | (926 | ) |
Issuance of common stock upon exercise of stock options | | | 6 | | | | — | | | | 298 | | | | 298 | | | | — | |
Proceeds from the issuance of preferred stock | | | 6,628 | | | | 16,696 | | | | 27,026 | | | | 25,744 | | | | 1,370 | |
Debt issue costs | | | — | | | | — | | | | — | | | | — | | | | (20 | ) |
Proceeds from issued debt | | | 574 | | | | 1,205 | | | | 257 | | | | 79 | | | | 4,379 | |
Principal payments on debt | | | (106 | ) | | | (664 | ) | | | (953 | ) | | | (694 | ) | | | (515 | ) |
Payments on capital leases | | | (34 | ) | | | (41 | ) | | | (31 | ) | | | (9 | ) | | | (7 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by financing activities | | | 7,271 | | | | 17,196 | | | | 26,119 | | | | 25,076 | | | | 4,281 | |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from discontinued operations | | | | | | | | | | | | | | | | | | | | |
Operating cash flows | | | — | | | | — | | | | (818 | ) | | | (174 | ) | | | — | |
Investing cash flows | | | — | | | | — | | | | (1,163 | ) | | | (970 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net cash used in discontinued operations | | | — | | | | — | | | | (1,981 | ) | | | (1,144 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | | (14 | ) | | | (127 | ) | | | 144 | | | | 22 | | | | (160 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 692 | | | | 2,418 | | | | 4,161 | | | | 14,225 | | | | (5,179 | ) |
Cash and equivalents, beginning of period | | | 177 | | | | 869 | | | | 3,287 | | | | 3,287 | | | | 7,448 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and equivalents, end of period | | $ | 869 | | | $ | 3,287 | | | $ | 7,448 | | | $ | 17,512 | | | $ | 2,269 | |
| | | | | | | | | | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 134 | | | $ | 221 | | | $ | 125 | | | $ | 78 | | | $ | 136 | |
| | | | | | | | | | | | | | | | | | | | |
Equipment purchased under capital leases | | $ | 40 | | | $ | 37 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Conversion of note into Series A preferred stock | | $ | — | | | $ | — | | | $ | 40 | | | $ | 40 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Fair value of warrants issued with line of credit | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,047 | |
| | | | | | | | | | | | | | | | | | | | |
The accompanying footnotes are an integral part of these consolidated financial statements.
F-10
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
NOTE 1 — The Company
Oculus Innovative Sciences, Inc. (the “Company”) was incorporated under the laws of the State of California in April 1999. The Company’s principal office is located in Petaluma, California. The Company has developed and manufactures and markets a family of products intended to help prevent and treat infection in acute and chronic wounds. The Company’s platform technology, Microcyn, is a non-toxic,an electrically charged, or super-oxidized, water-based solution that is designed to treat a wide range of pathogens, including viruses, fungi, spores and antibiotic resistant strains of bacteria, such as MRSA and VRE, in wounds. The Company conducts its business world-wide, with its principal subsidiaries in Europe and Mexico.
As discussed in Note 2, the Company’s amended articles of incorporation were amended on August 28, 2006, authorizing it to issue up to 875,000 of Series C convertible preferred stock.
Stock Split
In November 2006, the board of directors of the Company approved a reverse split within a range of 1 for 4 and 1 for 6 of the Company’s outstanding shares and subsequently narrowed the range to 1 for 3.7 to 1 for 5. Pursuant to delegation of authority by the board of directors, the pricing committee approved a 1 for 4 reverse split on December 1, 2006. The reverse stock split was effectuated by filing an amended and restated certificate of incorporation of the Company on December 15, 2006. All common and preferred shares and per share amounts contained in the consolidated financial statements have been retroactively adjusted to reflect a 1 for 4 reverse stock split.
NOTE 2 — Liquidity and Financial Condition
The Company incurred net losses of $7,298,000, $16,530,000 and $23,099,000 for the years ended March 31, 2004, 2005 and 2006, respectively, and $8,666,000 for the six months ended September 30, 2006. At March 31, 2006 and September 30, 2006, the Company’s accumulated deficit amounted to $50,300,000 and $59,208,000, respectively.
During the years ended March 31, 2004, 2005 and 2006, the Company raised, net of offering costs, an aggregate of $6,837,000, $16,696,000 and $27,324,000, respectively in various equity financing transactions that, together with the proceeds of certain debt financing transactions, enabled it to sustain operations while attempting to execute its business plan. The Company had $5,127,000 of working capital as of March 31, 2006 and a working capital deficiency of $(797,000) as of September 30, 2006. In addition, in June 2006, the Company entered into a $5,000,000 credit facility from which it drew $4,182,000, to fund its operations, and invest in new equipment (Note 9). In addition, on November 7, 2006, the Company entered into a $4.0 million loan agreement which will be repaid within twelve months or within 5 days after the close of the Company’s initial public offering of its common stock,
The Company’s ability to continue its operations is dependent upon its ability to raise additional capital and generate revenue and operating cash flow through the execution of its business plan. The Company is also in the process of effectuating an initial public offering (“IPO”) of its equity securities. The Company’s Board of Directors and stockholders also approved an amendment to the Articles of Incorporation (that became effective on August 28, 2006) to authorize the issuance of up to 875,000 shares of Series C convertible preferred stock. On September 14, 2006, the Company sold 84,539 units, consisting of 84,539 shares of Series C convertible preferred stock and warrants to purchase 16,907 shares of the Company’s common stock, for gross proceeds of $1,521,702 ($1,369,532 net of offering costs). On October 20, 2006, the Company sold 108,486 units, consisting of 108,486 shares of Series C convertible preferred stock and warrants to purchase 21,697 shares of the Company’s common stock, for gross proceeds of $1,952,478 ($1,757,230 net of offering
F-11
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
costs). The Company cannot provide any assurance that it will successfully raise any additional capital under this offering as a result of the authorization to issue these shares.
Management believes the Company’s current level of working capital, the $4.0 million raised in the note offering described in Note 18, as well as funds the Company expects to generate from operations and raise through an initial public offering, will sustain the business through September 30, 2007. However, the Company cannot provide any assurance that it will raise capital through this initial public offering or an alternative funding source. Without completion of this offering, or the raise of capital through an alternative funding source, the Company may curtail certain operational activities in order to reduce costs. These activities may include clinical and regulatory trials, sales and marketing activities, and international operations. In the event that the Company is required to raise additional capital, the Company cannot provide any assurance that it will secure any commitments for new financing on acceptable terms, if at all.
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 C.V. (“OTM”), and Oculus Innovative Sciences B.V. (“OIS Europe”). All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements are presented in United States Dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation.” (“SFAS 52”). The Company’s subsidiary OTM uses the local currency (Mexican Pesos) as its functional currency and OIS Europe uses the local currency (Euro) 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 are recorded directly to accumulated other comprehensive (loss) income.
The Company, in determining whether it is required to consolidate investee businesses, considers both the voting and variable interest models of consolidation as required under Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R) “Consolidation of Variable Interest Entities,” (“FIN 46(R)”). Accordingly the Company consolidates investee entities when it owns less than 50% of the voting interests but, based on the risks and rewards of its participation, has established financial control. As described in Note 17, the Company’s consolidated financial statements include the results of a variable interest entity that is being presented as a discontinued operation in accordance with SFAS No. 144 “Accounting for the Impairment and Disposal of Long Lived Assets.”
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. These estimates and assumptions include revenue recognition 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.
F-12
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Unaudited Interim Results
The accompanying consolidated balance sheet as of September 30, 2006, statement of changes in stockholders’ equity (deficit) for the six months ended September 30, 2006, and the consolidated statements of operations and statements of cash flows for the six months ended September 30, 2005 and 2006 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations and cash flows for the six months ended September 30, 2005 and 2006. The financial data and other information disclosed in the notes to the consolidated financial statements related to the three month periods are unaudited. The results for the six months ended September 30, 2006 are not necessarily indicative of the results to be expected for the year ending March 31, 2007 or for any other interim period or for any future year.
Revenue Recognition
The Company generates revenue from sales of its products to hospitals, medical centers, doctors, pharmacies, distributors and partners. The Company sells its products directly to third parties and to distributors through various cancelable distribution agreements. The Company has also entered into an agreement to license its products.
The Company also provides regulatory compliance testing and quality assurance services to medical device and pharmaceutical companies.
The Company applies the revenue recognition principles set forth in Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) 104 “Revenue Recognition” with respect to all of its revenue. Accordingly, the Company records revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectability of the sale is reasonable 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 a purchase order.
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, 2004, 2005 and 2006 and for the six months ended September 30, 2006 and 2005.
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
F-13
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
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 180 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 the time of collection. The Company maintains a reserve for amounts which may not be collectible.
During the fiscal year ended March 31, 2005, approximately $434,000 of sales in Mexico were recognized when cash was collected since collection was not reasonably assured.
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 end 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.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents may be invested in money market funds, commercial paper, and certificates of deposits. Cash equivalents are carried at cost, which approximates fair value.
Restricted Cash
In connection with operating lease agreements, the Company is required to maintain cash deposits in a restricted account. Restricted cash held as security under this arrangement amounted to $45,000, $44,000 and $46,000 at March 31, 2005 and 2006, and September 30, 2006, respectively.
Concentration of Credit Risk
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. Management believes that the financial institutions that hold the Company’s deposits are financially sound and have minimal credit risk.
The Company grants credit to its business customers, which are primarily located in the United States, Mexico, and Europe. Collateral is generally not required for trade receivables. The Company maintains allowances for potential credit losses.
Accounts Receivable
Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment, doubtful accounts, government chargebacks and sales returns. Estimates for cash discounts, government chargebacks and sales returns are based on contractual terms, historical trends and expectations regarding the utilization rates for these programs. With respect to government chargebacks, the Mexican Ministry of Health’s (“MOH”) policy is to levy penalties on its vendors for product received after scheduled delivery times. The Company
F-14
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
has not incurred any such chargebacks to date; however such penalties (if incurred) would be recorded as a reduction of revenue and the related accounts receivable balance.
The 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 Company had a low occurrence of credit losses through 2005 and therefore did not consider it necessary to establish an allowance for doubtful accounts as of March 31, 2005. The allowance for doubtful accounts at March 31, 2006 and September 30, 2006 represents probable credit losses in the amounts of $90,000 and $171,000, respectively.
Inventories
Inventories of finished goods and raw materials are stated at the lower of cost, determinedfirst-in, first-out under a standard cost method, or market.
The Company also establishes reserves for obsolescence or unmarketable inventory. The Company recorded reserves to reduce the carrying amounts of inventories to their net realizable value in the amounts of $221,000, $996,000 and $44,000 for the years ended March 31, 2005, 2006 and the six months ended September 30, 2006, respectively, which is included in the accompanying statements of operations as a component of cost of goods sold. In the six month period ended September 30, 2006, the Company discarded inventory reserved for in prior periods.
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. Useful lives by classification is as follows:
| | | | |
| | Years | |
|
Office equipment | | | 3 | |
Manufacturing and other equipment | | | 5 | |
Furniture and fixtures | | | 7 | |
Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred.
F-15
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Debt Issue Costs
Costs of obtaining lines of credit or revolving credit arrangements (which could include cash or the fair value of equity securities) are deferred and amortized over the term of the related facility in accordance with Accounting Principles Board Opinion (“APB”) No. 21 “Debt Issue Costs.” (“APB 21”).
Impairment of Long-Lived Assets
The Company periodically reviews the carrying values of its long lived assets in accordance with SFAS 144 “Long Lived Assets” when events or changes in circumstances would indicate that it is more likely than not that their carrying values may exceed their realizable values, and records impairment charges when considered necessary. Specific potential indicators of impairment include, but are not necessarily limited to:
| | |
| • | a significant decrease in the fair value of an asset; |
|
| • | a significant change in the extent or manner in which an asset is used or a significant physical change in an asset; |
|
| • | a significant adverse change in legal factors or in the business climate that affects the value of an asset; |
|
| • | an adverse action or assessment by the U.S. Food and Drug Administration or another regulator; |
|
| • | an accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset; and operating or cash flow losses combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an income-producing asset. |
When circumstances indicate that an impairment may have occurred, the Company tests such assets for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of such assets and their eventual disposition to their carrying amounts. In estimating these future cash flows, assets and liabilities are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other such groups. If the undiscounted future cash flows are less than the carrying amount of the asset, an impairment loss, measured as the excess of the carrying value of the asset over its estimated fair value, will be recognized. The cash flow estimates used in such calculations are based on estimates and assumptions, using all available information that management believes is reasonable.
Research and Development
Research and development expense is charged to operations as incurred and consists primarily of personnel expenses, outside services and supplies. For the years ended March 31, 2004, 2005 and 2006, research and development expense amounted to $1,413,000, $1,654,000 and $2,600,000, respectively. For the six months ended September 30, 2005 and 2006, research and development expense amounted to $965,000 and $1,595,000, respectively.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs amounted to $99,000, $122,000 and $126,000, for the years ended March 31, 2004, 2005 and 2006, respectively. Advertising costs amounted to $100,000 and $27,000 for the six months ended September 30, 2005 and 2006, respectively.
F-16
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Shipping and Handling Costs
The Company applies the guidelines enumerated in Emerging Issues Task Force Issue (“EITF”) 00-10 “Accounting for Shipping and Handling Fees and Costs” with respect to its shipping and handling costs. Accordingly, the Company classifies amounts billed to customers related to shipping and handling in sale transactions as revenue. Shipping and handling costs incurred are recorded in cost of sales. To date, shipping and handling costs billed to customers have been insignificant.
Foreign Currency Transactions
Foreign currency gains (losses) relate to working capital loans that the Company’s made to its foreign subsidiaries. The Company recorded foreign currency gains (losses) for the years ended March 31, 2004, 2005 and 2006 of ($4,000), $134,000, and ($283,000), respectively, and $(102,000) and $(119,000) for the six months ended September 30, 2005 and 2006, respectively. The related gains (losses) were recorded in other income (expense) in the accompanying statements of operations.
Stock-Based Compensation
Prior to April 1, 2006, the Company accounted for stock-based employee compensation arrangements in accordance with the provisions of APB No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations and applied the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.” The Company used the minimum value method to measure the fair value of awards issued prior to April 1, 2006 with respect to its application of the disclosure requirements under SFAS 123.
Effective April 1, 2006, the Company adopted SFAS No. 123(R) “Share Based Payment” (“SFAS 123(R)”). This statement is a revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25, and its related implementation guidance. SFAS 123(R) addresses all forms of share based payment (“SBP”) awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS 123(R), SBP awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will result in a charge to operations.
The Company had a choice of two attribution methods for allocating compensation costs under SFAS 123(R): the “straight-line method,” which allocates expense on a straight-line basis over the requisite service period of the last separately vesting portion of an award, or the “graded vesting attribution method,” which allocates expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The Company chose the former method and amortized the fair value of each option on a straight-line basis over the requisite period of the last separately vesting portion of each award.
Under SFAS 123(R), nonpublic entities, including those that become public entities after June 15, 2005, that used the minimum value method of measuring equity share options and similar instruments for either recognition or pro forma disclosure purposes under Statement 123 are required to apply SFAS 123(R) prospectively to new awards and to awards modified, repurchased, or cancelled after the date of adoption. In addition, SFAS 123(R), requires such entities to continue accounting for any portion of awards outstanding at the date of initial application using the accounting principles originally applied to those awards. Accordingly, stock based compensation expense relating to awards granted prior to April 1, 2006 that are expected to vest in periods ending after April 1, 2006 are being recorded in accordance with the provisions of APB 25 and its related interpretive guidance.
F-17
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
The Company has adopted the prospective method with respect to accounting for its transition to SFAS 123(R). Accordingly, the Company recognized in salaries and related expense in the statement of operations $104,000 of stock based compensation expense in the six month period ended September 30, 2006, which represents the intrinsic value amortization of options granted prior to April 1, 2006 that the Company is continuing to account for using the recognition and measurement principles prescribed under APB 25. The Company also recognized in salaries and related expense in the statement of operations $42,000 of stock based compensation expense in the six months ended September 30, 2006, which represents the amortization of the fair value of options granted subsequent to adoption of SFAS 123(R). In the current quarter we have reclassified certain components of our stockholders’ equity section to reflect the elimination of deferred compensation arising from unvested share-based compensation pursuant to the requirements of Staff Accounting Bulletin No. 107, regarding Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.” This deferred compensation was previously recorded as an increase to additional paid-in capital with a corresponding reduction to stockholders’ equity for such deferred compensation. This reclassification has no effect on net income or total stockholders’ equity as previously reported. The Company will record an increase to additional paid-in capital as the share-based payments vest.
Non-Employee Stock Based Compensation
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123(R) and EITF IssueNo. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” (“EITF 96-18”) which requires that such equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instrument vests. Non-employee stock-based compensation charges are being amortized over the vesting period.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). Under SFAS No. 109, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Comprehensive Loss
Other comprehensive loss includes all changes in stockholders’ equity (deficit) during a period from non-owner sources and is reported in the consolidated statement of stockholders’ equity (deficit). To date, other comprehensive loss consists of changes in accumulated foreign currency translation adjustments during the period.
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128 “Earnings Per Share” and has applied the guidance enumerated in Staff Accounting Bulletin No. 98 (“SAB Topic 4D”) with respect to evaluating its issuances of equity securities during all periods presented.
Under SFAS No. 128, basic net loss per share is computed by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and
F-18
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
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, 2004, 2005, 2006, and the six months ended September 30, 2005 and 2006 excludes potentially dilutive securities because their inclusion would be anti-dilutive.
In addition to the above, the SEC (under SAB Topic 4D) requires new registrants to retroactively include the dilutive effect of common stock or potential common stock issued for nominal consideration during all periods presented in its computation of basic earnings (loss) per share and diluted earnings per share as if they were, in substance, recapitalizations. The Company evaluated all of its issuances of equity securities and determined that it had no nominal issuances of common stock or common stock equivalents to include in its computation of loss per share for any of the periods presented.
Common stock equivalents excluded from the determination of basic and diluted net loss per share because their effect would be anti-dilutive are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | | Six Months Ended
| |
| | Year Ended March 31, | | | September 30, | |
| | 2004 | | | 2005 | | | 2006 | | | 2005 | | | 2006 | |
| | | | | | | | | | | (unaudited) | |
|
Options to purchase common stock | | | 1,535 | | | | 1,340 | | | | 1,969 | | | | 1,429 | | | | 2,125 | |
Warrants to purchase common stock | | | 30 | | | | 464 | | | | 858 | | | | 517 | | | | 875 | |
Convertible preferred stock (as if converted) | | | 1,338 | | | | 2,352 | | | | 3,984 | | | | 3,906 | | | | 4,068 | |
Warrants to purchase preferred stock (as if converted) | | | — | | | | 17 | | | | 17 | | | | 17 | | | | 88 | |
Convertible debt | | | 20 | | | | 10 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | 2,923 | | | | 4,183 | | | | 6,828 | | | | 5,869 | | | | 7,156 | |
| | | | | | | | | | | | | | | | | | | | |
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. The carrying amounts of the Company’s line of credit obligation and other long term obligations approximate fair value as such instruments feature contractual interest rates that are consistent with current market rates of interest or have effective yields that are consistent with instruments of similar risk, when taken together with equity instruments issued to the holder.
Preferred Stock
The Company applies the guidance enumerated in SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” and EITF Topic D-98 “Classification and Measurement of Redeemable Securities,” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value in accordance with SFAS 150. All other issuances of preferred stock are subject to the classification and measurement principles of EITF Topic D-98. Accordingly the Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events
F-19
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity.
The Company’s preferred shares do not feature any redemption rights within the holders control or conditional redemption features not within the Company’s control as of March 31, 2005, March 31, 2006 or September 30, 2006. Accordingly all issuances of preferred are presented as a component of stockholders equity (deficit).
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and EITF00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF00-19”).
SFAS 133 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments in accordance with EITF00-19. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of SFAS 133. SFAS 133 and EITF00-19 also provide an exception to this rule when the host instrument is deemed to be conventional (as that term is described in the implementation guidance to SFAS 133 and further clarified in EITF05-2 “The Meaning of “Conventional Convertible Debt Instrument” in IssueNo. 00-19).
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with the provisions of EITF98-5 “Accounting for Convertible Securities with Beneficial Conversion Features,” (“EITF98-5”) and EITF00-27 “Application of EITF98-5 to Certain Convertible Instruments.” Accordingly, the Company records when necessary discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
The Company evaluated the conversion option embedded in its convertible instruments during each of the reporting periods presented and has determined, in accordance with the provisions of these statements, that it does not meet the criteria requiring bifurcation of these instruments. Additionally, the Company’s conversion options, if free standing, would not be considered derivatives subject to accounting guidelines prescribed under SFAS 133.
The Company had approximately $80,000 of convertible notes previously outstanding (Note 9). These notes were convertible into a fixed number of preferred shares. In addition, the holders of these notes could only realize the benefit of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of preferred shares or cash at the Company’s discretion. These notes, which amounted to
F-20
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
approximately $80,000 were either repaid or converted during the year ended March 31, 2006. In addition, discounts associated with the beneficial conversion features in these notes were insignificant to the Company’s financial position and results of operations during each of the reporting periods presented.
The characteristics of common stock that is issuable upon a holder’s exercise of conversion options embedded in the Company’s preferred shares are deemed to be clearly and closely related to the characteristics of the preferred shares (as that term is clarified in paragraph 61 l of the implementation guidance included in Appendix A of SFAS 133). The Company did not record deemed dividends during any of the periods presented because the effective conversion price of the preferred shares exceeded the fair value of the Company common stock at the respective dates of issuance.
Common Stock Purchase Warrants and Other Derivative Financial Instruments
The Company accounts for the issuance of common stock purchase warrants issued and other free standing derivative financial instruments in accordance with the provisions ofEITF 00-19. Based on the provisions ofEITF 00-19, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
Recent Accounting Pronouncements
In EITF IssueNo. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” the EITF reached a consensus that contingently convertible instruments, such as contingently convertible debt, contingently convertible preferred stock and other such securities should be included in diluted earnings per share (if dilutive) regardless of whether the market price trigger has been met. The consensus became effective for reporting periods ending after December 15, 2004. The adoption of this pronouncement did not have material effect on the Company’s financial statements.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). This Statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed.
APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is
F-21
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company’s does not believe that the adoption of SFAS 154 did not have an effect on its financial statements.
On June 29, 2005, the EITF ratified IssueNo. 05-2, “The Meaning of ‘Conventional Convertible Debt Instrument’ in EITF IssueNo. 00-19, ‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.’ ” EITFIssue 05-2 provides guidance on determining whether a convertible debt instrument is “conventional” for the purpose of determining when an issuer is required to bifurcate a conversion option that is embedded in convertible debt in accordance with SFAS 133. IssueNo. 05-2 is effective for new instruments entered into and instruments modified in reporting periods beginning after June 29, 2005. The Company does not believe that the adoption of this pronouncement did not have a significant effect on its financial statements.
In September 2005, IssueNo. 05-4, “The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF IssueNo. 00-19, ‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.’ ”EITF 05-4 provides guidance to issuers as to how to account for registration rights agreements that require an issuer to use its “best efforts” to file a registration statement for the resale of equity instruments and have it declared effective by the end of a specified grace period and, if applicable, maintain the effectiveness of the registration statement for a period of time or pay a liquidated damage penalty to the investor. The Company is currently in the process of evaluating the effect that the adoption of this pronouncement may have on its financial statements.
In September 2005, the FASB ratified EITF IssueNo. 05-7, “Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues,” which addresses whether a modification to a conversion option that changes its fair value affects the recognition of interest expense for the associated debt instrument after the modification and whether a borrower should recognize a beneficial conversion feature, not a debt extinguishment if a debt modification increases the intrinsic value of the debt (for example, the modification reduces the conversion price of the debt). This issue is effective for future modifications of debt instruments beginning in the first interim or annual reporting period beginning after December 15, 2005. The Company does not believe that the adoption of this pronouncement will have a significant effect on its financial statements.
In September 2005, the FASB also ratified EITF IssueNo. 05-8, “Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,” which discusses whether the issuance of convertible debt with a beneficial conversion feature results in a basis difference arising from the intrinsic value of the beneficial conversion feature on the commitment date (which is treated and recorded in stockholder’s equity for book purposes, but as a liability for income tax purposes) and, if so, whether that basis difference is a temporary difference under FASB Statement No. 109, “Accounting for Income Taxes.” This Issue should be applied by retrospective application pursuant to Statement 154 to all instruments with a beneficial conversion feature accounted for underIssue 00-27 included in financial statements for reporting periods beginning after December 15, 2005. The Company does not believe that the adoption of this pronouncement will have a significant effect on its financial statements.
In February 2006, the FASB issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 addresses the following: a) permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133; c) establishes a requirement to evaluate interests in securitized
F-22
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and e) amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the requirements of SFAS 155, but does not expect that the adoption of this pronouncement will have a material effect on its financial statements.
In March 2006, the FASB issued SFAS 156 “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 156”). SFAS 156 is effective for the first fiscal year beginning after September 15, 2006. SFAS 156 changes the way entities account for servicing assets and obligations associated with financial assets acquired or disposed of. The Company has not yet completed its evaluation of the impact of adopting SFAS 156 on its results of operations or financial position, but does not expect that the adoption of SFAS 156 will have a material impact.
The FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” on July 13, 2006. The new rules will be effective for the Company in fiscal 2008. At this time, the Company has not completed its review and assessment of the impact of the adoption of FIN 48.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
In September 2006, the FASB issued SFAS No. 157, “Accounting for Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, and establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. SFAS 157 is effective for financial statements issued subsequent to November 15, 2007. We do not expect the new standard to have any material impact on our financial position, results of operations or cash flows.
NOTE 4 — Accounts Receivable
Accounts receivable consisted of the following (in thousands):
| | | | | | | | | | | | |
| | March 31, | | | September 30,
| |
| | 2005 | | | 2006 | | | 2006 | |
| | | | | | | | (unaudited) | |
|
Accounts receivable | | $ | 227 | | | $ | 1,166 | | | $ | 1,872 | |
Less: allowance for doubtful accounts | | | — | | | | (90 | ) | | | (171 | ) |
| | | | | | | | | | | | |
| | $ | 227 | | | $ | 1,076 | | | $ | 1,701 | |
| | | | | | | | | | | | |
F-23
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
NOTE 5 — Inventories
Inventories consisted of the following (in thousands):
| | | | | | | | | | | | |
| | March 31, | | | September 30,
| |
| | 2005 | | | 2006 | | | 2006 | |
| | | | | | | | (unaudited) | |
|
Raw materials | | $ | 272 | | | $ | 267 | | | $ | 351 | |
Finished goods | | | 817 | | | | 1,046 | | | | 48 | |
| | | | | | | | | | | | |
| | | 1,089 | | | | 1,313 | | | | 399 | |
Less: inventory allowances | | | (221 | ) | | | (996 | ) | | | (44 | ) |
| | | | | | | | | | | | |
| | $ | 868 | | | $ | 317 | | | $ | 355 | |
| | | | | | | | | | | | |
NOTE 6 — Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
| | | | | | | | | | | | |
| | March 31, | | | September 30,
| |
| | 2005 | | | 2006 | | | 2006 | |
| | | | | | | | (unaudited) | |
|
Prepaid expenses | | $ | 355 | | | $ | 304 | | | $ | 333 | |
Value added tax receivable | | | — | | | | 722 | | | | 588 | |
Other current assets | | | 144 | | | | 360 | | | | 187 | |
| | | | | | | | | | | | |
| | $ | 499 | | | $ | 1,386 | | | $ | 1,108 | |
| | | | | | | | | | | | |
NOTE 7 — Property and Equipment
Property and equipment consisted of the following (in thousands):
| | | | | | | | | | | | |
| | March 31, | | | September 30,
| |
| | 2005 | | | 2006 | | | 2006 | |
| | | | | | | | (unaudited) | |
|
Manufacturing and other equipment | | $ | 1,834 | | | $ | 1,866 | | | $ | 2,187 | |
Office equipment | | | 447 | | | | 653 | | | | 688 | |
Furniture and fixtures | | | 200 | | | | 209 | | | | 213 | |
Leasehold improvements | | | 219 | | | | 498 | | | | 482 | |
Capital projects in progress | | | 51 | | | | — | | | | 251 | |
| | | | | | | | | | | | |
| | | 2,751 | | | | 3,226 | | | | 3,821 | |
Less accumulated depreciation and amortization | | | (792 | ) | | | (1,286 | ) | | | (1,597 | ) |
| | | | | | | | | | | | |
| | $ | 1,959 | | | $ | 1,940 | | | $ | 2,224 | |
| | | | | | | | | | | | |
Fixed assets include $217,000 and $186,000 of equipment purchases that were financed under capital lease obligations as of March 31, 2005 and 2006, respectively (Note 10). The Company made approximately
F-24
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
$40,000 and $37,000 of such purchases during the years ended March 31, 2004 and 2005, respectively. The accumulated amortization on these assets amounted to $80,000, $108,000 and $126,000 as of March 31, 2005 and 2006 and September 30, 2006, respectively.
Depreciation expense (including amortization of leased assets) amounted to $163,000, $434,000 and $651,000 for the years ended March 31, 2004, 2005 and 2006, respectively, and $307,000 and $328,000 for the six months ended September 30, 2005 and 2006, respectively.
NOTE 8 — Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | | |
| | March 31, | | | September 30,
| |
| | 2005 | | | 2006 | | | 2006 | |
| | | | | | | | (unaudited) | |
|
Accrued salaries | | $ | 220 | | | $ | 267 | | | $ | 371 | |
Accrued professional fees | | | 641 | | | | 673 | | | | 566 | |
Estimated liability for pending litigation | | | 335 | | | | 300 | | | | 300 | |
Investor deposits | | | 497 | | | | — | | | | — | |
Accrued stock option rescission | | | 250 | | | | — | | | | — | |
Accrued value added tax payable | | | 285 | | | | 220 | | | | 187 | |
Deferred revenue | | | — | | | | 156 | | | | 163 | |
Accrued other | | | 107 | | | | 70 | | | | 218 | |
| | | | | | | | | | | | |
| | $ | 2,335 | | | $ | 1,686 | | | $ | 1,805 | |
| | | | | | | | | | | | |
NOTE 9 — Long-Term Debt
From May 1, 1999 through January 7, 2003, the Company issued various notes for aggregate principal amounting to $385,000 with interest rates ranging from 8% to 10.3% per annum. The proceeds of these notes were used to fund the Company’s operations. The Company made the remaining principal payments on these notes which amounted to $84,000 and $185,000 during the years ending March 31, 2004 and 2005, respectively. Aggregate interest expense under these obligations amounted to $19,000 and $9,000 for the years ended March 31, 2004 and 2005, respectively.
On May 1, 1999, the Company issued a note payable in the amount of $64,000 with interest at 8% per annum and a final payment due on December 31, 2009. The remaining balance on this obligation, which amounts to $68,000 including accrued interest, is included in non-current portion of long-term debt in the accompanying balance sheet at March 31, 2006. Contractual interest expense under this note amounted to $7,000 for each of the years ended March 31, 2004 and 2005. In the six months ended September 30, 2006, the Company made principal payments on this note in the amount of $15,000.
On February 7, 2003, the Company issued a $40,000 convertible note to a director of the Company bearing interest at the rate of 10% per annum. The note was convertible, at the option of the holder, into such number shares of the Company’s common stock or Series A preferred stock determined by dividing the amount to be converted by the conversion price of $4.00 per share.
On February 26, 2003, the Company issued a $40,000 convertible note to a director of the Company bearing interest at the rate of 10% per annum with a maturity date of August 26, 2004. The note was
F-25
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
convertible, at the option of the holder, into such number shares of the Company’s common stock or Series A preferred stock determined by dividing the amount to be converted by the conversion price of $4.00 per share.
The proceeds of these notes were used to finance operating activities. The fair value of the underlying stock, measured at the commitment date of each of these financing transactions, was $8.00 per share. Accordingly, the Company recorded a $40,000 discount against the principal values of the each of these notes and a corresponding increase in stockholders’ equity for the intrinsic value of the beneficial conversion feature in accordance with EITF 98-5. The principal balance of the note originated on February 7, 2003 was repaid in October 2004. The principal balance of the note originated on February 26, 2003 was converted into 10,000 shares of convertible series A preferred stock in June 2005.
Aggregate contractual interest expense under the convertible notes amounted to $3,000, $8,000 and $4,000 for the years ended March 31, 2004, 2005 and 2006, respectively.
On April 30, 2003, the Company completed a $500,000 financing transaction through the issuance of a note bearing variable interest at the rate of 18% to 22% per annum and warrants to purchase up to 20,618 shares of the Company’s common stock (Note 12). In accordance with APB Opinion No. 14 “Accounting for Convertible Debt Issued with Stock Purchase Warrants,” the Company allocated $538,000 of the proceeds to the note and $117,000 of proceeds to the warrants. The difference between the carrying amount of the note and its contractual redemption amount was accreted as interest expense through July 31, 2005, its earliest date of redemption. Accretion of the aforementioned discount amounted to $36,500, $60,100 and $20,400 for the years ended March 31, 2004, 2005, and 2006, respectively and is included as a component of interest expense in the accompanying statements of operations. The proceeds from this note were used to fund operating activities. Contractual interest expense under this obligation amounted to $72,500, $99,700 and $30,100 for the years ended March 31, 2004, 2005 and 2006, respectively. Principal payments on this note amounted to $100,000 and $400,000 during the years ended March 31, 2005 and 2006, respectively, including the final payment made in July 2005.
From November 2003 to March 2006, the Company issued various notes for aggregate principal amounting to $443,000 with interest rates ranging from 6.65% to 8.2% per annum. The proceeds of these notes were used to fund certain operating activities. The Company made principal payments on these notes which amounted to $21,300, $91,500 and $191,200 during the years ending March 31, 2004, 2005 and 2006, respectively, and $85,000 for the six months ended September 30, 2006. Interest expense under these note obligations amounted to $900, $2,000 and $4,800 for the years ended March 31, 2004, 2005 and 2006, respectively, and $5,000 for the six months ended September 30, 2006. The aggregate remaining principal balance of these notes, which amounts to $139,000, is included in the current portion of long-term debt in the accompanying balance sheet at March 31, 2006.
In March 2004, the Company entered into an equipment financing facility providing it with up to $1,000,000 of available credit to finance equipment purchases through March 31, 2005. During the year ended March 31, 2005, the Company drew an aggregate of $994,000 of advances under this facility, which are payable in 33 monthly installments with interest at the rate of 13.5% per annum and mature at various times through May 1, 2007. The Company also paid approximately $82,000 of fees to the lender under this arrangement including $5,000 in cash and $77,000 representing the fair value of warrants to purchase up to 16,666 shares of the Company’s Series A preferred stock (Note 12). The company recorded the fair value of warrants and other fees as interest expense during the year ended March 31, 2005, the one year period in which the Company was permitted to draw advances under this facility. All borrowings under this arrangement are collateralized by the equipment financed under this facility. The Company made principal payments on these notes which amounted to $288,000 and $337,000 during the years ending March 31, 2005 and 2006 respectively, and $187,000 for the six months ended September 30, 2006. Interest expense under this obligation
F-26
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
amounted to $83,000 and $73,000 for the years ended March 31, 2005 and 2006, respectively, and $19,000 for the six months ended September 30, 2006. The remaining principal balance on this long-term debt amounted to $350,000 at March 31, 2006, including $332,000 included in the current portion of notes payable obligations in the accompanying balance sheet.
From January 2004 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% percent per annum. The proceeds of these notes were used to purchase automobiles and software. The Company made principal payments on these notes of $1,000, and $24,000 during the years ending March 31, 2005 and 2006, respectively, and $17,000 for the six months ended September 30, 2006. Aggregate interest expense under these obligations amounted to $1,000 and $8,900 for the years ended March 31, 2005 and 2006, respectively, and $6,000 for the six months ended September 30, 2006. These notes are payable in aggregate monthly installments of $3,000 through March 14, 2011. The remaining balance of these notes amounted to $156,000 at March 31, 2006, including $33,000 in the current portion of long-term debt in the accompanying balance sheet.
In June 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. During the three months ended June 30, 2006, the Company drew an aggregate of $4,182,000 of borrowings under this facility. These borrowings are payable in 30 to 33 fixed monthly installments with interest at rates ranging from 12.4% to 12.7% per annum, maturing at various times through April 9, 2009. The Company has no unused availability under this credit facility since amounts drawn under the working capital facility were based upon an initial measurement of eligible accounts receivable.
The Company also issued to the lender warrants to purchase up to 71,534 shares of its Series B preferred stock upon originating the loan. In addition, the Company will issue warrants to purchase up to 3,466 additional shares of its Series B preferred stock in connection with its utilization of the line of credit. The aggregate fair value of all warrants issued to the lender under this arrangement amounts to $1,047,000 (Note 12). This amount was recorded as debt issue costs in the September 30, 2006 balance sheet and is being amortized as interest expense over the term of the credit facility.
Borrowings under the growth capital line are collateralized by the total assets of the Company. Borrowings under the equipment line are collateralized by the underlying assets funded, and borrowings under the working capital line are collateralized by eligible accounts receivable. On a monthly basis, the Company must maintain a 1:1 ratio of borrowing under the working capital line to eligible accounts receivable. The Company has 30 days from each measurement date to either increase eligible accounts receivable or pay the excess principal in the event that the ratio is less than 1:1. No restrictive covenants exist for either the equipment line or the growth capital line. The Company made $167,000 of principal payments and paid $101,000 of interest on these notes during the six months ended September 30, 2006. The Company is not required to direct customer remittances to a lock box, nor does the credit agreement provide for subjective acceleration of the loans. The aggregate remaining principal balance under this facility amounted to $4,013,000, including $1,410,000 in the current portion of long term debt in the accompanying balance sheet at September 30, 2006.
In June 2006, the Company entered into a note agreement for $69,000 with interest rate of 7.94% percent per annum. The proceeds of this note were used to purchase an automobile. This note is payable in monthly installments of $1,200 through May 2012. The Company made principal payments of $2,900 and interest payments of $2,000 in the six months ended September 30, 2006. The remaining balance of this note amounted to $66,000 at September 30, 2006, including $9,300 in the current portion of long-term debt in the accompanying balance sheet.
F-27
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
From July 2006 to September 2006, the Company entered into note agreements for $129,000 with interest rates ranging from 9.6% to 9.7% percent per annum. The proceeds of these notes were used to finance insurance premiums. These notes are payable in monthly installments of $11,400 through June 2007. The Company made principal payments of $40,700 and interest payments of $770 in the six months ended September 30, 2006. The remaining balance of these notes amounted to $88,300 at September 30, 2006, and is included in the current portion of long-term debt in the accompanying balance sheet.
A summary of principal payments due in years subsequent to March 31, 2006 is as follows (in thousands):
| | | | |
For years ending March 31, | | | |
|
2007 | | $ | 504 | |
2008 | | | 54 | |
2009 | | | 39 | |
2010 | | | 106 | |
2011 | | | 11 | |
| | | | |
Total principal payments | | | 714 | |
Less: current portion | | | (504 | ) |
| | | | |
Long-term portion | | $ | 210 | |
| | | | |
NOTE 10 — Capital Lease Obligations
From September 1, 2001, through July 1, 2002, the Company entered into various capital leases under which the aggregate present value of the minimum lease payments amounted to $123,000. In accordance with SFAS 13, “Accounting for Leases” (“SFAS 13”), the present value of the minimum lease payments was calculated using discount rates ranging from 10% to 17%. Lease payments, including amounts representing interest, amounted to $38,000, $36,000 and $15,000, for the years ended March 31, 2004, 2005 and 2006, respectively. These capital leases were paid in full by March 2006.
From September 1, 2003, through October 1, 2003, the Company entered into various capital leases under which the aggregate present value of the minimum lease payments amounted to $40,000. The present value of the minimum lease payments was calculated using discount rates of ranging from 13% to 18%. Lease payments, including amounts representing interest, amounted to $3,000, $11,000 and $11,000 for the years ended March 31, 2004, 2005 and 2006, respectively, and $6,000 for the six months ended September 30, 2006. The remaining principal balance on these obligations amounted to $27,000 at March 31, 2006, including $7,700 included in the current portion of capital lease obligations in the accompanying balance sheet.
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 $3,900 and $8,500 for the years ended March 31, 2005 and 2006, respectively, and $4,600 for the six months ended September 30, 2006. The remaining principal balance on these obligations amounted to $29,000 at March 31, 2006, including $7,000 included in the current portion of capital lease obligations in the accompanying balance sheet.
The Company recorded interest expense in connection with these lease agreements in the amounts of $9,600, $11,000 and $8,900 for the years ended March 31, 2004, 2005 and 2006, respectively, and $3,500 for the six months ended September 30, 2006.
F-28
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Minimum lease payments due in years subsequent to March 31, 2006 are as follows (in thousands):
| | | | |
For years ending March 31, | | | |
|
2007 | | $ | 21 | |
2008 | | | 21 | |
2009 | | | 21 | |
2010 | | | 6 | |
| | | | |
Total minimum lease payments | | | 69 | |
Less: amounts representing interest | | | (13 | ) |
| | | | |
Present value of minimum lease payments | | | 56 | |
Less: current portion | | | (15 | ) |
| | | | |
Long-term portion | | $ | 41 | |
| | | | |
NOTE 11 — Commitments, Contingencies and Other Matters
Lease Commitments
The Company has entered into various non-cancelable operating leases, primarily for office facility space, that expire at various time through April 2011. Minimum lease payments for non-cancelable operating leases are as follows (in thousands):
| | | | |
For years ending March 31, | | | |
|
2007 | | $ | 341 | |
2008 | | | 177 | |
2009 | | | 163 | |
2010 | | | 92 | |
2011 | | | 105 | |
| | | | |
Total minimum lease payments | | $ | 878 | |
| | | | |
Rent expense amounted to $273,000, $510,000 and $535,000 for the years ended March 31, 2004, 2005 and 2006, respectively. Rent expense amounted to $351,000 and $268,000 for the six months ended September 30, 2005 and 2006, respectively.
In September 2006, the Company extended its operating lease on its Petaluma facility. This lease was extended through September 2007.
Employment Agreements
During years ended March 31, 2005 and 2006, the Company entered into employment agreements with five of its key executives. The agreements provide, among other things, for the payment of aggregate annual salaries of approximately $880,000 and up to twenty four months of severance compensation for terminations under certain circumstances. Aggregate potential severance compensation amounted to $1,284,000 at March 31, 2006.
F-29
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
In October 2005, the Board of Directors also authorized the Company to grant 60,000 stock options at an exercise price of $3.00 per share to its Chief Financial Officer upon the successful completion of its proposed IPO (if completed). These options, if awarded, would be fully vested and non-forfeitable at the date of grant.
Legal Matters
The Company was named as a defendant in an employment related matter under a complaint filed by one of its former employees in the Superior Court of the State of California in the County of Sonoma in April 2005. The Company entered into a settlement agreement with the plaintiff in November 2006, which provides for the payment of $250,000 and the issuance of a warrant to purchase 50,000 shares of our common stock exercisable at $3.00 per share. The warrants which will be nonforfeitable at the date of issuance will be recorded at fair value which is estimated to be $550,000. The expense will be recorded as general and administrative expense. The issuance of the warrant is subject to our obtaining appropriate waivers from our preferred stockholders and the cash payment is subject to the closing of an equity financing resulting in gross proceeds to the Company of $10 million or more, or the completion of our initial public offering of securities. Under the terms of the agreement, the plaintiff has agreed to dismiss his claim and has waived any other previous claims against us. Although the Company believes that the employee’s claim is without merit and intends to defend its position with respect to this matter, a $300,000 reserve was established based on the Company’s estimate of potential loss. Although the Company believes that its estimate is reasonable with respect to this matter, there can be no assurance that the Company will successfully defend itself against this litigation. The reserve is a component of accrued expenses and other current liabilities in the accompanying balance sheets.
In November 2005, the Company identified a possible criminal misappropriation of its technology in Mexico, and it notified the Mexican Attorney General’s office. The Company believes the Mexican Attorney General is currently conducting an investigation.
On March 14, 2006, the Company filed suit in the U.S. District Court for the Northern District of California against Nofil Corporation and Naoshi Kono, Chief Executive Officer of Nofil, for breach of contract, misappropriation of trade secrets and trademark infringement. The Company believes that Nofil Corporation violated key terms of both an exclusive purchase agreement and non-disclosure agreement by contacting and working with a potential competitor in Mexico. In the complaint, the Company seeks damages of $3,500,000 and immediate injunctive relief. No trial date has been set.
The Company is currently a party in two trademark matters asserting confusion in trademarks with respect to the Company’s use of the name Microcyn60 in Mexico. Although the Company believes that the nature and intended use of its products are different from those with the similar names, it has agreed with one of the parties to stop using the name Microcyn60 by September 2007. Although such plaintiff referred the matter to the Mexico Trademark Office, the Company is not aware of a claim for monetary damages. Company management believes that the name change will satisfy an assertion of confusion; however, Company management believes that the Company could incur a possible loss of approximately $100,000 for the use of the name Microcyn60 during the twelve month period following the date of settlement.
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.
F-30
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
While the Company 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.
In August 2006, the Company received a “show cause” letter from the U.S. Environmental Protection Agency (“EPA”), which stated that, in tests conducted by the EPA, Cidalcyn was found to be ineffective in killing certain specified pathogens when used according to label directions. Based on its results, the EPA strongly recommended that the Company immediately recalled all Cidalcyn distributed on and after September 28, 2005. Accordingly, the Company has commenced a voluntary recall of Cidalcyn. Although the Company has not marketed Cidalcyn on a large commercial scale, it has provided it in small quantities to numerous hospitals solely for use in product evaluation exercises. In a second letter, the EPA stated it intended to file a civil administrative complaint against the Company for violation of the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”). Under FIFRA, the EPA could assess civil penalties related to the sale and distribution of a pesticide product not meeting the label’s claims as a broad-spectrum hospital disinfectant. The Company believes that such civil penalties could be up to $200,000. The Company currently cannot estimate the actual amount of penalties which may be incurred. The Company does not believe this issue will have a material impact on future operations. The amount of expense to be incurred with regard to the recall of the product is currently not estimable, however, the Company believes any potential expense would be insignificant because the product was not commercialized and the number of samples distributed was minimal. For these reasons, the Company has not established an accrual for the product recall.
In September 2006, a consulting firm in Mexico City contacted the Company threatening legal action in Mexico, alleging breach of contract and claiming damages of $225,000. A formal compliant has not been served and no trial date has been set. In December 2006, the Company entered into a settlement agreement with the consulting firm where the Company paid $115,000 for the dismissal of their claim and waiver of any previous claims against the Company.
The Company, from time to time, is involved in legal matters arising in the ordinary course of its business. While management believes that such matters are currently insignificant, 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.
Consulting Agreements
On October 1, 2005 the Company entered into a consulting agreement with White Moon Medical. Akihisa Akao, a member of the Board of Directors, is the sole stockholder of White Moon Medical. Under the terms of the agreement, the individual will be compensated for services provided outside his normal Board duties. Total compensation to be paid amounts to $146,000, payable in monthly installments over the one year term of the agreement. In accordance with the terms of this agreement, the Company made payments in the amount of $146,000 for the period of October 1, 2005 to September 30, 2006. The Company extended the agreement for an additional one-year term.
As described in Note 18, the Company entered into a consulting agreement with Mr. Robert Burlingame, one of the Company’s directors who also provided the company with a $4.0 million Bridge Loan which is described in Note 18.
Proposed Initial Public Offering
On September 1, 2005 the Board of Directors authorized the Company to file a registration statement with the SEC in connection with its proposed IPO. The Company incurred $478,000 of costs during the year ended March 31, 2006 and $731,000 of costs in the six months ended September 30, 2006 in connection with
F-31
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
its proposed IPO, which amounts are presented as deferred offering costs in the accompanying balance sheet at March 31, 2006 and September 30, 2006.
The Company expects to receive net proceeds of approximately $34.0 million from this offering, based on an assumed initial public offering price of $13.00 per share, after deducting the underwriting discount and estimated offering expenses. If the underwriters exercise their over-allotment option in full, our estimated net proceeds will be approximately $39.6 million.
The Company currently intends to use the proceeds of this offering as follows: approximately $12.6 million will be used to expand sales and marketing capabilities, including the expansion of a direct sales force in the U.S. and Europe, approximately $13.0 million will be used to fund clinical trials and related research, approximately $1.5 million to repay the principal and interest on the $4.0 million Bridge Loan (that will be repaid in its entirety as described in Note 18) and the remaining proceeds are to be used for general corporate purposes, including working capital.
The Company cannot provide any assurance that it will complete its proposed IPO. The Company expects to incur substantial additional costs in connection with its efforts to complete this offering. If the Company completes its IPO, these costs will be recorded as a reduction of the proceeds received. If the Company does not successfully complete its IPO, the costs will be recorded as a charge to operations.
NOTE 12 — Stockholders’ Equity
Authorized Capital
The Company is authorized to issue up to 100,000,000 shares of common stock and 30,000,000 shares of preferred stock of which 1,375,000 shares have been designated as Series A preferred stock, 2,805,555 shares have been designated as Series B preferred stock and 875,000 shares have been designated Series C preferred stock. As described in Note 18, the Company reincorporated in Delaware on December 15, 2006 and now has Common stock, Series A Preferred, Series B Preferred and Series C Preferred 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, subject to the prior right of the preferred Series A stockholders to cumulative dividends that accrue beginning January 1, 2006.
Convertible Preferred Stock
During the year ended March 31, 2004, the Company issued in a private placement transaction, 1,337,709 shares of its Series A convertible preferred stock for net proceeds of $6,628,000 (gross proceeds of $8,027,000 less offering costs of $1,399,000).
The Company also issued in a private placement transaction, an aggregate of 2,635,744 shares of its Series B for net proceeds of $43,722,000 (gross proceeds of $47,446,000 less offering costs of $3,724,000) including 1,014,093 shares issued during the year ended March 31, 2005 for net proceeds of $16,696,000 and 1,621,651 shares issued during the year ended March 31, 2006 for net proceeds of $27,026,000.
In addition to the above, during the six months ended September 30, 2006, the Company issued in a private placement transaction, an aggregate of 84,539 shares of its Series C stock for net proceeds of $1,370,000 (gross proceeds of $1,521,700 less offering costs of $152,170).
F-32
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
The Series A is convertible into common stock at any time, at the option of the holder at a conversion price of $6.00 per share. The Series B and Series C is convertible into common stock at any time, at the option of the holder, at a conversion price of $18.00 per share.
The conversion prices of the Series A, Series B and Series C is subject to adjustment for stock splits, stock dividends, recapitalizations, dilutive issuances and other anti-dilution provisions, including circumstances in which the Company, at its discretion, issues equity securities or convertible instruments that feature prices lower than the conversion prices specified in the Series A, B and C preferred shares. The Series A, Series B and Series C are also automatically convertible into shares of the Company’s common stock, at the then applicable conversion price, (i) in the event that the holders of two-thirds of the outstanding shares of Series A, Series B and Series C consent to such conversion; or (ii) upon the closing of a firm commitment underwritten public offering of shares of common stock of the Company yielding aggregate proceeds of not less than $20 million (before deduction of underwriters commissions and expenses); or (iii) Company’s going public by means of a merger or acquisition which has a resultant market capitalization of greater than $75 million.
The Company has reserved 5,055,555 shares of its common stock for issuance upon the conversion of its convertible preferred stock.
Each share of Series A, Series B and Series C preferred has voting rights equal to an equivalent number of common shares into which it is convertible and votes together as one class with common stock. The holders of the Series A are entitled to receive cumulative dividends in preference to any dividend on the common stock at the rate of 6% per annum on the initial investment amount commencing January 1, 2006. Dividends accrued but unpaid with respect to this feature amounted to $121,000 for both the year ended March 31, 2006 and $242,000 for the six months ended September 30, 2006, and is presented as an increase in net loss available to the common stockholders for the year ended March 31, 2006 and six months ended September 30, 2006. The Company has the option of paying the dividend in either common stock or cash. The holders of Series B are entitled to receive non-cumulative dividends when and if declared by the Board. The holders of Series C are entitled to non-cumulative dividends when and if declared by the Board and only after the Series A have been paid all accrued but unpaid dividends and any dividends declared by the Board and payable to the Series B have been paid. The holders of Series A, Series B and Series C are also entitled to participate pro rata in any dividends paid on the common stock, if declared by the board of directors on an as converted basis.
In the event of any liquidation or winding up of the Company, the holders of the Series A shall be entitled to participate in the ratable distribution of the assets of the Company until the holders of the Series A have received a per share amount equal to $12.00 plus any declared but unpaid dividends. The holders of Series B are entitled to participate in the ratable distribution of the assets of the Company after the holders of Series A have received a per share amount equal to $12.00 and holders of Series B have received a per share amount equal to $22.50, plus any declared but unpaid dividends. The holders of Series C are entitled to participate in the ratable distribution of the assets of the Company after the holders of Series A have received a per share amount equal to $12.00, Series B have received a per share amount equal to $22.50 and Series C have received a per share amount equal to $22.50, plus any declared but unpaid dividends. Thereafter, any remaining assets would be distributed ratably to the holders of common stock until the common stockholders have received a per share amount equal to $12.00. Any remaining assets of the Company thereafter would be distributed ratably to the Series A preferred stockholders, Series B preferred stockholders, Series C preferred stockholders and to the common stockholders, on an as converted basis.
Liquidation events include (i) a final dissolution or winding up of the Company’s affairs requiring a liquidation of all classes of stock, (ii) a merger, consolidation or similar event resulting in a more than 50% change in control, (iii) the sale of all or substantially all of the Company’s assets and (iv) the effectuation (at the Company’s election) of any transaction or series of transactions resulting in a more than 50% change in control.
F-33
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Under the terms of Series A, Series B and Series C investors rights agreements between the Company and its preferred stockholders, any time after six months following the Company’s IPO (if completed), the Series A, Series B and Series C investors may request that the Company file a registration statement covering the public sale of the underlying common stock under the Securities Act of 1933, as amended (the “1933 Act”) with limited rights to delay by the Company. The investors are also entitled to unlimited piggyback registration rights on all 1933 Act registrations of the Company (except for registrations relating to employee benefit plans onForm S-8 and corporate reorganizations onForm S-4). The foregoing demand and piggyback registration rights terminate on the earlier of (i) one year after the Company’s IPO or (ii) such time as Rule 144 or another similar exemption under the 1933 Act is available for sale of all of an Investor’s shares during a three-month period without registration. The Investors Rights Agreement also places certain restrictions on the preferred stockholders from selling their shares and provides them with certain rights of first refusal, co-sale and drag along and tag along rights for sales effectuated under certain circumstances.
As described in Note 3, the Company applies the classification and measurement principles enumerated in EITF Topic D-98 with respect to accounting for its issuances of the Series A, Series B and Series C preferred stock. The Company is required, under California law, to obtain the approval of its board of directors in order to effectuate a merger, consolidation or similar event resulting in a more than 50% change in control or a sale of all or substantially all of its assets. The board of directors is then required to submit proposals to enter into these types of transactions to its stockholders for their approval by majority vote. The Company’s preferred stockholders do not (i) have control of the Company’s Board of Directors and (ii) currently do not have sufficient voting rights to control a redemption of these shares by either of these events. In addition the effectuation of any transaction or series of transactions resulting in a more than 50% change in control of the Company can be made only by the Company at its own election. Based on these provisions, the Company classified its Series A, Series B and Series C preferred shares in stockholders’ equity in the accompanying balance sheet because the liquidation events are deemed to be within the Company’s control in accordance with the provisions of EITF Topic D-98.
Also as described in Note 3, the Company evaluated the conversion options embedded in the Series A, Series B and Series C securities to determine (in accordance with SFAS 133 andEITF 00-19) whether they should be bifurcated from their host instruments and accounted for as separate derivative financial instruments. The Company determined, in accordance with SFAS 133, that the risks and rewards of the common shares underlying the conversion feature are clearly and closely related to those of the host instrument. Accordingly the conversion features, which are not deemed to be beneficial at the commitment dates of these financing transactions, are being accounted for as embedded conversion options in accordance with EITF 98-5 andEITF 00-27.
The Company evaluates the Series A, Series B and Series C convertible preferred stock at each reporting date for appropriate balance sheet classification.
Stock Purchase Warrants Issued in Financing Transactions
During the year ended March 31, 2004, the Company issued a warrant to purchase 15,618 shares of common stock in connection with bridge financing at an exercise price of $8.00 per share, subject to adjustment in the event that the Company, at its discretion, issues equity securities or convertible instruments with exercise prices lower than the exercise price of these warrants. The warrants were valued using the Black-Scholes pricing model. Assumptions used were as follows: Fair value of the underlying stock $8.00; risk-free interest rate 3.03%; contractual life of 5 years; dividend yield of 0%; and volatility of 70%. The fair value of these warrants, which amounted to $88,478, was recorded as interest expense in the accompanying statement of operations for the year ended March 31, 2004.
F-34
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
During the year ended March 31, 2005, the Company issued a warrant to purchase 5,000 shares of common stock in connection with bridge financing at an exercise price of $6.00 per share subject to adjustment in the event that the Company, at its discretion, issues equity securities or convertible instruments with exercise prices lower than the exercise price of these warrants. The warrants were valued using the Black-Scholes pricing model. Assumptions used were as follows: Fair value of the underlying stock $1.41; risk-free interest rate 2.94%; contractual life of 4 years; dividend yield of 0%; and volatility of 70%. The fair value of the warrants amounted to $28,309 and was recorded as interest expense in the accompanying statement of operations for the year ended March 31, 2005.
During the year ended March 31, 2005, the Company issued a warrant to purchase 16,666 shares of Series A preferred stock at an exercise price of $6.00 per share in connection with an equipment leasing arrangement. The warrants were valued using the Black-Scholes pricing model. Assumptions used were as follows: Fair value of the underlying stock $5.76; risk-free interest rate 5.55% percent; contractual life of 10 years; dividend yield of 0%; and volatility of 70%. The fair value of the warrants, which amounted to $77,000, was recorded as interest expense in the accompanying statement of operations for the year ended March 31, 2005.
During the year ended March 31, 2005, the Company issued a warrant to purchase 433,774 shares of common stock at an exercise price of $3.00 per share to the placement agent that managed the Series A offering. The warrants were fully exercisable at the date of issuance with no future performance obligations by the placement agent and expire the second year following an IPO by the Company.
During the year ended March 31, 2006, the Company issued a warrant to purchase 329,471 shares of common stock at an exercise price of $18.00 per share to the placement agent that managed the Series B stock offering. The warrants were fully exercisable at the date of issuance with no future performance obligations by the placement agent and expire the second year following an IPO by the Company.
During the six month period ended September 30, 2006, the Company issued warrants to purchase 71,534 shares of Series B preferred stock at an exercise price of $18.00 per share in connection with the new financing facility described in Note 9. 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 11 years; dividend yield of 0%; and volatility of 70%. The fair value of the warrants, which amounted to $1,047,000, was recorded as deferred debt issue costs and is being amortized as interest expense over the term of the credit facility. Amortization of the these costs amounted to $125,000 and is included as a component of interest expense in the accompanying statement of operations for the six months ended September 30, 2006.
During the six months ended September 30, 2006, the Company issued a warrant to purchase 10,567 shares of common stock at an exercise price of $18.00 per share to the placement agent of the Series C stock offering. The warrants were fully exercisable at the date of issuance with no future performance obligations by the placement agent and expire five years from the date of issuance.
During the six months ended September 30, 2006, the Company issued warrants to purchase 16,907 shares of common stock at an exercise price of $18.00 per share to investors in conjunction with the purchase of 84,539 Series C stock units. The warrants require settlement in shares of the Company’s common stock. The Company accounts for the issuance of common stock purchase warrants issued in connection with sales of its Units in accordance with the provisions ofEITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. Based on the provisions ofEITF 00-19, the Company classified the warrants as equity. In addition, the Company determined the preferred stock was issued with no effective beneficial conversion feature and therefore it was not necessary to record a deemed dividend.
F-35
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Common Stock and Common Stock Purchase Warrants Issued to Non-Employees for Services
During the year ended March 31, 2004, the Company issued warrants to purchase 9,664 shares of common stock to various consultants at exercise prices ranging from $3.00 to $8.00 per share. The warrants were fully exercisable at date of issuance and expire on dates ranging from May 31, 2013 to February 14, 2014. The warrants were valued using the Black-Scholes pricing model. Assumptions used were as follows: Fair value of the underlying stock of $5.24 to $8.00; risk-free interest rate 3.69% to 4.35%; contractual life of 10 years; dividend yield of 0%; and a volatility of 70%. The fair value of the warrants amounted to $44,000 and was recorded as selling, general and administrative expense in the accompanying statement of operations for the year ended March 31, 2004.
During the year ended March 31, 2006, the Company issued 12,500 shares of common stock to a consultant in exchange for services provided. The fair value of the underlying stock was valued at $10.16 per share. The shares were fully earned when issued with no future performance obligation by the consultant. The aggregate fair value of the shares amounted to $127,000 and was recorded as a selling, general and administrative expense in the accompanying statement of operations for the year ended March 31, 2006.
During the year ended March 31, 2006, the Company issued warrants to purchase 73,843 shares of common stock to various consultants at an exercise price of $18.00 per share. Fair value of the underlying stock at the date of grant was $10.16 per share. The warrants become exercisable at various dates through November 11, 2009 and expire at various dates through August 31, 2015. The fair value of the warrants amounted to $153,000, $82,000 and $70,000 and was recorded as a selling, general and administrative expense in the accompanying statement of operations for the year ended March 31, 2006 and the six months ended September 30, 2005 and 2006, respectively. The non-vested portion of the warrants were adjusted to fair value at each reporting date using the following weighted average assumptions:
| | | | | | | | | | | | |
| | Year Ended
| | | Six Months Ended
| |
| | March 31, | | | September 30, | |
| | 2006 | | | 2005 | | | 2006 | |
| | | | | (unaudited) | |
|
Fair market value of common stock | | $ | 12.00 | | | $ | 10.16 | | | $ | 13.00 | |
Estimated life | | | 6.24 yrs | | | | 5.47 yrs | | | | 6.35 yrs | |
Risk-free interest rate | | | 4.85% | | | | 4.11% | | | | 4.64% | |
Dividend yield | | | 0.00% | | | | 0.00% | | | | 0.00% | |
Volatility | | | 70% | | | | 70% | | | | 70% | |
The Company accounted for its issuance of stock based compensation to non-employees for services using the measurements date guidelines enumerated in SFAS 123 and EITF 96-18. Accordingly, the value of any awards that were vested and non forfeitable at their date of issuance were measured based on the fair value of the equity instruments at the date of issuance. The non-vested portion of awards that are subject to the future performance of the counterparty are adjusted at each reporting date to their fair values based upon the then current market value of the company’s stock and other assumptions that management believes are reasonable.
During the six month period ended September 30, 2006, the Company issued 3,750 shares of common stock to a consultant in exchange for services provided. The fair value of the underlying stock was valued at $11.28 per share. The shares were fully vested and were non-forfeitable when issued with no future performance obligation by the consultant. The aggregate fair value of the shares, which amounted to $43,000, was recorded as a selling, general and administrative expense in the accompanying statement of operations for the six months ended September 30, 2006.
F-36
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Valuation of Common Stock
For the year ended March 31, 2004, all stock options that the Company granted to employees and non-employees under its 1999, 2000 and 2003 Stock Option Plans were recorded at their cash settlement value due to a compliance matter for which the statute of limitations has expired (Note 13). In July 2005, the Company engaged Valuation Research Corporation, an outside valuation specialist to determine the fair value of its common stock. The fair value of the Company’s common stock, based on this valuation study, was determined to be $10.16 per share. Accordingly, the fair value of the Company’s common stock underlying all equity transactions completed during the years ended March 31, 2004, 2005 and 2006 (other than options granted under the 1999, 2000 and 2003 stock option plans) was based on the results of the valuation study. The results were adjusted to the date of grant based on an analysis performed by management. The results were assessed for reasonableness by comparing such amounts to concurrent sales of other equity instruments to unrelated parties for cash and intervening events reflected in the price of the Company’s stock.
In June 2006, the Company engaged Valuation Research Corporation, an independent valuation specialist, to determine the fair value of its common stock. The fair value of the Company’s common stock, based on this valuation study, was determined to be $11.28 per share. The fair value of the Company’s common stock underlying common equity transactions completed during the six months ended September 30, 2006 was based on the valuation study, the mid point of the Company’s proposed IPO which was determined to be $13.00 and a negotiated exercise price of $18.00 per share for warrants issued to the placement agent for the Series C stock offering.
NOTE 13 — Stock Compensation Plans
1999, 2000 and 2003 Stock Plans
The 1999, 2000 and 2003 Stock Option Plans became effective May 1999, June 2000 and July 2003, respectively. The Plans provide for grants of both incentive stock options (ISO’s) and non-qualified stock options (NSO’s) to employees, consultants and directors. A total of 1,151,250, 348,750 and 1,000,000 common shares were reserved for issuance under the 1999, 2000 and 2003 Plans, respectively.
In accordance with the Plans, stated exercise price shall 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 ISO’s and NSO’s, 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 Plan have a ten-year term and generally became exercisable over a five-year period.
As of March 31, 2006, the Company’s compensation committee of the board of directors determined that it would not approve any further grants under its 1999, 2000, and 2003 Plans. At March 31, 2006 there were 1,436,317 options available for issue in the 1999, 2000, and 2003 Plans that will not be issued.
On June 29, 2006, the compensation committee of the Company’s board of directors adopted a resolution authorizing the Company to cancel these plans. Accordingly, 1,436,317 options previously available for issue are no longer available for future grants.
2004 Stock Plan
The 2004 Stock Option Plan (“the 2004 Plan”) became effective July 2004. The 2004 Plan provides for the issuance of both ISO’s and NSO’s. Nonqualified and incentive stock options may be granted to employees,
F-37
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
consultants and directors. A total of 1,500,000 common shares were reserved for issuance under the 2004 Plan at March 31, 2005. As of March 31, 2006, 550,411 shares are available for future grant under the Plan.
In accordance with the Plan, the stated exercise price shall not be less than 100% and 85% of the estimated fair market value of common stock on the date of grant for ISO’s and NSO’s, 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 shall not be less than 110% of the estimated fair market value per share on the date of grant.
Options issued under the Plan have a ten-year term and generally become exercisable over a five-year period.
Options Granted Outside of Plans
In May 2004, the Company granted an option to purchase 300,000 shares of the Company’s common stock with an exercise price of $0.16 per share to the Chief Executive Officer of the Company. The fair value of the underlying common stock at the date of grant was $5.96 per share. The options were fully exercisable on the date of grant. Stock compensation expense related to these options amounted to $1,740,000 and was recorded in selling, general and administrative expense in the year ended March 31, 2005.
Options Subject to Repurchase
In the period from May 1999 to December 2003, the Company granted an aggregate of 1,827,405 stock options to various employees and non-employees under its 1999, 2000, and 2003 Plans. Subsequent to making such grants, the Company determined that such grants may not have been exempt from registration or qualification rights under the provisions of applicable state securities laws. A failure to comply with applicable state securities laws may give rise to claims optionees against the Company for the repurchase of their unexercised options at an amount determined by a formula specified by state securities law regulators, plus legal interest, or rescission of the purchase of the shares of common stock issued upon exercise of the options at an amount equal to the exercise price of the options, plus interest from the date of exercise. The repurchase and rescission rights held by the Company’s security holders, if any, are subject to applicable statute of limitations prescribed by state law. In California, the statute of limitation is two years. During the period from May 2001 to December 2005 the statute of limitations would have lapsed for bringing claims against the Company related to options granted during the period from May 2001 to December 2005 subject to California law.
The Company accounted for the repurchase and rescission rights in accordance with APB 25 paragraph 25 and SFAS 123 paragraph 25, both of which are titled “Awards That Call for Settlement in Cash”. These standards require entities to record stock based compensation awards as liability instruments when the optionee has the ability to compel the entity to settle the award by transferring cash or other assets. In addition, other accounting literature (including literature relating to accounting for derivative financial instruments) requires liability classification when a net cash settlement is in the holder’s control. The Company believes that if the holders of these awards possess a free standing right to require cash settlement that liability classification of these awards is required under APB 25 and SFAS 123 (the standards applicable at the time of grant) and that such treatment is consistent with the principles of other literature relating to the classification of financial instruments. Accordingly, these awards were classified as liability instruments for their estimated cash settlement amounts. The Company reclassified the liability instruments to permanent equity at the time the statute of limitations lapsed and the holder could no longer control settlement of the award in cash.
In the year ended March 31, 2004, 2005, 2006, and the six months ended September 30, 2005, the Company included in the accompanying statements of operations stock compensation expense of $343,000,
F-38
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
$22,000, $6,000, and $6,000 respectively. In addition, included in accrued liabilities in the accompanying balance sheet at March 31, 2005 are liabilities relating to the repurchase offers, including statutory interest, of $250,169.
Stock-Based Compensation Before Adoption of SFAS No. 123(R)
Prior to April 1, 2006, the Company accounted for stock-based employee compensation arrangements in accordance with the provisions of APB No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations and applied the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.” The Company used the minimum value method to measure the fair value of awards issued prior to April 1, 2006 with respect to its application of the disclosure requirements under SFAS 123.
The following table illustrates the effect on net loss as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation arrangements (in thousands, except per share data):
| | | | | | | | | | | | |
| | Year Ended March 31, | |
| | 2004 | | | 2005 | | | 2006 | |
|
Net loss available to common stockholders, as reported | | $ | (7,298 | ) | | $ | (16,530 | ) | | $ | (23,220 | ) |
Add: Total stock-based employee compensation expenses included in Net loss | | | 30 | | | | 2,297 | | | | 279 | |
Deduct: Total stock-based employee compensation determined under the fair-value based method for all awards | | | (81 | ) | | | (2,448 | ) | | | (503 | ) |
| | | | | | | | | | | | |
Net loss available to common stockholders, pro forma | | $ | (7,349 | ) | | $ | (16,681 | ) | | $ | (23,444 | ) |
| | | | | | | | | | | | |
Net loss per common share, basic and diluted: | | | | | | | | | | | | |
As reported | | $ | (1.88 | ) | | $ | (4.22 | ) | | $ | (5.60 | ) |
Pro forma | | $ | (1.88 | ) | | $ | (4.26 | ) | | $ | (5.65 | ) |
In accordance with the provisions of SFAS No. 123, the fair value of each employee option granted in reporting periods prior to the adoption of SFAS 123(R) was estimated on the date of grant using the minimum value method with the following weighted-average assumptions:
| | | | | | | | | | | | | | | | |
| | | | | | | | Three Months
|
| | Year Ended March 31, | | Ended Sept 30,
|
| | 2004 | | 2005 | | 2006 | | 2005 |
|
Estimated life | | | 6 yrs | | | | 6 yrs | | | | 6 yrs | | | | 6 yrs | |
Risk-free interest rate | | | 3.18% | | | | 3.95% | | | | 4.27% | | | | 3.76% | |
Dividend yield | | | 0.00% | | | | 0.00% | | | | 0.00% | | | | 0.00% | |
The weighted-average estimated minimum values of options granted were $0.96, $5.00 and $3.12 for the years ended March 31, 2004, 2005 and 2006, respectively, and $7.12 for the six months ended September 30, 2005.
F-39
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
A summary of activity under option Plans as of March 31, 2006 is presented below
| | | | | | | | | | | | |
| | | | Options Outstanding |
| | Options Available
| | Number
| | Weighted Average
|
| | for Grant | | of Options | | Exercise Price |
|
Balance at March 31, 2003 | | | 451,100 | | | | 1,027,000 | | | $ | 0.45 | |
Options authorized | | | 1,000,000 | | | | — | | | | | |
Options granted | | | (544,405 | ) | | | 544,405 | | | | 3.00 | |
Options exercised | | | — | | | | (30,500 | ) | | | 0.18 | |
Options canceled | | | 6,500 | | | | (6,500 | ) | | | 2.69 | |
| | | | | | | | | | | | |
Balance at March 31, 2004 | | | 913,195 | | | | 1,534,405 | | | | 1.35 | |
Options authorized | | | 1,500,000 | | | | — | | | | — | |
Options granted | | | (313,089 | ) | | | 313,089 | | | | 3.00 | |
Options exercised | | | — | | | | | | | | 3.00 | |
Options canceled | | | 507,575 | | | | (507,575 | ) | | | 1.30 | |
| | | | | | | | | | | | |
Balance at March 31, 2005 | | | 2,607,681 | | | | 1,339,919 | | | | 1.75 | |
Options authorized | | | — | | | | — | | | | — | |
Options granted | | | (786,998 | ) | | | 786,998 | | | | 9.20 | |
Options exercised | | | — | | | | (291,828 | ) | | | 1.02 | |
Options canceled | | | 166,050 | | | | (166,050 | ) | | | 6.17 | |
| | | | | | | | | | | | |
Balance at March 31, 2006 | | | 1,986,733 | | | | 1,669,039 | | | $ | 4.96 | |
| | | | | | | | | | | | |
The options outstanding and currently exercisable under Plans by exercise price at March 31, 2006 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding and Exercisable | | | | |
| | | | Weighted
| | | | Options Vested |
| | | | Average
| | Weighted
| | | | Weighted
|
| | | | Remaining
| | Average
| | | | Average
|
| | Number
| | Contractual
| | Exercise
| | Number
| | Exercise
|
Exercise Price | | Outstanding | | Life (years) | | Price | | Exercisable | | Price |
|
$0.11-$0.85 | | | 396,000 | | | | 3.41 | | | $ | 0.37 | | | | 396,000 | | | $ | 0.37 | |
$1.10-$2.50 | | | 56,000 | | | | 4.53 | | | $ | 2.10 | | | | 56,000 | | | $ | 2.10 | |
$3.00-$3.00 | | | 547,791 | | | | 7.77 | | | $ | 3.00 | | | | 249,073 | | | $ | 3.00 | |
$4.40-$4.40 | | | 90,000 | | | | 9.05 | | | $ | 4.40 | | | | 10,000 | | | $ | 4.40 | |
$10.16-$12.00 | | | 579,248 | | | | 9.57 | | | $ | 10.30 | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | 1,669,039 | | | | 7.32 | | | $ | 4.96 | | | | 711,073 | | | $ | 1.49 | |
| | | | | | | | | | | | | | | | | | | | |
Stock-Based Compensation After Adoption of SFAS 123(R) (Unaudited)
Effective April 1, 2006, the Company adopted SFAS No. 123(R),Share-Based Payment, using the prospective transition method, which requires the measurement and recognition of compensation expense for all share-based payment awards granted, modified and settled to the Company’s employees and directors after April 1, 2006. The Company’s financial statements as of and for the six months ended September 30, 2006 reflect the impact of SFAS No. 123(R). In accordance with the prospective transition method, the Company’s
F-40
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).
The effect of the change of recording stock-based compensation expense from the original provisions of APB No. 25 to the provisions of SFAS No. 123(R)for the six months ended September September��30, 2006 is as follows (unaudited):
| | | | |
| | Impact from
| |
| | SFAS No. 123(R)
| |
| | Provisions for Six
| |
| | Months Ended
| |
| | September 30,
| |
| | 2006 | |
|
Cost of revenues service | | $ | 1,000 | |
Selling, general and administrative | | | 41,000 | |
| | | | |
Total stock based compensation | | $ | 42,000 | |
| | | | |
Effect on basic and diluted net loss per common share | | $ | (0.01 | ) |
No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options. The implementation of SFAS No. 123(R) did not have an impact on cash flows from financing activities during the six months ended September 30, 2006.
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 period of the awards. The fair value of employee stock options was estimated using the following weighted-average assumptions for the six months ended September 30, 2006 (unaudited):
| | | | |
| | Six Months
|
| | Ended |
|
Estimated life | | | 6 yrs. | |
Risk-free interest rate | | | 4.76% | |
Dividend yield | | | 0.00% | |
Volatility | | | 70% | |
The expected term of stock options represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by SAB 107 for “plain vanilla” options. The Company used this approach as it did not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. The expected stock price volatility for the Company’s stock options for the six months ended September 30, 2006 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 the Company did not have any trading history for the Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term assumption as more historical data for the Company’s common stock becomes available. The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.
In addition, SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated
F-41
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
based on historical experience. Prior to the adoption of SFAS No. 123(R), the Company accounted for forfeitures as they occurred.
A summary of all option activity, including options issued outside of plans, as of September 30, 2006 (unaudited), and changes during the six month period ended September 30, 2006 is presented below (unaudited):
| | | | | | | | | | | | | | | | |
| | Shares
| | Weighted-Average
| | Weighted-Average
| | Aggregate Intrinsic
|
Options | | (000) | | Exercise Price | | Contractual Term | | Value ($000) |
|
Outstanding at April 1, 2006 | | | 1,969 | | | $ | 4.22 | | | | | | | | | |
Granted | | | 170 | | | | 12.00 | | | | | | | | | |
Forfeited or expired | | | (14 | ) | | | 10.16 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at September 30, 2006 | | | 2,125 | | | | 4.81 | | | | 7.16 | | | $ | 17,402 | |
| | | | | | | | | | | | | | | | |
Exercisable at September 30, 2006 | | | 1,103 | | | $ | 1.28 | | | | 5.66 | | | $ | 12,939 | |
| | | | | | | | | | | | | | | | |
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 ($13.00) for stock options that arein-the-money as of September 30, 2006.
At September 30, 2006, there was $598,000 of unrecognized compensation cost related to options that the Company accounted for under APB 25 through March 31, 2006. These costs are expected to be recognized over a weighted average amortization period of 1.82 years.
During the six months ended September 30, 2006, the Company granted 170,124 stock options to employees with a weighted-average grant date fair value of $7.92 per share. At September 30, 2006, there was unrecognized compensation costs of $1,299,000 related to these stock options. The cost is expected to be recognized over a weighted-average amortization period of 4.82 years.
The weighted-average estimated minimum values of options granted were $0.96, $5.00 and $3.12 for the years ended March 31, 2004, 2005 and 2006, respectively and $7.12 for the six months ended September 30, 2005.
In the six months ended September 30, 2006, the Company did not modify any stock options granted to employees or non-employees under share based arrangements or capitalize the cost associated with stock based compensation.
The Company issues new shares of common stock upon exercise of stock options.
F-42
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Non-Employee Options
The Company believes that the fair value of the stock options issued to non-employees is more reliably measurable than the fair value of the services received. The fair value of the stock options granted was calculated using the Black-Scholes option-pricing model as prescribed by SFAS No. 123 using the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | | | | |
| | | | Six Months
|
| | | | Ended
|
| | Year Ended March 31, | | September 30, |
| | 2004 | | 2005 | | 2006 | | 2005 | | 2006 |
| | | | | | | | (unaudited) |
|
Estimated life | | | 8.25 yrs | | | | 9.06 yrs | | | | 8.67 yrs | | | | 8.73 yrs | | | | 8.52 yrs | |
Risk-free interest rate | | | 3.88% | | | | 4.50% | | | | 4.27% | | | | 4.00% | | | | 4.67% | |
Dividend yield | | | 0.00% | | | | 0.00% | | | | 0.00% | | | | 0.00% | | | | 0.00% | |
Volatility | | | 70% | | | | 70% | | | | 70% | | | | 70% | | | | 70% | |
The stock-based compensation expense will fluctuate as the fair market value of the common stock fluctuates. In connection with stock options granted to non-employees, the Company recorded $7,000, $30,000, $32,000 of stock-based compensation expense in the years ended March 31, 2004, 2005 and 2006, respectively, and $22,000 and $10,000 for the six months ended September 30, 2005 and 2006, respectively.
NOTE 14 — Taxes
The Company has the following net deferred tax assets (in thousands):
| | | | | | | | |
| | March 31, | |
| | 2005 | | | 2006 | |
|
Deferred tax assets: | | | | | | | | |
Net operating loss carryforwards | | $ | 8,870 | | | $ | 17,290 | |
Tax credits carryforwards | | | 123 | | | | 212 | |
Stock-based compensation | | | 964 | | | | 1,070 | |
Reserves and accruals | | | 327 | | | | 186 | |
| | | | | | | | |
Total deferred tax assets | | | 10,284 | | | | 18,758 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Basis difference in assets | | | (100 | ) | | | (78 | ) |
State taxes | | | (508 | ) | | | (897 | ) |
| | | | | | | | |
Total deferred tax liabilities | | | (608 | ) | | | (975 | ) |
| | | | | | | | |
Net deferred tax asset | | | 9,676 | | | | 17,783 | |
Valuation allowance | | | (9,676 | ) | | | (17,783 | ) |
| | | | | | | | |
Net deferred tax asset | | $ | — | | | $ | — | |
| | | | | | | | |
F-43
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
The Company’s recorded income tax benefit, net of the change in the valuation allowance, for each of the periods presented is as follows (in thousands):
| | | | | | | | | | | | |
| | Year Ended March 31, | |
| | 2004 | | | 2005 | | | 2006 | |
|
Income tax benefit | | $ | 2,479 | | | $ | 6,019 | | | $ | 8,107 | |
Change in valuation allowance | | | (2,479 | ) | | | (6,019 | ) | | | (8,107 | ) |
| | | | | | | | | | | | |
Net income tax benefit | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
| | | | | | | | | | | | |
| | Year Ended March 31, | |
| | 2004 | | | 2005 | | | 2006 | |
|
Expected statutory rate | | | (34.0 | )% | | | (34.0 | )% | | | (34.0 | )% |
State income taxes, net of federal benefit | | | (3.0 | )% | | | (3.8 | )% | | | (3.3 | )% |
Foreign earnings taxed at different rates | | | 1.4 | % | | | 1.0 | % | | | 1.8 | % |
Effect of permanent differences | | | 1.7 | % | | | 0.3 | % | | | 0.3 | % |
| | | | | | | | | | | | |
| | | (33.9 | )% | | | (36.5 | )% | | | (35.2 | )% |
Change in valuation allowance | | | 33.9 | % | | | 36.5 | % | | | 35.2 | % |
| | | | | | | | | | | | |
Totals | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | | | | | | | | | | | |
At March 31, 2006, the Company had net operating loss carryforwards for federal, state and foreign income tax purposes of approximately $28,800,000, $25,900,000 and $17,400,000, respectively. The carryforwards expire beginning 2020, 2010 and 2014, respectively. The Company also had, at March 31, 2006, federal and state research credit carryforwards of approximately $104,000 and $108,000, respectively. The federal credits expire beginning in 2026 and the state credits do not expire.
The Company experienced substantial ownership changes in connection with financing transactions it completed through the year ended March 31, 2006. Accordingly, the Company’s utilization of its net operating loss and tax credit carryforwards against taxable income in future periods, if any, is subject to substantial limitations under the Change in Ownership rules of Section 382 of the Internal Revenue Code. 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 six months ended September 30, 2006 and anticipates it will incur such losses for the year ended March 31, 2007. 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 standard of SFAS No. 109, the valuation allowance will be reduced accordingly.
NOTE 15 — Employee Benefit Plan
In 2002, the Company established a program to contribute and administer individual retirement 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 $34,000, $63,000 and $53,000 to the program for
F-44
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
the years ended March 31, 2004, 2005 and 2006, respectively, and $25,000 and $32,000 for the six months ended September 30, 2005 and 2006, respectively.
NOTE 16 — Segment and Geographic Information
In accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS 131”), operating segments are identified as components of an enterprise for which separate and discreet financial information is available and is used by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief decision-makers, as defined by SFAS 131, are the Chief Executive Officer and his direct reports.
The Company’s chief decision-makers review financial information presented on a consolidated basis, accompanied by disaggregated information about revenue and operating profit by operating unit. This information is used for purposes of allocating resources and evaluating financial performance.
The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies.” Segment data includes segment revenue, segment operating profitability, and total assets by segment. Shared corporate operating expenses are reported in the U.S. segment.
The Company is organized primarily on the basis of operating units which are segregated by geography.
F-45
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
The following tables present information about reportable segments (in thousands):
| | | | | | | | | | | | | | | | |
| | U.S. | | | Europe | | | Mexico | | | Total | |
|
Year ended March 31, 2004: | | | | | | | | | | | | | | | | |
Product revenues | | $ | — | | | $ | — | | | $ | 95 | | | $ | 95 | |
Service revenues | | | 807 | | | | — | | | | — | | | | 807 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 807 | | | | — | | | | 95 | | | | 902 | |
Depreciation expense | | | 159 | | | | 2 | | | | 2 | | | | 163 | |
Operating loss | | | (4,914 | ) | | | (209 | ) | | | (1,974 | ) | | | (7,097 | ) |
Interest expense | | | (178 | ) | | | — | | | | — | | | | (178 | ) |
Interest income | | | 3 | | | | — | | | | — | | | | 3 | |
Total assets | | | 2,150 | | | | 245 | | | | 597 | | | | 2,992 | |
Year ended March 31, 2005: | | | | | | | | | | | | | | | | |
Product revenues | | $ | 4 | | | $ | 35 | | | $ | 434 | | | $ | 473 | |
Service revenues | | | 883 | | | | — | | | | — | | | | 883 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 887 | | | | 35 | | | | 434 | | | | 1,356 | |
Depreciation expense | | | 368 | | | | 49 | | | | 17 | | | | 434 | |
Operating loss | | | (12,242 | ) | | | (1,529 | ) | | | (2,541 | ) | | | (16,312 | ) |
Interest expense | | | (372 | ) | | | — | | | | — | | | | (372 | ) |
Interest income | | | 8 | | | | — | | | | — | | | | 8 | |
Total assets | | | 5,017 | | | | 858 | | | | 1,065 | | | | 6,940 | |
Year ended March 31, 2006: | | | | | | | | | | | | | | | | |
Product revenues | | $ | 109 | | | $ | 69 | | | $ | 1,788 | | | $ | 1,966 | |
Service revenues | | | 618 | | | | — | | | | — | | | | 618 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 727 | | | | 69 | | | | 1,788 | | | | 2,584 | |
Depreciation expense | | | 463 | | | | 96 | | | | 92 | | | | 651 | |
Operating loss | | | (12,621 | ) | | | (2,685 | ) | | | (5,545 | ) | | | (20,851 | ) |
Interest expense | | | (172 | ) | | | — | | | | — | | | | (172 | ) |
Interest income | | | 282 | | | | — | | | | — | | | | 282 | |
Total assets | | | 8,977 | | | | 1,652 | | | | 2,060 | | | | 12,689 | |
Six months ended September 30, 2005 (unaudited): | | | | | | | | | | | | | | | | |
Product revenues | | $ | 88 | | | $ | 64 | | | $ | 655 | | | $ | 807 | |
Service revenues | | | 275 | | | | — | | | | — | | | | 275 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 363 | | | | 64 | | | | 655 | | | | 1,082 | |
Depreciation expense | | | 227 | | | | 42 | | | | 39 | | | | 307 | |
Operating loss | | | (5,518 | ) | | | (913 | ) | | | (3,003 | ) | | | (9,434 | ) |
Interest expense | | | (103 | ) | | | — | | | | — | | | | (103 | ) |
Interest income | | | 68 | | | | — | | | | — | | | | 68 | |
Total assets | | | 19,069 | | | | 1,187 | | | | 7,098 | | | | 27,354 | |
F-46
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
| | | | | | | | | | | | | | | | |
| | U.S. | | | Europe | | | Mexico | | | Total | |
|
Six months ended September 30, 2006 (unaudited): | | | | | | | | | | | | | | | | |
Product revenues | | $ | 56 | | | $ | 828 | | | $ | 1,058 | | | $ | 1,942 | |
Service revenues | | | 388 | | | | — | | | | — | | | | 388 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 444 | | | | 828 | | | | 1,058 | | | | 2,330 | |
Depreciation expense | | | 190 | | | | 92 | | | | 46 | | | | 328 | |
Operating loss | | | (5,715 | ) | | | (1,053 | ) | | | (1,829 | ) | | | (8,597 | ) |
Interest expense | | | (261 | ) | | | — | | | | — | | | | (261 | ) |
Interest income | | | 100 | | | | — | | | | — | | | | 100 | |
Total assets | | | 5,172 | | | | 2,514 | | | | 2,370 | | | | 10,056 | |
For the six months ended September 30, 2006, the Company recorded $580,000 of sales to customers in India. These sales are reported as part of the Europe segment.
NOTE 17 — Discontinued Operations
On June 16, 2005, the Company entered into a series of agreements with Quimica Pasteur, or 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, an individual designated by the Company who is also one of the Company’s executive officers concurrently acquired, in his individual capacity and for no additional consideration, a 0.25% equity interest in QP. The Company was granted an option to acquire the remaining 99.75% directly from its principals in exchange for 600,000 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.
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 in accordance with FIN 46(R) and its results were consolidated with the Company’s financial statements for the period of June 16, 2005 through March 26, 2006, the effective termination date of the distribution and related agreements.
In accordance with SFAS 144, the Company has reported QP’s results for the period of June 16, 2005 through March 26, 2006 as discontinued operations because the operations and cash flows of QP have been eliminated from the Company’s ongoing operations as a result of having terminated these agreements. The Company no longer has any continuing involvement with QP as of the date in which the agreements were terminated. Amounts associated with the Company’s loss upon the termination of its agreements with QP, which consists of funds advanced by the Company for working capital, are presented separately from QP’s operating results.
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
F-47
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
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 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.
NOTE 18 — Subsequent Events
Private Placement of Series C Preferred Stock
On October 20, 2006, the Company sold 108,486 units, consisting of 108,486 shares of Series C convertible preferred stock and warrants to purchase 21,697 shares of the Company’s common stock at $18.00 per share, at a per unit price of $18.00. Gross proceeds from this sale amounted to $1,952,748 and proceeds net of commissions amounted to $1,757,473. In addition, the Company issued to the placement agent warrants to purchase 13,560 shares of the Company’s common stock at $18.00 per share. These shares were sold in connection with an agreement entered into between the Company and a placement agent in May 2006. The Series C shares are described in Note 12.
Termination of Distribution Agreement
In October 2006, the Company agreed to pay a distributor $90,000 to terminate an agreement which provided the distributor with exclusive rights to sell the Company’s products in the United Kingdom. This agreement was reached between the Company and distributor without legal action.
Consulting Agreement
On November 7, 2006, the Company entered into a two-year consulting agreement with its new director, Robert Burlingame. Under the terms of the agreement, the Company has issued the consultant a warrant to purchase 75,000 shares of the Company’s common stock, exercisable at $13.00 per share in consideration of corporate advisory services.
Bridge Financing
On November 7, 2006, the Company signed a loan agreement with Robert Burlingame, one of the company’s directors, in the amount of $4.0 million, which funded on November 10, 2006 and which will accrue interest at an annual rate of 7%. Concurrently, Mr. Burlingame became a consultant to the Company under a two-year consulting agreement, and he was appointed to fill the vacancy on the Company’s board of directors. The principal and all accrued interest under the loan agreement will become due and payable in full with interest on the earlier of November 10, 2007 or five business days after the completion of an initial public offering resulting in gross proceeds to us of at least 30.0 million. The loan will be secured by all of our assets, other than our intellectual property, but will be subordinate to the security interest held by our secured lender. At the time the principal is advanced to us, Brookstreet Securities Corporation will be paid a fee of $50,000 and will be granted a warrant to purchase 25,000 shares of the Company’s common stock at an exercise price of $18.00 per share.
Settlement Agreement
In November 2006, the Company entered into a settlement agreement with a former director and chief operating officer. The settlement agreement provides for a $250,000 cash payment, which is subject to the
F-48
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Company closing equity financing with gross proceeds of $10 million or more, or its initial public offering. In addition, the plaintiff will be provided a warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $3.00 per share. Issuance of the warrant is subject to the waiver of any applicable rights by the holders of the Company’s preferred stock under the Company’s Amended and Restated Investors Rights Agreement. On December 14, 2006, the Company’s preferred stockholders voted to waive the applicable rights allowing the Company to issue the warrants. The Company previously reserved for this litigation and the expense will be recorded as a general and administrative expense in the period the warrants are approved and issued (Note 11).
Engagement Letter
In November 2006, the Company engaged an investment bank (the “Underwriter”) as financial advisors and lead underwriter in connection with a proposed offering of approximately $40 million of the Company’s common stock, plus a 15% over-allotment option and agreed to pay a fee equal to 7% and a non-accountable expense allowance of 1.0% of the gross proceeds from the offering. In addition, contingent upon the closing of the offering, the Company will issue to the Underwriter warrants to purchase common stock equal to 7% of the total shares issued and outstanding upon the final closing of the offering at an exercise price of 165% of the offering price.
Board Nomination
On November 7, 2006, the Board of Directors appointed an individual to fill the vacant Series A board seat. Pursuant to the terms of the Director Agreement, the Company will issue the individual an option to purchase 75,000 shares of the Company’s common stock at $13.00 per share. The options vest immediately and are exercisable for a period of five years. On December 14, 2006 the Series A stockholders approved the appointment of this individual to the Company’s Board of Directors.
2006 Stock Incentive Plan
On November 7, 2006, the board authorized and reserved 1,250,000 shares for issuance of options that may be granted under the Company’s 2006 Stock Incentive Plan, which was previously adopted by the board of directors. On December 14, 2006 the stockholders approved the Company’s 2006 Stock Incentive Plan.
Stock-split
On November 7, 2006, the board of directors authorized the Company to effectuate a reverse split of its common stock within a specified range to satisfy a pre-condition requiring it to complete a reverse split of its stock prior to completing its proposed IPO. Pursuant to delegation of authority by the board of directors, the pricing committee approved a 1 for 4 reverse split on December 1, 2006. Accordingly, the accompanying financial statements give retroactive effect to a 1 for 4 reverse stock split for all periods presented. The reverse stock split is subject to stockholder approval and may be subject to possible change based on the final terms and conditions of the underwriting commitment that the Company anticipates it will enter into in connection with completing its proposed IPO. On December 15, 2006 the reverse stock split was effectuated by filing an amended and restated certificate of incorporation by the Company. The Company also cannot provide any assurance that the proposed IPO will be completed according to the terms that are currently contemplated, if at all.
F-49
OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Delaware Reincorporation
On December 15, 2006, the Company merged into OIS Reincorporation Sub, Inc., a Delaware corporation (the Delaware Company). Pursuant to the Merger Agreement an amendment to the certificate of incorporation was filed pursuant to which (i) each four shares of outstanding Company Common Stock were converted into one share of the Delaware Company’s Common Stock ($0.0001 par value), (ii) each four shares of the Company’s outstanding Series A Preferred Stock were converted into one share of the Delaware Company’s Series A Preferred Stock ($0.0001 par value), (iii) each four shares of the Company’s outstanding Series B Preferred Stock were converted into one share of the Delaware Company’s Series B Preferred Stock ($0.0001 par value), and (iv) each four shares of the California Company’s outstanding Series C Preferred Stock were converted into one share of the Delaware Company’s Series C Preferred Stock ($0.0001 par value). In addition, all options, warrants or rights to purchase shares of Company Common Stock or Company Preferred Stock outstanding immediately prior to the Reincorporation will be converted into options, warrants or rights to purchase the an equivalent number of shares of the Delaware Company’s Common Stock or Preferred Stock, as the case may be, and those securities will continue to vest upon the same terms and conditions as existed immediately prior to the Reincorporation.
F-50
WITH REVOLUTIONARY MICROCYN (R) TECHNOLOGY |
3,076,923 Shares
Oculus Innovative Sciences, Inc.
Common Stock
ROTH CAPITAL PARTNERS
| |
MAXIM GROUP LLC | BROOKSTREET SECURITIES CORPORATION |
The date of this prospectus is , 2006
Until , 2007, all dealers that effect transaction in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
| |
Item 13. | Other Expenses of Issuance and Distribution |
The following table sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts listed are estimated except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and the Nasdaq Global Market listing fee.
| | | | |
SEC registration fee | | $ | 8,614 | |
National Association of Securities Dealers, Inc. filing fee | | | 8,550 | |
Nasdaq Global Market listing fee | | | 100,000 | |
Blue Sky fees and expenses | | | 10,000 | |
Accounting fees and expenses | | | 875,000 | |
Legal fees and expenses | | | 1,200,000 | |
Printing and engraving expenses | | | 350,000 | |
Registrar and Transfer Agent’s fees | | | 100,000 | |
Miscellaneous fees and expenses | | | 100,000 | |
| | | | |
Nonaccountable underwriter expenses | | $ | 400,000 | |
Total | | $ | 3,152,164 | |
| | | | |
| |
Item 14. | Indemnification of Directors and Officers |
Section 145 of the Delaware General Corporation Law provides for the indemnification of officers, directors, and other corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933 (the “Securities Act”). The Registrant’s form of Restated Certificate of Incorporation to be effective upon completion of this offering (Exhibit 3.3 hereto) and the Registrant’s form of Bylaws to be effective upon completion of this offering (Exhibit 3.6 hereto) provide for indemnification of the Registrant’s directors, officers, employees and other agents to the fullest extent permitted by the Delaware General Corporation Law. The Registrant also intends to enter into agreements with its directors and officers that will require the Registrant, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers to the fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) will provide for indemnification by the Underwriters of the Registrant, its directors and officers, and by the Registrant, of the Underwriters, for certain liabilities, including liabilities arising under the Securities Act, and affords certain rights of contribution with respect thereto.
| |
Item 15. | Recent Sales of Unregistered Securities |
The following information does not give effect to the Registrant’s reverse split to be effected prior to the completion of this offering.
Exercises of Stock Options
On various dates between January 14, 2002 and November 30, 2006, the Registrant sold 1,334,916 shares of its common stock to employees and directors pursuant to the exercise of options granted under our 1999, 2000, 2003 and 2004 stock plans. The exercise prices per share ranged from $0.03 to $0.75, for an aggregate consideration of $297,585.
The sales of the above securities were considered to be exempt from registration under the Securities Act in reliance on Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions under compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The sale of
II-1
the above securities in a 12 months period did not exceed the greater of (a) $1,000,000, (b) 15% of total assets as of the Registrant’s most recent balance sheet or (c) 15% of the number of outstanding shares of the Registrant’s common stock sold in reliance on this Rule.
Issuances of Capital Stock in Financing Rounds
On various dates between August 7, 2003 and February 25, 2004, the Registrant sold 5,391,244 shares of series A convertible preferred stock for aggregate consideration of $8,066,866 to 198 accredited investors. In connection with these sales the Registrant paid to Brookstreet Securities Corporation, or Brookstreet, as placement agent, an aggregate of $1,123,746 in commissions and issued to Brookstreet and its affiliates warrants to purchase an aggregate of 1,735,123 shares of the Registrant’s common stock. The Registrant also issued a warrant to purchase 66,667 shares of its series A convertible preferred stock and a promissory note that could be converted into 40,000 shares of series A convertible preferred stock. On June 30, 2005, this convertible note was converted into 40,000 shares of the Registrant’s Series A convertible preferred stock.
The sales of the above securities were considered to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D promulgated under the Securities Act, as transactions by an issuer not involving a public offering. The purchasers of these securities were accredited investors, represented their intention to acquire the securities for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in the transaction. All purchasers had adequate access, through their relationship with the Registrant, to information about the Registrant.
On various dates between April 30, 2004 and October 27, 2005, the Registrant sold 10,543,474 shares of series B convertible preferred stock for aggregate consideration of $47,445,663 to 361 accredited investors. In connection with these sales the Registrant paid to Brookstreet, as placement agent, an aggregate of $3,413,818 in commissions and issued to Brookstreet and its affiliates warrants to purchase an aggregate of 1,317,933 shares of the Registrant’s common stock.
The sales of the above securities were considered to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D promulgated under the Securities Act, as transactions by an issuer not involving a public offering. The purchasers of these securities were accredited investors, represented their intention to acquire the securities for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in the transaction. All purchasers had adequate access, through their relationship with the Registrant, to information about the Registrant.
In September and October 2006, the Registrant sold 772,100 units, consisting of 772,100 shares of Series C convertible preferred stock at a per unit price of $4.50, and warrants to purchase 154,419 shares of common stock at $4.50 per share, for aggregate gross proceeds of $3,474,450 to one qualified institutional buyer and one institutional accredited investor. In connection with this sale, the Registrant paid to Brookstreet Securities Corporation, as placement agent, an aggregate of $347,444 in commissions and issued to Brookstreet fully vested warrants to purchase an aggregate of 96,512 shares of the Registrant’s common stock.
The sales of the above securities were considered to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D promulgated under the Securities Act, as transactions by an issuer not involving a public offering. The purchasers of these securities were qualified institutional buyers or institutional accredited investors, represented their intention to acquire the securities for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in the transaction. All purchasers had adequate access, through their relationship with the Registrant, to information about the Registrant.
Issuance of Securities in Debt Financing
In June 2006, the Registrant entered into a loan and security agreement with a financial institution. In conjunction with this agreement, the Registrant issued warrants to purchase an aggregate of 300,000 shares of
II-2
its series B preferred stock at an exercise price of $4.50 per share. The sale of these securities was considered to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D promulgated under the Securities Act, as a transaction by an issuer not involving a public offering. The purchaser is an accredited investor, represented its intention to acquire the securities for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the instruments issued in the transaction. The purchaser had access, through its relationship with the Registrant, to information about the Registrant.
Issuance of Securities to Consultant
In November 2006, the Registrant issued a warrant to purchase an aggregate of 300,000 shares of its common stock at an exercise price of $3.25 per share to a consultant providing consulting services for the Registrant. The sale of these securities was considered to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D promulgated under the Securities Act, as a transaction by an issuer not involving a public offering. The purchaser is an accredited investor, represented his intention to acquire the securities for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the instruments issued in the transaction. The purchaser had access, through its relationship with the Registrant, to information about the Registrant.
Issuance of Securities for Finder’s Fee
On November 7, 2006, the Registrant signed a loan agreement with Robert Burlingame, one of its directors, under which Mr. Burlingame advanced to the Registrant $4.0 million, which accrues interest at an annual rate of 7% (the “Bridge Loan”). The principal and all accrued interest under the loan agreement, which is available to the Registrant as working capital, will become due and payable in full on the earlier of November 10, 2007 or five days after the completion of an initial public offering of the Registrant’s common stock resulting in gross proceeds to it of at least $30.0 million. The loan is secured by all of the Registrant’s assets, other than its intellectual property, but is subordinate to the security interest held by its secured lenders. In connection with this Bridge Loan, the Registrant paid to Brookstreet, as finder, a fee in the amount of $50,000 and granted Brookstreet a warrant to purchase 100,000 shares of the Registrant’s common stock at an exercise price of $4.50 per share. The sale of the above securities was considered to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D promulgated under the Securities Act, as transactions by an issuer not involving a public offering. The purchaser of the securities was an accredited investor, represented its intention to acquire the securities for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in the transaction. The purchaser had adequate access, through its relationship with the Registrant, to information about the Registrant.
| |
Item 16. | Exhibits and Financial Statement Schedules |
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
|
| 1 | .1 | | Form of Underwriting Agreement. | 1 | .1 | | Form of Underwriting Agreement. |
| 3 | .1 | | Restated Certificate of Incorporation of the Registrant. | 3 | .1** | | Restated Certificate of Incorporation of the Registrant. |
| 3 | .2 | | [Reserved] | 3 | .2 | | [Reserved] |
| 3 | .3 | | [Reserved] | 3 | .3 | | [Reserved] |
| 3 | .4 | | [Reserved] | 3 | .4 | | [Reserved] |
| 3 | .5** | | Form of Restated Certificate of Incorporation of the Registrant, to be filed upon the completion of the offering to which this Registration Statement relates. | 3 | .5** | | Form of Restated Certificate of Incorporation of the Registrant, to be filed upon the completion of the offering to which this Registration Statement relates. |
| 3 | .6 | | Bylaws of the Registrant. | 3 | .6** | | Bylaws of the Registrant. |
| 3 | .7 | | [Reserved] | 3 | .7 | | [Reserved] |
II-3
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
|
| 3 | .8** | | Form of Bylaws of the Registrant, to be effective upon the completion of the offering to which this Registration Statement relates. | 3 | .8** | | Form of Bylaws of the Registrant, to be effective upon the completion of the offering to which this Registration Statement relates. |
| 4 | .1 | | Specimen Common Stock Certificate. | 4 | .1** | | Specimen Common Stock Certificate. |
| 4 | .2** | | Warrant to Purchase Series A Preferred Stock of Registrant by and between the Registrant and Venture Lending & Leasing III, Inc., dated April 21, 2004. | 4 | .2** | | Warrant to Purchase Series A Preferred Stock of Registrant by and between the Registrant and Venture Lending & Leasing III, Inc., dated April 21, 2004. |
| 4 | .3** | | Warrant to Purchase Series B Preferred Stock of Registrant by and between the Registrant and Venture Lending & Leasing IV, Inc., dated June 14, 2006. | 4 | .3** | | Warrant to Purchase Series B Preferred Stock of Registrant by and between the Registrant and Venture Lending & Leasing IV, Inc., dated June 14, 2006. |
| 4 | .4** | | Form of Warrant to Purchase Common Stock of Registrant. | 4 | .4** | | Form of Warrant to Purchase Common Stock of Registrant. |
| 4 | .5** | | Form of Warrant to Purchase Common Stock of Registrant. | 4 | .5** | | Form of Warrant to Purchase Common Stock of Registrant. |
| 4 | .6** | | Amended and Restated Investors Rights Agreement, effective as of September 14, 2006. | 4 | .6** | | Amended and Restated Investors Rights Agreement, effective as of September 14, 2006. |
| 4 | .7** | | Form of Promissory Note issued to Venture Lending & Leasing III, Inc. | 4 | .7** | | Form of Promissory Note issued to Venture Lending & Leasing III, Inc. |
| 4 | .8** | | Form of Promissory Note (Equipment and Soft Cost Loans) issued to Venture Lending & Leasing IV, Inc. | 4 | .8** | | Form of Promissory Note (Equipment and Soft Cost Loans) issued to Venture Lending & Leasing IV, Inc. |
| 4 | .9** | | Form of Promissory Note (Growth Capital Loans) issued to Venture Lending & Leasing IV, Inc. | 4 | .9** | | Form of Promissory Note (Growth Capital Loans) issued to Venture Lending & Leasing IV, Inc. |
| 4 | .10** | | Form of Promissory Note (Working Capital Loans) issued to Venture Lending & Leasing IV, Inc. | 4 | .10** | | Form of Promissory Note (Working Capital Loans) issued to Venture Lending & Leasing IV, Inc. |
| 4 | .11** | | Form of Warrant to Purchase Common Stock of Registrant. | 4 | .11** | | Form of Warrant to Purchase Common Stock of Registrant. |
| 4 | .12 | | Form of Common Stock Purchase Warrant issued to the Underwriters. | 4 | .12 | | Form of Common Stock Purchase Warrant issued to the Underwriters. |
| 5 | .1 | | Opinion of Pillsbury Winthrop Shaw Pittman LLP. | 5 | .1** | | Opinion of Pillsbury Winthrop Shaw Pittman LLP. |
| 10 | .1** | | Form of Indemnification Agreement between the Registrant and its officers and directors. | 10 | .1** | | Form of Indemnification Agreement between the Registrant and its officers and directors. |
| 10 | .2** | | 1999 Stock Plan and related form stock option plan agreements | 10 | .2** | | 1999 Stock Plan and related form stock option plan agreements |
| 10 | .3** | | 2000 Stock Plan and related form stock option plan agreements. | 10 | .3** | | 2000 Stock Plan and related form stock option plan agreements. |
| 10 | .4** | | 2003 Stock Plan and related form stock option plan agreements. | 10 | .4** | | 2003 Stock Plan and related form stock option plan agreements. |
| 10 | .5** | | 2004 Stock Plan and related form stock option plan agreements. | 10 | .5** | | 2004 Stock Plan and related form stock option plan agreements. |
| 10 | .6** | | Form of 2006 Stock Incentive Plan and related form stock option plan agreement. | 10 | .6** | | Form of 2006 Stock Incentive Plan and related form stock option plan agreement. |
| 10 | .7** | | Office Lease Agreement, dated October 26, 1999, between the Registrant and RNM Lakeville, L.P. | 10 | .7** | | Office Lease Agreement, dated October 26, 1999, between the Registrant and RNM Lakeville, L.P. |
| 10 | .8** | | Amendment to Office Lease No. 1, dated September 15, 2000, between Registrant and RNM Lakeville L.P. | 10 | .8** | | Amendment to Office Lease No. 1, dated September 15, 2000, between Registrant and RNM Lakeville L.P. |
| 10 | .9** | | Amendment to Office Lease No. 2, dated July 29, 2005, between the Registrant and RNM Lakeville L.P. | 10 | .9** | | Amendment to Office Lease No. 2, dated July 29, 2005, between the Registrant and RNM Lakeville L.P. |
| 10 | .10** | | 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). | 10 | .10** | | 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). |
| 10 | .11** | | Office Lease Agreement, dated July 2003, between Oculus Innovative Sciences Netherlands, B.V. and Artikona Holding B.V. (translated from Dutch). | 10 | .11** | | Office Lease Agreement, dated July 2003, between Oculus Innovative Sciences Netherlands, B.V. and Artikona Holding B.V. (translated from Dutch). |
| 10 | .12** | | Loan and Security Agreement, dated March 25, 2004, between the Registrant and Venture Lending & Leasing III, Inc. | 10 | .12** | | Loan and Security Agreement, dated March 25, 2004, between the Registrant and Venture Lending & Leasing III, Inc. |
| 10 | .13** | | Loan and Security Agreement, dated June 14, 2006, between the Registrant and Venture Lending & Leasing IV, Inc. | 10 | .13** | | Loan and Security Agreement, dated June 14, 2006, between the Registrant and Venture Lending & Leasing IV, Inc. |
| 10 | .14** | | Employment Agreement, dated January 1, 2004, between the Registrant and Hojabr Alimi. | 10 | .14** | | Employment Agreement, dated January 1, 2004, between the Registrant and Hojabr Alimi. |
| 10 | .15** | | Employment Agreement, dated January 1, 2004, between the Registrant and Jim Schutz. | 10 | .15** | | Employment Agreement, dated January 1, 2004, between the Registrant and Jim Schutz. |
| 10 | .16** | | Employment Agreement, dated June 1, 2004, between the Registrant and Robert Miller. | 10 | .16** | | Employment Agreement, dated June 1, 2004, between the Registrant and Robert Miller. |
| 10 | .17** | | Employment Agreement, dated June 1, 2005, between the Registrant and Bruce Thornton. | 10 | .17** | | Employment Agreement, dated June 1, 2005, between the Registrant and Bruce Thornton. |
| 10 | .18** | | Employment Agreement, dated March 23, 2005, between the Registrant and Theresa Mitchell. | 10 | .18** | | Employment Agreement, dated March 23, 2005, between the Registrant and Theresa Mitchell. |
| 10 | .19** | | Employment Agreement, dated June 10, 2006, between the Registrant and Mike Wokasch. | 10 | .19** | | Employment Agreement, dated June 10, 2006, between the Registrant and Mike Wokasch. |
| 10 | .20** | | Form of Director Agreement. | 10 | .20** | | Form of Director Agreement. |
| 10 | .21** | | Consultant Agreement, dated October 1, 2005, by and between the Registrant and White Moon Medical. | 10 | .21** | | Consultant Agreement, dated October 1, 2005, by and between the Registrant and White Moon Medical. |
| 10 | .22** | | Leasing Agreement, dated May 5, 2006, made by and between Mr. Jose Alfonzo I. Orozco Perez and Oculus Technologies of Mexico, S.A. de C.V. | 10 | .22** | | Leasing Agreement, dated May 5, 2006, made by and between Mr. Jose Alfonzo I. Orozco Perez and Oculus Technologies of Mexico, S.A. de C.V. |
| 10 | .23** | | Amendment No. 3 to Lease dated August 23, 2006, between the Registrant and RNM Lakeville, L.P. | 10 | .23** | | Amendment No. 3 to Lease dated August 23, 2006, between the Registrant and RNM Lakeville, L.P. |
II-4
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
|
| 10 | .24** | | Stock Purchase Agreement, dated June 16, 2005, between the Registrant, Quimica Pasteur, S de R.L., Francisco Javier Orozco Gutierrez and Jorge Paulino Hermosillo Martin. | 10 | .24** | | Stock Purchase Agreement, dated June 16, 2005, between the Registrant, Quimica Pasteur, S de R.L., Francisco Javier Orozco Gutierrez and Jorge Paulino Hermosillo Martin. |
| 10 | .25** | | Framework Agreement, dated June 16, 2005, between Javier Orozco Gutierrez, Quimica Pasteur, S de R.L., Jorge Paulino Hermosillo Martin, the Registrant and Oculus Technologies de Mexico, S.A. de C.V. | 10 | .25** | | Framework Agreement, dated June 16, 2005, between Javier Orozco Gutierrez, Quimica Pasteur, S de R.L., Jorge Paulino Hermosillo Martin, the Registrant and Oculus Technologies de Mexico, S.A. de C.V. |
| 10 | .26** | | 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. | 10 | .26** | | 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. |
| 10 | .27** | | Partnership Interest Purchase Option Agreement, dated June 16, 2005, between the Registrant and Javier Orozco Gutierrez. | 10 | .27** | | Partnership Interest Purchase Option Agreement, dated June 16, 2005, between the Registrant and Javier Orozco Gutierrez. |
| 10 | .28** | | 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). | 10 | .28** | | 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). |
| 10 | .29** | | 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). | 10 | .29** | | 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). |
| 10 | .30** | | Loan and Security Agreement, dated November 7, 2006, between the Registrant and Robert Burlingame. | 10 | .30** | | Loan and Security Agreement, dated November 7, 2006, between the Registrant and Robert Burlingame. |
| 10 | .31** | | Non-Negotiable Secured Promissory Note, dated November 10, 2006, between the Registrant and Robert Burlingame. | 10 | .31** | | Non-Negotiable Secured Promissory Note, dated November 10, 2006, between the Registrant and Robert Burlingame. |
| 10 | .32** | | Subordination Agreement, dated November 7, 2006, by and among the Registrant, Robert Burlingame, Venture Lending & Leasing III, LLC, and Venture Lending & Leasing IV, LLC. | 10 | .32** | | Subordination Agreement, dated November 7, 2006, by and among the Registrant, Robert Burlingame, Venture Lending & Leasing III, LLC, and Venture Lending & Leasing IV, LLC. |
| 10 | .33** | | Consulting Agreement, effective November 9, 2006, by and between the Registrant and Robert Burlingame. | 10 | .33** | | Consulting Agreement, effective November 9, 2006, by and between the Registrant and Robert Burlingame. |
| 10 | .34** | | Director Agreement, dated November 8, 2006, by and between the Registrant and Robert Burlingame. | 10 | .34** | | Director Agreement, dated November 8, 2006, by and between the Registrant and Robert Burlingame. |
| 10 | .35†** | | Exclusive Marketing Agreement, dated December 5, 2005, by and between the Registrant and Alkem Laboratories Ltd. | 10 | .35†** | | Exclusive Marketing Agreement, dated December 5, 2005, by and between the Registrant and Alkem Laboratories Ltd. |
| 10 | .36** | | Settlement Agreement, effective September 21, 2006, by and among the Registrant and Messrs. Jorge Ahumada Ayala and Fernando Ahumada Ayala. | 10 | .36** | | Settlement Agreement, effective September 21, 2006, by and among the Registrant and Messrs. Jorge Ahumada Ayala and Fernando Ahumada Ayala. |
| 10 | .37** | | Settlement Agreement, dated October 25, 2006, by and between the Registrant and Mr. Kim Kelderman. | 10 | .37** | | Settlement Agreement, dated October 25, 2006, by and between the Registrant and Mr. Kim Kelderman. |
| 16 | .1** | | Letter regarding change in certifying accountants. | 16 | .1** | | Letter regarding change in certifying accountants. |
| 21 | .1** | | List of Subsidiaries. | 21 | .1** | | List of Subsidiaries. |
| 23 | .1 | | Consent of Marcum & Kliegman LLP. | 23 | .1 | | Consent of Marcum & Kliegman LLP. |
| 23 | .2 | | Consent of Pillsbury Winthrop Shaw Pittman LLP (included in Exhibit 5.1). | 23 | .2** | | Consent of Pillsbury Winthrop Shaw Pittman LLP (included in Exhibit 5.1). |
| 23 | .3** | | Consent of Cheryl Bongiovanni, Ph.D., RVT, CWS | 23 | .3** | | Consent of Cheryl Bongiovanni, Ph.D., RVT, CWS |
| 23 | .4** | | Consent of Tom A. Wolvos, M.D., F.A.C.S | 23 | .4** | | Consent of Tom A. Wolvos, M.D., F.A.C.S |
| 23 | .5** | | Consent of David Armstrong, M.D. | 23 | .5** | | Consent of David Armstrong, M.D. |
| 23 | .6** | | Consent of David E. Allie, M.D. | 23 | .6** | | Consent of David E. Allie, M.D. |
| 23 | .7** | | Consent of Dr. Alfredo Barrera | 23 | .7** | | Consent of Dr. Alfredo Barrera |
| 23 | .8** | | Consent of Valuation Research Corporation | 23 | .8** | | Consent of Valuation Research Corporation |
| 23 | .9** | | Consent of Chevez, Ruiz, Zamarripa y Cia, S.C. | 23 | .9** | | Consent of Chevez, Ruiz, Zamarripa y Cia, S.C. |
| 23 | .10** | | Consent of Luca Dalla-Paola, M.D. | 23 | .10** | | Consent of Luca Dalla-Paola, M.D. |
| 23 | .11** | | Consent of Andrew Boulton, M.D. | 23 | .11** | | Consent of Andrew Boulton, M.D. |
| 23 | .12** | | Consent of Dr. Ariel Miranda | 23 | .12** | | Consent of Dr. Ariel Miranda |
| 24 | .1** | | Power of Attorney (seepage II-5 of this Registration Statement). | 24 | .1** | | Power of Attorney (seepage II-5 of this Registration Statement). |
| 24 | .2** | | Power of Attorney for Robert Burlingame | 24 | .2** | | Power of Attorney for Robert Burlingame |
| | |
† | | Confidential treatment has been requested for portions of this exhibit. |
II-5
Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness.Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(4) For the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(5) It will provide to the underwriters at the closing(s) specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 45 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Petaluma, State of California, on the 15th20th day of December, 2006.
Oculus Innovative Sciences, Inc.
Hojabr Alimi
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
| | | | | | |
Name | | Title | | Date |
|
/s/ Hojabr Alimi Hojabr Alimi | | President and Chief Executive Officer (Principal Executive Officer) and Director | | December 15,20, 2006 |
| | | | |
/s/ Robert E. Miller Robert E. Miller | | Chief Financial Officer (Principal Financial and Accounting Officer) | | December 15,20, 2006 |
| | | | |
/s/ Akihisa Akao* Akihisa Akao | | Director | | December 15,20, 2006 |
| | | | |
/s/ Edward M. Brown* Edward M. Brown | | Director | | December 15,20, 2006 |
| | | | |
/s/ Richard Conley* Richard Conley | | Director | | December 15,20, 2006 |
| | | | |
/s/ Gregory M. French* Gregory M. French | | Director | | December 15,20, 2006 |
| | | | |
/s/ James J. Schutz* James J. Schutz | | Director | | December 15,20, 2006 |
| | | | |
/s/ Robert Burlingame* Robert Burlingame | | Director | | December 15,20, 2006 |
| | | | |
* /s/ Hojabr Alimi Hojabr Alimi | | Attorney-in-fact | | December 15,20, 2006 |
II-7
Exhibit Index
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
|
| 1 | .1 | | Form of Underwriting Agreement. | 1 | .1 | | Form of Underwriting Agreement. |
| 3 | .1 | | Restated Certificate of Incorporation of the Registrant. | 3 | .1** | | Restated Certificate of Incorporation of the Registrant. |
| 3 | .2 | | [Reserved] | 3 | .2 | | [Reserved] |
| 3 | .3 | | [Reserved] | 3 | .3 | | [Reserved] |
| 3 | .4 | | [Reserved] | 3 | .4 | | [Reserved] |
| 3 | .5** | | Form of Restated Certificate of Incorporation of the Registrant, to be filed upon the completion of the offering to which this Registration Statement relates. | 3 | .5** | | Form of Restated Certificate of Incorporation of the Registrant, to be filed upon the completion of the offering to which this Registration Statement relates. |
| 3 | .6 | | Bylaws of the Registrant. | 3 | .6** | | Bylaws of the Registrant. |
| 3 | .7 | | [Reserved] | 3 | .7 | | [Reserved] |
| 3 | .8** | | Form of Bylaws of the Registrant, to be effective upon the completion of the offering to which this Registration Statement relates. | 3 | .8** | | Form of Bylaws of the Registrant, to be effective upon the completion of the offering to which this Registration Statement relates. |
| 4 | .1 | | Specimen Common Stock Certificate. | 4 | .1** | | Specimen Common Stock Certificate. |
| 4 | .2** | | Warrant to Purchase Series A Preferred Stock of Registrant by and between the Registrant and Venture Lending & Leasing III, Inc., dated April 21, 2004. | 4 | .2** | | Warrant to Purchase Series A Preferred Stock of Registrant by and between the Registrant and Venture Lending & Leasing III, Inc., dated April 21, 2004. |
| 4 | .3** | | Warrant to Purchase Series B Preferred Stock of Registrant by and between the Registrant and Venture Lending & Leasing IV, Inc., dated June 14, 2006. | 4 | .3** | | Warrant to Purchase Series B Preferred Stock of Registrant by and between the Registrant and Venture Lending & Leasing IV, Inc., dated June 14, 2006. |
| 4 | .4** | | Form of Warrant to Purchase Common Stock of Registrant. | 4 | .4** | | Form of Warrant to Purchase Common Stock of Registrant. |
| 4 | .5** | | Form of Warrant to Purchase Common Stock of Registrant. | 4 | .5** | | Form of Warrant to Purchase Common Stock of Registrant. |
| 4 | .6** | | Amended and Restated Investors Rights Agreement, effective as of September 14, 2006. | 4 | .6** | | Amended and Restated Investors Rights Agreement, effective as of September 14, 2006. |
| 4 | .7** | | Form of Promissory Note issued to Venture Lending & Leasing III, Inc. | 4 | .7** | | Form of Promissory Note issued to Venture Lending & Leasing III, Inc. |
| 4 | .8** | | Form of Promissory Note (Equipment and Soft Cost Loans) issued to Venture Lending & Leasing IV, Inc. | 4 | .8** | | Form of Promissory Note (Equipment and Soft Cost Loans) issued to Venture Lending & Leasing IV, Inc. |
| 4 | .9** | | Form of Promissory Note (Growth Capital Loans) issued to Venture Lending & Leasing IV, Inc. | 4 | .9** | | Form of Promissory Note (Growth Capital Loans) issued to Venture Lending & Leasing IV, Inc. |
| 4 | .10** | | Form of Promissory Note (Working Capital Loans) issued to Venture Lending & Leasing IV, Inc. | 4 | .10** | | Form of Promissory Note (Working Capital Loans) issued to Venture Lending & Leasing IV, Inc. |
| 4 | .11** | | Form of Warrant to Purchase Common Stock of Registrant. | 4 | .11** | | Form of Warrant to Purchase Common Stock of Registrant. |
| 4 | .12 | | Form of Common Stock Purchase Warrant issued to the Underwriters. | 4 | .12 | | Form of Common Stock Purchase Warrant issued to the Underwriters. |
| 5 | .1 | | Opinion of Pillsbury Winthrop Shaw Pittman LLP. | 5 | .1** | | Opinion of Pillsbury Winthrop Shaw Pittman LLP. |
| 10 | .1** | | Form of Indemnification Agreement between the Registrant and its officers and directors. | 10 | .1** | | Form of Indemnification Agreement between the Registrant and its officers and directors. |
| 10 | .2** | | 1999 Stock Plan and related form stock option plan agreements | 10 | .2** | | 1999 Stock Plan and related form stock option plan agreements |
| 10 | .3** | | 2000 Stock Plan and related form stock option plan agreements. | 10 | .3** | | 2000 Stock Plan and related form stock option plan agreements. |
| 10 | .4** | | 2003 Stock Plan and related form stock option plan agreements. | 10 | .4** | | 2003 Stock Plan and related form stock option plan agreements. |
| 10 | .5** | | 2004 Stock Plan and related form stock option plan agreements. | 10 | .5** | | 2004 Stock Plan and related form stock option plan agreements. |
| 10 | .6** | | Form of 2006 Stock Incentive Plan and related form stock option plan agreement. | 10 | .6** | | Form of 2006 Stock Incentive Plan and related form stock option plan agreement. |
| 10 | .7** | | Office Lease Agreement, dated October 26, 1999, between the Registrant and RNM Lakeville, L.P. | 10 | .7** | | Office Lease Agreement, dated October 26, 1999, between the Registrant and RNM Lakeville, L.P. |
| 10 | .8** | | Amendment to Office Lease No. 1, dated September 15, 2000, between the Registrant and RNM Lakeville L.P. | 10 | .8** | | Amendment to Office Lease No. 1, dated September 15, 2000, between the Registrant and RNM Lakeville L.P. |
| 10 | .9** | | Amendment to Office Lease No. 2, dated July 29, 2005, between the Registrant and RNM Lakeville L.P. | 10 | .9** | | Amendment to Office Lease No. 2, dated July 29, 2005, between the Registrant and RNM Lakeville L.P. |
| 10 | .10** | | 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). | 10 | .10** | | 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). |
| 10 | .11** | | Office Lease Agreement, dated July 2003, between Oculus Innovative Sciences, B.V. and Artikona Holding B.V. (translated from Dutch). | 10 | .11** | | Office Lease Agreement, dated July 2003, between Oculus Innovative Sciences, B.V. and Artikona Holding B.V. (translated from Dutch). |
| 10 | .12** | | Loan and Security Agreement, dated March 25, 2004, between Registrant and Venture Lending & Leasing III, Inc. | 10 | .12** | | Loan and Security Agreement, dated March 25, 2004, between Registrant and Venture Lending & Leasing III, Inc. |
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
|
| 10 | .13** | | Loan and Security Agreement, dated June 14, 2006, between Registrant and Venture Lending & Leasing IV, Inc. | 10 | .13** | | Loan and Security Agreement, dated June 14, 2006, between Registrant and Venture Lending & Leasing IV, Inc. |
| 10 | .14** | | Employment Agreement, dated January 1, 2004, between the Registrant and Hojabr Alimi. | 10 | .14** | | Employment Agreement, dated January 1, 2004, between the Registrant and Hojabr Alimi. |
| 10 | .15** | | Employment Agreement, dated January 1, 2004, between the Registrant and Jim Schutz. | 10 | .15** | | Employment Agreement, dated January 1, 2004, between the Registrant and Jim Schutz. |
| 10 | .16** | | Employment Agreement, dated June 1, 2004, between the Registrant and Robert Miller. | 10 | .16** | | Employment Agreement, dated June 1, 2004, between the Registrant and Robert Miller. |
| 10 | .17** | | Employment Agreement, dated June 1, 2005, between the Registrant and Bruce Thornton. | 10 | .17** | | Employment Agreement, dated June 1, 2005, between the Registrant and Bruce Thornton. |
| 10 | .18** | | Employment Agreement, dated March 23, 2005, between the Registrant and Theresa Mitchell. | 10 | .18** | | Employment Agreement, dated March 23, 2005, between the Registrant and Theresa Mitchell. |
| 10 | .19** | | Employment Agreement, dated June 10, 2006, between the Registrant and Mike Wokasch. | 10 | .19** | | Employment Agreement, dated June 10, 2006, between the Registrant and Mike Wokasch. |
| 10 | .20** | | Form of Director Agreement. | 10 | .20** | | Form of Director Agreement. |
| 10 | .21** | | Consultant Agreement, dated October 1, 2005, by and between the Registrant and White Moon Medical. | 10 | .21** | | Consultant Agreement, dated October 1, 2005, by and between the Registrant and White Moon Medical. |
| 10 | .22** | | Leasing Agreement, dated May 5, 2006, made by and between Mr. Jose Alfonso I. Orozco Perez and Oculus technologies of Mexico, S.A. de C.V. | 10 | .22** | | Leasing Agreement, dated May 5, 2006, made by and between Mr. Jose Alfonso I. Orozco Perez and Oculus technologies of Mexico, S.A. de C.V. |
| 10 | .23** | | Amendment No. 3 to Lease, dated August 23, 2006, by and between the Registrant and RNM Lakeville, L.P. | 10 | .23** | | Amendment No. 3 to Lease, dated August 23, 2006, by and between the Registrant and RNM Lakeville, L.P. |
| 10 | .24** | | Stock Purchase Agreement, dated June 16, 2005, between the Registrant, Quimica Pasteur, S de R.L., Francisco Javier Orozco Gutierrez and Jorge Paulino Hermosillo Martin. | 10 | .24** | | Stock Purchase Agreement, dated June 16, 2005, between the Registrant, Quimica Pasteur, S de R.L., Francisco Javier Orozco Gutierrez and Jorge Paulino Hermosillo Martin. |
| 10 | .25** | | Framework Agreement, dated June 16, 2005, between Javier Orozco Gutierrez, Quimica Pasteur, S de R.L., Jorge Paulino Hermosillo Martin, the Registrant and Oculus Technologies de Mexico, S.A. de C.V. | 10 | .25** | | Framework Agreement, dated June 16, 2005, between Javier Orozco Gutierrez, Quimica Pasteur, S de R.L., Jorge Paulino Hermosillo Martin, the Registrant and Oculus Technologies de Mexico, S.A. de C.V. |
| 10 | .26** | | 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. | 10 | .26** | | 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. |
| 10 | .27** | | Partnership Interest Purchase Option Agreement, dated June 16, 2005, between the Registrant and Javier Orozco Gutierrez. | 10 | .27** | | Partnership Interest Purchase Option Agreement, dated June 16, 2005, between the Registrant and Javier Orozco Gutierrez. |
| 10 | .28** | | 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). | 10 | .28** | | 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). |
| 10 | .29** | | 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). | 10 | .29** | | 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). |
| 10 | .30** | | Loan and Security Agreement, dated November 7, 2006, between the Registrant and Robert Burlingame. | 10 | .30** | | Loan and Security Agreement, dated November 7, 2006, between the Registrant and Robert Burlingame. |
| 10 | .31** | | Non-Negotiable Secured Promissory Note, dated November 10, 2006, between the Registrant and Robert Burlingame. | 10 | .31** | | Non-Negotiable Secured Promissory Note, dated November 10, 2006, between the Registrant and Robert Burlingame. |
| 10 | .32** | | Subordination Agreement, dated November 7, 2006, by and among the Registrant, Robert Burlingame, Venture Lending & Leasing III, LLC, and Venture Lending & Leasing IV, LLC. | 10 | .32** | | Subordination Agreement, dated November 7, 2006, by and among the Registrant, Robert Burlingame, Venture Lending & Leasing III, LLC, and Venture Lending & Leasing IV, LLC. |
| 10 | .33** | | Consulting Agreement, effective November 9, 2006, by and between the Registrant and Robert Burlingame. | 10 | .33** | | Consulting Agreement, effective November 9, 2006, by and between the Registrant and Robert Burlingame. |
| 10 | .34** | | Director Agreement, dated November 8, 2006, by and between the Registrant and Robert Burlingame. | 10 | .34** | | Director Agreement, dated November 8, 2006, by and between the Registrant and Robert Burlingame. |
| 10 | .35†** | | Exclusive Marketing Agreement, dated December 5, 2005, by and between the Registrant and Alkem Laboratories Ltd. | 10 | .35†** | | Exclusive Marketing Agreement, dated December 5, 2005, by and between the Registrant and Alkem Laboratories Ltd. |
| 10 | .36** | | Settlement Agreement, effective September 21, 2006, by and among the Registrant and Messrs. Jorge Ahumada Ayala and Fernando Ahumada Ayala. | 10 | .36** | | Settlement Agreement, effective September 21, 2006, by and among the Registrant and Messrs. Jorge Ahumada Ayala and Fernando Ahumada Ayala. |
| 10 | .37** | | Settlement Agreement, dated October 25, 2006, by and between the Registrant and Mr. Kim Kelderman. | 10 | .37** | | Settlement Agreement, dated October 25, 2006, by and between the Registrant and Mr. Kim Kelderman. |
| 16 | .1** | | Letter regarding change in certifying accountants. | 16 | .1** | | Letter regarding change in certifying accountants. |
| 21 | .1** | | List of Subsidiaries. | 21 | .1** | | List of Subsidiaries. |
| 23 | .1 | | Consent of Marcum & Kliegman LLP. | 23 | .1 | | Consent of Marcum & Kliegman LLP. |
| 23 | .2 | | Consent of Pillsbury Winthrop Shaw Pittman LLP (included in Exhibit 5.1). | 23 | .2** | | Consent of Pillsbury Winthrop Shaw Pittman LLP (included in Exhibit 5.1). |
| 23 | .3** | | Consent of Cheryl Bongiovanni, Ph.D., RVT, CWS | 23 | .3** | | Consent of Cheryl Bongiovanni, Ph.D., RVT, CWS |
| | | | |
Exhibit
| | |
Number | | Description |
|
| 23 | .4** | | Consent of Tom A. Wolvos, M.D., F.A.C.S |
| 23 | .5** | | Consent of David Armstrong, M.D. |
| 23 | .6** | | Consent of David E. Allie, M.D. |
| 23 | .7** | | Consent of Dr. Alfredo Barrera |
| 23 | .8** | | Consent of Valuation Research Corporation |
| 23 | .9** | | Consent of Chevez, Ruiz, Zamarripa y Cia, S.C. |
| 23 | .10** | | Consent of LucaDalla-Paola, M.D. |
| 23 | .11** | | Consent of Andrew Boulton, M.D. |
| 23 | .12** | | Consent of Dr. Ariel Miranda |
| 24 | .1** | | Power of Attorney (seepage II-5 of this Registration Statement). |
| 24 | .2** | | Power of Attorney for Robert Burlingame |
| | |
† | | Confidential treatment has been requested for portions of this exhibit. |