Business context and reporting period
Oculus Innovative Sciences, Inc. (the issuer named in this filing) filed this Form 10-Q for the quarter ended September 30, 2015, its fiscal second quarter. The filing reports three- and six-month results through September 30, 2015, compared with the same periods in 2014. The company develops and sells Microcyn-based dermatology and advanced tissue-care products, along with laboratory testing services, in the United States and 39 other countries.
Key financial results
Amounts below are in thousands of dollars, except per-share data and percentages.
| Metric | Three months ended Sep. 30, 2015 | Three months ended Sep. 30, 2014 | Six months ended Sep. 30, 2015 | Six months ended Sep. 30, 2014 |
|---|---|---|---|---|
| Total revenue | $4,054 | $3,264 | $7,734 | $6,656 |
| Gross profit | $2,090 | $1,732 | $3,963 | $3,638 |
| Gross margin | 51.6% | 53.1% | 51.2% | 54.7% |
| Operating expenses | $3,948 | $3,276 | $8,132 | $6,696 |
| Operating loss | $(1,858) | $(1,544) | $(4,169) | $(3,058) |
| Net loss | $(1,763) | $(718) | $(4,103) | $(788) |
| Net loss per share, basic and diluted | $(0.11) | $(0.08) | $(0.26) | $(0.09) |
Financial position and cash flows
- At September 30, 2015, cash and cash equivalents were $7.974 million, versus $6.136 million at March 31, 2015. Working capital was $10.104 million, up from $7.066 million.
- Total assets were $13.584 million and total liabilities were $2.836 million. Long-term debt was not reported at quarter-end; the current portion was zero, compared with $87,000 at March 31.
- For the six months, operating activities used $4.333 million of cash. Investing activities provided $4.300 million, including $4.538 million from selling the company’s remaining Ruthigen shares, partly offset by equipment purchases and related costs. Financing activities provided $1.927 million, primarily from net at-the-market stock sales.
- Accounts receivable rose to $2.572 million from $1.517 million at March 31, and inventory rose to $1.670 million from $1.402 million.
Material changes versus the prior comparable periods
- Quarterly revenue rose 24% and six-month revenue rose 16%. Product sales increased 64% for the quarter and 51% for the six months, with growth in the United States, Latin America, and Europe and the rest of the world.
- Product licensing fees and royalties fell 66% for the quarter and 62% for the six months, chiefly reflecting the termination of the Innovacyn agreement, lower Exeltis sales, and lower amortization of Sanfer upfront payments. The filing attributes the prior-period comparison in net loss partly to a substantially larger noncash derivative fair-value gain in 2014.
- SG&A increased 21% for the quarter and 23% for the six months, primarily due to the U.S. dermatology sales force and product launches. R&D increased 17% and 11%, respectively, primarily due to study costs. Gross margin declined in both comparisons.
- U.S. product revenue rose to $1.186 million for the quarter and $1.973 million for the six months, attributed to dermatology, animal-health, and wound-care sales. Management reported that currency weakness dampened reported growth in Latin America and Europe.
Outlook, risks, and unusual items
- Management expects continued losses for the foreseeable future. It stated that cash was expected to fund working-capital needs and sales, marketing, and R&D efforts for at least 12 months from the filing’s reporting date, but that additional capital may be needed for longer-term plans and market development. The company said it might have to reduce spending or curtail R&D if it cannot secure funding.
- The company said U.S. pivotal clinical trials to pursue Microcyn as a drug would be delayed until it finds a strategic funding partner. It had FDA 510(k) clearances to market products as medical devices but did not have the approvals needed to market Microcyn as a drug.
- Management expected SG&A to remain within the current range over the next several quarters; the filing does not provide a specific dollar range or numerical revenue or earnings guidance.
- Customer concentration remained significant: one customer represented 37% of quarterly revenue and 44% of six-month revenue. At quarter-end, three customers represented 40%, 12%, and 10% of net receivables.
- The $4.538 million Ruthigen share-sale proceeds were a material, nonrecurring investing cash source. The company also raised $2.000 million net through at-the-market share sales during the six months, issuing 1,224,100 shares. Outstanding common shares increased to 16,415,765 from 15,045,080 at March 31.
- At September 30, derivative liabilities were $5,000; their fair-value changes produced a $65,000 quarterly gain and a $6,000 six-month gain. The filing identifies these as warrant-related noncash remeasurements.
- Potential severance under four executive employment agreements was $1.097 million. Management described ordinary-course legal matters as currently insignificant but cautioned that litigation could adversely affect the business. The filing reported no material change to previously disclosed risk factors.
- After quarter-end, the company increased authorized common shares to 60 million, effective October 22, 2015. Shareholders had also approved a possible reverse split, but the board had not authorized one as of the filing.
Important facts for investors to verify
- Whether product-sales growth can continue and offset lower licensing and royalty revenue, particularly after the Innovacyn agreement termination.
- Whether the company can control operating costs, improve margins, and reduce cash use; operating cash burn was $4.333 million for the six months.
- How much of quarter-end liquidity depends on further equity financing, and the resulting dilution and share authorization capacity.
- Whether customer concentration, receivable collection, inventory reserves, and foreign-exchange exposure materially affect future results.
- Whether management secures a partner or other funding for clinical trials and longer-term product development, and whether cash runway remains consistent with its stated expectation.