As filed with the Securities and Exchange Commission on
July 3, 2006
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
OCULUS INNOVATIVE SCIENCES,
INC.
(
Exact
name of registrant as specified in its charter)
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California (prior to
reincorporation)
Delaware (after reincorporation)
(
State
or other jurisdiction of
incorporation or organization)
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3841
(
Primary
Standard Industrial
Classification Code Number)
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68-0423298
(
I.R.S.
Employer
Identification No.)
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1129 N. McDowell
Blvd.
Petaluma, CA 94954
(707) 782-0792
(
Address,
including zip code, and telephone number, including area code,
of registrants principal executive offices)
Hojabr Alimi
Chief Executive Officer and
President
1129 N. McDowell
Blvd.
Petaluma, CA 94954
(707) 782-0792
(
Name,
address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
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Sylvia K. Burks, Esq.
Gabriella A. Lombardi, Esq.
Pillsbury Winthrop Shaw Pittman LLP
2475 Hanover Street
Palo Alto, CA
94304-1114
(650) 233-4500
(650) 233-4545
facsimile
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Michael W. Hall, Esq.
William C. Davisson III, Esq.
Latham & Watkins LLP
140 Scott Drive
Menlo Park, CA 94025
(650) 328-4600
(650) 463-2600 facsimile
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box.
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.
o
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If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
_
_
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
_
_
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Title of Each Class of
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Aggregate
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Amount of
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Securities to be
Registered
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Offering Price(1)(2)
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Registration Fee
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Common Stock, $0.0001 par value
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$80,500,000
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$8,614
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(1)
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Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) under the Securities Act of
1933.
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(2)
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Includes shares of common stock issuable upon the exercise of
the underwriters over-allotment option.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and we are not soliciting any offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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SUBJECT
TO COMPLETION, DATED JULY 3, 2006
PRELIMINARY
PROSPECTUS
Shares
Oculus
Innovative Sciences, Inc.
Common
Stock
We are
offering shares
of our common stock. This is our initial public offering, and no
public market currently exists for our shares. We anticipate
that the initial public offering price will be between
$ and
$ per share. We have applied
for quotation of our common stock on the Nasdaq National Market
under the symbol OCLS.
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should carefully consider the risk
factors described in Risk Factors beginning on
page 7 of this prospectus.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to
Oculus Innovative Sciences, Inc.
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$
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$
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The underwriters may also purchase up to an
additional shares from us at
the public offering price, less the underwriting discount,
within 30 days after the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares on or
about ,
2006.
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A.G.
Edwards
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Jefferies &
Company
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First
Albany Capital
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C.E.
Unterberg, Towbin
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The date of this
prospectus
is ,
2006
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with different information. We
are not making an offer to sell these securities in any
jurisdiction where the offer is not permitted. You should not
assume that the information contained in this prospectus is
accurate as of any date other than the respective dates as of
which the information is given.
PROSPECTUS
SUMMARY
Before you decide whether to invest in our common stock, you
should carefully read this entire prospectus, including
Risk Factors and the consolidated financial
statements and related notes. In this prospectus,
we, us, our and
Oculus refer to Oculus Innovative Sciences, Inc. and
its consolidated subsidiaries unless the context requires
otherwise.
Oculus
Innovative Sciences, Inc.
We develop, manufacture and market a family of products intended
to prevent and eliminate infection in chronic and acute wounds.
Infection is a serious potential complication in both chronic
and acute wounds, and controlling infection is a critical step
in wound healing. Our platform technology, called Microcyn, is a
non-toxic, super-oxidized water-based solution that is designed
to eliminate a wide range of pathogens including viruses, fungi,
spores and antibiotic resistant strains of bacteria such as
Methicillin-resistant
Staphylococcus aureus,
or MRSA, and
Vancomycin-resistant
Enterococcus
, or VRE. In clinical
testing, our products eliminated a wide range of pathogens and
were found to be safe, easy to use and complementary with most
existing treatment methods in wound care. Our experience and
clinical data indicate that the use of Microcyn may shorten
hospital stays, lower aggregate patient care costs and, in
certain cases, reduce the need for systemic antibiotics.
Microcyn also has applications in several other large consumer
and professional markets, including hard surface disinfectant,
respiratory, dermatology, mold and atmospheric remediation and
dental.
We believe Microcyn provides significant advantages over current
methods of care in the treatment of a wide range of chronic and
acute wounds throughout all stages of treatment. We believe that
Microcyn is the first topical product that eliminates a broad
range of bacteria and other infectious microbes without causing
toxic side effects on, or irritation of, healthy tissue. Unlike
most antibiotics, Microcyn does not target specific strains of
bacteria, a practice which has been shown to promote the
development of resistant bacteria. Because our products are
shelf stable and require no special preparation, they can be
used in hospitals, clinics, burn centers, extended care
facilities and in the home.
Our products have received CE Mark approval for wound cleaning
and reduction of infection, three U.S. Food and Drug
Administration, or FDA, 510(k) clearances for use of Microcyn as
a medical device in wound debridement, lubricating, moistening
and dressing and have been granted approval for use as an
antiseptic, disinfectant and sterilant in Mexico. Physicians in
several countries have conducted studies in which Microcyn
eliminated infection in a variety of wounds, including
hard-to-treat
wounds such as diabetic ulcers and burns, and, in some cases,
reduced the need for systemic antibiotics. We expect to complete
our pivotal clinical trial for pre-operative skin preparation in
the third quarter of 2006 and intend to file a New Drug
Application, or NDA, for the use of Microcyn as a pre-operative
skin preparation in late 2006. In addition, we intend to seek
FDA approval for the use of Microcyn to eliminate infection and
accelerate healing in wounds. We have established a protocol,
based on comments from the FDA, for a Phase IIb clinical
trial to be conducted in patients with diabetic foot ulcers and
other open wounds comparing clinical cure rates and the rate of
wound healing.
We began selling our Microcyn product in July 2004 in Mexico,
where we sell through a dedicated
75-person
contract sales force, and in October 2004 in Europe, where we
have an eight-person direct sales force and exclusive
distribution agreements with four distributors experienced in
supplying the wound care market, with an aggregate combined
sales force of over 25 full-time equivalent salespeople. We
began selling our products in the United States in June 2005 and
have established a network of one national and five regional
distributors supported by four direct salespeople.
Market
Opportunity
According to Medtech Insight, a Division of Windhover
Information, there were over 90 million incidents of wounds
in the United States during 2004. Of these, over 6 million
were chronic wounds, including arterial, diabetic, pressure and
venous ulcers. The remaining 84 million incidents were
acute wounds, which follow the normal process of healing and
commonly include burns, traumatic wounds and approximately
67 million surgical incisions. Key trends in wound care
include a large and increasing at-risk population,
1
primarily of elderly, diabetic and obese people, increased
emphasis on controlling the cost of patient care, technological
product and treatment innovation, increased focus on improving
the patient experience and advancements in combination treatment
methods.
When infection is present in a wound, standard treatments
include cleansing, debridement and systemic antibiotics.
Although there are a number of topical antiseptics and
antibiotics currently used to treat acute and chronic wounds,
their overall effectiveness is limited. For example:
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many antiseptics, including Betadine, hydrogen peroxide and
Dakins solution, are toxic, can destroy human cells and
tissue, may cause allergic reactions and can impede the wound
healing process;
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silver-based products are expensive and require precise dosage
and close monitoring by trained medical staff to minimize the
potential for allergic reactions and bacterial
resistance; and
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the increase in antibiotic resistant bacterial strains, such as
MRSA and VRE, have compromised the efficacy of some widely used
topical antibiotics, including Neosporin or Bacitracin.
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Our
Solution
Our products have the following key features:
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Effective.
In physician clinical
studies, our products eliminated a wide range of pathogens that
cause infection in a variety of acute and chronic wounds without
promoting the development of resistant bacteria.
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Safe.
Clinical data shows that our
products are non-toxic, do not cause skin irritation and do not
inhibit wound healing. Throughout our clinical trials and
physician clinical studies to date and since commercialization
in 2004, we have received no reports of adverse events related
to the use of Microcyn.
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Easy to Use.
Our products require no
preparation before use or at time of disposal, and caregivers
can use our products without significant training. In addition,
Microcyn has a shelf life ranging from one to two years
depending on the size and type of packaging, can be stored at
room temperature and does not require any specific handling
procedures.
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Cost Effective.
Treatment of many
wounds requires extended hospitalization and care, including the
use of systemic antibiotics. Infection of wounds prolongs the
healing time and increases the use of systemic antibiotics. Our
clinical trials and physician clinical studies to date indicate
that Microcyn eliminates infection, accelerates healing time and
reduces the use of systemic antibiotics, thereby lowering
overall patient cost.
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Our
Strategy
Our goal is to become a worldwide leader in wound care by
establishing Microcyn as the standard of care for controlling
infection in chronic and acute wounds throughout all stages of
treatment. We also intend to leverage our expertise in wound
care into additional market opportunities. The key elements of
our strategy include the following:
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drive adoption of Microcyn as the standard of care in the wound
care market to prevent and eliminate infection;
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obtain additional regulatory approvals in the United States;
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expand our direct sales force and distribution networks;
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pursue opportunities to combine Microcyn with other treatments;
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develop strategic collaborations in the wound care
market; and
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leverage our Microcyn platform to address additional markets.
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2
Principal
Risks
There are significant risks and challenges relating to our
business and industry that may materially and adversely affect
our ability to execute our strategy and achieve our objectives.
We have a history of losses, expect to continue to incur losses
and may never achieve profitability. All of our products are
based on our Microcyn platform technology, and we do not have
the necessary regulatory approvals to market Microcyn as a drug
in the United States. We will be required to conduct clinical
trials that will be lengthy and expensive. These trials may not
be successful or lead to additional regulatory approvals.
Corporate
Information
We were incorporated in California in 1999 as Micromed
Laboratories, Inc. In August 2001, we changed our name to Oculus
Innovative Sciences, Inc. In connection with this offering, we
intend to reincorporate in Delaware. Our principal executive
offices are located at 1129 N. McDowell Blvd.,
Petaluma, California, 94954, and our telephone number is
(707) 782-0792.
We have two principal subsidiaries: Oculus Technologies of
Mexico, S.A. de C.V., organized in Mexico, and Oculus Innovative
Sciences Netherlands, B.V., organized in The Netherlands. Our
website is
www.oculusis.com.
Information that is included
on our website is not a part of this prospectus.
We currently use
Microcyn, Dermacyn
and
Vetericyn
,
which are registered trademarks, and our Oculus Innovative
Sciences logo as trademarks in the United States and other
countries. We have applied to the U.S. Patent and Trademark
Office to register our Oculus Innovative Sciences logo. We are
also seeking U.S. trademark registrations for
Cidalcyn
and
Dentricyn.
All other trademarks, trade names or
services marks appearing in this prospectus are the property of
their respective holders.
Our human wound treatment product is marketed under the name
Dermacyn in the United States and the European Union and under
the name Microyn60 in Mexico. All references in this prospectus
to Microcyn as a product are to the products marketed under
their respective names. Other references to Microcyn are to our
platform technology used in producing our products for wound
care and for other markets.
3
The
Offering
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Common stock to be offered by us
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shares
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Common stock to be outstanding after the offering
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shares
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Initial public offering price per share
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$
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Use of proceeds
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We intend to use the net proceeds from this offering to expand
our sales and marketing capabilities, to fund clinical trials
and related research, to expand our manufacturing capabilities
and for general corporate purposes, including working capital.
See Use of Proceeds.
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Proposed Nasdaq National Market symbol
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OCLS
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The number of shares of common stock that will be outstanding
immediately after this offering is based upon
16,875,928 shares of common stock outstanding as of
March 31, 2006 and does not include:
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8,116,174 shares of our common stock issuable upon the
exercise of outstanding stock options and options granted in
connection with this offering, at a weighted-average exercise
price of $1.05 per share;
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3,782,396 shares of our common stock issuable upon the
exercise of outstanding warrants, at a weighted average exercise
price of $2,61 per share; and
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up to 2,201,643 additional shares of our common stock reserved
for issuance under our equity plans.
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Unless we indicate otherwise, all information in this prospectus:
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gives effect to the conversion of all outstanding shares of our
preferred stock into 15,934,718 shares of our common stock
upon the completion of this offering;
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does not reflect the exercise of outstanding warrants or options
to purchase shares of our common stock;
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assumes that the underwriters do not exercise their
over-allotment option to purchase additional shares in this
offering;
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reflects a -for-one split of our common stock to be
effected before completion of this offering;
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reflects our reincorporation in Delaware from California; and
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reflects the amendment of our certificate of incorporation in
connection with this offering to, among other things, change the
number of shares authorized for issuance.
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4
Summary
Consolidated Financial Data
(In thousands, except per share data)
The following tables present our summary consolidated financial
data. Our historical results are not necessarily indicative of
the results that may be expected in the future. You should read
this information together with our audited consolidated
financial statements and related notes and the information under
Selected Consolidated Financial Data and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus.
The following tables present our summary financial data as of
March 31, 2006:
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on an actual basis;
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on a pro forma basis to give effect to the automatic conversion
of all outstanding shares of our convertible preferred stock
into 15,934,718 shares of our common stock upon the closing
of this offering; and
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on a pro forma as adjusted basis to further give effect to the
sale
of shares
of common stock in this offering at an assumed initial public
offering price of
$ per
share, after deducting the underwriting discount and our
estimated offering expenses.
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Year Ended
March 31,
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2004
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2005
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2006
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Consolidated Statements of
Operations Data:
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Revenues
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Product
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$
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95
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$
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473
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$
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1,966
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Service
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807
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883
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618
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Total revenues
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902
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1,356
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2,584
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Cost of revenues
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Product
(1)
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1,403
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2,211
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3,899
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Service
(1)
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1,265
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1,311
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1,003
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Total cost of revenues
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2,668
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3,522
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4,902
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Gross loss
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(1,766
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)
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(2,166
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)
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(2,318
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)
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Operating expenses:
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Research and
development
(1)
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1,413
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1,654
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2,600
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Selling, general and
administrative
(1)
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3,918
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12,492
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15,933
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Total operating expenses
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5,331
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14,146
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18,533
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Loss from operations
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(7,097
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)
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(16,312
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(20,851
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)
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Interest expense
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(178
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)
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(372
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(172
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)
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Interest income
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3
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8
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282
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Other income (expense), net
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(26
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)
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146
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(377
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Net loss from continuing operations
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(7,298
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)
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(16,530
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)
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(21,118
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Loss on discontinued operations
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(1,981
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Net loss
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(7,298
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)
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(16,530
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)
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(23,099
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Preferred stock dividends
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(121
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Net loss available to common
stockholders
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$
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(7,298
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)
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$
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(16,530
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$
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(23,220
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Net loss per common share: basic
and diluted
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$
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(0.47
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)
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$
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(1.06
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$
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(1.40
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)
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Weighted-average shares
outstanding: basic and diluted
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15,647
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15,659
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16,602
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Pro forma net loss per common
share: basic and diluted
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$
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(0.75
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)
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Pro forma weighted-average shares
outstanding: basic and diluted
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30,728
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(1)
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Includes the following stock-based compensation charges:
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5
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|
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Year Ended
March 31,
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|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Service
|
|
|
10
|
|
|
|
3
|
|
|
|
1
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
56
|
|
|
|
5
|
|
|
|
52
|
|
Selling, general and administrative
|
|
|
358
|
|
|
|
2,339
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
424
|
|
|
$
|
2,349
|
|
|
$
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
2006
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
|
|
|
(unaudited)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
(1)
|
|
$
|
7,448
|
|
|
|
|
|
Working
capital
(1)
|
|
|
5,127
|
|
|
|
|
|
Total
assets
(1)
|
|
|
12,689
|
|
|
|
|
|
Total liabilities
|
|
|
5,351
|
|
|
|
|
|
Total stockholders
equity
(1)
|
|
|
7,338
|
|
|
|
|
|
|
|
|
(1)
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) this amount on a pro forma as adjusted
basis by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
underwriting discount and our estimated offering expenses.
|
6
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below with all
of the other information included in this prospectus before
making an investment decision. If any of the following risks
actually occur, our business, results of operations or financial
condition would likely suffer. In that case, the market price of
our common stock could decline and you could lose all or part of
your investment in our common stock. Additional risks and
uncertainties not presently known to us or that we currently
deem immaterial may also impair our business operations.
Risks
Related to Our Business
We have a
history of losses, we expect to continue to incur losses and we
may never achieve profitability.
We have incurred significant net losses in each fiscal year
since our inception, including losses of $7.3 million,
$16.5 million and $23.1 million for the years ended
March 31, 2004, 2005 and 2006, respectively. Our
accumulated deficit as of March 31, 2006 was
$50.3 million. We have yet to demonstrate that we can
generate sufficient sales of our products to become profitable.
The extent of our future operating losses and the timing of
profitability are highly uncertain, and we may never achieve
profitability. Even if we do generate significant revenues from
our product sales, we expect that increased operating expenses
will result in significant operating losses in the near term as
we, among other things:
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expand our sales and marketing capabilities in the United States
and internationally;
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conduct preclinical studies and clinical trials on our products
and product candidates;
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seek Food and Drug Administration, or FDA, clearance to market
Microcyn as a drug in the United States;
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increase our research and development efforts to enhance our
existing products, commercialize new products and develop new
product candidates and;
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establish additional and expand existing manufacturing
facilities.
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As a result of these activities, we will need to generate
significant revenue in order to achieve profitability and may
never become profitable. We must also maintain specified cash
reserves in connection with our loan and security agreement
which may limit our investment opportunities. Failure to
maintain these reserves could result in our lender foreclosing
against our assets or imposing significant restrictions on our
operations. Even if we do achieve profitability, we may not be
able to sustain or increase profitability on an ongoing basis.
Because
all of our products are based on our Microcyn platform
technology, we will need to generate sufficient revenues from
the sale of Microcyn to execute our business plan.
All of our products are based on our Microcyn platform
technology, and we do not have any non-Microcyn product
candidates that will generate revenues in the foreseeable
future. Accordingly, we expect to derive substantially all of
our future revenues from sales of our Microcyn products. We have
only been selling our products since July 2004, and
substantially all of our historical product revenues have been
from sales of Microcyn in Mexico. Although we began selling in
Europe in October 2004 and in the United States in June 2005,
our product revenues outside of Mexico to date have not been
significant. For example, product revenues from countries
outside of Mexico were 9.1% of our product revenues for the year
ended March 31, 2006. Microcyn has not been adopted as a
standard of care for wound treatment in any country and may not
gain acceptance among physicians, nurses, patients, third-party
payors and the medical community. Existing protocols for wound
care are well established within the medical community and tend
to vary geographically, and healthcare providers may be
reluctant to alter their protocols to include the use of
Microcyn. If Microcyn does not achieve an adequate level of
acceptance, we will not generate sufficient revenues to become
profitable.
7
We do not
have the necessary regulatory approvals to market Microcyn as a
drug in the United States.
We have obtained three 510(k) clearances in the United States
that permit us to sell Microcyn as a medical device to clean,
moisten and debride wounds. However, we do not have the
necessary regulatory approvals to market Microcyn in the United
States as a drug, which we will need to obtain in order to
execute our business plan. Before we are permitted to sell
Microcyn as a drug in the United States, we must, among other
things, successfully complete additional well-controlled
clinical trials, submit a New Drug Application, or NDA, to the
FDA and obtain FDA approval. We have not completed the clinical
trials that will be necessary to support an NDA for Microcyn. We
intend to file an NDA for Microcyn as a pre-operative skin
preparation in late 2006, and we also intend to seek FDA
approval for the use of Microcyn to prevent and eliminate
infection and accelerate healing in wounds. The FDA approval
process is expensive and uncertain, requires detailed and
comprehensive scientific and other data and generally takes
several years. Despite the time and expense exerted, approval is
never guaranteed. We do not know whether we will obtain the
necessary regulatory approvals to market Microcyn as a drug in
the United States. We anticipate that the earliest we could
obtain approval to sell Microcyn as a pre-operative skin
preparation in the United States is 2007, and any approval of
Microcyn to prevent and eliminate infection in wounds in the
United States will take even longer. Even if we obtain FDA
approval to sell Microcyn as a drug, we may not be able to
successfully commercialize Microcyn as a drug in the United
States and may never recover the substantial costs we have
invested in the development of our Microcyn products.
Delays or
adverse results in clinical trials could result in increased
costs to us and delay our ability to generate revenue.
Clinical trials are long and expensive, and the outcome of
clinical trials are uncertain and subject to delays. It may take
several years to complete clinical trials, if at all, and a
product candidate may fail at any stage of the clinical trial
process. The length of time required varies substantially
according to the type, complexity, novelty and intended use of
the product candidate. Interim results of a preclinical study or
clinical trial do not necessarily predict final results, and
acceptable results in preclinical studies or early clinical
trials may not be repeatable in later subsequent clinical
trials. The commencement or completion of any of our clinical
trials may be delayed or halted for a variety of reasons,
including the following:
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the FDA or other regulatory authorities do not approve a
clinical trial protocol;
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patients do not enroll in clinical trials at the rate we expect;
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delays in reaching agreement on acceptable clinical trial
agreement terms with prospective sites;
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delays in obtaining institutional review board approval to
conduct a study at a prospective site;
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third party clinical investigators do not perform our clinical
trials on our anticipated schedule or consistent with the
clinical trial protocol and good clinical practices, or the
third party organizations do not perform data collection and
analysis in a timely or accurate manner;
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governmental regulations or administrative actions are
changed; and
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insufficient funds to continue our clinical trials.
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We do not know whether our existing or any future clinical
trials will demonstrate safety and efficacy sufficiently to
result in additional FDA approvals. While a number of physicians
have conducted clinical studies assessing the safety and
efficacy of Microcyn for various indications, the data from
these studies is not sufficient to support approval of Microcyn
as a drug in the United States, and we will be required to
complete additional, well-controlled clinical studies in
compliance with FDA requirements before we submit an NDA for
Microcyn. Our failure to adequately demonstrate the safety and
efficacy of our product candidates to the satisfaction of the
FDA will prevent our receipt of FDA approval for additional
indications and, ultimately, impact commercialization of our
products in the United States. If we experience significant
delays or adverse results in clinical trials, our financial
results and the commercial prospects for products based on
Microcyn will be harmed, our costs would increase and our
ability to generate revenue would be delayed.
8
If we
fail to obtain, or experience significant delays in obtaining,
regulatory clearances to market our current or future products,
we will be unable to commercialize these products.
Developing, testing, manufacturing, marketing and selling of
medical technology products are subject to extensive regulation
by numerous governmental authorities in the United States and
other countries. The process of obtaining regulatory clearance
and approval of medical technology products is costly and time
consuming. Even though the underlying product formulation may be
the same or similar, our products are subject to different
regulations and approval processes depending upon their intended
use. In the United States, use of Microcyn to cleanse and
debride a wound comes within the medical device regulation
framework, while use of Microcyn to prepare the skin
pre-operatively and to control infection in wounds will require
us to seek FDA approval of Microcyn as a drug in the United
States.
To obtain regulatory approval of our products as drugs in the
U.S., we must first show that our products are safe and
effective for target indications through preclinical studies
(animal testing) and clinical trials (human testing). The FDA
generally clears marketing of a medical device through the
510(k) pre-market clearance process if it is demonstrated that
the new product has the same intended use and is substantially
equivalent to another legally marketed device, including a
510(k)-cleared product, and otherwise meets the FDAs
requirements. Product modifications, including labeling the
product for a new intended use, may require the submission of a
new 510(k) clearance before the modified product can be
marketed. Some higher-risk medical devices must receive
pre-market approval, or PMA, before they may be commercialized.
The PMA process is more costly, lengthy and uncertain than the
510(k) clearance process and requires the development and
submission of clinical studies supporting the safety and
effectiveness of the device. We cannot assure you that any new
products or any product enhancements we develop will be subject
to the shorter 510(k) clearance process instead of the more
lengthy PMA or drug approval processes.
We do not know whether our products based on Microcyn will
receive approval from FDA as a drug. The data from clinical
studies of Microcyn conducted by physicians to date will not
satisfy FDAs regulatory criteria for approval of an NDA.
We are therefore conducting, and will need to conduct
additional, well-controlled clinical trials in order to generate
data that demonstrates to the satisfaction of FDA that Microcyn
is safe and effective for the indications we seek in our NDAs.
The outcomes of clinical trials are inherently uncertain, and
there is no guarantee that the results of our clinical trials
will replicate the data obtained from the physician clinical
studies and that these clinical trials will support FDA approval
of Microcyn as a drug. In addition, we do not know whether the
necessary approvals or clearances will be granted for future
products or that FDA review or actions will not involve delays
caused by the FDAs request for additional information or
clinical testing that could adversely affect the time to market
and sale of products as drugs. If we do not obtain the requisite
regulatory clearances and approvals, we will be unable to
commercialize our products as drugs and may never recover any of
the substantial costs we have invested in the development of
Microcyn.
Distribution of our products outside the United States is
subject to extensive government regulation. These regulations,
including the requirements for approvals or clearance to market,
the time required for regulatory review and the sanctions
imposed for violations, vary from country to country. We do not
know whether we will obtain regulatory approvals in such
countries or that we will not be required to incur significant
costs in obtaining or maintaining these regulatory approvals. In
addition, the export by us of certain of our products that have
not yet been cleared for domestic commercial distribution may be
subject to FDA export restrictions. Failure to obtain necessary
regulatory approvals, the restriction, suspension or revocation
of existing approvals or any other failure to comply with
regulatory requirements would have a material adverse effect on
our future business, financial condition, and results of
operations.
We may incur significant liabilities in connection with our
prior relationship with a distributor in Mexico, and our results
of operations may be negatively affected by the termination of
this relationship.
On June 16, 2005, we entered into a series of agreements
with Quimica Pasteur, or QP, a Mexico-based distributor of
pharmaceutical products to hospitals and health care entities
owned or operated by the Mexican Ministry of Health, or MOH.
These agreements provided, among other things, for QP to act as
our exclusive distributor of Microcyn to the MOH for a period of
three years. We concurrently acquired a small equity interest in
QP and an option to acquire the remaining equity of QP directly
from its principals. In addition,
9
two of our employees were appointed as officers of QP, which
resulted in the establishment of financial control of QP by our
company under applicable accounting literature.
As a result of our agreements, we were required to consolidate
QPs operations with our financial results. In connection
with our audit of QPs financial statements in late 2005,
we were made aware of a number of facts that suggested that QP
or its principals may have engaged in some form of tax avoidance
practice prior to the execution of the agreements between our
company and QP. We did not discover these facts prior to our
execution of these agreements or for several months thereafter.
Our audit committee engaged an outside law firm to conduct an
investigation whose findings implicated QPs principals in
a systemic tax avoidance practice prior to June 16, 2005.
We estimate that taxes, interest and penalties related to these
practices could amount to $7 million or more. Based on the
results of this investigation, we terminated our agreements with
QP effective March 26, 2006.
Although we believe that we are not responsible for any tax
avoidance practices of QPs principals prior to
June 16, 2005, the Mexican taxing authority could make a
claim against us or our Mexican subsidiary.
QP had a well-established relationship with the MOH. We lost the
benefit of this relationship when we terminated our agreements
with QP. Although we currently market Microcyn in Mexico through
a dedicated contract sales force and we continue to market
Microcyn to the MOH, we do not know whether our future sales in
Mexico will decline as a result of the termination of our
relationship with QP.
If our
competitors develop products similar to Microcyn, we may need to
modify or alter our business strategy, which may delay the
achievement of our goals.
Competitors may develop products with similar characteristics as
Microcyn. Such similar products marketed by larger competitors
can hinder our efforts to penetrate the market. As a result, we
may be forced to modify or alter our business and regulatory
strategy and sales and marketing plans, as a response to changes
in the market, competition and technology limitations, among
others. Such modifications may pose additional delays in
achieving our goals.
If we are
unable to expand our direct domestic sales force, we may not be
able to successfully sell our products in the United
States.
We currently sell Microcyn in the United States through a
network of one national and five regional distributors and a
direct sales force comprised of four persons. We plan to sell
directly into the U.S. market and are expanding our
domestic sales force. Our intent is to expand our domestic sales
force by December 2007 to coincide as closely as possible with
our anticipated receipt of FDA approval to market and sell
Microcyn as a drug for pre-operative skin preparation.
Developing a sales force is expensive and time consuming, and
the lack of qualified sales personnel could delay or limit the
success of our product launch. Our domestic sales force, if
established, will be competing with the sales operations of our
competitors, which are better funded and more experienced. We
may not be able to develop domestic sales capacity on a timely
basis or at all.
Our
dependence on distributors for sales could limit or prevent us
from selling our products and from realizing long-term revenue
growth.
We currently depend on distributors to sell Microcyn in the
United States, Europe and other countries and intend to continue
to sell our products primarily through distributors in Europe
and the United States for the foreseeable future. In addition,
if we are unable to expand our direct sales force, we will
continue to rely on distributors to sell Microcyn. Our existing
distribution agreements are generally short-term in duration,
and we may need to pursue alternate distributors if the other
parties to these agreements terminate or elect not to
10
renew their agreements. If we are unable to retain our current
distributors for any reason, we must replace them with
alternative distributors experienced in supplying the wound care
market, which could be time-consuming and divert
managements attention from other operational matters. In
addition, we will need to attract additional distributors to
expand the geographic areas in which we sell Microcyn.
Distributors may not commit the necessary resources to market
and sell our products to the level of our expectations, which
could harm our ability to generate revenues. In addition, some
of our distributors may also sell products that compete with
ours. If current or future distributors do not perform
adequately, or we are unable to locate distributors in
particular geographic areas, we may not realize long-term
revenue growth.
We depend
on a contract sales force to sell our products in
Mexico.
We currently depend on a contract sales force to sell Microcyn
in Mexico. Our existing agreement is short-term in duration and
can be terminated by either party upon 30 days written
notice. If we are unable to retain our current agreement for any
reason, we may need to build our own internal sales force or
find an alternate source for contract sales people. We may be
unable to find an alternate source, or the alternate
sources sales force may not generate sufficient revenue.
If our current or future contract sales force does not perform
adequately, we may not realize long-term revenue growth in
Mexico.
If we
fail to comply with ongoing regulatory requirements, or if we
experience unanticipated problems with our products, these
products could be subject to restrictions or withdrawal from the
market.
Regulatory approvals or clearances that we currently have and
that we may receive in the future are subject to limitations on
the indicated uses for which the products may be marketed, and
any future approvals could contain requirements for potentially
costly post-marketing
follow-up
studies. In addition, the manufacturing, labeling, packaging,
adverse event reporting, storage, advertising, promotion,
distribution and record-keeping for approved products are
subject to extensive regulation. Our manufacturing facilities,
processes and specifications are subject to periodic inspection
by FDA, KEMA, and other regulatory authorities and from time to
time, we may receive notices of deficiencies from these agencies
as a result of such inspections. Our failure to continue to meet
regulatory standards or to remedy any deficiencies could result
in restrictions being imposed on products or manufacturing
processes, fines, suspension or loss of regulatory approvals or
clearances, product recalls, termination of distribution or
product seizures or the need to invest substantial resources to
comply with various existing and new requirements. In the more
egregious cases, criminal sanctions, civil penalties,
disgorgement of profits or closure of our manufacturing
facilities are possible. The subsequent discovery of previously
unknown problems with Microcyn, including adverse events of
unanticipated severity or frequency, may result in restrictions
on the marketing of our products, and could include voluntary or
mandatory recall or withdrawal of products from the market.
New government regulations may be enacted and changes in FDA
policies and regulations, their interpretation and enforcement,
could prevent or delay regulatory approval of our products. We
cannot predict the likelihood, nature or extent of adverse
government regulation that may arise from future legislation or
administrative action, either in the United States or abroad.
Therefore, we do not know whether we will be able to continue to
comply with any regulations or that the costs of such compliance
will not have a material adverse effect on our future business,
financial condition, and results of operations. If we are not
able to maintain regulatory compliance, we will not be permitted
to market our products and our business would suffer.
Our
competitive position depends on our ability to protect our
intellectual property and our proprietary
technologies.
Our ability to compete and to achieve and maintain profitability
depends on our ability to protect our intellectual property and
proprietary technologies. We currently rely on a combination of
patents, patent applications, trademarks, trade secret laws,
confidentiality agreements, license agreements and invention
assignment agreements to protect our intellectual property
rights. We also rely upon unpatented know-how and continuing
technological innovation to develop and maintain our competitive
position. These measures may not be adequate to safeguard our
Microcyn technology. In addition, we granted a security interest
in our assets under a loan and security agreement. The security
interest extends to our intellectual property in the event we
11
fail to maintain specified cash reserves under the loan. If we
do not protect our rights adequately, third parties could use
our technology, and our ability to compete in the market would
be reduced.
Although we have filed U.S. and foreign patent applications
related to our Microcyn based products, the manufacturing
technology for making the products, and their uses, no patents
have been issued from these applications.
Our pending patent applications and any patent applications we
may file in the future may not result in issued patents, and we
do not know whether any of our in-licensed patents or any
additional patents that might ultimately be issued by the
U.S. Patent and Trademark Office will protect our Microcyn
technology. Any claims that issue may not be sufficiently broad
to prevent third parties from producing competing substitutes
and may be infringed, designed around, or invalidated by third
parties. Even issued patents may later be found to be invalid,
or may be modified or revoked in proceedings instituted by third
parties before various patent offices or in courts.
The degree of future protection for our proprietary rights is
more uncertain in part because legal means afford only limited
protection and may not adequately protect our rights, and we
will not be able to ensure that:
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we were the first to invent the inventions described in patent
applications;
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|
|
|
we were the first to file patent applications for inventions;
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|
|
|
others will not independently develop similar or alternative
technologies or duplicate our products without infringing our
intellectual property rights;
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any patents licensed or issued to us will provide us with any
competitive advantages;
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we will develop proprietary technologies that are
patentable; or
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the patents of others will not have an adverse effect on our
ability to do business.
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The policies we use to protect our trade secrets may not be
effective in preventing misappropriation of our trade secrets by
others. In addition, confidentiality and invention assignment
agreements executed by our employees, consultants and advisors
may not be enforceable or may not provide meaningful protection
for our trade secrets or other proprietary information in the
event of unauthorized use or disclosures. We cannot be certain
that the steps we have taken will prevent the misappropriation
and use of our intellectual property, particularly in foreign
countries where the laws may not protect our proprietary rights
as fully as in the United States. For example, one of our former
contract partners, Nofil Corporation, whom we relied upon to
manufacture our proprietary machines had access to our
proprietary information and we believe undertook the development
and manufacture of the machines to be sold to third parties in
violation of our agreement with such company. We have brought a
claim against Nofil in the Northern District of California. We
believe that a former officer of our Mexico subsidiary
collaborated in these acts, misappropriated our trade secrets,
and is currently selling products in Mexico that are competitive
to our products. In addition, we believe that, through the
licensor of the patents that we in-license and who has also
assigned patents to us, a company in Japan obtained one of our
patent applications, translated it into Hangul and filed it
under such companys and the licensors name in South
Korea. These and any other leak of confidential data into the
public domain or to third parties could allow our competitors to
learn our trade secrets.
We are in
a dispute with the licensor of all of our current issued
patents, which could result in our losing all rights under such
patents
and
have a material adverse impact on our business opportunities in
Japan.
In March 2003, we obtained an exclusive license to six issued
Japanese patents and five Japanese published pending patent
applications owned by Coherent Technologies. The issued Japanese
patents and pending Japanese patent applications relate to an
early generation of super-oxidized water product and aspects of
the method and apparatus for producing such product and will
expire between 2011 and 2014. In June 2006, we received written
notice 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
12
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 could have to defend ourselves against
infringement claims from Coherent in Japan based on their
position on termination of the license.
We may
face intellectual property infringement claims that could be
time-consuming, costly to defend and could result in our loss of
significant rights and the assessment of treble
damages.
From time to time, we may receive notices of claims of
infringement, misappropriation or misuse of other parties
proprietary rights. In September 2005, a complaint was filed
against us in Mexico claiming confusion in trademarks with
respect to our Microcyn60 mark. We have tentatively agreed to
change the name Microcyn60 within twelve months from the date of
a proposed settlement. The party has referred the matter to the
Mexico Trademark Office. We could incur a liability of
approximately $100,000 for the use of the name Microcyn60 during
the twelve month period following the date of settlement. We
cannot be sure that we will not be required to take additional
actions, including making additional payments related to this
matter, or that changing our product name will not have a
negative impact on our product sales in Mexico.
In addition, we may have disputes regarding intellectual
property rights with the parties that have licensed those rights
to us. Some claims received from third parties may lead to
litigation. We cannot assure you that we will prevail in these
actions, or that other actions alleging misappropriation or
misuse by us of third-party trade secrets, infringement by us of
third-party patents and trademarks or the validity of our
patents, will not be asserted or prosecuted against us. We may
also initiate claims to defend our intellectual property.
Intellectual property litigation, regardless of outcome, is
expensive and time-consuming, could divert managements
attention from our business and have a material negative effect
on our business, operating results or financial condition. If
there is a successful claim of infringement against us, we may
be required to pay substantial damages (including treble damages
if we were to be found to have willfully infringed a third
partys patent) to the party claiming infringement, develop
non-infringing technology, stop selling our products or using
technology that contains the allegedly infringing intellectual
property or enter into royalty or license agreements that may
not be available on acceptable or commercially practical terms,
if at all. Our failure to develop non-infringing technologies or
license the proprietary rights on a timely basis could harm our
business. In addition, modifying our products to include the
non-infringing technologies could require us to seek re-approval
or clearance from various regulatory bodies for our products,
which would be costly and time consuming. Also, we may be
unaware of pending patent applications that relate to our
technology. Parties making infringement claims on future issued
patents may be able to obtain an injunction that would prevent
us from selling our products or using technology that contains
the allegedly infringing intellectual property, which could harm
our business.
Our
ability to generate revenue will be diminished if we are unable
to obtain acceptable prices or an adequate level of
reimbursement from third-party payors of healthcare
costs.
The continuing efforts of governmental and other third-party
payors, including managed care organizations such as health
maintenance organizations, or HMOs, to contain or reduce costs
of health care may affect our future revenue and profitability,
and the future revenue and profitability of our potential
customers, suppliers and collaborative or license partners and
the availability of capital. For example, in certain foreign
markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United
States, governmental and private payors have limited the growth
of health care costs through price regulation or controls,
competitive pricing programs and drug rebate programs. Our
ability to commercialize our products successfully will depend
in part on the extent to which appropriate coverage and
reimbursement levels for the cost of our Microcyn products and
related treatment are obtained from governmental authorities,
private health insurers and other organizations, such as HMOs.
There is significant uncertainty concerning third-party coverage
and reimbursement of newly approved medical products and drugs.
Third-party payors are increasingly challenging the prices
charged for medical products and services. Also, the trend
toward managed healthcare in the United States and the
concurrent growth of organizations such as HMOs, as well as
legislative proposals to reform healthcare or reduce government
insurance programs, may result in lower prices for or rejection
of our products. The cost
13
containment measures that health care payors and providers are
instituting and the effect of any health care reform could
materially and adversely affect our ability to generate revenues.
In addition, given ongoing federal and state government
initiatives directed at lowering the total cost of health care,
the U.S. Congress and state legislatures will likely
continue to focus on health care reform, the cost of
prescription pharmaceuticals and on the reform of the Medicare
and Medicaid payment systems. While we cannot predict whether
any proposed cost-containment measures will be adopted, the
announcement or adoption of these proposals could reduce the
price that we receive for our Microcyn products in the future.
We could
be required to indemnify third parties for alleged infringement,
which could cause us to incur significant costs.
Some of our distribution agreements contain commitments to
indemnify our distributors against liability arising from
infringement of third party intellectual property such as
patents. We may be required to indemnify our customers for
claims made against them or license fees they are required to
pay. If we are forced to indemnify for claims or to pay license
fees, our business and financial condition could be
substantially harmed.
A
significant part of our business is conducted outside of the
United States, exposing us to additional risks that may not
exist in the United States, which in turn could cause our
business and operating results to suffer.
We have international operations in Mexico and Europe. For the
fiscal years ended March 31, 2004, 2005 and 2006,
approximately 10%, 35% and 75%, respectively, of our total
revenue was generated from sales outside of the United States.
Our business is highly regulated for the use, marketing and
manufacturing of our Microcyn products both domestically and
internationally. Our international operations are subject to
risks, including:
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local political or economic instability;
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changes in governmental regulation;
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changes in import/export duties;
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trade restrictions;
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lack of experience in foreign markets;
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difficulties and costs of staffing and managing operations in
certain foreign countries;
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work stoppages or other changes in labor conditions;
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difficulties in collecting accounts receivables on a timely
basis or at all; and
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adverse tax consequences or overlapping tax structures.
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We plan to continue to expand internationally to respond to
customer requirements and market opportunities. We currently
have international manufacturing facilities in Mexico and The
Netherlands. Establishing operations in any foreign country or
region presents risks such as those described above as well as
risks specific to the particular country or region. In addition,
until a payment history is established over time with customers
in a new geography or region, the likelihood of collecting
receivables generated by such operations could be less than our
expectations. As a result, there is a greater risk that reserves
set with respect to the collection of such receivables may be
inadequate. If our international expansion efforts in any
foreign country are unsuccessful, we could incur significant
losses and we may not achieve profitability.
In addition, changes in policies or laws of the United States or
foreign governments resulting in, among other things, changes in
regulations and the approval process, higher taxation, currency
conversion limitations, restrictions on fund transfers or the
expropriation of private enterprises, could reduce the
anticipated benefits of our international expansion. If we fail
to realize the anticipated revenue growth of our future
international operations, our business and operating results
could suffer.
14
Our sales
in international markets subject us to foreign currency exchange
and other risks and costs which could harm our
business.
A substantial portion of our revenues are derived from outside
the United States, and primarily from Mexico. We anticipate that
revenues from international customers will continue to represent
a substantial portion of our revenues for the foreseeable
future. Because we generate revenues in foreign currencies, we
are subject to the effects of exchange rate fluctuations. For
the years ended March 31, 2004, 2005 and 2006,
approximately 10%, 35% and 75%, respectively, of our revenues
were denominated in currencies other than the U.S. dollar.
We incurred foreign currency exchange losses of $4,000 and
$283,000 for the years ended March 31, 2004 and 2006,
respectively, and a gain of $134,000 for the fiscal year ended
March 31, 2005. The functional currency of our Mexican
subsidiary is the Mexican Peso and the functional currency of
our subsidiary in The Netherlands is the Euro. For the
preparation of our consolidated financial statements, the
financial results of our foreign subsidiaries are translated
into U.S. dollars on average exchange rates during the
applicable period. If the U.S. dollar appreciates against
the Mexican Peso or the Euro, as applicable, the revenues we
recognize from sales by our subsidiaries will be adversely
impacted. Foreign exchange gains or losses as a result of
exchange rate fluctuations in any given period could harm our
operating results and negatively impact our revenues.
Additionally, if the effective price of our products were to
increase as a result of fluctuations in foreign currency
exchange rates, demand for our products could decline and
adversely affect our results of operations and financial
condition.
The loss
of key members of our senior management team, one of our
directors or our inability to retain highly skilled scientists,
technicians and salespeople could adversely affect our
business.
Our success depends largely on the skills, experience and
performance of key members of our executive management team,
including Hojabr Alimi, our Chief Executive Officer, and Akihisa
Akao, a member of our Board of Directors and one of our
consultants. The efforts of these people will be critical to us
as we continue to develop our products and as we attempt to
commercialize products in the chronic and acute wound care
market. If we were to lose one or more of these individuals, we
may experience difficulties in competing effectively, developing
our technologies and implementing our business strategies.
Our research and development programs depend on our ability to
attract and retain highly skilled scientists and technicians. We
may not be able to attract or retain qualified scientists and
technicians in the future due to the intense competition for
qualified personnel among medical technology businesses,
particularly in the San Francisco Bay Area. We also face
competition from universities and public and private research
institutions in recruiting and retaining highly qualified
personnel. In addition, our success depends on our ability to
attract and retain salespeople with extensive experience in
wound care and close relationships with the medical community,
including physicians and other medical staff. We may have
difficulties locating, recruiting or retaining qualified
salespeople, which could cause a delay or decline in the rate of
adoption of our products. If we are not able to attract and
retain the necessary personnel to accomplish our business
objectives, we may experience constraints that will adversely
affect our ability to support our research, development and
sales programs.
We maintain key-person life insurance only on Mr. Alimi. We
may discontinue this insurance in the future, it may not
continue to be available on commercially reasonable terms or, if
continued, it may prove inadequate to compensate us for the loss
of Mr. Alimis services.
We may be
unable to manage our future growth effectively, which would make
it difficult to execute our business strategy.
We may experience periods of rapid growth as we expand our
business, which will likely place a significant strain on our
limited personnel and other resources. Any failure by us to
manage our growth effectively could have an adverse effect on
our ability to achieve our commercialization goals.
Furthermore, we conduct business in a number of geographic
regions and are seeking to expand to other regions. We have not
established a physical presence in many of the international
regions in which we conduct or plan to conduct business, but
rather we manage our business from our headquarters in Northern
California.
15
As a result, we conduct business at all times of the day and
night with limited personnel. If we fail to appropriately target
and increase our presence in these geographic regions, we may
not be able to effectively market and sell our Microcyn products
in these locations or we may not meet our customers needs
in a timely manner, which could negatively affect our operating
results.
Future growth will also impose significant added
responsibilities on management, including the need to identify,
recruit, train and integrate additional employees. In addition,
rapid and significant growth will place strain on our
administrative and operational infrastructure, including sales
and marketing and clinical and regulatory personnel. Our ability
to manage our operations and growth will require us to continue
to improve our operational, financial and management controls,
reporting systems and procedures. If we are unable to manage our
growth effectively, it may be difficult for us to execute our
business strategy.
The wound
care industry is highly competitive and subject to rapid
technological change. If our competitors are better able to
develop and market products that are less expensive or more
effective than any products that we may develop, our commercial
opportunity will be reduced or eliminated.
The wound care industry is highly competitive and subject to
rapid technological change. Our success depends, in part, upon
our ability to stay at the forefront of technological change and
maintain a competitive position.
We compete with large healthcare, pharmaceutical and
biotechnology companies, along with smaller or early-stage
companies that have collaborative arrangements with larger
pharmaceutical companies, academic institutions, government
agencies and other public and private research organizations.
Many of our competitors have significantly greater financial
resources and expertise in research and development,
manufacturing, pre-clinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products
than we do. Our competitors may:
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develop and patent processes or products earlier than we will;
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develop and commercialize products that are less expensive or
more efficient than any products that we may develop;
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obtain regulatory approvals for competing products more rapidly
than we will;
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improve upon existing technological approaches or develop new or
different approaches that render our technology or products
obsolete or non-competitive.
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As a result, we may not be able to successfully commercialize
any future products.
Our
inability to raise additional capital on acceptable terms in the
future may limit our ability to develop and commercialize new
products and technologies.
We expect capital outlays and operating expenditures to increase
over the next several years as we work to commercialize our
products and expand our infrastructure and research and
development activities. We may need to raise additional capital
to, among other things:
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sustain commercialization of our current products or new
products;
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increase our sales and marketing efforts to drive market
adoption and address competitive developments;
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fund our clinical trials and preclinical studies;
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expand our research and development activities;
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expand our manufacturing capabilities;
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acquire or license technologies; and
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finance capital expenditures and our general and administrative
expenses.
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Our present and future funding requirements will depend on many
factors, including:
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the level of research and development investment required to
maintain and improve our technology position;
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cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
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our efforts to acquire or license complementary technologies or
acquire complementary businesses;
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changes in product development plans needed to address any
difficulties in commercialization;
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competing technological and market developments; and
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changes in regulatory policies or laws that affect our
operations.
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If we raise additional funds by issuing equity securities,
dilution to our stockholders could result. Any equity securities
issued also may provide for rights, preferences or privileges
senior to those of holders of our common stock. If we raise
additional funds by issuing debt securities, these debt
securities would have rights, preferences and privileges senior
to those of holders of our common stock, and the terms of the
debt securities issued could impose significant restrictions on
our operations. If we raise additional funds through
collaborations and licensing arrangements, we might be required
to relinquish significant rights to our technologies or
products, or grant licenses on terms that are not favorable to
us. If adequate funds are not available, we may have to scale
back our operations or limit our research and development
activities.
The
success of our research and development efforts may depend on
our ability to find suitable collaborators to fully exploit our
capabilities. If we are unable to establish collaborations or if
these future collaborations are unsuccessful, our research and
development efforts may be unsuccessful, which could adversely
affect our results of operations and financial
condition.
An important element of our business strategy will be to enter
into collaborative or license arrangements under which we
license our Microcyn technology to other parties for development
and commercialization. We expect that while we may initially
seek to conduct initial clinical trials on our drug candidates,
we may need to seek collaborators for a number of our potential
products because of the expense, effort and expertise required
to continue additional clinical trials and further develop those
potential products candidates. Because collaboration
arrangements are complex to negotiate, we may not be successful
in our attempts to establish these arrangements. Also, we may
not have products that are desirable to other parties, or we may
be unwilling to license a potential product because the party
interested in it is a competitor. The terms of any arrangements
that we establish may not be favorable to us. Alternatively,
potential collaborators may decide against entering into an
agreement with us because of our financial, regulatory or
intellectual property position or for scientific, commercial or
other reasons. If we are not able to establish collaborative
agreements, we may not be able to develop and commercialize new
products, which would adversely affect our business and our
revenues.
In order for any of these collaboration or license arrangements
to be successful, we must first identify potential collaborators
or licensees whose capabilities complement and integrate well
with ours. We may rely on these arrangements for, not only
financial resources, but also for expertise or economies of
scale that we expect to need in the future relating to clinical
trials, manufacturing, sales and marketing, and for licenses to
technology rights. However, it is likely that we will not be
able to control the amount and timing of resources that our
collaborators or licensees devote to our programs or potential
products. If our collaborators or licensees prove difficult to
work with, are less skilled than we originally expected, or do
not devote adequate resources to the program, the relationship
will not be successful. If a business combination, involving a
collaborator or licensees and a third party were to occur, the
effect could be to diminish, terminate or cause delays in
development of a potential product.
We may
acquire other businesses or form joint ventures that could harm
our operating results, dilute your ownership of us, increase our
debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions of
complementary businesses and assets, as well as technology
licensing arrangements. We also intend to pursue strategic
alliances that leverage our core
17
technology and industry experience to expand our product
offerings or distribution. We have no experience with respect to
acquiring other companies and limited experience with respect to
the formation of collaborations, strategic alliances and joint
ventures. If we make any acquisitions, we may not be able to
integrate these acquisitions successfully into our existing
business, and we could assume unknown or contingent liabilities.
Any future acquisitions by us also could result in significant
write-offs or the incurrence of debt and contingent liabilities,
any of which could harm our operating results. Integration of an
acquired company also may require management resources that
otherwise would be available for ongoing development of our
existing business. We may not identify or complete these
transactions in a timely manner, on a cost-effective basis, or
at all, and we may not realize the anticipated benefits of any
acquisition, technology license, strategic alliance or joint
venture.
To finance any acquisitions, we may choose to issue shares of
our common stock as consideration, which would dilute your
ownership interest in us. If the price of our common stock is
low or volatile, we may not be able to acquire other companies
for stock. Alternatively, it may be necessary for us to raise
additional funds for acquisitions through public or private
financings. Additional funds may not be available on terms that
are favorable to us, or at all.
If we are
unable to comply with broad and complex federal and state fraud
and abuse laws, we could face substantial penalties and our
products could be excluded from government healthcare
programs.
We are subject to various broad and complex federal and state
laws pertaining to healthcare fraud and abuse, which, among
other things, prohibit payments to induce the referral of
products and services and the fraudulent billing of federal
healthcare programs. Any violations of these laws, or any
action against us for violation of these laws, even if we
successfully defend against it, could result in a material
adverse effect on our business, financial condition and results
of operations. If there is a change in law, regulation or
administrative or judicial interpretations, we may have to
change our business practices or our existing business practices
could be challenged as unlawful, which could have a material
adverse effect on our business, financial condition and results
of operations.
The frequency of suits to enforce these laws have increased
significantly in recent years and have increased the risk that a
healthcare company will have to defend a false claim action, pay
fines or be excluded from the Medicare, Medicaid or other
federal and state healthcare programs as a result of an
investigation arising out of such action. We cannot assure you
that we will not become subject to such litigation or, if we are
not successful in defending against such actions, that such
actions will not have a material adverse effect on our business,
financial condition and results of operations. In addition, we
cannot assure you that the costs of defending claims or
allegations under the False Claims Act will not have a material
adverse effect on our business, financial condition and results
of operations.
Our
efforts to discover and develop potential products may not lead
to the discovery, development, commercialization or marketing of
actual drug products.
We are currently engaged in a number of different approaches to
discover and develop new product applications and product
candidates. At the present time, we have one drug candidate in
clinical trials. We also have a non-Microcyn based compound in
the research and development phase. This compound has potential
applications in oncology. Discovery and development of potential
drug candidates are expensive and time-consuming, and we do not
know if our efforts will lead to discovery of any drug
candidates that can be successfully developed and marketed. If
our efforts do not lead to the discovery of a suitable drug
candidate, we may be unable to grow our clinical pipeline or we
may be unable to enter into agreements with collaborators who
are willing to develop our drug candidates.
We must
implement additional and expensive finance and accounting
systems, procedures and controls as we grow our business and
organization and to satisfy new reporting requirements, which
will increase our costs and require additional management
resources.
As a public reporting company, we will be required to comply
with the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the Securities and Exchange Commission, including
expanded disclosures and accelerated reporting requirements and
more complex accounting rules. Compliance with Section 404
of
18
the Sarbanes-Oxley Act and other requirements will increase our
costs and require additional management resources. We recently
have been upgrading our finance and accounting systems,
procedures and controls and will need to continue to implement
additional finance and accounting systems, procedures and
controls as we grow our business and organization, enter into
complex business transactions and take actions designed to
satisfy new reporting requirements. Specifically, our
transaction with QP may indicate that we need to better plan for
complex transactions and the application of complex accounting
principles relating to those transactions. If we are unable to
complete the required Section 404 assessment as to the
adequacy of our internal control over financial reporting, if we
fail to maintain or implement adequate controls, or if our
independent registered public accounting firm is unable to
provide us with an unqualified report as to the effectiveness of
our internal control over financial reporting as of the date of
our first Annual Report on
Form 10-K
for which compliance is required and thereafter, our ability to
obtain additional financing could be impaired. In addition,
investors could lose confidence in the reliability of our
internal control over financial reporting and in the accuracy of
our periodic reports filed under the Exchange Act. A lack of
investor confidence in the reliability and accuracy of our
public reporting could cause our stock price to decline.
We may
not be able to maintain sufficient product liability insurance
to cover claims against us.
Product liability insurance for the healthcare industry is
generally expensive to the extent it is available at all. We may
not be able to maintain such insurance on acceptable terms or be
able to secure increased coverage if the commercialization of
our products progresses, nor can we be sure that existing or
future claims against us will be covered by our product
liability insurance. Moreover, the existing coverage of our
insurance policy or any rights of indemnification and
contribution that we may have may not be sufficient to offset
existing or future claims. A successful claim against us with
respect to uninsured liabilities or in excess of insurance
coverage and not subject to any indemnification or contribution
could have a material adverse effect on our future business,
financial condition, and results of operations.
Risks
Related to Our Common Stock
Purchasers
in this offering will experience immediate and substantial
dilution in the book value of their investment.
The initial public offering price of our common stock is
substantially higher than the net tangible book value per share
of our common stock immediately after this offering. Therefore,
if you purchase our common stock in this offering, you will
incur an immediate dilution of $
in net tangible book value per share from the price you paid,
based on the assumed initial public offering price of
$ per share. The exercise of
outstanding options will result in further dilution of your
investment. For additional information, please see
Dilution.
Our
operating results may fluctuate, which could cause our stock
price to decrease.
Fluctuations in our operating results may lead to fluctuations,
including declines, in our share price. Our operating results
and our share price may fluctuate from period to period due to a
variety of factors, including:
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demand by physicians, other medical staff and patients for our
Microcyn products;
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reimbursement decisions by third-party payors and announcements
of those decisions;
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clinical trial results and publication of results in
peer-reviewed journals or the presentation at medical
conferences;
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the inclusion or exclusion of our Microcyn products in large
clinical trials conducted by others;
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actual and anticipated fluctuations in our quarterly financial
and operating results;
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developments or disputes concerning our intellectual property or
other proprietary rights;
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issues in manufacturing our product candidates or products;
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new or less expensive products and services or new technology
introduced or offered by our competitors or us;
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the development and commercialization of product enhancements;
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changes in the regulatory environment;
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delays in establishing new strategic relationships;
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introduction of technological innovations or new commercial
products by us or our competitors;
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litigation or public concern about the safety of our product
candidates or products;
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changes in recommendations of securities analysts or lack of
analyst coverage;
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failure to meet analyst expectations regarding our operating
results;
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additions or departures of key personnel; and
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general market conditions.
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Variations in the timing of our future revenues and expenses
could also cause significant fluctuations in our operating
results from period to period and may result in unanticipated
earning shortfalls or losses. In addition, the Nasdaq National
Market in general, and the market for life sciences companies in
particular, have experienced significant price and volume
fluctuations that have often been unrelated or disproportionate
to the operating performance of those companies.
If an
active, liquid trading market for our common stock does not
develop, you may not be able to sell your shares quickly or at
or above the initial offering price.
Prior to this offering, there has not been a public market for
our common stock. An active and liquid trading market for our
common stock may not develop or be sustained following this
offering. You may not be able to sell your shares quickly or at
or above the initial offering price if trading in our stock is
not active. The initial public offering price may not be
indicative of prices that will prevail in the trading market.
See Underwriting for more information regarding the
factors that will be considered in determining the initial
public offering price.
Future
sales of shares by our stockholders could cause the market price
of our common stock to drop significantly, even if our business
is doing well.
After this offering, we will
have
outstanding shares of common stock based on the number of shares
outstanding
at ,
2006. This includes
the shares
we are selling in this offering, which (other than shares
purchased by our affiliates) may be resold in the public market
immediately. Subject to the
lock-up
arrangements described in Underwriting and volume
and other restrictions as applicable under Rule 144 and 701
under the Securities Act, the remaining shares will become
available for resale in the public market as shown in the chart
below.
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Number of Restricted Shares and
% of
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Total Outstanding Following
Offering
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Date Available for Sale Into
Public Market
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shares,
or %
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Immediately
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shares,
or %
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90 days after the date of
this prospectus
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shares,
or %
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Immediately upon expiration of the
180-day
lock
up agreement
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shares,
or %
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At some point after the expiration
of the
180-day
lock
up agreement
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We do not
expect to pay dividends in the foreseeable future. As a result,
you must rely on stock appreciation for any return on your
investment.
We do not anticipate paying cash dividends on our common stock
in the foreseeable future. Any payment of cash dividends will
also depend on our financial condition, results of operations,
capital requirements and other factors and will be at the
discretion of our board of directors. Accordingly, you will have
to rely on appreciation in the price of our common stock, if
any, to earn a return on your investment in our common
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stock. Furthermore, we may in the future become subject to
contractual restrictions on, or prohibitions against, the
payment of dividends.
We may
allocate net proceeds from this offering in ways with which you
may not agree.
Our management will have broad discretion in using the proceeds
from this offering and may use the proceeds in ways with which
you may disagree. Because we are not required to allocate the
net proceeds from this offering to any specific investment or
transaction, you cannot determine at this time the value or
propriety of our application of the proceeds. Moreover, you will
not have the opportunity to evaluate the economic, financial or
other information on which we base our decisions on how to use
our proceeds. We may use the proceeds for corporate purposes
that do not immediately enhance our prospects for the future or
increase the value of your investment. As a result, you and
other stockholders may not agree with our decisions.
Anti-takeover
provisions in our charter, by-laws and Delaware law may make it
difficult for you to change our management and may also make a
takeover difficult.
Our corporate documents and Delaware law contain provisions that
limit the ability of stockholders to change our management and
may also enable our management to resist a takeover. These
provisions include limitations on persons authorized to call a
special meeting of stockholders and advance notice procedures
required for stockholders to make nominations of candidates for
election as directors or to bring matters before an annual
meeting of stockholders. These provisions might discourage,
delay or prevent a change of control or in our management. These
provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors and
cause us to take other corporate actions. In addition, the
existence of these provisions, together with Delaware law, might
hinder or delay an attempted takeover other than through
negotiations with our board of directors.
21
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
risks and uncertainties, such as statements about our plans,
objectives, expectations, assumptions, and future events. In
some cases, you can identify forward-looking statements by
terminology such as anticipate,
estimate, plan, project,
continue, ongoing,
potential, expect, predict,
believe, intend, may,
will, should, could,
would, and similar expressions. These statements
involve estimates, assumptions, known and unknown risks,
uncertainties and other factors that could cause actual results
to differ materially from any future results, performances, or
achievements expressed or implied by the forward-looking
statements. Consequently, you should not place undue reliance on
these forward-looking statements. We discuss many of these risks
in greater detail under the heading Risk Factors
above.
Forward-looking statements include, but are not limited to,
statements about:
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the progress and timing of our development programs and
approvals for our products;
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the benefits and effectiveness of our products;
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the progress and timing of clinical trials;
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our expectations and capabilities relating to the sales and
marketing of our current products and our product candidates;
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our expectations related to the use of our proceeds from this
offering;
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our ability to manufacture sufficient amounts of our product
candidates for clinical trials and products for
commercialization activities;
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our investment in property and equipment to support our products;
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the content and timing of submissions to and decisions made by
FDA and other regulatory agencies, including demonstrating to
the satisfaction of FDA the safety and efficacy of our products;
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the rate and causes of infection;
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|
the accuracy of our estimates of the size and characteristics of
the markets to be addressed by our products;
|
|
|
|
the timing of commercializing our products;
|
|
|
|
our ability to protect our intellectual property and operate our
business without infringing on the intellectual property of
others;
|
|
|
|
our relationship with and consolidation of Quimica Pasteur;
|
|
|
|
our ability to compete with other companies that are developing
or selling products that are competitive with our products;
|
|
|
|
the ability of our products to become the standard of care for
controlling infection in chronic and acute wounds;
|
|
|
|
our estimates regarding future operating performance, earnings
and capital requirements;
|
|
|
|
our expectations relating to the concentration of our revenue
from international sales; and
|
|
|
|
the impact of the Sarbanes-Oxley Act of 2002 and any future
changes in accounting regulations or practices in general with
respect to public companies.
|
The forward-looking statements speak only as of the date on
which they are made, and, except as required by law, we
undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which the
statement is made or to reflect the occurrence of unanticipated
events. In addition, we cannot assess the impact of each factor
on our business or the extent to which any factor, or
combination
22
of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
This prospectus contains statistical and market data that we
obtained from third-party sources. Although we believe that this
information is reliable, we have not independently verified this
information.
23
USE OF
PROCEEDS
We expect to receive net proceeds of approximately
$ million from this offering,
based on an assumed initial public offering price of
$ 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
$ million. A $1.00 increase
or decrease in the assumed initial public offering price of
$ per share would increase or
decrease, as applicable, the net proceeds to us by approximately
$ , assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the
underwriting discount and our estimated offering expenses.
We currently intend to use the proceeds of this offering as
follows:
|
|
|
|
|
approximately $ million to
expand our sales and marketing capabilities, including the
expansion of our direct sales force;
|
|
|
|
approximately $ million to
fund clinical trials and related research;
|
|
|
|
approximately $ million to
expand our manufacturing capabilities; and
|
|
|
|
the remaining proceeds for general corporate purposes, including
working capital.
|
While we have estimated the particular uses for the net proceeds
to be received upon the completion of this offering, the actual
amounts and timing of any expenditure will depend upon the rate
of growth, if any, of our business, the amount of cash generated
by our operations, status of our research and development
efforts, competitive and technological developments and the
amount of proceeds actually raised in this offering. A portion
of the net proceeds may also be used to acquire or invest in
complementary businesses, technologies, services or products,
although we have no agreements with respect to any such
transactions as of the date of this prospectus. Accordingly, our
management will have significant flexibility in applying the net
proceeds from this offering.
We believe that the net proceeds from this offering, together
with our future revenues, cash and cash equivalent balances and
interest we earn on these balances will be sufficient to meet
our anticipated cash requirements through at least the next
12 months. Pending these uses described above, we intend to
invest the net proceeds in short-term, investment grade
securities.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our common
stock. Upon the completion of this offering, we anticipate that
any earnings will be retained for development and expansion of
our business, and we do not anticipate paying any cash dividends
in the foreseeable future on our common stock. Our board of
directors has sole discretion to pay cash dividends based on our
financial condition, results of operations, capital
requirements, contractual obligations and other relevant
factors. In the future, we may also obtain loans or other credit
facilities that may restrict our ability to declare or pay
dividends.
24
CAPITALIZATION
The following table describes our cash, cash equivalents and
capitalization as of March 31, 2006:
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma as adjusted basis to give effect to:
|
|
|
|
|
|
the automatic conversion of all outstanding shares of our
convertible preferred stock into 15,934,718 shares of our
common stock; and
|
|
|
|
the sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per
share, which is the midpoint of our expected offering range,
after deducting the underwriting discount and estimated offering
expenses payable by us.
|
You should read this table together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the related notes appearing elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
2006
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands, except share and
per share data)
|
|
|
Cash and cash
equivalents
(1)
|
|
$
|
7,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
519
|
|
|
|
|
|
Long-term debt, less current
portion
|
|
$
|
251
|
|
|
|
|
|
Stockholders equity
(deficit):
|
|
|
|
|
|
|
|
|
Convertible preferred stock, no
par value; 30,000,000 shares authorized,
15,934,718 shares issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma as adjusted
|
|
|
50,390
|
|
|
|
|
|
Preferred stock, $0.0001 par
value; no shares authorized, issued and outstanding, actual;
5,000,000 shares authorized, no shares issued and
outstanding, pro forma as adjusted
|
|
|
|
|
|
|
|
|
Common stock, no par value;
100,000,000 shares authorized; 16,875,928 shares
issued and outstanding,
actual; shares
issued and outstanding, pro forma as adjusted
|
|
|
3,399
|
|
|
|
|
|
Additional paid-in
capital
(1)
|
|
|
4,644
|
|
|
|
|
|
Deferred compensation
|
|
|
(798
|
)
|
|
|
|
|
Accumulated other comprehensive
gain (loss)
|
|
|
3
|
|
|
|
|
|
Accumulated deficit
|
|
|
(50,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders
equity
(1)
|
|
|
7,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capitalization
(1)
|
|
$
|
8,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) this amount on a pro forma as adjusted
basis by approximately $ million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the underwriting discount and our estimated offering
expenses.
|
25
The outstanding share information set forth in the table
excludes as of March 31, 2006:
|
|
|
|
|
8,116,174 shares of our common stock issuable upon the
exercise of outstanding stock options and options granted in
connection with this offering, at a weighted average exercise
price of $1.05 per share;
|
|
|
|
3,782,396 shares of our common stock issuable upon the
exercise of outstanding warrants, at a weighted average exercise
price of $2.61 per share; and
|
|
|
|
up to 2,201,643 additional shares of our common stock reserved
for issuance under our equity plans.
|
26
DILUTION
Our net tangible book value as of March 31, 2006 was
approximately $7.3 million, or $0.43 per share of
common stock. Our net tangible book value per share represents
the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding.
Dilution of pro forma net tangible book value per share
represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the
pro forma as adjusted net tangible book value per share of
common stock immediately after completion of this offering.
After giving effect to the sale
of shares
of common stock at an assumed initial public offering price of
$ per share, which is the
midpoint of our expected offering range, and after deducting the
underwriting discount and estimated offering expenses payable by
us, our pro forma as adjusted net tangible book value as of
March 31, 2006 would have been
$ million, or
$ per share of common stock.
This represents an immediate increase in net tangible book value
of $ per share of common
stock to existing common stockholders and an immediate dilution
in pro forma as adjusted net tangible book value of
$ per share to new investors
purchasing shares of common stock in this offering. The
following table illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
Assumed offering price per share
of common stock
|
|
|
|
|
|
$
|
|
|
Net tangible book value per share
at March 31, 2006
|
|
$
|
0.43
|
|
|
|
|
|
Increase in net tangible book
value per share attributable to the issue of new shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible
book value per share after this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to investors in
this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of $ per share would
increase or decrease, as applicable, our pro forma as adjusted
net tangible book value by
$ million, the pro forma as
adjusted net tangible book value per share by
$ per share and the dilution in the
pro forma net tangible book value to new investors in this
offering by $ per share, assuming
the number of shares offered by us, as set forth on the cover
page of this prospectus, remains the same and after deducting
the underwriting discount and estimated offering expenses
payable by us.
The following table summarizes as of March 31, 2006, the
number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid to us by
existing and new investors purchasing shares of common stock in
this offering assuming an initial public offering price of
$ per share, which is the midpoint
of our expected offering range, before deducting the
underwriting discount and estimated offering expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
32,810,646
|
|
|
|
|
%
|
|
$
|
59,037,000
|
|
|
|
|
%
|
|
$
|
1.80
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of $ per share would
increase or decrease, as applicable, total consideration paid by
new investors and total consideration paid by all stockholders
by $ million, assuming the
number of shares offered by us, as set forth on the cover of
this prospectus, remains the same.
If the underwriters exercise their over-allotment option in
full, our existing stockholders would own % and our
new investors would own % of the total number of
shares of our common stock outstanding after this offering.
The number of shares of our common stock referred to above that
will be outstanding immediately after completion of this
offering is based on 16,875,928 shares of our common stock
outstanding as of March 31,
27
2006, reflects the automatic conversion of our preferred stock
into 15,934,718 shares of common stock and excludes:
|
|
|
|
|
8,116,174 shares of our common stock issuable upon the
exercise of outstanding stock options and options granted in
connection with this offering, at a weighted-average exercise
price of $1.05 per share;
|
|
|
|
3,782,396 shares of our common stock issuable upon the
exercise of outstanding warrants, at a weighted average exercise
price of $2.61 per share; and
|
|
|
|
up to 2,201,643 additional shares of our common stock reserved
for issuance under our equity plans.
|
If all of our outstanding options and warrants as of
March 31, 2006 were exercised, the pro forma as adjusted
net tangible book value per share after this offering would be
$ per share, representing an
increase attributable to new investors of
$ per share, and there would
be an immediate dilution of
$ per share to new investors.
In addition, we may choose to raise additional capital due to
market conditions or strategic considerations even if we believe
we have sufficient funds for our current or future operating
plans. To the extent that additional capital is raised through
the sale of equity or convertible debt securities, the issuance
of these securities could result in further dilution to our
stockholders.
28
SELECTED
CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial
data together with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes
included elsewhere in this prospectus. The selected consolidated
statements of operations data for each of the years ended
March 31, 2004, 2005 and 2006 and the selected consolidated
balance sheet data as of March 31, 2005 and 2006 have been
derived from our audited consolidated financial statements that
are included elsewhere in this prospectus. The selected
consolidated statements of operations data for the years ended
March 31, 2002 and 2003 and the selected consolidated
balance sheet data at March 31, 2002, 2003 and 2004 have
been derived from our consolidated financial statements not
included in this prospectus. The selected consolidated statement
of operations data for the year ended March 31, 2003 and
the selected consolidated balance sheet data as of
March 31, 2003 have not been audited. Our historical
results are not necessarily indicative of the results that may
be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
March 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share
data)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
|
|
|
$
|
|
|
|
$
|
95
|
|
|
$
|
473
|
|
|
$
|
1,966
|
|
Service
|
|
|
2,000
|
|
|
|
2,470
|
|
|
|
807
|
|
|
|
883
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,000
|
|
|
|
2,470
|
|
|
|
902
|
|
|
|
1,356
|
|
|
|
2,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
(1)
|
|
|
|
|
|
|
|
|
|
|
1,403
|
|
|
|
2,211
|
|
|
|
3,899
|
|
Service
(1)
|
|
|
815
|
|
|
|
1,768
|
|
|
|
1,265
|
|
|
|
1,311
|
|
|
|
1,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
815
|
|
|
|
1,768
|
|
|
|
2,668
|
|
|
|
3,522
|
|
|
|
4,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
1,185
|
|
|
|
702
|
|
|
|
(1,766
|
)
|
|
|
(2,166
|
)
|
|
|
(2,318
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
(1)
|
|
|
6
|
|
|
|
68
|
|
|
|
1,413
|
|
|
|
1,654
|
|
|
|
2,600
|
|
Selling, general and
administrative
(1)
|
|
|
1,326
|
|
|
|
2,102
|
|
|
|
3,918
|
|
|
|
12,492
|
|
|
|
15,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,332
|
|
|
|
2,170
|
|
|
|
5,331
|
|
|
|
14,146
|
|
|
|
18,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(147
|
)
|
|
|
(1,468
|
)
|
|
|
(7,097
|
)
|
|
|
(16,312
|
)
|
|
|
(20,851
|
)
|
Interest expense
|
|
|
(24
|
)
|
|
|
(123
|
)
|
|
|
(178
|
)
|
|
|
(372
|
)
|
|
|
(172
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
8
|
|
|
|
282
|
|
Other income (expense), net
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
(26
|
)
|
|
|
146
|
|
|
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(167
|
)
|
|
|
1,595
|
|
|
|
(7,298
|
)
|
|
|
(16,530
|
)
|
|
|
(21,118
|
)
|
Loss on discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(167
|
)
|
|
|
1,595
|
|
|
|
(7,298
|
)
|
|
|
(16,530
|
)
|
|
|
(23,099
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common
stockholders
|
|
$
|
(167
|
)
|
|
$
|
(1,595
|
)
|
|
$
|
(7,298
|
)
|
|
$
|
(16,530
|
)
|
|
$
|
(23,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: basic
and
diluted
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(0.01
|
)
|
|
|
(0.10
|
)
|
|
|
(0.47
|
)
|
|
|
(1.06
|
)
|
|
|
(1.28
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(1.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding: basic and diluted
|
|
|
15,182
|
|
|
|
15,309
|
|
|
|
15,647
|
|
|
|
15,659
|
|
|
|
16,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per common
share: basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted shares
outstanding: basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
(1)
|
|
Includes the following stock-based compensation charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
March 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Service
|
|
|
|
|
|
|
55
|
|
|
|
10
|
|
|
|
3
|
|
|
|
1
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
5
|
|
|
|
52
|
|
Selling, general and administrative
|
|
|
|
|
|
|
186
|
|
|
|
358
|
|
|
|
2,339
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
241
|
|
|
$
|
424
|
|
|
$
|
2,349
|
|
|
$
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
See Note 1 to our consolidated financial statements for a
description of the method used to compute basic and diluted net
loss per share and number of shares used in computing historical
basic and diluted net loss per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
764
|
|
|
$
|
177
|
|
|
$
|
869
|
|
|
$
|
3,287
|
|
|
$
|
7,448
|
|
Working capital
|
|
|
889
|
|
|
|
(145
|
)
|
|
|
(1,186
|
)
|
|
|
663
|
|
|
|
5,127
|
|
Total assets
|
|
|
1,687
|
|
|
|
961
|
|
|
|
2,992
|
|
|
|
6,940
|
|
|
|
12,689
|
|
Total liabilities
|
|
|
747
|
|
|
|
1,040
|
|
|
|
3,374
|
|
|
|
4,738
|
|
|
|
5,351
|
|
Total stockholders equity
(deficit)
|
|
|
940
|
|
|
|
(79
|
)
|
|
|
(382
|
)
|
|
|
2,202
|
|
|
|
7,338
|
|
30
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read together with our
consolidated financial statements and related notes included
elsewhere in this prospectus. This discussion contains
forward-looking statements based upon current expectations that
involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these
forward-looking statements as a result of various factors,
including those set forth under Risk Factors,
Information Regarding Forward-looking Statements and
elsewhere in this prospectus.
Overview
We develop, manufacture and market a family of products intended
to prevent and eliminate infection in chronic and acute wounds.
Infection is a serious potential complication in both chronic
and acute wounds, and controlling infection is a critical step
in wound healing. Our platform technology, called Microcyn, is a
non-toxic, super-oxidized water-based solution that is designed
to eliminate a wide range of pathogens including viruses, fungi,
spores and antibiotic resistant strains of bacteria such as
Methicillin-resistant
Staphylococcus aureus,
or MRSA, and
Vancomycin-resistant
Enterococcus,
or VRE. In clinical
testing, our products eliminated a wide range of pathogens and
were found to be safe, easy to use and complementary with most
existing treatment methods in wound care. Our experience and
clinical data indicate that the use of Microcyn may shorten
hospital stays, lower aggregate patient care costs and, in
certain cases, reduce the need for systemic antibiotics.
Microcyn also has applications in several other large consumer
and professional markets, including hard surface disinfectant,
respiratory, dermatology, mold and atmospheric remediation and
dental.
We believe that Microcyn is the first topical product that
eliminates a broad range of bacteria and other infectious
microbes without causing toxic side effects on, or irritation
of, healthy tissue. Unlike most antibiotics, Microcyn does not
target specific strains of bacteria, a practice which has been
shown to promote the development of resistant bacteria. Because
our products are shelf stable and require no special
preparation, they can be used in hospitals, clinics, burn
centers, extended care facilities and in the home.
We currently sell Microcyn in the United States through a
four-person direct sales force and through one national and five
regional distributors. In Europe, we have an eight-person direct
sales force and exclusive distribution agreements with four
distributors, all of which are experienced suppliers to the
wound care market, with an aggregate combined sales force of
over 25 full-time equivalent salespeople. In Mexico, we
sell through a dedicated 75-person contract sales force,
including salespeople, nurses and clinical support staff, and a
network of distributors to both the public and private sector.
The MOH, which approves product selection and procurement for
government hospitals and healthcare institutions, has approved
reimbursement for Microcyn. We plan to expand our direct sales
force in the United States, Europe and Mexico to support our
distribution network.
We have incurred significant net losses since our inception and
had an accumulated deficit of $50.3 million as of
March 31, 2006. We expect to incur significant expenses in
the foreseeable future as we seek to commercialize our products,
and we cannot be sure that we will achieve profitability.
Financial
Operations Overview
Revenues
We derive our revenues from product sales and service
arrangements. Product revenues are generated from the sale of
Microcyn to hospitals, medical centers, doctors, pharmacies,
distributors and strategic partners, and are generally recorded
upon shipment following receipt of a purchase order or upon
obtaining proof of sell-through by a distributor. Product sales
are made either through direct sales personnel or distributors.
Historically, a significant majority of our product sales have
been in Mexico.
Service revenues are derived from consulting and testing
contracts. Service revenues are generally recorded upon
performance under the service contract. Revenues generated from
testing contracts are recorded upon completion of the test and
when the final report is sent to the customer. We have refocused
our business
31
efforts away from consulting and testing services toward the
commercialization of Microcyn. As a result, we expect service
revenues to continue to significantly decline in future periods.
Cost of
Revenues
Cost of product revenues represents the costs associated with
the manufacturing of our products, including operating expenses
for our various facilities which are permanently fixed, and
related personnel cost and the cost of materials used to produce
our products. Cost of service revenues consists primarily of
personnel related expenses and supplies.
Research
and Development Expense
Research and development expense consists of costs related to
the research and development of Microcyn and our manufacturing
process. Research and development expense represents costs
incurred to enhance our manufacturing process, to develop
products and new delivery systems for our products and to carry
out preclinical studies and clinical trials to obtain various
regulatory approvals. Research and development expense is
charged as incurred.
Selling,
General and Administrative Expense
Selling, general and administrative expense consists of
personnel related costs, including salaries and sales
commissions, and education and promotional expenses associated
with Microcyn and costs related to administrative personnel and
senior management. These expenses also include the costs of
educating physicians and other healthcare professionals
regarding our products and participating in industry conferences
and seminars. Selling, general and administrative expense also
includes travel costs, outside consulting services, legal and
accounting fees and other professional and administrative costs.
Stock-Based
Compensation Expense
We account for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board
Opinion No. 25, or APB No. 25, Accounting for
Stock Issued to Employees, and its interpretations and
comply with the disclosure requirements of Statement of
Financial Accounting Standard, or SFAS, No. 148,
Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of the Financial Accounting Standards
Board Statement No. 123. We have elected to continue
to follow Interpretation of No. 44, or FIN 44,
Accounting for Certain Transactions Involving Stock
Compensation and Interpretation of APB No. 25, in
accounting for employee stock options. Under APB No. 25,
compensation expense is based upon the excess of the estimated
fair value of our stock over the exercise price, if any, on the
grant date. Employee stock-based compensation is amortized on a
straight-line basis over the vesting period of the underlying
options. SFAS No. 123 defines a fair value
based method of accounting for an employee stock option or
similar equity instrument.
In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 123(R) Share Based
Payment. This statement is a revision of
SFAS Statement No. 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion
No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance.
SFAS 123(R) addresses all forms of share-based payment, or
SBP, awards including shares issued under employee stock
purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS 123(R), SBP awards result
in a cost that will be measured at fair value on the
awards grant date, based on the estimated number of awards
that are expected to vest and will result in a charge to
operations for stock-based compensation expense. We are subject
to requirements of SFAS 123(R) effective April 1, 2006.
Management is evaluating the requirements of SFAS 123(R)
and expects that the adoption of this pronouncement will have a
significant effect on our consolidated results of operations and
earnings (loss) per share.
32
Discontinued
Operations
On June 16, 2005, we entered into a series of agreements
with Quimica Pasteur, or QP, a Mexico-based distributor of
pharmaceutical products to hospitals and health care entities
owned
and/or
operated by the Mexican Ministry of Health, or MOH. These
agreements provided, among other things, for QP to act as our
exclusive distributor of Microcyn to the MOH for a period of
three years. We concurrently acquired, for no additional
consideration, a 0.25% equity interest in QP and an option to
acquire the remaining 99.75% of QP directly from its principals
in exchange for 600,000 shares of common stock, contingent
upon QPs attainment of certain financial milestones. The
distribution and related agreements were cancelable by us on
thirty days notice without cause and featured certain provisions
to hold us harmless from debts incurred by QP outside the scope
of the distribution and related agreements. We terminated these
agreements with QP on March 26, 2006. For additional
information, please see Risk Factors We
may incur significant liabilities in connection with our prior
relationship with a distributor in Mexico, and our results of
operations may be negatively affected by the termination of this
relationship.
Due to its liquidity circumstances, QP was unable to sustain
operations without our financial and management support.
Accordingly, QP was deemed to be a variable interest entity in
accordance with FIN 46R and the results of QP were
therefore consolidated with our financial statements for the
period from June 16, 2005 through March 26, 2006, the
effective termination date of the distribution and related
agreements.
In accordance with SFAS 144, we have reported QPs
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 our
ongoing operations as a result of the termination of these
agreements. We no longer have any continuing involvement with QP
as of the date on which the agreements were terminated. Amounts
associated with the loss upon the termination of the agreements
with QP, which consists of funds we advanced to QP to provide it
with working capital, are presented separately from QPs
operating results.
Critical
Accounting Policies
The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to exercise its judgment. We
exercise considerable judgment with respect to establishing
sound accounting polices and in making estimates and assumptions
that affect the reported amounts of our assets and liabilities,
our recognition of revenues and expenses, and disclosure of
commitments and contingencies at the date of the financial
statements.
On an ongoing basis, we evaluate our estimates and judgments.
Areas in which we exercise significant judgment include, but are
not necessarily limited to, our valuation of accounts
receivable, inventory, depreciation, amortization,
recoverability of long-lived assets, income taxes, equity
transactions (compensatory and financing) and contingencies. We
have also adopted certain polices with respect to our
recognition of revenue that we believe are consistent with the
guidance provided under Securities and Exchange Commission Staff
Accounting Bulletin No. 104.
We base our estimates and judgments on a variety of factors
including our historical experience, knowledge of our business
and industry, current and expected economic conditions, the
attributes of our products, regulatory environment, and in
certain cases, the results of outside appraisals. We
periodically re-evaluate our estimates and assumptions with
respect to these judgments and modify our approach when
circumstances indicate that modifications are necessary.
While we believe that the factors we evaluate provide us with a
meaningful basis for establishing and applying sound accounting
policies, we cannot guarantee that the results will always be
accurate. Since the determination of these estimates requires
the exercise of judgment, actual results could differ from such
estimates.
33
A description of significant accounting polices that require us
to make estimates and assumptions in the preparation of our
consolidated financial statements is as follows:
Revenue
Recognition and Accounts Receivable
We generate product revenues from sales of our products to
hospitals, medical centers, doctors, pharmacies, distributors
and strategic partners. We sell our products directly to third
parties and to distributors through various cancelable
distribution agreements. We have also entered into an agreement
to license our products.
We apply the revenue recognition principles set forth in
Securities and Exchange Commission Staff Accounting Bulletin, or
SAB, 104 Revenue Recognition, with respect to all of
our revenues. Accordingly, we record revenues when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed or determinable, and collectability of the sale is
reasonable assured.
We require all of our product sales to be supported by evidence
of a sale transaction that clearly indicates the selling price
to the customer, shipping terms and payment terms. Evidence of
an arrangement generally consists of a contract or purchase
order approved by the customer. We have ongoing relationships
with certain customers from which we customarily accept orders
by telephone in lieu of a purchase order.
We recognize revenues at the time in which we receive a
confirmation that the goods were either tendered at their
destination when shipped FOB destination, or
transferred to a shipping agent when shipped FOB shipping
point. Delivery to the customer is deemed to have occurred
when the customer takes title to the product. Generally, title
passes to the customer upon shipment, but could occur when the
customer receives the product based on the terms of the
agreement with the customer.
While we have a policy of investigating the creditworthiness of
our customers, we have, under certain circumstances, shipped
goods in the past and deferred the recognition of revenues when
available information indicates that collection is in doubt. We
establish allowances for doubtful accounts when available
information causes us to believe that a credit loss is probable.
We market a substantial portion of our goods through
distributors. In Europe, we defer recognition of
distributor-generated revenues until the time we confirm that
distributors have sold these goods. Although our terms provide
for no right of return, our products have a finite shelf life
and we may, at our discretion, accommodate distributors by
accepting returns to avoid the distribution of expired goods.
Service revenues are recorded upon performance of the service
contracts. Revenues generated from testing contracts are
recorded when the test is completed and the final report is sent
to the customer.
Inventory
and Cost of Revenues
We state our inventory at the lower of cost, determined using
the
first-in,
first-out method, or market, based on standard costs.
Establishing standard manufacturing costs requires us to make
estimates and assumptions as to the quantities and costs of
materials, labor and overhead that are required to produce a
finished good. Cost of service revenues is expensed when
incurred.
Income
Taxes
We are required to determine the aggregate amount of income tax
expense or loss based upon tax statutes in jurisdictions in
which we conduct business. In making these estimates, we adjust
our results determined in accordance with generally accepted
accounting principles for items that are treated differently by
the applicable taxing authorities. Deferred tax assets and
liabilities, as a result of these differences, are reflected on
our balance sheet for temporary differences in loss and credit
carryforwards that will reverse in subsequent years. We also
establish a valuation allowance against deferred tax assets when
it is more likely than not that some or all of the deferred tax
assets will not be realized. Valuation allowances are based, in
part, on predictions that management must make as to our results
in future periods. The outcome of events could differ over time
which would require that we make changes in our valuation
allowance.
34
Equity
Transactions
Under generally accepted accounting principles, we have the
ability to choose between two alternative methods of accounting
for employee stock based compensation: the intrinsic value
method or the fair value method. Although we have adopted the
intrinsic value method, the results we could derive under the
fair value method could differ significantly. In addition, since
our stock is not publicly traded, we must estimate its fair
value. We have used outside valuation specialists that have
relied upon information provided by management to determine
value of our stock and have also made valuation estimates based
on concurrent sales of equity securities for cash and other
business related information.
Deferred
Stock-Based Compensation Expense
Stock-based compensation expense, which is a non-cash charge,
results from stock option grants at exercise prices that, for
financial reporting purposes, are deemed to be below the fair
value of the underlying common stock. We recognize stock-based
compensation expense on a straight-line basis over the vesting
period of the underlying option, which is generally five years.
The amount of stock-based compensation expense expected to be
amortized in future periods may decrease if unvested options for
which deferred stock-based compensation expense has been
recorded are subsequently cancelled or may increase if future
option grants are made with exercise prices below the deemed
fair value of the common stock on the date of measurement.
During the period from April 1, 2005 to March 31,
2006, we granted options to purchase a total of 3,148,000 shares
of common stock with exercise prices ranging from $1.10 to
$3.00 per share and at a weighted average exercise price of
$2.30 per share. We obtained a contemporaneous valuation
from an independent valuation specialist in July 2005. This
valuation was used by our board of directors to establish the
fair market value of our common stock with respect to the
majority of options granted in the year ended March 31,
2006. Our other options were granted at fair market value as
determined by our board of directors. Given the absence of an
active market for our common stock and resulting lack of
liquidity in the year ended March 31, 2006, our board of
directors determined the estimated fair value of our common
stock on the date of grant based on several factors, including
the offering prices and liquidation preferences of our preferred
stock, progress and milestones achieved in our business, our
financial condition, equity market conditions, trading ranges of
comparable public companies and the likelihood of achieving a
liquidity event such as an initial public offering or a sale of
the company given prevailing market conditions.
After receipt of the independent valuation in July 2005, our
board of directors reassessed the value of our common stock. In
reassessing the value of our common stock, we used a
straight-line approach because we determined no single event
supported incremental movement in the underlying stock. Further,
we believe this approach is consistent with valuation
methodologies applied by similar companies pursuing an initial
public offering. Based upon this process, we determined that the
reassessed fair value of options granted from August 7,
2003 through April 1, 2005 ranged from $0.82 to $2.28 per
share. Accordingly, we recorded deferred stock-based
compensation of $233,000, $2.8 million and $401,000 during
the years ended March 31, 2004, 2005 and 2006,
respectively, in accordance with Accounting Principles Board, or
APB, Opinion 25. The deferred stock-based compensation is
being amortized on a straight-line basis over the vesting period
of the related awards, which is generally five years. For the
years ended March 31, 2004, 2005 and 2006, we recorded
employee stock-based compensation of $30,000, $2.3 million
and $279,000, respectively. Stock-based compensation expense
recorded during the year ended March 31, 2005 includes
$1.7 million for the intrinsic value of options to purchase
1.2 million shares of common stock granted to our
Chief Executive Officer.
The information regarding net loss as required by SFAS No.
123 presented in Note 3 to our consolidated financial
statements, has been determined as if we had accounted for our
employee stock options under the fair value method. The
resulting effect on net loss pursuant to SFAS No. 123 is
not likely to be representative of the effect on net loss
pursuant to SFAS No. 123 in future years, since future
years are likely to include additional grants and the impact of
future years vesting.
35
Comparison
of Years Ended March 31, 2006 and March 31,
2005
Revenues
Revenues increased $1.2 million, or 48%, to
$2.6 million for the year ended March 31, 2006, from
$1.4 million for the year ended March 31, 2005.
Product revenues increased $1.5 million, or 316%, to
$2.0 million for the year ended March 31, 2006, from
$473,000 for the year ended March 31, 2005. This increase
was primarily due to a $1.4 million increase in sales of
Microcyn60 in Mexico following the expansion of our sales force
in that country and the receipt of product reimbursement by the
MOH.
The increase in product revenues was partially offset by a
$265,000 decrease in service revenues during the year ended
March 31, 2006, as compared to the prior year. The decrease
in service revenues was a result of a shift in our focus from
services to the development of our Microcyn products in fiscal
2006.
We expect that product revenues will continue to increase as we
expand our sales and marketing efforts worldwide. We expect that
our service revenues will remain flat or decline in future
periods, as we continue our strategy of focusing primarily on
our Microcyn business.
Cost of
Revenues
Cost of revenues increased $1.4 million, or 39%, to
$4.9 million for the year ended March 31, 2006, from
$3.5 million for the year ended March 31, 2005. Cost
of revenues from product sales principally include fixed costs
associated with plant and labor and to a lesser extent variable
costs associated with packaging and other raw materials. Cost of
revenues from product sales increased $1.7 million, or 76%,
to $3.9 million in the year ended March 31, 2006, from
$2.2 million in the year ended March 31, 2005. This
increase was due primarily to European product manufacturing
beginning in the middle of the year ended March 31, 2005 as
compared to a full year of costs in the year ended
March 31, 2006. As such, total cost of product revenues in
Europe increased $637,000 to $1.0 million for the year
ended March 31, 2006 from $381,000 for the year ended
March 31, 2005. Additionally, we incurred charges we
believe to be
non-recurring.
We wrote off $1.0 million of inventory due to product
labeling issues and expiring shelf life of products as a result
of a one-time build-up of excess product inventory. We also
relocated our manufacturing facility in Mexico and incurred
approximately $200,000 of labor and severance charges related to
the move. These increases were partially offset by a $308,000,
or 23%, decrease in costs related to service revenues to
$1.0 million in the year ended March 31, 2006, from
$1.3 million in the year ended March 31, 2005. The
lower cost of service revenues was related to lower our shifted
in focus to product development and the sale of our Microcyn
products during fiscal 2006.
We expect that cost of revenues will continue to increase in
absolute dollars as product sales increase in the year ended
March 31, 2007 and subsequent years. We anticipate cost of
revenues will continue to exceed revenues until we achieve a
significant increase in the volumes of our product sales.
Research
and Development Expense
Research and development expense increased $946,000, or 57%, to
$2.6 million in the year ended March 31, 2006, from
$1.7 million in the year ended March 31, 2005. This
increase was primarily attributable to the expansion of our
regulatory team, which focused on EPA, FDA and KEMA approvals
for Microcyn products during the period. Additionally, in
September 2005, we commenced our pre-operative skin preparation
pilot studies to support our application for an FDA drug
clearance indicating microbial load reduction. Total spending on
regulatory trials, other clinical studies, and related expenses
increased $1.2 million, or 164%, to $1.9 million for
the year ended March 31, 2006, from $735,000 during the
year ended March 31, 2005. This increase was partially
offset by a $418,000 decrease in spending on new product
development of $497,000 in the year ended March 31, 2006.
We expect that research and development expense will continue to
increase substantially in future years as we seek additional
regulatory approvals of our Microcyn products. We expect to
expand the scope of our new product development, which may also
result in substantial increases in research and development
expense.
36
Selling,
General and Administrative Expense
Selling, general and administrative expense increased
$3.4 million, or 28%, to $15.9 million during the year
ended March 31, 2006, from $12.5 million during the
year ended March 31, 2005. This increase was partially due
to a $1.8 million increase in U.S. selling, general
and administrative expense primarily as a result of higher
outside consulting and service fees during the year ended
March 31, 2006. Specifically, outside accounting fees
increased by $653,000 due to the preparation and completion of
an audit of our last four fiscal years, legal fees increased by
$507,000 due to expanded intellectual property and general legal
support, and outside consulting and service fees increased by
$294,000 due to consulting expenses related to the marketing of
our products in Asia.
In addition, sales and marketing expense in Europe increased
$429,000 due to the hiring of additional sales and marketing
personnel during the year ended March 31, 2006.
Selling, general and administrative expense in Mexico increased
$3.3 million in the year ended March 31, 2006 compared
to the prior year primarily due to expanded sales and marketing
efforts in Mexico, as well as non-recurring charges associated
with the relocation of our Mexican subsidiarys facility.
During the year ended March 31, 2006, we began utilizing
75 full-time, direct sales personnel in the major districts
of Mexico, dedicated to the sale of Microcyn60 in the hospital
and pharmacy markets in Mexico. As a result, sales and marketing
expense in Mexico increased $2.7 million during the year
ended March 31, 2006, compared to the prior year.
The increase in selling, general and administrative expense was
offset by a $1.8 million decrease in non-cash stock
compensation expense in the year ended March 31, 2006
compared to the prior year. Approximately $1.7 million
incurred in the year ended March 31, 2005 was related to
the grant of an option to purchase 1.2 million shares of
common stock to our Chief Executive Officer.
We expect that selling, general and administrative expense will
increase during the year ended March 31, 2007 and in future
years as we increase sales and marketing personnel, expand our
legal and accounting staff and infrastructure to support the
requirements of being a public company.
Interest
Expense and Interest Income
Interest expense decreased $200,000, or 54%, to $172,000 in the
year ended March 31, 2006, from $372,000 in the year ended
March 31, 2005. This decrease was primarily the result of
lower borrowings during the year. Interest income increased
$274,000, to $282,000 in the year ended March 31, 2006,
from $8,000 in the year ended March 31, 2005. This increase
was primarily the result of higher balances of interest-bearing
instruments during the year ended March 31, 2006.
Other
Income (Expense), Net
Other income (expense), net was $377,000 net expense in the
year ended March 31, 2006, compared with $146,000 net
income in the year ended March 31, 2005. This change was
primarily attributable to a $283,000 loss on foreign exchange
transactions in the year ended March 31, 2006, as compared
to a gain of $134,000 in the year ended March 31, 2005.
Discontinued
Operations
Loss on discontinued operations was $2.0 million in the
year ended March 31, 2006. This loss consisted of $818,000
classified as a loss from operations of discontinued business
and $1.2 million of loss on the disposal of discontinued
business. This charge represents the net operating loss of QP,
which was consolidated with our financial results as required by
FIN 46(R). The relationship was terminated in the fourth
quarter of the year ended March 31, 2006 and the loss was
classified as a discontinued operation on our statements of
operations. In addition, $1.2 million of net assets
associated with this entity were written off and classified as a
loss on disposal of discontinued business. As no relationship
existed with this entity prior to the year ended March 31,
2006, no charges were recognized in prior years.
37
Comparison
of Years Ended March 31, 2005 and March 31,
2004
Revenues
Revenues increased $454,000, or 50%, to $1.4 million for
the year ended March 31, 2005, from $902,000 for the year
ended March 31, 2004. Product revenues increased $378,000
to $473,000 for the year ended March 31, 2005, as compared
to $95,000 in the prior year. This increase was primarily
attributable to the hiring of new sales and marketing personnel
in Mexico and an increased demand for Microcyn60 in the Mexican
private hospital market.
Service revenues increased $76,000, or 9%, to $883,000 for the
year ended March 31, 2005, as compared to $807,000 for the
prior year. This increase was primarily the result of increased
demand for our laboratory testing services.
Cost of
Revenues
Cost of revenues increased $854,000, or 32%, to
$3.5 million for the year ended March 31, 2005, from
$2.7 million for the year ended March 31, 2004. Cost
of product revenues increased $808,000 primarily due to the
expansion of our manufacturing capacity in the United States and
Europe and related costs, including operating expenses for new
facilities and an increase in personnel.
Cost of service revenues was $1.3 million for both the
years ended March 31, 2005 and 2004.
Cost of revenues exceeded revenue in both the year ended
March 31, 2005 and March 31, 2004, due to expenses
incurred to develop our manufacturing sites in the United
States, Europe and Mexico prior to significant sales in those
countries.
Research
and Development Expense
Research and development expense increased $241,000, or 17%, to
$1.7 million for the year ended March 31, 2005, from
$1.4 million for the year ended March 31, 2004. This
increase was primarily related to a $194,000 increase in salary
expense related to the expansion of our research and development
and regulatory teams and a $102,000 increase in consulting
services in the year ended March 31, 2005, as compared to
the prior year.
Selling,
General and Administrative Expense
Selling, general and administrative expense increased
$8.6 million, or 219%, to $12.5 million for the year
ended March 31, 2005, from $3.9 million for the year
ended March 31, 2004. This increase was due in part to a
$4.1 million increase in personnel costs associated with
hiring additional senior management, sales and marketing,
operations and administrative personnel. Additionally, selling,
general and administrative expense was higher due to a
$2.0 million increase in non-cash stock compensation
expense in the year ended March 31, 2005 compared to the
prior year.
Interest
Expense
Interest expense increased $194,000, or 109%, to $372,000 in
the year ended March 31, 2005, from $178,000 in the year
ended March 31, 2004. This increase was primarily due to an
increase in non-cash interest expense charged on warrants issued
in connection with debt financing transactions in the year ended
March 31, 2005.
Other
Income (Expense), net
Other income (expense), net was net income of $146,000 in the
year ended March 31, 2005, compared to net expense of
$26,000 in the year ended March 31, 2004. The change was
primarily attributable to a gain of $134,000 on foreign exchange
transactions in the year ended March 31, 2005, compared to
a loss of $4,000 in the prior year.
38
Liquidity
and Capital Resources
Since our inception, we have incurred significant losses and, as
of March 31, 2006, we had an accumulated deficit of
approximately $50.3 million. We have not yet achieved
profitability. We expect that our research and development and
selling, general and administrative expenses will continue to
increase and, as a result, we will need to generate significant
product revenues to achieve profitability. We may never achieve
profitability.
Sources
of Liquidity
Since our inception, substantially all of our operations have
been financed through the sale of our common and preferred
stock. Through March 31, 2006, we had received net proceeds
of $3.5 million from the sale of common stock,
$6.6 million from the sale of Series A preferred
stock, $43.7 million from the sale of Series B
preferred stock and $304,000 from the issuance of common stock
to employees, consultants and directors in connection with the
exercise of stock options. We have received additional funding
through loans and capital equipment leases, as described below.
We have also used our revenues to date as a source of additional
liquidity. As of March 31, 2006, we had cash and cash
equivalents of $7.4 million and debt under our notes
payable and equipment loans of $770,000.
In June 2006, we entered into a Loan and Security Agreement with
a financial institution to borrow a maximum of
$5.0 million. The facility allows us to borrow a maximum of
$2.8 million in working capital, $1.3 million in
accounts receivable financing and $1.0 million in equipment
financing, subject to certain conditions. In conjunction with
this agreement, we agreed to issue warrants to purchase up to
300,000 shares of our Series B preferred stock at an
exercise price of $4.50 per share. Warrants to purchase
215,000 shares were earned and exercisable at execution of
the agreement, and warrants to purchase 85,000 shares will
be earned on a pro rata basis upon our use of this facility. As
of June 30, 2006, we had borrowed $4.2 million against
this facility at an interest rate of 8.5%. Future draws under
this facility will bear interest at prime plus one-half percent.
Cash
Flows
As of March 31, 2006, we had $7.4 million in cash and
cash equivalents, compared to $3.3 million at
March 31, 2005. The increase was due primarily to the
issuance of $27.0 million of preferred stock during the
year ended March 31, 2006, partially offset by net losses
from continuing operations of $21.1 million during the same
period.
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. 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 $897,000 for the years ended
March 31, 2004, 2005 and 2006, respectively. 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 $26.6 million, respectively. This
increase was primarily attributable to the sale of 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, and common stock, which generated
$203,000 for the year ended March 31, 2004. In addition,
net proceeds from debt financing added $574,000,
$1.2 million and $257,000 for the year ended March 31,
2004, 2005 and 2006, respectively. Debt financing consisted
primarily of notes payable to individuals and secured notes
issued to finance the purchase of capital equipment and
corporate insurance premiums.
39
Contractual
Obligations
As of March 31, 2006, we had contractual obligations as
follows (long-term debt and capital lease amounts include
principal payments only):
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Payments Due by Period
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Less than
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After
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Total
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1 year
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1-3 years
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4-5 years
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5 years
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(In thousands)
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Long-term debt
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$
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714
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$
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504
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$
|
199
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$
|
117
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|
$
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Capital leases
|
|
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56
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|
|
15
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36
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6
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Operating leases
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878
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341
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432
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197
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8
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Total
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$
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1,648
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$
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860
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$
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667
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$
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320
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$
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8
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We have leases covering approximately 31,000 square feet of
office and manufacturing space in Petaluma, California, expiring
in 2006, approximately 19,000 square feet of office and
manufacturing space in Sittard, The Netherlands expiring in
2009, and approximately 12,000 square feet of office and
manufacturing space and 5,000 square feet of warehouse
space in Zapopan, Mexico, expiring in 2011 and 2007,
respectively.
We do not have any off-balance sheet arrangements as such term
is defined in rules promulgated by the SEC.
Operating
Capital and Capital Expenditure Requirements
We expect to continue to incur substantial operating losses in
the future and to make capital expenditures to support the
expansion of our research and development programs and to expand
our commercial operations. We anticipate using a portion of the
proceeds from this offering to finance these activities. It may
take several years to obtain the necessary regulatory approvals
to commercialize Microcyn as a drug in the United States.
We expect to use the net proceeds from this offering to fund
approximately $ million in
expenses related to the expansion of our sales and marketing
capabilities, including the expansion of our direct sales forces
in the United States, Europe and Mexico, approximately
$ million to fund clinical
trials and related research, approximately
$ million to expand our
manufacturing facilities and the remaining proceeds for general
corporate purposes, including working capital. A portion of the
net proceeds may also be used to acquire or invest in
complementary businesses, technologies, services or products.
The amount and timing of actual expenditures may vary
significantly depending upon the rate of growth, if any, of our
business, the amount of cash generated by our operations, status
of our research and development efforts, competitive and
technological developments and the amount of proceeds actually
raised in this offering.
We currently anticipate that our cash and cash equivalents,
together with proceeds from this offering and revenue generated
by the sale of our products, will be sufficient to fund our
operations for at least the next 12 months.
Our future funding requirements will depend on many factors,
including:
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the scope, rate of progress and cost of our clinical trials and
other research and development activities;
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future clinical trial results;
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the terms and timing of any collaborative, licensing and other
arrangements that we may establish;
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the cost and timing of regulatory approvals;
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the cost and delays in product development as a result of any
changes in regulatory oversight applicable to our products;
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the cost and timing of establishing sales, marketing and
distribution capabilities;
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the effect of competing technological and market developments;
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40
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the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights; and
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the extent to which we acquire or invest in businesses, products
and technologies.
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If we are unable to generate a sufficient amount of revenue to
finance our operations, research and development and regulatory
plans, we may seek to raise additional funds through public or
private equity offerings, debt financings, capital lease
transactions, corporate collaborations or other means. We may
seek to raise additional capital due to favorable market
conditions or strategic considerations even if we have
sufficient funds for planned operations. The sale of additional
equity or convertible debt securities could result in dilution
to our stockholders. To the extent that we raise additional
funds through collaborative arrangements, it may be necessary to
relinquish some rights to our technologies or grant licenses on
terms that are not favorable to us. We do not know whether
additional funding will be available on acceptable terms, or at
all. If we are not able to secure additional funding when
needed, we may have to delay, reduce the scope of or eliminate
one or more research and development programs or sales and
marketing initiatives.
Recent
Accounting Pronouncements
In Emerging Issues Task Force, or EITF, Issue
No. 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
our financial statements.
In May 2005, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards No. 154,
Accounting Changes and Error
Corrections a replacement of APB Opinion
No. 20 and FASB Statement No. 3, or
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 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. We do not believe that the
adoption of SFAS 154 will have a significant effect on our
financial statements.
On June 29, 2005, the EITF ratified Issue
No. 05-2,
The Meaning of Conventional Convertible Debt
Instrument in EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock. EITF
Issue 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. Issue
No. 05-2
is effective for new instruments entered into and instruments
modified in reporting periods beginning
41
after June 29, 2005. We do not believe that the adoption of
this pronouncement will have a significant effect on our
financial statements.
In September 2005, the EITF ratified Issue
No. 05-4,
The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys 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. We are currently in the process of evaluating the
effect that the adoption of this pronouncement may have on our
financial statements.
In September 2005, the FASB ratified the EITF Issue
No. 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. We do not believe
that the adoption of this pronouncement will have a significant
effect on our financial statements.
In September 2005, the FASB also ratified the EITFs Issue
No. 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 the shareholders
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 under
Issue 00-27
included in financial statements for reporting periods beginning
after December 15, 2005. We do not believe that the
adoption of this pronouncement will have a significant effect on
our 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, or
FAS 155. FAS 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 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. FAS 155 is
effective for all financial instruments acquired or issued after
the beginning of an entitys first fiscal year that begins
after September 15, 2006. We are currently evaluating the
requirements of FAS 155, but do not expect that the
adoption of this pronouncement will have a material effect on
our financial statements.
In March 2006, the FASB issued
SFAS 156 Accounting for Servicing of
Financial Assets an amendment of FASB Statement
No. 140, or 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. We have not yet completed our
evaluation of the impact of adopting SFAS 156 on our
results of operations or financial position, but do not expect
that the adoption of SFAS 156 will have a material impact.
42
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 our consolidated financial statements upon adoption.
Income
Taxes
Since inception, we have incurred operating losses and,
accordingly, have not recorded a provision for income taxes for
any of the periods presented. As of March 31, 2006, we had
net operating loss carryforwards for federal, state and foreign
income tax purposes of approximately $28.8 million,
$25.9 million and $17.4 million, respectively. The
carryforwards expire beginning 2020, 2010 and 2014,
respectively. We also had, as of March 31, 2006, federal
and state research credit carryforwards of approximately
$104,000 and $108,000, respectively. The federal credits expire
beginning 2026, and the state credits have no expiration.
We have experienced substantial ownership changes in connection
with financing transactions completed through the year ended
March 31, 2006. Accordingly, our utilization of 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. After considering
all available evidence, we have fully reserved for these and
other deferred tax assets since it is more likely than not such
benefits will not be realized in future periods. We will
continue to evaluate our 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 our deferred income tax assets
satisfy the realization standard of SFAS No. 109, the
valuation allowance will be reduced accordingly.
Quantitative
and Qualitative Disclosures About Market Risk
Market risk represents the risk of changes in the value of
market risk sensitive instruments caused by fluctuations in
interest rates, foreign exchange rates and commodity prices.
Changes in these factors could cause fluctuations in our results
of operations and cash flows.
Our exposure to interest rate risk is confined to our excess
cash in highly liquid money market funds. The primary objective
of our investment activities is to preserve our capital to fund
operations. We also seek to maximize income from our investments
without assuming significant risk. We do not use derivative
financial instruments in our investment portfolio. Our cash and
investments policy emphasizes liquidity and preservation of
principal over other portfolio considerations.
We have operated primarily in the United States; however we do
have two significant subsidiaries, one each in Europe, and
Mexico. In order to mitigate our exposure to foreign currency
rate fluctuations, we maintain minimal cash balances in the
foreign subsidiaries. However, if we are successful in our
efforts to grow internationally, our exposure to foreign
currency rate fluctuations, primarily the Euro and Mexican Peso,
may increase. We are exposed to foreign currency risk related to
the Euro denominated and Mexican Peso denominated intercompany
receivables. Because our intercompany receivables are accounted
for in Euros and Mexican Pesos, any appreciation or devaluation
of the Euro or Mexican Peso will result in a gain or loss to the
consolidated statements of operations.
43
BUSINESS
Overview
We develop, manufacture and market a family of products intended
to prevent and eliminate infection in chronic and acute wounds.
Infection is a serious potential complication in both chronic
and acute wounds, and controlling infection is a critical step
in wound healing. Our platform technology, called Microcyn, is a
non-toxic, super-oxidized water-based solution that is designed
to eliminate a wide range of pathogens, including viruses,
fungi, spores and antibiotic resistant strains of pathogens such
as Methicillin-resistant
Staphylococcus aureus,
or MRSA,
and Vancomycin-resistant
Enterococcus
, or VRE. In
clinical testing, our products eliminated a wide range of
pathogens and were found to be safe, easy to use and
complementary with most existing treatment methods in wound
care. Our experience and clinical data indicate that the use of
Microcyn may shorten hospital stays, lower aggregate patient
care costs and, in certain cases, reduce the need for systemic
antibiotics. Microcyn also has applications in several other
large consumer and professional markets, including hard surface
disinfectant, respiratory, dermatology, mold and atmospheric
remediation and dental.
In 2004, chronic and acute wound care represented an aggregate
of $9 billion in global product sales, of which
$3.3 billion was spent for the treatment of skin ulcers,
$1.5 billion to treat burns and $4.2 billion for the
treatment of surgical and trauma wounds, according to Kalorama
Information, a life sciences market research firm. Common
methods of controlling infection, including topical antiseptics
and antibiotics, have proven to be moderately effective in
combating infection in the wound bed. However, topical
antiseptics tend to inhibit the healing process due to their
toxicity and may require specialized preparation or handling.
Antibiotics can lead to the emergence of resistant bacteria,
such as MRSA and VRE. Systemic antibiotics may not be effective
in controlling infection in patients with disorders affecting
circulation, such as diabetes, which are commonly associated
with chronic wounds. As a result, no single treatment is used
across all types of wounds and stages of healing.
We believe Microcyn provides significant advantages over current
methods of care in the treatment of a wide range of chronic and
acute wounds throughout all stages of treatment. These stages
include debridement, cleaning, prevention and elimination of
infection and wound moistening. We believe that Microcyn is the
first topical product that eliminates a broad range of bacteria
and other infectious microbes without causing toxic side effects
on, or irritation of, healthy tissue. Unlike most antibiotics,
Microcyn does not target specific strains of bacteria, a
practice which has been shown to promote the development of
resistant bacteria. Because our products are shelf stable and
require no special preparation, they can be used in hospitals,
clinics, burn centers, extended care facilities and in the home.
Our goal is to become a worldwide leader in wound care by
establishing Microcyn as the standard of care for preventing and
eliminating infection in chronic and acute wounds. We intend to
seek regulatory clearances and approvals for, and to market,
Microcyn worldwide. We initiated our commercial activities in
Mexico, where, after receiving approval for the use of Microcyn
as an antiseptic, disinfectant and sterilant, we began selling
in July 2004. Since then, physicians in the United States,
Europe and Mexico have conducted eleven physician clinical
studies in which Microcyn eliminated infection in a variety of
wounds, including
hard-to-treat
wounds such as diabetic ulcers and burns and, in some cases,
reduced the need for systemic antibiotics. We used the data
generated from some of these studies to support our application
for the CE Mark for wound cleaning and reduction of infection,
which we received in November 2004. To date, Microcyn has
received three FDA 510(k) clearances for use as a medical
device in wound debridement, lubricating, moistening and
dressing. We expect to complete our pivotal clinical trial for
pre-operative skin preparation in the third quarter of 2006 and
intend to file a New Drug Application, or NDA, for the use of
Microcyn as a pre-operative skin preparation in late 2006.
In addition, we intend to seek FDA approval for the use of
Microcyn to eliminate infections and accelerate healing in
wounds. We have established a protocol, based on comments from
the FDA, for a Phase IIb clinical trial to be conducted in
patients with diabetic foot ulcers and other open wounds
comparing the clinical cure rates and healing time of wounds
treated with Microcyn with those not treated with Microcyn. This
clinical trial is scheduled to begin in late 2006 and is
anticipated to last up to nine months.
44
We currently sell Microcyn in the United States through a
four-person direct sales force and through one national and five
regional distributors. In Europe, we have an eight-person direct
sales force and exclusive distribution agreements with four
distributors, all of which are experienced suppliers to the
wound care market, with an aggregate combined sales force of
over 25 full-time equivalent salespeople. In Mexico, we
sell through a dedicated 75-person contract sales force,
including salespeople, nurses and clinical support staff, and a
network of distributors to both the public and private sector.
The MOH, which approves product selection and procurement for
government hospitals and healthcare institutions, has approved
reimbursement for Microcyn. We plan to expand our direct sales
force in the United States, Europe and Mexico to support our
distribution network.
Industry
Background
Wound Care Industry Overview
According to Medtech Insight, a Division of Windhover
Information, there were over 90 million incidents of wounds
in the United States during 2004. Of these, over six million
were chronic wounds, including arterial, diabetic, pressure and
venous ulcers. The remaining 84 million were acute wounds,
which follow the normal process of healing and commonly include
burns, traumatic wounds, and approximately 67 million
surgical incisions.
Key trends in wound care include:
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Large and increasing elderly, diabetic and obese populations,
each of which is vulnerable to developing a variety of
difficult-to-heal
ulcers.
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Increased emphasis on controlling the cost of patient care in
hospitals, wound care centers and in private practice.
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Technological innovation, which has expanded treatment options
from traditional ointments and gauze to include advanced
treatments, such as vacuum devices, silver dressings, ultrasound
and skin grafts.
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Increased focus on improving the patient experience, including
reduction of pain and accelerated healing time.
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Adjunctive nature of the market where multiple treatment methods
are employed, either simultaneously or sequentially, depending
on the type and stage of the wound.
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Wound care is complex, and controlling infection is a critical
step in wound healing.
Difficult-to-heal
wounds can result from traumatic injury, diabetes, peripheral
vascular disease, complications following surgery, rheumatoid
arthritis, congestive heart failure, arterial or venous ulcers
and many other conditions which compromise circulation. Without
proper medical intervention and control of infection, these
types of wounds typically remain open and chronically infected.
Chronic Wounds
Chronic wounds are wounds that do not heal within a normally
expected time frame under standard care. The most frequently
occurring chronic wounds are venous, arterial, pressure and
diabetic foot ulcers. According to Medtech Insight, in 2004, the
incidence of chronic wounds in the United States was
approximately 6.1 million, comprised of 2.0 million
pressure ulcers, 1.7 million arterial ulcers,
1.6 million venous ulcers and 800,000 diabetic foot ulcers.
In addition to being expensive to treat, chronic wounds are
debilitating, painful and can result in amputations and other
serious consequences. Clinical studies suggest that, depending
on the severity of the wound, up to 43% of patients with
diabetic foot ulcers undergo an amputation. Furthermore, the
five year survival rate for patients undergoing amputations is
20%.
The increasing incidence of chronic wounds is driven by the
large and growing elderly, diabetic and obese populations.
Aging.
People aged 65 and over are more
susceptible to wounds that become chronic than the overall
population. In 2006, there were more than 37 million people
in the United States over 65, representing more
45
than 12% of the population. By 2030, this group is expected to
comprise more than 19% of the total population of the United
States, according to U.S. Census Bureau projections.
Furthermore, according to the Centers for Disease Control and
Prevention, or CDC, the incidence of diabetes is significantly
higher in people over 65: in 2004, 16% of people over 65 were
diabetic compared to 7.5% of the total population. Additionally,
according to Medtech Insight, 70% of the pressure ulcers occur
in people age 70 years or older and 25% of patients in
nursing homes suffer from pressure ulcers.
Diabetes.
Diabetics are particularly
vulnerable to chronic wounds as a result of the debilitating
effect of diabetes on the circulatory system. According to CDC,
one of three children born in 2000 in the United States will
develop diabetes. There are currently approximately
14.7 million diabetic Americans, representing 5% of the
total population, up from 2.7% in 1990.
Obesity.
Obesity is a leading cause of
Type II, or adult onset, diabetes, making the
obese population more likely to eventually sustain chronic
wounds. Obesity in the United States is a growing problem.
According to the National Institute of Diabetes and Digestive
and Kidney Diseases in 2000, more than 30% of the United States
population was obese, up from 13% in 1960.
Acute Wounds
Acute wounds are typically caused by traumatic injury or
surgical incision and are broadly categorized as those that can
be expected to heal within a definable timeframe. However, the
healing process may be affected by complicating factors such as
infection, leading to chronic wounds.
All acute wounds have the potential for infection and may
require prophylactic treatment to prevent infection. According
to Medtech Insight, in 2004, about 16.2 million traumatic
wounds were treated, including 8.7 million open wounds.
Also according to Medtech Insight, in 2004, approximately
67 million surgical wounds were reported in the United
States, including 36 million completed under anesthesia.
Despite modern infection control procedures, and technologies at
hospitals and surgery centers, every time the skin is opened
there is a risk of infection. We believe that there is a higher
likelihood of infection in surgeries involving anesthesia
because of the length of time the wound is open. In a clinical
study on surgical infections, it was shown that infection rates
vary with the time required to complete the surgery. For
example, infection rates varied from about 3.6% for surgeries
taking less than 30 minutes to about 16.4% for those longer than
5 hours.
Critical Steps for Wound Treatment
Infection Control
One out of every 20 patients contracts an infection while
in the hospital. Certain infections are increasingly dangerous
because they cannot be effectively controlled by commonly used
antibiotics. According to industry estimates, infections add
more than $30 billion annually to health care costs in the
United States. In addition, each year in the United States,
approximately two million patients contract infections while in
hospitals and, of those, an estimated 100,000 die as a result.
According to a recent study, patients with surgical site
infections incur almost triple the average hospital costs of
other patients. Surgical site infections account for
approximately 500,000 hospital acquired infections in the United
States each year, according to CDC. Surgical site infections are
estimated to cost hospitals more than $1.0 billion each
year in additional medical treatment.
Staphylococcus aureus
, or
Staph
, is one of the
most common hospital acquired infections. One of the deadliest
forms of
Staph
infection is MRSA. According to data from
CDC, in 2003, 57% of the
Staph
infections reported were
MRSA, up from 22% in 1995 and 2% in 1974. Patients who do
survive MRSA often spend months in the hospital and endure
repeated surgeries to remove infected tissue.
When infection is present in a wound, standard treatments can
include cleansing, debridement and systemic antibiotics. Many
cleansing agents can harm tissue, causing irritation and
sensitization and impeding the wound healing process. Some forms
of debridement may increase scar tissue and complicate skin
grafting. Systemic antibiotics may be ineffective if the
patients metabolic state is compromised. Additionally,the
46
efficacy of oral or systemic antibiotics in diabetic foot ulcer
patients may be diminished due to the patients poor
circulation, limiting delivery of the antibiotics to the wound
site.
Because there is a risk of infection with many surgical
procedures, clinicians perform several procedures before and
after surgery designed to prevent infection. Pre-operative
procedures generally involve preparing the surgical site with an
anti-bacterial agent, such as Betadine. Post-operative
procedures can include an anti-infective irrigation, a body
cavity lavage and the use of systemic antibiotics.
Wound
Healing and Closure
Wound healing is a cascade process comprised of inflammation,
proliferation and maturation. The first stage of the wound
healing is the inflammatory phase, which is associated with
swelling, redness and heat, and involves the migration of
healthy cells to the wound bed. Removing dead tissue or debris
from the wound prepares the wound bed for regeneration of new
tissue. The second phase is the proliferative phase, which
involves collagen synthesis, formation of blood vessels and
tissue growth. The final phase, maturation, occurs as the wound
begins to take on its permanent form as collagen undergoes
remodeling, forming new skin. None of these phases, however,
will progress normally in the presence of infection.
Advanced
Technologies
Techniques and devices have been developed to treat complex and
hard-to-treat
wounds, ranging from specialized devices to antimicrobial
dressings. Negative pressure wound therapy, hyperbaric oxygen
chambers and localized devices, sophisticated water-based
debriders, oxygenated mist devices and tissue engineered skin
substitutes are some of the most advanced devices available to
the wound care specialist. Although relatively effective, many
of these treatments have limitations or drawbacks in that they
cannot be used on certain types of wounds or are expensive and
complex to use. Despite these advanced technologies, treatment
of challenging wounds continues to be multi-modal, with a number
of adjunctive therapies employed in an attempt to achieve wound
closure.
Market
Opportunity Key Limitations of Existing
Treatments
Commonly used topical antiseptics and antibiotics have
limitations and side effects that may constrain their usage. For
example:
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many antiseptics, including Betadine, hydrogen peroxide and
Dakins solution, are toxic, can destroy human cells and
tissue, may cause allergic reactions and can impede the wound
healing process;
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silver-based products are expensive and require precise dosage
and close monitoring by trained medical staff to minimize the
potential for allergic reactions and bacterial
resistance; and
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the increase in antibiotic resistant bacterial strains, such as
MRSA and VRE, have compromised the efficacy of some widely used
topical antibiotics including Neosporin and Bacitracin.
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Our
Solution
We believe Microcyn provides significant advantages over current
methods of care in the treatment of chronic and acute wounds,
including the following:
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Effective.
In physician clinical
studies, our products eliminated a wide range of pathogens that
cause infection in a variety of acute and chronic wounds. In
addition, because of its mechanism of action, Microcyn does not
target specific strains of bacteria, the practice of which has
been shown to promote the development of resistant bacteria.
Where Microcyn was used both independent of and in conjunction
with other wound care therapeutic products, patients generally
experienced less pain, improved mobility and physical activity
levels and better quality of life.
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Safe.
Clinical data shows that our
products are non-toxic, do not cause skin irritation and do not
inhibit wound healing. Throughout all our clinical trials and
physician clinical studies to date and since
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47
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commercialization in 2004, we have received no reports of
adverse events related to the use of Microcyn.
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Easy to Use.
Our products require no
preparation before use or at time of disposal, and caregivers
can use our products without significant training. In addition,
Microcyn can be stored at room temperature and does not require
any specific handling procedures. Unlike other super-oxidized
water solutions, which are typically stable for not more than
48 hours, laboratory tests shows that Microcyn has a shelf
life ranging from one to two years depending on the size and
type of packaging. Our products are also complementary with
advanced technologies, such as negative pressure wound therapy,
jet lavage and tissue-engineered skin substitutes.
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Cost Effective.
Treatment of many
wounds requires extended hospitalization and care, including the
use of expensive systemic antibiotics. Infection prolongs the
healing time and increases the use of systemic antibiotics. Our
clinical trials, physician clinical studies and clinical results
demonstrate that Microcyn eliminates infection, accelerates
healing time and reduces the use of systemic antibiotics,
thereby lowering overall patient cost.
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Our
Strategy
Our goal is to become a worldwide leader in wound care by
establishing Microcyn as the standard of care for preventing and
eliminating infection in chronic and acute wounds throughout all
stages of treatment. We also intend to leverage our expertise in
wound care into additional market opportunities. The key
elements of our strategy include the following:
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Drive adoption of Microcyn as the standard of care in the
wound care market to prevent and eliminate infection
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We believe our products are well positioned to become the
standard of care in preventing and eliminating infection. We
seek to drive adoption of Microcyn as the standard of care in
the wound care market through data from physician clinical
studies, clinical trials and key opinion leader programs. We
intend to continue to maintain a marketing presence in key
medical communities throughout the world through targeted direct
marketing and sponsorships of physician presentations at medical
conferences and seminars.
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Obtain additional regulatory approvals in the United
States
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We intend to seek additional regulatory approvals, which we
believe will allow us to accelerate adoption of our products by
wound care specialists worldwide. We expect to complete our
pivotal clinical trial for pre-operative skin preparation in the
third quarter of 2006 and, if the results are positive, intend
to file an NDA for use of Microcyn as a pre-operative skin
preparation in late 2006. In addition, we have developed a
protocol, based on comments from the FDA, for a Phase IIb
trial to be conducted in subjects with diabetic foot ulcers and
other open wounds comparing the healing time of wounds treated
with Microcyn with those not treated with Microcyn. This
clinical trial is intended to support the safety as well as the
efficacy of Microcyn for infection control and wound healing.
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Expand our direct sales force and distribution
networks
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We intend to expand our direct sales force and distribution
networks in the United States, Europe and the rest of the world.
In the United States, Europe and Mexico, we sell our products
through distribution networks supported by our direct sales
force. We have distribution agreements for our products in
India, Southeast Asia and the Middle East. We select
distributors based on their demonstrated expertise in selling to
wound care professionals and facilities.
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Pursue opportunities to combine Microcyn with other
treatments
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We believe our products are compatible with and enhance the
efficacy of a variety of existing wound care treatment methods
including negative pressure wound therapy, pulse and jet lavage
and tissue engineered skin substitutes. Combining Microcyn with
these therapies has improved their efficacy in
48
eliminating infection, as demonstrated in physician clinical
studies. We believe combination treatment methods to eliminate
infection are gaining acceptance by wound care professionals and
may prove to be clinically and commercially attractive.
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Develop strategic collaborations in the wound care
market
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We intend to pursue strategic relationships with respect to both
product development and distribution. To accelerate adoption of
our products, we may enter into strategic relationships with
healthcare companies that have product lines or distribution
channels that are complementary to ours. These relationships may
take the form of co-promotion agreements, distribution
agreements or joint ventures. In addition, we may expand our
offerings of new products or technologies through acquisitions
or licensing agreements.
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Leverage our Microcyn platform to address additional
markets
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We believe our products have applications in several other large
consumer and professional markets, including the hard surface
disinfectant, respiratory, dermatology, veterinary, mold and
atmospheric remediation and dental markets. We intend to access
these markets through strategic partnerships or joint ventures.
To date, we have entered into distribution agreements in the
hard surface disinfectant, veterinarian and mold and atmospheric
remediation markets.
Our
Products Microcyn Platform
The following are products we currently offer:
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Geographic Region
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Brand Name
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Indication
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United States
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Dermacyn Wound Care
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A medical device product intended
for moistening absorbent wound dressings and cleaning minor
cuts, minor burns, superficial abrasions and minor irritations
of the skin, for moistening and lubricating absorbent wound
dressings for traumatic wounds, cuts, abrasions and minor burns,
and for moistening and debriding acute and chronic dermal
lesions, such as
stage I-IV
pressure ulcers, stasis ulcers, diabetic ulcers, post-surgical
wounds, first and second degree burns, abrasions and minor
irritations of the skin.
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Cidalcyn
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A multi-purpose disinfectant
cleaner for use on hard, non-porous, inanimate surfaces. Broad
spectrum disinfectant kills odor-causing bacteria while
chemically neutralizing odors. It is non-flammable and
non-corrosive.
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Vetericyn Wound Care
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A product used for the management
of traumatic wounds, cuts, abrasions, skin irritations,
post-surgical incisions and minor burns in animals. Safe for use
around head and eyes.
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European Union
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Dermacyn Wound Care
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A super-oxidized solution intended
for use in the debridement, irrigation and moistening of acute
and chronic wounds, ulcers, cuts, abrasions and burns. Through
reducing microbial load and assisting in a moist environment, it
enables the body to perform its own healing process. It can be
broadly applied within a comprehensive wound treatment.
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Oculus Microcyn Disinfectant
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A high-level disinfectant solution
for the reprocessing of heat sensitive and other medical
devices.
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Geographic Region
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Brand Name
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Indication
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Mexico
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Microcyn60
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A product used for the antiseptic
treatment of wounds and infected areas and for the disinfection
of medical instruments and equipment and clean-rooms.
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India
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Oxum
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A super-oxidized solution intended
for use in the debridement, irrigation and moistening of acute
and chronic wounds, ulcers, cuts, abrasions and burns. Through
reducing microbial load and assisting in a moist environment, it
enables the body to perform its own healing process. It can be
broadly applied within a comprehensive wound treatment regimen.
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Canada
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Dermacyn Wound Care
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A product used in moistening,
irrigating, cleansing and debriding acute and chronic dermal
lesions, such as
stage I-IV
pressure ulcers, stasis ulcers, diabetic ulcers, post-surgical
wounds, first and second degree burns, abrasions, lacerations
and minor irritations of the skin.
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Mechanism
of Action
We believe Microcyns ability to prevent and eliminate
infection is based on its uniquely engineered chemistry.
Laboratory studies conducted on Microcyn show that it reduces
various bacteria, spores, fungi and viruses. Unlike current
treatments, physician clinical studies indicate that Microcyn
does not cause adverse effects on human tissue. We believe this
is due to the specialized combination of oxidizing chemical
species produced through our proprietary process of
electrolyzation. Our laboratory studies suggest that Microcyn
reacts with and damages the cell wall of the organism, causing
rupture of the cell. Laboratory and physician clinical studies
suggest that this process destroys only single cell organisms
such as bacteria, spores, fungi and viruses.
This rupture of the cell wall appears to occur through a
fundamentally different process than that which occurs as a
result of contact with chlorine-based solution because
experiments have confirmed that Microcyn kills
chlorine-resistant bacteria.
In laboratory tests, Microcyn has been shown to eliminate
certain biofilms. A biofilm is a complex aggregation of
microorganisms or bacteria marked by the formation of a
protective and adhesive matrix, allowing the bacteria to collect
and proliferate. It is estimated that over 65% of microbial
infections in the body involve bacteria growing as a biofilm.
Bacteria living in a biofilm typically have significantly
different properties from free-floating bacteria of the same
species. One result of this film environment is increased
resistance to antibiotics and to the bodys immune system.
In chronic wounds, biofilms interfere with the normal healing
process and halt or slow wound closure. In laboratory studies,
Microcyn was shown to destroy two common biofilms after five
minutes of exposure.
It is widely accepted that reducing inflammation surrounding an
injury or wound is beneficial to wound healing. Our laboratory
research indicates that Microcyn inhibits histamine production
and cytokine release. These factors are critical components of
the bodys natural inflammatory response to injury or
wounds, as well as other conditions, such as rhinosinusitis.
Inhibition of cytokine release blocks the initial stages of the
inflammation process, in which cells (including mast cells)
involved in triggering the inflammatory response are prevented
from releasing the inflammation signal to the rest of the body.
Our laboratory research suggests that Microcyns
interference with these cells is selective to only the
inflammation signaling pathway and does not interfere with other
functions of these cells. Additionally, physician clinical
studies suggest that Microcyn only inhibits this function in
tissue that is directly exposed to the solution.
50
Clinical
Trials and Physician Studies
Current
and Planned Trials
Pre-Operative Skin Preparation Trial.
In
September 2005, we initiated our pivotal pre-operative skin
preparation trial, using 64 healthy volunteers. Patients were
selected for enrollment based on the presence of a baseline
microbial load in specific areas of the body and received a
Microcyn scrub in the same manner as preparation for surgery.
The patients were evaluated for microbial load reduction at
intervals throughout the day. The results of this trial are
expected to be received in the third quarter of 2006. If the
trial is successful, we anticipate filing our NDA with the FDA
in late 2006. There can be no assurance that the outcome of the
trial will be successful, and even if successful, the FDA may
not agree with our interpretation of the data and may require
additional pivotal trials.
Open Wound Trial.
We have established, based
on comments from the FDA, the protocol for our Phase IIb
clinical trial of Microcyn in patients with diabetic foot ulcers
and other open wounds. This study will evaluate a total of
approximately 160 patients in two groups of
80 patients each and is intended to assess clinical cure
and wound healing time in open and infected wounds. We expect to
begin enrollment in late 2006 and to complete this trial within
nine month. The result will be used to determine the sample size
of a subsequent Phase III pivotal trial, which we estimate
may require up to 500 patients enrolled in 30 to
40 centers in the United States and Europe. The current FDA
guidelines for this indication require only a single pivotal
trial for marketing clearance although there is no guarantee
that the FDA will not require us to conduct additional clinical
studies in support of our NDA for this indication. The pivotal
trial is intended to demonstrate safety and efficacy of Microcyn
in eliminating infections in diabetic foot and venous stasis
ulcers and deep wounds.
Physician Clinical Studies.
A number of other
physician clinical studies are planned comparing the results of
using Microcyn with the current standard of care. These studies
are intended to provide supporting data as to microbial load
reduction, healing time, eliminating infections, compatibility
with dressings and devices, effects on blood flow, bone healing
rates, the prevention of post-surgical complications, the
prevention of intubation-related pneumonia and a reduction in
the cost of care.
These physician clinical studies may provide supporting data for
our applications for regulatory approval when they are conducted
in strict compliance with the guidance on good clinical
practices and meet other requirements of the regulatory
authority. Based on the number of patients and variety of wound
types treated, the safety data from these studies may allow us
to truncate the FDA clinical trial process, which usually
involves three phases of development. See
BusinessGovernment RegulationPharmaceutical
Product Regulation. We believe these studies will be
supportive of our future regulatory applications.
Completed
Trials and Studies
Physicians in the United States, Europe and Mexico have
conducted eleven clinical studies of Microcyn, some sponsored by
us and some physician initiated, generating data indicating that
Microcyn is safe and effective for the indications under study
and that it results in reduced costs to healthcare providers and
patients.
Since there is not one universal standard of care in wound
treatment, healthcare providers use many different devices,
antiseptics, bandages and antibiotics to treat various types of
wounds. For example, in the United States, a typical protocol
for treatment of diabetic foot ulcers includes treatment with
saline solution or topical antibiotics as an infection control
agent, whereas the typical protocol for diabetic foot ulcers in
Europe often includes treatment with Betadine. Efforts to change
formal or favored protocols meet with resistance unless clear
evidence of greater safety, superior efficacy, reduction in
cost, or other benefits is demonstrated.
Dr. David E. Allie, a cardiovascular surgeon and head
of the Cardiovascular Institute of the South in Lafayette,
Louisiana and a member of our Business and Medical Advisory
Board, completed a retrospective study in January 2006 comparing
the use of Microcyn on 60 patients to a comparable matched
control group. The study was designed to examine the effect on
wound healing, limb salvage and skin irritation. The results of
this study showed improvements in wound healing time and in
rates of limb salvage. Furthermore, the
51
Microcyn group experienced no skin irritation while 13% of the
patients in the control group did experience skin irritation.
The following is a summary of those results:
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Microcyn
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Traditional
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Number of patients
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60
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60
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Percentage of limb salvage
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98
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%
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90
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%
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Adverse effects / complications
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0
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8 (13
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)%
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Average wound healing time
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34 days
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67 days
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Dr. Luca Dalla Paola, an Endocrinologist and surgeon and
Chief of the Diabetic Foot Unit of Presidio Ospedaliero Abano
Terme in Padova, Italy, conducted a controlled physician
clinical study in Italy in November 2004 designed to assess the
rate of elimination of infection when Microcyn was used on
diabetic foot ulcers localized below the ankle. In the study,
patients were treated daily using gauze soaked with Microcyn or
Betadine. Microbiological specimens were taken at the time of
the enrollment and weekly thereafter until wound closure
occurred. The results showed that patients treated with Microcyn
had less than one-third the strains of bacteria than those
treated with Betadine. The following table summarizes the
results of the study:
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Microcyn
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Betadine
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P-Value
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Number of patients
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110
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108
|
|
|
|
|
|
Bacteria strains at beginning of
study
|
|
|
230
|
|
|
|
232
|
|
|
|
|
|
Strains after treatment
|
|
|
14
|
|
|
|
43
|
|
|
|
p<0.001
|
|
Percentage eliminated
|
|
|
94
|
%
|
|
|
81
|
%
|
|
|
|
|
Adverse effects / complications
|
|
|
0
|
|
|
|
18
|
|
|
|
|
|
Average wound healing time
|
|
|
43 days
|
|
|
|
55 days
|
|
|
|
p<0.0001
|
|
Dr. Alfredo Barrera, a gastrointestinal surgeon and head of
the Department of Surgery at the Hospital Ruben Leñoro,
Mexico, conducted a six-month controlled physician clinical
study in Mexico in 2004. The study was designed to test
microbial load reduction in patients with extensive abdominal
peritonitis. In this study, patients were given a comprehensive
therapy using saline solution lavage plus Microcyn or given the
same comprehensive therapy with saline solution only, a widely
used standard of care. Patients treated with Microcyn
experienced greater microbial load reduction and shorter
hospital stays. The following table summarizes the results of
the study:
|
|
|
|
|
|
|
|
|
|
|
Microcyn
|
|
|
Saline
|
|
|
Number of patients
|
|
|
20
|
|
|
|
20
|
|
Bacteria strains at beginning of
study
|
|
|
30
|
|
|
|
29
|
|
Bacteria strains after treatment
|
|
|
2
|
|
|
|
24
|
|
Percentage of bacteria strains
eliminated
|
|
|
93
|
%
|
|
|
17
|
%
|
Adverse effect / complications
|
|
|
0
|
|
|
|
n/a
|
|
Average hospital stay
|
|
|
22 days
|
|
|
|
33 days
|
|
Dr. Ariel Miranda, a board certified plastic surgeon and
Chief of the Burn Unit of the Civil Hospital of Guadalajara,
Mexico, conducted a retrospective clinical study in Mexico in
2004, using Microcyn on pediatric burn patients. The study was
designed to evaluate the rate of infection, the need for skin
grafts and antibiotics, and the duration of hospital stays in
pediatric burn patients. In this study, Dr. Miranda used
Microcyn for initial debridement and to moisten the burn site
for 5-15 minutes, three times a day until elimination of
the infection. No gels or dressings were applied to the wound.
An independent statistician reviewed and analyzed the results of
this study and compared it to the results from burn patients
treated by Dr. Miranda with silver sulfadiazine. The
patients treated with Microcyn suffered no adverse effects or
related complications. In addition, the use of Microcyn enabled
Dr. Miranda to reduce the use of systemic antibiotics
without the
52
development of infections. Dr. Miranda also noted that, due
to the flexible and smooth quality of the healed skin, the
patients treated with Microcyn needed less skin grafting. The
following table summarizes the results of the independent
statisticians analysis of the study:
|
|
|
|
|
|
|
|
|
|
|
Microcyn
|
|
|
Silver Sulfadiazine
|
|
|
Number of patients
|
|
|
64
|
|
|
|
64
|
|
Patients with bacteria strains
after 7 to 15 days
|
|
|
6
|
|
|
|
22
|
|
Patients on antibiotics
|
|
|
6
|
|
|
|
46
|
|
Adverse effects / complications
|
|
|
0
|
|
|
|
n/a
|
|
Average hospital stay
|
|
|
15 days
|
|
|
|
29 days
|
|
Seven additional physician clinical studies in the United
States, Europe and Mexico have been completed using Microcyn to
eliminate infection in a variety of different wounds, including
diabetic foot and venous stasis ulcers and oral surgery.
In addition, there are several ongoing and planned physician
clinical studies being conducted in the United States and Europe
to assess Microcyns effectiveness in preventing and
eliminating infection in wounds. For example, we are supporting
with a research grant 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 Centre
at the Manchester Royal Infirmary in the United Kingdom. This is
a study of diabetic foot ulcers using the VersaJet lavage 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 study involving 100 patients
comparing Microcyn to Polyhexanid in the treatment of diabetic
foot necrobiosis, with time to wound healing the primary
endpoint. Dr. Tom Wolvos, a board certified surgeon who is
the Medical Director at the Scottsdale Healthcare Wound
Management Center in Arizona, is conducting a forty patient
study comparing Microcyn to saline solution with the VAC
Negative Pressure Wound Therapy system from Kinetic Concepts,
Inc., 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 focusing on
both the potential savings from the use of Microcyn in treating
a variety of wounds as well as a 20 patient study comparing
Microcyn with saline solution in the treatment of leg ulcers.
We provide financial support for some of these studies in the
form of research funding, expense reimbursement and supply of
product. In addition, Drs. Allie and Dalla Paola are
members of our Physician Advisory Board. Dr. Dalla Paola is
compensated $1,000 per month for his participation on this
committee. Dr. Allie is a paid consultant, investor and
stockholder. For additional information, please see
Management - Advisory Board Compensation.
Regulatory
Strategy
Our regulatory strategy is to seek the necessary clearances and
approvals for Microcyn to accelerate its adoption by wound care
specialists worldwide as the standard of care in preventing and
eliminating infection throughout all stages of treatment. We
intend to seek and obtain FDA approval of Microcyn as a topical
antimicrobial to treat infected wounds. We expect to complete a
pivotal pre-operative skin trial using 64 healthy volunteers in
the third quarter of 2006 and expect to file an NDA for this
indication in late 2006. Concurrently, we intend to apply for
similar or expanded clearances in Europe and other parts of the
world. In addition, we have developed a protocol, based on
comments from the FDA, for a Phase IIb trial to be
conducted in subjects with diabetic foot ulcers and other open
wounds comparing the healing time of wounds treated with
Microcyn with those not treated with Microcyn. This clinical
trial is intended to support the safety as well as the efficacy
of Microcyn in terms of rate of clinical cure and wound healing.
In November 2004, we received CE Mark approval to market and
sell Microcyn in Europe as a wound care product as part of a
comprehensive wound care treatment for microbial load reduction.
We have obtained three 510(k) clearances for Microcyn as a
medical device for moistening, cleansing, lubricating and
debriding acute and chronic dermal lesions, such as
stage IV pressure ulcers, stasis ulcers, diabetic ulcers,
post-surgical
53
wounds, first and second degree burns, abrasions and minor
irritations of the skin. Based on the CE Mark and FDA approvals,
we filed for and received clearance to market Microcyn in India,
Singapore and Pakistan.
Sales and
Marketing
We are developing distribution and sales networks to market our
products in the United States and Europe. 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 and are
actively recruiting additional distributors. We employ four
full-time direct salespeople, in addition to our distributors,
with marketing contacts in leading wound care clinics, hospitals
and health care agencies that provide wound care services. We
intend to hire additional salespeople in the United States
beginning in the fourth quarter of 2006.
In Europe, we have distribution arrangements in Germany, Italy,
Sweden and the Czech Republic with an aggregate of over
25 full-time equivalent salespeople focused on the sale of
Microcyn and are actively pursuing additional distribution
arrangements in other European countries. We currently have an
eight-person 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 75-person sales force, including salespeople, nurses
and clinical support staff responsible for selling Microcyn to
over 250 private and public hospitals and to retail independent
pharmacies.
We have established distributors for our disinfectant and wound
care products in India, Bangladesh, Pakistan, Singapore, United
Arab Emirates and Saudi Arabia. In December 2005, we entered
into a distribution agreement with Alkem Laboratories, a large,
privately-held pharmaceutical firm headquartered in Mumbai,
India, employing more than 800 salespeople servicing the Indian
healthcare market. In January 2006, the Indian Ministry of
Health approved Microcyn for use in chronic and acute wounds,
and we commenced sales to Alkem in April 2006.
In Canada, we are currently recruiting wound care specialty
distributors and expect to commence product sales following
receipt of our drug identification number from Canadian
regulatory authorities. Sales in Canada are currently supported
by one employee resident in our headquarters in Petaluma,
California. We intend to hire two additional direct sales
persons for Canada by the first quarter of 2007.
Other
Market Opportunities
We believe our products have applications in several other large
consumer and professional markets and intend to access these
markets through strategic partnerships or joint ventures. These
markets include:
Hard
Surface Disinfectant
In the United States, we obtained Environmental Protection
Agency, or EPA, clearance for use of the Microcyn technology as
a disinfectant in May 2004. Our product, Cidalcyn, is a
hospital-grade multi-purpose disinfectant cleaner and food
contact sanitizer used in patient care areas, households, child
care facilities,
54
health clubs, laboratories and on food contact surfaces where
cross-contamination of treated surfaces can occur.
According to Global Industry Analysts, Inc., the worldwide
disinfectant market is estimated to be $1.7 billion, of
which approximately $270 million is attributable to the
United States. Disinfectants currently in the marketplace, such
as bleach and ammonia, may have adverse effects after long-term
use for the person applying the disinfectant, and there are
other environmental, biodegradability and general concerns
regarding toxicity. Most leading brands of disinfectant products
are classified by the EPA as having a high level of toxicity and
require appropriate warning statements. Based on the EPA
toxicity categorization of antimicrobial products, Cidalcyn
received the lowest toxicity rating and, as a result,
precautionary labeling statements are not required.
In December 2005, we entered into an exclusive distribution
agreement with a leading manufacturer of wet wipes and moist
towelette products for the consumer, food service and healthcare
industries. The distribution agreement allows our distributor to
market, sell and distribute our hard-surface disinfectant
products under the distributors private label in the
United States, Canada, Caribbean and Latin America, excluding
Mexico. We expect our distributor to launch this product in the
fourth quarter of 2006.
Respiratory
Our nasal product candidate is an anti-microbial solution
designed to be self-administered into a patients nasal
cavity for the treatment of chronic rhinosinusitis. In animal
studies, it has been shown to kill the bacteria that causes
rhinosinusitis. We are currently conducting pre-clinical animal
studies seeking to support efficacy and safety and intend to
seek FDA approval once clinical trials are successfully
completed for this product and indication.
Rhinosinusitis, or inflammation of the nasal sinuses, affects an
estimated 35 million Americans. 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 are developing dermatology-focused product candidates using
our Microcyn technology for the treatment of various fungal and
bacterial skin infections, including:
|
|
|
|
|
Acne vulgaris, a common skin disease affecting 85% of
adolescents and young adults;
|
|
|
|
Psoriasis, a chronic inflammatory skin condition affecting more
than 4.0 million Americans;
|
|
|
|
Vaginal candidiasis, an infection usually caused by a species of
the yeast Candida albicans, affecting approximately 75% of women
at least once in their lifetime; and
|
|
|
|
Onychomycosis, a fungal infection of the toenail affecting
35 million North Americans.
|
Our dermatology product candidates will be administered in a
liquid suspension and a gel formulation. In laboratory and
clinical tests, our anti-fungal product candidates were
effective in treating these fungal infections without the need
for long-term exposure to systemic antibiotics. We intend to
seek FDA approval to sell our dermatology products by
prescription and
over-the-counter.
Despite the significant sales of prescription products for
treatment of diseases of the skin, we believe that many serious
limitations remain in the treatment of these diseases. Existing
treatments are often inadequate for reasons of efficacy,
toxicity or patient noncompliance.
Veterinary
Medicine
Our animal wound care product, 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. Veterinarians in the United States use
Vetericyn in a variety of applications, including, for example,
to treat hard-to-heal equine wounds. We believe a non-toxic
wound spray or gel that is safe for use in animals has
55
wide application. According to the American Veterinary Medical
Association, as of December 31, 2005, there were more than
54,000 veterinarians in private practice in more than 27,000
veterinary practices nationwide.
Mold
and Atmospheric Remediation
We plan to commercialize our Microcyn technology in liquid and
mist form for the industrial and residential remediation
markets. Tests have shown that our Microcyn products are
non-irritating and non-sensitizing to humans and yet contain
ingredients with potent kill times. Our products are safe,
non-corrosive, non-flammable and easy to use, requiring no
significant training or experience. In addition, unlike other
competitive products, Microcyn does not need to be removed after
application, thereby saving time and labor costs. Our Microcyn
products have been granted the lowest class EPA toxicity rating
and are therefore safe to use to remediate blackwater, mold and
other household and industrial damage due to flooding.
Recent scientific data suggests an association between exposure
to mold or damp indoor environments and the development of cough
and upper respiratory tract symptoms, wheezing, and asthma
symptoms in sensitized persons.
In July 2005, we entered into a license agreement with a
provider of restoration and remediation services in Canada, for
the restoration of residential, commercial, industrial and
business property damaged by fire, flood and wind. We expect to
begin commercializing this product following receipt of
appropriate regulatory approvals.
Dental
and Oral Care
We are developing an oral rinse and antimicrobial toothpaste for
the oral care market. Based on data from the Freedonia Group,
the U.S. market for mouthwash and dental rinse products was
$600 million in 2003. Our oral rinse product candidate is
expected to compete with consumer oral rinses, such as
Listerine, Scope and Cepacol, and prescription rinses, such as
Peridex and Perigard. Our Microcyn oral rinse product candidate
has been tested in clinical studies and shown to be safe for use
in oral surgery. We intend to seek FDA approval to market our
dental and oral care product either by prescription or
over-the-counter as FDA designates.
Research
and Development
The goals of our research and 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 and development efforts 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:
|
|
|
|
|
an intravenous bag and spikeable bottle for use with compatible
wound care systems, such as negative wound pressure therapy, jet
lavage and oxygenated mist devices;
|
|
|
|
an antimicrobial gel formulation that hydrates, moistens and
protects the wound;
|
|
|
|
various formulations and delivery systems that extend the
stability of the product;
|
56
|
|
|
|
|
an oral rinse to treat ulcerations of oral tissues (stomatitis)
and inflammation of oral tissues (mucositis);
|
|
|
|
an antimicrobial toothpaste that reduces plaque and gingivitis
and will not be irritating to the mouth;
|
|
|
|
a surgical irrigant to control infections during and after
surgery; and
|
|
|
|
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.
We also intend to develop other products for use in non-medical
markets based on our core technology and intellectual property
portfolio. These potential products include the following:
|
|
|
|
|
a solution used with various materials in the manufacture of
disinfectant wipe products;
|
|
|
|
a mist form of Microcyn used for decontaminating environmental
areas containing potential biological hazards, such as in
aircraft decontamination; and
|
|
|
|
a mist used to decontaminate people exposed to biological
hazardous agents.
|
We also intend to focus efforts on our L3 anti-viral compound
for the treatment of early stage cancers, initially targeting
cervical dysplasia. Based on our research, L3 has inhibited the
growth of certain cancer cells in preclinical studies.
As of May 31, 2006, we had nine full-time employees engaged
in research and development activities. Our director of research
and development coordinates all such activities. We plan to
increase our research and development staff in the future to
address market demands identified in our direct market research
and to expand our product line by using our Microcyn technology
in different medical and non-medical applications.
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 technologys efficacy and safety.
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
manufacturing process produces very little waste, which is
disposed of as water after a simple non-toxic chemical
treatment. Our facilities are required to meet and maintain
regulatory standards applicable to the manufacture of products.
Our United States and Netherlands facilities are ISO 13485
certified and comply with cGMP 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 and ISO requirements.
This validation is designed to ensure that the final product is
manufactured with the same level of consistency and quality in
all manufacturing sites, and includes the testing of all
internal and external components, mechanical and electrical
parts and the software in each machine. Certain materials used
in manufacturing our machines are proprietary.
We believe we have a sufficient number of machines to produce
Microcyn as required to meet anticipated future requirements for
at least the next two years. As we expand into other geographic
markets, we may establish additional manufacturing facilities in
or near 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
57
from infringing our proprietary rights. We seek to protect our
proprietary position by, among other methods, filing, when
possible, U.S. and foreign patent applications relating to our
technology, inventions and improvements that are important to
our business. We also rely on trade secrets, know-how,
continuing technological innovation, and in-licensing
opportunities to develop and maintain our proprietary position.
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 super-oxidized
water product and aspects of the method and apparatus for
producing Microcyn and will expire between 2011 and 2014. In
June 2006, we received written notice 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.
As of May 31, 2006, we had twelve U.S. pending patent
applications and fifteen foreign pending patent applications.
These applications include U.S. provisional applications
for which the one-year period to file a non-provisional
application has not yet expired as well as international PCT
applications that have not yet reached the deadline to file
corresponding national phase applications. Our portfolio of
pending applications can be divided into two groups. The first
group includes three U.S. 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. We have
received a Notice of Allowance from the U.S. Patent and
Trademark Office for one of our pending U.S. applications
in this group. Before a patent may issue, a second review of our
application must be completed. The second group includes nine
U.S. and eight foreign applications that relate to Microcyn, the
method and apparatus for manufacturing Microcyn, and its uses.
Although we work to protect our technology, we cannot assure you
that any patent will issue from currently pending patent
applications or from future patent applications. We also cannot
assure you that the scope of any 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 to our business.
Despite any measures taken to protect our intellectual property,
unauthorized parties may attempt to copy aspects of our products
or to wrongfully obtain or use information that we regard as
proprietary.
58
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. Kinetic Concepts, Inc.,
Smith & Nephew plc, Johnson & Johnson,
Healthpoint, Ltd., a subsidiary of DFB Pharmaceuticals Inc.,
Kendall, a division of Tyco International Ltd., ConvaTec, a
division of Bristol-Myers Squibb Company and Coloplast Ltd. have
a wide range of product offerings for the wound market.
Collectively, these companies have a substantial share of the
wound care market. Several large well-funded drug companies also
develop and sell topical antibiotics.
Our competitors enjoy several competitive advantages, including:
|
|
|
|
|
significantly greater name recognition;
|
|
|
|
established relationships with healthcare professionals,
patients and third party payors;
|
|
|
|
established distribution networks;
|
|
|
|
additional product lines and the ability to offer rebates or
bundle products to offer discounts or incentives;
|
|
|
|
greater experience in conducting research and development,
manufacturing, obtaining regulatory approval for products and
marketing; and
|
|
|
|
greater financial and human resources for product development,
sales and marketing and patient support.
|
While many companies are able to produce oxidized water, their
products, unlike ours, are typically stable for not more than
48 hours, have an acidic pH, which irritates the skin and
has a much higher chlorine content. One such company, PuriCore,
sells electrolysis machines used to manufacture brine-based
oxidized water primarily as a sterilant.
Our products compete with a large number of products that
include
over-the-counter
treatments and prescription drugs, including topical
anti-infectives, such as Betadine, silver sulfadiazine, hydrogen
peroxide, Dakins solution, 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 with
others, we may compete with such companies in some product lines
and complement other product lines.
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-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,
59
manufacturing, safety, labeling, storage 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
New medical devices, such as Microcyn, are subject to FDA
approval and extensive regulation under the 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 FDAs Quality System Regulation,
which sets forth good manufacturing practice requirements;
facility registration and product reporting of adverse medical
events listing; 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 previously
approved device. If the FDA agrees that the proposed device is
substantially equivalent to the predicate device, then 510(k)
clearance to market will be granted. After a device receives
510(k) clearance, any modification that could significantly
affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k)
clearance or could require 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, 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.
If the FDA finds that a manufacturer has failed to comply 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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60
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 U.S., 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.
The Company is currently pursuing anti-microbial claims through
the Center for Drug Evaluation and Research.
Pharmaceutical
Product Regulation
In the United States, the FDA regulates drugs under the Federal
Food, Drug, and Cosmetic Act, or FDCA, and implementing
regulations that are adopted under the FDCA. In the case of
biologics, the FDA regulates such products under the Public
Health Service Act. If we fail to comply with the applicable
requirements under these laws and regulations at any time during
the product development process, approval process, or after
approval, we may become subject to administrative or judicial
sanctions. These sanctions could include the FDAs refusal
to approve pending applications, withdrawals of approvals,
clinical holds, warning letters, product recalls, product
seizures, total or partial suspension of our operations,
injunctions, fines, civil penalties or criminal prosecution. Any
agency enforcement action could have a material adverse effect
on us. The FDA also administers certain controls over the export
of drugs and biologics from the U.S.
Under the U.S. 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 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
61
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 patients informed
consent. Typically, clinical evaluation involves the following
time-consuming and costly three-phase sequential process:
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Phase I.
Phase I human clinical
trials are conducted in a limited number of healthy individuals
to determine the drugs safety and tolerability and include
biological analyses to determine the availability and
metabolization of the active ingredient following
administration. The total number of subjects and patients
included in Phase I clinical trials varies, but is
generally in the range of 20 to 80 people.
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Phase II.
Phase II clinical trials
involve administering the drug to individuals who suffer from
the target disease or condition to determine the drugs
potential efficacy and ideal dose. These clinical trials are
typically well controlled, closely monitored, and conducted in a
relatively small number of patients, usually involving no more
than several hundred subjects. These trials require scale up for
manufacture of increasingly larger batches of bulk chemical.
These batches require validation analysis to confirm the
consistent composition of the product.
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Phase III.
Phase III clinical trials
are performed after preliminary evidence suggesting
effectiveness of a drug has been obtained and safety (toxicity),
tolerability, and an ideal dosing regimen have been established.
Phase III clinical trials are intended to gather additional
information about the effectiveness and safety that is needed to
evaluate the overall benefit-risk relationship of the drug and
to complete the information needed to provide adequate
instructions for the use of the drug, also referred to as the
Official Product Information. Phase III trials usually
include from several hundred to several thousand subjects.
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Throughout the clinical phase, samples of the product made in
different batches are tested for stability to establish shelf
life constraints. In addition, large-scale production protocols
and written standard operating procedures for each aspect of
commercial manufacture and testing must be developed.
Phase I, II, and III testing may not be completed
successfully within any specified time period, if at all. The
FDA closely monitors the progress of each of the three phases of
clinical trials that are conducted under an IND and may, at its
discretion, reevaluate, alter, suspend, or terminate the testing
based upon the data accumulated to that point and the FDAs
assessment of the risk/benefit ratio to the patient. Clinical
investigators, IRBs, and companies may be subject to
pre-approval, routine, or for cause inspections by
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
investigators participation in a clinical trial, at any
time for various reasons, including a finding that the subjects
or patients are being exposed to an unacceptable health risk.
The FDA can also request additional clinical trials be conducted
as a condition to product approval. Additionally, new government
requirements may be established that could delay or prevent
regulatory approval of our products under development.
Furthermore, institutional review boards, which are independent
entities constituted to protect human subjects in the
institutions in which clinical trials are being conducted, have
the authority to suspend clinical trials in their respective
institutions at any time for a variety of reasons, including
safety issues.
62
Post-Approval Phase.
After approval, we are
still subject to continuing regulation by 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 FDA and certain state agencies and are subject to
periodic routine and unannounced inspections by the FDA to
assess compliance with cGMP regulations. Facilities may also be
subject to inspections by other federal, foreign, state, or
local agencies. In addition, approved biological drug products
may be subject to
lot-by-lot
release testing by the FDA before these products can be
commercially distributed. Accordingly, manufacturers must
continue to expend time, money, and effort in the area of
production and quality control to maintain compliance with cGMP
and other aspects of regulatory compliance. Future FDA
inspections may identify compliance issues at our facilities or
at the facilities that may disrupt production or distribution,
or require substantial resources to correct.
In addition, following FDA approval of a product, discovery of
problems with a product or the failure to comply with
requirements may result in restrictions on a product,
manufacturer, or holder of an approved marketing application,
including withdrawal or recall of the product from the market or
other voluntary or FDA-initiated action that could delay further
marketing. Newly discovered or developed safety or effectiveness
data may require changes to a products approved labeling,
including the addition of new warnings and contraindications.
Also, the FDA may require post-market testing and surveillance
to monitor the products safety or efficacy, including
additional clinical studies, known as Phase IV trials, to
evaluate long-term effects.
Regulation
of Disinfectants
In the United States, the EPA, regulates disinfectants as
antimicrobial pesticides under the Federal Insecticide,
Fungicide, and Rodenticide Act, or FIFRA, and the implementing
regulations that EPA has adopted under FIFRA. Before marketing a
disinfectant in the United States, we must satisfy EPAs
pesticide registration requirements. That registration process
requires us to demonstrate the disinfectants efficacy and
to determine the potential human and ecological risks associated
with use of the disinfectant. The testing and registration
process could be lengthy and could be expensive. 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 FIFRAs requirements could expose us
to various enforcement actions. FIFRA empowers EPA to seek
administrative or judicial sanctions against those who violate
FIFRA. Among the potential FIFRA penalties are civil
administrative penalties, stop sale orders, 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
63
costs, including price regulation, competitive pricing, and
managed-care arrangements, are continuing in many countries
where we do business, including the U.S. 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 have attempted to
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. Examples of how limits on drug coverage and
reimbursement in the United States may cause drug price
sensitivity include the growth of managed care, changing
Medicare reimbursement methodologies, decisions on which drugs
to include in formularies and drug rebate calculations. Some
third-party payors also require pre-approval of coverage for new
or innovative devices or therapies before they will reimburse
health care providers who use the 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 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 anti-kickback laws, which, among other things, prohibit
the payment of remuneration intended to induce the purchase of
products or services and the fraudulent billing of federal
healthcare programs. These laws constrain the sales, marketing
and other promotional activities of pharmaceutical companies,
such as us, by limiting the kinds of financial arrangements
(including for example, our sales programs and physician
advisory board relationships) we may have with prescribers,
purchasers, dispensers and users of drugs. In addition, the HHS
Office of Inspector General has issued Compliance Guidance for
pharmaceutical manufacturers which, among other things,
identifies manufacturer practices implicating the federal
anti-kickback law and describes elements of an effective
compliance program. The laws of many states impose similar
requirements and in some cases may not be limited to government
reimbursed items.
Due to the breadth of the provisions of some of these laws, it
is possible that some of our practices might be challenged under
one or more of these laws in the future. Violations of these
laws can lead to civil and criminal penalties, including
imprisonment, fines and exclusion from participation in
Medicare, Medicaid and other federal health care programs. Any
such violations could have a material adverse effect on our
business, financial condition, results of operations or cash
flows.
Health
Information Privacy and Security
Individually identifiable health information is subject to an
array of federal and state regulation. Federal rules promulgated
pursuant to the Health Information Portability and
Accountability Act of 1996, or HIPAA, regulate the use and
disclosure of health information by covered entities
(which includes individual and institutional providers from
which we may receive individually identifiable health
information). These regulations govern, among other things, the
use and disclosure of health information for research purposes,
and require the covered entity to obtain the written
authorization of the individual before using or disclosing
health information for research. Failure of the covered entity
to obtain such authorization (absent obtaining a waiver of the
authorization requirement from an Institutional Review Board)
could subject the covered entity to civil and criminal
penalties. We may experience delays and complex negotiations as
we deal with each entitys differing interpretation of the
regulations and what is required for compliance. Also, where our
customers or contractors are covered entities, including
hospitals, universities, physicians or clinics, we may be
required by the HIPAA regulations to enter into business
associate agreements that subject us to certain privacy
and security requirements. In addition, many states have laws
that apply to the use and disclosure of health information, and
these laws could also affect the manner in which we conduct our
research and other aspects of our business. Such state laws are
not preempted by the federal privacy law where they afford
greater privacy protection to the individual. While activities
to assure compliance with health information privacy laws are a
routine business practice, we are unable to predict the extent
to which our resources may be diverted in the event of an
investigation or enforcement action with respect to such laws.
64
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.
Under the European Union regulatory systems we may submit
marketing authorization applications either under a centralized
or decentralized procedure. The centralized procedure, which is
available for medicines produced by biotechnology or which are
innovative, provides for the grant of a single marketing
authorization that is valid for all the European Union member
states. This authorization is a marketing authorization
approval, or MAA. The decentralized procedure provides for
mutual recognition of national approval decisions. Under this
procedure, the holder of a national marketing authorization may
submit an application to the remaining member states. Within
90 days of receiving the applications and assessment
report, each member state must decide whether to recognize
approval. This procedure is referred to as the mutual
recognition procedure, or MRP.
In addition, regulatory approval of prices is required in most
countries other than the United States. We face the risk that
the prices which result from the regulatory approval process
would be insufficient to generate an acceptable return to us or
our collaborators.
Employees
As of May 31, 2006, we had 81 full-time employees,
including 25 in manufacturing, nine in research and development,
four in regulatory and clinical, 16 in sales and marketing and
27 in administrative functions. In late 2006, we plan to add
additional sales and marketing personnel to support our various
markets and opportunities. We also plan to hire additional
marketing and 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 20,000 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
June 2007.
Legal
Proceedings
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
600,000 shares of our common stock at $0.75 per share.
A trial date has been set in July 2006, and we intend to
vigorously defend
65
this action. If the claims are litigated, we may incur
considerable litigation costs. We have tendered the claims to
our insurance carrier, but we expect the insurance carrier to
deny coverage to all or a portion of the claim.
In March 2006, we filed suit in the Northern District of
California Federal Court 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 competitor in Mexico. In
the complaint, we seek damages of $3.5 million and
immediate injunctive relief. No trial date has been set.
In September 2005, a complaint was filed against us in Mexico
claiming confusion in trademarks with respect to our Microcyn60
mark, and we may be required to cease using the mark in Mexico
and compensate the other party.
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.
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
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Capable of killing infectious agents or of preventing them from
spreading and causing infection.
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Antimicrobial
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Capable of destroying or inhibiting the growth of
micro-organisms.
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Antiseptic
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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
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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
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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 (i.e., antiseptics) or on environmental
surfaces (i.e., disinfectants).
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Microbial load
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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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P-value
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Indicates the probability that the result obtained in a
statistical test is due to chance rather than a true
relationship between measures. A small p-value, generally less
than 0.05, or p<0.05, indicates that it is very unlikely
that the results are due to chance.
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Spore
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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
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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 June 30, 2006:
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Name
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Age
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Position(s)
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Hojabr Alimi
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44
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Chief Executive Officer, President
and Chairman of the Board
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Michael Wokasch
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55
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Chief Operating Officer
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Robert Miller
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Chief Financial Officer
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James Schutz
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43
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Vice President of Corporate
Development, General Counsel, Corporate Secretary and Director
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Theresa Mitchell
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56
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Vice President of Regulatory,
Clinical Affairs, Quality Assurance and Research and Development
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Bruce Thornton
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42
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Vice President of International
Operations and Sales
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Robert Northey, Ph.D.
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49
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Director of Research and
Development
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Andres
Gutiérrez, M.D., Ph.D.
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45
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Director of Medical Affairs
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Gerard de Nies
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42
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Marketing and Sales
Director-Europe, Middle East and Africa of Oculus Innovative
Sciences Netherlands
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Sergio Caleti
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41
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Commercial Director of Oculus
Technologies of Mexico
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Akihisa Akao
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52
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Director
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Edward
Brown
(3)
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42
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Director
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Richard
Conley
(1)(2)(3)
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55
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Director
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Gregory
French
(1)(2)(3)
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45
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Director
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(1)
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Member of the audit committee
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(2)
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Member of the compensation committee
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(3)
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Member of the nominating and corporate governance committee
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Hojabr Alimi
, one of our founders, has served as our
Chief Executive Officer, President and director since 2002 and
was appointed as Chairman of the board of directors in
June 2006. In 1999, Mr. Alimi co-founded MicroMed
Laboratories, a contract research organization providing
assistance to pharmaceutical and medical device companies
worldwide in the FDA and CE Mark approval processes, as well as
with laboratory testing support. Prior to co-founding MicroMed
with his spouse, Mr. Alimi was a Corporate Microbiologist
for Arterial Vascular Engineering. Mr. Alimi received a
B.A. in biology from Sonoma State University.
Michael Wokasch
has served as our Chief Operating Officer
since June 2006. From July 2004 to May 2006, Mr. Wokasch
served as Senior Vice President of 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
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served as President of Aurora Biosciences Corporation, a drug
discovery company, 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, he held sales and
marketing positions at Abbott Laboratories, Merck &
Co., and Miles. Mr. Wokasch received a B.S. from the
University of Minnesota, College of Pharmacy.
Robert Miller
has served as our Chief Financial Officer
since June 2004 and was a consultant to us from March 2003 to
May 2004. Mr. Miller served as a director of Scanis, Inc.
since 1998 and 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 Schutz
has 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 Mitchell
has served as our Vice President of
Regulatory, Clinical Affairs, Quality Assurance and Research and
Development since March 2005. 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 Thornton
has 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 Nies
has served as our Director of
Marketing & Sales - Europe, Middle East and Africa at
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.
68
Sergio Caleti
has served as our 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 Akao
has 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 of
E-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 Brown
has 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 firms West Coast healthcare
effort and was one of the senior partners responsible for the
firms 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.
Richard Conley
has 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 Caroline University and an M.B.A. from
St. Marys University.
Gregory French
has 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 six members. We
currently anticipate that we will add one new independent member
to our board prior to completion of this offering. 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 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
National Market.
69
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.
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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 each of
Messrs. Conley and French 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 officers performance and
setting our chief executive officers compensation.
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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 of
Rule 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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70
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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.
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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 other company.
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 78,283 shares of our common stock, which
represented 0.5% of the then fully diluted shares of our common
stock, and granted Mr. Schutz an option to purchase
25,000 shares of our common stock, with an exercise price
of $0.75 per share. We granted an option to purchase
200,000 shares of our common stock to Mr. Brown
pursuant to his agreement with an exercise price of
$2.54 per share. All unvested shares underlying these
options will vest in full upon completion of this offering. We
also granted Messrs. Alimi and Schutz options to purchase
50,000 shares and 25,000 shares of our common stock,
respectively, with an exercise price of $2.54 per share. Mr.
Browns option vests as to 20% of the shares on the first
anniversary of the grant date and as to
1
/
60
each month thereafter until fully vested. The remainder of the
director options 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 reasonable
out-of-pocket
expenses incurred on our behalf.
71
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 $100,000 for all services rendered in all
capacities to us during the fiscal year ended March 31,
2006. We refer to these individuals as our named executive
officers. The compensation described in this table does not
include medical, group life insurance or other benefits which
are generally available to all of our salaried employees.
Summary
Compensation Table
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Long-Term
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Compensation
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Annual Compensation
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Shares Underlying
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All Other
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Name and Position(s)
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Salary ($)
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Bonus ($)
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Options (#)
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Compensation ($)
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Hojabr Alimi
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$
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293,302
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$
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26,250
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50,000
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$
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4,517
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(1)
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President and Chief Executive
Officer
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Robert Miller
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184,288
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1,250
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25,000
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Chief Financial Officer
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James Schutz
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187,972
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1,250
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25,000
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6,246
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(2)
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Vice President of Corporate
Development, General Counsel and Corporate Secretary
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Theresa Mitchell
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176,327
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6,250
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402,500
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Vice President of Regulatory,
Clinical Affairs, Quality Assurance and Research and Development
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Bruce Thornton
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173,101
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1,250
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362,500
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5,042
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(3)
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Vice President of International
Operations and Sales
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(1)
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Consists of $350 for IRA contributions and $4,167 for life
insurance premiums.
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(2)
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Consists of $5,486 for IRA contributions and $760 for life
insurance premiums.
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(3)
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Consists of IRA contributions.
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72
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 2,518,000 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
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at Assumed
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Number of
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% of Total
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Annual Rates of
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Shares
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Options
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Stock Price
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Underlying
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Granted to
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Appreciation for
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Options
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Employees in
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Exercise Price
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Expiration
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Option Term(4)
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Name
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Granted(1)
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2005
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Per Share(2)
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Date(3)
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5% ($)
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10% ($)
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Hojabr Alimi
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50,000
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2.0
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%
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$
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2.54
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10/1/2015
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$
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$
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Robert Miller
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25,000
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1.0
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2.54
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10/1/2015
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James Schutz
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25,000
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1.0
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2.54
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10/1/2015
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Theresa Mitchell
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200,000
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7.9
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1.10
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4/1/2015
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202,500
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8.0
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2.54
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10/1/2015
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Bruce Thornton
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80,000
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3.2
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1.10
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5/6/2015
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282,500
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11.2
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2.54
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10/1/2015
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(1)
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Unless otherwise noted, 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)
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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)
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Unless otherwise noted, the options have a term of ten years,
subject to earlier termination in 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)
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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 2005 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. The table assumes a per share
fair market value equal to $ ,
which is the midpoint of the range set forth on the cover of the
prospectus.
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Value of Unexercised
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Number of Unexercised
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In-the-Money
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Shares
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Options at
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Options/SARs
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Acquired
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Value
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Fiscal
Year-End (#)
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at Fiscal
Year-End ($)
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Name
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on Exercise
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Realized
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Exercisable
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Unexercisable
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Exercisable
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Unexercisable
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Hojabr Alimi
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1,659,314
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108,969
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$
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$
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Robert Miller
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240,000
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295,256
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25,000
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James Schutz
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230,000
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370,000
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Theresa Mitchell
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40,000
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362,500
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Bruce Thornton
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16,000
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386,500
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73
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 officers
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 30 days,
or in the case of Mr. Alimi, 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 78,283 shares for service as a director
at an exercise price of $0.75 per share which vests at a
rate of 20% per year from the date of grant provided that
such options will vest 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 as our Chief Operating Officer. In
connection with Mr. Wokaschs agreement, we will also
grant him an option to purchase 500,000 shares of our
common stock at an exercise price to be determined by our board
of directors 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.
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 378,532 shares of
common stock, which vested immediately based on
Mr. Millers prior consultant work for us, and an
option to purchase 156,724 shares of common stock, which vests
based on Mr. Millers hours of service. Upon
completion of this offering, we will grant Mr. Miller an
additional fully-vested option to purchase 240,000 shares of
common stock. All of these options have or will have an exercise
price of $0.75 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
150,000 shares of our common stock at an exercise price of
$0.75 per share which vests in five equal annual
installments from the date of grant. Separately, we granted
Mr. Schutz an option to purchase 25,000 shares for
service as a director at an exercise price of $0.75 per
share which vests at a rate of 20% per year from the date
of grant provided that such options will vest 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. Mitchells
agreement, we also granted her an option to purchase
200,000 shares of our common stock at an exercise price of
$1.10 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. Mitchells 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
74
acceleration (including the reimbursement of any additional
federal, state and local taxes payable as a result of the gross
up).
Bruce Thornton.
Our agreement with Mr.
Thornton, entered on 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 80,000 shares of our common stock at
an exercise price of $1.10 per share which vests ratably over
five years from the date of grant. We must provide him with
6 months notice if he is terminated without cause. During
this 6 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. Thorntons 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 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
have reserved 4,605,000 shares of our common stock for
issuance. As of March 31, 2006, 1,894,599 shares of
common stock remained available for future issuance under our
1999 stock plan. As of March 31, 2006, options to purchase
a total of 1,674,000 shares of common stock were
outstanding under the 1999 stock plan at a weighted average
exercise price of $0.11 per share. As of June 2006, no
shares of our common stock remain available for future issuance
under the 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
75
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 have reserved 1,395,000 shares of our common stock for
issuance. As of March 31, 2006, 1,223,800 shares of
common stock remained available for future issuance under our
2000 stock plan. As of March 31, 2006, options to purchase
a total of 158,000 shares of common stock were outstanding
under the 2000 stock plan at a weighted average exercise price
of $0.62 per share. As of June 2006, no shares of our
common stock remain available for future issuance under the 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 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
76
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 4,000,000 shares of our common stock for
issuance. As of March 31, 2006, 2,626,868 shares of
common stock remained available for future issuance under our
2003 stock plan. As of March 31, 2006, options to purchase
a total of 1,285,818 shares of common stock were
outstanding under the 2003 stock plan at a weighted average
exercise price of $0.75 per share. As of June 2006, no
shares of our common stock remain available for future issuance
under the 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 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 have reserved 6,000,000 shares of our common stock for
issuance. As of March 31, 2006, 2,201,643 shares of
common stock remained available for future issuance under our
2004 stock plan. As of March 31, 2006, options to purchase
a total of 3,558,356 shares of common stock were
outstanding under the 2004 stock plan at a weighted average
exercise price of $1.97 per share. Following the completion
of this offering, no shares of our common stock will remain
available for future issuance under the 2004 stock plan.
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
77
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.
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 employees compensation for
the year. All contributions are made directly to an individual
retirement account established for each employee.
Indemnification
Agreements
We intend to enter into new agreements to indemnify our
directors and executive officers following our reincorporation
in Delaware. We believe that these provisions and 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 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.
78
Physician
Advisors
We have two physician advisory boards: Business and Medical
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.
Our Business and Medical 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 the completion of the physician clinical
studies and presenting the results to other physicians.
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Our Business and Medical Advisory Board is currently comprised
of the following individuals:
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Name
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Specialty
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Position
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Don C. Wukasch, M.D.
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Cardiovascular Surgery
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Fellow, American College of
Surgeons and American College of Cardiology
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Barnett L. Cline, M.D.
M.P.H., Ph.D.
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Tropical Medicine
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Tulane University Professor of
Tropical Medicine, Emeritus; member, Armed Forces
Epidemiological Board
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Paul L. Schnur, M.D.
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Plastic and Reconstructive Surgery
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Consultant, Plastic Surgery
Division, Mayo Clinic Scottsdale; Associate Professor,
University of Arizona, College of Medicine
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Bruce C. Wilson, M.D.,
F.A.C.C.
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Cardiology
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Fellow, American College of
Cardiology; Chairman, Heart Hospital of Milwaukee; Assistant
Professor of Medicine, Medical College of Wisconsin
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Gerald L. Woolam, M.D.
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General Surgery
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Professor of Surgery, Texas Tech
University
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William A. Rutala, Ph.D.,
M.P.H.
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Infectious Disease
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Professor, Division of Infectious
Diseases, University of North Carolina School of Medicine;
Director of Hospital Epidemiology, Occupational Health and
Safety Program, University of North Carolina Health Care System
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Philip J. Kearney
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Assistant United States Attorney
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79
|
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Name
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Specialty
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Position
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David E. Allie, M.D.
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Cardiothoracic and Endovascular
Surgery
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Chief of Cardiothoracic and
Endovascular Surgery, Cardiovascular Institute of the South
Lafayette; Director, Vascular Surgery and Noninvasive Vascular
Labs Houma
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Luca Dalla Paola, M.D.
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Endrocrinologist and Surgery
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Chief of the Diabetic Foot Unit of
Presidio Ospedaliero Abano Terme Hospital; Professor, Bologna
University School of Medicine
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Our Clinical Investigational Board assists us by introducing us
to practicing physicians and key opinion leaders in our target
markets and conducting physician clinical studies. The Clinical
Investigational Board is currently comprised of the following
individuals:
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Name
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Specialty
|
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Position
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Gerald Keusch, M.D.
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Infectious Disease
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Associate Dean of Global Health,
Professor of Medicine, Boston University
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Richard Marks, M.D.
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Foot and Ankle Surgery
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Associate Professor of Orthopedic
Surgery, Medical College of Wisconsin
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Akito
Ohmura, M.D., Ph.D.
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Anesthesiology
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Head of Medical ISO Committee
Japan; Dean, Teikyo University School of Medicine
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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.
Advisory
Board Compensation
We pay each of the physicians serving on the Business and
Medical Advisory Board a quarterly stipend, except for
Dr. Allie. Drs. Cline, Schnur, Woolam, Rutala, Dalla
Paola and Wilson each receive $3,000 each quarter.
Drs. Wukasch and Wilson receive $6,000 and $12,000,
respectively, each quarter. Although Dr. Allie does not
receive a quarterly stipend, we paid Dr. Allie $10,000 and
issued him 50,000 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 physician
advisors, except for Drs. Ohmura and Dalla Paola, warrants
to purchase shares of our common stock with a conversion price
of $4.50 per share. Drs. Allie, Keusch and Marks each
have a warrant to purchase 10,000 shares, Drs. Cline,
Schnur, Wilson, Woolam and Rutala each have a warrant to
purchase 15,000 shares, and Dr. Wukasch has a warrant
to purchase 25,000 shares. We also granted Dr. Ohmura
an option to purchase 10,000 shares of our common stock
with an exercise price of $0.75 per share. This option will not
vest fully until October 2008. We also compensate our medical
advisory board members for clinical studies they conduct for us.
80
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 one year consulting agreement with White Moon
Medical, a company formed under the laws of Japan, in October
2005. 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.
We also 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
40,000 shares of either common stock or series A
preferred stock. On June 30, 2005, Mr. Conley
converted this note into an aggregate of 40,000 shares of
our series A preferred stock at a conversion price of
$1.00 per share.
The vesting of options to purchase 580,248 shares of our
common stock granted to our directors will be accelerated upon
completion of this offering.
In connection with the termination of Robert Millers
prior consulting agreement, we have agreed to grant him a
fully-vested option to purchase 240,000 shares of our
common stock at $0.75 per share upon completion of this
offering.
We intend to enter into indemnification agreements with our
directors and executive officers in connection with our
reincorporation in Delaware.
81
PRINCIPAL
STOCKHOLDERS
The following table sets forth information as of May 31,
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.
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We are not aware of any owners of more than 5% of our common
stock other than Messrs. Alimi and Akao. 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 assumed that
16,875,928 shares of common stock are issued and
outstanding prior to the completion of this offering
and 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
May 31, 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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Percentage of Shares
Outstanding
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Name of Beneficial
Owner(1)
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Beneficially Owned
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Before the Offering
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After the Offering
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Hojabr Alimi(2)
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5,741,283
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34.0
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%
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Robert Miller(3)
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775,256
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4.6
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%
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James Schutz(4)
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245,000
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1.5
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%
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Theresa Mitchell(5)
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40,000
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0.2
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%
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Bruce Thornton(6)
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34,666
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0.2
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%
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Akihisa Akao(7)
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2,156,283
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12.8
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%
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Edward Brown(8)
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200,000
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1.2
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%
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Richard Conley(9)
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746,283
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4.4
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%
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Gregory French(10)
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241,283
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1.4
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%
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All directors and executive
officers as a group (10 persons)(11)
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10,180,054
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60.3
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%
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*
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Represents beneficial ownership of less than 1%.
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(1)
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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)
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Includes 1,674,971 shares issuable upon exercise of options
that are exercisable within 60 days of May 31, 2006.
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(3)
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|
Includes 295,256 shares issuable upon exercise of options
that are exercisable within 60 days of May 31, 2006,
240,000 shares issuable upon exercise of options to be
granted upon completion of this offering and 200,000 shares
held by The Miller 2005 Grandchildrens Trust, for which
Mr. Miller is a trustee.
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(4)
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Includes 230,000 shares issuable upon exercise of options
that are exercisable within 60 days of May 31, 2006
and 15,000 shares issuable upon exercise of options that
will become exercisable upon completion of this offering.
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(5)
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Consists of 40,000 shares issuable upon exercise of options
that are exercisable within 60 days of May 31, 2006.
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(6)
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Consists of 34,666 shares issuable upon exercise of options
that are exercisable within 60 days of May 31, 2006.
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(7)
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Includes 35,314 shares issuable upon exercise of options
that are exercisable within 60 days of May 31, 2006.
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(8)
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Upon completion of this offering, options to purchase
200,000 shares will become exercisable.
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(9)
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Includes 554,971 shares issuable upon exercise of options
that are exercisable within 60 days of May 31, 2006
and 31,312 shares issuable upon exercise of options that
will become exercisable upon completion of this offering.
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(10)
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Includes 67,314 shares issuable upon exercise of options
that are exercisable within 60 days of May 31, 2006
and 31,312 shares issuable upon exercise of options that
will become exercisable upon completion of this offering.
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(11)
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Includes 2,932,492 shares issuable upon exercise of options
that are exercisable within 60 days of May 31, 2006
and 580,248 shares issuable upon exercise of options that
will become exercisable upon completion of this offering.
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DESCRIPTION
OF CAPITAL STOCK
General
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. 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 and
assumes our reincorporation in Delaware.
Common
Stock
As of May 31, 2006, there were 16,875,928 shares of
common stock outstanding held by
approximately
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 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
Upon completion of this offering, 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
Upon completion of this offering, the holders of
17,287,522 shares of common stock issued upon conversion of
the preferred stock and preferred stock 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
or the account of a security holder, other than on a
Form 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
84
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.
Upon completion of this offering, the holders of
352,804 shares of common stock issued upon conversion of
the preferred stock issued pursuant to 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 or the account of a security holder, other than on a
Form S-8, on a form in which the common stock issued upon
conversion of the preferred stock may be included, 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 or managing dealer
warrant agreement with the holders, holders of a majority of the
shares of common stock issued upon conversion of the preferred
stock issued pursuant to the exercise of warrants 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.
Upon completion of this offering, the holders of
3,429,592 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 Delaware Law and Our Certificate of Incorporation and
Bylaws
The 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 will be 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.
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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.
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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.
Charter
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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stockholders may not call special meetings of the stockholders
or fill vacancies on the board;
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our board of directors will be divided into three classes
serving staggered three-year terms, with one class of directors
being elected at each annual meeting of stockholders and the
other classes continuing for the remainder of their respective
terms;
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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.
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In addition, so long as a single or related group of
stockholders continue to own at least one-third of our
outstanding common stock, a transaction between us and any
person or entity in which such stockholder or stockholders have
a material interest, if required under applicable federal and
state law or Nasdaq rules to be approved by our stockholders,
will require approval of a majority of the outstanding shares
not held by such interested stockholders present in person or by
proxy at the meeting of stockholders held with respect to such
transaction.
Limitation
of Liability and Indemnification Matters
We intend to adopt provisions in our certificate of
incorporation and bylaws that 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 directors 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
86
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 directors 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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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.
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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 restated certificate of incorporation and bylaws will
eliminate the personal liability of directors to the maximum
extent permitted by Delaware law. In addition, our certificate
of incorporation and bylaws will 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 have entered 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 for quotation of our common stock on the Nasdaq
National Market under the symbol OCLS.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock
is .
87
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 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 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
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.
Lock-Up
Agreements
Our directors and executive officers and certain of our other
stockholders who collectively hold an aggregate
of shares,
or % of our outstanding common stock, have agreed
that they will not sell any common stock owned by them without
the prior written consent of A.G. Edwards & Sons, Inc.
and Jefferies & Company, Inc. for a period of at least
180 days after the date of this prospectus. To the extent
shares are released before the expiration of the
lock-up
period and these shares are sold into the market, the market
price of our common stock could decline. As a result of the
lock-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:
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shares
will be eligible for sale immediately following the date of this
prospectus;
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shares
will be eligible for sale upon the expiration of the
lock-up
agreements, described above, beginning 180 days after the
date of this prospectus; and
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shares
will be eligible for sale upon the exercise of vested options,
beginning 180 days after the date of this prospectus.
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Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, a
person deemed to be our affiliate, or a person holding
restricted shares who beneficially owns shares that were not
acquired from us or any of our affiliates within the previous
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 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 National Market during the four calendar weeks preceding
the date on which notice of the sale is filed with the SEC.
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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
88
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 persons other than affiliates subject only to the
manner of sale provisions of Rule 144
and 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 on
Form S-8
under the Securities Act covering
approximately shares
of common stock reserved for issuance under our stock option
plans. 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, upon completion of this offering, the holders of
approximately 15,934,718 shares of common 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.
89
UNDERWRITING
Subject to the terms and conditions of the underwriting
agreement among us and the underwriters, each underwriter has
severally 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
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Shares
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A.G. Edwards & Sons,
Inc.
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Jefferies & Company,
Inc.
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First Albany Capital Inc.
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C.E. Unterberg, Towbin, LLC
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Total
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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 the
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 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
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, each
underwriter 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
underwriters 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.
We, our directors and executive officers and certain of our
other stockholders have agreed that during the
180-day
period after the date of this prospectus, subject to limited
exceptions, we and they will not, without the prior written
consent of A.G. Edwards & Sons, Inc. and
Jefferies & Company, Inc., 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 of
Rule 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 for or
exchangeable for our common stock or any interest therein or any
capital stock of our subsidiary). These
lock-up
agreements will cover approximately % of our
outstanding common stock in the aggregate. A.G.
Edwards & Sons, Inc. or Jefferies &
Company, Inc. may, in each of their sole discretion, allow
any of these parties to dispose of common stock or other
securities prior to the expiration of the
180-day
period. There are, however, no agreements between A.G. Edwards
& Sons, Inc. or Jefferies & Company, Inc. and the
parties that would allow them to do so as of the date of this
prospectus.
The
180-day
restricted period described above is subject to extension such
that, in the event that either (1) during the last
17 days of the
180-day
restricted period, we issue an earnings release or material news
or a material event relating to us occurs or (2) prior to
the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period, the lock-up restrictions described above
will, subject to limited exceptions, continue to apply until the
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expiration of the
18-day
period beginning on 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 the representatives. Among the factors
considered in determining the price will be:
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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.
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The representatives have advised us that they do not intend to
confirm sales to any account over which they exercise
discretionary authority.
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
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No Exercise
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Full Exercise
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Per Share
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$
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$
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Total
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$
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$
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We expect to incur expenses of approximately
$ million in connection with
this offering.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of
1933.
Until the distribution of the common stock is completed, rules
of the Securities and Exchange 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
coving transactions and penalty bids in accordance with
Regulation M under the Securities Exchange Act of 1934.
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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 either exercising their
over-allotment option
and/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
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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.
|
|
|
|
|
|
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.
We have applied to list the common stock on the Nasdaq National
Market under the symbol OCLS.
From time to time in the ordinary course of their respective
businesses, some of the underwriters and their affiliates may in
the future engage in commercial banking or investment banking
transactions with our affiliates and us.
No Public
Offering Outside the United States
No action has been or will be taken in any jurisdiction (except
in the United States) that would permit a public offering of our
shares or the possession, circulation or distribution of this
prospectus or any other material relating to use or our shares
in any jurisdiction where action for that purpose is required.
Accordingly, our shares may not be offered or sold, directly or
indirectly, and neither this prospectus nor any other offering
material or advertisements in connection with our shares may be
distributed or published, in or from any country or jurisdiction
except in compliance with any applicable rules and regulations
of any such country or 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.
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 Latham & Watkins LLP, Menlo Park,
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
92
of Marcum & Kliegman LLP, independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
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 as our
independent registered public accounting firm.
We will request that PWC furnish a letter addressed to the
Securities and Exchange Commission stating whether PWC believes
any events requiring disclosure under Item 304 of
Regulation S-K
have occurred. A copy of their letter will be filed as an
exhibit to the registration statement of which this prospectus
forms a part.
PWC did not issue a report on our financial statements for the
years ended March 31, 2004 or 2005 or for the period
through April 12, 2006.
We did not consult with Marcum & Kliegman LLP on any
accounting or financial reporting matters in the periods prior
to their appointment.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC 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 SECs 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 SEC filings,
including the registration statement, are also available to the
public on the SECs 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 SEC. Such periodic
reports, proxy statements and other information will be
available for inspection at the public reference room and
website of the SEC referred to above.
93
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
Contents
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Page
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F-2
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F-3
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F-4
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F-5
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F-7
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F-8
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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
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Oculus Innovative Sciences, Inc. and Subsidiaries, as of
March 31, 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.
/s/ Marcum
& Kliegman
llp
New York, New York
June 21, 2006
F-2
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,287
|
|
|
$
|
7,448
|
|
Accounts receivable, net
|
|
|
227
|
|
|
|
1,076
|
|
Inventories
|
|
|
868
|
|
|
|
317
|
|
Prepaid expenses and other current
assets
|
|
|
499
|
|
|
|
1,386
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,881
|
|
|
|
10,227
|
|
Property and equipment, net
|
|
|
1,959
|
|
|
|
1,940
|
|
Notes receivable
|
|
|
55
|
|
|
|
|
|
Restricted cash
|
|
|
45
|
|
|
|
44
|
|
Deferred offering costs
|
|
|
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,940
|
|
|
$
|
12,689
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
906
|
|
|
$
|
2,774
|
|
Accrued expenses and other current
liabilities
|
|
|
2,335
|
|
|
|
1,686
|
|
Dividend payable
|
|
|
|
|
|
|
121
|
|
Current portion of long-term debt
|
|
|
950
|
|
|
|
504
|
|
Current portion of capital lease
obligations
|
|
|
27
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,218
|
|
|
|
5,100
|
|
Long-term debt, less current
portion
|
|
|
460
|
|
|
|
210
|
|
Capital lease obligations, less
current portion
|
|
|
60
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,738
|
|
|
|
5,351
|
|
|
|
|
|
|
|
|
|
|
Commitments, Contingencies and
Other Matters
|
|
|
|
|
|
|
|
|
Stockholders
Equity
|
|
|
|
|
|
|
|
|
Convertible preferred stock, no
par value; 30,000,000 shares authorized,
Series A 5,351,244 and 5,391,244 shares issued and
outstanding at
March 31, 2005 and 2006, respectively
|
|
|
6,628
|
|
|
|
6,668
|
|
Series B 4,056,568 and
10,543,474 shares issued and outstanding at
March 31, 2005 and 2006, respectively
|
|
|
16,696
|
|
|
|
43,722
|
|
Common stock, no par value;
100,000,000 shares authorized,
15,658,614 and 16,875,928 shares issued and outstanding
at
March 31, 2005 and 2006, respectively
|
|
|
3,101
|
|
|
|
3,399
|
|
Additional paid-in capital
|
|
|
3,674
|
|
|
|
4,644
|
|
Deferred compensation
|
|
|
(676
|
)
|
|
|
(798
|
)
|
Accumulated other comprehensive
(loss) income
|
|
|
(141
|
)
|
|
|
3
|
|
Accumulated deficit
|
|
|
(27,080
|
)
|
|
|
(50,300
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,202
|
|
|
|
7,338
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
6,940
|
|
|
$
|
12,689
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
95
|
|
|
$
|
473
|
|
|
$
|
1,966
|
|
Service
|
|
|
807
|
|
|
|
883
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
902
|
|
|
|
1,356
|
|
|
|
2,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
1,403
|
|
|
|
2,211
|
|
|
|
3,899
|
|
Service
|
|
|
1,265
|
|
|
|
1,311
|
|
|
|
1,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
2,668
|
|
|
|
3,522
|
|
|
|
4,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(1,766
|
)
|
|
|
(2,166
|
)
|
|
|
(2,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,413
|
|
|
|
1,654
|
|
|
|
2,600
|
|
Selling, general and administrative
|
|
|
3,918
|
|
|
|
12,492
|
|
|
|
15,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,331
|
|
|
|
14,146
|
|
|
|
18,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,097
|
)
|
|
|
(16,312
|
)
|
|
|
(20,851
|
)
|
Interest expense
|
|
|
(178
|
)
|
|
|
(372
|
)
|
|
|
(172
|
)
|
Interest income
|
|
|
3
|
|
|
|
8
|
|
|
|
282
|
|
Other income (expense), net
|
|
|
(26
|
)
|
|
|
146
|
|
|
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(7,298
|
)
|
|
|
(16,530
|
)
|
|
|
(21,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of
discontinued business
|
|
|
|
|
|
|
|
|
|
|
(818
|
)
|
Loss on disposal of discontinued
business
|
|
|
|
|
|
|
|
|
|
|
(1,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(1,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7,298
|
)
|
|
|
(16,530
|
)
|
|
|
(23,099
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common
stockholders
|
|
$
|
(7,298
|
)
|
|
$
|
(16,530
|
)
|
|
$
|
(23,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: basic
and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.47
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(1.28
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.47
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(1.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares
used in per common share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
15,647
|
|
|
|
15,659
|
|
|
|
16,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,298
|
)
|
|
$
|
(16,530
|
)
|
|
$
|
(23,099
|
)
|
Foreign currency translation
adjustments
|
|
|
(14
|
)
|
|
|
(127
|
)
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(7,312
|
)
|
|
$
|
(16,657
|
)
|
|
$
|
(22,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-4
OCULUS
INNOVATIVE SCIENCES, INC.
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumu-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
lated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Convertible Preferred
Stock
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Based
|
|
|
Compre-
|
|
|
Accum-
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Compen-
|
|
|
hensive
|
|
|
ulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
sation
|
|
|
Income
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance, April 1, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,435,112
|
|
|
$
|
2,892
|
|
|
$
|
286
|
|
|
$
|
(5
|
)
|
|
|
|
|
|
$
|
(3,252
|
)
|
|
$
|
(79
|
)
|
Issuance of common stock, net of
offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,500
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
Issuance of common stock upon
exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,000
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233
|
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Non-employee stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Issuance of common stock warrants
in exchange for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
Reclassification of options subject
to cash settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Issuance of common stock warrants
in connection with debt financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Issuance of Series A
convertible preferred stock, net of offering costs
|
|
|
5,351,244
|
|
|
$
|
6,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,628
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,298
|
)
|
|
|
(7,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2004
|
|
|
5,351,244
|
|
|
|
6,628
|
|
|
|
|
|
|
|
|
|
|
|
15,658,612
|
|
|
|
3,101
|
|
|
|
661
|
|
|
|
(208
|
)
|
|
|
(14
|
)
|
|
|
(10,550
|
)
|
|
|
(382
|
)
|
Issuance of common stock upon
exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,765
|
|
|
|
(2,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,297
|
|
|
|
|
|
|
|
|
|
|
|
2,297
|
|
Non-employee stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
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-5
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
|
|
|
Series B
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Compen-
|
|
|
hensive
|
|
|
ulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
sation
|
|
|
Income
|
|
|
Deficit
|
|
|
Total
|
|
|
Issuance of Series B
convertible preferred stock, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
4,056,568
|
|
|
|
16,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,696
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
(127
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,530
|
)
|
|
|
(16,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2005
|
|
|
5,351,244
|
|
|
$
|
6,628
|
|
|
|
4,056,568
|
|
|
$
|
16,696
|
|
|
|
15,658,614
|
|
|
$
|
3,101
|
|
|
$
|
3,674
|
|
|
$
|
(676
|
)
|
|
$
|
(141
|
)
|
|
$
|
(27,080
|
)
|
|
$
|
2,202
|
|
Issuance of common stock upon
exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,167,314
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401
|
|
|
|
(401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
Non-employee stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Issuance of common stock warrants
in exchange for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
Issuance of common stock in
exchange for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
Reclassification of options subject
to cash settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257
|
|
Issuance of Series B
convertible preferred stock, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
6,486,906
|
|
|
|
27,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,026
|
|
Issuance of Series A
convertible preferred stock in connections with convertible debt
|
|
|
40,000
|
|
|
|
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
|
|
|
5,391,244
|
|
|
$
|
6,668
|
|
|
|
10,543,474
|
|
|
$
|
43,722
|
|
|
|
16,875,928
|
|
|
$
|
3,399
|
|
|
$
|
4,644
|
|
|
$
|
(798
|
)
|
|
$
|
3
|
|
|
$
|
(50,300
|
)
|
|
|
$7,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-6
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(7,298
|
)
|
|
$
|
(16,530
|
)
|
|
$
|
(21,118
|
)
|
Adjustments to reconcile net loss
from continuing operations to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
163
|
|
|
|
434
|
|
|
|
651
|
|
Stock-based compensation
|
|
|
424
|
|
|
|
2,349
|
|
|
|
597
|
|
Non-cash interest expense
|
|
|
37
|
|
|
|
131
|
|
|
|
21
|
|
Loss on disposal of assets
|
|
|
10
|
|
|
|
2
|
|
|
|
113
|
|
Changes in operating assets and
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of
doubtful accounts
|
|
|
(195
|
)
|
|
|
217
|
|
|
|
(849
|
)
|
Inventory
|
|
|
(119
|
)
|
|
|
(748
|
)
|
|
|
551
|
|
Prepaid expenses and other current
assets
|
|
|
(163
|
)
|
|
|
(278
|
)
|
|
|
(887
|
)
|
Accounts payable
|
|
|
857
|
|
|
|
(165
|
)
|
|
|
1,868
|
|
Accrued expenses and other current
liabilities
|
|
|
726
|
|
|
|
1,055
|
|
|
|
(649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(5,558
|
)
|
|
|
(13,533
|
)
|
|
|
(19,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(982
|
)
|
|
|
(1,042
|
)
|
|
|
(475
|
)
|
Issuance of note receivable
|
|
|
|
|
|
|
(55
|
)
|
|
|
55
|
|
Changes in restricted cash
|
|
|
(25
|
)
|
|
|
(21
|
)
|
|
|
1
|
|
Deferred offering costs
|
|
|
|
|
|
|
|
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(1,007
|
)
|
|
|
(1,118
|
)
|
|
|
(897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of
common stock
|
|
|
203
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon
exercise of stock options
|
|
|
6
|
|
|
|
|
|
|
|
298
|
|
Proceeds from the issuance of
preferred stock
|
|
|
6,628
|
|
|
|
16,696
|
|
|
|
27,026
|
|
Proceeds from issued debt
|
|
|
574
|
|
|
|
1,205
|
|
|
|
257
|
|
Principal payments on debt
|
|
|
(106
|
)
|
|
|
(664
|
)
|
|
|
(953
|
)
|
Payments on capital leases
|
|
|
(34
|
)
|
|
|
(41
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
7,271
|
|
|
|
17,196
|
|
|
|
26,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
|
|
|
|
|
|
|
|
|
(818
|
)
|
Investing cash flows
|
|
|
|
|
|
|
|
|
|
|
(1,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(1,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash
and cash equivalents
|
|
|
(14
|
)
|
|
|
(127
|
)
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
692
|
|
|
|
2,418
|
|
|
|
4,161
|
|
Cash and equivalents, beginning of
period
|
|
|
177
|
|
|
|
869
|
|
|
|
3,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents, end of period
|
|
$
|
869
|
|
|
$
|
3,287
|
|
|
$
|
7,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
134
|
|
|
$
|
221
|
|
|
$
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchased under capital
leases
|
|
$
|
40
|
|
|
$
|
37
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of note into
Series A preferred stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-7
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTE 1 The
Company
Oculus Innovative Sciences, Inc. (the Company) was
incorporated under the laws of the State of California in April
1999. The Companys principal office is located in
Petaluma, California. The Company develops, manufactures and
markets a family of products intended to prevent and eliminate
infection in acute and chronic wounds. The Companys
platform technology, Microcyn, is a non-toxic, superoxidized
water-based solution that is designed to eliminate a wide range
of bacteria, viruses, fungi and spores without promoting the
development of resistant strains of pathogens. The Company
conducts its business worldwide, with subsidiaries in Europe and
Mexico.
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. At March 31, 2006, the Companys
accumulated deficit amounted to $50,300,000.
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. In addition, the Company entered into a $5,000,000 credit
facility to be used to fund its operations, and invest in new
equipment in June 2006 (Note 18).
The Companys 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 Companys Board of Directors and
stockholders have also approved an amendment to the Articles of
Incorporation to authorize the issuance of up to 3,500,000
shares of Series C convertible preferred stock. The Company
cannot provide any assurance that it will successfully raise any
capital as a result of the authorization to issue these shares.
Management believes the Companys current level of working
capital and the additional funds it expects to generate from
operations will sustain the business through March 31,
2007. However, the Company cannot provide any assurance that
unforeseen circumstances will not require it to raise additional
capital
and/or
make
operational changes in the business to conserve liquidity. If
the Companys liquidity circumstances change materially
from managements plan at any time during the year ending
March 31, 2007, it could be required to curtail certain
activities to reduce costs in order to sustain the business. In
the event that the Company is required to raise additional
capital, the Company cannot provide any assurance that it will
successfully 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 Companys 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
F-8
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Companys 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.
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
F-9
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, respectively.
The Company evaluates the creditworthiness of new customers and
monitors the creditworthiness of its existing customers to
determine whether events or changes in their financial
circumstances would raise doubt as to the collectability of a
sale at the time in which a sale is made. Payment terms on sales
made in the United States are generally 30 days and
internationally, generally range from 30 days to
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. For
the year ended March 31, 2005 and 2006, cash held as
security was $45,000 and $44,000, respectively, and was
classified as restricted cash.
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 Companys 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
charge-backs and sales returns. Estimates for cash discounts,
government chargebacks
F-10
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and sales returns are based on contractual terms, historical
trends and expectations regarding the utilization rates for
these programs.
The Companys policy is to reserve for uncollectible
accounts based on its best estimate of the amount of probable
credit losses in its existing accounts receivable. The Company
periodically reviews its accounts receivable to determine
whether an allowance for doubtful accounts is necessary based on
an analysis of past due accounts and other factors that may
indicate that the realization of an account may be in doubt.
Other factors that the Company considers include its existing
contractual obligations, historical payment patterns of its
customers and individual customer circumstances, an analysis of
days sales outstanding by customer and geographic region, and a
review of the local economic environment and its potential
impact on government funding and reimbursement practices.
Account balances deemed to be uncollectible are charged to the
allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. The 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 represents a probable credit
loss due from a single customer in the amount of $90,000.
Inventories
Inventories of finished goods and raw materials are stated at
the lower of cost, determined
first-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 and $996,000 for the years
ended March 31, 2005 and 2006, respectively, which is
included in the accompanying statements of operations as a
component of cost of goods sold.
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.
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;
|
F-11
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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.
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.
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.
Foreign
Currency Transactions
Foreign currency gains (losses) relate to working capital loans
that the Companys 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 The related gains (losses) were
recorded in other income (expense) in the accompanying
statements of operations.
Stock-Based
Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB
No. 25, Accounting for Stock Issued to
Employees, and its interpretations and complies with the
disclosure requirements of SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123.
The Company has elected to continue to follow Interpretation of
No. 44 (FIN 44), Accounting for Certain
Transactions Involving Stock Compensation and Interpretation of
APB 25, in accounting for employee stock option plans. Under APB
25, compensation
F-12
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense is based upon the excess of the estimated fair value of
the Companys stock over the exercise price, if any, on the
grant date. Employee stock-based compensation is amortized on a
straight-line basis over the vesting period of the underlying
options. SFAS No. 123 defines a fair value
based method of accounting for an employee stock option or
similar equity instrument.
In accordance with the provisions of SFAS No. 123, the
fair value of each employee option is estimated on the date of
grant using the minimum value method with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Estimated life
|
|
|
6 yrs
|
|
|
|
6 yrs
|
|
|
|
6 yrs
|
|
Risk-free interest rate
|
|
|
3.18
|
%
|
|
|
3.95
|
%
|
|
|
4.27
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Based on the above assumptions, the weighted-average estimated
minimum values of options granted were $0.24, $1.25 and $0.78
for the years ended March 31, 2004, 2005 and 2006,
respectively.
The following table illustrates the effect on net loss if the
Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee 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
|
|
$
|
(0.47
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(1.40
|
)
|
Pro forma
|
|
$
|
(0.47
|
)
|
|
$
|
(1.07
|
)
|
|
$
|
(1.41
|
)
|
Non-Employee
Stock Based Compensation
The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of
SFAS No. 123 and EITF Issue
No. 96-18,
Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, which requires that such equity
instruments are recorded at their fair value on the measurement
date. The measurement of stock-based compensation is subject to
periodic adjustment as the underlying equity instrument vests.
Non-employee stock-based compensation charges are amortized over
the vesting period.
Income
Taxes
The Company accounts for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes
(SFAS No. 109). Under
SFAS No. 109, deferred tax assets and liabilities are
determined based on the differences between the financial
reporting and tax bases of assets and liabilities and net
operating loss and credit carryforwards using enacted tax rates
in effect for the year in which the differences are expected to
F-13
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Options to purchase common stock
|
|
|
6,138
|
|
|
|
5,360
|
|
|
|
7,876
|
|
Warrants to purchase common stock
|
|
|
121
|
|
|
|
1,856
|
|
|
|
3,430
|
|
Convertible preferred stock (as if
converted)
|
|
|
5,351
|
|
|
|
9,408
|
|
|
|
15,935
|
|
Warrants to purchase preferred
stock (as if converted)
|
|
|
|
|
|
|
67
|
|
|
|
67
|
|
Convertible debt
|
|
|
80
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,690
|
|
|
|
16,731
|
|
|
|
27,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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.
F-14
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Convertible
Notes
The Company accounts for conversion options embedded in
convertible notes in accordance with SFAS No. 133
Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) and
EITF 00-19
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock
(EITF 00-19).
SFAS 133 generally requires companies to bifurcate
conversion options embedded in convertible notes from their host
instruments and to account for them as free standing derivative
financial instruments in accordance with
EITF 00-19.
SFAS 133 provides for an exception to this rule when the
host instruments are deemed to be conventional as that term is
described in the implementation guidance to SFAS 133 and
further clarified in
EITF 05-2
The Meaning of Conventional Convertible Debt
Instrument in Issue
No. 00-19.
The Company accounts for convertible notes (deemed conventional)
in accordance with the provisions of EITF 98-5
Accounting for Convertible Securities with Beneficial
Conversion Features, (EITF 98-5) and
EITF 00-27
Application of EITF 98-5 to Certain Convertible
Instruments. Accordingly, the Company records, as a
discount to convertible notes, the intrinsic value of such
conversion options 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 Companys convertible instruments do not host
conversion options that are deemed to be free standing
derivative financial instruments.
Common
Stock Purchase Warrants and Other Derivative Financial
Instruments
The Company accounts for the issuance of common stock purchase
warrants issued and other free standing derivative financial
instruments in accordance with the provisions of
EITF 00-19.
Based on the provisions of
EITF 00-19,
the Company classifies as equity any contracts that
(i) require physical settlement or net-share settlement or
(ii) gives the Company a choice of net-cash settlement or
settlement in its own shares (physical settlement or net-share
settlement). The Company classifies as assets or liabilities any
contracts that (i) require net-cash settlement (including a
requirement to net cash settle the contract if an event occurs
and if that event is outside the control of the Company) or
(ii) gives the counterparty a choice of net-cash settlement
or settlement in shares (physical settlement or net-share
settlement).
Recent
Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R
Share Based Payment. This statement is a revision of
SFAS Statement No. 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion
No. 25, and its related implementation guidance.
SFAS 123R 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 123R, 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 for
stock-based compensation expense. The effective date for a
nonpublic entity that becomes a public entity after
June 15, 2005 is the first interim or annual reporting
period beginning after the entity becomes a public entity. The
adoption of this pronouncement will result in the recognition of
stock based compensation expense in the Companys financial
statements.
In EITF Issue
No. 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 Companys financial statements.
F-15
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 does not believe that
the adoption of SFAS 154 will have a significant effect on
its financial statements.
On June 29, 2005, the EITF ratified Issue
No. 05-2,
The Meaning of Conventional Convertible Debt
Instrument in EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock. EITF
Issue 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. Issue
No. 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 will have a significant effect on its financial
statements.
In September 2005, Issue
No. 05-4,
The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys 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 Issue
No. 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.
F-16
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September 2005, the FASB also ratified EITF Issue
No. 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 stockholders 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
under
Issue 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 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 entitys 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.
Other accounting standards that have been issued or proposed by
the FASB or other standards-setting bodies that do not require
adoption until a future date are not expected to have a material
impact on the consolidated financial statements upon adoption.
NOTE 4 Accounts
Receivable
Accounts receivable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Accounts receivable
|
|
$
|
227
|
|
|
$
|
1,166
|
|
Less: allowance for doubtful
accounts
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
227
|
|
|
$
|
1,076
|
|
|
|
|
|
|
|
|
|
|
F-17
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 5 Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Raw materials
|
|
$
|
272
|
|
|
$
|
267
|
|
Finished goods
|
|
|
817
|
|
|
|
1,046
|
|
|
|
|
1,089
|
|
|
|
1,313
|
|
|
|
|
|
|
|
|
|
|
Less: inventory allowances
|
|
|
(221
|
)
|
|
|
(996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
868
|
|
|
$
|
317
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 Prepaid
Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Prepaid expenses
|
|
$
|
355
|
|
|
$
|
304
|
|
Value added tax receivable
|
|
|
|
|
|
|
722
|
|
Other current assets
|
|
|
144
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
499
|
|
|
$
|
1,386
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 Property
and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Manufacturing and other equipment
|
|
$
|
1,834
|
|
|
$
|
1,866
|
|
Office equipment
|
|
|
447
|
|
|
|
653
|
|
Furniture and fixtures
|
|
|
200
|
|
|
|
209
|
|
Leasehold improvements
|
|
|
219
|
|
|
|
498
|
|
Capital projects in progress
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,751
|
|
|
|
3,226
|
|
Less accumulated depreciation and
amortization
|
|
|
(792
|
)
|
|
|
(1,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,959
|
|
|
$
|
1,940
|
|
|
|
|
|
|
|
|
|
|
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 $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 and $108,000 as of March 31, 2005 and
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.
F-18
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 8 Accrued
Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Accrued salaries
|
|
$
|
220
|
|
|
$
|
267
|
|
Accrued tax and audit costs
|
|
|
641
|
|
|
|
673
|
|
Estimated liability for pending
litigation
|
|
|
335
|
|
|
|
300
|
|
Investor deposits
|
|
|
497
|
|
|
|
|
|
Accrued stock option rescission
|
|
|
250
|
|
|
|
|
|
Accrued value added tax payable
|
|
|
285
|
|
|
|
220
|
|
Deferred revenue
|
|
|
|
|
|
|
156
|
|
Accrued other
|
|
|
107
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,335
|
|
|
$
|
1,686
|
|
|
|
|
|
|
|
|
|
|
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
Companys 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.
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
Companys common stock or Series A preferred stock
determined by dividing the amount to be converted by the
conversion price of $1.00 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 convertible, at the option of
the holder, into such number shares of the Companys common
stock or Series A preferred stock determined by dividing
the amount to be converted by the conversion price of
$1.00 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
$2.00 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 2, 2003 was repaid in
October 2004. The principal balance of the note originated on
February 23, 2003 was converted into 40,000 shares of
convertible series A preferred stock in June 2005.
F-19
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 82,500 shares of the
Companys common stock. The warrants have a term of
10 years and an exercise price of $1.50 to $2.00 per
share. 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, $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.
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. 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 66,667 shares of the Companys
Series A preferred stock. 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. Interest expense under this obligation amounted to
$83,000 and $73,000 for the years ended March 31, 2005 and
2006, respectively. 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. Aggregate interest expense under
these obligations amounted to $1,000 and $8,900 for the years
ended March 31, 2005 and 2006, respectively. 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.
F-20
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. 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. 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.
F-21
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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.
In October 2005, the Board of Directors also authorized the
Company to grant 240,000 stock options at an exercise price of
$0.75 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.
F-22
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Legal
Matters
The Company has been 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. Although the Company
believes that the employees claim is without merit and
intends to defend its position with respect to this matter, a
$300,000 reserve was established based on the Companys
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
misappropiation of its technology in Mexico, and it notified the
Mexican Attorney Generals office. The Company believes the
Mexican Attorney General is currently conducting an
investigation.
On March 14, 2006, the Company filed suit in the Northern
District of California Federal Court 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
Companys 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
tentatively agreed with one of the parties to change the name
Microcyn60 within twelve months from the date of a proposed
settlement. 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.
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 could become involved in
litigation, will not have a material adverse effect on its
business, financial condition or results of operations.
Consulting
Agreement
On October 1, 2005 the Company entered into a consulting
agreement with a member of the Board of Directors. 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.
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 in connection
with its proposed IPO, which are presented as deferred offering
costs in the accompanying balance sheet at March 31, 2006.
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.
F-23
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 5,500,000 shares have been designated as
Series A preferred stock and 11,222,222 shares have
been designated as Series B preferred stock.
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, 5,351,244 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).
In addition to the above, the Company issued in a private
placement transaction, an aggregate of 10,543,474 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 4,056,568 shares issued during the year ended
March 31, 2005 for net proceeds of $16,696,000 and
6,486,906 shares issued during the year ended
March 31, 2006 for net proceeds of $27,026,000.
The Series A is convertible into common stock at any time,
at the option of the holder at a conversion price of 1.50 per
share. The Series B is convertible into common stock at any
time, at the option of the holder, at a conversion price of
$4.50 per share. In accordance with SFAS 133 and
EITF 00-19,
the Company evaluated the conversion options embedded in these
securities to determine 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 commitments dates of these financing transactions, are being
accounted for as embedded conversion options in accordance with
EITF 98-5 and
EITF 00-27.
The number of shares issuable under the conversion features of
the Series A and Series B is subject to adjustment for
stock splits, stock dividends, recapitalizations, dilutive
issuances and other anti-dilution provisions. The Series A
and Series B are also automatically convertible into shares
of the Companys 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 and
Series B 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) Companys going public by means of a merger or
acquisition which has a resultant market capitalization of
greater than $75 million.
The Company has reserved 16,722,222 shares of its common
stock for issuance upon the conversion of its convertible
preferred stock.
Each share of Series A and Series B 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 and is
presented as an increase in net loss available to the
F-24
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
common stockholders for the year ended March 31, 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 A and Series B 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 two times the original purchase price,
as applicable, 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 $3.00 and holders of Series B have received a per share
amount equal to 125% of their original purchase price of the
Series B, in both cases 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 $3.00.
Any remaining assets of the Company thereafter would be
distributed ratably to Series A preferred and Series B
preferred stockholders and to the common stockholders, on an as
converted basis.
Liquidation events include (i) a final dissolution or
winding up of the Companys 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
Companys assets and (iv) the effectuation (at the
Companys election) of any transaction or series of
transactions resulting in a more than 50% change in control. The
Company is required, under California law, to obtain the
approval of a majority of its stockholders with respect to
effectuating either a merger, consolidation or similar
transaction or any transaction resulting in the sale of all or
substantially all of its assets. The Companys preferred
stockholders currently represent less than a 50% voting
majority. Accordingly, the Company classified its Series A
and Series B preferred shares in stockholders equity
in the accompanying balance sheet because the liquidation events
are deemed to be within the Companys control in accordance
with the provisions of EITF
Topic D-98
Classification and Measurement of Redeemable
Securities.
Under the terms of Series A and B registration rights
agreements between the Company and its preferred stockholders,
any time after six months following the Companys IPO (if
completed), the Series A and Series B 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 on
Form S-8
and corporate reorganizations on
Form S-4).
The foregoing demand and piggyback registration rights terminate
on the earlier of (i) one year after the Companys IPO
or (ii) such time as Rule 144 or another similar
exemption under the 1933 Act is available for sale of all
of an Investors 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.
Stock
Purchase Warrants Issued in Financing Transactions
During the year ended March 31, 2004, the Company issued a
warrant to purchase 62,500 shares of common stock in
connection with bridge financing at an exercise price equal to
the lesser of $2.00 per share or the price offered to any
other investor in subsequent stock offerings prior to the
expiration date of the warrants. The warrants were valued using
the Black-Scholes pricing model. Assumptions used were as
follows: Fair value of the underlying stock $2.00; 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-25
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the year ended March 31, 2005, the Company issued a
warrant to purchase 20,000 shares of common stock in
connection with bridge financing at an exercise price equal to
the lesser of $1.50 per share or the price offered to any
other investor in subsequent stock offerings prior to the
expiration date of the 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 66,667 shares of Series A
preferred stock at an exercise price of $1.50 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 $1.44;
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 1,735,124 shares of common stock at an
exercise price of $1.50 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 1,317,933 shares of common stock at an
exercise price of $4.50 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.
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 38,662 shares of common stock to
various consultants at exercise prices ranging from $0.75 to
$2.00 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 $1.31 to $2.00;
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
50,000 shares of common stock to a consultant in exchange
for services provided. The fair value of the underlying stock
was valued at $2.54 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 255,374 shares of common stock to
various consultants at an exercise price of $4.50 per
share. Fair value of the underlying stock at the date of grant
was $2.54 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, which amounted to $153,000, was recorded as a
selling, general and administrative expense in the accompanying
statement of operations for the year ended March 31, 2006.
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
F-26
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value of the equity instruments at the date of issuance. The
non-vested portion of awards that are subject to the future
performance of the counterparty are adjusted at each reporting
date to their fair values based upon the then current market
value of the companys stock and other assumptions that
management believes are reasonable.
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. In July 2005, the Company
engaged an outside valuation specialist to determine the fair
value of its common stock. The fair value of the Companys
common stock, based on this valuation study, was determined to
be $2.54 per share. Accordingly, the fair value of the
Companys 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 Companys
stock.
NOTE 13 Stock
Compensation Plans
1999,
2000 and 2003 Stock Plans
The 1999, 2000 and 2003 Stock Option Plans were effective May
1999, June 2000 and July 2003, respectively. The Plans provide
for the issuance of both incentive stock options (ISOs)
and non-qualified stock options (NSOs). Nonqualified and
incentive stock options may be granted to employees, consultants
and directors. A total of 4,605,000, 1,395,000 and 4,000,000
common shares were reserved for issuance under the 1999, 2000
and 2003 Plans, respectively.
In accordance with the Plans, 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 ISOs and
NSOs, respectively, as determined by the board of
directors at the date of grant. With respect to any 10%
shareholder, the exercise price of an ISO or NSO 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
became exercisable over a five-year period.
As of March 31, 2006, the Companys compensation
committee determined that it will not grant any further awards
under its 1999, 2000, and 2003 Plans. At March 31, 2006
there are 5,745,267 options approved for issue in the 1999,
2000, and 2003 Plans that will not be issued.
2004
Stock Plan
The 2004 Stock Option Plan (the 2004 Plan) became
effective July 2004. The 2004 Plan provides for the issuance of
both ISOs and NSOs. Nonqualified and incentive stock
options may be granted to employees, consultants and directors.
A total of 6,000,000 common shares were reserved for issuance
under the 2004 Plan at March 31, 2005. As of March 31,
2006, 2,201,643 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 ISOs and NSOs,
respectively, as determined by the board of directors at the
date of grant. With respect to any 10% shareholder, the exercise
price of an ISO or NSO shall not be less than 110% of the
estimated fair market value per share on the date of grant.
F-27
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Options issued under the Plan have a ten-year term and generally
become exercisable over a five-year period.
Option activity under all Plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
Options
|
|
|
|
|
|
Weighted
|
|
|
|
Available
|
|
|
Number
|
|
|
Average
|
|
|
|
for Grant
|
|
|
of Options
|
|
|
Exercise Price
|
|
|
Balance at March 31, 2003
|
|
|
1,804,400
|
|
|
|
4,108,000
|
|
|
$
|
|
|
Options authorized
|
|
|
4,000,000
|
|
|
|
|
|
|
|
0.75
|
|
Options granted
|
|
|
(2,177,632
|
)
|
|
|
2,177,632
|
|
|
|
0.05
|
|
Options exercised
|
|
|
|
|
|
|
(122,000
|
)
|
|
|
0.67
|
|
Options canceled
|
|
|
26,000
|
|
|
|
(26,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2004
|
|
|
3,652,768
|
|
|
|
6,137,632
|
|
|
|
0.34
|
|
Options authorized
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,252,356
|
)
|
|
|
1,252,356
|
|
|
|
0.75
|
|
Options exercised
|
|
|
|
|
|
|
(2
|
)
|
|
|
0.75
|
|
Options canceled
|
|
|
2,030,298
|
|
|
|
(2,030,298
|
)
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005
|
|
|
10,430,710
|
|
|
|
5,359,688
|
|
|
|
0.44
|
|
Options authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(3,148,000
|
)
|
|
|
3,148,000
|
|
|
|
2.30
|
|
Options exercised
|
|
|
|
|
|
|
(1,167,314
|
)
|
|
|
0.25
|
|
Options canceled
|
|
|
664,200
|
|
|
|
(664,200
|
)
|
|
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
|
|
7,946,910
|
|
|
|
6,676,174
|
|
|
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and currently exercisable by exercise
price at March 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and
Exercisable
|
|
|
|
|
|
|
|
|
|
Under Plans
|
|
|
Options Vested
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Under Plans
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
Outstanding
|
|
|
Life (years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$0.03 - $0.21
|
|
|
1,584,000
|
|
|
|
3.41
|
|
|
$
|
0.09
|
|
|
|
1,584,000
|
|
|
$
|
0.09
|
|
$0.28 - $0.63
|
|
|
224,000
|
|
|
|
4.53
|
|
|
$
|
0.53
|
|
|
|
224,000
|
|
|
$
|
0.53
|
|
$0.75 - $0.75
|
|
|
2,191,174
|
|
|
|
7.77
|
|
|
$
|
0.75
|
|
|
|
996,298
|
|
|
$
|
0.75
|
|
$1.10 - $1.10
|
|
|
360,000
|
|
|
|
9.05
|
|
|
$
|
1.10
|
|
|
|
40,000
|
|
|
$
|
1.10
|
|
$2.54 - $3.00
|
|
|
2,317,000
|
|
|
|
9.57
|
|
|
$
|
2.58
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,676,174
|
|
|
|
7.32
|
|
|
$
|
1.24
|
|
|
|
2,844,298
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Options
Granted Outside of Plans
In May 2004, the Company granted an option to purchase
1,200,000 shares of the Companys common stock with an
exercise price of $0.04 per share to the Chief Executive
Officer of the Company. The fair value of the underlying common
stock at the date of grant was $1.49 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.
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:
|
|
|
|
|
|
|
|
|
Year Ended
March 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
Estimated life
|
|
8.25 yrs
|
|
9.06 yrs
|
|
8.67 yrs
|
Risk-free interest rate
|
|
3.88%
|
|
4.50%
|
|
4.27%
|
Dividend yield
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
Volatility
|
|
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.
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-29
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys 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
Companys 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 Companys
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 will continue to evaluate its
deferred tax assets to determine whether any changes in
circumstances could affect the realization of their future
benefit. If it is determined in future periods that portions of
the Companys deferred income tax assets satisfy the
realization standard of SFAS No. 109, the valuation
allowance will be reduced accordingly.
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 employees
salary. The Company contributed $34,000, $63,000 and $53,000 to
the program for the years ended March 31, 2004, 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
F-30
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
discreet financial information is available and is used by the
chief operating decision maker, or decision-making group, in
making decisions on how to allocate resources and assess
performance. The Companys chief decision-makers, as
defined by SFAS 131, are the Chief Executive Officer and
his direct reports.
The Companys chief decision-makers review financial
information presented on a consolidated basis, accompanied by
disaggregated information about revenue and operating profit by
operating unit. This information is used for purposes of
allocating resources and evaluating financial performance.
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting
Policies. Segment data includes segment revenue, segment
operating profitability, and total assets by segment. Shared
corporate operating expenses are reported in the
U.S. segment.
The Company is organized primarily on the basis of operating
units which are segregated by geography.
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
|
|
|
365
|
|
|
|
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
|
|
F-31
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Companys exclusive
distributor of Microcyn to the Mexican Ministry of Health for a
period of three years. The Company concurrently acquired, for no
additional consideration, a 0.25% equity interest in QP and an
option to acquire the remaining 99.75% directly from its
principals in exchange for 600,000 shares of common stock,
contingent upon QPs attainment of certain financial
milestones. The Companys distribution and related
agreements were cancelable by the Company on thirty
days notice without cause and included certain
provisions to hold the Company harmless from debts incurred by
QP outside the scope of the distribution and related agreements.
The Company terminated these agreements on March 26, 2006.
Due to its liquidity circumstances, QP was unable to sustain
operations without the Companys subordinated financial and
management support. Accordingly, QP was deemed to be a variable
interest entity in accordance with FIN 46(R) and its
results were consolidated with the Companys 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
QPs 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
Companys 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
Companys loss upon the termination of its agreements with
QP, which consists of funds advanced by the Company for working
capital, are presented separately from QPs 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
Companys board of directors engaged an independent
counsel, as well as tax counsel in Mexico to investigate this
matter. The audit committee of the board of directors was
advised that QPs principals could be liable for up to
$7,000,000 of unpaid taxes; however, the Company is unlikely to
have any loss exposure with respect to this matter because the
alleged tax omission occurred prior to the Companys
involvement with QP. The Company has not received any
communications to date from Mexican tax authorities with respect
to this matter.
While 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, 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
Series C
Convertible Preferred Stock
In May and June 2006, the Board of Directors and stockholders,
respectively, approved an amendment to the Articles of
Incorporation to authorize the issuance of up to
3,500,000 shares of Series C convertible preferred
stock.
New
Credit Facility
In June 2006, the Company entered into a Loan and Security
Agreement with a financial institution to borrow up to a maximum
of $5,000,000. The facility allows the Company to borrow up to a
maximum of $2,750,000 in working capital, $1,250,000 in accounts
receivable financing and $1,000,000 in equipment
F-32
OCULUS
INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financing, subject to certain conditions. Substantially all
assets of the Company are pledged as security for this facility.
Also in conjunction with this agreement, the Company will issue
warrants to purchase up to 300,000 share of Series B
preferred stock of the Company at an exercise price of $4.50 per
share. Warrants to purchase 215,000 shares are earned and
exercisable at execution of the agreement and warrants to
purchase 85,000 shares will be earned on a pro rata basis
upon use of the line. Should the Company not successfully
complete its IPO by March 31, 2007, the warrant exercise
price will be adjusted to 75% of the effective price per share
of preferred stock issued in the next round of financing or an
initial public offering. In June 2006, the Company borrowed
$2,750,000 against the working capital line, $717,000 against
the equipment financing line and $717,000 under the accounts
receivable line.
Legal
Matters
In June 2006, the Company received a written communication from
the grantor of a license to an earlier version of its technology
indicating that such license was terminated due to an alleged
breach of the license agreement. The license agreement extends
to the Companys use of the technology in Japan only. While
the Company does not believe that the grantors revocation
is valid under the terms of the license agreement and no legal
claim has been threatened to date, the Company cannot provide
any assurance that the grantor will not take legal action to
restrict the Companys use of the technology in the
licensed territory.
While 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
Companys financial position or results of operations.
Stock
Option Plans
On June 29, 2006, the compensation committee of the
Companys board of directors determined that no further
stock options would be granted under the 1999, 2000 or 2003
Stock Option Plans. At the time of the resolution, there were
5,745,267 options available for grant that the Company will
not award in future periods.
F-33
Shares
Oculus
Innovative Sciences, Inc.
Common
Stock
|
|
A.G.
Edwards
|
Jefferies &
Company
|
|
|
First
Albany Capital
|
C.E.
Unterberg, Towbin
|
The
date of this prospectus
is ,
2006
Until ,
2006, 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 National Market listing
fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
8,614
|
|
National Association of Securities
Dealers, Inc. filing fee
|
|
|
8,550
|
|
Nasdaq National Market listing fee
|
|
|
100,000
|
|
Blue Sky fees and expenses
|
|
|
10,000
|
|
Accounting fees and expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Registrar and Transfer
Agents fees
|
|
|
*
|
|
Miscellaneous fees and expenses
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
* To be filed by amendment
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
In connection with the completion of this offering, the
Registrant intends to reincorporate into Delaware.
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
Registrants form of Restated Certificate of Incorporation
to be effective upon completion of this offering
(Exhibit 3.3 hereto) and the Registrants form of
Bylaws to be effective upon completion of this offering
(Exhibit 3.6 hereto) provide for indemnification of the
Registrants directors, officers, employees and other
agents to the fullest extent permitted by the Delaware General
Corporation Law. The Registrant has also entered into agreements
with our 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, our
directors and officers, and by the Registrant, of the
Underwriters, for certain liabilities, including liabilities
arising under the 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
Registrants reverse common stock split to be effected
prior to the completion of this offering.
On various dates between January 14, 2002 and May 31,
2006, the Registrant sold 1,364,916 shares of its common
stock to employees, directors and consultants pursuant to the
exercise of options granted under our 1999, 2000, 2003 and 2004
stock plans. The exercise prices per share ranged from $0.033 to
$0.75, for an aggregate consideration of $297,585.
II-1
On various dates between August 7, 2003 and
February 25, 2004, the Registrant sold
5,391,244 shares of series A preferred stock for
aggregate consideration of $8,066,866 to 198 accredited
investors. In connection with these sales the Registrant paid to
Brookstreet Securities, Inc. an aggregate of $1,123,746 in
commissions and issued to Brookstreet and its affiliates
warrants to purchase an aggregate of 1,735,124 shares of
the Registrants common stock. The Registrant also issued a
warrant to purchase 66,667 shares of its series A
preferred stock and a promissory note that could be converted
into 40,000 shares of series A preferred stock. On
June 30, 2005, this convertible note was converted into
40,000 shares of the Registrants common stock.
On various dates between April 30, 2004 and
October 27, 2005, the Registrant sold
10,543,474 shares of series B preferred stock for
aggregate consideration of $47,445,663 to 361 accredited
investors. In connection with these sales the Registrant paid to
Brookstreet Securities, Inc. 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 Registrants common stock.
The sales of the above securities were considered to be exempt
from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, or Regulation D
promulgated thereunder, or Rule 701 promulgated under
Section 3(b) of the Securities Act, as transactions by an
issuer not involving a public offering or transactions under
compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients of
securities in each of these transactions 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 these transactions. All recipients had
adequate access, through their relationship with the Registrant,
to information about the Registrant.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.1
|
|
Amended and Restated Articles of
Incorporation of the Registrant.
|
|
3
|
.2
|
|
Certificate of Amendment of
Articles of Incorporation of the Registrant.
|
|
3
|
.3
|
|
Certificate of Amendment of
Articles of Incorporation of the Registrant.
|
|
3
|
.4*
|
|
Certificate of Incorporation of
the Registrants subsidiary, OIS Reincorporation Sub, Inc.,
a Delaware corporation.
|
|
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, as
amended (composite copy).
|
|
3
|
.7*
|
|
Bylaws of the Registrants
subsidiary, OIS Reincorporation Sub, Inc., a Delaware
corporation.
|
|
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
|
.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
|
.4
|
|
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 April 30, 2004.
|
|
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
|
.9
|
|
Form of Promissory Note (Growth
Capital Loans) issued to Venture Lending & Leasing IV,
Inc.
|
II-2
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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.
|
|
5
|
.1*
|
|
Opinion of Pillsbury Winthrop Shaw
Pittman LLP.
|
|
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
|
.3
|
|
2000 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
|
.6*
|
|
2006 Stock Incentive Plan and
related form stock option plan agreements.
|
|
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
|
.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
|
.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
|
.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
|
.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
|
.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
|
.19
|
|
Employment Agreement, dated
June 10, 2006, between the Registrant and Mike Wokasch.
|
|
10
|
.20
|
|
Form of Director Agreement.
|
|
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.
|
|
16
|
.1*
|
|
Letter re change in certifying
accountants.
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Marcum &
Kliegman LLP.
|
|
23
|
.2*
|
|
Consent of Pillsbury Winthrop Shaw
Pittman LLP (included in Exhibit 5.1).
|
|
24
|
.1
|
|
Power of Attorney (see
page II-5
of this Registration Statement).
|
|
|
|
*
|
|
To be filed by amendment.
|
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
II-3
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) 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-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused 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
30th day of June, 2006.
Oculus Innovative Sciences, Inc.
Hojabr Alimi
President and Chief Executive Officer
POWER OF
ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Hojabr Alimi and Robert
Miller and each of them, his true and lawful attorneys in fact
and agents, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments, including
post-effective amendments, to this Registration Statement, and
any registration statement relating to the offering covered by
this Registration Statement and filed pursuant to
Rule 462(b) under the Securities Act of 1933, and to file
the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said
attorneys in fact and agents or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
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
|
|
June 30, 2006
|
|
|
|
|
|
/s/
Robert
E. Miller
Robert
E. Miller
|
|
Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
June 30, 2006
|
|
|
|
|
|
/s/
Akihisa
Akao
Akihisa
Akao
|
|
Director
|
|
June 30, 2006
|
|
|
|
|
|
/s/
Edward
M. Brown
Edward
M. Brown
|
|
Director
|
|
June 30, 2006
|
|
|
|
|
|
/s/
Richard
Conley
Richard
Conley
|
|
Director
|
|
June 30, 2006
|
|
|
|
|
|
/s/
Gregory
M. French
Gregory
M. French
|
|
Director
|
|
June 30, 2006
|
|
|
|
|
|
/s/
James
J. Schutz
James
J. Schutz
|
|
Director
|
|
June 30, 2006
|
II-5
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.1
|
|
Amended and Restated Articles of
Incorporation of the Registrant.
|
|
3
|
.2
|
|
Certificate of Amendment of
Articles of Incorporation of the Registrant.
|
|
3
|
.3
|
|
Certificate of Amendment of
Articles of Incorporation of the Registrant.
|
|
3
|
.4*
|
|
Certificate of Incorporation of
the Registrants subsidiary, OIS Reincorporation Sub, Inc.,
a Delaware corporation.
|
|
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, as
amended (composite copy).
|
|
3
|
.7*
|
|
Bylaws of the Registrants
subsidiary, OIS Reincorporation Sub, Inc., a Delaware
corporation.
|
|
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
|
.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
|
.4
|
|
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 April 30, 2004.
|
|
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
|
.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
|
.11
|
|
Form of Warrant to Purchase Common
Stock of Registrant.
|
|
5
|
.1*
|
|
Opinion of Pillsbury Winthrop Shaw
Pittman LLP.
|
|
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
|
.3
|
|
2000 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
|
.6*
|
|
2006 Stock Incentive Plan and
related form stock option plan agreements.
|
|
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
|
.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
|
.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
|
.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
|
.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.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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
|
.19
|
|
Employment Agreement, dated
June 10, 2006, between the Registrant and Mike Wokasch.
|
|
10
|
.20
|
|
Form of Director Agreement.
|
|
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.
|
|
16
|
.1*
|
|
Letter regarding change in
certifying accountants.
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Marcum &
Kliegman LLP.
|
|
23
|
.2*
|
|
Consent of Pillsbury Winthrop Shaw
Pittman LLP (included in Exhibit 5.1).
|
|
24
|
.1
|
|
Power of Attorney (see
page II-5
of this Registration Statement).
|
|
|
|
*
|
|
To be filed by amendment.
|
Exhibit 10.12
LOAN AND SECURITY AGREEMENT
(Equipment)
Dated as of March 25, 2004
between
OCULUS INNOVATIVE SCIENCES, INC.
a California Corporation
as Borrower,
and
VENTURE
LENDING & LEASING III, INC.,
a Maryland corporation
as Lender
1
LOAN AND SECURITY AGREEMENT
(Equipment)
The Borrower and Lender identified on the cover page of this document have entered or
anticipate entering into one or more transactions pursuant to which Lender agrees to make available
to Borrower a loan facility governed by the terms and conditions set forth in this document and one
or more Supplements executed by Borrower and Lender which incorporate this document by reference.
Each Supplement constitutes a supplement to and forms part of this document, and will be read and
construed as one with this document, so that this document and the Supplement constitute a single
agreement between the parties (collectively referred to as this Agreement).
Accordingly, the parties agree as follows:
ARTICLE 1 INTERPRETATION
1.1 Definitions
. The terms defined in Article 10 and in the Supplement will have the meanings
therein specified for purposes of this Agreement.
1.2 Inconsistency
. In the event of any inconsistency between the provisions of any Supplement
and this document, the provisions of the Supplement will be controlling for the purpose of all
relevant transactions.
ARTICLE 2 THE COMMITMENT AND LOANS
2.1 The Commitment
. Subject to the terms and conditions of this Agreement, Lender agrees to
make term loans to Borrower from time to time from the Closing Date and to, but not including, the
Termination Date in an aggregate principal amount not exceeding the Commitment, for the purpose of
financing the acquisition or carrying of certain Equipment. The Commitment is not a revolving
credit commitment, and Borrower does not have the right to repay and reborrow hereunder. Each Loan
requested by Borrower to be made on a single Business Day shall be for a minimum principal amount
set forth in the Supplement, except to the extent the remaining Commitment is a lesser amount.
2.2 Notes Evidencing Loans, Repayment
. Each Loan shall be evidenced by a separate Note payable
to the order of Lender, in the total principal amount of the Loan. Principal and interest of each
Loan shall be payable at the times and in the manner set forth in the Note and payment shall be
effected by automatic debit of the appropriate funds from Borrowers Primary Operating Account as
specified in the Supplement hereto.
2.3 Procedures for Borrowing
.
(a) Borrower shall give Lender, at least five (5) Business Days prior to a proposed Borrowing
Date, written notice of any request for borrowing hereunder (a Borrowing Request). Each Borrowing
Request shall be in substantially the form of
Exhibit B
to the Supplement, shall be
executed by a responsible executive or financial officer of Borrower, and shall state how much is
requested, and shall be accompanied by such other information and documentation as Lender may
reasonably request.
(b) No later than 1:00 p.m. Pacific Standard Time on the Borrowing Date, if Borrower has
satisfied the conditions precedent in Article 4, Lender shall make the Loan available to Borrower
in immediately available funds.
2.4 Interest
. Except as otherwise set forth in the Supplement, Basic Interest on the
outstanding principal balance of each Loan shall accrue daily at the Designated Rate from the
Borrowing Date until the Maturity Date. If the outstanding principal balance of such Loan is not
paid on the Maturity Date, interest shall accrue at the Default Rate until paid in full, as further
set forth herein.
2.5 Terminal Payment
. Borrower shall pay the Terminal Payment with respect to each Loan on the
Maturity Date of such Loan.
2.6 Interest Rate Calculation
. Basic Interest, along with charges and fees under this
Agreement and any Loan Document, shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest, charge or fee payments than if a 365-day year were
used. In no event shall Borrower be obligated to pay Lender interest, charges or fees at a rate in
excess of the highest rate permitted by applicable law from time to time in effect.
2.7 Default Interest
. Any unpaid payments of principal or interest or the Terminal Payment
with respect to any Loan shall bear interest from their respective maturities. whether scheduled or
accelerated, at the Designated Rate for such Loan
plus
five percent (5.00%) per annum,
until paid in full, whether before or after judgment (the Default Rate). Borrower shall pay such
interest on demand.
2
2.8 Late Charges
. If Borrower is late in making any payment of principal or interest or
Terminal Payment under this Agreement by more than five (5) days, Borrower agrees to pay a late
charge of five percent (5%) of the installment due, but not less than fifty dollars ($50.00) for
any one such delinquent payment. This late charge may be charged by Lender for the purpose of
defraying the expenses incidental to the handling of such delinquent amounts. Borrower acknowledges
that such late charge represents a reasonable sum considering all of the circumstances existing on
the date of this Agreement and represents a fair and reasonable estimate of the costs that will be
sustained by Lender due to the failure of Borrower to make timely payments. Borrower further agrees
that proof of actual damages would be costly and inconvenient. Such late charge shall be paid
without prejudice to the right of Lender to collect any other amounts provided to be paid or to
declare a default under this Agreement or any of the other Loan Documents or from exercising any
other rights and remedies of Lender.
2.9 Lenders Records
. Principal, Basic Interest, Terminal Payments and all other sums owed
under any Loan Document shall be evidenced by entries in records maintained by Lender for such
purpose. Each payment on and any other credits with respect to principal, Basic Interest, Terminal
Payments and all other sums outstanding under any Loan Document shall be evidenced by entries in
such records. Absent manifest error, Lenders records shall be conclusive evidence thereof.
2.10 Grant of Security Interests; Filing of Financing Statements
.
(a) To secure the timely payment and performance of all of Borrowers Obligations to Lender,
Borrower hereby grants to Lender continuing security interests in all of the Collateral. In
connection with the foregoing, Borrower authorizes Lender to prepare and file any financing
statements describing the Collateral without otherwise obtaining the Borrowers signature or
consent with respect to the filing of such financing statements.
(b) Borrower is and shall remain absolutely and unconditionally liable for the performance of
its obligations under the Loan Documents, including, without limitation, any deficiency by reason
of the failure of the Collateral to satisfy all amounts due Lender under any of the Loan Documents.
(c) All Collateral pledged by Borrower under this Agreement and any Supplement shall secure
the timely payment and performance of all Obligations under this Agreement, the Notes and the other
Loan Documents. Except as expressly provided in this Agreement, no Collateral pledged under this
Agreement or any Supplement shall be released until such time as all Obligations under this
Agreement and the other Loan Documents have been satisfied and paid in full.
ARTICLE 3 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that, except as set forth in the Supplement or any schedule
of exceptions executed by the parties, as of the Closing Date and each Borrowing Date:
3.1 Due Organization
. Borrower is a corporation duly organized and validly existing in good
standing under the laws of the jurisdiction of its incorporation, and is duly qualified to conduct
business and is in good standing in each other jurisdiction in which its business is conducted or
its properties are located, except where the failure to be so qualified would not reasonably be
expected to have a Material Adverse Effect.
3.2 Authorization, Validity and Enforceability
. Subject to obtaining the approval of the
requisite vote of the shareholders of Borrower in favor of the increase of the authorized capital
of the borrower and consent to the grant of the Warrant, the execution, delivery and performance of
all Loan Documents executed by Borrower are within Borrowers powers, have been duly authorized,
and are not in conflict with Borrowers articles or certificate of incorporation or by-laws, or the
terms of any charter or other organizational document of Borrower, as amended from time to time;
and all such Loan Documents (other than the Warrant) constitute valid and binding obligations of
Borrower, enforceable in accordance with their terms (except as may be limited by bankruptcy,
insolvency and similar laws affecting the enforcement of creditors rights in general, and subject
to general principles of equity).
3.3 Compliance with Applicable Laws
. Borrower has complied with all licensing, permit and
fictitious name requirements necessary to lawfully conduct the business in which it is engaged, and
to any sales, leases or the furnishing of services by Borrower, including without limitation those
requiring consumer or other disclosures, the noncompliance with which would have a Material Adverse
Effect.
3.4 No Conflict
. The execution. delivery, and performance by Borrower of all Loan Documents
(other than the Warrant) are not in conflict with any
3
law, rule, regulation, order or directive, or
any indenture, agreement, or undertaking to which Borrower is a party or by which Borrower may be
bound or affected.
3.5 No Litigation, Claims or Proceedings
. There is no litigation, tax claim, proceeding or
dispute pending, or, to the knowledge of Borrower, threatened against or affecting Borrower, its
property or the conduct of its business.
3.6 Correctness of Financial Statements
. Borrowers financial statements which have been
delivered to Lender fairly and accurately reflect Borrowers financial condition in accordance with
GAAP as of the latest date of such financial statements; and, since that date there has been no
Material Adverse Change.
3.7 No Subsidiaries
. Borrower is not a majority owner of or in a control relationship with any
other business entity, except as shown on the Supplement.
3.8 Environmental Matters
. Borrower has reviewed, or caused to be reviewed on its behalf, all
Environmental Laws applicable to its business operations and materials handled therein, and as a
result thereof has reasonably concluded that Borrower is in compliance with such Environmental
Laws, except to the extent a failure to be in such compliance could not reasonably be expected to
have a Material Adverse Effect.
3.9 No Event of Default
. No Default or Event of Default has occurred and is continuing.
3.10 Full Disclosure
. None of the representations or warranties made by Borrower in the Loan
Documents as of the date such representations and warranties are made or deemed made, and none of
the statements contained in any exhibit, report, statement or certificate furnished by or on behalf
of Borrower in connection with the Loan Documents (including disclosure materials delivered by or
on behalf of Borrower to Lender prior to the Closing Date or pursuant to Section 5.2 hereof),
contains any untrue statement of a material fact or omits any material fact required to be stated
therein or necessary to make the statements made therein, in light of the circumstances under which
they are made, not misleading as of the time when made or delivered.
3.11 Specific Representations Regarding Collateral
.
(a)
Title
. Except for the security interests created by this Agreement and Permitted Liens,
(i) Borrower is and will be the unconditional legal and beneficial owner of the Collateral, and
(ii) the Collateral is genuine and subject to no Liens, rights or defenses of others.
(b)
Location of Collateral
. Borrowers chief executive office, Records, Equipment, and any
other offices or places of business are located at the address(es) shown on the Supplement.
(c)
Business Names
. Other than its full corporate name, Borrower has not conducted business
using any trade names or fictitious business names except as shown on the Supplement.
3.12 Copyrights, Patents, Trademarks and Licenses
.
(a) Borrower owns or is licensed or otherwise has the right to use all of the patents,
trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and
other similar rights that are reasonably necessary for the operation of its business, without, to
the best of Borrowers knowledge, conflict with the rights of any other Person.
(b) To Borrowers knowledge, no slogan or other advertising device, product, process, method,
substance, part or other material now employed, or now contemplated to be employed, by Borrower
infringes upon any rights held by any other Person.
(c) No claim or litigation regarding any of the foregoing is pending or, to Borrowers
knowledge, threatened, and no patent, invention, device, application, principle or any statute,
law, rule, regulation, standard or code is pending or proposed which, in either case, could
reasonably be expected to have a Material Adverse Effect.
3.13 Survival
. The representations and warranties of Borrower as set forth in this Agreement
survive the execution and delivery of this Agreement.
ARTICLE 4 CONDITIONS PRECEDENT
4.1 Conditions to First Loan
. The obligation of Lender to make its first Loan hereunder is, in
addition to the conditions precedent specified in Section 4.2, subject to the fulfillment of the
following conditions and to the receipt by Lender of the documents described below, duly executed
and in form and substance satisfactory to Lender and its counsel:
4
(a)
Resolutions
. A certified copy of the resolutions of the Board of Directors of Borrower
authorizing the execution, delivery and performance by Borrower of the Loan Documents.
(b)
Incumbency and Signatures
. A certificate of the secretary of Borrower certifying the names
of the officer or officers of Borrower authorized to sign the Loan Documents, together with a
sample of the true signature of each such officer.
(c)
Legal Opinion
. The opinion of legal counsel for Borrower as to such matters as Lender may
reasonably request in substantially the form of Exhibit F attached to the Supplement.
(d)
Articles and By-Laws
. Certified copies of the Articles or Certificate of Incorporation and
By-Laws of Borrower, as amended through the Closing Date.
(e)
This Agreement
. A counterpart of this Agreement and an initial Supplement, with all
schedules completed and attached thereto, and disclosing such information as is acceptable to
Lender.
(f)
Financing Statements
. Filing copies (or other evidence of filing satisfactory to Lender
and its counsel) of such UCC financing statements, account control agreements, collateral
assignments and termination statements, with respect to the Collateral as Lender shall request.
(g)
Lien Searches
. UCC lien, judgment, bankruptcy and tax lien searches of Borrower from such
jurisdictions or offices as Lender may reasonably request, all as of a date reasonably satisfactory
to Lender and its counsel.
(h)
Good Standing Certificate
. A Certificate of status or good standing of Borrower as of a
date acceptable to Lender from the jurisdiction of Borrowers organization and any foreign
jurisdictions where Borrower is or should be qualified to do business.
4.2 Conditions to All Loans
. The obligation of Lender to make its initial Loan and each
subsequent Loan is subject to the following further conditions precedent that:
(a)
No Default
. No Default or Event of Default has occurred and is continuing or will result
from the making of any such Loan, and the representations and warranties of Borrower contained in
Article 3 of this Agreement and Part 3 of the Supplement are true and correct as of the Borrowing
Date of such Loan.
(b)
No Material Adverse Effect
. No event that has had or could reasonably be expected to have
a Material Adverse Effect has occurred.
(c)
Borrowing Request
. Borrower shall have delivered to Lender a Borrowing Request for such
Loan.
(d)
Note
. Borrower shall have delivered an executed Note evidencing such Loan, substantially
in the form of
Exhibit A
attached to the Supplement.
(e)
Supplemental Lien Filings
. Borrower shall have executed and delivered such amendments or
supplements to this Agreement and such financing statements as Lender may reasonably request in
connection with the proposed Loan, in order to create or perfect or to maintain the perfection of
Lenders Liens on the Collateral.
(f)
VCOC Limitation
. Lender shall not be obligated to make any Loan under its Commitment if at
the time of or after giving effect to the proposed Loan Lender would no longer qualify as: (A) a
venture capital operating company under U.S. Department of Labor Regulations Section
2510.3-101(d), Title 29 of the Code of Federal Regulations, as amended; and (B) a business
development company under the provisions of federal Investment Company Act of 1940, as amended;
and (C) a regulated investment company under the provisions of the Internal Revenue Code of 1986,
as amended.
(g)
Financial Projections
. Borrower shall have delivered to Lender Borrowers business plan
and/or financial projections or forecasts as most recently approved by Borrowers Board of
Directors.
ARTICLE 5 AFFIRMATIVE COVENANTS
During the term of this Agreement and until its performance of all Obligations, Borrower will:
5.1 Notice to Lender
. Promptly give written notice to Lender of
(a) Any litigation or administrative or regulatory proceeding affecting Borrower where the
amount claimed against Borrower is at the Threshold Amount or more, or where the granting of the
relief requested could have a Material Adverse Effect.
5
(b) Any substantial dispute which may exist between Borrower or any governmental or regulatory
authority.
(c) The occurrence of any Default or any Event of Default.
(d) Any change in the location of any of Borrowers places of business or Collateral at least
thirty (30) days in advance of such change, or of the establishment of any new, or the
discontinuance of any existing, place of business.
(e) Any dispute or default by Borrower or any other party under any joint venture, partnering,
distribution, cross-licensing, strategic alliance, collaborative research or manufacturing, license
or similar agreement which could reasonably be expected to have a Material Adverse Effect
(f) Any other matter which has resulted or might reasonably result in a Material Adverse
Change.
5.2 Financial Statements
. Deliver to Lender or cause to be delivered to Lender, in form and
detail satisfactory to Lender the following financial and other information, which Borrower
warrants shall be accurate and complete in all material respects:
(a)
Monthly Financial Statements
. As soon as available but no later than thirty (30) days
after the end of each month, Borrowers balance sheet as of the end of such period, and Borrowers
income statement for such period and for that portion of Borrowers financial reporting year ending
with such period, prepared in accordance with GAAP and attested by a responsible financial officer
of Borrower as being complete and correct and fairly presenting Borrowers financial condition and
the results of Borrowers operations. After a Qualified Public Offering, the foregoing interim
financial statements shall be delivered no later than 45 days after each fiscal quarter and for the
quarter-annual fiscal period then ended.
(b)
Year-End Financial Statements
. As soon as available but no later than one hundred twenty
(120) days after and as of the end of each financial reporting year, starting on the financial
reporting year ending December 31, 2005 or any prior year that Borrowers Board of Directors
directs audited statements to be produced, a complete copy of Borrowers audit report, which shall
include balance sheet, income statement, statement of changes in equity and statement of cash flows
for such year, prepared in accordance with GAAP and certified by an independent certified public
accountant selected by Borrower and satisfactory to Lender (the Accountant). The Accountants
certification shall not be qualified or limited due to a restricted or limited examination by the
Accountant of any material portion of Borrowers records or otherwise. For its financial reporting
year ended December 31, 2003 (and December 31, 2004, if applicable), Borrower shall furnish company
prepared annual financial statements to Lender as otherwise required above.
(c)
Compliance Certificates
. Simultaneously with the delivery of each set of financial
statements referred to in paragraphs (a) and (b) above, a certificate of the chief financial
officer of Borrower substantially in the form of
Exhibit C
to the Supplement (i) setting
forth in reasonable detail any calculations required to establish whether Borrower is in compliance
with any financial covenants or tests set forth in the Supplement, and (ii) stating whether any
Default or Event of Default exists on the date of such certificate, and if so, setting forth the
details thereof and the action which Borrower is taking or proposes to take with respect thereto.
(d)
Government Required Reports; Press Releases
. Promptly after sending, issuing, making
available, or filing, copies of all statements released to any news media for publication, all
reports, proxy statements, and financial statements that Borrower sends or makes available to its
stockholders, and, not later than five (5) days after actual filing or the date such filing was
first due, all registration statements and reports that Borrower files or is required to file with
the Securities and Exchange Commission, or any other governmental or regulatory authority.
(e)
Other Information
. Such other statements, lists of property and accounts, budgets,
forecasts, reports, or other information as Lender may from time to time reasonably request.
5.3 Managerial Assistance from Lender
. Permit Lender to substantially participate in, and
substantially influence the conduct of management of Borrower through the exercise of management
rights, as that term is defined in 29 C.F.R. § 2510.3-101(d), including without limitation the
following rights:
(a) Borrower agrees that (i) it will make its officers, directors, employees and affiliates
available at such times as Lender may reasonably request for Lender to consult with and advise as
to the conduct of Borrowers business, its equipment and financing plans, and its financial
condition and prospects, (ii) Lender shall have the right to inspect Borrowers books, records,
facilities and properties at reasonable times during normal business hours on reasonable advance
6
notice, and (iii) Lender shall be entitled to recommend prospective candidates for election or
nomination for election to Borrowers Board of Directors and Borrower shall give due consideration
to (but shall not be bound by) such recommendations, it being the intention of the parties that
Lender shall be entitled through such rights,
inter alia
, to furnish significant managerial
assistance, as defined in Section 2(a)(47) of the Investment Company Act of 1940, to Borrower.
(b) Without limiting the generality of (a) above, if Lender reasonably believes that financial
or other developments affecting Borrower have impaired or are likely to impair Borrowers ability
to perform its obligations under this Agreement, permit Lender reasonable access to Borrowers
management and/or Board of Directors and opportunity to present Lenders views with respect to such
developments.
Lender shall cooperate with Borrower to ensure that the exercise of Lenders rights shall not
disrupt the business of Borrower. The rights enumerated above shall not be construed as giving
Lender control over Borrowers management or policies.
5.4 Existence
. Maintain and preserve Borrowers existence, present form of business, and all
rights and privileges necessary or desirable in the normal course of its business; and keep all
Borrowers property in good working order and condition, ordinary wear and tear excepted.
5.5 Insurance
. Obtain and keep in force insurance in such amounts and types as is usual in the
type of business conducted by Borrower, with insurance carriers having a policyholder rating of not
less than A and financial category rating of Class VII in Bests Insurance Guide, unless
otherwise approved by Lender. Such insurance policies must be in form and substance satisfactory to
Lender, and shall list Lender as an additional insured or loss payee, as applicable, on
endorsement(s) in form reasonably acceptable to Lender. Borrower shall furnish to Lender such
endorsements, and upon Lenders request, copies of any or all such policies.
5.6 Accounting Records
. Maintain adequate books, accounts and records, and prepare all
financial statements in accordance with GAAP, and in compliance with the regulations of any
governmental or regulatory authority having jurisdiction over Borrower or Borrowers business.
5.7 Compliance With Laws
. Comply with all laws (including Environmental Laws), rules,
regulations applicable to, and all orders and directives of any governmental or regulatory
authority having jurisdiction over, Borrower or Borrowers business, and with all material
agreements to which Borrower is a party, except where the failure to so comply would not have a
Material Adverse Effect.
5.8 Taxes and Other Liabilities
. Pay all Borrowers Indebtedness when due; pay all taxes and
other governmental or regulatory assessments before delinquency or before any penalty attaches
thereto, except as may be contested in good faith by the appropriate procedures and for which
Borrower shall maintain appropriate reserves; and timely file all required tax returns.
5.9 Special Collateral Covenants
.
(a)
Maintenance of Collateral; Inspection
. Do all things reasonably necessary to maintain,
preserve, protect and keep all Collateral in good working order and salable condition, ordinary
wear and tear excepted, deal with the Collateral in all ways as are considered good practice by
owners of like property, and use the Collateral lawfully and, to the extent applicable, only as
permitted by Borrowers insurance policies. Maintain, or cause to be maintained, complete and
accurate Records relating to the Collateral. Upon reasonable prior notice at reasonable times
during normal business hours, Borrower hereby authorizes Lenders officers, employees,
representatives and agents to inspect the Collateral and to discuss the Collateral and the Records
relating thereto with Borrowers officers and employees.
(b)
Financing Statements and Other Actions
. Execute and deliver to Lender all financing
statements, notices and other documents from time to time reasonably requested by Lender to
maintain a first perfected security interest in the Collateral in favor of Lender; perform such
other acts, and execute and deliver to Lender such additional conveyances, assignments, agreements
and instruments, as Lender may at any time request in connection with the administration and
enforcement of this Agreement or Lenders rights, powers and remedies hereunder.
(c)
Liens
. Not create, incur, assume or permit to exist any Lien or grant any other Person a
negative pledge on any Collateral, except Permitted Liens.
(d)
Documents of Title
. Not sign or authorize the signing of any financing statement or other
document naming Borrower as debtor or obligor, or acquiesce or cooperate in the issuance of any
bill of lading, warehouse receipt or other document or instrument of title with respect to any
Collateral, except those
7
negotiated to Lender, or those naming Lender as secured party.
(e)
Change in Location or Name
. Without at least 30 days prior written notice to Lender: (a)
not relocate any Collateral or Records, its chief executive office, or establish a place of
business at a location other than as specified in the Supplement; and (b) not change its name,
mailing address, location of Collateral, jurisdiction of incorporation or its legal structure.
(f)
Decals, Markings
. At the request of Lender, firmly affix a decal, stencil or other marking
to designated items of Equipment, indicating thereon the security interest of Lender.
(g)
Agreement With Real Property Owner/Landlord
. Obtain and maintain such acknowledgments,
consents, waivers and agreements from the owner, lienholder, mortgagee and landlord with respect to
any real property on which Equipment is located as Lender may require, all in form and substance
satisfactory to Lender.
5.10 Intellectual Property
. Borrower shall use reasonable commercial efforts to (i) protect,
defend and maintain the validity and enforceability of its Trademarks, Patents, Copyrights, and any
licenses of any of the foregoing (ii) detect infringements of its Trademarks, Patents, Copyrights,
and any licenses of any of the foregoing, and (iii) not allow any material Trademarks, Patents or
Copyrights to be abandoned, forfeited or dedicated to the public unless approved by Borrowers
Board of Directors.
5.11 Authorization for Automated Clearinghouse Funds Transfer
. (i) Authorize Lender to
initiate debit entries to Borrowers Primary Operating Account, specified in the Supplement hereto,
through Automated Clearinghouse (ACH) transfers, in order to satisfy the Obligations; (ii)
provide Lender at least thirty (30) days notice of any change in Borrowers Primary Operating
Account; and (iii) grant Lender any additional authorizations necessary to begin ACH debits from a
new account which becomes the Primary Operating Account.
ARTICLE 6 NEGATIVE COVENANTS
During the term of this Agreement and until the performance of all Obligations, Borrower will
not (without Lenders prior written consent):
6.1 Dividends
. Except after a Qualified Public Offering, pay any dividends or purchase, redeem
or otherwise acquire or make any other distribution with respect to any of Borrowers capital
stock, except (a) dividends or other distributions solely of capital stock of Borrower, (b) so long
as no Event of Default has occurred and is continuing, (i) repurchases of stock from employees upon
termination of employment under reverse vesting or similar repurchase plans, or (ii) dividends
required to be paid to Series A Preferred Stockholders pursuant to the Amended and Restated
Articles of Incorporation in force at the time of the execution of this Agreement and (c) as
expressly permitted in the Supplement.
6.2 Changes/Mergers
. Liquidate or dissolve; or enter into any consolidation, merger or other
combination in which the stockholders of the Borrower immediately prior to the first such
transaction own less than 50% of the voting stock of the Borrower immediately after giving effect
to such transaction or related series of such transactions, except that Borrower may consolidate or
merge so long as: (A) the entity that results from such merger or consolidation (the Surviving
Entity) shall have executed and delivered to Lender an agreement in form and substance reasonably
satisfactory to Lender, containing an assumption by the Surviving Entity of the due and punctual
payment and performance of all Obligations and performance and observance of each covenant and
condition of Borrower in the Loan Documents; (B) all such obligations of the Surviving Entity to
Lender shall be guaranteed by any entity that directly or indirectly owns or controls more than 50%
of the voting stock of the Surviving Entity; (C) immediately after giving effect to such merger or
consolidation, no Event of Default or, event which with the lapse of time or giving of notice or
both, would result in an Event of Default shall have occurred and be continuing; and (D) the credit
risk to Lender, in its sole discretion, of the Surviving Entity shall not be increased. In
determining whether the proposed merger or consolidation would result in an increased credit risk,
Lender may consider, among other things, changes in Borrowers management team, employee base,
access to equity markets, venture capital support, financial position and/or disposition of
intellectual property rights which may reasonably be anticipated as a result of the transaction.
6.3 Sales of Assets
. Sell, transfer, lease, license or otherwise dispose of (a Transfer) any
of Borrowers assets except (i) non-exclusive licenses of Intellectual Property in the ordinary
course of business consistent with industry practice; (ii) Transfers of worn-out, obsolete or
surplus property (each as determined by the Borrower in its reasonable judgment) not constituting
Equipment as to which a Loan was made hereunder; (iii) Transfers of Inventory not constituting
Equipment
8
as to which a Loan was made hereunder; (iv) Transfers constituting Permitted Liens; (v)
Transfers of Borrowers assets (other than Intellectual Property and Equipment as to which a Loan
was made hereunder) for fair consideration and in the ordinary course of its business, and (vi)
except as expressly permitted in the Supplement.
6.4 Loans/Investments
. Make or suffer to exist any loans, guaranties, advances, or
investments, except:
(a) Accounts receivable in the ordinary course of Borrowers business;
(b) Investments in domestic certificates of deposit issued by, and other domestic investments
with, financial institutions organized under the laws of the United States or a state thereof,
having One Hundred Million Dollars ($100,000,000) in capital and a rating of at least investment
grade by Moodys or Standard & Poors of any successor rating agency;
(c) Investments in marketable obligations of the United States of America and in open market
commercial paper rated at least A2 or P2 by Moodys and /or Standard & Poors.
(d) Temporary advances to cover incidental expenses to be incurred in the ordinary course of
business;
(e) Investments in joint ventures, strategic alliances, licensing and similar arrangements
customary in Borrowers industry and which do not require Borrower to assume or otherwise become
liable for the obligations of any third party not directly related to or arising out of such
arrangement or, without the prior written consent of Lender, require Borrower to transfer ownership
of Collateral to such joint venture or other entity; and
(f) Investments in wholly-owned subsidiaries of the Borrower; and
(g) as expressly permitted in the Supplement.
6.5 Transactions With Related Persons
. Directly or indirectly enter into any transaction with
or for the benefit of a Related Person on terms more favorable to the Related Person than would
have been obtainable in an arms length dealing.
6.6 Other Business
. Engage in any material line of business other than the business Borrower
conducts as of the Closing Date.
6.7 Financial Covenants
. Fail to comply with any financial covenants or tests set forth in the
Supplement.
6.8 Compliance
. Become an investment company or controlled by an investment company,
within the meaning of the Investment Company Act of 1940, or become principally engaged in, or
undertake as one of its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Loan for such purpose. Fail to meet
the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as
defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any
law or regulation, which violation could have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Lenders Lien on the Collateral, or permit any of its
subsidiaries to do any of the foregoing.
6.9 Stock Ownership
. Allow any Person or two or more Persons acting in concert to acquire
beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission)
of twenty-five percent (25%) or more of the outstanding shares of voting stock of Borrower.
ARTICLE 7 EVENTS OF DEFAULT
7.1 Events of Default; Acceleration
. Upon the occurrence and during the continuation of any
Default, the obligation of Lender to make any additional Loan shall be suspended. The occurrence of
any of the following (each, an Event of Default) shall terminate any obligation of Lender to make
any additional Loan; and shall, at the option of Lender (1) make all sums of Basic Interest and
principal, all Terminal Payments, and any Obligations and other amounts owing under any Loan
Documents immediately due and payable without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor or any other notices or demands, and (2) give Lender
the right to exercise any other right or remedy provided by contract or applicable law:
(a) Borrower shall fail to pay any principal, interest or Terminal Payment under this
Agreement or any Note, or fail to pay any fees or other charges when due under any Loan Document,
and such failure continues for five (5) Business Days or more after the same first becomes due; or
an Event of Default as
9
defined in any other Loan Document shall have occurred.
(b) Any representation or warranty made, or financial statement, certificate or other document
provided, by Borrower under any Loan Document shall prove to have been false or misleading in any
material respect when made or deemed made herein.
(c) Borrower shall fail to pay its debts generally as they become due or shall commence any
Insolvency Proceeding with respect to itself; an involuntary Insolvency Proceeding shall be filed
against Borrower, or a custodian, receiver, trustee, assignee for the benefit of creditors, or
other similar official, shall be appointed to take possession, custody or control of the properties
of Borrower, and such involuntary Insolvency Proceeding, petition or appointment is acquiesced to
by Borrower or is not dismissed within sixty (60) days; or the dissolution or termination of the
business of Borrower.
(d) Borrower shall be in default beyond any applicable period of grace or cure under any other
agreement involving the borrowing of money, the purchase of property, the advance of credit or any
other monetary liability of any kind to Lender or to any Person which results in the acceleration
of payment of such obligation in an amount in excess of the Threshold Amount.
(e) Any governmental or regulatory authority shall take any judicial or administrative action,
or any defined benefit pension plan maintained by Borrower shall have any unfunded liabilities, any
of which, in the reasonable judgment of Lender, might have a Material Adverse Effect.
(f) Subject to Section 6.3 hereof, any sale, transfer or other disposition of all or a
substantial or material part of the assets of Borrower, including without limitation to any trust
or similar entity, shall occur, except any transfer to a wholly-owned subsidiary permitted under
the Supplement.
(g) Any judgment(s) singly or in the aggregate in excess of the Threshold Amount shall be
entered against Borrower which remain unsatisfied, unvacated or unstayed pending appeal for ten
(10) or more days after entry thereof.
(h) Borrower shall fail to perform or observe any covenant contained in Article 6 of this
Agreement.
(i) Borrower shall fail to perform or observe any covenant contained in Section 5.9 of this
Agreement.
(j) Borrower shall fail to perform or observe any covenant contained in this Agreement or any
other Loan Document (other than a covenant which is dealt with specifically elsewhere in this
Article 7) and, if capable of being cured, the breach of such covenant is not cured within 30 days
after the sooner to occur of Borrowers receipt of notice of such breach from Lender or the date on
which such breach fast becomes known to any officer of Borrower;
provided
,
however
that if such breach is not capable of being cured within such 30-day period and Borrower timely
notifies Lender of such fact and Borrower diligently pursues such cure, then the cure period shall
be extended to the date requested in Borrowers notice but in no event more than 90 days from the
initial breach; provided, further, that such additional 60-day opportunity to cure shall not apply
in the case of any failure to perform or observe any covenant which has been the subject of a prior
failure within the preceding 180 days or which is a willful and knowing breach by Borrower.
7.2 Remedies Upon Default
. Upon the occurrence and during the continuance of an Event of
Default, Lender shall be entitled to, at its option, exercise any or all of the rights and remedies
available to a secured party under the UCC or any other applicable law, and exercise any or all of
its rights and remedies provided for in this Agreement and in any other Loan Document. The
obligations of Borrower under this Agreement shall continue to be effective or be reinstated, as
the case may be, if at any time any payment of any Obligations is rescinded or must otherwise be
returned by Lender upon, on account of, or in connection with, the insolvency, bankruptcy or
reorganization of Borrower or otherwise, all as though such payment had not been made.
7.3 Sale of Collateral
. Upon the occurrence and during the continuance of an Event of Default,
Lender may, subject to the provisions contained in the UCC and other applicable law, rules or
regulations, sell all or any part of the Collateral, at public or private sales, to itself, a
wholesaler, retailer or investor, for cash, upon credit or for future delivery, and at such price
or prices as Lender may deem commercially reasonable. To the extent permitted by law, Borrower
hereby specifically waives all rights of redemption and any rights of stay or appraisal which it
has or may have under any applicable law in effect from time to time. Any such public or private
sales shall be held at such times and at such place(s) as Lender may determine. In case of the sale
of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may
be retained by Lender until the selling price is paid by the purchaser, but Lender shall not incur
any liability in case of the failure of such purchaser to pay for the
10
Collateral and, in case of
any such failure, such Collateral may be resold. Lender may, instead of exercising its power of
sale, proceed to enforce its security interest in the Collateral by seeking a judgment or decree of
a court of competent jurisdiction.
7.4 Borrowers Obligations Upon Default
. Upon the request of Lender after the occurrence and
during the continuance of an Event of Default, Borrower will:
(a) Assemble and make available to Lender the Collateral at such place(s) as Lender shall
reasonably designate, segregating all Collateral so that each item is capable of identification;
and
(b) Subject to the rights of any lessor, permit Lender, by Lenders officers, employees,
agents and representatives, to enter any premises where any Collateral is located, to take
possession of the Collateral, to complete the processing, manufacture or repair of any Collateral,
and to remove the Collateral, or to conduct any public or private sale of the Collateral, all
without any liability of Lender for rent or other compensation for the use of Borrowers premises.
ARTICLE 8 SPECIAL COLLATERAL PROVISIONS
8.1 Performance of Borrowers Obligations
. Without having any obligation to do so, upon
reasonable prior notice to Borrower, Lender may perform or pay any obligation which Borrower has
agreed to perform or pay under this Agreement, including, without limitation, the payment or
discharge of taxes or Liens levied or placed on or threatened against the Collateral. In so
performing or paying, Lender shall determine the action to be taken and the amount necessary to
discharge such obligations. Borrower shall reimburse Lender on demand for any amounts paid by
Lender pursuant to this Section, which amounts shall constitute Obligations secured by the
Collateral and shall bear interest from the date of demand at the Default Rate.
8.2 Power of Attorney
. For the purpose of protecting and preserving the Collateral and
Lenders rights under this Agreement, Borrower hereby irrevocably appoints Lender, with full power
of substitution, as its attorney-in-fact with full power and authority, after the occurrence and
during the continuance of an Event of Default, to do any act which Borrower is obligated to do
hereunder; to exercise such rights with respect to the Collateral as Borrower might exercise; to
use such Equipment, Fixtures or other property as Borrower might use; to enter Borrowers premises;
to give notice of Lenders security interest in, and to collect the Collateral; and to execute and
file in Borrowers name any financing statements, amendments and continuation statements necessary
or desirable to perfect or continue the perfection of Lenders security interests in the
Collateral. Borrower hereby ratifies all that Lender shall lawfully do or cause to be done by
virtue of this appointment.
8.3 Authorization for Lender to Take Certain Action
. The power of attorney created in Section
8.2 is a power coupled with an interest and shall be irrevocable. The powers conferred on Lender
hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon
lender to exercise such powers. Lender shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and in no event shall Lender or any of its
directors, officers, employees, agents or representatives be responsible to Borrower for any act or
failure to act, except for gross negligence or willful misconduct. After the occurrence and during
the continuance of an Event of Default, Lender may exercise this power of attorney without notice
to or assent of Borrower, in the name of Borrower, or in Lenders own name, from time to time in
Lenders sole discretion and at Borrowers expense. To further carry out the terms of this
Agreement, after the occurrence and during the continuance of an Event of Default, Lender may:
(a) Execute any statements or documents or take possession of, and endorse and collect and
receive delivery or payment of, any checks, drafts, notes, acceptances or other instruments and
documents constituting Collateral, or constituting the payment of amounts due and to become due or
any performance to be rendered with respect to the Collateral.
(b) Sign and endorse any invoices, freight or express bills, bills of lading, storage or
warehouse receipts; drafts, certificates and statements under any commercial or standby letter of
credit relating to Collateral; or any other documents relating to the Collateral, including without
limitation the Records.
(c) Use or operate Collateral or any other property of Borrower for the purpose of preserving
or liquidating Collateral.
(d) File any claim or take any other action or proceeding in any court of law or equity or as
otherwise deemed appropriate by Lender for the purpose of collecting any and all monies due or
11
securing any performance to be rendered with respect to the Collateral.
(e) Commence, prosecute or defend any suits, actions or proceedings or as otherwise deemed
appropriate by Lender for the purpose of protecting or collecting the Collateral.
(f) Prepare, adjust, execute, deliver and receive payment under insurance claims, and collect
and receive payment of and endorse any instrument in payment of loss or returned premiums or any
other insurance refund or return, and apply such amounts at Lenders sole discretion, toward
repayment of the Obligations or replacement of the Collateral.
8.4 Application of Proceeds
. Any Proceeds and other monies or property received by Lender
pursuant to the terms of this Agreement or any Loan Document may be applied by Lender first to the
payment of expenses of collection, including without limitation reasonable attorneys fees, and
then to the payment of the Obligations in such order of application as Lender may elect.
8.5 Deficiency
. If the Proceeds of any disposition of the Collateral are insufficient to cover
all costs and expenses of such sale and the payment in full of all the Obligations, plus all other
sums required to be expended or distributed by Lender, then Borrower shall be liable for any such
deficiency.
8.6 Lender Transfer
. Upon the transfer of all or any part of the Obligations, Lender may
transfer all or part of the Collateral and shall be fully discharged thereafter from all liability
and responsibility with respect to such Collateral so transferred, and the transferee shall be
vested with all the rights and powers of Lender hereunder with respect to such Collateral so
transferred, but with respect to any Collateral not so transferred, Lender shall retain all rights
and powers hereby given.
8.7 Lenders Duties
.
(a) Lender shall use reasonable care in the custody and preservation of any Collateral in its
possession. Without limitation on other conduct which may be considered the exercise of reasonable
care, Lender shall be deemed to have exercised reasonable care in the custody and preservation of
such Collateral if such Collateral is accorded treatment substantially equal to that which Lender
accords its own property, it being understood that Lender shall not have any responsibility for
ascertaining or taking action with respect to declining value or other matters relative to any
Collateral, regardless of whether Lender has or is deemed to have knowledge of such matters; or
taking any necessary steps to preserve any rights against any Person with respect to any
Collateral. Under no circumstances shall Lender be responsible for any injury or loss to the
Collateral, or any part thereof, arising from any cause beyond the reasonable control of Lender.
(b) Lender may at any time deliver the Collateral or any part thereof to Borrower and the
receipt of Borrower shall be a complete and full acquittance for the Collateral so delivered, and
Lender shall thereafter be discharged from any liability or responsibility therefor.
(c) Neither Lender, nor any of its directors, officers, employees, agents, attorneys or any
other person affiliated with or representing Lender shall be liable for any claims, demands, losses
or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other
party through the ordinary negligence of Lender, or any of its directors, officers, employees,
agents, attorneys or any other person affiliated with or representing Lender.
8.8 Termination of Security Interests
. Upon the payment in full of the Obligations and
satisfaction of all Borrowers obligations under this Agreement and the other Loan Documents, and
if Lender has no further obligations under its Commitment, the security interest granted hereby
shall terminate and all rights to the Collateral shall revert to Borrower. Upon any such
termination, the Lender shall, at Borrowers expense, execute and deliver to Borrower such
documents as Borrower shall reasonably request to evidence such termination.
ARTICLE 9 GENERAL PROVISIONS
9.1 Notices
. Any notice given by any party under any Loan Document shall be in writing and
personally delivered, sent by overnight courier, or United States mail, postage prepaid, or sent by
facsimile, or other authenticated message, charges prepaid, to the other partys or parties
addresses shown on the Supplement. Each party may change the address or facsimile number to which
notices, requests and other communications are to be sent by giving written notice of such change
to each other party. Notice given by hand delivery shall be deemed received on the date delivered;
if sent by overnight courier, on the next Business Day after delivery to the courier service; if by
first class mail, on the third Business Day after deposit in the U.S. Mail; and if by facsimile, on
the date of transmission.
12
9.2 Binding Effect
. The Loan Documents shall be binding upon and inure to the benefit of
Borrower and Lender and their respective successors and assigns; provided, however, that neither
Borrower nor Lender may assign or transfer Borrowers rights or obligations under any Loan Document
without the other partys prior written consent, provided that Lender may grant a security interest
in its rights under the Loan Documents. Lender shall at all times maintain the confidentiality of
all documents and information which Lender now or hereafter may have relating to the Loans,
Borrower, or its business. It is the intention of the parties that. as a venture capital operating
company, Venture Lending & Leasing III, LLC (LLC), the parent and sole owner of Venture Lending
& Leasing III, Inc., shall have the benefit of, and the power to independently exercise, those
management rights provided in Section 5.3. To that end, the references to Lender in Sections
4.2(f), 5.1, 5.2, 5.3 and 5.9(a) hereof shall include LLC, and LLC shall have the right to exercise
the advisory, inspection, information and other rights given to lender under those Sections
independently of Lender. No amendment or modification of this Agreement shall alter or diminish
LLCs rights under the preceding sentence without the consent of LLC.
9.3 No Waiver
. Any waiver, consent or approval by Lender of any Event of Default or breach of
any provision, condition, or covenant of any Loan Document must be in writing and shall be
effective only to the extent set forth in writing. No waiver of any breach or default shall be
deemed a waiver of any later breach or default of the same or any other provision of any Loan
Document. No failure or delay on the part of Lender in exercising any power, right, or privilege
under any Loan Document shall operate as a waiver thereof, and no single or partial exercise of any
such power, right, or privilege shall preclude any further exercise thereof or the exercise of any
other power, right or privilege. Lender has the right at its sole option to continue to accept
interest and/or principal payments due under the Loan Documents after default, and such acceptance
shall not constitute a waiver of said default or an extension of the Maturity Date unless Lender
agrees otherwise in writing.
9.4 Rights Cumulative
. All rights and remedies existing under the Loan Documents are
cumulative to, and not exclusive of, any other rights or remedies available under contract or
applicable law.
9.5 Unenforceable Provisions
. Any provision of any Loan Document executed by Borrower which is
prohibited or unenforceable in any jurisdiction, shall be so only as to such jurisdiction and only
to the extent of such prohibition or unenforceability, but all the remaining provisions of any such
Loan Document shall remain valid and enforceable.
9.6 Accounting Terms
. Except as otherwise provided in this Agreement, accounting terms and
financial covenants and information shall be determined and prepared in accordance with GAAP.
9.7 Indemnification; Exculpation
. Borrower shall pay and protect, defend and indemnify Lender
and Lenders employees, officers, directors, shareholders, affiliates, correspondents, agents and
representatives (other than Lender, collectively Agents) against, and hold Lender and each such
Agent harmless from, all claims, actions, proceedings, liabilities, damages, losses, expenses
(including, without limitation, attorneys fees and costs) and other amounts incurred by Lender and
each such Agent, arising from (i) the matters contemplated by this Agreement or any other Loan
Documents or (ii) any contention that Borrower has failed to comply with any law, rule, regulation,
order or directive applicable to Borrowers business; provided, however, that this indemnification
shall not apply to any of the foregoing incurred solely as the result of Lenders or any Agents
gross negligence or willful misconduct. This indemnification shall survive the payment and
satisfaction of all of Borrowers Obligations to Lender.
9.8 Reimbursement
. Borrower shall reimburse Lender for all costs and expenses, including
without limitation reasonable attorneys fees and disbursements expended or incurred by Lender in
any arbitration, mediation, judicial reference, legal action or otherwise in connection with (a)
the preparation and negotiation of the Loan Documents (which Lender acknowledges shall be included
within the Documentation Fee), (b) the amendment and enforcement of the Loan Documents, including
without limitation during any workout, attempted workout, and/or in connection with the rendering
of legal advice as to Lenders rights, remedies and obligations under the Loan Documents, (c)
collecting any sum which becomes due Lender under any Loan Document, (d) any proceeding for
declaratory relief, any counterclaim to any proceeding, or any appeal, or (e) the protection,
preservation or enforcement of any rights of Lender. For the purposes of this section, attomeys
fees shall include, without limitation, fees incurred in connection with the following: (1)
contempt proceedings; (2) discovery; (3) any motion, proceeding or other activity of any kind in
connection with an Insolvency Proceeding; (4) garnishment, levy, and debtor and third party
examinations; and (5) postjudgment motions and proceedings of any kind, including without
limitation any activity taken to collect or enforce any judgment.
13
All of the foregoing costs and
expenses shall be payable upon demand by Lender, and if not paid within forty-five (45) days of
presentation of invoices shall bear interest at the highest applicable Default Rate.
9.9 Execution in Counterparts
. This Agreement may be executed in any number of counterparts
which, when taken together, shall constitute but one agreement.
9.10 Entire Agreement
. The Loan Documents are intended by the parties as the final expression
of their agreement and therefore contain the entire agreement between the parties and supersede all
prior understandings or agreements concerning the subject matter hereof. This Agreement may be
amended only in a writing signed by Borrower and Lender.
9.11 Governing Law and Jurisdiction
.
(a) THIS AGREEMENT AND THE LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT
MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE NORTHERN
DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF BORROWER AND
LENDER CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF
THOSE COURTS. EACH OF BORROWER AND LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION
TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS
AGREEMENT OR ANY DOCUMENT RELATED HERETO. BORROWER AND LENDER EACH WAIVE PERSONAL SERVICE OF ANY
SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA
LAW.
9.12 Waiver of Jury Trial
. BORROWER AND LENDER EACH WAIVES ITS RESPECTIVE RIGHTS TO A TRIAL BY
JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING
OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY
PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE.
BORROWER AND LENDER EACH AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT
TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION,
COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEMS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF.
THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
ARTICLE 10 DEFINITIONS
The definitions appearing in this Agreement or any Supplement shall be applicable to both the
singular and plural forms of the defined terms:
Account
means any account, as such term is defined in the UCC, now owned or hereafter acquired
by Borrower or in which Borrower now holds or hereafter acquires any interest and, in any event,
shall include, without limitation, all accounts receivable, book debts and other forms of
obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments)
now owned or hereafter received or acquired by or belonging or owing to Borrower (including,
without limitation, under any trade name, style or division thereof) whether arising out of goods
sold or services rendered by Borrower or from any other transaction, whether or not the same
involves the sale of goods or services by Borrower (including, without limitation, any such
obligation that may be characterized as an account or contract right under the UCC) and all of
Borrowers rights in, to and under all purchase orders or receipts now owned or hereafter acquired
by it for goods or services, and all of Borrowers rights to any goods represented by any of the
foregoing (including, without limitation, unpaid sellers rights of rescission, replevin,
reclamation and stoppage in transit and rights to returned, reclaimed or
14
repossessed goods), and
all monies due or to become due to Borrower under all purchase orders and contracts for the sale of
goods or the performance of services or both by Borrower or in connection with any other
transaction (whether or not yet earned by performance on the part of Borrower), now in existence or
hereafter occurring, including, without limitation, the right to receive the proceeds of said
purchase orders and contracts, and all collateral security and guarantees of any kind given by any
Person with respect to any of the foregoing.
Affiliate
means any Person which directly or indirectly controls, is controlled by, or is under
common control with Borrower. Control, controlled by and under common control with mean
direct or indirect possession of the power to direct or cause the direction of management or
policies (whether through ownership of voting securities, by contract or otherwise); provided, that
control shall be conclusively presumed when any Person or affiliated group directly or indirectly
owns five percent (5%) or more of the securities having ordinary voting power for the election of
directors of a corporation.
Agreement
means this Loan and Security Agreement and each Supplement thereto, as each may be
amended or supplemented from time to time.
Bankruptcy Code
means the Federal Bankruptcy Reform Act of 1978 (1I U.S.C. §101,
et
seq
.), as amended.
Basic Interest
means the fixed rate of interest payable on the outstanding balance of each Loan
at the applicable Designated Rate.
Borrowing Date
means the Business Day on which the proceeds of a Loan are disbursed by Lender.
Borrowing Request
means a written request from Borrower in substantially the form of
Exhibit
B
to the Supplement, requesting the funding of one or more Loans on a particular Borrowing
Date.
Business Day
means any day other than a Saturday, Sunday or other day on which commercial banks
in New York City or San Francisco are authorized or required by law to close.
Chattel Paper
means any chattel paper, as such term is defined in the UCC, now owned or
hereafter acquired by Borrower or in which Borrower now holds or hereafter acquires any interest.
Closing Date
means the date of this Agreement.
Collateral
means all of Borrowers right, title and interest in and to Equipment, whether now or
hereafter owned or acquired by Borrower and wherever located; and whether held by Borrower or in
the possession of any third party, and all Proceeds of each of the foregoing and all accessions to
substitutions and replacements for, and rents, profits and products of each of the foregoing.
Commitment
means the obligation of Lender to make Loans to Borrower up to the aggregate principal
amount set forth in the Supplement.
Copyrights
means all of the following now owned or hereafter acquired by Borrower or in which
Borrower now holds or hereafter acquires any interest: (i) all copyrights, whether registered or
unregistered, held pursuant to the laws of the United States, any State thereof or of any other
country; (ii) all registrations, applications and recordings in the United States Copyright Office
or in any similar office or agency of the United States, any State thereof or any other country;
(iii) all continuations, renewals or extensions thereof; and (iv) any registrations to be issued
under any pending applications.
Default
means an event which with the giving of notice, passage of time, or both would constitute
an Event of Default.
Default Rate
is defined in Section 2.7.
Designated Rate
means the rate of interest per annum described in the Supplement as being
applicable to an outstanding Loan from time to time.
Environmental Laws
means all federal, state or local laws, statutes, common law duties, rules,
regulations, ordinances and codes, together with all administrative orders, directed duties,
requests, licenses, authorizations and permits of, and agreements with, any governmental
authorities, in each case relating to environmental, health, or safety matters.
Equipment
means each item of equipment and goods, as such terms are defined in the UCC,
described on
Schedule I
, attached to the Supplement and incorporated herein by this
reference (as such
Schedule I
may be amended or supplemented from time to time), now owned
or hereafter acquired by Borrower or in which Borrower now holds or hereafter acquires any
interest, and any and all additions, substitutions and replacements of any of the foregoing,
wherever located, together with all attachments,
15
components, parts, equipment and accessories
installed thereon or affixed thereto; and all proceeds of the foregoing arising from the sale,
lease, use of other disposition of all or any portion of such property, including all rights to
payments with respect to insurance or condemnation of the foregoing, and any cause of action
relating to any of the foregoing.
Event of Default
means any event described in Section 7. I.
GAAP
means generally accepted accounting principles and practices consistent with those
principles and practices promulgated or adopted by the Financial Accounting Standards Board and the
Board of the American Institute of Certified Public Accountants, their respective predecessors and
successors. Each accounting term used but not otherwise expressly defined herein shall have the
meaning given it by GAAP.
Indebtedness
of any Person means at any date, without duplication and without regard to whether
matured or unmatured, absolute or contingent: (i) all obligations of such Person for borrowed
money; (ii) all obligations of such Person evidenced by bonds, debentures, notes, or other similar
instruments; (iii) all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising in the ordinary course of business; (iv) all
obligations of such Person as lessee under capital leases; (v) all obligations of such Person to
reimburse or prepay any bank or other Person in respect of amounts paid under a letter of credit,
bankers acceptance, or similar instrument, whether drawn or undrawn; (vi) all obligations of such
Person to purchase securities which arise out of or in connection with the sale of the same or
substantially similar securities; (vii) all obligations of such Person to purchase, redeem,
exchange, convert or otherwise acquire for value any capital stock of such Person or any warrants,
rights or options to acquire such capital stock, now or hereafter outstanding, except to the extent
that such obligations remain performable solely at the option of such Person; (viii) all
obligations to repurchase assets previously sold (including any obligation to repurchase any
accounts or chattel paper under any factoring, receivables purchase, or similar arrangement): (ix)
obligations of such Person under interest rate swap, cap, collar or similar hedging arrangements,
excluding foreign exchange contracts used for hedging; and (x) all obligations of others of any
type described in clause (i) through clause (ix) above guaranteed by such Person.
Insolvency Proceeding
means (a) any case, action or proceeding before any court or other
governmental authority relating to bankruptcy, reorganization, insolvency, liquidation,
receivership, dissolution, winding up or relief of debtors, or (b) any general assignment for the
benefit of creditors, composition, marshalling of assets for creditors, or other, similar
arrangement in respect of its creditors generally or any substantial portion of its creditors,
undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code.
Instruments
means any instrument, as such term is defined in the UCC, now owned or hereafter
acquired by Borrower or in which Borrower now holds or hereafter acquires any interest.
Lien
means any mortgage, deed of trust, pledge, hypothecation, assignment for security, security
interest, encumbrance, levy, lien or charge of any kind, whether voluntarily incurred or arising by
operation of law or otherwise, against any property, any conditional sale or other title retention
agreement, any lease in the nature of a security interest, and the filing of any financing
statement (other than a precautionary financing statement with respect to a lease that is not in
the nature of a security interest) under the UCC or comparable law of any jurisdiction.
Loan
means an extension of credit by Lender under this Agreement.
Loan Documents
means, individually and collectively, this Loan and Security Agreement, each
Supplement, each Note, and any other security or pledge agreement(s), any Warrants issued by
Borrower to Lender in connection with this Agreement, and all other contracts, instruments, addenda
and documents executed in connection with this Agreement or the extensions of credit which are the
subject of this Agreement.
Material Adverse Effect
or
Material Adverse Change
means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties, or condition (financial or
otherwise) of Borrower, (b) a material impairment of the ability of Borrower to perform under any
Loan Document; or (c) a material adverse effect upon the legality, validity, binding effect or
enforceability against Borrower of any Loan Document.
Maturity Date
means, with regard to a Loan, the earlier of (i) its maturity by reason of
acceleration, or (ii) its stated maturity date; and is the date on which payment of all outstanding
principal, accrued interest,
16
and the Terminal Payment with respect to such Loan is due.
Note
means a promissory note substantially in the form attached to the Supplement as Exhibit A,
executed by Borrower evidencing each Loan.
Obligations
means all debts, obligations and liabilities of Borrower to Lender currently existing
or now or hereafter made, incurred or created under, pursuant to or in connection with this
Agreement or any other Loan Document, whether voluntary or involuntary and however arising or
evidenced, whether direct or acquired by Lender by assignment or succession, whether due or not
due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether
Borrower may be liable individually or jointly, or whether recovery upon such debt may be or become
barred by any statute of limitations or otherwise unenforceable; and all renewals, extensions and
modifications thereof; and all attorneys fees and costs incurred by Lender in connection with the
collection and enforcement thereof as provided for in any Loan Document.
Patents
means all of the following property now owned or hereafter acquired by Borrower or in
which Borrower now holds or hereafter acquires any interest: (a) all letters patent of, or rights
corresponding thereto in, the United States or any other county, all registrations and recordings
thereof, and all applications for letters patent of, or rights corresponding thereto in, the United
States or any other country, including, without limitation, registrations, recordings and
applications in the United States Patent and Trademark Office or in any similar office or agency of
the United States, any State thereof or any other country; (b) all reissues, continuations,
continuations-in-part or extensions thereof; (c) all petty patents, divisionals, and patents of
addition; and (d) all patents to be issued under any such applications.
Permitted Lien
means
(a) Involuntary Liens which, in the aggregate, would not have a Material Adverse Effect and
which in any event would not exceed, in the aggregate, the Threshold Amount;
(b) Liens for current taxes or other governmental or regulatory assessments which are not
delinquent, or which are contested in good faith by the appropriate procedures and for which
appropriate reserves are maintained;
(c) security interests on any property held or acquired by Borrower in the ordinary course of
business securing Indebtedness incurred or assumed for the purpose of financing all or any part of
the cost of acquiring such property;
provided
, that such Lien attaches solely to the
property acquired with such Indebtedness and that the principal amount of such Indebtedness does
not exceed one hundred percent (100%) of the cost of such property; and further
provided
,
that such property is not equipment or other Collateral with respect to which a Loan has been made
hereunder.
(d) Liens in favor of Lender;
(e) bankers liens, rights of setoff and similar Liens incurred on deposits made in the
ordinary course of business;
(f) material mens, mechanics, repairmens, employees or other like Liens arising in the
ordinary course of business and which are not delinquent for more than 45 days or are being
contested in good faith by appropriate proceedings;
(g) any judgment, attachment or similar Lien, unless the judgment it secures has not been
discharged or execution thereof effectively stayed and bonded against pending appeal within 30 days
of the entry thereof;
(h) nonexclusive licenses or sublicenses of patents, copyrights or trademarks in the order
course of Borrowers business; and
(i) Liens which have been approved by Lender in writing prior to the Closing Date.
Proceeds
means proceeds, as such term is defined in the UCC and, in any event, shall include,
without limitation, (a) any and all Accounts, Chattel Paper, Instruments, cash or other forms of
money or currency or other proceeds payable to Borrower from time to time in respect of the
Collateral, (b) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to
Borrower from time to time with respect to any of the Collateral, (c) any and all payments (in any
form whatsoever) made or due and payable to Borrower from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral
by any governmental authority (or any Person acting under color of governmental authority), (d) any
claim of Borrower against third parties (i) for past, present or future infringement of any
copyright, patent or patent license or (ii) for past, present or future infringement or
17
dilution of
any trademark or trademark license or for injury to the goodwill associated with any trademark,
trademark registration or trademark licensed under any trademark license and (e) any and all other
amounts from time to time paid or payable under or in connection with any of the Collateral
Person
means any individual, sole proprietorship, partnership, joint venture, trust,
unincorporated organization, association, corporation, limited liability company, institution,
public benefit corporation, other entity or government (whether federal, state, county, city,
municipal, local, foreign, or otherwise, including any instrumentality, division, agency, body or
department thereof).
Qualified Public Offering
means the closing of a firmly underwritten public offering of
Borrowers common stock with aggregate proceeds of not less than $20,000,000 (prior to underwriting
expenses and commissions).
Records
means all Borrowers computer programs, software, hardware, source codes and data
processing information, all written documents, books, invoices, ledger sheets, financial
information and statements, and all other writings concerning Equipment and other Collateral.
Related Person
means any Affiliate of Borrower, or any officer, employee, director or equity
security holder of Borrower or any Affiliate.
Supplement
means that certain supplement to the Loan and Security Agreement, as the same may be
amended or restated from time to time, and any other supplements entered into between Borrower and
Lender, as the same may be amended or restated from time to time.
Terminal Payment
means, with respect to each Loan, an amount payable on the Maturity Date of such
Loan in an amount equal to that percentage of the original principal amount of such Loan specified
in the Supplement.
Termination Date
has the meaning specified in the Supplement.
Threshold Amount
has the meaning specified in the Supplement.
Trademarks
means all of the following property now owned or hereafter acquired by Borrower or in
which Borrower now holds or hereafter acquires any interest: (a) all trademarks, tradenames,
corporate names, business names, trade styles, service marks, logos, other source or business
identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and
general intangibles of like nature, now existing or hereafter adopted or acquired, all
registrations and recordings thereof, and any applications in connection therewith, including,
without limitation, registrations, recordings and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any State thereof or any
other country or any political subdivision thereof and (b) reissues, extensions or renewals
thereof.
UCC
means the Uniform Commercial Code as the same may, from time to time, be in effect in the
State of California;
provided
, that in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection or priority of, or remedies with respect to, Lenders
Lien on any Collateral is governed by the uniform Commercial Code as enacted and in effect in a
jurisdiction other than the State of California, the term UCC shall mean the Uniform Commercial
Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions
thereof relating to such attachment, perfection, priority or remedies and for purposes of
definitions related to such provisions. Unless otherwise defined herein, terms that are defined in
the UCC and used herein shall have the meanings given to them in the UCC.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above
written.
BORROWER:
OCULUS INNOVATIVE SCIENCES, INC.
By:
/s/
Name: Hojabr Alimi
Title:
BORROWER:
VENTURE LENDING & LEASING III, INC.
By:
/s/
Name: Salvador O. Gutierrez
Title: President
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Disclosure Schedule to Loan and Security Agreement
This Disclosure Schedule is provided to Venture Lending & Leasing III, Inc. (the
Lender) by Oculus Innovative Sciences, Inc. (the Borrower) in connection with that certain Loan
and Security Agreement dated as of March 25, 2004 and entered into by and between Lender and
Borrower (the Agreement). This Disclosure Schedule is incorporated into, and shall be deemed a
part of the Agreement. The Borrower hereby delivers this Disclosure Schedule to the Lender setting
forth certain exceptions to the Borrowers representations and warranties given in the Agreement.
The item numbers in this Disclosure Schedule correspond to the Section numbers in the Agreement;
however, any information disclosed herein under any item number shall be deemed to be disclosed and
incorporated in other Section numbers of the Agreement, where such disclosure would be appropriate.
Capitalized terms not otherwise defined herein shall have the meanings assigned to them in the
Agreement.
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3.4
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(a) In the event that the Lender has not, as of the Closing Date,
received the release from Remington Partners, Inc. contemplated in
Section 3 of the Supplement (the Remington Release), the
transactions contemplated in the Agreement and the documents related
thereto may be in conflict with the terms of that certain Security
Agreement dated as of April 25, 2003 by and between the Borrower and
Remington Partners, Inc. (the Remington Agreement).
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(b) In the event that the Lender has not, as of the Closing Date,
received the consent from Remington Partners, Inc. contemplated in
Section 3 of the Supplement regarding payment by Borrower to Lender
of the principal amount of any Loan, any such payment, prior to the
full payment of the loan outstanding under the Remington Agreement,
would conflict with Borrowers covenant under Section 9(h) of the
Remington Agreement.
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3.11
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In the event that the Lender has not, as of the Closing Date,
received the Remington Release, the Collateral may be subject to a
security interest in favor of Remington Partners, Inc.
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[Signature Page Follows)
Executed as of the date first written above.
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BORROWER
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LENDER
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Oculus Innovative Sciences, Inc.
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Venture Lending & Leasing III, Inc.
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By
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/s/
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By:
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/s/
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Name :
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Robert Miller
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Name:
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Title:
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Chief Financial Officer
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Title:
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[SIGNATURE PAGE TO DISCLOSURE SCHEDULE TO LOAN AND SECURITY
AGREEMENT]
SUPPLEMENT
to the
Loan and Security Agreement
Dated as of March 25, 2004
between
Oculus Innovative Sciences, Inc. (Borrower)
and
Venture Lending & Leasing III, Inc. (Lender)
This is a Supplement identified in the document entitled Loan and Security Agreement dated as
of March 25, 2004, between Borrower and Lender. All capitalized terms used in this Supplement and
not otherwise defined in this Supplement have the meanings ascribed to them in Section 10 of the
Loan and Security Agreement, which is incorporated in its entirety into this Supplement. In the
event of any inconsistency between the provisions of that document and this Supplement, this
Supplement is controlling. Execution of this Supplement by the Lender and Borrower shall constitute
execution of the Loan and Security Agreement.
In addition to the provisions of the Loan and Security Agreement, the parties agree as
follows:
Part 1. Additional Definitions
:
Commitment
: Subject to the terms and conditions set forth in the Loan and Security Agreement
and this Supplement, Lender commits to make Equipment Loans to Borrower up to the aggregate
original principal amount of One Million Dollars ($1,000,000.00) to finance the acquisition of
Eligible Equipment. As a sub-facility of the Commitment, Lender commits to make Soft Cost Loans to
Borrower in an aggregate original principal amount not to exceed Seven Hundred Fifty Thousand
Dollars ($750,000.00) of the Commitment (the Soft Cost Loan Sublimit),
provided
,
however
, that in no event shall the aggregate original principal amount of all Equipment
Loans and Soft Cost Loans funded under the Commitment exceed One Million Dollars ($1,000,000).
Equipment Loans and Soft Cost Loans are sometimes referred to herein individually as a Loan or
collectively as Loans.
Designated Rate
: The Designated Rate shall be (i) for each Loan, a fixed rate of interest
per annum equal to the Prime Rate as published on the Business Day on which Lender prepares the
Note for such Loan following Borrowers submission of the Borrowing Request for such Loan, plus
five and 797/1000 percent (5.797%);
provided
,
however
, that in no event shall the
Designated Rate for an Loan be less than nine and 797/1000 percent (9.797%).
Eligible Equipment
means manufacturing equipment, computer equipment, lab and shop
equipment, test equipment, office equipment and other standard hardware located in the United
Stated, approved by Lender in writing and that is not the subject of a license agreement(s) between
Borrower and any Person, and excluding any equipment constituting Soft Costs.
Equipment Loan
means any Loan requested by Borrower and funded by Lender to finance
Borrowers acquisition or carrying of specific items of Eligible Equipment.
Permitted Lien
includes, in addition to those Permitted Liens defined in the Loan and
Security Agreement, the security interest in favor of Remington Partners, Inc.
Prime Rate
means the prime rate of interest, as published from time to time by The Wall
Street Journal in the Money Rates section of its Western Edition newspaper.
Soft Costs
means, with respect to amounts to be financed hereunder with proceeds of a Soft
Cost Loan, Borrowers costs of acquiring or licensing non-standard equipment (not otherwise
approved by Lender as Eligible Equipment), perpetual software license fees, tenant improvements at
Borrowers primary business premises, mask sets, sales tax, freight charges and other items
approved by Lender in writing. In addition, Soft Costs includes
equipment located outside of the
United States that would otherwise qualify as Eligible Equipment and including the installation of
flooring at the Borrowers facility in the Netherlands.
Soft Cost Loan
means any Loan requested by Borrower and funded by Lender to finance Soft
Costs.
Spin-off Subsidiary
means L3 Pharmaceuticals, Inc. a Delaware corporation. which was formed
to conduct Borrowers lines of business in the development of oncology technology and the provision
of consulting services.
Terminal Payment
: Each Loan shall have a Terminal Payment equal to five percent (5%) of the
original principal amount of such Loan.
Termination Date
: The Termination Date is the earliest of (a) the date Lender may terminate
making Loans or extending other credit pursuant to the rights of Lender under Article 7 of the Loan
and Security Agreement, or (b) December 31, 2004;
provided
,
however
, if there is a
remaining balance of unused Commitment of at least Fifty Thousand Dollars ($50,000.00) on December
31, 2004, such date shall be extended to March 31, 2005, provided that the aggregate sum of all
Borrowing Requests submitted after December 31, 2004 shall not exceed the lesser of (i) the
remaining balance of the Commitment, or (ii) Three Hundred Thousand Dollars ($300,000.00).
Threshold Amount
: Seventy-Five Thousand Dollars ($75,000.00).
Part 2. Additional Covenants and Conditions
:
I.
Use of Proceeds; Limitations on Loans
.
(a) Equipment Loan Facility and Soft Cost Loan Sub-facility. Subject to the terms and
conditions of the Agreement, Lender agrees to make:
(i) Equipment Loans to Borrower from time to time from the Closing Date and to and including
the Termination Date in an aggregate original principal amount up to but not exceeding the lesser
of (A) the then unfunded portion of the Commitment, and (B) an amount equal to 100% of the amount
paid or payable by Borrower to a manufacturer, vendor or dealer who is not an Affiliate of Borrower
for each item of Eligible Equipment being financed with the proceeds of such Loan as shown on an
invoice therefor (excluding any commissions and any portion of the amount invoiced which relates to
servicing of the Eligible Equipment, delivery, freight and installation charges or sales taxes
payable upon acquisition) (Original Cost). Notwithstanding the foregoing, no item of Eligible
Equipment shall be eligible to be financed with the proceeds of an Equipment Loan if such item was
acquired or first placed in service by Borrower earlier than 90 days prior to the Borrowing Date of
such Equipment Loan; provided, however, that so long as the Borrowing Date of the initial Equipment
Loan occurs prior to April 15, 2004, Borrower may finance Eligible Equipment acquired or first
placed in service after January 15, 2003, at the Original Cost of such Eligible Equipment.
(ii) Soft Cost Loans to Borrower from time to time from the Closing Date and to and including
the Termination Date in an aggregate original principal amount up to but not exceeding the lowest
of (A) the then unfunded portion of the Commitment; (B) the then unfunded portion of the Soft Cost
Loan Sublimit; and (C) an amount equal to 100% of the Soft Costs proposed to be financed under the
related Borrowing Request. Notwithstanding the foregoing, no item of Soft Costs shall be eligible
to be financed with the proceeds of a Soft Cost Loan if such Soft Cost was first expended,
incurred, or acquired (in the case of equipment) by Borrower earlier than 90 days prior to the
Borrowing Date of such Soft Cost Loan.
(b) Locations of Equipment. All Eligible Equipment financed hereunder shall be located at all
times at Borrowers principal place of business in Petaluma, California, or with respect to Soft
Costs, such other place of business located within or outside the United States disclosed on the
Supplement or, if not so disclosed, approved by Lender in writing prior to the Funding Date of any
Soft Cost Loan. Borrower shall provide a monthly statement of all Equipment financed by Lender
which shall include the location(s) of all such Equipment.
(c) Minimum Funding Amount. Except to the extent the remaining Commitment is a lesser amount,
each Loan or Loans requested by Borrower to be made on a single Business Day shall be for a minimum
aggregate principal amount of Fifty Thousand Dollars ($50,000.00). Borrower shall not submit a
Borrowing Request more frequently than once each month.
2.
Prepayment
. Borrower may voluntarily prepay Loans as follows:
(a) On or before January 31, 2005, Borrower may voluntarily prepay all, but not less than all,
Loans in whole but not in part at any time by tendering to Lender payment in respect of each such
Loan as provided in this paragraph (a). The prepayment of the outstanding principal balance of each
such Loan shall be accompanied by payment of: (i) all accrued and unpaid Basic Interest on such
Loan as of the date of prepayment; (ii) the undiscounted Terminal Payment on such Loan; and (iii)
an amount equal to the undiscounted, total amount of all installment payments of principal and
Basic Interest that would have accrued and been payable from the date of prepayment through the
stated Maturity Date of the Loan had it remained outstanding and been paid in accordance with the
terms of the related Note.
(b) On or after February I, 2005, Borrower may voluntarily prepay all, but not less than all,
Loans in whole but not in part at any time by tendering to Lender payment in respect of each such
Loan as provided in this paragraph (b). The prepayment of the outstanding principal balance of each
such Loan shall be accompanied by payment of : (i) all accrued and unpaid Basic Interest on such
Loan as of the date of prepayment; (ii) the Terminal Payment on such Loan discounted at a rate per
annum equal to 0.89%, from the scheduled Maturity Date of such Loan to the date of such prepayment;
and (iii) an amount equal to the, total amount of all installment payments of principal and Basic
Interest that would have accrued and been payable from the date of prepayment through the stated
Maturity Date of the Loan had it remained outstanding and been paid in accordance with the terms of
the related Note, discounted at a rate per annum equal to 0.89%, from the scheduled Maturity Date
of such Loan to the date of such prepayment.
3. P
artial Releases of Blanket Liens, Remington Partners Waiver of Payment Restrictions
. As an
additional condition precedent under Section 4.2 of the Loan and Security Agreement, on or prior to
each Borrowing Date, Lender shall be in receipt of an executed release from Remington Partners,
Inc. and any lenders who may acquire a security interest in assets of the Borrower subsequent to
the execution of the Loan Agreement, if any, of any and all Liens on the Collateral that is the
subject of the Borrowing Request. As an additional condition precedent under Section 4.1 of the
Loan and Security Agreement, on or prior to the initial Borrowing Date, Borrower shall provide to
Lender the written approval by Remington Partners, Inc, to all principal, interest and/or other
payments to be made to Letider by Borrower under any Note executed by Borrower pursuant to the Loan
and Security Agreement
4.
Issuance of Warrants to Lender
. As additional consideration for the making of the
Commitment, Lender has earned and is entitled to receive a warrant instrument issued by Borrower
(the Warrant) initially exercisable for 66,667 of fully paid and nonassessable shares of the
Borrowers Series A Preferred Stock. The Warrant shall be exercisable at an initial exercise price
of $1.50 per share. The above stated exercise price per share and number of shares issuable upon
exercise of the Warrant shall also be subject to adjustment as provided in the Warrant.
The Warrant shall be in substantially the form attached hereto as
Exhibit D
and
shall be exercisable at any time and from time to time through December 31, 2014, and shall include
piggyback and S-3 registration rights and anti-dilution protection provisions reasonably
satisfactory to Lender and its counsel and equivalent to those rights and protections granted to
the holders of Borrowers Series A Preferred Stock. Borrower acknowledges that Lender has assigned
its rights to receive the Warrant to its parent, Venture Lending & Leasing III, LLC: in connection
therewith, Borrower shall issue the Warrant directly to Venture Lending & Leasing III, LLC. Upon
request of Borrower, Lender shall furnish to Borrower a copy of the agreement in which Lender
assigned the right to receive the Warrant to Venture Lending & Leasing III, LLC.
Notwithstanding the foregoing or anything contrary elsewhere in the Loan Agreement, no later
than April 30, 2004, all action on the part of Borrower necessary for the valid execution, delivery
and performance by Borrower of the Warrant shall have been duly and effectively taken and evidence
satisfactory to Lender. In addition, borrower
shall provide an opinion of legal counsel for the
Borrower regarding the due authorization by the Borrower of the issuance of the Warrant to Lender.
Borrower agrees that the failure to deliver the Warrant on or before April 30, 2004 shall
constitute an Event of Default and entitle Lender to, at its election, make all sums of Basic
Interest and principal, with respect to any Equipment or Soft Cost Loans outstanding at that time,
immediately due and payable without notice of default, presentment or demand for payment, protest
or notice of nonpayment or dishonor or any other notices or demands, to terminate making Loans or
extending other credit pursuant to the rights of Lender under Article 7 of the Loan and Security
Agreement, and to take such other action allowable under applicable law, including but not limited
to requesting a court to grant specific performance of the issuance and delivery of the Warrant.
5.
Equity Purchase
. As additional consideration for the making of the Commitment, Borrower
grants Lender the right to purchase up to an aggregate amount of Two Hundred Thousand ($200,000) of
Borrowers stock issued in Borrowers next
bona fide
round of equity financing resulting in net
aggregate proceeds to the Borrower of at least $1,000,000.00 at the same price per share paid by
the lead investor of that round of financing. Borrower shall give Lender reasonable advance notice
of such securities offering, and if Lender desires to participate in such offering, it shall give
Borrower written notice of its election to purchase within fifteen (15) calendar days after receipt
of Borrowers notice. Lender shall have no obligation to purchase Borrowers securities except
pursuant to definitive purchase documents executed in connection with the offering, containing such
representations as Borrower and its counsel shall reasonably deem necessary to comply with
applicable law.
6.
Documentation Fee Payment
. As an additional condition precedent under Section 4.1 of the
Loan and Security Agreement, on or prior to the initial Borrowing Date, Borrower shall pay Lender
an amount not to exceed Six Thousand Dollars ($6,000.00), which amount shall constitute payment for
the total amount of Lenders legal expenses incurred in connection with the preparation and
negotiation of the Loan Documents pursuant to Section 9.8(a) of the Loan and Security Agreement
(the Documentation Fee); provided, however, that Documentation Fee does not include Lenders
out-of-pocket costs of perfecting its security interest, which Borrower shall pay to Lender on
demand.
7.
Completion of Due Diligence; Payment and Disposition of Commitment Fee
. As an additional
condition precedent under Section 4.1 of the Loan and Security Agreement, Lender shall have
completed to its satisfaction its due diligence review of Borrowers business and financial
condition and prospects, and Lenders credit committee shall have approved the Commitment. If this
condition is not satisfied, Lender shall refund to Borrower the Five Thousand Dollar ($5,000.00)
commitment fee previously paid to Lender on account of the Commitment. Lender agrees that with
respect to each Loan advanced, on the Borrowing Date applicable to such Loan, Lender shall credit
against the payments due from Borrower on such date in respect of such Loan an amount equal to the
product of Five Thousand Dollars ($5,000.00) and a fraction the numerator of which is the principal
amount of such Loan and the denominator of which is One Million Dollars ($1,000,000.00), until the
aggregate amount of such credits equals but does not exceed Five Thousand Dollars ($5,000.00).
8.
Spin-Off of Subsidiary
. Notwithstanding anything to the contrary elsewhere in the Loan
Agreement, Lender acknowledges that Borrower has formed the Spin-off Subsidiary. Borrower may
without Lenders prior consent (i) Transfer assets, that are related to each line of business to
the Spin-off Subsidiary; and (ii) re-distribute the capital stock of either of the Spin-off
Subsidiary issued to the Borrower, to the Borrowers shareholders, provided, however, that Borrower
shall not transfer any assets comprising Collateral or any assets, including Intellectual Property,
that are directly related to the operation or development of Borrowers disinfectant technology.
9.
Debits to Account for ACH Transfers
. For purposes of Section 2.2 and 5.10 of the Loan and
Security Agreement, Borrowers Primary Operating Account is:
Cupertino National Bank
3 Palo Alto Square, Suite I50
Palo Alto, CA 94306
Account No.: 003115895
Routing No.: 121141152
Loans will be advanced to the account specified above and payments will be automatically
debited from the same account.
Part 3. Additional Representations
:
Borrower represents and warrants that as of the Closing Date and each Borrowing Date:
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a)
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Its chief executive office is located at: 1129 North McDowell Blvd., Petaluma, CA 94954
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b)
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Its Equipment is located at: 1129 North McDowell Blvd., Petaluma, CA 94954,
except as otherwise disclosed in the Borrowing Request for a Loan.
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c)
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Its Records are located at: 1129 North McDowell Blvd., Petaluma, CA 94954.
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d)
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In addition to its chief executive office, Borrower maintains offices or
operates its business at the following locations:
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Aquamed Technologies
1129 N. McDowell Blvd.
Petaluma, CA 94954 USA
MicroMed Laboratories, Inc.
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
L3 Pharmaceuticals, Inc.
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
Oculus Technologies of Mexico S.A. de C.V.
Salvador Pineda No. 214 Col. Dr. Miguel
Silva, C.P. 58120
Morelia, Michoacan
Mexico
Oculus Innovative Sciences Netherlands B.V.
Nusterweg 123
6136 KT Sittard
P.O. Box 5056
6130 PB Sittard
The Netherlands
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e)
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Other than its full corporate name, Borrower has conducted business using the
following trade names or fictitious business names: Micromed Laboratories
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(f)
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Borrowers Federal Tax I.D. number is: 64-0423298
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(g)
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Borrowers California state corporation I.D. number is: C2160639
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(h)
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Borrower is a majority owner of or in a control relationship with the following
business entities:
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Aquamed Technologies
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
MicroMed Laboratories, Inc.
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
(corporation formed but shares not yet issued)
L3 Pharmaceuticals, Inc.
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
(corporation formed but shares not yet issued)
Oculus Technologies of Mexico S.A. de C.V.
Salvador Pineda No. 214 Col. Dr. Miguel
Silva, C.P. 58120
Morelia, Michoacan
Mexico
Oculus Innovative Sciences Netherlands B.V.
Nusterweg 123
6136 KT Sittard
P.O. Box 5056
6130 PB Sittard
The Netherlands
Part 4. Additional Loan Documents
:
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Form of Note
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Exhibit A
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Form of Borrowing Request
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Exhibit B
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Form of Compliance Certificate
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Exhibit C
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Form of Warrant
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Exhibit D
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Form of Landlord Waiver
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Exhibit E
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Form of Legal Opinion
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Exhibit F
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[Signature Page Follows)
IN WITNESS WHEREOF, the parties have executed this Supplement as of the date first above
written.
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BORROWER
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OCULUS INNOVATIVE SCIENCES, INC.
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By:
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/s/ Hojabr Alimi
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Name:
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Hojabr Alimi
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Title:
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CEO
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Address for Notices:
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Attn:
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1129 North McDowell Blvd., Petaluma, CA 94954
Fax #: (707) 283-0551
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LENDER:
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VENTURE LENDING & LEASING III, INC.
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By:
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/s/
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Name:
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Title:
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Address for Notices:
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Attn: Chief Financial Officer
2010 North First Street, Suite 310
San Jose, California 95131
Fax #: (408) 436-8625
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EXHIBIT A
FORM OF PROMISSORY NOTE
[Note No. X-XXX]
San Jose, California
The undersigned (Borrower) promises to pay to the order of VENTURE LENDING & LEASING III,
INC., a Maryland corporation (Lender), at its office at 2010 North First Street, Suite 310, San
Jose, California 95131, or at such other place as Lender may designate in writing, in lawful money
of the United States of America, the principal sum of
Dollars ($
),
with Basic Interest thereon (except as otherwise provided herein) from the date hereof until
maturity, whether scheduled or accelerated, at a fixed rate per annum equal to [the Prime Rate on
the Business Day Lender prepares the Note plus 5.797%, but in no event less than 9.797%; (the
Designated Rate) [, and a Terminal Payment in the sum of 15.00% of face amount] Dollars
($
) payable on the Maturity Date.]
This Note is one of the Notes referred to in, and is entitled to all the benefits of, a Loan
and Security Agreement dated as of March 25, 2004, between Borrower and Lender (the Loan
Agreement). Each capitalized term not otherwise defined herein shall have the meaning set forth in
the Loan Agreement. The Loan Agreement contains provisions for the acceleration of the maturity of
this Note upon the happening of certain stated events.
Principal of and interest on this Note shall be payable as follows:
On the Borrowing Date, Borrower shall pay (i) interest at the Designated Rate on the
outstanding principal balance of this Note for the period from the Borrowing Date through [the last
day of the same month]; and (ii) a first (1
st
) amortization installment of principal and
Basic Interest at the Designated Rate in the amount of
in advance for the month of [first
full month after Borrowing Date] and (iii) a thirty-third (33rd) amortization installment of
principal and Basic Interest at the Designated Rate in the amount of $
, in advance for the
month of [date of last regular amortization payment] .
Commencing on the first day of the second full month after the Borrowing Date, and continuing
on the first day of each consecutive month thereafter, principal and Basic Interest at the
Designated Rate shall be payable, in advance, in thirty (30) equal consecutive installments of
Dollars ($
) each, with a thirty-first (31st) installment equal to the entire
unpaid principal balance and accrued Basic Interest at the Designated Rate on
, 200_. The
Terminal Payment and unpaid expenses, fees, interest and principal amount shall be due and payable
on [one month later]
, 200_.]
This Note may be voluntarily prepaid only as permitted under Section 2 of Part 2 of the
Supplement to the Loan Agreement.
Any unpaid payments of principal or interest on this Note shall bear interest from their
respective maturities, whether scheduled or accelerated, at a rate per annum equal to the Default
Rate. Borrower shall pay such interest on demand.
Interest, charges and fees shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest, charge or fee payments than if a 365-day year were
used. In no event shall Borrower be obligated to pay interest, charges or fees at a rate in excess
of the highest rate permitted by applicable law from time to time in effect.
If Borrower is late in making any payment under this Note by more than five (5) days, Borrower
agrees to pay a late charge of five percent (5%) of the installment due, but not less than fifty
dollars ($50.00) for any one such delinquent payment. This late charge may be charged by Lender for
the purpose of defraying the expenses incidental to the handling of such delinquent amounts.
Borrower acknowledges that such late charge represents a reasonable
sum considering all of the circumstances existing on the date of this Note and represents a
fair and reasonable estimate of the costs that will be sustained by Lender due to the failure of
Borrower to make timely payments. Borrower further agrees that proof of actual damages would be
costly and inconvenient. Such late charge shall be paid without prejudice to the right of Lender to
collect any other amounts provided to be paid or to declare a default under this Note or any of the
other Loan Documents or from exercising any other rights and remedies of Lender.
This Note shall be governed by, and construed in accordance with, the laws of the State of
California.
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OCULUS INNOVATIVE SCIENCES, INC.
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By:
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Name:
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Its:
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EXHIBIT B
FORM OF BORROWING REQUEST
[Date]
Venture Lending & Leasing III, Inc.
2010 North First Street, Suite 310
San Jose, CA 95131
Re: Oculus Innovative Sciences, Inc. Gentlemen
Reference is made to the Loan and Security Agreement dated as of March 25, 2004 (as amended
from time to time, the Loan Agreement, the capitalized terms used herein as defined therein),
between Venture Lending & Leasing III, Inc. and Oculus Innovative Sciences, Inc. (the Company).
The undersigned is the ____________of the Company, and hereby requests on behalf of the
Company a Loan under the Loan Agreement, and in that connection certifies as follows:
I. The type(s) of the proposed Loan is/are [an Equipment Loan] a [Soft Cost Loan]. The amount
of the proposed Loan is _________and _________/100 Dollars ($____________). The Borrowing Date of
the proposed Loan is _________,200_________.
2. The Eligible Equipment and/or Soft Costs to be financed with the proceeds of the Equipment
Loan are described, and are or will be located at the address(es) shown, on the attached
Schedule I
or amendment or supplement to
Schedule I
, which is hereby incorporated
by reference in and made a part of the Loan Agreement. The requested amount of the Equipment Loan
and/or Soft Cost Loan does not exceed the aggregate of one hundred percent (100%) of the amount
paid or payable by Borrower to a non-affiliated manufacturer, vendor or dealer for such items of
Eligible Equipment and/or Soft Costs as shown on an invoice therefor (excluding any commissions and
any portion of the payment which relates to the servicing of the equipment or item and sales taxes
payable by Borrower upon acquisition, and delivery charges). No item of Eligible Equipment or Soft
Costs has been owned or was incurred by Borrower earlier than 90 days before the proposed Borrowing
Date, or with respect to the Eligible Equipment, before January 15, 2003, for the initial Equipment
Loan, if funded prior to April, 15, 2004.
3. [If this Borrowing Request will utilize the remainder of the Commitments] After giving
effect to the Loan(s) requested hereby, no more than Seven Hundred Fifty Thousand Dollars
($750,000.00) of the Commitment has been used to finance Soft Costs.
4. As of this date, no Default or Event of Default has occurred and is continuing, or will
result from the making of the proposed Loan, the representations and warranties of the Company
contained in Article 3 of the Loan Agreement are true and correct, and the conditions precedent
described in Article 4 of the Loan Agreement have been met.
5. No event that has had, or could reasonably be expected to have, a Material Adverse Change
has occurred.
6, The Companys most recent [financial projections or business plan] dated _________, as
approved by the Companys Board of Directors on _________, are enclosed herewith.
The Company shall notify you promptly before the funding of the Loan if any of the matters to
which I have certified above shall not be true and correct on the Borrowing Date
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Very truly yours,
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OCULUS INNOVATIVE SCIENCES, INC.
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By:
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Name:
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Title:
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Schedule I to the Loan and Security Agreement
Description of Equipment/Soft Costs
Quantity
Article
Make
Year Mfg.
Model/Serial #
Location
ü
If Soft Cost
See
attached continuation to Schedule I
together with all improvements,
replacements, accessions and additions thereto, wherever located,
and all Proceeds thereof arising from the sale, lease, rental or other use or disposition of any
such property, including all rights to payment with respect to insurance or condemnation, returned
premiums, or any cause of action relating to any of the foregoing.
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OCULUS INNOVATIVE SCIENCES, INC.
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By:
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Name:
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Title:
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VENTURE LENDING & LEASING III, INC.
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By:
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Name:
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Title:
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EXHIBIT C
COMPLIANCE CERTIFICATE
Venture Lending & Leasing III, Inc.
2010 North First Street, Suite 310
San Jose, CA 95131
Re: Oculus Innovative Sciences, Inc.
Gentlemen.
Reference is made to the Loan and Security Agreement dated as of March 25, 2004 (as the same
have been and may be amended from time to time, the Loan Agreement, the capitalized terms used
herein as defined therein), between Venture Lending & Leasing III, Inc. and Oculus Innovative
Sciences, Inc. (the Company).
The undersigned authorized representative of the Company hereby certifies that in accordance
with the terms and conditions of the Loan Agreement, the Company is in complete compliance for the
financial reporting period ending _______ with all required financial reporting under the Loan
Agreement, except as noted below. Attached herewith are the required documents supporting the
foregoing certification. The undersigned further certifies that the accompanying financial
statements have been prepared in accordance with Generally Accepted Accounting Principles, and are
consistent from one period to the next, except as explained below.
Indicate compliance status by circling Yes/No under Complies
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REPORTING REQUIREMENT
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REQUIRED
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COMPLIES
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Interim Financial Statements
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Monthly within 30 days
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YES/NO
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Annual Financial Statements
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FYE within 120 days
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YES/NO
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Business Plan or Projections
dated
With each Borrowing Request
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YES/NO
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Any Change in budget since prior Borrowing Request
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YES/NO
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EXPLANATIONS
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Very truly yours,
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OCULUS INNOVATIVE SCIENCES, INC.
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By:
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Title:
*
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*
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Must be executed by Borrowers Chief
Financial Officer or other executive officer.
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EXHIBIT D
FORM OF WARRANT
EXHIBIT D
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO, OR IN CONNECTION WITH, THE SALE AND DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT) OR ANY STATE SECURITIES LAWS.
SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF
COUNSEL IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED DUE
TO AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE
66,667 SHARES OF SERIES A PREFERRED STOCK OF
OCULUS INNOVATIVE SCIENCES, INC.
(Void after December 31, 2014)
This certifies that VENTURE LENDING & LEASING III, LLC, a Delaware limited liability company,
or assigns (the Holder), for value received, is entitled to purchase from OCULUS INNOVATIVE
SCIENCES, INC., a California corporation (the Company), 66,667 fully paid and nonassessable
shares of the Companys Series A Preferred Stock (Preferred Stock) for cash at a price of $1.50
per share (the Stock Purchase Price) at any time or from time to time up to and including 5:00
p.m. (Pacific time) on December 31, 2014 (the Expiration Date), upon surrender to the Company at
its principal office at 1 129 North McDowell Blvd., Petaluma, California 94954. (or at such other
location as the Company may advise Holder in writing) of this Warrant properly endorsed with the
Form of Subscription attached hereto duly filled in and signed and upon payment in cash or by check
of the aggregate Stock Purchase Price for the number of shares for which this Warrant is being
exercised determined in accordance with the provisions hereof The Stock Purchase Price and the
number of shares purchasable hereunder are subject to adjustment as provided in Section 4 of this
Warrant.
This Warrant is subject to the following terms and conditions:
1
.
Exercise, Issuance of Certificates; Payment for Shares
.
(a) Unless an election is made pursuant to clause (b) of this Section 1, this Warrant shall be
exercisable at the option of the Holder, at any time or from time to time, on or before the
Expiration Date for all or any portion of the shares of Preferred Stock (but not for a fraction of
a share) which may be purchased hereunder for the Stock Purchase Price multiplied by the number of
shares to be purchased. In the event, however, that pursuant to the Companys Articles of
Incorporation, as amended, an event causing automatic conversion of the Companys Preferred Stock
shall have occurred prior to the exercise of this Warrant, in whole or in part, then this Warrant
shall be exercisable for the number of shares of Common Stock of the Company into which the
Preferred Stock not purchased upon any prior exercise of this Warrant would have been so converted
(and, where the context requires, reference to Preferred Stock shall be deemed to be or include
such Common Stock, as may be appropriate). The Company agrees that the shares of Preferred Stock
purchased under this Warrant shall be and are deemed to be issued to the Holder hereof as the
record owner of such shares as of the close of business on the date on which the form of
subscription shall have been delivered and payment made for such shares. Subject to the provisions
of Section 2, certificates for the shares of Preferred Stock so purchased, together with any other
securities or property to which the Holder hereof is entitled upon such exercise, shall be
delivered to the Holder hereof by the Company at the Companys expense within a reasonable time
after the rights represented by this Warrant have been so exercised. Except as provided in clause
(b) of this Section 1, in case of a purchase of less than all the shares which may be purchased
under this Warrant, the Company shall cancel this Warrant and execute and deliver a new Warrant or
Warrants of like tenor for the balance of the shares purchasable under this Warrant surrendered
upon such purchase to the Holder hereof within a reasonable time. Each stock certificate so
delivered shall be in such denominations of
Preferred Stock as may be requested by the Holder hereof and shall be registered in the name
of such Holder or such other name as shall be designated by such Holder, subject to the limitations
contained in Section 2.
(b) The Holder. in lieu of exercising this Warrant by the cash payment of the Stock Purchase
Price pursuant to clause (a) of this Section l, may elect, at any time on or before the Expiration
Date, to surrender this Warrant and receive that number of shares of Preferred Stock equal to the
quotient of (i) the difference between (A) the Per Share Price (as hereinafter defined) of the
Preferred Stock, less (B) the Stock Purchase Price then in effect, multiplied by the number of
shares of Preferred Stock the Holder would otherwise have been entitled to purchase hereunder
pursuant to clause (a) of this Section 1 [or such lesser number of shares as the Holder may
designate in the case of a partial exercise of this Warrant); over (ii) the Per Share Price.
Election to exercise under this section (b) may be made by delivering a signed form of subscription
to the Company via facsimile, to be followed by delivery of this Warrant.
(c) For purposes of clause (b) of this Section 1, Per Share Price means the product of: (i)
the greater of (A) the closing price of the securities issuable upon conversion of the Preferred
Stock, as quoted by NASDAQ or listed on any exchange, whichever is applicable, as published in the
Western Edition of The Wall Street Journal for the trading day immediately prior to the date of the
Holders election hereunder or, (B) if applicable at the time of or in connection with the exercise
under clause (b) of this Section 1, the gross sales price of one share of the Companys Common
Stock pursuant to a registered public offering or that amount which stockholders of the Company
will receive for each share of Common Stock pursuant to a merger, reorganization or sale of assets;
and (ii) that number of shares of Common Stock into which each share of Preferred Stock is
convertible. If the securities issuable upon conversion of the Preferred Stock are not quoted by
NASDAQ or listed on an exchange and none of the above clauses apply, the Per Share Price of the
Preferred Stock (or the equivalent number of shares of Common Stock into which such Preferred Stock
is convertible) shall be the price per share which the Board of Directors of the Company shall
determine in good faith.
2.
Limitation on Transfer
.
(a) This Warrant and the Preferred Stock shall not be transferable without the prior written
consent of the Company (which shall not be unreasonably withheld or delayed) and then only after
compliance with the conditions specified in this Section 2, which conditions are intended to insure
compliance with the provisions of the Securities Act. Each holder of this Warrant or the Preferred
Stock issuable hereunder will cause any proposed transferee of the Warrant or Preferred Stock to
agree to take and hold such securities subject to the provisions and upon the conditions specified
in this Section 2.
(b) Each certificate representing (i) this Warrant, (ii) the Preferred Stock, (iii) shares of
the Companys Common Stock issued upon conversion of the Preferred Stock and (iv) any other
securities issued in respect to the Preferred Stock or Common Stock issued upon conversion of the
Preferred Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or
similar event, shall (unless otherwise permitted by the provisions of this Section 2 or unless such
securities have been registered under the Securities Act or sold under Rule 144) be stamped or
otherwise imprinted with a legend substantially in the following form (in addition to any legend
required under applicable state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH
A VIEW TO, OR IN CONNECTION WITH, THE SALE AND DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED DUE TO AN EXEMPTION THEREFROM
UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
(c) The Holder of this Warrant and each person to whom this Warrant is subsequently
transferred (if permitted hereunder) represents and warrants to the Company (by acceptance of such
transfer) that it will not transfer this Warrant (or securities issuable upon exercise hereof
unless a registration statement under the Securities Act was in effect with respect to such
securities at the time of issuance thereof) except pursuant to (i) an effective registration
statement under the Securities Act, (ii) Rule 144 under the Securities Act (or any other rule under
the
Securities Act relating to the disposition of securities), or (iii) an opinion of counsel,
reasonably satisfactory to counsel for the Company, that an exemption from such registration is
available.
3.
Shares to be Fully Paid; Reservation of Shares
. The Company covenants and agrees
that all shares of Preferred Stock which may be issued upon the exercise of the rights represented
by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and
nonassessable and free from all preemptive rights of any stockholder and free of all taxes, liens
and charges with respect to the issue thereof. The Company further covenants and agrees that during
the period within which the rights represented by this Warrant may be exercised, the Company will
at all times have authorized and reserved, for the purpose of issue upon exercise of the
subscription rights evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Preferred Stock, or other securities and property, when and as required to provide for the
exercise of the rights represented by this Warrant. The Company will take all such action as may be
necessary to assure that such shares of Preferred Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of any domestic securities
exchange upon which the Preferred Stock may be listed. The Company will not take any action which
would result in any adjustment of the Stock Purchase Price (as defined in Section 4 hereof) (i) if
the total number of shares of Preferred Stock issuable after such action upon exercise of all
outstanding warrants, together with all shares of Preferred Stock then outstanding and all shares
of Preferred Stock then issuable upon exercise of all options and upon the conversion of all
convertible securities then outstanding, would exceed the total number of shares of Preferred Stock
then authorized by the Companys Articles of Incorporation, (ii) if the total number of shares of
Common Stock issuable after such action upon the conversion of all such shares of Preferred Stock
together with all shares of Common Stock then outstanding and then issuable upon exercise of all
options and upon the conversion of all convertible securities then outstanding would exceed the
total number of shares of Common Stock then authorized by the Companys Articles of Incorporation
or (iii) if the par value per share of the Preferred Stock would exceed the Stock Purchase Price.
4.
Adjustment of Stock Purchase Price and Number of Shares
. The Stock Purchase Price
and the number of shares purchasable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the occurrence of certain events described in this Section 4.
Upon each adjustment of the Stock Purchase Price, the Holder of this Warrant shall thereafter be
entitled to purchase, at the Stock Purchase Price resulting from such adjustment, the number of
shares obtained by multiplying the Stock Purchase Price in effect immediately prior to such
adjustment by the number of shares purchasable pursuant hereto immediately prior to such
adjustment, and dividing the product thereof by the Stock Purchase Price resulting from such
adjustment.
4.1
Subdivision or Combination of Stock
. In case the Company shall at any time
subdivide its outstanding shares of Preferred Stock into a greater number of shares, the Stock
Purchase Price in effect immediately prior to such subdivision shall be proportionately reduced,
and conversely, in case the outstanding shares of Preferred Stock of the Company shall be combined
into a smaller number of shares, the Stock Purchase Price in effect immediately prior to such
combination shall be proportionately increased.
4.2
Dividends in Preferred Stock, Other Stock
. Property, Reclassification. If at any
time or from time to time the holders of Preferred Stock (or any shares of stock or other
securities at the time receivable upon the exercise of this Warrant) shall have received or become
entitled to receive, without payment therefor,
(a) Preferred Stock, or any shares of stock or other securities whether or not such securities
are at any time directly or indirectly convertible into or exchangeable for Preferred Stock, or any
rights or options to subscribe for, purchase or otherwise acquire any of the foregoing by way of
dividend or other distribution, or
(b) any cash paid or payable otherwise than as a cash dividend, or
(c) Preferred Stock or other or additional stock or other securities or property (including
cash) by way of spin off, split-up, reclassification, combination of shares or similar corporate
rearrangement, (other than shares of Preferred Stock issued as a stock split, adjustments in
respect of which shall be covered by the terms of Section 4.1 above),
Then and in each such case, the Holder hereof shall, upon the exercise of this Warrant, be entitled
to receive, in addition to the number of shares of Preferred Stock receivable thereupon, and
without payment of any additional
consideration therefore, the amount of stock and other securities and property (including cash in
the cases referred to in clauses (b) and (c) above) which such Holder would hold on the date of
such exercise had he been the holder of record of such Preferred Stock as of the date on which
holders of Preferred Stock received or became entitled to receive such shares and/or all other
additional stock and other securities and property.
4.3
Reorganization, Reclassification, Consolidation, Merger or Sale
. If any capital
reorganization of the capital stock of the Company, or any consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Preferred Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Preferred Stock, then, as a
condition of such reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provisions shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive (in lieu of the shares of the Preferred Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights represented hereby) such
shares of stock, securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Preferred Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of the rights
represented hereby. In any such case, appropriate provision shall be made with respect to the
rights and interests of the holder of this Warrant to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Stock Purchase Price and of the
number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be possible, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof. The Company will not effect any such
consolidation, merger or sale unless, prior to the consummation thereof, the successor corporation
(if other than the Company) resulting from such consolidation or the corporation purchasing such
assets shall assume by written instrument, executed and mailed or delivered to the registered
Holder hereof at the last address of such Holder appearing on the books of the Company, the
obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such Holder may be entitled to purchase.
4.4
Sale or Issuance Below Purchase Price
. The other antidilution rights applicable to
the shares of series Preferred Stock purchasable hereunder are set forth in the Companys Articles
of Incorporation, as amended through the date hereof (the Charter). The Company shall promptly
provide the Holder hereof with any restatement, amendment, modification or waiver of the Charter
promptly after the same has been made.
4.5
Notice of Adjustment
. Upon any adjustment of the Stock Purchase Price, and/or any
increase or decrease in the number of shares purchasable upon the exercise of this Warrant the
Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the
registered holder of this Warrant at the address of such holder as shown on the books of the
Company. The notice, which may be substantially in the form of Exhibit A attached hereto, shall
be signed by the Companys chief financial officer and shall state the Stock Purchase Price
resulting from such adjustment and the increase or decrease, if any, in the number of shares
purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based.
4.6
Other Notices. If at any time
:
(a) the Company shall declare any cash dividend upon its Preferred Stock;
(b) the Company shall declare any dividend upon its Preferred Stock payable in stock or make
any special dividend or other distribution to the holders of its Preferred Stock;
(c) the Company shall offer for subscription pro rata to the holders of its Preferred Stock
any additional shares of stock in connection with a Down Round or additional shares of stock of any
class or other rights;
(d) there shall be any capital reorganization or reclassification of the capital stock of the
Company, or consolidation or merger of the Company with, or sale of all or substantially all of its
assets to, another entity;
(e) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the
Company; or
(f) the Company shall take or propose to take any other action, notice of which is actually
provided to holders of the Preferred Stock;
then, in any one or more of said cases, the Company shall give, by first class mail, postage
prepaid, addressed to the Holder of this Warrant at the address of such Holder as shown on the
books of the Company, (i) at least 20 days prior written notice of the date on which the books of
the Company shall close or a record shall be taken for such dividend, distribution or subscription
rights or for determining rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, or other action and (ii) in
the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, or other action, at least 20 days written notice of the date when the
same shall take place. Any notice given in accordance with the foregoing clause (i) shall also
specify, in the case of any such dividend, distribution or subscription rights, the date on which
the holders of Preferred Stock shall be entitled thereto. Any notice given in accordance with the
foregoing clause (ii) shall also specify the date on which the holders of Preferred Stock shall be
entitled to exchange their Preferred Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, or other action as the case may be.
4.7
Certain Events
. If any change in the outstanding Preferred Stock of the Company or
any other event occurs as to which the other provisions of this Section 4 are not strictly
applicable and the Board of Directors in good faith believes that an adjustment is necessary to
effect the essential intent and principles with the adjustment provisions of this Warrant or if the
provisions of this Section 4 are strictly applicable to an event but the application of such
provisions would not fairly effect the adjustments to this Warrant in accordance with the essential
intent and principles of such provisions, then the Board of Directors of the Company shall make in
good faith an adjustment in the number and class of shares issuable under this Warrant, the Stock
Purchase Price and/or the application of such provisions, in accordance with such essential intent
and principles, so as to protect such purchase rights as aforesaid. The adjustment shall be such as
will give the Holder of this Warrant upon exercise for the same aggregate Stock Purchase Price the
total number, class and kind of shares as the Holder would have owned had this Warrant been
exercised prior to the event and had the Holder continued to hold such shares until after the event
requiring adjustment.
5.
Issue Tax
. The issuance of certificates for shares of Preferred Stock upon the
exercise of this Warrant shall be made without charge to the Holder of this Warrant for any issue
tax in respect thereof; provided, however, that the Company shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the then Holder of this Warrant being exercised.
6.
Closing of Books
. The Company will at no time close its transfer books against the
transfer of this Warrant or of any shares of Preferred Stock issued or issuable upon the exercise
of this Warrant in any manner which interferes with the timely exercise of this Warrant, unless
required by applicable law or regulation, or to avoid the violation of any applicable law or
regulation..
7.
No Voting or Dividend Rights; Limitation of Liability
. Nothing contained in this
Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent as
a stockholder in respect of meetings of stockholders for the election of directors of the Company
or any other matters or any rights whatsoever as a stockholder of the Company. No dividends or
interest shall be payable or accrued in respect of this Warrant or the interest represented hereby
or the shares purchasable hereunder until, and only to the extent that this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the Holder to purchase
shares of Preferred Stock, and no mere enumeration herein of the rights or privileges of the Holder
hereof, shall give rise to any liability of such Holder for the Stock Purchase Price or as a
stockholder of the Company, whether such liability is asserted by the Company or by its creditors.
8.
Intentionally Omitted
.
9.
Registration Rights
. The Holder hereof shall be entitled, with respect to the
shares of Preferred Stock issued upon exercise hereof or the shares of Common Stock or other
securities issued upon conversion of such Preferred Stock as the case may be, to all of the
registration rights set forth in the Series A Preferred Shares Investors Rights Agreement executed
by the holders of Series A Preferred Stock in connection with the offering of Series A Preferred
Shares (the Rights Agreement), to the same extent and on the same terms and conditions as
possessed by the investors thereunder with the following exceptions and clarifications: (i) the
Holder will have no demand registration rights; (ii) the Holder will be subject to the same
provisions regarding indemnification as contained in the Rights Agreement; (iii) the registration
rights are freely assignable by the Holder of this Warrant in connection with a permitted transfer
of this Warrant or the shares issuable upon exercise hereof, and (iv) the Holder will be subject to
the same lock-up obligations as contained in the Rights Agreement. The Company shall take such
action as may be reasonably necessary to assure that the granting of such registration rights to
the Holder does not violate the provisions of the Rights Agreement or any of the Companys charter
documents or rights of prior grantees of registration rights.
10.
Rights and Obligations Survive Exercise of Warrant
. The rights and obligations of
the Company, of the Holder of this Warrant and of the holder of shares of Preferred Stock issued
upon exercise of this Warrant, contained in Sections 6 and 9 shall survive the exercise of this
Warrant.
11.
Modification and Waiver
. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the party against which
enforcement of the same is sought.
12.
Notices
. Any notice, request or other document required or permitted to be given
or delivered to the Holder hereof or the Company shall be deemed to have been given (i) upon
receipt if delivered personally or by courier (ii) upon confirmation of receipt if by telecopy or
(iii) three business days after deposit in the US mail, with postage prepaid and certified or
registered, to each such Holder at its address as shown on the books of the Company or to the
Company at the address indicated therefor in the first paragraph of this Warrant.
13.
Binding Effect on Successors
. This Warrant shall be binding upon any corporation
succeeding the Company by merger, consolidation or acquisition of all or substantially all of the
Companys assets. All of the obligations of the Company relating to the Preferred Stock issuable
upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All
of the covenants and agreements of the Company shall inure to the benefit of the successors and
assign of the holder hereof. The Company will, at the time of the exercise of this Warrant, in
whole or in part, upon request of the Holder hereof and at the Holders expense, acknowledge in
writing its continuing obligation to the Holder hereof in respect of any rights (including, without
limitation, any right to registration of the shares of Common Stock) to which the Holder hereof
shall continue to be entitled after such exercise in accordance with this Warrant; provided, that
the failure of the Holder hereof to make any such request shall not affect the continuing
obligation of the Company to the Holder hereof in respect of such rights.
14.
Descriptive Headings and Governing Law
. The descriptive headings of the several
sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a
part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by. the laws of the State of California.
15.
Lost Warrants or Stock Certificates
. The Company represents and warrants to the
Holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Warrant or stock certificate and, in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or
in the case of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company at its expense will make and deliver a new Warrant or stock certificate,
of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate.
16.
Fractional Shares
. No fractional shares shall be issued upon exercise of this
Warrant. The Company shall, in lieu of issuing any fractional share, pay the holder entitled to
such fraction a sum in cash equal to such fraction multiplied by the then effective Stock Purchase
Price.
17.
Representations of Holder
. With respect to this Warrant, Holder represents and
warrants to the Company as follows:
17.1
Experience
. It is an accredited investor as that term is defined in Rule 501
(a) promulgated under the Securities Act of 1933, as amended; is experienced in evaluating and
investing in companies engaged in businesses similar to that of the Company; it understands that
investment in this Warrant involves substantial risks; it has made detailed inquiries concerning
the Company, its business and services, its officers and its personnel; the officers of the Company
have made available to Holder any and all written information it has requested; the officers of the
Company have answered to Holders satisfaction all inquiries made by it; in making this investment
it has relied upon information made available to it by the Company; and it has such knowledge and
experience in financial and business matters that it is capable of evaluating the merits and risks
of investment in the Company and it is able to bear the economic risk of that investment.
17.2
Investment
. It is acquiring this Warrant for investment for its own account and
not with a view to, or for resale in connection with, any distribution thereof. It understands that
this Warrant, the shares of Preferred Stock issuable upon exercise thereof and the shares of Common
Stock issuable upon conversion of the Preferred Stock, have not been registered under the
Securities Act, nor qualified under applicable state securities laws.
17.3
Rule 144
. It acknowledges that this Warrant, the Preferred Stock and the Common
Stock must be held indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration is available. It has been advised or is aware of the provisions
of Rule 144 promulgated under the Securities Act.
17.4
Access to Data
. It has had an opportunity to discuss the Companys business, management
and financial affairs with the Companys management and has had the opportunity to inspect the
Companys facilities.
18.
Additional Representations and Covenants of the Company
. The Company hereby
represents, warrants and agrees as follows:
18.1
Corporate Power
. The Company has all requisite corporate power and corporate
authority to issue this Warrant and to carry out and perform its obligations hereunder.
18.2
Authorization
. All corporate action on the part of the Company, its directors and
stockholders necessary for the authorization, execution, delivery and performance by the Company of
this has been taken. This Warrant is a valid and binding obligation of the Company, enforceable in
accordance with its terms.
18.3
Offering
. Subject in part to the truth and accuracy of Holders representations
set forth in Section 17 hereof, the offer, issuance and sale of this Warrant is, and the issuance
of Preferred Stock upon exercise of this Warrant and the issuance of Common Stock upon conversion
of the Preferred Stock will be exempt from the registration requirements of the Securities Act, and
are exempt from the qualification requirements of any applicable state securities laws; and neither
the Company nor anyone acting on its behalf will take any action hereafter that would cause the
loss of such exemptions.
18.4
Stock Issuance
. Upon exercise of this Warrant, the Company will use its best
efforts to cause stock certificates representing the shares of Preferred Stock purchased pursuant
to the exercise to be issued in the names of Holder, its nominees or assignees, as appropriate at
the time of such exercise. Upon conversion of the shares of Preferred Stock into shares of Common
Stock, the Company will issue the Common Stock in the names of Holder, its nominees or assignees,
as appropriate.
18.5
Certificates and By-Laws
. The Company has provided Holder with true and complete
copies of the Companys Certificate of Incorporation, By-Laws, and each Certificate of Designation
or other charter document setting, forth any rights, preferences and privileges of Companys
capital stock, each as amended and in effect on the date of issuance of this Wan-ant.
18.6
Conversion of Preferred Stock
. As of the date hereof, each share of the Preferred
Stock is convertible into one share of the Common Stock.
18.7
Financial and Other Reports
. From time to time up to the earlier of the
Expiration Date or the complete exercise of this Warrant, the Company shall furnish to Holder (i)
within 90 days after the close of each fiscal year of the Company an audited balance sheet and
statement of changes in financial position at and as of the end of such fiscal year, together with
an audited statement of income for such fiscal year; (ii) within 45 days after the close of each
fiscal quarter of the Company, an unaudited balance sheet and statement of cash flows at and as of
the end of such quarter, together with an unaudited statement of income for such quarter; and (iii)
promptly after sending, making available, or filing, copies of all reports, proxy statements, and
financial statements that the Company sends or makes available to its stockholders and all
registration statements and reports that the Company files with the SEC or any other governmental
or regulatory authority.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its officers,
thereunto duly authorized this ___day of February, 2004.
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OCULUS INNOVATIVE SCIENCES, INC.
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By:
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/s/ Robert Miller
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Title:
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CFO
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VENTURE LENDING & LEASING III, INC.
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By: VLLI CAPITAL, LLC
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a Delaware limited liability company,
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its Managing Member
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By:
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Westech Investment Advisors, Inc.
its Managing Member
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By:
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/s/
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Name:
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Salvador Investment Advisors, Inc. its
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Managing Member
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Title:
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President
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FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
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To:
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OCULUS INNOVATIVE SCIENCES. INC.
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The undersigned, the holder of the within Warrant,
hereby irrevocably
elects to exercise the purchase right represented by such Warrant for,
and to purchase thereunder, (1) See Below
(
) shares
(the Shares) of Stock of
and herewith makes payment of
Dollars ($
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therefor, and requests that the
certificates for such shares be issued in the name of, and delivered
to,
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whose address is
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The undersigned hereby elects to convert
percent (
%) of the
value of the Warrant pursuant to the provisions of Section 1(b) of the
Warrant.
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The undersigned acknowledges that it has reviewed the representations and warranties contained in
Section 17 of this Warrant and by its signature below hereby makes such representations and
warranties to the Company.
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Dated
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Holder
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By:
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Its:
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(Address)
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(1)
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Insert here the number of shares called for on the face of the Warrant (or, in the case of a
partial exercise, the portion thereof as to which the Warrant is being exercised), in either
case without making any adjustment for additional Preferred Stock or any other stock or other
securities or property or cash which, pursuant to the adjustment provisions of the Warrant,
may be issuable upon exercise.
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ASSIGNMENT
FOR VALUE RECEIVED, the undersigned, the holder of the within Warrant, hereby sells, assigns and
transfers all of the rights of the undersigned under the within Warrant, with respect to the number
of shares of Preferred Stock covered thereby set forth herein below, unto:
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Name of Assignee
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Address
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No. of Shares
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EXHIBIT A
[
On letterhead of the Company]
Reference is hereby made to that certain Warrant dated February ___, 2004 issued by OCULUS
INNOVATIVE SCIENCES, INC, a California corporation (the Company), to VENTURE LENDING & LEASING
III, INC., a Maryland corporation (the Holder).
[IF APPLICABLE] Notice is hereby given pursuant to Section 4.5 of the Warrant that the
following adjustment(s) have been made to the Warrant: [describe adjustments, setting forth
details regarding method of calculation and facts upon which calculation is based].
This
certifies that the Holder is entitled to purchase from the Company
___ (___)
fully paid and nonassessable shares of the Companys ___Stock at a price of ___
Dollars ($___) per share (the Stock Purchase Price). The Stock Purchase Price and the
number of shares purchasable under the Warrant remain subject to adjustment as provided in Section
4 of the Warrant.
Executed
this ___ day of ___, 200_.
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OCULUS INNOVATIVE SCIENCES, INC.
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By:
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Name:
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Title:
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EXHIBIT E
FORM OF LANDLORD WAIVER
Recording Requested By: Venture Lending & Leasing III, Inc.
and When Recorded Return to:
Venture Lending & Leasing III, Inc.
2010 North First Street, Suite 310
San Jose, CA 95131
LANDLORD/MORTGAGEE WAIVER
In order to induce VENTURE LENDING & LEASING III, INC. (Lender) to provide financing for
certain equipment (the Equipment) to OCULUS INNOVATIVE SCIENCES, INC., a California corporation
(Tenant), pursuant to that certain Loan and Security Agreement dated March___, 2004, between
Lender and Tenant, and any supplements, extensions, renewals and replacements thereof (the Loan
Agreement), some or all of which Equipment may be located upon that certain real property located
at 1 129 North McDowell Blvd., Petaluma, CA 94954., more particularly described on
Exhibit
A
attached hereto (the Real Property), the undersigned declares and agrees as follows:
1. The undersigned has an interest in the Real Property as (as indicated):
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Mortgagee or Beneficiary under a Deed of Trust; or
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Other (describe):
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2. The undersigned agrees that the Equipment shall at all times be deemed personal
property, even though it maybe placed on or affixed to the Real Property. Lender shall have the
right, at all reasonable times, to enter upon the Real Property to take possession and dispose
of the Equipment pursuant to the terms of the Loan Agreement or otherwise, free of any claim to,
interest in, or lien on the Equipment in favor of the undersigned; provided that if Lender, in
removing the Equipment damages any improvements of the undersigned on the Real Property, Lender
will, at its own expense, cause the same to be repaired.
3. Any right or interest in the Equipment that the undersigned now has or may hereafter
acquire because of the location or installation of the Equipment on the Real Property or otherwise
is hereby made subject, subordinate and inferior to the rights of Lender to the Equipment under
the terms of the Loan Agreement; provided, that the undersigned shall continue to retain all
rights to bring an action in unlawful detainer and trespass against Tenant for nonpayment of its
(lease / mortgage] or any other breaches of agreements with the undersigned, subject to Lenders
rights with respect to the Equipment.
4. Each reference herein to Lender and the undersigned shall be deemed to include their
respective successors and assigns, all of whom shall be bound by and entitled to the benefits of
the provisions hereof.
EXHIBIT F
FORM OF LEGAL OPINION
Exhibit 10.13
LOAN AND SECURITY AGREEMENT
Dated as of June14, 2006
among
OCULUS INNOVATIVE SCIENCES, INC.
a California corporation,
and
OCULUS TECHNOLOGIES OF MEXICO, S.A. de C.V.
a corporation organized under the laws of Mexico,
and
OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V
.
a corporation organized under the laws of The Netherlands
each individually as a Borrower and collectively, as the Borrowers"
and
VENTURE LENDING & LEASING IV, INC.,
a Maryland corporation,
as Lender"
LOAN AND SECURITY AGREEMENT
The Borrowers and Lender identified on the cover page of this document have entered or
anticipate entering into one or more transactions pursuant to which Lender agrees to make available
to Borrowers a loan facility governed by the terms and conditions set forth in this document and
one or more Supplements executed by Borrowers and Lender which incorporate this document by
reference. Each Supplement constitutes a supplement to and forms part of this document, and will
be read and construed as one with this document, so that this document and the Supplement
constitute a single agreement between the parties (collectively referred to as this Agreement).
Accordingly, the parties agree as follows:
ARTICLE 1 INTERPRETATION
1.1 Definitions.
The terms defined in Article 11 and in the Supplement will have the meanings
therein specified for purposes of this Agreement.
1.2 Inconsistency.
In the event of any inconsistency between the provisions of any Supplement
and this document, the provisions of the Supplement will be controlling for the purpose of all
relevant transactions.
ARTICLE 2 THE COMMITMENT AND LOANS
2.1 The Commitment
. Subject to the terms and conditions of this Agreement, Lender agrees to
make term loans to Borrowers from time to time from the Closing Date and to, but not including, the
Termination Date in an aggregate principal amount not exceeding the Commitment. The Commitment is
not a revolving credit commitment, and no Borrower has the right to repay and reborrow hereunder.
Each Loan requested by a Borrower to be made on a single Business Day shall be for a minimum
principal amount set forth in the Supplement, except to the extent the remaining Commitment is a
lesser amount.
2.2 Notes Evidencing Loans; Repayment
. Each Loan shall be evidenced by a separate Note
executed by Borrowers payable to the order of Lender, in the total principal amount of the Loan.
Principal and interest of each Loan shall be payable at the times set forth in the Note and
regularly scheduled payments thereof and each Final Payment shall be effected by automatic debit of
the appropriate funds from Borrowers Primary Operating Account as specified in the Supplement
hereto.
2.3 Procedures for Borrowing
.
(a) At least five (5) Business Days prior to a proposed Borrowing Date, Lender shall have
received a written notice of any request for borrowing hereunder (a Borrowing Request). Each
Borrowing Request shall be in substantially the form of
Exhibit B
to the Supplement,
shall be executed by a responsible executive or financial officer of the Parent on behalf of the
Borrowers, and shall state how much is requested, and shall be accompanied by such other
information and documentation as Lender may reasonably request, including the original executed
Note(s) for the Loan(s) covered by the Borrowing Request.
(b) No later than 1:00 p.m. Pacific Standard Time on the Borrowing Date, if Borrowers have
satisfied the conditions precedent in Article 4, Lender shall make the Loan available to each such
applicable Borrower in immediately available funds.
2.4 Interest
. Except as otherwise specified in the applicable Note and/or the Supplement,
Basic Interest on the outstanding principal balance of each Loan shall accrue daily at the
Designated Rate from the Borrowing Date. If the outstanding principal balance of such Loan is not
paid at maturity, interest shall accrue at the Default Rate until paid in full, as further set
forth herein.
2.5 Final Payment
. Borrowers shall pay the Final Payment with respect to each Loan on the
date set forth in the Note evidencing such Loan.
2.6 Interest Rate Calculation
. Basic Interest, along with charges and fees under this
Agreement and any Loan Document, shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest, charge or fee payments than if a 365-day year were
used. In no event shall a Borrower be obligated to pay Lender interest, charges or fees at a rate
in excess of the highest rate permitted by applicable law from time to time in effect.
2.7 Default Interest
. Any unpaid payments of principal or interest or the Final Payment with
respect to any Loan shall bear interest from their respective
1
maturities, whether scheduled or accelerated, at the Designated Rate for such Loan
plus
five percent (5.00%) per annum, until paid in full, whether before or after judgment (the Default
Rate). Each Borrower shall pay such interest on demand.
2.8 Late Charges.
If Borrowers are late in making any payment of principal or interest or
Final Payment under this Agreement by more than five (5) days, Borrowers agree to pay a late charge
of five percent (5%) of the installment due, but not less than fifty dollars ($50.00) for any one
such delinquent payment. This late charge may be charged by Lender for the purpose of defraying the
expenses incidental to the handling of such delinquent amounts. Borrowers acknowledge that such
late charge represents a reasonable sum considering all of the circumstances existing on the date
of this Agreement and represents a fair and reasonable estimate of the costs that will be sustained
by Lender due to the failure of Borrowers to make timely payments. Borrowers further agree that
proof of actual damages would be costly and inconvenient. Such late charge shall be paid without
prejudice to the right of Lender to collect any other amounts provided to be paid or to declare a
default under this Agreement or any of the other Loan Documents or from exercising any other rights
and remedies of Lender.
2.9 Lenders Records
. Principal, Basic Interest, Final Payments and all other sums owed under
any Loan Document shall be evidenced by entries in records maintained by Lender for such purpose.
Each payment on and any other credits with respect to principal, Basic Interest, Final Payments and
all other sums outstanding under any Loan Document shall be evidenced by entries in such records.
Absent manifest error, Lenders records shall be conclusive evidence thereof.
2.10 Grant of Security Interests; Filing of Financing Statements.
(a)
To secure the timely payment and performance of all of the Obligations, subject to the
terms of the Supplement, each Borrower hereby grants to Lender a continuing security interest in, ,
all of the Collateral of such Borrower. In connection with the foregoing, each Borrower (i)
authorizes Lender to prepare and file any financing statements in the United States of America
describing the Collateral without otherwise obtaining such Borrowers signature or consent with
respect to the filing of such financing statements; and (ii) agrees to assist in the filing or
recordation of such other documents or instruments as may be customary or reasonably required by
Lender in accordance with the laws of the jurisdiction where the Borrower or its Collateral is
located in order to create, maintain and/or perfect Lenders Lien on such Collateral.
(b)
In furtherance of the Parents grant of the security interests in the Collateral pursuant
to Section 2.10(a) above, Parent hereby pledges, assigns and grants to Lender a security interest
in all the Shares, together with all proceeds and substitutions thereof, all cash, stock and other
moneys and property paid thereon, all rights to subscribe for securities declared or granted in
connection therewith, and all other cash and noncash proceeds of the foregoing, as security for the
performance of the Obligations. On the Closing Date, the certificate or certificates for the
Shares will be delivered to Lender, accompanied by an instrument of assignment duly executed in
blank by Parent, if and to the extent such Shares have been certificated. To the extent required
by the terms and conditions governing the Shares, Parent shall cause the books of each entity whose
Shares are part of the Collateral and any transfer agent to reflect the pledge of the Shares. Upon
the occurrence and during the continuance of an Event of Default, Lender may effect the transfer of
any securities included in the Collateral (including but not limited to the Shares) into the name
of Lender and cause new certificates representing such securities to be issued in the name of
Lender or its transferee(s). Parent will execute and deliver such documents, and take or cause to
be taken such actions, as Lender may reasonably request to perfect or continue the perfection of
Lenders security interest in the Shares, including delivering to Lender the certificate or
certificates for any Shares of any Subsidiary that were not certificated as of the Closing Date or
previously delivered to Lender. Unless and until an Event of Default shall have occurred and be
continuing, Parent shall be entitled to exercise any voting rights with respect to the Shares and
to give consents, waivers and ratifications in respect thereof, provided that no vote shall be cast
or consent, waiver or ratification given or action taken which would be inconsistent with any of
the terms of this Agreement or which would constitute or create any violation of any of such terms.
All such rights to vote and give consents, waivers and ratifications shall terminate upon the
occurrence and continuance of an Event of Default.
(c)
Each Borrower is and shall remain absolutely and unconditionally liable, on a joint and
several basis, for the payment and performance of the Obligations under the Loan Documents,
including,
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without limitation, any deficiency by reason of the failure of the Collateral to satisfy all
amounts due Lender under any of the Loan Documents.
(d)
All Collateral pledged by each Borrower under this Agreement and any Supplement shall
secure the timely payment and performance of all Obligations under this Agreement, the Notes and
the other Loan Documents. Except as expressly provided in this Agreement, no Collateral pledged
under this Agreement or any Supplement shall be released until such time as all Obligations under
this Agreement and the other Loan Documents have been satisfied and paid in full.
2.11 Withholding Adjustment.
In the event any Borrower is required to deduct or withhold any
Taxes (hereinafter defined) from any Loan payment or other amount payable to Lender hereunder,
Borrowers agree to pay timely such additional amount as may be necessary to ensure that Lender
receives a net amount, free and clear of all Taxes, equal to the full amount which Lender would
have received had no such withholding been made.
Taxes
includes any present or future
tax, levy import, duty, charge, fee, deduction or withholding of any nature and whatever called, by
a government or other fiscal authority of any country, including any province thereof or
subdivision thereof, on whomever and whatever imposed, levied, collected, withheld or assessed, in
any event from or with respect of any amount payable to Lender. Borrowers shall, from time to time
and promptly after paying, depositing and/or filing such Tax, deliver to Lender receipts,
certificates or other proof evidencing the amounts (if any) paid or payable to the relevant
government or other fiscal authority in respect of such Taxes.
ARTICLE 3 REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants that, except as set forth in the Supplement or any
schedule of exceptions executed by the parties, as of the Closing Date and each Borrowing Date:
3.1 Due Organization
. Each Borrower is a company or corporation duly organized and validly
existing in good standing under the laws of the jurisdiction (where such standing is legally
recognized) of its organization or incorporation, and is duly qualified to conduct business and is
in good standing in each other jurisdiction (where such standing is legally recognized) in which
its business is conducted or its properties are located, except where the failure to be in good
standing or so qualified would not reasonably be expected to have a Material Adverse Effect..
3.2 Authorization, Validity and Enforceability
. The execution, delivery and performance of
all Loan Documents executed by each Borrower are within each such Borrowers corporate or company
powers, have been duly authorized, and are not in conflict with any Borrowers certificate of
incorporation or by-laws, articles of association, or the terms of any charter or other
organizational document of any Borrower (each to the extent applicable), as amended from time to
time; and all such Loan Documents constitute valid and binding obligations of each Borrower,
enforceable in accordance with their terms (except as may be limited by bankruptcy, insolvency and
similar laws affecting the enforcement of creditors rights in general, and subject to general
principles of equity and subject to the satisfaction of the post-closing requirements set forth in
that certain side letter of Lender to Parent regarding the pledge of shares in Oculus Technologies
of Mexico, S.A. de C.V. and Oculus Innovative Sciences Netherlands B.V.)
3.3 Compliance with Applicable Laws
. Each Borrower has complied with all licensing, permit
and fictitious name requirements necessary to lawfully conduct the business in which it is engaged,
and to any sales, leases or the furnishing of services by each Borrower, including without
limitation those requiring consumer or other disclosures, the noncompliance with which would have a
Material Adverse Effect.
3.4 No Conflict
. The execution, delivery, and performance by each Borrower of all Loan
Documents are not in conflict with any law, rule, regulation, order or directive, or any indenture,
agreement, or undertaking to which each Borrower is a party or by which each Borrower may be bound
or affected. Without limiting the generality of the foregoing: the issuance of the Warrant to
Lender (or its designee) by Parent and the grant of registration rights in connection therewith do
not violate any agreement or instrument by which Parent is bound or require the consent of any
holders of Parents securities other than consents which have been obtained prior to the Closing
Date; and the grant by each Borrower of Liens in favor of Lender pursuant to Section 2.10 of this
Agreement does not violate any laws applicable to such Borrower or require the consent or approval
or any governmental authority having jurisdiction over such Borrower.
3.5 No Litigation, Claims or Proceedings
. There is no litigation, tax claim, proceeding or
dispute pending, or, to the knowledge of any Borrower,
3
threatened against or affecting any Borrower, its property or the conduct of its business.
3.6 Correctness of Financial Statements
. The consolidated and consolidating financial
statements of Parent and its Subsidiaries which have been delivered to Lender fairly and accurately
reflect the financial condition of Parent and its Subsidiaries in accordance with GAAP as of the
latest date of such financial statements; and, since that date there has been no Material Adverse
Change.
3.7 No Subsidiaries
. Except as set forth on
Schedule 3.7
hereto, no Borrower is a
majority owner of or in a control relationship with any other business entity.
3.8 Environmental Matters
. To its knowledge each Borrower has concluded that such Borrower is
in compliance with Environmental Laws, except to the extent a failure to be in such compliance
could not reasonably be expected to have a Material Adverse Effect.
3.9 No Event of Default
. No Default or Event of Default has occurred and is continuing.
3.10 Full Disclosure
. None of the representations or warranties made by any Borrower in the
Loan Documents as of the date such representations and warranties are made or deemed made, and none
of the statements contained in any exhibit, report, statement or certificate furnished by or on
behalf of any Borrower in connection with the Loan Documents (including disclosure materials
delivered by or on behalf of any Borrower to Lender prior to the Closing Date or pursuant to
Section 5.2 hereof), contains any untrue statement of a material fact or omits any material fact
required to be stated therein or necessary to make the statements made therein, in light of the
circumstances under which they are made, not misleading as of the time when made or delivered.
3.11 Specific Representations Regarding Collateral.
(a) Title.
Except for the security interests created by this Agreement and Permitted Liens,
(i) each Borrower is and will be the unconditional legal and beneficial owner of the Collateral,
and (ii) the Collateral is genuine and subject to no Liens, rights or defenses of others. There
exist no prior assignments or encumbrances of record with the U.S. Patent and Trademark Office or
U.S. Copyright Office, or such other applicable offices where such assignments or encumbrances of
record are filed within the respective jurisdictions of the Borrowers affecting any Collateral in
favor of any third party other than Lender.
(b) Rights to Payment.
The names of the obligors, amount owing to each Borrower, due dates
and all other information with respect to the Rights to Payment are and will be correctly stated in
all material respects in all Records relating to the Rights to Payment. Each Borrower further
represents and warrants, to its knowledge, that each Person appearing to be obligated on a Right to
Payment has authority and capacity to contract and is bound as it appears to be.
(c) Location of Collateral.
Each Borrowers chief executive office, Inventory, Records,
Equipment, and any other offices or places of business are located at the address(es) shown on the
Supplement.
(d) Business Names.
Other than its full corporate name, no Borrower has conducted business
using any trade names or fictitious business names except as shown on the Supplement.
3.12 Copyrights, Patents, Trademarks and Licenses
.
(a) Each Borrower owns or is licensed or otherwise has the right to use all of the patents,
trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and
other similar rights that are reasonably necessary for the operation of its respective business,
without conflict with the rights of any other Person.
(b) To each Borrowers knowledge, no slogan or other advertising device, product, process,
method, substance, part or other material now employed, or now contemplated to be employed, by any
Borrower infringes upon any rights held by any other Person.
(c) No claim or litigation regarding any of the foregoing is pending or, to each Borrowers
knowledge, threatened, and no patent, invention, device, application, principle or any statute,
law, rule, regulation, standard or code is pending or proposed which, in either case, could
reasonably be expected to have a Material Adverse Effect.
3.13 Regulatory Compliance.
To the extent applicable to such Borrower, Borrower has met the
minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA.
No event has occurred resulting from such Borrowers failure to comply with ERISA that is
4
reasonably likely to result in such Borrowers incurring any liability that could have a Material
Adverse Effect. No Borrower is an investment company or a company controlled by an investment
company within the meaning of the Investment Company Act of 1940. No Borrower is engaged
principally, or as one of its important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the
Board of Governors of the Federal Reserve System). Each Borrower has complied with all the
provisions of the Federal Fair Labor Standards Act.
3.14 Shares.
Parent has full power and authority to create a first priority Lien on the
Shares, and no disability or contractual obligation exists that would prohibit Parent from pledging
the Shares pursuant to this Agreement. To Parents knowledge, there are no subscriptions,
warrants, rights of first refusal or other restrictions on transfer relative to, or options
exercisable with respect to the Shares. The Shares have been and will be duly authorized and
validly issued, and are fully paid and non-assessable. To Parents knowledge, the Shares are not
the subject of any present or threatened suit, action, arbitration, administrative or other
proceeding, and Parent knows of no reasonable grounds for the institution of any such proceedings.
3.15 Survival.
The representations and warranties of the Borrowers as set forth in this
Agreement survive the execution and delivery of this Agreement.
ARTICLE 4 CONDITIONS PRECEDENT
4.1 Conditions to First Loan
. The obligation of Lender to make its first Loan hereunder is,
in addition to the conditions precedent specified in Section 4.2 and in any Supplement, subject to
the fulfillment of the following conditions and to the receipt by Lender of the documents described
below, duly executed and in form and substance satisfactory to Lender and its counsel:
(a) Resolutions
. A certified copy of the resolutions of the Board of Directors and
shareholders of each Borrower, as applicable, of each Borrower authorizing the execution, delivery
and performance by each such Borrower of the Loan Documents.
(b) Incumbency and Signatures
. A certificate of the secretary of each Borrower certifying the
names of the officer or officers of each Borrower authorized to sign the Loan Documents, together
with a sample of the true signature of each such officer.
(c) Legal Opinion
. The opinion of legal counsel for Parent in the form of Exhibit H attached
to the Supplement.
(d) Organizational Documents
. Copies of the charter and organizational documents (e.g.,
certificate or articles of incorporation or association and bylaws) of each Borrower, as amended
through the Closing Date, certified by each Borrower as being true, correct and complete.
(e) This Agreement
. Original counterparts of this Agreement and an initial Supplement, with
all schedules completed and attached thereto, and disclosing such information as is acceptable to
Lender.
(f) Lien Perfection Documents
. Filing copies (or other evidence of filing satisfactory to
Lender and its counsel) of such UCC financing statements, foreign lien/charge registrations,
collateral assignments, account control agreements, and termination statements, with respect to the
Collateral as Lender shall request.
(g) Intentionally Omitted
.
(h) Lien Searches
. UCC lien, judgment, bankruptcy and tax lien searches of each Borrower from
such jurisdictions or offices as Lender may reasonably request, all as of a date reasonably
satisfactory to Lender and its counsel.
(i) Good Standing Certificate
. A certificate of status or good standing of each Borrower as
of a date acceptable to Lender from the jurisdiction of each Borrowers organization and any
foreign jurisdictions where each such Borrower is qualified to do business.
(j) Warrant
. A warrant issued by Parent to Lender (or its designee) exercisable for such
number, type and class of shares of such issuers capital stock, and for an initial exercise price
as is specified in the Supplement.
(k) Pledge by Aquamed
. The pledge agreement by Aquamed Technologies, Inc., a California
corporation of its shares of stock in Oculus Technologies of Mexico S.A. de C.V.
(l) Other Documents
. Such other documents and instruments as Lender may reasonably request to
effectuate the intents and purposes of this Agreement,
5
including the certificate or certificates for the Shares, accompanied by an instrument of
assignment or stock power duly executed in blank.
4.2 Conditions to All Loans
. The obligation of Lender to make its initial Loan and each
subsequent Loan is subject to any additional conditions precedent specified in the Supplement and
the following further conditions precedent that:
(a) No Default
. No Default or Event of Default has occurred and is continuing or will result
from the making of any such Loan, and the representations and warranties of Borrowers contained in
Article 3 of this Agreement and Part 3 of the Supplement are true and correct as of the Borrowing
Date of such Loan.
(b) No Material Adverse Change
. No event has occurred that has had or could reasonably be
expected to have a Material Adverse Change.
(c) Borrowing Request
. Borrowers shall have delivered to Lender a Borrowing Request for such
Loan.
(d) Note
. Each Borrower shall have delivered an original executed Note evidencing such Loan,
substantially in the form attached to the Supplement.
(e) Supplemental Lien Filings
. Each Borrower shall have executed and delivered such
amendments or supplements to this Agreement and additional Security Documents, any required filings
or registrations for lien perfection under foreign law, financing statements and third party
waivers as Lender may reasonably request in connection with the proposed Loan, in order to create,
protect or perfect or to maintain the perfection of Lenders Liens on the Collateral.
(f) VCOC Limitation
. Lender shall not be obligated to make any Loan under its Commitment if
at the time of or after giving effect to the proposed Loan Lender would no longer qualify as: (A)
a venture capital operating company under U.S. Department of Labor Regulations Section
2510.3-101(d), Title 29 of the Code of Federal Regulations, as amended; and (B) a business
development company under the provisions of federal Investment Company Act of 1940, as amended;
and (C) a regulated investment company under the provisions of the Internal Revenue Code of 1986,
as amended.
(g) Financial Projections
. Parent shall have delivered to Lender each such Borrowers
business plan and/or financial projections or forecasts as most recently approved by Parents Board
of Directors.
ARTICLE 5 AFFIRMATIVE COVENANTS
During the term of this Agreement and until its performance of all Obligations, each Borrower
will:
5.1 Notice to Lender
. Promptly give written notice to Lender of:
(a) Any litigation or administrative or regulatory proceeding affecting any Borrower where the
amount claimed against any Borrower is at the Threshold Amount or more, or where the granting of
the relief requested could have a Material Adverse Effect; or of the acquisition by any Borrower of
any commercial tort claim, including brief details of such claim and such other information as
Lender may reasonably request to enable Lender to better perfect its Lien in such commercial tort
claim as Collateral.
(b) Any substantial dispute which may exist between any Borrower or any governmental or
regulatory authority.
(c) The occurrence of any Default or any Event of Default.
(d) Any change in the location of any of Borrowers places of business or Collateral at least
thirty (30) days in advance of such change, or of the establishment of any new, or the
discontinuance of any existing, place of business.
(e) Any dispute or default by any Borrower or any other party under any joint venture,
partnering, distribution, cross-licensing, strategic alliance, collaborative research or
manufacturing, license or similar agreement which could reasonably be expected to have a Material
Adverse Effect.
(f) Any other matter which has resulted or might reasonably result in a Material Adverse
Change.
5.2 Financial Statements
. Deliver to Lender or cause to be delivered to Lender, in form and
detail satisfactory to Lender the following financial and other information, which each Borrower
warrants shall be accurate and complete in all material respects:
(a) Monthly Financial Statements
. As soon as available but no later than thirty (30) days
after the end of each month, Parents and its Subsidiaries unaudited
6
balance sheet as of the end of such period, and Parents and its Subsidiaries unaudited income
statement and unaudited cash flow statement for such period and for that portion of Parents and
its Subsidiaries financial reporting year ending with such period, on a consolidated and
consolidating basis, prepared in accordance with GAAP, and attested by a responsible financial
officer of Parent as being complete and correct and fairly presenting the consolidated financial
condition and the results of operations of Parent and its Subsidiaries.
(b) Year-End Financial Statements
. As soon as available but no later than one hundred twenty
(120) days after and as of the end of each financial reporting year, starting on the financial
reporting year ending March 31, 2006 or any prior year that Parents Board of Directors directs
audited statements to be produced a complete copy of Parents and its Subsidiaries audit report,
which shall include balance sheet, income statement, statement of changes in equity and statement
of cash flows for such year, on a consolidated and consolidating basis, prepared in accordance with
GAAP and certified by an independent certified public accountant selected by Parent and
satisfactory to Lender (the Accountant). The Accountants certification shall not be qualified
or limited due to a restricted or limited examination by the Accountant of any material portion of
Parents records or otherwise. For its financial reporting year ended March 31, 2005, if
applicable, Parent shall furnish company prepared annual financial statements to Lender as
otherwise required above.
(c) Compliance Certificates
. Simultaneously with the delivery of each set of financial
statements referred to in paragraphs (a) and (b) above, a certificate of the chief financial
officer of each Borrower substantially in the form of
Exhibit C
to the Supplement, (i)
setting forth in reasonable detail any calculations required to establish whether Borrowers are in
compliance with any financial covenants or tests set forth in the Supplement, and (ii) stating
whether any Default or Event of Default exists on the date of such certificate, and if so, setting
forth the details thereof and the action which each such Borrower is taking or proposes to take
with respect thereto.
(d) Government Required Reports; Press Releases
. Promptly after sending, issuing, making
available, or filing, copies of all statements released to any news media for publication, all
reports, proxy statements, and financial statements that any Borrower sends or makes available to
its stockholders, and, not later than five (5) days after actual filing or the date such filing was
first due, all registration statements and reports that Borrower files or is required to file with
the Securities and Exchange Commission, or any other governmental or regulatory authority.
(e) Other Information
. Such other statements, lists of property and accounts, budgets,
forecasts, sales projections, operating plans, reports, or other financial information as Lender
may from time to time reasonably request.
5.3 Managerial Assistance from Lender
. Permit Lender to substantially participate in, and
substantially influence the conduct of management of Parent through the exercise of management
rights, as that term is defined in 29 C.F.R. § 2510.3-101(d), including without limitation the
following rights:
(a) Each Borrower agrees that (i) it will make its officers, directors, employees and
affiliates available at such times as Lender may reasonably request for Lender to consult with and
advise as to the conduct of Borrowers business, its equipment and financing plans, and its
financial condition and prospects, (ii) Lender shall have the right to inspect Borrowers books,
records, facilities and properties at reasonable times during normal business hours on reasonable
advance notice, and (iii) Lender shall be entitled to recommend prospective candidates for election
or nomination for election to Parents Board of Directors and Parent shall give due consideration
to (but shall not be bound by) such recommendations, it being the intention of the parties that
Lender shall be entitled through such rights,
inter alia
, to furnish significant managerial
assistance, as defined in Section 2(a)(47) of the Investment Company Act of 1940, to each
Borrower.
(b) Without limiting the generality of (a) above, if Lender reasonably believes that financial
or other developments affecting any Borrower have impaired or are likely to impair such Borrowers
ability to perform its obligations under this Agreement, permit Lender reasonable access to such
Borrowers management and/or Board of Directors and opportunity to present Lenders views with
respect to such developments.
Lender shall cooperate with each Borrower to ensure that the exercise of Lenders rights shall not
disrupt the business of such Borrower. The rights enumerated above shall not be construed as
giving Lender control over any Borrowers management or policies.
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5.4 Existence
. Maintain and preserve each Borrowers existence, present form of business, and
all rights and privileges necessary or desirable in the normal course of its business; and keep all
Borrowers property in good working order and condition, ordinary wear and tear excepted.
5.5 Insurance
. Obtain and keep in force insurance in such amounts and types as is usual in
the type of business conducted by each Borrower, with insurance carriers having a policyholder
rating of not less than A and financial category rating of Class VII in Bests Insurance Guide,
unless otherwise approved by Lender. Such insurance policies must be in form and substance
satisfactory to Lender, and shall list Lender as an additional insured or loss payee, as
applicable, on endorsement(s) in form reasonably acceptable to Lender. Each Borrower shall furnish
to Lender such endorsements, and upon Lenders request, copies of any or all such policies.
5.6 Accounting Records
. Maintain adequate books, accounts and records, and prepare all
financial statements in accordance with GAAP (or similar standards under foreign law or practice
applicable to Borrower), and in compliance with the regulations of any governmental or regulatory
authority having jurisdiction over any Borrower or any such Borrowers business; and permit
employees or agents of Lender at such reasonable times as Lender may request, During such
Borrowers normal business hours, to inspect each Borrowers properties, and to examine, and make
copies and memoranda of each Borrowers books, accounts and records if Lender reasonably believes
the Collateral has been impaired.
5.7 Compliance With Laws
. Comply with all laws (including Environmental Laws), rules,
regulations applicable to, and all orders and directives of any governmental or regulatory
authority having jurisdiction over, any Borrower or any such Borrowers business, and with all
material agreements to which any Borrower is a party, except where the failure to so comply would
not have a Material Adverse Effect.
5.8 Taxes and Other Liabilities
. Pay all of each Borrowers Indebtedness when due; pay all
taxes and other governmental or regulatory assessments before delinquency or before any penalty
attaches thereto, except as may be contested in good faith by the appropriate procedures and for
which such Borrower shall maintain appropriate reserves; and timely file all required tax returns.
5.9 Special Collateral Covenants.
(a) Maintenance of Collateral; Inspection.
Do all things reasonably necessary to maintain,
preserve, protect and keep all Collateral in good working order and salable condition, ordinary
wear and tear excepted, deal with the Collateral in all ways as are considered good practice by
owners of like property, and use the Collateral lawfully and, to the extent applicable, only as
permitted by each Borrowers insurance policies. Maintain, or cause to be maintained, complete and
accurate Records relating to the Collateral. Upon reasonable prior notice at reasonable times
during normal business hours, each Borrower hereby authorizes Lenders officers, employees,
representatives and agents to inspect the Collateral and to discuss the Collateral and the Records
relating thereto with each such Borrowers officers and employees, and, in the case of any Right to
Payment, with any Person which is or may be obligated thereon.
(b) Ownership of Subsidiaries
. Not sell, transfer, encumber or otherwise dispose of all or
any portion of Parents ownership interest in any Subsidiary.
(c) Liens.
Not create, incur, assume or permit to exist any Lien or grant any other Person a
negative pledge on any Collateral, except Permitted Liens.
(d) Documents of Title.
Not sign or authorize the signing of any financing statement or
other document naming any Borrower as debtor or obligor, or acquiesce or cooperate in the issuance
of any bill of lading, warehouse receipt or other document or instrument of title with respect to
any Collateral, except those negotiated to Lender, or those naming Lender as secured party, or if
solely to create, perfect or maintain a Permitted Lien.
(e) Change in Location or Name.
Without at least 30 days prior written notice to Lender:
(a) not relocate any Collateral or Records, its chief executive office, or establish a place of
business at a location other than as specified in the Supplement; and (b) not change its name,
mailing address, location of Collateral, jurisdiction of incorporation or its legal structure.
(f) Decals, Markings.
At the request of Lender, firmly affix a decal, stencil or other
marking to designated items of Equipment, indicating thereon the security interest of Lender.
(g) Agreement With Real Property Owner/Landlord.
Obtain and maintain such
8
acknowledgments, consents, waivers and agreements (each, a Waiver) from the owner, lienholder,
mortgagee and landlord (each, a Landlord) with respect to any real property on which Collateral
is located as Lender may require, all in form and substance satisfactory to Lender, if Lender
advises Borrower that such real property is located in a jurisdiction that provides for statutory
landlords liens or where the lease for such real property grants to the Landlord a Lien on such
Borrowers personal property. In all other cases, each Borrower agrees it will use commercially
reasonable efforts to obtain a Waiver from the Landlord if requested by Lender.
(h) Certain Agreements on Rights to Payment.
Other than in the ordinary course of business,
not make any material discount, credit, rebate or other reduction in the original amount owing on a
Right to Payment or accept in satisfaction of a Right to Payment less than the original amount
thereof.
5.10 Authorization for Automated Clearinghouse Funds Transfer.
(i) Authorize Lender to
initiate debit entries to the Primary Operating Account, specified in the Supplement hereto,
through Automated Clearinghouse (ACH) transfers, in order to satisfy the Obligations; (ii)
provide Lender at least thirty (30) days notice of any change in the Primary Operating Account; and
(iii) grant Lender any additional authorizations necessary to begin ACH debits from a new account
which becomes the Primary Operating Account.
ARTICLE 6 NEGATIVE COVENANTS
During the term of this Agreement and until the performance of all Obligations, each Borrower
will not, and will not permit any Subsidiary to:
6.1 Indebtedness.
Be indebted for borrowed money, the deferred purchase price of property, or
leases which would be capitalized in accordance with GAAP; or become liable as a surety, guarantor,
accommodation party or otherwise for or upon the obligation of any other Person, except:
(a) Indebtedness incurred for the acquisition of supplies or inventory on normal trade credit;
(b) Indebtedness incurred pursuant to one or more transactions permitted under
Section
6.4
;
(c) Indebtedness of any Borrower under this Agreement;
(d) Indebtedness in the form of bridge loans, provided such Indebtedness shall be subordinated
to the Obligations on terms and conditions acceptable to Lender, including without limiting the
generality of the foregoing, subordination of such Indebtedness in right of payment to the prior
payment in full of the Obligations, and the subordination of the priority of any Lien at any time
securing such Indebtedness to the Liens of Lender in the collateral covered thereby;
(e) Subordinated Debt;
(f) Intercompany Indebtedness among Borrowers;
(g) any Indebtedness existing on the Closing Date as shown on
Schedule 6.1
, and
(h) Indebtedness permitted under the terms of the Supplement.
6.2 Liens
. Create, incur, assume or permit to exist any Lien, or grant any other Person a
negative pledge, on any of Borrowers or such Subsidiarys property, except Permitted Liens. Each
Borrower and Lender agree that this covenant is not intended to constitute a lien, deed of trust,
equitable mortgage, or security interest of any kind on any of each Borrowers real property, and
this Agreement shall not be recorded or recordable. Notwithstanding the foregoing, however,
violation of this covenant by any Borrower shall constitute an Event of Default. Without limiting
the generality of the foregoing, and as a material inducement to the Lenders making of the
Commitment and entering into the Loan Documents, each Borrower agrees that (i) it shall not assign,
mortgage, pledge, grant a security interest in, or encumber any of such Borrowers Intellectual
Property, and (ii) it shall not permit the inclusion in any agreement, document, instrument or
other arrangement with any Person (except with or in favor of Lender) which directly or indirectly
prohibits or has the effect of prohibiting such Borrower from assigning, mortgaging, pledging,
granting a security interest in or upon, or encumbering any of such Borrowers Intellectual
Property, except as is otherwise permitted in Section 6.5(i) or (ii) of this Agreement, or would
otherwise be a Permitted Lien hereunder.
6.3 Dividends
. Except after a Qualified Public Offering, pay any dividends or purchase,
redeem or
9
otherwise acquire or make any other distribution with respect to any of each Borrowers capital
stock, except: (a) dividends or other distributions solely of capital stock of each such Borrower;
(b) so long as no Event of Default has occurred and is continuing, (i) repurchases of Parents
stock from its employees upon termination of employment under reverse vesting or similar repurchase
plans not to exceed $100,000 in any calendar year; (ii) dividends required to be paid to the
Parents Series A Preferred Stockholders pursuant to the Amended and Restated Articles of
Incorporation in force at the time of the execution of this Agreement and (c) any Subsidiary of
Parent may pay dividends to Parent from time to time so long as such funds are not further
distributed to any equity holders of Parent.
6.4 Changes/Mergers
. Liquidate or dissolve; or enter into any consolidation, merger or other
combination in which the stockholders of any Borrower immediately prior to the first such
transaction own less than 50% of the voting stock of any such Borrower immediately after giving
effect to such transaction or related series of such transactions, except that any such Borrower
may consolidate or merge so long as: (A) the entity that results from such merger or consolidation
(the Surviving Entity) shall have executed and delivered to Lender an agreement in form and
substance reasonably satisfactory to Lender, containing an assumption by the Surviving Entity of
the due and punctual payment and performance of all Obligations and performance and observance of
each covenant and condition of such Borrower in the Loan Documents; (B) all such obligations of the
Surviving Entity to Lender shall be guaranteed by any entity that directly or indirectly owns or
controls more than 50% of the voting stock of the Surviving Entity; (C) immediately after giving
effect to such merger or consolidation, no Event of Default or, event which with the lapse of time
or giving of notice or both, would result in an Event of Default shall have occurred and be
continuing; and (D) the credit risk to Lender, in its reasonable discretion, of the Surviving
Entity shall not be increased. In determining whether the proposed merger or consolidation would
result in an increased credit risk, Lender may consider, among other things, changes in such
Borrowers management team, employee base, access to equity markets, venture capital support,
financial position and/or disposition of intellectual property rights which may reasonably be
anticipated as a result of the transaction.
Notwithstanding anything to the contrary in this Section 6.4, (i) changes in ownership
resulting from additional bona fide private equity financings by financial investors shall be
permitted (subject to the covenants of Section 6.13 hereof), and (ii) Parent shall be permitted (A)
to liquidate or dissolve any Subsidiary in a transaction pursuant to which all of the assets of
such Subsidiary are transferred to Parent, and (B) merge with or into a Subsidiary in a transaction
in which Parent is the surviving entity
6.5 Sales of Assets
. Sell, transfer, lease, license or otherwise dispose of (a Transfer) any
Borrowers or Subsidiarys assets (including, without limitation, shares of stock and indebtedness
of any Subsidiary) except: (i) non-exclusive licenses of Intellectual Property in the ordinary
course of business consistent with industry practice or as permitted elsewhere in this Agreement or
the other Loan Documents
;
(ii) exclusive licenses of Intellectual Property granted by Borrower in
the ordinary course of business to a distributor or licensee with respect to one or more fields of
use which when taken alone or together do not constitute a major portion of the existing uses of
Grantors Intellectual Property and approved by the Board of Directors; (iii) Transfers of
worn-out, obsolete or surplus property (each as determined by each Borrower in its reasonable
judgment); (iv) Transfers of Inventory; (v) Transfers constituting Permitted Liens; (vi) Transfers
permitted in Section 6.6 hereunder; and (vii) Transfers of Collateral (other than Intellectual
Property) for fair consideration and in the ordinary course of its business.
6.6 Loans/Investments
. Make or suffer to exist any loans, guaranties, advances, or
investments, except:
(a) accounts receivable in the ordinary course of business;
(b) investments in domestic certificates of deposit issued by, and other domestic investments
with, financial institutions organized under the laws of the United States or a state thereof,
having at least One Hundred Million Dollars ($100,000,000) in capital and a rating of at least
investment grade or A by Moodys or any successor rating agency;
(c) investments in marketable obligations of the United States of America and in open market
commercial paper rated A1 or P1 and floating rate preferred rated AAA by a national credit agency
and maturing not more than one year from the creation thereof;
(d) temporary advances to cover incidental expenses to be incurred in the ordinary course of
business;
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(e) investments in joint ventures, strategic alliances, licensing and similar arrangements
customary in each Borrowers industry and which do not require such Borrower to assume or otherwise
become liable for the obligations of any third party not directly related to or arising out of such
arrangement or, without the prior written consent of Lender, require such Borrower to transfer
ownership of non-cash assets to such joint venture or other entity; and
(f) Investments in and loans to Subsidiaries of Parent
.
6.7 Transactions With Related Persons
. Directly or indirectly enter into any transaction with
or for the benefit of a Related Person on terms more favorable to the Related Person than would
have been obtainable in an arms length dealing.
6.8 Other Business
. Engage in any material line of business other than the business any
Borrower conducts or contemplates conducting as of the Closing Date.
6.9 Compliance.
Become an investment company or controlled by an investment company,
within the meaning of the Investment Company Act of 1940, or become principally engaged in, or
undertake as one of its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Loan for such purpose. Fail to
meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards
Act or violate any law or regulation, which violation could have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Lenders Lien on the Collateral, or
permit any of its subsidiaries to do any of the foregoing.
6.10 Other Deposit and Securities Accounts.
Maintain any Deposit Accounts or accounts holding
securities except (i) Deposit Accounts and investment/securities accounts as set forth in the
Supplement, and (ii) other Deposit Accounts and securities/investment accounts, in each case, with
respect to which each Borrower and Lender shall have taken such action as Lender reasonably deems
necessary to obtain a perfected first security interest therein.
6.11 Subsidiaries
. Cause or permit a Subsidiary to issue any additional Shares, unless the
same have been pledged to Lender as part of the Collateral. In addition, Parent will not allow its
wholly owned subsidiary Aquamed Technologies, Inc., a California corporation, to engage in any
business or incur any Indebtedness after the Closing Date.
6.12 Financing Statements and Other Actions.
Fail to execute and deliver to Lender all
financing statements, account control agreements, notices and other documents (including, without
limitation, any filings with the United States Patent and Trademark Office,) from time to time
reasonably requested by Lender or as necessary in order to maintain either (i) a first priority
fixed or floating security interest in the Collateral, or (ii) a first perfected security interest
in the Collateral, in favor of Lender, except in each case to the extent a Permitted Lien is
permitted to be senior to Lenders security interests; perform such other acts, and execute and
deliver to Lender such additional conveyances, assignments, agreements and instruments, as Lender
may at any time reasonably request.
6.13 Stock Ownership
Allow any Person or two or more Persons acting in concert to acquire
beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission)
of fifty percent (50%) or more of the outstanding shares of voting stock of Borrower.
ARTICLE 7 EVENTS OF DEFAULT
7.1 Events of Default; Acceleration
. Upon the occurrence and during the continuation of any
Default, the obligation of Lender to make any additional Loan shall be suspended. The occurrence
of any of the following (each, an Event of Default) shall terminate any obligation of Lender to
make any additional Loan; and shall, at the option of Lender (1) make all sums of Basic Interest
and principal, all Final Payments and any Obligations and other amounts owing under any Loan
Documents immediately due and payable without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor or any other notices or demands, and (2) give Lender
the right to exercise any other right or remedy provided by contract or applicable law:
(a) Borrowers shall fail to pay any principal, interest or Final Payment under this Agreement
or any Note, or fail to pay any fees or other charges when due under any Loan Document, and such
failure continues for five (5) Business Days or more after the same first
11
becomes due; or an Event of Default as defined in any other Loan Document shall have occurred.
(b) Any representation or warranty made, or financial statement, certificate or other document
provided, by any Borrower under any Loan Document shall prove to have been false or misleading in
any material respect when made or deemed made herein.
(c) Any Borrower shall fail to pay its debts generally as they become due or shall commence
any Insolvency Proceeding with respect to itself; an involuntary Insolvency Proceeding shall be
filed against any Borrower, or a custodian, receiver, trustee, assignee for the benefit of
creditors, or other similar official, shall be appointed to take possession, custody or control of
the properties of any Borrower, and such involuntary Insolvency Proceeding, petition or appointment
is acquiesced to by any Borrower or is not dismissed within sixty (60) days; or the dissolution or
termination of the business of any Borrower.
(d) Any Borrower shall be in default beyond any applicable period of grace or cure under any
other agreement involving the borrowing of money, the purchase of property, the advance of credit
or any other monetary liability of any kind to Lender or to any Person which results in the
acceleration of payment of such obligation in an amount in excess of the Threshold Amount.
(e) Any governmental or regulatory authority shall take any judicial or administrative action,
or any defined benefit pension plan maintained by any Borrower shall have any unfunded liabilities,
any of which, in the reasonable judgment of Lender, might have a Material Adverse Effect.
(f) Any sale, transfer or other disposition of all or a substantial or material part of the
assets of any Borrower, including without limitation to any trust or similar entity, shall occur,
except as permitted by Section 6.5.
(g) Any judgment(s) singly or in the aggregate in excess of the Threshold Amount shall be
entered against any Borrower which remain unsatisfied, unvacated or unstayed pending appeal for ten
(10) or more days after entry thereof.
(i) Any Borrower shall fail to perform or observe any covenant contained in Article 6 of this
Agreement.
(h) (Intentionally Omitted.)
(j) Any Borrower shall fail to perform or observe any material covenant contained in Article 5
or elsewhere in this Agreement or any other Loan Document (other than a covenant which is dealt
with specifically elsewhere in this Article 7) and, if capable of being cured, the breach of such
covenant is not cured within 30 days after the sooner to occur of such Borrowers receipt of notice
of such breach from Lender or the date on which such breach first becomes known to any officer of
such Borrower;
provided
,
however
that if such breach is not capable of being cured
within such 30-day period and such Borrower timely notifies Lender of such fact and such Borrower
diligently pursues such cure, then the cure period shall be extended to the date requested in such
Borrowers notice but in no event more than 90 days from the initial breach;
provided
,
further
, that such additional 60-day opportunity to cure shall not apply in the case of any
failure to perform or observe any covenant which has been the subject of a prior failure within the
preceding 180 days or which is a willful and knowing breach by Borrower.
7.2 Remedies Upon Default.
Upon the occurrence and during the continuance of an Event of
Default, Lender shall be entitled to, at its option, exercise any or all of the rights and remedies
available to a secured party under the UCC or any other applicable law, and exercise any or all of
its rights and remedies provided for in this Agreement and in any other Loan Document. The
obligations of Borrowers under this Agreement shall continue to be effective or be reinstated, as
the case may be, if at any time any payment of any Obligations is rescinded or must otherwise be
returned by Lender upon, on account of, or in connection with, the insolvency, bankruptcy or
reorganization of any Borrower or otherwise, all as though such payment had not been made.
7.3 Sale of Collateral.
Upon the occurrence and during the continuance of an Event of
Default, Lender may, subject to the provisions contained in the UCC and other applicable law, rules
or regulations, sell all or any part of the Collateral, at public or private sales, to itself, a
wholesaler, retailer or investor, for cash, upon credit or for future delivery, and at such price
or prices as are commercially reasonable. Any such public or private sales shall be held at such
times and at such place(s) as Lender may determine. In case of the sale of all or any part of the
Collateral on credit or for future delivery, the Collateral so sold may be retained by Lender until
the selling price is paid by the purchaser, but Lender shall not incur any liability in case of the
failure of such purchaser to pay for the Collateral and,
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in case of any such failure, such Collateral may be resold. Lender may, instead of exercising its
power of sale, proceed to enforce its security interest in the Collateral by seeking a judgment or
decree of a court of competent jurisdiction. Without limiting the generality of the foregoing, if
an Event of Default is in effect,
(1) Subject to the rights of any third parties, Lender may license, or sublicense, whether
general, special or otherwise, and whether on an exclusive or non-exclusive basis, any Copyrights,
Patents or Trademarks included in the Collateral throughout the world for such term or terms, on
such conditions and in such manner as Lender shall in its sole discretion determine;
(2) Lender may (without assuming any obligations or liability thereunder), at any time and
from time to time, enforce (and shall have the exclusive right to enforce) against any licensee or
sublicensee all rights and remedies of any Borrower in, to and under any Copyright Licenses, Patent
Licenses or Trademark Licenses and take or refrain from taking any action under any thereof, and
each Borrower hereby releases Lender from, and agrees to hold Lender free and harmless from and
against any claims arising out of, any lawful action so taken or omitted to be taken with respect
thereto other than claims arising out of Lenders gross negligence or willful misconduct; and
(3) Upon request by Lender, each Borrower will execute and deliver to Lender a power of
attorney, in form and substance reasonably satisfactory to Lender for the implementation of any
lease, assignment, license, sublicense, grant of option, sale or other disposition of a Copyright,
Patent or Trademark. In the event of any such disposition pursuant to this
clause 3
,
Borrowers shall supply their know-how and expertise relating to the products or services made or
rendered in connection with Patents, the manufacture and sale of the products bearing Trademarks,
and its customer lists and other records relating to such Copyrights, Patents or Trademarks and to
the distribution of said products, to Lender.
(4) If, at any time when Lender shall determine to exercise its right to sell the whole or any
part of the Shares hereunder, such Shares or the part thereof to be sold shall not, for any reason
whatsoever, be effectively registered under the Securities Act (or any similar statute), then
Lender may, in its discretion (subject only to applicable requirements of law), sell such Shares or
part thereof by private sale in such manner and under such circumstances as Lender may deem
necessary or advisable, but subject to the other requirements of this
Article 7
, and shall
not be required to effect such registration or to cause the same to be effected. Without limiting
the generality of the foregoing, in any such event, Lender in its discretion may (i) in accordance
with applicable securities laws proceed to make such private sale notwithstanding that a
registration statement for the purpose of registering such Shares or part thereof could be or shall
have been filed under the Securities Act (or similar statute), (ii) approach and negotiate with a
single possible purchaser to effect such sale, and (iii) restrict such sale to a purchaser who is
an accredited investor under the Securities Act and who will represent and agree that such
purchaser is purchasing for its own account, for investment and not with a view to the distribution
or sale of such Shares or any part thereof. In addition to a private sale as provided above in
this
Article 7
, if any of the Shares shall not be freely distributable to the public
without registration under the Securities Act (or similar statute) at the time of any proposed sale
pursuant to this
Article 7
, then Lender shall not be required to effect such registration
or cause the same to be effected but, in its discretion (subject only to applicable requirements of
law), may require that any sale hereunder (including a sale at auction) be conducted subject to
restrictions:
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(A) as to the financial sophistication and ability of any Person permitted to bid or
purchase at any such sale;
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(B) as to the content of legends to be placed upon any certificates representing the Shares
sold in such sale, including restrictions on future transfer thereof;
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(C) as to the representations required to be made by each Person bidding or purchasing at
such sale relating to such Persons access to financial information about Parent or any of
its Subsidiaries and such Persons intentions as to the holding of the Shares so sold for
investment for its own account and not with a view to the distribution thereof; and
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(D) as to such other matters as Lender may, in its discretion, deem necessary or appropriate
in order that such sale (notwithstanding any failure so to register) may be effected in
compliance with the Bankruptcy Code and other laws affecting the enforcement of creditors
rights and the Securities Act and all applicable state
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13
(5) Borrowers recognize that Lender may be unable to effect a public sale of any or all the
Shares and may be compelled to resort to one or more private sales thereof in accordance with
clause (4)
above. Borrowers also acknowledge that any such private sale may result in
prices and other terms less favorable to the seller than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall not be deemed to have
been made in a commercially unreasonable manner solely by virtue of such sale being private.
Lender shall be under no obligation to delay a sale of any of the Shares for the period of time
necessary to permit the applicable Subsidiary to register such securities for public sale under the
Securities Act, or under applicable state securities laws, even if such Borrower and/or the
Subsidiary would agree to do so
7.4 Borrowers Obligations Upon Default.
Upon the request of Lender after the occurrence and
during the continuance of an Event of Default, each Borrower will:
(a)
Assemble and make available to Lender the Collateral at such place(s) as Lender shall
reasonably designate, segregating all Collateral so that each item is capable of identification;
and
(b)
Subject to the rights of any lessor, permit Lender, by Lenders officers, employees,
agents and representatives, to enter any premises where any Collateral is located, to take
possession of the Collateral, to complete the processing, manufacture or repair of any Collateral,
and to remove the Collateral, or to conduct any public or private sale of the Collateral, all
without any liability of Lender for rent or other compensation for the use of Borrowers premises.
ARTICLE 8 SPECIAL COLLATERAL PROVISIONS
8.1 Intentionally Omitted.
8.2 Performance of Borrowers Obligations.
Without having any obligation to do so, upon
reasonable prior notice to any Borrower, Lender may perform or pay any obligation which any
Borrower has agreed to perform or pay under this Agreement, including, without limitation, the
payment or discharge of taxes or Liens levied or placed on or threatened against the Collateral.
In so performing or paying, Lender shall determine the action to be taken and the amount necessary
to discharge such obligations. Borrowers shall reimburse Lender on demand for any amounts paid by
Lender pursuant to this Section, which amounts shall constitute Obligations secured by the
Collateral and shall bear interest from the date of demand at the Default Rate.
8.3 Power of Attorney.
For the purpose of protecting and preserving the Collateral and
Lenders rights under this Agreement, each Borrower hereby irrevocably appoints Lender, with full
power of substitution, as its attorney-in-fact with full power and authority, after the occurrence
and during the continuance of an Event of Default, to do any act which each such Borrower is
obligated to do hereunder; to exercise such rights with respect to the Collateral as each such
Borrower might exercise; to use such Inventory, Equipment, Fixtures or other property as each such
Borrower might use; to enter each Borrowers premises; to give notice of Lenders security interest
in, and to collect the Collateral; and before or after Default, to execute and file in each such
Borrowers name any financing statements, amendments and continuation statements necessary or
desirable to perfect or continue the perfection of Lenders security interests in the Collateral.
Each Borrower hereby ratifies all that Lender shall lawfully do or cause to be done by virtue of
this appointment.
8.4 Authorization for Lender to Take Certain Action.
The power of attorney created in Section
8.3 is a power coupled with an interest and shall be irrevocable. The powers conferred on Lender
hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon
Lender to exercise such powers. Lender shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and in no event shall Lender or any of its
directors, officers, employees, agents or representatives be responsible to any Borrower for any
act or failure to act, except for gross negligence or willful misconduct. After the occurrence and
during the continuance of an Event of Default, Lender may exercise this power of attorney without
notice to or assent of any Borrower, in the name of each Borrower, or in Lenders own name, from
time to time in Lenders sole discretion and at Borrowers expense. To further carry out the terms
of this Agreement, after the occurrence and during the continuance of an Event of Default, Lender
may:
(a)
Execute any statements or documents or take possession of, and endorse and collect and
receive delivery or payment of, any checks, drafts, notes, acceptances or other instruments and
documents constituting Collateral, or constituting the payment of
14
amounts due and to become due or any performance to be rendered with respect to the Collateral.
(b)
Sign and endorse any invoices, freight or express bills, bills of lading, storage or
warehouse receipts; drafts, certificates and statements under any commercial or standby letter of
credit relating to Collateral; assignments, verifications and notices in connection with Accounts;
or any other documents relating to the Collateral, including without limitation the Records.
(c)
Use or operate Collateral or any other property of any Borrower for the purpose of
preserving or liquidating Collateral.
(d)
File any claim or take any other action or proceeding in any court of law or equity or as
otherwise deemed appropriate by Lender for the purpose of collecting any and all monies due or
securing any performance to be rendered with respect to the Collateral.
(e)
Commence, prosecute or defend any suits, actions or proceedings or as otherwise deemed
appropriate by Lender for the purpose of protecting or collecting the Collateral.
(f)
Prepare, adjust, execute, deliver and receive payment under insurance claims, and collect
and receive payment of and endorse any instrument in payment of loss or returned premiums or any
other insurance refund or return, and apply such amounts at Lenders sole discretion, toward
repayment of the Obligations or replacement of the Collateral.
8.5 Application of Proceeds.
Any Proceeds and other monies or property received by Lender
pursuant to the terms of this Agreement or any Loan Document may be applied by Lender first to the
payment of expenses of collection, including without limitation reasonable attorneys fees, and
then to the payment of the Obligations in such order of application as Lender may elect.
8.6 Deficiency.
If the Proceeds of any disposition of the Collateral are insufficient to
cover all costs and expenses of such sale and the payment in full of all the Obligations, plus all
other sums required to be expended or distributed by Lender, then each Borrower shall be liable for
any such deficiency.
8.7 Lender Transfer.
Upon the transfer of all or any part of the Obligations, Lender may
transfer all or part of the Collateral and shall be fully discharged thereafter from all liability
and responsibility with respect to such Collateral so transferred, and the transferee shall be
vested with all the rights and powers of Lender hereunder with respect to such Collateral so
transferred, but with respect to any Collateral not so transferred, Lender shall retain all rights
and powers hereby given.
8.8 Lenders Duties.
(a)
Lender shall use reasonable care in the custody and preservation of any Collateral in its
possession. Without limitation on other conduct which may be considered the exercise of reasonable
care, Lender shall be deemed to have exercised reasonable care in the custody and preservation of
such Collateral if such Collateral is accorded treatment substantially equal to that which Lender
accords its own property, it being understood that Lender shall not have any responsibility for
ascertaining or taking action with respect to calls, conversions, exchanges, maturities, declining
value, tenders or other matters relative to any Collateral, regardless of whether Lender has or is
deemed to have knowledge of such matters; or taking any necessary steps to preserve any rights
against any Person with respect to any Collateral. Under no circumstances shall Lender be
responsible for any injury or loss to the Collateral, or any part thereof, arising from any cause
beyond the reasonable control of Lender.
(b)
Lender may at any time deliver the Collateral or any part thereof to any Borrower and the
receipt of such Borrower shall be a complete and full acquittance for the Collateral so delivered,
and Lender shall thereafter be discharged from any liability or responsibility therefor.
(c)
Neither Lender, nor any of its directors, officers, employees, agents, attorneys or any
other person affiliated with or representing Lender shall be liable for any claims, demands, losses
or damages, of any kind whatsoever, made, claimed, incurred or suffered by any Borrower or any
other party through the ordinary negligence of Lender, or any of its directors, officers,
employees, agents, attorneys or any other person affiliated with or representing Lender.
8.9 Termination of Security Interests.
Upon the payment in full of the Obligations and
satisfaction of all Borrowers obligations under this Agreement and the other Loan Documents, and
if Lender has no further obligations under its Commitment, the security interest granted hereby
shall terminate and all rights to the Collateral shall revert to Borrowers. Upon any such
15
termination, the Lender shall, at Borrowers expense, execute and deliver to Borrowers such
documents as Borrowers shall reasonably request to evidence such termination.
ARTICLE 9 GENERAL PROVISIONS
9.1 Notices
. Any notice given by any party under any Loan Document shall be in writing and
personally delivered, sent by overnight courier, or United States mail, postage prepaid, or sent by
facsimile, or other authenticated message, charges prepaid, to the other partys or parties
addresses shown on the Supplement. Each party may change the address or facsimile number to which
notices, requests and other communications are to be sent by giving written notice of such change
to each other party. Notice given by hand delivery shall be deemed received on the date delivered;
if sent by overnight courier, on the next Business Day after delivery to the courier service; if by
first class mail, on the third Business Day after deposit in the U.S. Mail; and if by facsimile, on
the date of transmission.
9.2 Binding Effect
. The Loan Documents shall be binding upon and inure to the benefit of each
Borrower and Lender and their respective successors and permitted assigns; provided, however, that
no Borrower nor Lender may assign or transfer such Borrowers rights or obligations under any Loan
Document without the other partys prior written consent, provided that Lender may (i) transfer
its rights under any of the Loan Documents to an affiliate of Lender and, (ii) may grant a security
interest in its rights and obligations under the Loan Documents. Lender shall at all times
maintain the confidentiality of all documents and information which Lender now or hereafter may
have relating to the Loans, any Borrower, or its business. It is the intention of the parties that,
as a venture capital operating company, Venture Lending & Leasing IV, LLC (LLC), the parent and
sole owner of Venture Lending & Leasing IV, Inc., shall have the benefit of, and the power to
independently exercise, those management rights provided in Section 5.3. To that end, the
references to Lender in Sections 4.2(f), 5.1, 5.2, 5.3 and 5.9(a) hereof shall include LLC, and LLC
shall have the right to exercise the advisory, inspection, information and other rights given to
lender under those Sections independently of Lender. No amendment or modification of this
Agreement shall alter or diminish LLCs rights under the preceding sentence without the consent of
LLC.
9.3 No Waiver
. Any waiver, consent or approval by Lender of any Event of Default or breach of
any provision, condition, or covenant of any Loan Document must be in writing and shall be
effective only to the extent set forth in writing. No waiver of any breach or default shall be
deemed a waiver of any later breach or default of the same or any other provision of any Loan
Document. No failure or delay on the part of Lender in exercising any power, right, or privilege
under any Loan Document shall operate as a waiver thereof, and no single or partial exercise of any
such power, right, or privilege shall preclude any further exercise thereof or the exercise of any
other power, right or privilege. Lender has the right at its sole option to continue to accept
interest and/or principal payments due under the Loan Documents after default, and such acceptance
shall not constitute a waiver of said default or an extension of the maturity of any Loan unless
Lender agrees otherwise in writing.
9.4 Rights Cumulative
. All rights and remedies existing under the Loan Documents are
cumulative to, and not exclusive of, any other rights or remedies available under contract or
applicable law.
9.5 Unenforceable Provisions
. Any provision of any Loan Document executed by any Borrower
which is prohibited or unenforceable in any jurisdiction, shall be so only as to such jurisdiction
and only to the extent of such prohibition or unenforceability, but all the remaining provisions of
any such Loan Document shall remain valid and enforceable.
9.6 Accounting Terms
. Except as otherwise provided in this Agreement, accounting terms and
financial covenants and information shall be determined and prepared in accordance with GAAP.
9.7 Indemnification; Exculpation
. Each Borrower shall pay and protect, defend and indemnify
Lender and Lenders employees, officers, directors, shareholders, affiliates, correspondents,
agents and representatives (other than Lender, collectively Agents) against, and hold Lender and
each such Agent harmless from, all claims, actions, proceedings, liabilities, damages, losses,
expenses (including, without limitation, attorneys fees and costs) and other amounts incurred by
Lender and each such Agent, arising from (i) the matters contemplated by this Agreement or any
other Loan Documents, (ii) any dispute between any Borrower and a third party, or (iii) any
contention that any Borrower has failed to comply with any law, rule, regulation, order or
directive applicable to such Borrowers business;
provided, however
, that this
indemnification shall not
16
apply to any of the foregoing incurred solely as the result of Lenders or any Agents gross
negligence or willful misconduct. This indemnification shall survive the payment and satisfaction
of all of Borrowers Obligations to Lender.
9.8 Reimbursement
. Borrowers shall reimburse Lender for all costs and expenses, including
without limitation reasonable attorneys fees and disbursements expended or incurred by Lender in
any arbitration, mediation, judicial reference, legal action or otherwise in connection with (a)
the preparation and negotiation of the Loan Documents, (b) the amendment and enforcement of the
Loan Documents, including without limitation during any workout, attempted workout, and/or in
connection with the rendering of legal advice as to Lenders rights, remedies and obligations under
the Loan Documents, (c) collecting any sum which becomes due Lender under any Loan Document, (d)
any proceeding for declaratory relief, any counterclaim to any proceeding, or any appeal, or (e)
the protection, preservation or enforcement of any rights of Lender. For the purposes of this
section, attorneys fees shall include, without limitation, fees incurred in connection with the
following: (1) contempt proceedings; (2) discovery; (3) any motion, proceeding or other activity
of any kind in connection with an Insolvency Proceeding; (4) garnishment, levy, and debtor and
third party examinations; and (5) postjudgment motions and proceedings of any kind, including
without limitation any activity taken to collect or enforce any judgment. All of the foregoing
costs and expenses shall be payable upon demand by Lender, and if not paid within forty-five (45)
days of presentation of invoices shall bear interest at the highest applicable Default Rate.
9.9 Execution in Counterparts
. This Agreement may be executed in any number of counterparts
which, when taken together, shall constitute but one agreement.
9.10 Entire Agreement
. The Loan Documents are intended by the parties as the final expression
of their agreement and therefore contain the entire agreement between the parties and supersede all
prior understandings or agreements concerning the subject matter hereof. This Agreement may be
amended only in a writing signed by each Borrower and Lender.
9.11 Governing Law and Jurisdiction
.
(a) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, THIS AGREEMENT AND THE LOAN
DOCUMENTS SHALL BE GOVERNED EXCLUSIVELY BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF CALIFORNIA WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT
MAY BE BROUGHT EXCLUSIVELY IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE
NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE
BORROWERS AND LENDER CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE EXCLUSIVE
JURISDICTION OF THOSE COURTS. EACH OF THE BORROWERS AND LENDER IRREVOCABLY WAIVES ANY OBJECTION,
INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS,
WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION
IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. EACH OF THE BORROWERS AND LENDER EACH
WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER
MEANS PERMITTED BY CALIFORNIA LAW.
9.12 Waiver of Jury Trial
. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, BORROWERS AND
LENDER EACH WAIVES ITS RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT
BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT
TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. BORROWERS AND LENDER EACH AGREES THAT ANY SUCH
CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE
FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL
17
BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEMS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR
THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
ARTICLE 10 CROSS-CORPORATE GUARANTEES
10.1 Guaranty.
In consideration of the execution and delivery by Lender of this Agreement
and the making of Loans to Borrowers hereunder, each Borrower hereby jointly and severally
guarantees absolutely and unconditionally to Lender the due and punctual payment, when and as due
(whether upon demand, at maturity, by reason of acceleration or otherwise), of all liabilities and
obligations of each other Borrower under this Agreement and the other Loan Documents, and agrees to
pay any and all expenses (including reasonable legal fees and disbursements) which may be incurred
by Lender in enforcing its rights under this guaranty. The liability of Borrowers under this
guaranty shall be joint and several, unlimited and unconditional, and this guaranty shall be a
continuing guaranty of any and all Notes given as evidence of or in extension or renewal of any of
the Obligations.
10.2 Waivers.
Each Borrower, to the fullest extent permitted by applicable law, hereby
waives (i) diligence, presentment, demand and protest with respect to any instrument at any time
evidencing any of the Obligations, (ii) any requirement that Lender exhaust any right or take any
action against any other Person or any of the Collateral or other property at any time securing any
of the Obligations, (iii) the benefit of all principles or provisions of applicable law which are
or might be in conflict with the terms of this guaranty, (iv) notice of acceptance hereof, (v)
notice of the occurrence of a Default or Event of Default,(vi) notice of any and all favorable and
unfavorable information, financial or other, about any other Borrower, heretofore, now or hereafter
learned or acquired by a Borrower, (vii) notice of the existence or creation of any of the
Obligations, (viii) notice of any alterations, amendments, increase, extension or exchange of any
of the Obligations; (ix) notice of any amendments, modifications or supplements of or to this
Agreement or any of the other Loan Documents, and (x) the right to require Lender to proceed
against the Borrowers or any Borrower on any of the Obligations. Each Borrower hereby further
agrees that the time of payment of any of the Obligations may be extended and the Borrowers will
remain bound under this guaranty notwithstanding such extensions, whether or not referred to above,
which might otherwise constitute a legal or equitable discharge of a guaranty.
10.3 Subrogation; Subordination.
No Borrower shall have any right of subrogation,
contribution, reimbursement or indemnity whatsoever, nor any right of recourse to security for any
of the Obligations, and nothing shall discharge or satisfy the liability of any Borrower hereunder,
until the termination of this Agreement and the irrevocable satisfaction in full of, or provision
for, the Obligations; and any and all present and future debts and obligations of each Borrower to
the others are hereby postponed in favor of and subordinated to the full payment and performance of
all present and future Obligations.
10.4 Release of Collateral.
The joint and several liability of Borrowers shall continue
notwithstanding and shall not be impaired and affected by any release of any Collateral or by the
release of any one or more Persons liable for any of the Obligations, whether as principal, surety,
guarantor, indemnitor or otherwise.
10.5 Other Waivers.
To the extent permitted by law, each Borrower hereby waives any right of
set-off and any and all other rights, benefits, protections and other defenses available to a
surety or guarantor now or at any time hereafter, including, without limitation, under California
Civil Code 2787 to 2855, inclusive.
10.6 Statutory Waiver of Rights and Defenses Regarding Election of Remedies.
Each Borrower
hereby waives all rights and defenses arising out of the election of remedies by Lender, even
though that election of remedies, such as a nonjudicial foreclosure with respect to security for a
guaranteed obligation, has destroyed such Borrowers rights of subrogation and reimbursement
against the other Borrower by the operation of Section 580d of the California Code of Civil
Procedure or otherwise.
10.7 Financial Condition of Borrowers.
Each Borrower represents and warrants that it is
fully aware of the financial condition of the other Borrower, and each Borrower delivers its
guarantee based solely upon its own independent investigation of such other
18
Borrowers financial condition and in no part upon any representation or statement of Lender with
respect thereto. Each Borrower further represents and warrants that it is in a position to and
hereby does assume full responsibility for obtaining such additional information concerning the
other Borrowers financial condition as such Borrower may deem material to its obligations
hereunder, and such Borrower is not relying upon, nor expecting Lender to furnish it any
information in Lenders possession concerning the other Borrowers financial condition or
concerning any circumstances bearing on the existence or creation, or the risk of nonpayment or
nonperformance of the Obligations.
10.8 Advice of Counsel.
Each Borrower acknowledges that it has either obtained the advice of
counsel or has had the opportunity to obtain such advice in connection with the terms and
provisions of this Section 10.
10.9 Limitation of Guarantee Obligations.
In any action or proceeding involving any state
corporate law, or any state or federal bankruptcy, insolvency, reorganization or other law
affecting the rights of creditors generally, if the obligations of a Borrower under its guarantee
in this Section 10 would otherwise be held or determined to be void, invalid or unenforceable, or
subordinated to the claims of any other creditors, on account of the amount of its liability under
its guarantee, then, notwithstanding, any other provision of this Section 10 to the contrary, the
amount of such liability shall, without further action of such Borrower, Lender or any other
person, be automatically limited and reduced to the highest amount which is valid and enforceable
and not subordinated to the claims of other creditors as determined in such action or proceeding.
ARTICLE 11 DEFINITIONS
The definitions appearing in this Agreement or any Supplement shall be applicable to both the
singular and plural forms of the defined terms:
Account
means any account, as such term is defined in the UCC now owned or hereafter acquired
by any Borrower or in which any Borrower now holds or hereafter acquires any interest and, in any
event, shall include, without limitation, all accounts receivable, book debts and other forms of
obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments)
now owned or hereafter received or acquired by or belonging or owing to any Borrower (including,
without limitation, under any trade name, style or division thereof) whether arising out of goods
sold or services rendered by any Borrower or from any other transaction, whether or not the same
involves the sale of goods or services by any Borrower (including, without limitation, any such
obligation that may be characterized as an account or contract right under the UCC) and all of any
Borrowers rights in, to and under all purchase orders or receipts now owned or hereafter acquired
by it for goods or services, and all of any Borrowers rights to any goods represented by any of
the foregoing (including, without limitation, unpaid sellers rights of rescission, replevin,
reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), and
all monies due or to become due to any Borrower under all purchase orders and contracts for the
sale of goods or the performance of services or both by any Borrower or in connection with any
other transaction (whether or not yet earned by performance on the part of any Borrower), now in
existence or hereafter occurring, including, without limitation, the right to receive the proceeds
of said purchase orders and contracts, and all collateral security and guarantees of any kind given
by any Person with respect to any of the foregoing.
Affiliate
means any Person which directly or indirectly controls, is controlled by, or is under
common control with any Borrower. Control, controlled by and under common control with mean
direct or indirect possession of the power to direct or cause the direction of management or
policies (whether through ownership of voting securities, by contract or otherwise); provided, that
control shall be conclusively presumed when any Person or affiliated group directly or indirectly
owns five percent (5%) or more of the securities having ordinary voting power for the election of
directors of a corporation.
Agreement
means this Loan and Security Agreement and each Supplement thereto, as each may be
amended or supplemented from time to time.
Bankruptcy Code
means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. §101,
et
seq
.), as amended.
Basic Interest
means the fixed rate of interest payable on the outstanding balance of each Loan
at the applicable Designated Rate.
Borrowing Date
means the Business Day on which the proceeds of a Loan are disbursed by Lender.
19
Borrowing Request
means a written request from Borrowers in substantially the form of
Exhibit
B
to the Supplement, requesting the funding of one or more Loans on a particular Borrowing
Date.
Business Day
means any day other than a Saturday, Sunday or other day on which commercial banks
in New York City or San Francisco are authorized or required by law to close.
"
Chattel Paper
means any chattel paper, as such term is defined in the UCC now owned or
hereafter acquired by any Borrower or in which any Borrower now holds or hereafter acquires any
interest.
Closing Date
means the date of this Agreement.
Collateral
means all of Borrowers right, title and interest in and to the following property,
whether now owned or hereafter acquired and wherever located: (a) all Receivables; (b) all
Equipment; (c) all Fixtures; (d) all General Intangibles; (e) all Inventory; (f) all Investment
Property; (g) all Deposit Accounts; (h) all Shares, (i) all other Goods and personal property of
any Borrower, whether tangible or intangible and whether now or hereafter owned or existing,
leased, consigned by or to, or acquired by, any Borrower and wherever located; (j) all Records; and
(k) all Proceeds of each of the foregoing and all accessions to, substitutions and replacements
for, and rents, profits and products of each of the foregoing.
Commitment
means the obligation of Lender to make Loans to Borrowers up to the aggregate
principal amount set forth in the Supplement.
Copyright License
means any written agreement granting any right to use any Copyright or
Copyright registration now owned or hereafter acquired by any Borrower or in which any Borrower now
holds or hereafter acquires any interest.
Copyrights
means all of the following now owned or hereafter acquired by any Borrower or in which
any Borrower now holds or hereafter acquires any interest: (i) all copyrights, whether registered
or unregistered, held pursuant to the laws of the United States, any State thereof or of any other
country; (ii) all registrations, applications and recordings in the United States Copyright Office
or in any similar office or agency of the United States, any State thereof or any other country;
(iii) all continuations, renewals or extensions thereof; and (iv) any registrations to be issued
under any pending applications.
Default
means an event which with the giving of notice, passage of time, or both would constitute
an Event of Default.
Default Rate
is defined in Section 2.7.
Deposit Accounts
means any deposit accounts, as such term is defined in the UCC, now owned or
hereafter acquired by any Borrower or in which any Borrower now holds or hereafter acquires any
interest.
Designated Rate
means the rate of interest per annum described in the Supplement as being
applicable to an outstanding Loan from time to time.
Documents
means any documents, as such term is defined in the UCC, now owned or hereafter
acquired by any Borrower or in which any Borrower now holds or hereafter acquires any interest.
Environmental Laws
means all federal, state or local laws, statutes, common law duties, rules,
regulations, ordinances and codes, together with all administrative orders, directed duties,
requests, licenses, authorizations and permits of, and agreements with, any governmental
authorities, in each case relating to environmental, health, or safety matters.
Equipment
means any equipment, as such term is defined in the UCC now owned or hereafter
acquired by any Borrower or in which any Borrower now holds or hereafter acquires any interest and
any and all additions, substitutions and replacements of any of the foregoing, wherever located,
together with all attachments, components, parts, equipment and accessories installed thereon or
affixed thereto.
Event of Default
means any event described in Section 7.1.
Final Payment
means, with respect to a Loan, an amount equal to that percentage of the original
principal amount of such Loan and payable at the time specified in the Supplement or the Note
evidencing such Loan.
Fixtures
means any fixtures, as such term is defined in the UCC, now owned or hereafter
acquired by any Borrower or in which any Borrower now holds or hereafter acquires any interest.
GAAP
means generally accepted accounting principles and practices consistent with those
principles and practices promulgated or adopted by the Financial
20
Accounting Standards Board and the Board of the American Institute of Certified Public Accountants,
their respective predecessors and successors. Each accounting term used but not otherwise
expressly defined herein shall have the meaning given it by GAAP.
General Intangibles
means any general intangibles, as such term is defined in the UCC now owned
or hereafter acquired by any Borrower or in which any Borrower now holds or hereafter acquires any
interest and, in any event, shall include, without limitation, all right, title and interest that
any Borrower may now or hereafter have in or under any contract, all customer lists, Copyrights,
Trademarks, Patents, websites, domain names, and all applications therefor and reissues,
extensions, or renewals thereof, other rights to Intellectual Property, interests in partnerships,
joint ventures and other business associations, Licenses, permits, trade secrets, proprietary or
confidential information, inventions (whether or not patented or patentable), technical
information, procedures, designs, knowledge, know-how, software, data bases, data, skill,
expertise, recipes, experience, processes, models, drawings, materials and records, goodwill
(including, without limitation, the goodwill associated with any Trademark, Trademark registration
or Trademark licensed under any Trademark License), claims in or under insurance policies,
including unearned premiums, uncertificated securities, money, cash or cash equivalents, deposit,
checking and other bank accounts, rights to sue for past, present and future infringement of
Copyrights, Trademarks and Patents, rights to receive tax refunds and other payments and rights of
indemnification.
Goods
means any goods, as such term is defined in the UCC now owned or hereafter acquired by
any Borrower or in which any Borrower now holds or hereafter acquires any interest.
Indebtedness
of any Person means at any date, without duplication and without regard to whether
matured or unmatured, absolute or contingent: (i) all obligations of such Person for borrowed
money; (ii) all obligations of such Person evidenced by bonds, debentures, notes, or other similar
instruments; (iii) all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising in the ordinary course of business; (iv) all
obligations of such Person as lessee under capital leases; (v) all obligations of such Person to
reimburse or prepay any bank or other Person in respect of amounts paid under a letter of credit,
bankers acceptance, or similar instrument, whether drawn or undrawn; (vi) all obligations of such
Person to purchase securities which arise out of or in connection with the sale of the same or
substantially similar securities; (vii) all obligations of such Person to purchase, redeem,
exchange, convert or otherwise acquire for value any capital stock of such Person or any warrants,
rights or options to acquire such capital stock, now or hereafter outstanding, except to the extent
that such obligations remain performable solely at the option of such Person; (viii) all
obligations to repurchase assets previously sold (including any obligation to repurchase any
accounts or chattel paper under any factoring, receivables purchase, or similar arrangement); (ix)
obligations of such Person under interest rate swap, cap, collar or similar hedging arrangements
(other than foreign exchange hedging arrangements); and (x) all obligations of others of any type
described in clause (i) through clause (ix) above guaranteed by such Person.
Insolvency Proceeding
means with respect to a Person (a) any case, action or proceeding before
any court or other governmental authority relating to bankruptcy, reorganization, insolvency,
liquidation, receivership, dissolution, winding-up or relief of debtors with respect to such
Person, or (b) any general assignment for the benefit of creditors, composition, marshalling of
assets for creditors, or other, similar arrangement in respect of such Persons creditors generally
or any substantial portion of its creditors, undertaken under U.S. Federal, state or foreign law,
including the Bankruptcy Code, but in each case, excluding any avoidance or similar action against
such Person commenced by an assignee for the benefit of creditors, bankruptcy trustee, debtor in
possession, or other representative of another Person or such other Persons estate.
Instruments
means any instrument, as such term is defined in the UCC now owned or hereafter
acquired by any Borrower or in which any Borrower now holds or hereafter acquires any interest.
Intellectual Property
means all Copyrights, Trademarks, Patents, Licenses, trade secrets, source
codes, customer lists, proprietary or confidential information, inventions (whether or not patented
or patentable), technical information, procedures, designs, knowledge, know-how, software, data
bases, skill, expertise, experience, processes, models, drawings, materials, records and goodwill
associated with the foregoing.
Intellectual Property Security Agreement
means any Intellectual Property Security Agreement
21
executed and delivered by a Borrower in favor of Lender, as the same may be amended, supplemented,
or restated from time to time.
Inventory
means any inventory, as such term is defined in the UCC wherever located, now owned
or hereafter acquired by any Borrower or in which any Borrower now holds or hereafter acquires any
interest, and, in any event, shall include, without limitation, all inventory, goods and other
personal property that are held by or on behalf of any Borrower for sale or lease or are furnished
or are to be furnished under a contract of service or that constitute raw materials, work in
process or materials used or consumed or to be used or consumed in any Borrowers business, or the
processing, packaging, promotion, delivery or shipping of the same, and all finished goods, whether
or not the same is in transit or in the constructive, actual or exclusive possession of any
Borrower or is held by others for any Borrowers account, including, without limitation, all goods
covered by purchase orders and contracts with suppliers and all goods billed and held by suppliers
and all such property first may be in the possession or custody of any carriers, forwarding agents,
truckers, warehousemen, vendors, selling agents or other Persons.
Investment Property
means any investment property, as such term is defined in the UCC, now
owned or hereafter acquired by any Borrower or in which any Borrower now holds or hereafter
acquires any interest.
Letter of Credit Rights
means any letter of credit rights, as such term is defined in the UCC,
now owned or hereafter acquired by any Borrower or in which any Borrower now holds or hereafter
acquires any interest, including any right to payment under any letter of credit.
License
means any Copyright License, Patent License, Trademark License or other license of rights
or interests now held or hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest and any renewals or extensions thereof.
Lien
means any mortgage, deed of trust, pledge, hypothecation, assignment for security, security
interest, encumbrance, levy, lien or charge of any kind, whether voluntarily incurred or arising by
operation of law or otherwise, against any property, any conditional sale or other title retention
agreement, any lease in the nature of a security interest, and the filing of any financing
statement (other than a precautionary financing statement with respect to a lease that is not in
the nature of a security interest) under the UCC or comparable law of any jurisdiction.
Loan
means an extension of credit by Lender under this Agreement.
Loan Documents
means, individually and collectively, this Loan and Security Agreement, each
Supplement, each Note, the Intellectual Property Security Agreement and any other security or
pledge agreement(s), any Warrants issued by Borrower to Lender (or its designee) in connection with
this Agreement, and all other contracts, instruments, addenda and documents executed in connection
with this Agreement or the extensions of credit which are the subject of this Agreement.
Material Adverse Effect
or
Material Adverse Change
means, with respect to all Borrowers and
their respective Subsidiaries, if any, on a consolidated basis (a) a material adverse change in, or
a material adverse effect upon, the operations, business, properties, condition (financial or
otherwise) or prospects of the Borrowers, (b) a material impairment of the ability of the Borrowers
to perform under any Loan Document; (c) a material adverse effect upon the legality, validity,
binding effect or enforceability against the Borrowers of any Loan Document; or (d) a material
adverse effect on, or a material adverse change in, the Borrowers interest in, or the value,
perfection or priority of Lenders security interest in the Collateral.
Note
means a promissory note substantially in the form attached to the Supplement as
Exhibit
A-1, A-2 and A-3
, executed by Borrowers evidencing each Loan.
Obligations
means all debts, obligations and liabilities of Borrowers to Lender currently
existing or now or hereafter made, incurred or created under, pursuant to or in connection with
this Agreement or any other Loan Document, whether voluntary or involuntary and however arising or
evidenced, whether direct or acquired by Lender by assignment or succession, whether due or not
due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether a
Borrower may be liable individually or jointly, or whether recovery upon such debt may be or become
barred by any statute of limitations or otherwise unenforceable; and all renewals, extensions and
modifications thereof; and all attorneys fees and costs incurred by Lender in
22
connection with the collection and enforcement thereof as provided for in any Loan Document.
Patent License
means any written agreement granting any right with respect to any invention on
which a Patent is in existence now owned or hereafter acquired by any Borrower or in which any
Borrower now holds or hereafter acquires any interest.
Patents
means all of the following property now owned or hereafter acquired by any Borrower or in
which any Borrower now holds or hereafter acquires any interest: (a) all letters patent of, or
rights corresponding thereto in, the United States or any other country, all registrations and
recordings thereof, and all applications for letters patent of, or rights corresponding thereto in,
the United States or any other country, including, without limitation, registrations, recordings
and applications in the United States Patent and Trademark Office or in any similar office or
agency of the United States, any State thereof or any other country; (b) all reissues,
continuations, continuations-in-part or extensions thereof; (c) all petty patents, divisionals, and
patents of addition; and (d) all patents to be issued under any such applications.
Parent
means Oculus Innovative Sciences, Inc., a California corporation.
Permitted Lien
means:
(a)
involuntary Liens which, in the aggregate, would not have a Material Adverse Effect and
which in any event would not exceed, in the aggregate, the Threshold Amount;
(b)
Liens for current taxes or other governmental or regulatory assessments which are not
delinquent, or which are contested in good faith by the appropriate procedures and for which
appropriate reserves are maintained;
(c)
security interests on any property held or acquired by any Borrower in the ordinary course
of business securing Indebtedness incurred or assumed for the purpose of financing all or any part
of the cost of acquiring such property;
provided
, that such Lien attaches solely to the
property acquired with such Indebtedness and that the principal amount of such Indebtedness does
not exceed one hundred percent (100%) of the cost of such property;
(d)
Liens in favor of Lender;
(e)
bankers liens, rights of setoff and similar Liens incurred on deposits made in the
ordinary course of business;
(f)
materialmens, mechanics, repairmens, employees or other like Liens arising in the
ordinary course of business and which are not delinquent for more than 45 days or are being
contested in good faith by appropriate proceedings;
(g)
any judgment, attachment or similar Lien, unless the judgment it secures has not been
discharged or execution thereof effectively stayed and bonded against pending appeal within 30 days
of the entry thereof;
(h)
licenses or sublicenses of Intellectual Property granted in accordance with Sections
6.5(i) and 6.5(ii) hereof;
(i)
Liens in favor of Venture Lending & Leasing III, LLC, and
(j)
Liens which have been approved by Lender in writing prior to the Closing Date, including
the following: CIT Commercial (Avaya phone system); Exchange Bank (office furniture); Cupertino
National Bank (forklift); Bank of Petaluma (network cabling).
Person
means any individual, sole proprietorship, partnership, joint venture, trust,
unincorporated organization, association, corporation, limited liability company, institution,
public benefit corporation, other entity or government (whether federal, state, county, city,
municipal, local, foreign, or otherwise, including any instrumentality, division, agency, body or
department thereof).
Primary Operating Account
is set forth in Section 8 of Part 2 of the Supplement.
Proceeds
means proceeds, as such term is defined in the UCC and, in any event, shall include,
without limitation, (a) any and all Accounts, Chattel Paper, Instruments, cash or other forms of
money or currency or other proceeds payable to any Borrower from time to time in respect of the
Collateral, (b) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to
any Borrower from time to time with respect to any of the Collateral, (c) any and all payments (in
any form whatsoever) made or due and payable to any Borrower from time to time in connection with
any requisition, confiscation, condemnation, seizure or forfeiture of all or any part
23
of the Collateral by any governmental authority (or any Person acting under color of governmental
authority), (d) any claim of any Borrower against third parties (i) for past, present or future
infringement of any Copyright, Patent or Patent License or (ii) for past, present or future
infringement or dilution of any Trademark or Trademark License or for injury to the goodwill
associated with any Trademark, Trademark registration or Trademark licensed under any Trademark
License and (e) any and all other amounts from time to time paid or payable under or in connection
with any of the Collateral.
Qualified Public Offering
means the closing of a firmly underwritten public offering of any
Borrowers common stock with aggregate proceeds of not less than $20,000,000 (prior to underwriting
expenses and commissions).
Receivables
means all of Borrowers Accounts, Instruments, Documents, Chattel Paper, Supporting
Obligations, and letters of credit and Letter of Credit Rights.
Records
means all Borrowers computer programs, software, hardware, source codes and data
processing information, all written documents, books, invoices, ledger sheets, financial
information and statements, and all other writings concerning Borrowers business.
Related Person
means any Affiliate of any Borrower, or any officer, employee, director or equity
security holder of any Borrower or any Affiliate.
Rights to Payment
means all Borrowers accounts, instruments, contract rights, documents, chattel
paper and all other rights to payment, including, without limitation, the Accounts, all negotiable
certificates of deposit and all rights to payment under any Patent License, any Trademark License,
or any commercial or standby letter of credit.
Securities Act
means the Securities Act of 1933, as amended.
Security Documents
means this Loan and Security Agreement, the Supplement hereto, the
Intellectual Property Security Agreement, and any and all account control agreements, collateral
assignments, chattel mortgages, financing statements, amendments to any of the foregoing and other
documents from time to time executed or filed to create, perfect or maintain the perfection of
Lenders Liens on the Collateral.
Shares
means one hundred percent (100%) of the issued and outstanding capital stock, membership
units or other securities owned or held of record by Parent in any Subsidiary of Parent, including
the other Borrowers.
Subordinated Debt
means Indebtedness (i) approved by Lender and (ii) subordinated to the
Obligations on terms and conditions acceptable to Lender, including without limiting the generality
of the foregoing, subordination of such Indebtedness in right of payment to the prior payment in
full of the Obligations, the subordination of the priority of any Lien at any time securing such
Indebtedness to the Liens of Lender in the collateral covered thereby, and the subordination of the
rights of the holder of such Indebtedness to enforce its junior Lien following an Event of Default
hereunder pursuant to a written subordination agreement approved by Lender in its sole and good
faith discretion.
Subsidiary
means any Person a majority of the equity ownership or voting stock of which is at the
time owned, directly or indirectly, by a Borrower or by one or more other Subsidiaries or by a
Borrower and one or more other Subsidiaries.
Supplement
means that certain supplement to the Loan and Security Agreement, as the same may be
amended or restated from time to time, and any other supplements entered into among Borrowers and
Lender, as the same may be amended or restated from time to time.
Supporting Obligations
means any supporting obligations, as such term is defined in the UCC,
now owned or hereafter acquired by any Borrower or in which any Borrower now holds or hereafter
acquires any interest.
Termination Date
has the meaning specified in the Supplement.
Threshold Amount
has the meaning specified in the Supplement.
Trademark License
means any written agreement granting any right to use any Trademark or
Trademark registration now owned or hereafter acquired by any Borrower or in which any Borrower now
holds or hereafter acquires any interest.
Trademarks
means all of the following property now owned or hereafter acquired by any Borrower or
in which any Borrower now holds or hereafter acquires
24
any interest: (a) all trademarks, tradenames, corporate names, business names, trade styles,
service marks, logos, other source or business identifiers, prints and labels on which any of the
foregoing have appeared or appear, designs and general intangibles of like nature, now existing or
hereafter adopted or acquired, all registrations and recordings thereof, and any applications in
connection therewith, including, without limitation, registrations, recordings and applications in
the United States Patent and Trademark Office or in any similar office or agency of the United
States, any State thereof or any other country or any political subdivision thereof and (b)
reissues, extensions or renewals thereof.
UCC
means the Uniform Commercial Code as the same may, from time to time, be in effect in the
State of California;
provided
, that in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection or priority of, or remedies with respect to, Lenders
Lien on any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a
jurisdiction other than the State of California, the term UCC shall mean the Uniform Commercial
Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions
thereof relating to such attachment, perfection, priority or remedies and for purposes of
definitions related to such provisions. Unless otherwise defined herein, terms that are defined in
the UCC and used herein shall have the meanings given to them in the UCC.
11.2 Construction of Collateral Definitions.
In the definition of Collateral and in all terms
defined directly or indirectly within the definition of Collateral, all references to Borrower or
Borrowers shall be interpreted as referring to any Borrower or to each Borrower, as the
context may require for purposes of any Loan Document, including any security agreement, charge
registration or financing statement executed by any Borrower from time to time pursuant to this
Agreement.
25
[Signature page to Loan and Security Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above
written.
BORROWERS:
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OCULUS INNOVATIVE SCIENCES, INC.
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By:
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/s/ Hojabr Alimi
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Name:
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Hojabr Alimi
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Title:
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President/CEO
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OCULUS TECHNOLOGIES OF MEXICO, S.A. de C.V.
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By:
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/s/ Bruce Thornton
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Name:
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Bruce Thornton
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Title:
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VP Global Ops and Sales
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OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.
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By:
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/s/ Bruce Thornton
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Name:
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Bruce Thornton
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Title:
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VP Global Ops and Sales
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LENDER:
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VENTURE LENDING & LEASING IV, INC.
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By:
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/s/ Ronald W. Swenson
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Name:
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Ronald W. Swenson
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Title:
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CEO
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Schedules to Loan and Security Agreement
dated as of June 14, 2006
among
Oculus Innovative Sciences, Inc.
Oculus Technologies of Mexico, S.A. De C.V.
Oculus Innovative Sciences Netherlands B.V.
Co-Borrowers
and
Venture Lending & Leasing IV, Inc.
Lender
LSA 3.5 Litigation, Claims, Proceedings
(1) A former director and chief operating officer filed an action against Oculus 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 600,000
shares of the Companys common stock at $0.75 per share. The Company has tendered the claims to
the Companys Employment Practice Liability insurance carrier, but it expects the insurance carrier
to deny coverage to all or a portion of the claim.
(2) On March 14, 2006, the Company filed suit in the Northern District of California Federal Court
against Nofil Corporation and Naoshi Kono, CEO 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.
(3) A company in Mexico filed a complaint against the Company and Oculus Mexico alleging
infringement by the Companys trademark Microcyn in Mexico. The Company has filed a registration
for Oculus Microcyn with the Mexican authorities.
LSA 3.7 Subsidiaries
Parent owns 100% of the shares of Oculus Innovative Sciences Netherlands, B.V.
Parent owns 1% of the shares of Oculus Technologies of Mexico, C.A. de C.V.
Aquamed Technologies, Inc., a California corporation wholly-owned by Parent, owns 99% of the shares
of Oculus Technologies of Mexico, C.A. de C.V.
LSA 3.11 Title
(1) The Company licenses certain technology under six issued Japanese patents relating to Microcyn
products and the Companys proprietary super-oxidized water.
LSA 3.12(b)
(1) see disclosure in 3.5(3).
2
LSA 5.1(b) Dispute with governmental agency.
As a cautionary measure, the Company discloses that in its communications with the FDA, contrary to
information previously received from the FDA, the FDA has suggested that an additional pivotal
study could be required. If the additional study is required in connection with the pre-operative
skin treatment trials. IF such additional trials are required, such trials could cost as much as
$500,000. The matter is not a controversy or dispute but merely part of the regulatory clearance
process.
LSA 5.1(d) Change in locations
Notice is hereby given that the Company closed its Morelia, Mexico operations in September, 2005.
LSA 5.19(h) Certain agreements on rights to payment
Notice is hereby given that the Company intends to take a non-cash accounting charge to write down
any assets related to the termination of the Companys relationship with Quimica Pasteur. The
charge will be approximately $2.4 million.
Notice is hereby given that the Company, form time to time, exchanges product for inventory if the
shelf-life of product held by customers/distributors drops below limits specified in the Companys
arrangement with the customer/distributor.
LSA 6.1(g) Indebtedness
Equipment line and notes payable
In March of 2004, the Company obtained an equipment line of credit. The Company could borrow
an amount not to exceed $1,000,000, available in minimum monthly installments of $50,000 until
March 31, 2005, upon which the line expired. The Company was required to pledge fixed assets equal
to the amount of each draw as collateral. In 2005, the Company made four draws on this line of
credit for $494,000, $203,000, $181,000, $116,000 with effective interest rates of 13.5% and
maturities of December 1, 2006, January 1, 2007, April 1, 2007, and May 1, 2007, respectively. All
these loans are payable in 36 monthly installments with a 5% terminal payment due on maturity date.
Associated with this line was short-term notes payable at March 31, 2005 and 2006 of $337,439 and
$331,922. Additionally, associated with this line was long-term notes payable at March 31, 2005
and 2006 of $350,759 and $18,563, respectively. Also in connection with this line the Company
issued 66,667 warrants to purchase preferred series A shares (Note 6).
The Company had a note payable in the amount of $100,000 and which incurred interest at 8%
with a final payment due on April 1, 2004. Associated with this note was short-term notes payable
at March 31, 2005 and 2006 of $0 and $0 respectively. Additionally, associated with this note was
long-term notes payable at March 31, 2005 and 2006 of $0 and $0 respectively. This note was
associated with the financing of general operations. This note was paid in full in April, 2004.
The Company had a note payable in the amount of $15,000 and which incurred interest at 8% with
a final payment due on November 30, 2004. Associated with this note was short-term notes payable
at March 31, 2005 and 2006 of $0 and $0 respectively. Additionally, associated with this note was
long-term notes payable at March 31, 2005 and 2006 of $0 and $0 respectively. This note was
associated with the financing of general operations. This note was paid in full in November, 2004.
The Company had a note payable in the amount of $200,000 and which incurred interest at 8%
with a final payment due on November 1, 2004. Associated with this note was short-term notes
payable at March 31, 2005 and
3
2006 of $0 and $0 respectively. Additionally, associated with this note was long-term notes
payable at March 31, 2005 and 2006 of $0 and $0 respectively. This note was associated with the
financing of general operations. This note was paid in full in November, 2004.
The Company has a note payable in the amount of $64,086 and which incurred interest at 8% with
a final payment due on December 31, 2009. The note payable was amended in February 2005 to $95,000
with a final payment date of December 31, 2005, contingent upon the Company receiving institutional
funding of $15,000,000 by December 31, 2005. In the event institutional funding was not received
the maturity date reverts back to December 31, 2009. The funding was not received and the maturity
date reverted back to December 31, 2009. Associated with this note was short-term notes payable at
March 31, 2005 and 2006 of $95,000 and $0 respectively. Additionally, associated with the note was
long-term notes payable at March 31, 2005 and 2006 of $0 and $68,334 respectively. This note was
established for services rendered by a consultant.
The Company had a note payable in the amount of $91,073 and which incurred interest at 8% with
a final payment due on January 1, 2010. Associated with this note was short-term notes payable at
March 31, 2005 and 2006 of $16,171 and $17,316, respectively. Additionally, associated with this
note was long-term notes payable at March 31, 2005 and 2006 of $72,673 and $56,811, respectively.
This note was associated with the purchase of software, and was secured by the related software.
The Company had a note payable in the amount of $44,102 and which incurred interest at 6% with
a final payment due on March 2, 2010. Associated with this note was short-term notes payable at
March 31, 2005 and 2006 of $7,754 and $8,319, respectively. Additionally, associated with this
note was long-term notes payable at March 31, 2005 and 2006 of $36,348 and $27,444, respectively.
This note was associated with the purchase of a company automobile, and was secured by the related
automobile.
The Company had a note payable in the amount of $158,063 and which incurred interest at 8.2%
with a final payment due on January 1, 2007. Associated with this note was short-term notes
payable at March 31, 2005 and 2006 of $0 and $130,513, respectively. Additionally, associated with
this note was long-term notes payable at March 31, 2005 and 2006, of $0 and $0, respectively. This
note was associated with the financing of company insurance premiums.
The Company had a note payable in the amount of $26,928 and which incurred interest at 4.9%
with a final payment due on February 14, 2011. Associated with this note was short-term notes
payable at March 31, 2005 and 2006 of $0 and $4,890, respectively. Additionally, associated with
this note was long-term notes payable at March 31, 2005 and 2006, of $0 and $21,756, respectively.
This note was associated with the purchase of a company automobile, and was secured by the related
automobile.
The Company had a note payable in the amount of $19,661 and which incurred interest at 14.440%
with a final payment due on March 14, 2011. Associated with this note was short-term notes payable
at March 31, 2005 and 2006 of $0 and $2,664, respectively. Additionally, associated with this note
was long-term notes payable at March 31, 2005 and 2006, of $0 and $16,997, respectively. This note
was associated with the purchase of a company automobile, and was secured by the related
automobile.
The Company has outstanding obligations in the amount of $68,651.95 to Hansel-Prestige, Inc.
in connection with the lease of a car. The Company makes installment pagyments that are scheduled
to continue through May 2012.
The Company has entered into various note agreements that expire over the next five years from
March 31, 2006. Minimum payments for notes are as follows (in thousands):
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For years ending March 31,
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2007
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$
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546
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2008
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63
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2009
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44
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4
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For years ending March 31,
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2010
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109
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2011
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11
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Total minimum maturity payments
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773
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Less: amounts representing interest
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(58
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)
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Present value of minimum maturity payments
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|
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714
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Less: current portion
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(504
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)
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Long-term portion
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$
|
210
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5
SUPPLEMENT
to the
Loan and Security Agreement
Dated as of June 14, 2006
among
Oculus Innovative Sciences, Inc.,
Oculus Technologies of Mexico S.A. de C.V., and
Oculus Innovative Sciences Netherlands B.V.
(each individually a Borrower and collectively Borrowers)
and
Venture Lending & Leasing IV, Inc. (Lender)
This is a Supplement identified in the document entitled Loan and Security Agreement dated as
of June 14, 2006, among Borrowers and Lender. All capitalized terms used in this Supplement and
not otherwise defined in this Supplement have the meanings ascribed to them in Article 11 of the
Loan and Security Agreement, which is incorporated in its entirety into this Supplement. In the
event of any inconsistency between the provisions of that document and this Supplement, this
Supplement is controlling. Execution of this Supplement by the Lender and Borrowers shall
constitute execution of the Loan and Security Agreement.
In addition to the provisions of the Loan and Security Agreement, the parties agree as
follows:
Part 1. Additional Definitions
:
Average Expenses
means, as of any date of determination, an amount equal to the quotient of
(i) the aggregate dollar amount of operating and other expenses paid (excluding non-cash expenses,
amortization, depreciation, and deferred rent) by Borrowers during each of the four (4) full
calendar months most recently ended prior to such date of determination, divided by (ii) four (4).
For the avoidance of doubt, Average Expenses shall exclude extraordinary expenses related to the
closure (prior to the date hereof) of the business in Mexico (including accounting and legal
expenses) and extraordinary expenses related to Parents initial public offering process.
Borrowing Base
means, as of any date of determination, a dollar amount equal to the sum of
(A) eighty percent (80%) of the sum of Eligible Accounts Receivable with respect to which the
principal place of business and chief executive office of the account debtor obligated thereon is
located within the United States of America, plus (B) sixty percent (60%) of the sum of Eligible
Accounts Receivable with respect to which the principal place of business and chief executive
office of the account debtor obligated thereon is located outside the United States of America,
including where the account debtor is the Mexican Ministry of Health, and amounts available for
drawing by any Borrower as beneficiary under letters of credit issued by foreign banks.
Borrowing Base Certificate
is defined in Section 2(c) of Part 2 of this Supplement.
Cash Equivalents
means, as of any date of determination, the following assets or rights of
Borrowers: (i) marketable direct obligations issued or unconditionally guaranteed by the United
States government having maturities of not more than 12 months from the date of acquisition; (ii)
domestic certificates of deposit and time deposits having maturities of not more than 12 months
from the date of acquisition, and overnight bank deposits, in each case issued by a commercial bank
organized under the laws of the United States or any state thereof which at the time of acquisition
are rated A-1 or better by Standard & Poors Corporation (or equivalent), and not subject to any
offset rights in favor of such bank arising from any banking relationship with such bank; and (iii)
commercial paper which at the time of acquisition is rated A-1 or better by Standard & Poors
Corporation (or equivalent), and Floating Rate Preferred issues which at the time of acquisition is
rated AAA or better.
Combined Working Capital Loans
means, as of any date of determination, the aggregate
outstanding principal balance of all Working Capital Loans advanced by Lender hereunder.
Commitment"
: Subject to the terms and conditions set forth in the Loan and Security Agreement
and this Supplement, Lender commits to make:
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(i)
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Growth Capital Loans to Borrowers up to the aggregate original principal
amount of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000) for general
corporate purposes (the
Growth Capital Loan Commitment"
),
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(ii)
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Equipment Loans to Borrowers up to the aggregate original principal amount of
One Million Dollars ($1,000,000.00) to finance the acquisition of Eligible Equipment
and Soft Costs (the
Equipment Loan Commitment"
). As a sub-facility of the
Equipment Loan Commitment, Lender commits to make Soft Cost Loans to Borrowers in an
aggregate original principal amount not to exceed One Million Dollars
($1,000,000.00), i.e., the entire amount of the Equipment Loan Commitment without
duplication (the
Soft Cost Loan Sublimit"
); and
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(iii)
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Working Capital Loans to Borrowers up to the aggregate original principal
amount of One Million Two Hundred Fifty Thousand Dollars ($1,250,000) for working
capital financing (the
Working Capital Loan Commitment"
).
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As used herein, the term
Commitment
shall mean the Equipment Loan Commitment, the Growth
Capital Loan Commitment, the Working Capital Loan Commitment, or any combination or all of them, as
the context requires; and Equipment Loans, Soft Cost Loans, Growth Capital Loans, and Working
Capital Loans are sometimes referred to herein individually as a
Loan
or collectively as
Loans
.
Designated Rate"
: The Designated Rate for each Loan shall be a fixed rate of interest per
annum equal to the Prime Rate as published on the Business Day on which Lender prepares the Note
for such Loan following Borrowers submission of the Borrowing Request for such Equipment Loan,
plus one-half of one percent (0.50%);
provided
, however, that in no event shall the
Designated Rate for a Loan be less than eight percent (8.00%).
Eligible Accounts Receivable
means an Account which meets each of the following
requirements: (i) arises in the ordinary course of Borrowers business (which shall be deemed to
include government contracts); (ii) upon which Borrowers right to payment is absolute, subject to
Borrowers standard terms and conditions, and not contingent on the fulfillment of any conditions
(other than customary conditions such as acceptance by the obligor and final payment due upon
acceptance; provided that aggregate contingent payments shall equal no more than twenty percent
(20%) of the value of the Accounts); (iii) against which there has not been asserted any defense,
offset or discount; (iv) is owned by Borrower free and clear of Liens except for Permitted Liens;
(v) is not more than 90 days past due; and (vi) the principal place of business and chief executive
office of the account debtor obligated thereon is located within the United States or in a foreign
jurisdiction approved by Lender, or the account debtor is the Mexican Ministry of Health or a
foreign bank as issuer of a letter of credit issued for the benefit of Borrower.
Eligible Equipment
means manufacturing equipment, computer equipment, lab and shop
equipment, test equipment, office equipment and other standard hardware approved by Lender in
writing and that is not the subject of a license agreement(s) between Borrower and any Person.
Equipment Loan
means any Loan requested by Borrowers and funded by Lender to finance
Borrowers acquisition or carrying of specific items of Eligible Equipment.
Final Payment"
: Each Equipment Loan and Soft Cost Loan shall have a Final Payment equal to
six and 581/1000 percent (6.581%) of the original principal amount of such Loan. Each Growth
Capital Loan and each Working Capital Loan shall have a Final Payment equal to six and 59/1000
percent (6.059%) of the original principal amount of such Loan.
Growth Capital Loan
means any Loan requested by Borrowers and funded by Lender under the
Growth Capital Loan Commitment for general working capital purposes of Borrowers.
2
Prime Rate
means the prime rate of interest, as published from time to time by
The
Wall Street Journal
in the Money Rates section of its Western Edition newspaper.
Soft Costs
means, with respect to amounts to be financed hereunder with proceeds of a Soft
Cost Loan, Borrowers costs of acquiring or licensing non-standard equipment (not otherwise
approved by Lender as Eligible Equipment). Equipment located outside of the United States,
perpetual software license fees, tenant improvements and other items of personal property approved
in writing by Lender.
Soft Cost Loan
means any Loan requested by Borrowers and funded by Lender to finance Soft
Costs.
Termination Date"
: The Termination Date of a Commitment means the earlier of:
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(i)
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the date Lender may terminate making Loans or extending other
credit pursuant to the rights of Lender under Article 7 of the Loan and
Security Agreement, or
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(ii)
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(A)
with respect to the Growth Capital Loan Commitment
, June 16, 2006,
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(B)
with respect to the Equipment Loan Commitment
, December 31, 2006, or
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(C)
with respect to the Working Capital Loan Commitment
, December
31, 2006,
provided however
, that to the extent that there remains an
unfunded portion of Working Capital Loan Commitment on December 31, 2006,
Borrowers may continue to draw upon up to $500,000 of the unfunded portion of
the Working Capital Loan Commitment through March 31, 2007.
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Unrestricted Cash
means, as of any date of determination, Borrowers cash on hand and Cash
Equivalents which are not subject to a Lien of any Person other than Lender.
Working Capital Loan
means any Loan requested by Borrowers and funded by Lender for general
working capital purposes of Borrowers.
Working Capital Loan Coverage Ratio
means, as of any date of determination, the ratio of the
(a) Borrowing Base to (b) the Combined Working Capital Loans.
Threshold Amount"
: Seventy-Five Thousand Dollars ($75,000.00).
Part 2. Additional Covenants and Conditions
:
1.
Limitation on Loans; Use of Proceeds.
(a)
Equipment Loan Facility and Soft Cost Loan Sub-facility.
Subject to the terms and
conditions of the Loan and Security Agreement:
(i)
Equipment Loans.
Lender agrees to make Equipment Loans to Borrowers from time to time
from the Closing Date and to and including the Termination Date in an aggregate original principal
amount up to but not exceeding the lesser of (A) the then unfunded portion of the Equipment Loan
Commitment, and (B) an amount equal to 100% of the amount paid or payable by Borrowers to a
manufacturer, vendor or dealer who is not an Affiliate of Borrowers for each item of Eligible
Equipment being financed with the proceeds of such Loan as shown on an invoice therefor (excluding
any commissions and any portion of the amount invoiced which relates to servicing of the Eligible
Equipment, delivery, freight and installation charges or sales taxes payable upon acquisition)
(Original Cost). Notwithstanding the foregoing, no item of Eligible Equipment shall be eligible
to be financed with the proceeds of an Equipment Loan if such item was acquired or first placed in
service by Borrowers earlier than 90 days prior to the Borrowing Date of such Equipment Loan;
provided
, however, that so long as the Borrowing Date of the initial Equipment Loan occurs
prior to June 30, 2006, Borrowers may finance Eligible Equipment acquired or first placed in
service after July 1, 2005, at Original Cost.
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(ii)
Soft Cost Loans.
Lender agrees to make Soft Cost Loans to Borrowers from time to time
from the Closing Date and to and including the Termination Date in an aggregate original principal
amount up to but not exceeding the lowest of (A) the then unfunded portion of the Equipment Loan
Commitment; (B) the then unfunded portion of the Soft Cost Loan Sublimit; and (C) an amount equal
to 100% of the Soft Costs proposed to be financed under the related Borrowing Request.
Notwithstanding the foregoing, no item of Soft Costs shall be eligible to be financed with the
proceeds of a Soft Cost Loan if such Soft Cost was first expended or incurred by Borrowers earlier
than 90 days prior to the Borrowing Date of such Soft Cost Loan;
provided
, however, that so
long as the Borrowing Date of the initial Soft Cost Loan occurs prior to June 30, 2006, Borrowers
may finance Soft Costs incurred, acquired or first placed in service after July 1, 2005, at
Original Cost subject to Lenders approval of such Soft Costs.
(iii)
Location of Equipment.
All Eligible Equipment financed hereunder shall be located at
all times at Parents principal place of business in Petaluma, California, or such other place of
business located within the United States as may be consented to by Lender in writing.
(b)
Growth Capital Loans.
(i)
Growth Capital Loan Facility
. Subject to the
terms and conditions of the Loan and Security Agreement and the Supplement, Lender agrees to make Growth Capital Loans to
Borrowers at any time from and after the Closing Date up to and including the Termination Date in
an aggregate original principal amount up to but not exceeding the Growth Capital Loan Commitment.
(ii)
Use of Proceeds.
The proceeds of the Growth Capital Loan shall not be restricted and may
be used by Borrowers for general corporate and operating purposes.
(c)
Working Capital Loans; Mandatory Prepayment to Comply with Coverage Ratio.
Subject to the
terms and conditions of the Loan and Security Agreement and this Supplement, Lender agrees to make
Working Capital Loans to Borrowers from time to time from the Closing Date and to and including the
Termination Date in an aggregate original principal amount up to but not exceeding the lesser of
(i) the Borrowing Base, and (ii) then unfunded portion of Lenders Working Capital Loan Commitment.
(i)
Borrowing Base Limitation; Mandatory Prepayment.
At all times after the initial Working
Capital Loan is advanced, Borrowers shall maintain a Working Capital Loan Coverage Ratio of not
less than 1.0 to 1.0 (provided that failure to maintain such ratio shall not, by itself, constitute
an Event of Default). No later than five (5) days after the end of each month, Borrowers shall
deliver to Lender a certificate of the chief financial officer or other authorized representative
of Parent substantially in the form of
Exhibit D
to this Supplement (
Borrowing Base
Certificate"
), setting forth a calculation of the Working Capital Loan Coverage Ratio. Subject to
Section 1(c)(ii) below, if as of such date of determination the Working Capital Loan Coverage Ratio
is less than 1.0 to 1.0, then Borrowers shall immediately prepay outstanding principal of Working
Capital Loans in an amount necessary to restore compliance with such Ratio, without premium or
penalty. Such mandatory principal prepayments shall be applied to the most remote installments of
such Loans so that the dollar amounts of previously scheduled monthly payments remains unchanged
and the outstanding Loans are repaid sooner.
(ii)
Catch-Up Provision.
Notwithstanding anything to the contrary in Section 1(c)(i) above,
if as of the end of any month that the Working Capital Loan Coverage Ratio is less than 1.0 to 1.0,
and
if as of such date of determination no Event of Default has occurred and is continuing,
then Borrowers may, without penalty, delay prepaying the Loans as required by Section 1(c)(i) above
for up to 30 days after the date on which the related Borrowing Base Certificate was or should have
been delivered. If as of the end of such 30-day period the Borrowing Base has not increased in a
sufficient amount to restore compliance with the Working Capital Loan Coverage Ratio, then pursuant
to Section 1(c)(i) above Borrowers shall immediately prepay, in cash, outstanding principal of
Working Capital Loans in an amount necessary to restore compliance with the Working Capital Loan
Coverage Ratio as of the end of the most recent month-end. Such mandatory principal prepayments
shall be applied to the most remote installments of such Loans so that the dollar amounts of
previously scheduled monthly payments remains unchanged and the outstanding Loans are repaid
sooner.
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(d)
Minimum Funding Amount.
Except to the extent the remaining Commitment is a lesser amount
each Loan or Loans requested by Borrowers to be made on a single Business Day shall be for a
minimum aggregate principal amount of One Hundred Thousand Dollars ($100,000). Borrowers shall not
submit a Borrowing Request more frequently than once each month, provided that a Borrowing Request
may request more than one type of Loan.
(e)
Repayment of Loans.
(i)
Repayment of Equipment and Soft Cost Loans
. Principal of and interest on each Equipment
Loan and each Soft Cost Loan shall be payable as set forth in the Note (substantially in the form
of
Exhibit A-1
) evidencing such Loan, which Note shall provide substantially as follows.
Principal and interest at the Designated Rate shall be fully amortized over a period of 32 months
in equal, monthly installments. In particular, on the Borrowing Date applicable to the Loan
evidenced by such Note, Borrowers shall pay to Lender (i) if the Borrowing Date is not the first
day of the month, interest only at 1.00% per month, in advance, on the principal balance of the
Loan evidenced by such Note, for the period from such Borrowing Date through the last day of the
calendar month in which such Borrowing Date occurs, and (ii) the first amortization installment of
principal and interest. Commencing on the first day of the second full month after the Borrowing
Date, and continuing on the first day of each consecutive calendar month thereafter, principal and
interest at the Designated Rate shall be payable, in advance, in thirty-one (31) equal consecutive
monthly installments. Borrowers shall pay the Final Payment one month later. The rates for each
Equipment Loan and each Soft Cost Loan will be determined prior to funding and shall be fixed for
the term of each such Loan. The payment factors for the amortizing payments are based on a Prime
Rate of 7.50% (the
Base Rate"
) and will be indexed so that the all in yield (inclusive of any
interest-only and Final Payments) of the Loan shall be increased or decreased by any change in the
Prime Rate from the Base Rate, subject to a minimum Prime Rate of 7.50%.
(ii)
Repayment of Growth Capital Loans
. Principal of and interest on each Growth Capital Loan
shall be payable as set forth in the Note, substantially in the form attached hereto as
Exhibit
A-2
, evidencing such Loan, which Note shall provide substantially as follows. Principal and
interest at the Designated Rate shall be fully amortized over a period of 30 months in equal,
monthly installments, commencing after an initial 2 and one-half months period of interest-only
monthly payments which shall commence on June 15, 2006. In particular, if the Borrowing Date
is
on June 15, 2006, then on that date Borrowers shall pay to Lender a first
(1
st
) interest-only installment at a rate of 1.00% per month on the outstanding
principal balance of the Note for the period from June 15, 2006 through June 30, 2006. If the
Borrowing Date
is prior to
June 15, 2006, then on the first day of the first full calendar
month after such Borrowing Date, Borrowers shall pay to Lender interest only at a rate of 1.00% per
month on the outstanding principal balance of the Loan for the period from such Borrowing Date
through June 30, 2006. Commencing on July 1, 2006 after the Borrowing Date, and continuing on
August 1, 2006, Borrowers shall pay interest only, in advance, at a rate of 1.00% per month on the
outstanding principal balance of the Note for the ensuing month. Commencing on September 1, 2006,
and continuing on the first day of each consecutive calendar month thereafter, principal and
interest shall be payable, in advance, in thirty (30) equal consecutive installments in an amount
sufficient to fully amortize the Loan evidenced by such Note. Borrowers shall pay the Final
Payment on each Loan within 30 days of the last amortization payment. The payment factors for the
amortizing payments are based on a Prime Rate of 7.50% (the
Base Rate"
) and will be indexed so
that the all in yield (inclusive of any interest-only and Final Payments) of the Loan shall be
increased or decreased by any change in the Prime Rate from the Base Rate, subject to a minimum
Prime Rate of 7.50%.
(iii)
Repayment of Working Capital Loans
. Principal of and interest on each Working Capital
Loan shall be payable as set forth in the Note, substantially in the form attached hereto as
Exhibit A-3
, evidencing such Loan, which Note shall provide substantially as follows.
Principal and interest at the Designated Rate shall be fully amortized over a period of 30 months
in equal, monthly installments, commencing after an initial 3-month period of interest-only monthly
payments. In particular, if the Borrowing Date
is
the first day of the month, then on that
date Borrowers shall pay to Lender a first (1
st
) interest-only installment at a rate of
1.00% per month on the outstanding principal balance of the Note for the ensuing month; and if the
Borrowing Date
is not
the first day of the month, then on the first day of first full
calendar month after such Borrowing Date, Borrowers shall pay to Lender interest only at a rate of
1.00% per month on the outstanding principal balance of the Loan for the period from such Borrowing
Date through the last day of the calendar month in which such Borrowing Date
5
occurs. Commencing on the first day of the second full month after the Borrowing Date, and
continuing on the first day of each of the next two succeeding months, Borrowers shall pay interest
only, in advance, at a rate of 1.00% per month on the outstanding principal balance of the Note for
the ensuing month. Commencing on the first day of the fourth (4
th
) full calendar month
after the Borrowing Date, and continuing on the first day of each consecutive calendar month
thereafter, principal and interest shall be payable, in advance, in thirty (30) equal consecutive
installments in an amount sufficient to fully amortize the Loan evidenced by such Note. Borrowers
shall pay the Final Payment on each Loan within 30 days of the last amortization payment. The
payment factors for the amortizing payments are based on a Prime Rate of 7.50% (the
Base Rate"
)
and will be indexed so that the all in yield (inclusive of any interest-only and Final Payments) of
the Loan shall be increased or decreased by any change in the Prime Rate from the Base Rate,
subject to a minimum Prime Rate of 7.50%.
(f) Additional Condition Precedent to Loans in Excess of $4,000,000.
In addition to the
satisfaction of all the other conditions precedent specified in Sections 4.1 and 4.2 of the Loan
and Security Agreement, Lenders obligation to fund any Equipment, Soft Cost or Working Capital
Loan once Lender has advanced $4,000,000 in aggregate original principal amount of Loans (of any
type) is subject to the completion by Parents auditors, Marcum & Kliegman LLP, of its audit of
Borrowers 2006 financial reporting year without a going concern qualification.
2.
Voluntary Prepayment
. No Loan may be prepaid voluntarily except as provided in this
Section. Borrowers may voluntarily prepay all Loans in whole but not in part at any time by
tendering to Lender cash payment in respect of such Loans in an amount equal to the sum of: (i) all
accrued and unpaid Basic Interest on each such Loan as of the date of prepayment; (ii) the
undiscounted Final Payment on each such Loan; and (iii) an amount equal to the undiscounted, total
amount of all installment payments of principal and Basic Interest that would have accrued and been
payable from the date of prepayment through the stated Maturity Date of each Loan had it remained
outstanding and been paid in accordance with the terms of the related Note.
3.
Special Provisions Relating to Lien on Intellectual Property; Scope of Collateral Security
for Loans; Negative Pledge on Intellectual Property.
(a)
Initial Exclusion of IP from Collateral.
In reliance on Borrowers covenant in Section
6.2 of the Loan and Security Agreement to keep all of their Intellectual Property assets free and
clear of Liens other than as set forth in Section 6.2, Lender has agreed, subject to the provisions
of this Supplement, to exclude Intellectual Property from the Collateral over which each Borrower
has granted to Lender a Lien to secure the Obligations;
provided
that Collateral shall include
Accounts and General Intangibles that consist of rights to payment and proceeds from the sale,
licensing or disposition of all or any part, or rights in, the Intellectual Property (the
IP
Rights to Payment"
); and
further provided
,
that if at any time while the Obligations are
outstanding a judicial authority (including a U.S. Bankruptcy Court) determines that a security
interest in intellectual property is necessary to the creation or perfection of Lenders Lien in
the IP Rights to Payment, then the Collateral shall automatically, retroactive to the Closing Date,
include the Intellectual Property solely to the extent necessary to permit perfection of Lenders
security interest in the IP Rights to Payment. Consistent with the foregoing, notwithstanding
anything to the contrary in Section 2.10 of the Loan and Security Agreement, or in the definition
of Collateral or elsewhere in Article 11 of the Loan and Security Agreement, Borrowers initial
grant and the perfection of security interests in its assets as security for the Obligations and
the definition of Collateral shall be limited to the following:
Collateral
means all of Borrowers right, title and interest in and to
the following property, whether now owned or hereafter acquired and
wherever located: (a) all Receivables; (b) all Equipment; (c) all Fixtures;
(d) all General Intangibles (subject to the exclusion described below with
respect to Intellectual Property); (e) all Inventory; (f) all Investment
Property; (g) all Deposit Accounts; (h) all other Goods and personal
property of Borrowers
(subject to the exclusion described below with
respect to Intellectual Property)
, whether tangible or intangible and
whether now or hereafter owned or existing, leased, consigned by or to, or
acquired by, Borrowers and wherever located; (i) all Records; and (j) all
Proceeds of each of the foregoing and all accessions to, substitutions and
replacements for, and rents, profits and products of each of the
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foregoing. Notwithstanding the foregoing, the Collateral shall not include
Intellectual Property;
provided, however
, that the Collateral shall
include all Accounts and General Intangibles that consist of rights to
payment and proceeds from the sale, licensing or disposition of all or any
part, or rights in, the Intellectual Property (the
IP Rights to Payment"
);
provided, further
, that if at any time while the Obligations are
outstanding a judicial authority (including a U.S. Bankruptcy Court)
determines that a security interest in the intellectual property is
necessary to the creation or perfection of Lenders Lien in the IP Rights
to Payment, then the Collateral shall automatically, retroactive to the
Closing Date, include the Intellectual Property solely to the extent
necessary to permit perfection of Lenders security interest in the IP
Rights to Payment.
(b)
IP Lien Upon Reduced Liquidity; Release of IP Lien Upon Equity Funding.
Borrowers agree
that if at any time its Unrestricted Cash is less than 600% of Average Expenses, then the
definition of Collateral in Article 11 of the Loan and Security Agreement shall be amended
automatically and immediately, without any further action or writing required by the parties, to
read as stated in Article 11 of the Loan and Security Agreement without reference to Section 4(a)
above, such that all of Borrowers Intellectual Property then owned and thereafter arising or
acquired becomes part of the Collateral for all purposes of the Loan and Security Agreement. In
connection therewith: (A) Lender may file an amendment to its UCC-1 financing statement to reflect
the broader scope of the Collateral to cover Intellectual Property; (B) Borrowers shall execute and
deliver, at Borrowers sole cost and expense, all documents and instruments reasonably necessary to
perfect such Lien, including an Intellectual Property Security Agreement, substantially the form
attached hereto as
Exhibit E
; and (C) Lender shall have verified by customary lien
searches that upon filing such amendment to its financing statement and other perfection documents
Lender will have a perfected Lien of first priority against all Intellectual Property Collateral
subject only to Permitted Liens. If
after
the Lien upon the Borrowers Intellectual
Property in favor of the Lender has been put in place, Parent completes one or more rounds of
equity financing (including convertible, subordinated debt) from which Parent receives aggregate
proceeds of at least $10 million, then so long no Event of Default has occurred and is then
continuing, Lender agrees upon written request of Parent to partially release its Lien with respect
to that portion of the Collateral consisting of Intellectual Property, and upon such partial
release of Lien the provisions of Section 3(a) above shall become applicable.
4.
Subordination of Funded Debt.
During the term of the Loan and Security Agreement and until
performance of all Obligations to Lender, Borrowers shall not incur or permit to exist any
Indebtedness for borrowed money (excluding Indebtedness permitted under Section 6.1 of the Loan and
Security Agreement), unless (a) approved by Lender and (b) where the holders right to repayment of
such Indebtedness, the priority of any Lien on the Collateral securing the same, and the rights of
the holder thereof to enforce remedies against Borrowers following default have been made
subordinate to the Liens of Lender and the prior payment of the Obligations to Lender under the
Loan Documents pursuant to a written subordination agreement approved by Lender in its sole
discretion, which agreement may provide that regularly scheduled payments of accrued interest on
such subordinated Indebtedness may be paid by Borrowers and retained by the holder so long as no
Event of Default has occurred and is continuing. Notwithstanding the foregoing, if Parent (a) has
successfully concluded an initial public offering of its common stock, and (b) Borrowers have
Unrestricted Cash greater than two times the aggregate principal amount of outstanding Loans from
Lender, Borrowers may enter into additional credit facilities with third parties upon the prior
written consent of Lender, which shall not be unreasonably withheld.
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.
Factoring of Mexican Ministry of Health Accounts Receivables
. The portion of the
Collateral consisting of Mexican Ministry of Health accounts receivable owed to Oculus Technologies
of Mexico S.A. de C.V. shall be included in the Borrowing Base (to the extent that such accounts
receivable otherwise satisfy each of the elements of the definition of Eligible Accounts
Receivable) until such time as Oculus Technologies of Mexico S.A. de C.V. enters into an agreement
with NAFINSA for the factoring of a portion of such accounts receivable. Subsequent to the
effective date of such agreement, such portion of the accounts receivable factored to NAFINSA shall
not be deemed to be Eligible Accounts Receivable for purposes of calculation of Borrowing Base.
6.
Issuance of Warrant to Lender
. As additional consideration for the making of the
Commitment, Lender has earned and is entitled to receive immediately upon the execution of the Loan
and Security Agreement and this Supplement, a warrant instrument issued by Parent substantially the
form attached hereto as
Exhibit E
(the
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Warrant"
), exercisable for 215,000 of fully paid and nonassessable shares of Parents Series B
convertible preferred stock (Preferred Stock) at an initial exercise price per share of $4.50 per
share,
provided, however
, if Parent does not complete an initial public offering of its
common stock (IPO) prior to March 31, 2007, then the initial exercise price per share shall be
adjusted to 75% of either the Next Round Price, as defined in the Warrant, or a subsequent IPO
completed after March 31, 2007 (the Stock Purchase Price). The Warrant shall be immediately
vested and exercisable with respect to such shares.
In addition thereto, Lender shall be entitled to purchase under the Warrant at the Stock
Purchase Price up to 85,000 additional fully paid and nonassessable shares of the Parents
Preferred Stock pro rata with the aggregate original principal amount of all Loans advanced by
Lender (the Additional Shares). (For example, if Borrowers draw $1,000,000 of the $5,000,000
Commitment, Lender will be entitled to purchase an additional 17,000 Additional Shares, calculated
as follows: 1,000,000/5,000,000=.20*85,000 shares=17,000 shares). The Additional Shares shall vest
pro rata upon each advance by the Lender of a Loan to Borrowers.
The Warrant shall include piggyback and S-3 registration rights, anti-dilution protections and
other rights and protections equivalent to those rights and protections granted to the holders of
the series of preferred stock for which the Warrant is exercisable, and shall remain exercisable
beyond any public offering of Parents securities or merger transaction, and shall not be subject
to any pay to play provisions in Parents charter documents. The Warrant shall be exercisable at
any time and from time to time through March 31, 2017. Parent acknowledges that Lender has
assigned its rights to receive the Warrant to its parent, Venture Lending & Leasing IV, LLC; in
connection therewith, Parent shall issue the Warrant directly to Venture Lending & Leasing IV, LLC.
Lender shall furnish to Parent a copy of the agreement in which Lender assigned the Warrant to
Venture Lending & Leasing IV, LLC.
7.
Completion of Due Diligence; Payment and Disposition of Commitment Fee.
As an additional
condition precedent under Section 4.1 of the Loan and Security Agreement, Lender shall have
completed to its satisfaction its due diligence review of Borrowers business and financial
condition and prospects, and Lenders credit committee shall have approved the Commitment. If this
condition is not satisfied, Lender shall refund to Borrowers the Twenty-Five Thousand Dollar
($25,000.00) commitment fee previously paid to Lender on account of the Commitment. Lender agrees
that with respect to each Loan advanced, on the Borrowing Date applicable to such Loan, Lender
shall credit against the payments due from Borrowers on such date in respect of such Loan an amount
equal to the product of Twenty-Five Thousand Dollars ($25,000.00) and a fraction the numerator of
which is the principal amount of such Loan and the denominator of which is Five Million Dollars
($5,000,000.00), until the aggregate amount of such credits equals but does not exceed Twenty-Five
Thousand Dollars ($25,000.00).
8.
Debits to Account for ACH Transfers.
For purposes of Section 2.2 and 5.10 of the Loan and
Security Agreement, Borrowers Primary Operating Account is:
Cupertino National Bank
3 Palo Alto Square, Suite 150
Palo Alto, CA 94306
Account No.: 3115895
Routing No.: 121141534 for credit to Greater Bay Bank, Account # 3115895
Contact: Tod Racine Tel: 650-813-3800
Loans will be advanced to the account specified above and payments will be automatically debited
from the same account.
Part 3. Additional Representations
:
Borrowers represent and warrant that as of the Closing Date and each Borrowing Date:
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a)
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Its chief executive office is located at:
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(i)
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Parent: 1129 North McDowell Blvd., Petaluma, CA 94954
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(ii)
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Oculus Technologies of Mexico S.A. de C.V.: Industria Vidriera 81
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Fracc Industrial Zapopan Norte, Zapopan, Jalisco, México, 45130
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(iii)
|
|
Oculus Innovative Sciences Netherlands B.V.:
|
|
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|
Nusterweg 123, 6136 KT Sittard, P.O. Box 5056, 6130 PB Sittard, The Netherlands
|
|
|
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|
b)
|
|
Its Equipment is located at:
|
|
|
|
|
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|
(i)
|
|
Parent: 1129 North McDowell Blvd., Petaluma, CA 94954
|
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|
(ii)
|
|
Oculus Technologies of Mexico S.A. de C.V.: Industria Vidriera 81
|
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|
Fracc Industrial Zapopan Norte, Zapopan, Jalisco, México, 45130
|
|
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|
|
Oculus Innovative Sciences Netherlands B.V.: Nusterweg 123, 6136 KT
|
|
|
|
|
Sittard, P.O. Box 5056, 6130 PB Sittard, The Netherlands
|
|
|
|
|
|
c)
|
|
Its Records are located at:
|
|
|
|
|
|
|
|
(i)
|
|
Parent: 1129 North McDowell Blvd., Petaluma, CA 94954
|
|
|
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|
(ii)
|
|
Oculus Technologies of Mexico S.A. de C.V.: Industria Vidriera 81
|
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|
|
Fracc Industrial Zapopan Norte, Zapopan, Jalisco, México, 45130
|
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|
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|
(ii)
|
|
Oculus Innovative Sciences Netherlands B.V.:
|
|
|
|
|
Nusterweg 123, 6136 KT Sittard, P.O. Box 5056, 6130 PB Sittard, The Netherlands
|
|
|
|
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|
d)
|
|
Its Inventory is located at various distributor warehouse sites and at the Borrowers premises, as referenced below:
|
|
|
|
|
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|
|
(i)
|
|
Parent: 1129 North McDowell Blvd., Petaluma, CA 94954
|
|
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|
(ii)
|
|
Oculus Technologies of Mexico S.A. de C.V.: Pedro Martinez Rivas 861
|
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|
|
Parque Industrial Belenes Norte, Zapopan, Jalisco, México, 45150
|
|
|
|
|
|
|
|
(iii)
|
|
Oculus Innovative Sciences Netherlands B.V.: Nusterweg 123, 6136 KT
Sittard, P.O. Box 5056, 6130 PB Sittard, The Netherlands
|
|
|
|
|
|
e)
|
|
In addition to its chief executive office, Borrowers maintain offices or operates its business at the following locations:
|
Aquamed Technologies
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
MicroMed Laboratories, Inc.
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
L3 Pharmaceuticals, Inc.
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
Oculus Technologies of Mexico S.A. de C.V.
Industria Vidriera 81
Fracc Industrial Zapopan Norte
Zapopan, Jalisco
México
45130 (manufacturing and adminsitration)
9
Pedro Martinez Rivas 861
Parque Industrial Belenes Norte
Zapopan, Jalisco
México
45150 (warehouse)
Oculus Innovative Sciences Netherlands B.V.
Nusterweg 123
6136 KT Sittard
P.O. Box 5056
6130 PB Sittard
The Netherlands
|
f)
|
|
Other than its full corporate name, Parent has conducted business using the
following trade names or fictitious business names: Micromed Laboratories
|
|
|
g)
|
|
Parents Federal Tax I.D. number is: 680423298
|
|
|
h)
|
|
Parents California state corporation I.D. number is: C2160639
|
|
|
i)
|
|
Parent is a majority owner of or in a control relationship with the following
business entities:
|
Aquamed Technologies
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
MicroMed Laboratories, Inc.
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
(corporation formed but shares not yet issued)
L3 Pharmaceuticals, Inc.
1129 N. McDowell Blvd.
Petaluma, CA 94954
USA
(corporation formed but shares not yet issued)
Oculus Technologies of Mexico S.A. de C.V.
Industria Vidriera 81
Fracc Industrial Zapopan Norte
Zapopan, Jalisco
México
45130 [to be clarified]
Oculus Innovative Sciences Netherlands B.V.
Nusterweg 123
6136 KT Sittard
P.O. Box 5056
6130 PB Sittard
The Netherlands
10
|
|
i)
Borrowers Other Deposit and Investment Accounts
:
Including Borrowers
Primary Operating Account identified in Section 8 of Part 2 above, Borrowers
maintain the following other deposit and investment accounts located within the
United States:
|
______________________________________________________
Merrill Lynch
600 California Street, 8
th
Floor San Francisco, CA 94108
Mellon Bank N.A. One Mellon Bank Center, Pittsburgh, PA 15258
ABA# 043000261
For Credit to Merrill Lynch, Account 1011730
For further credit to Oculus Innovative Sciences Acct 6CA-07225
David Bell
415-955-3700
Financial Advisor
6CA-07225
Part 4. Additional Loan Documents
:
|
|
|
Form of Note for Equipment and Soft Cost Loans
|
|
Exhibit A-1
|
Form of Note for Growth Capital Loans
|
|
Exhibit A-2
|
Form of Note for Working Capital Loans
|
|
Exhibit A-3
|
Form of Borrowing Request
|
|
Exhibit B
|
Form of Compliance Certificate
|
|
Exhibit C
|
Form of Borrowing Base Certificate
|
|
Exhibit D
|
Form of Intellectual Property Security Agreement
|
|
Exhibit E
|
Form of Warrant
|
|
Exhibit F
|
Form of Landlord Waiver
|
|
Exhibit G
|
Form of Legal Opinion
|
|
Exhibit H
|
[
Signature Page Follows
]
11
IN WITNESS WHEREOF, the parties have executed this Supplement as of the date first above
written.
|
|
|
|
|
|
BORROWERS:
|
|
|
OCULUS INNOVATIVE SCIENCES, INC.
|
|
|
By:
|
/s/ Hojabr Alimi
|
|
|
|
Name:
|
Hojabr Alimi
|
|
|
|
Title:
|
President/CEO
|
|
|
|
|
|
Address for Notices:
|
|
Attn: General Counsel
|
|
|
1129 North McDowell Blvd., Petaluma, CA 94954
|
|
|
Fax #: (707) 283-0551
|
|
|
|
|
|
|
OCULUS TECHNOLOGIES OF MEXICO S.A. DE C.V.
|
|
|
By:
|
/s/ Bruce Thornton
|
|
|
|
Name:
|
Bruce Thornton
|
|
|
|
Title:
|
VP Global Ops and Sales
|
|
|
|
|
|
Address for Notices:
|
|
Attn: General Counsel, Oculus Innovative Sciences, Inc.
|
|
|
1129 North McDowell Blvd., Petaluma, CA 94954
|
|
|
Fax #: (707) 283-0551
|
|
|
|
|
|
|
OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.
|
|
|
By:
|
/s/ Bruce Thornton
|
|
|
|
Name:
|
Bruce Thornton
|
|
|
|
Title:
|
VP Global Ops and Sales
|
|
|
|
|
|
Address for Notices:
|
|
Attn: General Counsel, Oculus Innovative Sciences, Inc.
|
|
|
1129 North McDowell Blvd., Petaluma, CA 94954
|
|
|
Fax #: (707) 283-0551
|
|
|
|
Copy of any Notice to Borrowers:
|
|
Attn: Sylvia K. Burks
|
|
|
Pillsbury Winthrop Shaw Pittman LLP
|
|
|
2475 Hanover Street, Palo Alto, CA 94304-1114
|
|
|
Fax: (650) 233 4545
|
|
|
|
|
|
LENDER:
|
|
|
|
|
|
|
VENTURE LENDING & LEASING IV, INC.
|
|
|
By:
|
/s/ Ronald W. Swenson
|
|
|
|
Name:
|
Ronald W. Swenson
|
|
|
|
Title:
|
CEO
|
|
|
|
|
|
Address for Notices:
|
|
Attn: Chief Financial Officer
|
|
|
2010 North First Street, Suite 310
|
|
|
San Jose, California 95131
|
|
|
Fax #: (408) 436-8625
|
12
EXHIBIT A-1"
FORM OF PROMISSORY NOTE
[Equipment and Soft Cost Loans]
[
Note
No. X-XXX
]
|
|
|
$_____________
|
|
_______________, 200___
San Jose, California
|
Each of the undersigned (Borrowers) jointly and severally promises to pay to the order of
VENTURE LENDING & LEASING IV, INC., a Maryland corporation (Lender), at its office at 2010 North
First Street, Suite 310, San Jose, California 95131, or at such other place as Lender may designate
in writing, in lawful money of the United States of America, the principal sum of
_________________________ Dollars ($____________), with Basic Interest thereon (except as otherwise
provided herein) from the date hereof until maturity, whether scheduled or accelerated, at a fixed
rate per annum equal to
[the Prime Rate on the Business Day Lender prepares the Note plus 0.50%,
but in no event less than 8.00%;
(the Designated Rate), and a Final Payment in the sum of
[6.581% of face amount]
Dollars ($____________) payable on the Maturity Date.
]
This Note is one of the Notes referred to in, and is entitled to all the benefits of, a Loan
and Security Agreement dated as of June 14, 2006, between Borrowers and Lender (the Loan
Agreement). Each capitalized term not otherwise defined herein shall have the meaning set forth
in the Loan Agreement. The Loan Agreement contains provisions for the acceleration of the maturity
of this Note upon the happening of certain stated events.
Principal of and interest on this Note shall be payable as follows:
On the Borrowing Date, Borrowers shall pay [
if the Borrowing Date is not the first day of the
month:
(i) interest at the rate of 1.00% per month on the outstanding principal balance of this
Note for the period from the Borrowing Date through
[the last day of the same month]
____________,
in the amount of $___; and (ii)] a first (1
st
) amortization installment of
principal and interest at the Designated Rate in the amount of ____________, in advance for
the month of [
first full month after Borrowing Date
].
Commencing on the first day of the second full month after the Borrowing Date, and continuing
on the first day of each consecutive month thereafter, principal and interest at the Designated
Rate shall be payable, in advance, in thirty (30) equal consecutive installments of
____________ Dollars ($____________) each, with a thirty-first (31
st
)
installment on ____________, 200__ equal to the entire unpaid principal balance and accrued
interest at the Designated Rate and any unpaid expenses and fees. The Final Payment in the amount
of $____________ shall be due and payable on
[
one month later]
,
200_.]
This Note may be voluntarily prepaid only as permitted under Section 2 of Part 2 of the
Supplement to the Loan Agreement.
Any unpaid payments of principal or interest on this Note shall bear interest from their
respective maturities, whether scheduled or accelerated, at a rate per annum equal to the Default
Rate. Borrowers shall pay such interest on demand.
Interest, charges and fees shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest, charge or fee payments than if a 365-day year were
used. In no event shall Borrowers be
obligated to pay interest, charges or fees at a rate in
excess of the highest rate permitted by applicable law from time to time in effect.
If Borrowers are late in making any payment under this Note by more than five (5) days,
Borrowers agree to pay a late charge of five percent (5%) of the installment due, but not less
than fifty dollars ($50.00) for any one such delinquent payment. This late charge may be charged
by Lender for the purpose of defraying the expenses incidental to the handling of such delinquent
amounts. Borrowers acknowledge that such late charge represents a reasonable sum considering all
of the circumstances existing on the date of this Note and represents a fair and reasonable
estimate of the costs that will be sustained by Lender due to the failure of Borrowers to make
timely payments. Borrowers further agree that proof of actual damages would be costly and
inconvenient. Such late charge shall be paid without prejudice to the right of Lender to collect
any other amounts provided to be paid or to declare a default under this Note or any of the other
Loan Documents or from exercising any other rights and remedies of Lender.
This Note shall be governed by, and construed in accordance with, the laws of the State of
California.
|
|
|
|
|
|
|
|
|
OCULUS INNOVATIVE SCIENCES, INC.
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Its:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCULUS TECHNOLOGIES OF MEXICO S.A. DE C.V.
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Its:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Its:
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT A-2"
FORM OF PROMISSORY NOTE
[Growth Capital Loans]
[
Note
No. X-XXX
]
|
|
|
|
|
$________________
|
|
|
|
____________,
200___
San Jose, California
|
Each of the undersigned (Borrowers) jointly and severally promises to pay to the order of
VENTURE LENDING & LEASING IV, INC., a Maryland corporation (Lender), at its office at 2010 North
First Street, Suite 310, San Jose, California 95131, or at such other place as Lender may designate
in writing, in lawful money of the United States of America, the principal sum of
___Dollars ($_____________), with Basic Interest thereon (except as otherwise
provided herein) from the date hereof until maturity, whether scheduled or accelerated, at a fixed
rate per annum equal to
[the Prime Rate on the Business Day Lender prepares the Note plus 0.50%,
but in no event less than 8.00%;
(the Designated Rate), and a Final Payment in the sum of
[6.059% of face amount]
Dollars ($_____________) payable on the Maturity Date.
]
This Note is one of the Notes referred to in, and is entitled to all the benefits of, a Loan
and Security Agreement dated as of June 14, 2006, between Borrowers and Lender (the Loan
Agreement). Each capitalized term not otherwise defined herein shall have the meaning set forth
in the Loan Agreement. The Loan Agreement contains provisions for the acceleration of the maturity
of this Note upon the happening of certain stated events.
Principal of and interest on this Note shall be payable as follows:
On the Borrowing Date, Borrowers shall pay interest only at the rate of 1.00% per month on the
outstanding principal balance of this Note for the period from the Borrowing Date through June 30,
2006
,
in the amount of $_____________.
Commencing on July 1, 2006, and continuing on August 1, 2006, Borrowers shall make payments in
advance of interest only at the rate of 1.00% per month on the principal balance outstanding
hereunder, in the amount of $_____________ each.
Commencing on September 1,2006, and continuing on the first day of each consecutive month
thereafter, principal and interest at the Designated Rate shall be payable, in advance, in
twenty-nine (29) equal consecutive installments of _____________ Dollars ($_____________)
each, with a thirtieth
(30
th
)
installment on _____________, 200__, equal to the entire
unpaid principal balance and accrued interest at the Designated Rate and any unpaid expenses and
fees. The Final Payment in the amount of $_____________ shall be due and payable on
[
one month later]
,
200_.]
This Note may be voluntarily prepaid only as permitted under Section 2 of Part 2 of the
Supplement to the Loan Agreement.
Any unpaid payments of principal or interest on this Note shall bear interest from their
respective maturities, whether scheduled or accelerated, at a rate per annum equal to the Default
Rate. Borrowers shall pay such interest on demand.
Interest, charges and fees shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest, charge or fee payments than if a 365-day year were
used. In no event shall Borrowers be
obligated to pay interest, charges or fees at a rate in excess of the highest rate permitted by
applicable law from time to time in effect.
If Borrowers are late in making any payment under this Note by more than five (5) days,
Borrowers agree to pay a late charge of five percent (5%) of the installment due, but not less
than fifty dollars ($50.00) for any one such delinquent payment. This late charge may be charged
by Lender for the purpose of defraying the expenses incidental to the handling of such delinquent
amounts. Borrowers acknowledge that such late charge represents a reasonable sum considering all
of the circumstances existing on the date of this Note and represents a fair and reasonable
estimate of the costs that will be sustained by Lender due to the failure of Borrowers to make
timely payments. Borrowers further agree that proof of actual damages would be costly and
inconvenient. Such late charge shall be paid without prejudice to the right of Lender to collect
any other amounts provided to be paid or to declare a default under this Note or any of the other
Loan Documents or from exercising any other rights and remedies of Lender.
This Note shall be governed by, and construed in accordance with, the laws of the State of
California.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCULUS INNOVATIVE SCIENCES, INC.
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Its:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCULUS TECHNOLOGIES OF MEXICO S.A. DE C.V.
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Its:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Its:
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT A-3"
FORM OF PROMISSORY NOTE
[Working Capital Loans]
[
Note
No. X-XXX
]
|
|
|
$_____________
|
|
_____________, 200__
San Jose, California
|
Each of the undersigned (Borrowers) jointly and severally promises to pay to the order of
VENTURE LENDING & LEASING IV, INC., a Maryland corporation (Lender), at its office at 2010 North
First Street, Suite 310, San Jose, California 95131, or at such other place as Lender may designate
in writing, in lawful money of the United States of America, the principal sum of
_____________ Dollars ($_____________), with Basic Interest thereon (except as otherwise
provided herein) from the date hereof until maturity, whether scheduled or accelerated, at a fixed
rate per annum equal to
[the Prime Rate on the Business Day Lender prepares the Note plus 0.50%,
but in no event less than 8.00%;
(the Designated Rate), and a Final Payment in the sum of
[6.059% of face amount]
Dollars ($_____________) payable on the Maturity Date.
]
This Note is one of the Notes referred to in, and is entitled to all the benefits of, a Loan
and Security Agreement dated as of June 14, 2006, between Borrowers and Lender (the Loan
Agreement). Each capitalized term not otherwise defined herein shall have the meaning set forth
in the Loan Agreement. The Loan Agreement contains provisions for the acceleration of the maturity
of this Note upon the happening of certain stated events.
Principal of and interest on this Note shall be payable as follows:
On the Borrowing Date, Borrowers shall pay
[
if the Borrowing Date is not the first day of the
month:
(i) interest only at the rate of 1.00% per month on the outstanding principal balance of
this Note for the period from the Borrowing Date through
[the last day of the same
month]
_____________,
in the amount of $_____________; and (ii)
]
interest only at the rate of 1.00% per
month, in the amount of $_____________, for the month of
[date of first regular interest-only
installment]
.
Commencing on the first day of the second full month after the Borrowing Date, and continuing
on the first day of the third full month after the Borrowing Date, Borrowers shall make payments in
advance of interest only at the rate of 1.00% per month on the principal balance outstanding
hereunder, in the amount of $_____________ each.
Commencing on the first day of the fourth full month after the Borrowing Date, and continuing
on the first day of each consecutive month thereafter, principal and interest at the Designated
Rate shall be payable, in advance, in twenty-nine (29) equal consecutive installments of
_____________ Dollars ($_____________) each, with a thirtieth (30
th
) installment
on _____________, 200__,equal to the entire unpaid principal balance and accrued interest at the
Designated Rate and any unpaid expenses and fees. The Final Payment in the amount of
$___shall be due and payable on
[
one month later]
,
200_.]
This Note may be voluntarily prepaid only as permitted under Section 2 of Part 2 of the
Supplement to the Loan Agreement.
Any unpaid payments of principal or interest on this Note shall bear interest from their
respective maturities, whether scheduled or accelerated, at a rate per annum equal to the Default
Rate. Borrowers shall pay such interest on demand.
Interest, charges and fees shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest, charge or fee payments than if a 365-day year were
used. In no event shall Borrowers be obligated to pay interest, charges or fees at a rate in
excess of the highest rate permitted by applicable law from time to time in effect.
If Borrowers are late in making any payment under this Note by more than five (5) days,
Borrowers agree to pay a late charge of five percent (5%) of the installment due, but not less
than fifty dollars ($50.00) for any one such delinquent payment. This late charge may be charged
by Lender for the purpose of defraying the expenses incidental to the handling of such delinquent
amounts. Borrowers acknowledge that such late charge represents a reasonable sum considering all
of the circumstances existing on the date of this Note and represents a fair and reasonable
estimate of the costs that will be sustained by Lender due to the failure of Borrowers to make
timely payments. Borrowers further agree that proof of actual damages would be costly and
inconvenient. Such late charge shall be paid without prejudice to the right of Lender to collect
any other amounts provided to be paid or to declare a default under this Note or any of the other
Loan Documents or from exercising any other rights and remedies of Lender.
This Note shall be governed by, and construed in accordance with, the laws of the State of
California.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCULUS INNOVATIVE SCIENCES, INC.
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Its:
|
|
|
|
|
|
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OCULUS TECHNOLOGIES OF MEXICO S.A. DE C.V.
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By:
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Name:
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Its:
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OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.
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By:
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Name:
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Its:
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EXHIBIT B
FORM OF BORROWING REQUEST
[Date]
Venture Lending & Leasing IV, Inc.
2010 North First Street, Suite 310
San Jose, CA 95131
Re:
Oculus Innovative Sciences, Inc.
Gentlemen:
Reference is made to the Loan and Security Agreement dated as of June 14, 2006 (as amended
from time to time, the Loan Agreement, the capitalized terms used herein as defined therein),
between Venture Lending & Leasing IV, Inc. and Oculus Innovative Sciences, Inc.. (the Company),
Oculus Technologies of Mexico S.A. de C.V. and Oculus Innovative Sciences Netherlands B.V., as
borrowers (together with the Company, Borrowers).
The undersigned is the ___of the Company, and hereby requests on behalf of
Borrowers a Loan under the Loan Agreement, and in that connection certifies as follows:
1. The type(s) of the proposed Loan is/are
[an Equipment Loan][a Soft Cost Loan][Growth
Capital Loan][Working Capital Loan].
The amount of the proposed Loan is
_______ and ______/100 Dollars ($___). The Borrowing Date of the
proposed Loan is __________ ___, 200___.
2.
[If an Equipment Loan and/or Soft Cost Loan]
The Eligible Equipment and/or Soft Costs to be
financed with the proceeds of the Loan(s) is or will be located at the address(es) shown on the
attached
Schedule 1
or amendment or supplement to
Schedule 1
, which is hereby
incorporated by reference in and made a part of the Loan Agreement. The requested amount of the
Equipment Loan does not exceed the aggregate of one hundred percent (100%) of the amount paid or
payable by a Borrower to a non-affiliated manufacturer, vendor or dealer for such items of
Equipment as shown on an invoice therefor (excluding any commissions and any portion of the payment
which relates to the servicing of the equipment and sales taxes payable by a Borrower upon
acquisition, and delivery charges). No item of Equipment or Soft Costs was expended, first placed
in service or acquired by a Borrower earlier than ninety (90) days before the proposed Borrowing
Date
[
or, in the case of Eligible Equipment to be financed with an Equipment Loan, on or after July
1, 2005 for the initial Equipment Loan, if such Loan is funded prior to March 31, 2006
] [
or, in the
case of Soft Costs to be financed with a Soft Cost Loan, on or after July 1, 2005 for the initial
Soft Cost Loan, if such Loan is funded prior to March 31, 2006
]
.
3.
[If a Working Capital Loan].
The proposed Working Capital Loan is not in excess of the
Borrowing Base, and after giving effect to the proposed Working Capital Loan, the outstanding
balance of all Working Capital Loans will not exceed the Borrowing Base. The Borrowing Base as of
_____________, is calculated as follows:
Borrowing Base:
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(a) Eligible Accounts Receivable U.S. account debtors
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$_____________
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(b) 80% of (a)
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$_____________
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(c) Eligible Accounts Receivable foreign account debtors
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(including foreign bank LCs and accounts from Mexican Ministry of Health
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$_____________
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(d)
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60% of (c)
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$______________
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(e)
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does total of lines (b) and (d) equal or exceed the amount
of proposed Working Capital Loan?
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YES / NO
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(d)
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does total of lines (b) and (d) equal or exceed the
amount of all Working Capital Loans
outstanding plus the amount of the proposed Loan?
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YES/NO
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4. As of this date, no Default or Event of Default has occurred and is continuing, or will
result from the making of the proposed Loan, the representations and warranties of Borrowers
contained in Article 3 of the Loan Agreement are true and correct, and the conditions precedent
described in Article 4 of the Loan Agreement have been met.
5. No event that has had, or could reasonably be expected to have, a Material Adverse Change
has occurred.
6. The Companys most recent [financial projections or business plan] dated ___, are
enclosed herewith.
The Company shall notify you promptly before the funding of the Loan if any of the matters to
which I have certified above shall not be true and correct on the Borrowing Date
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Very truly yours,
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OCULUS INNOVATIVE
SCIENCES, INC.
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By:
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Name:
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Title:
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Schedule 1 to the Loan and Security Agreement
Description of Equipment/Soft Costs
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Quantity
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Article
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Make
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Year Mfg.
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Model/ Serial #
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Location
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*
if Soft Cost
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See attached continuation to Schedule 1
together with all improvements, replacements, accessions and additions thereto, wherever located,
and all Proceeds thereof arising from the sale, lease, rental or other use or disposition of any
such property, including all rights to payment with respect to insurance or condemnation, returned
premiums, or any cause of action relating to any of the foregoing.
(E) OCULUS
INNOVATIVE SCIENCES, INC.
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By:
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Name:
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Its:
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VENTURE LENDING
& LEASING IV, INC.
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By:
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Name:
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Its:
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EXHIBIT C
2 COMPLIANCE CERTIFICATE
Venture Lending & Leasing IV, Inc.
2010 North First Street, Suite 310
San Jose, CA 95131
Re:
Oculus Innovative Sciences, Inc.
Gentlemen:
Reference is made to the Loan and Security Agreement dated as of June 14, 2006 (as the same
have been and may be amended from time to time, the Loan Agreement, the capitalized terms used
herein as defined therein), between Venture Lending & Leasing IV, Inc. and Oculus Innovative
Sciences, Inc. (the Company), Oculus Technologies of Mexico S.A. de C.V. and Oculus Innovative
Sciences Netherlands B.V., as borrowers (together with the Company, Borrowers).
The undersigned authorized representative of the Company hereby certifies that in accordance
with the terms and conditions of the Loan Agreement, Borrowers are in complete compliance for the
financial reporting period ending ___with all required financial reporting under the Loan
Agreement, except as noted below. Attached herewith are the required documents supporting the
foregoing certification. The undersigned further certifies that the accompanying financial
statements have been prepared in accordance with Generally Accepted Accounting Principles, and are
consistent from one period to the next, except as explained below. These financial statements have
been prepared on a consolidated and consolidating basis for both the Company and its Subsidiaries
Indicate compliance status by circling Yes/No under Complies"
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REPORTING REQUIREMENT
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REQUIRED
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COMPLIES
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Interim Financial Statements
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Monthly within 30 days
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YES/NO
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Annual Financial Statements
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FYE within 150 days
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YES/NO
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Ratio of Unrestricted Cash to Average Expenses:
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(i) Unrestricted Cash as of ___:
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_____________________
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(ii) Average Expenses for the month ended ___:
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______
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(iii) Ratio of (i) to (ii): __________ [
if less than 6:1, then Lien against IP springs
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Business Plan or Projections dated ___
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With each Borrowing Request
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YES/NO
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Any change in budget since prior Borrowing Request
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YES/NO
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[If Lenders Lien on Borrowers Intellectual Property is then in effect:]
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PATENTS, TRADEMARKS AND COPYRIGHTS
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Patents, Trademarks and Copyrights applied
and/or filed with the U.S. Patent &
Trademark Office or U.S. Copyright Office
during the quarter ending _____________
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Quarterly within 30 days
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YES*/NO
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* if YES then please list by application/registration number and title
Pursuant to Section 6.11 of the Loan Agreement, Parent represents and warrants that: (i) as of the
date hereof, Borrowers maintains in the United States only those Deposit Accounts and
investment/securities accounts set forth below; and (ii) a control agreement has been executed and
delivered to Lender with respect to each such account
[Note: If a Borrower has established any new
account(s) since the date of the last compliance certificate, please so indicate]
.
(A) Deposit Accounts
(B)
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Control Agt.
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New
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Name of Institution
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Account Number
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In place?
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Complies
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Account
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1.)
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YES/NO
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YES/NO
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YES/NO
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2.)
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YES/NO
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YES/NO
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YES/NO
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3.)
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YES/NO
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YES/NO
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YES/NO
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4.)
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YES/NO
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YES/NO
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YES/NO
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(C) Investment Accounts
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Control Agt.
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New
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Name of Institution
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Account Number
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In place?
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Complies
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Account
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1.)
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YES/NO
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YES/NO
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YES/NO
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2.)
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YES/NO
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YES/NO
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YES/NO
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3.)
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YES/NO
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YES/NO
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YES/NO
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4.)
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YES/NO
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YES/NO
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YES/NO
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(D)
(E)
EXPLANATIONS
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Very truly yours,
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OCULUS INNOVATIVE SCIENCES,
INC
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Name:
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Title:
*
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*
Must be executed by Borrowers Chief
Financial Officer or other executive officer.
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EXHIBIT D
3 FORM OF BORROWING BASE CERTIFICATE
[to be delivered if Working Capital Loans are outstanding]
Venture Lending & Leasing IV, Inc.
2010 North First Street, Suite 310
San Jose, CA 95131
Re:
Oculus Innovative Sciences, Inc.
Reference is made to the Loan and Security Agreement dated as of June 14, 2006 (as the same
have been and may be amended from time to time, the Loan Agreement, the capitalized terms used
herein as defined therein), between Venture Lending & Leasing IV, Inc. and Oculus Innovative
Sciences, Inc. (the Company), Oculus Technologies of Mexico S.A. de C.V. and Oculus Innovative
Sciences Netherlands B.V., as borrowers (together with the Company, Borrowers).
The undersigned authorized representative of Company hereby certifies that in accordance with
the terms and conditions of the Loan Agreement, Borrowers are in complete compliance for the
financial reporting period ending ___with the borrowing base requirements with respect to
Working Capital Loans set forth in the Supplement to the Loan Agreement, except as noted below.
Attached herewith are the required documents supporting the foregoing certification.
BORROWING BASE REQUIREMENT
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Working Capital Loan Coverage Ratio
as of _________, 200
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Line12 must equal or exceed Line 2
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YES/NO
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Borrowing Base:
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1.
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(a) Eligible Accounts Receivable U.S. account debtors
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$__________________
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(b) 80% of (a)
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$__________________
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(c) Eligible Accounts Receivable foreign account debtors
(including foreign bank LCs and accounts from Mexican Ministry of Health)
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$__________________
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(d) 60% of (c)
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$__________________
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(e) Total of lines (b) and (d)
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$__________________
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2.
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Aggregate outstanding balance
of Combined Working Capital Loans $___
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If Line 2 exceeds Line 1, then Borrowers shall promptly restore compliance by prepaying principal
of Working Capital Loans in an amount necessary to restore compliance.
EXPLANATIONS
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Very truly yours,
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OCULUS INNOVATIVE SCIENCES,
INC.
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By:
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Name:
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Title:
*
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*
Must be executed by Companys Chief
Financial Officer or other executive officer.
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EXHIBIT E
FORM OF INTELLECTUAL PROPERTY SECURITY AGREEMENT
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Intellectual Property Security Agreement (this Agreement) is made as of ___,
200_, by and between OCULUS INNOVATIVE SCIENCES, INC., a California corporation (Grantor), and
VENTURE LENDING & LEASING IV, INC., a Maryland corporation (Secured Party).
RECITALS
A. Pursuant to a Loan and Security Agreement of dated as of June ___, 2006 (the Loan
Agreement) between Grantor, as borrower, and Secured Party, as lender, Secured Party has agreed to
make certain advances of money and to extend certain financial accommodations to Grantor (the
Loans) in the amounts and manner set forth in the Loan Agreement. All capitalized terms used
herein without definition shall have the meanings ascribed to them in the Loan Agreement.
B. Secured Party is willing to make the Loans to Grantor, but only upon the condition, among
others, that Grantor shall grant to Secured Party a security interest in substantially all of
Grantors personal property whether presently existing or hereafter acquired. To that end, Grantor
has executed in favor of Secured Party the Loan Agreement granting a security interest in all
Collateral, and is executing this Agreement with respect to certain items of Intellectual Property,
in particular.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1.
Grant of Security Interest
. As collateral security for the prompt and complete
payment and performance of all of Grantors present or future Obligations, Grantor hereby grants a
security interest and mortgage to Secured Party, as security, in and to Grantors entire right,
title and interest in, to and under the following Intellectual Property, now owned or hereafter
acquired by Grantor or in which Grantor now holds or hereafter acquires any interest (all of which
shall collectively be called the Collateral for purposes of this Agreement):
(a) Any and all copyrights, whether registered or unregistered, held pursuant to the laws of
the United States, any State thereof or of any other country; all registrations, applications and
recordings in the United States Copyright Office or in any similar office or agency of the United
States, and State thereof or any other country; all continuations, renewals, or extensions
thereof; and any registrations to be issued under any pending applications, including without
limitation those set forth on
Exhibit A
attached hereto (collectively, the Copyrights);
(b) All letters patent of, or rights corresponding thereto in, the United States or any other
country, all registrations and recordings thereof, and all applications for letters patent of, or
rights corresponding thereto in, the United States or any other country, including, without
limitation, registrations, recordings and applications in the United States Patent and Trademark
Office or in any similar office or agency of the United States, any State thereof or any other
country; all reissues, continuations, continuations-in-part or extensions thereof; all petty
patents, divisionals, and patents of addition; and all patents to be issued under any such
applications, including without limitation the patents and patent applications set forth on
Exhibit B
attached hereto (collectively, the Patents);
(c) All trademarks, trade names, corporate names, business names, trade styles, service marks,
logos, other source or business identifiers, prints and labels on which any of the foregoing have
appeared or appear, designs and general intangibles of like nature, now existing or hereafter
adopted or acquired, all registrations and recordings thereof, and any applications in connection
therewith, including, without limitation, registrations, recordings and applications in the United
States Patent and Trademark Office or in any similar office or agency of the United States, any
State thereof or any other country or any political subdivision thereof, and reissues, extensions
or renewals thereof, and the entire goodwill of the business of Grantor connected with and
symbolized by such trademarks, including without limitation those set forth on
Exhibit C
attached hereto (collectively, the Trademarks);
(d) Any and all claims for damages by way of past, present and future infringement of any of
the rights included above, with the right, but not the obligation, to sue for and collect such
damages for said use or infringement of the intellectual property rights identified above;
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(e) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all
license fees and royalties arising from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents;
and
(g) All proceeds and products of the foregoing, including without limitation all payments under
insurance or any indemnity or warranty payable in respect of any of the foregoing.
Notwithstanding the foregoing the term Collateral shall not include: (a) intent-to-use
trademarks at all times prior to the first use thereof, whether by the actual use thereof in
commerce, the recording of a statement of use with the United States Patent and Trademark Office or
otherwise, but only to the extent the granting of a security interest in such intent to use
trademarks would be contrary to applicable law or (b) any contract, instrument or chattel paper in
which Grantor has any right, title or interest if and to the extent such contract, instrument or
chattel paper includes a provision containing a restriction on assignment such that the creation of
a security interest in the right, title or interest of Grantor therein would be prohibited and
would, in and of itself, cause or result in a default thereunder enabling another person party to
such contract, instrument or chattel paper to enforce any remedy with respect thereto;
provided,
however
, that the foregoing exclusion shall not apply if (i) such
prohibition has been waived or such other person has otherwise consented to the creation hereunder
of a security interest in such contract, instrument or chattel paper, or (ii) such prohibition
would be rendered ineffective pursuant to Sections 9-407(a) or 9-408(a) of the UCC, as applicable
and as then in effect in any relevant jurisdiction, or any other applicable law (including the
Bankruptcy Code) or principles of equity);
provided
further
that immediately upon
the ineffectiveness, lapse or termination of any such provision, the term Collateral shall
include, and Grantor shall be deemed to have granted a security interest in, all its rights, title
and interests in and to such contract, instrument or chattel paper as if such provision had never
been in effect; and provided further that the foregoing exclusion shall in no way be construed so
as to limit, impair or otherwise affect Secured Partys unconditional continuing security interest
in and to all rights, title and interests of Grantor in or to any payment obligations or other
rights to receive monies due or to become due under any such contract, instrument or chattel paper
and in any such monies and other proceeds of such contract, instrument or chattel paper.
2.
Covenants and Warranties
. Grantor represents, warrants, covenants and agrees as
follows:
(a) Grantor is now the sole owner of the Collateral, except for licenses granted by Grantor to
its customers in the ordinary course of business;
(b) During the term of this Agreement, Grantor will not transfer or otherwise encumber any
interest in the Collateral, except for (i) exclusive licenses granted by Grantor in the ordinary
course of business to a distributor or licensee with respect to one or more fields of use which
when taken alone or together do not constitute a major portion of the existing uses of Grantors
intellectual property rights, and (ii) non-exclusive licenses granted by Grantor in the ordinary
course of business; or as permitted elsewhere in this Agreement or the Loan Agreement;
(c) To its knowledge, each of the Patents is valid and enforceable, and no part of the
Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been
made that any part of the Collateral violates the rights of any third party;
(d) Grantor shall deliver to Secured Party within thirty (30) days of the last day of each
fiscal quarter, a report signed by Grantor, in form reasonably acceptable to Secured Party, listing
any applications or registrations that Grantor has made or filed in respect of any patents,
copyrights or trademarks and the status of any outstanding applications or registrations. Grantor
shall promptly advise Secured Party of any material change in the composition of the Collateral,
including but not limited to any
subsequent ownership right of the Grantor in or to any Trademark, Patent or Copyright not
specified in this Agreement
;
(e) Grantor shall use reasonable commercial efforts to (i) protect, defend and maintain the
validity and enforceability of the Trademarks, Patents and Copyrights (ii) detect infringements of
the Trademarks, Patents and Copyrights and promptly advise Secured Party in writing of material
infringements detected and (iii) not allow
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any material Trademarks, Patents or Copyrights to be
abandoned, forfeited or dedicated to the public without the written consent of Secured Party, which
consent shall not be unreasonably withheld;
(f) Grantor shall apply for registration (to the extent not already registered) with the United
States Patent and Trademark Office or the United States Copyright Office, as applicable: (i) those
intellectual property rights listed on
Exhibits A
,
B
and
C
hereto within
thirty (30) days of the date of this Agreement; and (ii) those additional intellectual property
rights developed or acquired by Grantor from time to time in connection with any product or
service, prior to the sale or licensing of such product or the rendering of such service to any
third party (including without limitation revisions or additions to the intellectual property
rights listed on such
Exhibits A
,
B
and
C
), except with respect to such
rights that Grantor determines in its sole but reasonable commercial judgment need not be filed in
order to avoid a material adverse impact on the business and prospects of Grantor. Grantor shall,
from time to time, execute and file such other instruments, and take such further actions as
Secured Party may reasonably request from time to time to perfect or continue the perfection of
Secured Partys interest in the Collateral. Grantor shall give Secured Party notice of all such
applications or registrations; and
(g) Grantor shall not enter into any agreement that would materially impair or conflict with
Grantors obligations hereunder without Secured Partys prior written consent, which consent shall
not be unreasonably withheld. Grantor shall not permit the inclusion in any material contract to
which it becomes a party of any provisions that could or might in any way prevent the creation of a
security interest in Grantors rights and interests in any property included within the definition
of the Collateral acquired under such contracts.
3.
Further Assurances; Attorney in Fact
.
(a) On a continuing basis, Grantor will make, execute, acknowledge and deliver, and file and
record in the proper filing and recording places in the United States, all such instruments,
including appropriate financing and continuation statements and collateral agreements and filings
with the United States Patent and Trademark Office and the Register of Copyrights, and take all
such action as may reasonably be deemed necessary or advisable, or as reasonably requested by
Secured Party, to perfect Secured Partys security interest in all Copyrights, Patents and
Trademarks and otherwise to carry out the intent and purposes of this Agreement, or for assuring
and confirming to Secured Party the grant or perfection of a security interest in all Collateral.
(b) Grantor hereby irrevocably appoints Secured Party as Grantors attorney-in-fact, with full
authority in the place and stead of Grantor and in the name of Grantor, from time to time in
Secured Partys discretion, to take any action and to execute any instrument which Secured Party
may deem necessary or advisable to accomplish the purposes of this Agreement, including (i) to
modify, in its sole discretion, this Agreement without first obtaining Grantors approval of or
signature to such modification by amending
Exhibits A
,
B
and
C
, hereof, as
appropriate, to include reference to any right, title or interest in any Copyrights, Patents or
Trademarks acquired by Grantor after the execution hereof or to delete any reference to any right,
title or interest in any Copyrights, Patents or Trademarks in which Grantor no longer has or claims
any right, title or interest, (ii) to file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the Collateral without the
signature of Grantor where permitted by law, and (iii) after the occurrence of an Event of Default,
to transfer the Collateral into the name of Secured Party or a third party to the extent permitted
under the California Uniform Commercial Code.
4.
Events of Default
. The occurrence of any of the following shall constitute an Event
of Default under this Agreement:
(a) An Event of Default under the Loan Agreement; or
(b) Grantor breaches any warranty or agreement made by Grantor in this Agreement and, as to any
breach that is capable of cure, Grantor fails to cure such breach within thirty (30) days of the
sooner to occur of Grantors receipt of notice of such breach from Secured Party or the date on
which such breach first becomes known to Grantor.
3
5.
Amendments
. This Agreement may be amended only by a written instrument signed by
both parties hereto, except for amendments permitted under Section 3 hereof to be made by Secured
Party alone.
6.
Counterparts
. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute the same instrument.
[Signature Pages Follow]
4
[Signature page to Intellectual Property Security Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first
above written.
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GRANTOR:
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Address of Grantor:
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OCULUS INNOVATIVE SCIENCES, INC.,
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1129 N. McDowell Blvd.
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By:
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Petaluma, CA 94954
Attn:
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Name:
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Its:
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SECURED PARTY:
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Address of Secured Party:
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VENTURE LENDING & LEASING IV, INC.
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2010 North First Street, Suite 310
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By:
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San Jose, CA 95131
Attn: President
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Name:
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Its:
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5
[EXHIBITS A, B AND C TO BE COMPLETED BY GRANTOR
]
EXHIBIT A
Copyrights
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Description
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Registration Number
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Registration Date
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EXHIBIT B
Patents
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Description
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Registration/Serial Number
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Registration/Application Date
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EXHIBIT C
Trademarks
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Description
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U.S. Registration/Application Number
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Registration/Application Date
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EXHIBIT F
FORM OF WARRANT
EXHIBIT G
FORM OF LANDLORD WAIVER
EXHIBIT H
FORM OF LEGAL OPINION