10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2013

or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                                            to ___

Commission File Number 001-33216

OCULUS INNOVATIVE SCIENCES, INC.

(Exact name of registrant as specified in its charter)

Delaware	68-0423298
(State or other jurisdiction of incorporation or organization)	(I.R.S Employer Identification No.)

1129 North McDowell Blvd.

Petaluma, CA 94954

(Address of principal executive offices) (Zip Code)

(707) 283-0550

(Registrant’s telephone number, including area code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	£	Accelerated filer	£
Non-accelerated filer	£	Smaller reporting company	þ
(Do not check if a smaller reporting company)

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  þ

As of November 15, 2013, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 6,644,764.

OCULUS INNOVATIVE SCIENCES, INC.

Index

	Page
PART I — FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Comprehensive Loss	4
Condensed Consolidated Statements of Cash Flows	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	29
PART II — OTHER INFORMATION	29
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3. Defaults Upon Senior Securities	30
Item 4. Mine Safety Disclosures (Not applicable.)	30
Item 5. Other Information	31
Item 6. Exhibits	32

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	September 30,			March 31,
	2013			2013
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,190		$	7,900
Accounts receivable, net		2,424			1,707
Inventories, net		749			992
Prepaid expenses and other current assets		549			935
Total current assets		6,912			11,534
Property and equipment, net		987			800
Deferred offering costs		824			44
Other assets		159			187
Total assets	$	8,882		$	12,565
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,027		$	808
Accrued expenses and other current liabilities		699			703
Current portion of cash settlement liability (See Note 3)		116			37
Deferred revenue		2,322			2,320
Current portion of long-term debt, net of debt discount of $430 (unaudited) and $521 at September 30, 2013 and March 31, 2013, respectively		573			1,259
Total current liabilities		4,737			5,127
Deferred revenue		1,883			2,619
Long-term debt, net of debt discount of $45 (unaudited) and $248 at September 30, 2013 and March 31, 2013, respectively, less current portion		519			676
Cash settlement liability, less current portion (See Note 3)		193			62
Total liabilities		7,332			8,484
Commitments and Contingencies
Stockholders’ Equity
Convertible preferred stock, $0.0001 par value; 5,000,000 shares authorized, none issued and outstanding at September 30, 2013 (unaudited) and March 31, 2013,  respectively		–			–
Common stock, $0.0001 par value; 14,285,715 shares authorized, 6,633,694 and 6,583,150 shares issued and outstanding at September 30, 2013 (unaudited) and March 31, 2013, respectively		1			1
Additional paid-in capital		145,482			144,816
Accumulated other comprehensive loss		(3,077	)		(2,991	)
Accumulated deficit		(140,856	)		(137,745	)
Total stockholders’ equity		1,550			4,081
Total liabilities and stockholders’ equity	$	8,882		$	12,565

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

3

OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,						Six Months Ended September 30,
	2013			2012			2013			2012
Revenues
Product	$	3,456		$	3,890		$	6,177		$	7,674
Product licensing fees		397			374			830			406
Service		236			262			454			497
Total revenues		4,089			4,526			7,461			8,577
Cost of revenues
Product		1,203			1,092			2,224			2,080
Service		181			234			332			413
Total cost of revenues		1,384			1,326			2,556			2,493
Gross profit		2,705			3,200			4,905			6,084
Operating expenses
Research and development		883			513			1,390			1,045
Selling, general and administrative		3,093			3,504			5,912			6,351
Total operating expenses		3,976			4,017			7,302			7,396
Loss from operations		(1,271	)		(817	)		(2,397	)		(1,312	)
Interest expense		(188	)		(280	)		(438	)		(568	)
Interest income		–			1			1			2
Gain (loss) due to change in fair value of common stock (See Note 3)		99			–			(210	)		–
(Loss) gain due to change in fair value of derivative instruments		–			(397	)		–			850
Other expense, net		(39	)		(26	)		(67	)		(46	)
Net loss		(1,399	)		(1,519	)		(3,111	)		(1,074	)
Preferred stock deemed dividend		–			–			–			(1,062	)
Net loss available to common shareholders	$	(1,399	)	$	(1,519	)	$	(3,111	)	$	(2,136	)
Net loss per common share: basic and diluted	$	(0.21	)	$	(0.33	)	$	(0.47	)	$	(0.47	)
Weighted-average number of shares used in per common share calculations:
Basic and diluted		6,631			4,659			6,625			4,587
Other comprehensive loss, net of tax
Net loss	$	(1,399	)	$	(1,519	)	$	(3,111	)	$	(1,074	)
Foreign currency translation adjustments		13			119			(86	)		(1	)
Other comprehensive loss	$	(1,386	)	$	(1,400	)	$	(3,197	)	$	(1,075	)

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

4

OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended September 30,
	2013			2012
Cash flows from operating activities
Net loss	$	(3,111	)	$	(1,074	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		136			136
Stock-based compensation		666			941
Change in fair value of derivative liability		–			(850	)
Loss due to change in fair value of common stock (See Note 3)		210			–
Non-cash interest expense		294			303
Foreign currency transaction gains		(5	)		7
Changes in operating assets and liabilities:
Accounts receivable, net		(738	)		(705	)
Inventories, net		215			70
Prepaid expenses and other current assets		369			84
Accounts payable		225			(28	)
Accrued expenses and other liabilities		76			(71	)
Deferred revenue		(791	)		4,479
Net cash (used in) provided by operating activities		(2,454	)		3,292
Cash flows from investing activities:
Purchases of property and equipment		(338	)		(62	)
Long-term deposits		26			(143	)
Net cash used in investing activities		(312	)		(205	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs		–			1,925
Proceeds from the issuance of convertible preferred stock, net of offering costs		–			907
Proceeds from the exercise of common stock options and warrants		–			16
Deferred offering costs		(780	)		–
Principal payments on long-term debt		(1,138	)		(974	)
Net cash (used in) provided by financing activities		(1,918	)		1,874
Effect of exchange rate on cash and cash equivalents		(26	)		(2	)
Net (decrease) increase cash and cash equivalents		(4,710	)		4,959
Cash and cash equivalents, beginning of period		7,900			3,351
Cash and cash equivalents, end of period	$	3,190		$	8,310
Supplemental disclosure of cash flow information:
Cash paid for interest	$	143		$	265
Non-cash operating and financing activities:
Warrants issued as derivative liabilities in connection with registered direct offering	$	–		$	2,347

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

5

OCULUS INNOVATIVE SCIENCES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Organization and Summary of Significant Accounting Policies

Organization

Oculus Innovative Sciences, Inc. (the “Company”) was incorporated under the laws of the State of California in April 1999 and was reincorporated under the laws of the State of Delaware in December 2006. The Company’s principal office is located in Petaluma, California. The Company is a global healthcare company that designs, produces, and markets prescription and non-prescription products in 27 countries. It is pioneering innovative products for the dermatology, surgical, advanced wound and tissue care, and animal healthcare markets. The Company’s primary focus is on its proprietary technology platform called Microcyn® Technology. This technology is based on electrically charged oxychlorine small molecules designed to target a wide range of organisms that cause disease (pathogens). Several Microcyn® Technology tissue care products are designed to treat infections and enhance healing while reducing the need for antibiotics.

Reverse Stock Split

Effective as of the open of business on April 1, 2013, the Company effected a reverse stock split of its common stock, par value $0.0001 per share. Every 7 shares of common stock were reclassified and combined into one share of common stock. No fractional shares were issued as a result of the reverse stock split. Instead, each resulting fractional share of common stock was rounded up to one whole share. The reverse stock split reduced the number of shares of the Company’s common stock outstanding from 46,080,513 to 6,583,150. The total number of authorized shares of common stock was also proportionally decreased by a ratio of 1:7 and the par value per share of the common stock continued to be $0.0001.

All common shares and per share amounts contained in the condensed consolidated financial statements have been retroactively adjusted to reflect a 1 for 7 reverse stock split, effective April 1, 2013.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2013 and for the three and six months then ended have been prepared in accordance with the accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The unaudited condensed consolidated balance sheet as of September 30, 2013, the condensed consolidated statements of comprehensive loss for the three and six months ended September 30, 2013 and 2012, and the condensed consolidated statements of cash flows for the six months ended September 30, 2013 and 2012 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and six months ended September 30, 2013 are not necessarily indicative of results to be expected for the year ending March 31, 2014 or for any future interim period. The condensed consolidated balance sheet at March 31, 2013 has been derived from audited consolidated financial statements. However, it does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2013, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on June 25, 2013.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Aquamed Technologies, Inc. (“Aquamed”), Oculus Technologies of Mexico S.A. de C.V. and Oculus Innovative Sciences Netherlands, B.V. and Ruthigen, Inc. (“Ruthigen”). All significant intercompany accounts and transactions have been eliminated in consolidation. Aquamed has no current operations.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred taxes, the valuation of equity and derivative instruments, and debt discounts and the estimated amortization periods of upfront licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly. The allowance for uncollectible accounts receivable balances amounted to $9,000 and $22,000, which are included in accounts receivable, net in the accompanying September 30, 2013 and March 31, 2013 condensed consolidated balance sheets, respectively. The reserve for excess and obsolete inventory balances amounted to $76,000 and $170,000, which are included in inventories, net in the accompanying September 30, 2013 and March 31, 2013 condensed consolidated balance sheets, respectively.

6

Reclassifications

Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2014 presentation. These reclassifications have no impact on the Company’s previously reported net loss.

Net Loss per Share

The Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic net loss per share for the three and six months ended September 30, 2013 and 2012 (adjusted if applicable for the reverse stock split effective April 1, 2013) excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.

	September 30,
	2013		2012
	(in thousands)
Options to purchase common stock		1,229		988
Warrants to purchase common stock		1,318		1,529
		2,547		2,517

Common Stock Purchase Warrants and Other Derivative Financial Instruments

The Company classifies common stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement, or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies 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), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions as either an asset or a liability. The Company assesses classification of its freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required. The Company determined that its freestanding derivatives, which principally consist of warrants to purchase common stock, satisfied the criteria for classification as equity instruments at September 30, 2013, other than certain warrants that contain reset provisions and certain warrants that require net-cash settlement that the Company classified as derivative liabilities.

Fair Value of Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The fair value of capital lease obligations and equipment loans approximates their carrying amounts as a market rate of interest is attached to their repayment. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)

Financial liabilities measured at fair value on a recurring basis are summarized below:

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer. 

7

Level 3 Valuation Techniques:

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

The Company uses the Black-Scholes option valuation model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility.

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in “(Loss) gain due to change in fair value of derivative instruments” in the Company’s condensed consolidated statements of comprehensive loss.

As of September 30, 2013, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

Subsequent Events

Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued (Note 10).

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This guidance improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income.  In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of Accumulated Other Comprehensive Income in both net income and Other Comprehensive Income on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.  While the adoption of this standard required the Company to change the format of its condensed consolidated financial statements, it did not have a material impact on the Company’s consolidated financial position and results of operations.

The FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

Accounting standards that have been issued or proposed by the FASB, SEC and/or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the condensed consolidated financial statements upon adoption.

Note 2. Liquidity and Financial Condition

The Company reported a net loss of $3,111,000 for the six months ended September 30, 2013. At September 30, 2013 and March 31, 2013, the Company’s accumulated deficit amounted to $140,856,000 and $137,745,000, respectively. The Company had working capital of $2,175,000 and $6,407,000 as of September 30, 2013 and March 31, 2013, respectively. The Company expects the need to raise additional capital from external sources in order to continue the longer term efforts contemplated under its business plan and repay its outstanding notes payable obligations. The Company expects to continue incurring losses for the foreseeable future and may need to raise additional capital to pursue its product development initiatives, penetrate markets for the sale of its products and continue as a going concern. Upon the closing of the intended initial public offering by the Company’s subsidiary, Ruthigen, Inc., the Company will be repaid for certain costs incurred and advanced related to Ruthigen’s initial public offering and certain other agreed-upon expenses, pursuant to the terms of the separation agreement the Company entered into with Ruthigen (See Note 4). At September 30, 2013, these costs amounted to $911,000, of which $824,000 is reported as deferred offering costs in the accompanying condensed consolidated balance sheet and $87,000 was reported as selling, general and administrative expense.

The Company currently anticipates that its cash and cash equivalents will be sufficient to meet its working capital requirements to continue its sales and marketing and research and development efforts through at least October 1, 2014. However, in order to execute the Company’s long-term Microcyn® product development strategy and to penetrate new and existing markets, the Company may need to raise additional funds through public or private equity offerings, debt financings, corporate collaborations or other means and potentially reduce operating expenditures.

8

Management believes that the Company has access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, the Company has not secured any commitment for new financing at this time, nor can it provide any assurance that the Ruthigen initial public offering will be completed or that other new financings will be available on commercially acceptable terms, if needed. If the Company is unable to secure additional capital, it may be required to curtail its research and development initiatives and take additional measures to reduce costs in order to conserve its cash.

Note 3. Condensed Consolidated Balance Sheets

Inventories

Inventories consisted of the following (in thousands):

	September 30,			March 31,
	2013			2013
Raw materials	$	591		$	835
Finished goods		234			327
		825			1,162
Less: inventory allowances		(76	)		(170	)
	$	749		$	992

Notes Payable

Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc.

On May 1, 2010, the Company entered into a loan and security agreement and a supplement to the loan and security agreement with Venture Lending & Leasing V, Inc. (“VLL5”) to borrow up to an aggregate of $3,000,000 (collectively, the “VLL5 Agreements”). On May 3, 2010, the Company borrowed $2,000,000 on the first tranche and on November 17, 2010, the Company borrowed $1,000,000 on the second tranche.  The loan is secured by all assets of the Company excluding intellectual property under certain circumstances. Related to the first tranche, the Company made eight monthly interest-only payments of $16,660 through December 1, 2010. Thereafter, the Company made interest and principal payments of $75,000 per month through June 1, 2013. Related to the second tranche, the Company paid monthly interest only payments of $8,330 through May 1, 2012. Thereafter, the Company made interest and principal payments of $37,500 per month through November 1, 2013. The Company made a final balloon payment related to the first tranche of $132,000 prior to the June 1, 2013 deadline, and made a final balloon payment related to the second tranche of $66,000 on or prior to November 1, 2013. The effective interest rate on the first and second tranche is 13.3%. During the three months ended September 30, 2013 and 2012, the Company made interest payments of $7,000 and $50,000, respectively, and principal payments of $24,000 and $288,000, respectively. During the six months ended September 30, 2013 and 2012, the Company made interest payments of $27,000 and $109,000, respectively, and principal payments of $556,000 and $566,000, respectively.

In connection with the VLL5 Agreements, the Company issued two warrants to Venture Lending & Leasing V, LLC, a Delaware limited liability company (“LLC5”), which, in the aggregate, had a total put option cash value of $750,000 (the “VLL5 Warrants”). The $750,000 cash value of the VLL5 Warrants was recorded as a cash settlement liability and a corresponding amount of $750,000 was recorded as a discount on the note payable.  The discount is being accreted to non-cash interest expense over the term of the loan using the effective interest method.  During the three months ended September 30, 2013 and 2012, the Company recorded $24,000 and $63,000, respectively, of non-cash interest expense related to the loans. During the six months ended September 30, 2013 and 2012, the Company recorded $90,000 and $125,000, respectively, of non-cash interest expense related to the loans. The remaining balance of the loans amounted to $138,000 at September 30, 2013, which is included in the current portion of long-term debt, net of debt discount in the accompanying condensed consolidated balance sheet.

On June 29, 2011, the Company entered into a loan and security agreement and a supplement to the loan and security agreement with Venture Lending & Leasing VI, Inc. (“VLL6”) to borrow up to an aggregate of up to $2,500,000 (collectively, the “VLL6 Agreements”).  The VLL6 Agreements provided for a first tranche of $1,500,000 and, upon meeting certain financial milestones, a second tranche of $1,000,000. The loan is secured by the assets of the Company including intellectual property. On June 29, 2011, the Company borrowed $1,500,000 on the first tranche. On September 30, 2011, the Company met the financial milestones to borrow the second tranche. On November 10, 2011, the Company borrowed the second tranche.  The cash interest or “streaming” rate on the loan is 10%. In connection with the first tranche, for the first nine months, the Company made monthly interest-only payments set at $12,500 through March 1, 2012. The Company now makes principal and interest payments of $56,250 per month through September 1, 2014. Additionally, the Company will make a final balloon payment of $116,505 on September 29, 2014. In connection with the second tranche, for the first nine months, the Company made monthly interest-only payments set at $8,333 through August 31, 2012. The Company now makes principal and interest payments of $37,500 per month through February 1, 2015. Additionally, the Company will make a final balloon payment of $77,670 on February 1, 2015, resulting in an effective interest rate of 13%. During the three months ended September 30, 2013 and 2012, the Company made interest payments of $53,000 and $75,000, respectively and made principal payments of $228,000 and $148,000, respectively. During the six months ended September 30, 2013 and 2012, the Company made interest payments of $114,000 and $151,000, respectively and made principal payments of $449,000 and $266,000, respectively.

9

In connection with the VLL6 Agreements, the Company issued a warrant to Venture Lending & Leasing VI, LLC (individually referred to as “LLC6” and collectively referred to with LLC5 as “WTI”) for the purchase of 32,332 shares of its common stock at a purchase price per share equal to $11.592. Once the Company became eligible to draw the second tranche of the loan, the Company was required to issue a second warrant to LLC6 with coverage equal to $62,500 for the purchase of additional shares of the Company’s common stock at a strike price equal to the 10-day volume-weighted average price (“VWAP”) ending on the trading day prior to the date the Company satisfied the second tranche milestones. On September 30, 2011, the Company met the second tranche milestones and the Company issued the second warrant for the purchase of 5,586 shares of its common stock at a purchase price per share equal to $11.189. On November 10, 2011, the Company borrowed the second tranche and therefore the Company became obligated to issue a third warrant to LLC6 with coverage equal to $62,500 for the purchase of additional shares of its common stock at a strike price equal to the 10-day VWAP ending on the trading day prior to the borrowing date of the second tranche. In connection with borrowing the second tranche, the Company issued the third warrant for the purchase of 5,884 shares of its common stock at a purchase price per share equal to $10.623. The three warrants issued to LLC6 are hereinafter collectively referred to as the “VLL6 Warrants,” and had a total put option cash value, in the aggregate, of $1,250,000. The Company recorded the $1,250,000 cash value of the VLL6 Warrants as a cash settlement liability and a corresponding amount of $1,250,000 was recorded as a discount on the note payable. The discount is being accreted to non-cash interest expense over the term of the loan using the effective interest method. For the three months ended September 30, 2013 and 2012, the Company recorded $104,000 and $91,000 of non-cash interest related to the loan, respectively. For the six months ended September 30, 2013 and 2012, the Company recorded $204,000 and $178,000 of non-cash interest related to the loan, respectively. The remaining balance of the discount on the loan amounted to $474,000 at September 30, 2013. The remaining balance of the loan amounted to $1,367,000 at September 30, 2013, of which $821,000 is included in the current portion of long-term debt in the accompanying condensed consolidated balance sheet.

On October 30, 2012, the Company entered into respective letter agreements with VLL5 and VLL6 to amend the repayment terms of its outstanding debt obligations. Prior to the execution of these agreements, LLC5 and LLC6 held an aggregate of 79,517 warrants (adjusted for the reverse stock split effective April 1, 2013) to purchase common stock, which, in the aggregate, had a total put option cash value of $2,000,000 (the “Cash Settlement Liability”) and was included in long term liabilities on the Company’s condensed consolidated balance sheets.

On that same day, the Company also entered into a stock purchase agreement with WTI for the issuance to WTI of shares of its common stock having an aggregate grant date fair market value of $3,500,000, or approximately $5.67 per post-split share, in exchange for LLC5’s agreement to surrender the VLL5 Warrants, and LLC6’s agreement to surrender the VLL6 Warrants, and the surrender by WTI of the accompanying Cash Settlement Liability. Accordingly, on November 1, 2012, the Company issued an aggregate of 617,284 restricted shares of its post-split common stock (the “Shares”) to WTI, pursuant to the terms of the stock purchase agreement. The VLL5 Warrants and the VLL6 Warrants were surrendered on October 30, 2012.

If at any time between October 30, 2012 through either March 31, 2014 or July 31, 2015 (the “Settlement Dates”) WTI sells the Shares, then the proceeds from the sale of the Shares will be applied as follows (the “Grace Period”):

(a)	If and when the Shares are sold by WTI during the Grace Period, the fair value of the proceeds received will be retained by WTI as consideration for surrendering the Cash Settlement Liability, up to a maximum value of $2,000,000.
(b)	If and when the Shares are sold by WTI during the Grace Period, any additional proceeds received from the sale of the Shares in excess of $2,000,000 (approximately $3.22 per share) but up to $3,500,000 (approximately $5.67 per share) will be applied by WTI as a prepayment of a portion of the then outstanding debt based on the terms of the stock purchase agreement.
(c)	If and when the Shares are sold by WTI during the Grace Period, any additional proceeds received from the sale of the Shares in excess of $3,500,000 (approximately $5.67 per share) up to $4,500,000 (approximately $7.28 per share) shall be the sole possession and property of WTI, in accordance with the terms of the stock purchase agreement.
(d)	If and when the Shares are sold by WTI during the Grace Period for value in excess of $4,500,000 (approximately $6.72 per share), 50% of the amount of the proceeds in excess of the $4,500,000 will be the sole possession and property of WTI and 50% of the amount of the proceeds shall be applied as a prepayment of a portion of the then outstanding debt based on the terms of the stock purchase agreement.
(e)	If and when the Shares are sold by WTI during the Grace Period for value less than $2,000,000 (approximately $3.22 per share), the Company is required to make a cash payment to WTI until the total Cash Settlement Liability of $2,000,000 has been settled (“Cash Shortfall”).

If the Shares are not sold during the Grace Period, then the then fair value of the stock is to be determined at either of the Settlement Dates and the repayment of the Cash Settlement Liability, prepayment of outstanding, distribution of gains from the sale of the Shares, or calculation of the Cash Shortfall will consummate.

On October 30, 2012, upon the issuance of the Shares, the Company recorded a prepayment of $2,000,000 and $1,500,000 net against the Cash Settlement Liability and the outstanding notes payable, respectively, on that date.

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At September 30, 2013 and June 30, 2013, the Shares had not yet been sold by WTI and the fair value of the Shares at September 30, 2013 and June 30, 2013 amounted to $1,691,000 and $1,592,000 (approximately $2.74 and $2.58 per share), respectively. Accordingly, in connection with the increase in fair market value of the Shares, the Company recorded a gain on the fair value in the amount of $99,000, which is included in the accompanying condensed consolidated statements of comprehensive loss for the three months ended September 30, 2013. The fair value of the Shares at March 31, 2013 amounted to $1,901,000 ($3.08 per share). Accordingly, in connection with the decrease in fair market value of the Shares from March 31, 2013 to September 30, 2013, the Company recorded a loss on the fair value in the amount of $210,000, which is included in the accompanying condensed consolidated statements of comprehensive loss for the six months ended September 30, 2013. The fair value of the Shares will continue to be marked to market with any gain or loss recorded in the statement of comprehensive loss until either the Shares are sold by the holder or the Settlement Dates, whichever is earlier. As of September 30, 2013, the net Cash Settlement Liability was $309,000, of which $116,000 is included in the current portion of the Cash Settlement Liability on the accompanying condensed consolidated balance sheet. As of September 30, 2013, the $1,691,000 fair value of the Shares has been recorded as a prepayment against the Cash Settlement Liability on the accompanying condensed consolidated balance sheet.

Note 4. Commitments and Contingencies

Legal Matters

In June 2006, the Company received a written communication from the grantor of a license to an earlier version of its technology indicating that such license was terminated due to an alleged breach of the license agreement by the Company. The license agreement extends to its use of the technology in Japan only. While the Company does not believe that the grantor’s revocation is valid under the terms of the license agreement and no legal claim has been threatened to date, the Company cannot provide any assurance that the grantor will not take legal action to restrict its use of the technology in the licensed territory. While the Company's management does not anticipate that the outcome of this matter is likely to result in a material loss, there can be no assurance that if the grantor pursues legal action, such legal action would not have a material adverse effect on its consolidated financial position or results of comprehensive loss. The Company has not accrued a loss reserve for this matter.

On July 25, 2011, the Company received notice of a lawsuit filed in Mexico by Cesar Mangotich Pacheco and Prodinnv, S.A. de C.V. represented by Cesar Mangotich Pacheco. The lawsuit appears to allege conversion of assets, tortious interference and defamation, among other claims. The Company is currently evaluating the lawsuit, conferring with local counsel and translating the documents it has received. The Company’s preliminary assessment is that the lawsuit is completely without merit and intends to vigorously defend its position. The Company has not accrued a loss reserve for this matter.

The Company, from time to time, is involved in legal matters arising in the ordinary course of its business including matters involving proprietary technology. While management believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation, will not have a material adverse effect on its business, financial condition or results of comprehensive loss.

Employment Agreements

As of September 30, 2013, the Company had employment agreements in place with five of its key executives. The agreements provide, among other things, for the payment of nine to twenty-four months of severance compensation for terminations under certain circumstances. With respect to these agreements, at September 30, 2013, potential severance amounted to $1,843,000 and aggregated annual salaries amounted to $1,310,000.

Commercial Agreements

On January 26, 2009, the Company entered into a commercial agreement with VetCure, Inc., a California corporation, to market and sell the Company’s Microcyn® Technology-based animal healthcare products branded as Vetericyn®. VetCure, Inc. later changed its name to Vetericyn, Inc. This agreement was amended on February 24, 2009, July 24, 2009, June 1, 2010, and November 1, 2010. Pursuant to the agreement, the Company provides Vetericyn, Inc. with bulk product and Vetericyn, Inc. bottles, packages, and sells Microcyn® Technology-based animal healthcare products branded as Vetericyn®. The Company receives a fixed amount for each bottle of Vetericyn® sold by Vetericyn, Inc. At the time of these 2009 transactions, Vetericyn, Inc. was wholly-owned by Robert Burlingame, who was also a director of the Company at that time. Mr. Burlingame resigned from the Company’s board of directors on February 10, 2010. 

On September 15, 2009, the Company entered a commercial agreement with V&M Industries, Inc., a California corporation, to market and sell certain of the Company’s Microcyn® over-the-counter liquid and gel products. V&M Industries, Inc. subsequently changed its name to Innovacyn, Inc. On June 1, 2010, September 1, 2010, and November 1, 2010, the Company amended this agreement granting Innovacyn, Inc. the exclusive right to sell certain of its over-the-counter products. At the time of the 2009 transaction, V&M Industries, Inc. was wholly-owned by Robert Burlingame, who was also a director of the Company at that time. Mr. Burlingame resigned from the Company’s board of directors on February 10, 2010.  

On July 1, 2011, Vetericyn, Inc. and Innovacyn, Inc. began to share profits with the Company related to the Vetericyn® and Microcyn® over-the-counter sales, resulting in the Company receiving about a 30% royalty of net revenue. During the three months ended September 30, 2013 and 2012, the Company recorded revenue related to these agreements in the amounts of $1,289,000 and $1,229,000, respectively. During the six months ended September 30, 2013 and 2012, the Company recorded revenue related to these agreements in the amounts of $2,030,000 and $2,365,000, respectively. The revenue is recorded in product revenues in the accompanying condensed consolidated statements of comprehensive loss. At September 30, 2013 and March 31, 2013, the Company had outstanding accounts receivable of $801,000 and $264,000, respectively, related to Innovacyn, Inc.

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On August 9, 2012, the Company, along with its Mexican subsidiary and manufacturer Oculus Technologies of Mexico S.A. de C.V., entered into a license, exclusive distribution and supply agreement with More Pharma Corporation, S. de R.L. de C.V. (“More Pharma”) (the “License Agreement”). For a one-time payment of $500,000, the Company granted More Pharma an exclusive license, with the right to sublicense under certain conditions and with the Company’s consent, to all of the Company’s proprietary rights related to certain of its pharmaceutical products for human application that utilize the Company’s Microcyn® Technology within Mexico. For an additional one-time payment of $3,000,000, the Company also agreed to appoint More Pharma as the exclusive distributor of certain of its products in Mexico for the term of the agreement. Additionally, the Company granted More Pharma an exclusive license to certain of the Company’s then-held trademarks in exchange for a payment of $100,000. The Company has the ability to terminate the agreement if certain annual purchase minimums are not met. The term of the agreement is twenty-five years from the effective date of August 15, 2012. The term of the License Agreement will automatically renew after the twenty-five year term for successive two year terms as long as More Pharma has materially complied with any and all of the obligations under the License Agreement, including but not limited to, meeting the minimum purchase requirements set forth therein.

Additionally, on August 9, 2012, the Company entered into an exclusive distribution and supply agreement with More Pharma (the “Distribution Agreement”). For a one-time payment of $1,500,000, the Company granted More Pharma exclusive ability to market and sell certain of its pharmaceutical products for human application that utilize the Company’s Microcyn® Technology. The Company also appointed More Pharma as its exclusive distributor, with the right to execute sub-distribution agreements under certain conditions and with the Company’s consent, within the following countries: Antigua & Barbuda, Argentina, Aruba & Curacao, Bahamas, Barbados, Belize, Bolivia, Bonaire, Brazil, British Guyana, British Islands, Cayman Islands, Chile, Colombia, Cuba, Dominica, Dominican Republic, Ecuador, El Salvador, French Guyana, Grenada, Guadalupe, Guatemala, Haiti, Honduras, Jamaica, Martinique, Nicaragua, Paraguay, Peru, St. Bartolome, St. Vincent & Grenades, Surinam, Trinidad & Tobago, Turks & Caicos Islands, Uruguay, Venezuela and Virgin Islands.

The Company is recognizing the $5,100,000 related to the License Agreement and the Distribution Agreement as revenue on a straight line basis consistent with the Company’s historical experience with contracts with similar terms, which is typically over three to five years of the contract. Additionally, the Company capitalized $214,000 of its transaction costs related to the License Agreement and the Distribution Agreement, which will be amortized by the Company as expense on a straight line basis consistent with the related revenue recognition practices. At September 30, 2013 and March 31, 2013, the Company had outstanding accounts receivable of $717,000 and $580,000, respectively, due from More Pharma. During three months ended September 30, 2013 and 2012, the Company recognized $378,000 and $183,000, respectively, related to the amortization of the upfront fees received in the transaction. During six months ended September 30, 2013 and 2012, the Company recognized $752,000 and $183,000, respectively, related to the amortization of the upfront fees received in the transaction. The Company recognizes product sales on a sell-through basis as More Pharma sells products through to its customers.

Other Matters

Ruthigen, Inc.

The Company’s wholly owned subsidiary, Ruthigen, Inc., was incorporated in the State of Nevada on January 18, 2013, and reincorporated from Nevada to Delaware on September 25, 2013. Ruthigen has established offices in Santa Rosa, California.

On August 2, 2013, the Company entered into a separation agreement with Ruthigen that contains key provisions relating to the Company’s ongoing relationship with Ruthigen, and more specifically governs its relationship with Ruthigen following the completion of Ruthigen’s intended initial public offering. The Company previously announced its entry into a license and supply agreement and a shared services agreement with Ruthigen. Each of these agreements has been entered into in the overall context of the separation of the Company’s business and its novel biotechnology business into two separate, publicly-traded companies. The effective date for all three agreements is the closing date of Ruthigen’s intended initial public offering, if any should occur.

License and Supply Agreement

Pursuant to the license and supply agreement, the Company agreed to exclusively license certain of its proprietary technology to Ruthigen to enable Ruthigen’s research and development and commercialization of the newly discovered RUT58-60, and any improvements to it, in the United States, Canada, European Union and Japan, referred to as the Territory, for certain invasive procedures in human treatment as defined in the license and supply agreement. On October 9, 2013, the Company entered into Amendment No. 1 to the license and supply agreement, which amended the second milestone event set forth in Section 7.1 of the license and supply agreement. On November 6, 2013, the Company entered into Amendment No. 2 to the license and supply agreement with Ruthigen to further amend the certain milestone events set forth in Section 7.1 of the license and supply agreement and to amend the terms of the manufacturing equipment purchases set forth in Section 6.13 of the license and supply agreement. All other terms and conditions of the license and supply agreement remain unmodified and in full force and effect.

The license and supply agreement provides Ruthigen with the exclusive option, exercisable within the first five years following the effective date of the agreement, to expand the license to certain other therapeutic indications upon payment of a license expansion fee of $10 million within the first two years following the effective date of the agreement or, after the two–year period, the same fee plus certain out-of-pocket costs the Company may incur in developing products for any of the indications. Additionally, the Company will be prohibited from using the licensed proprietary technology to sell products that compete with Ruthigen’s products within the Territory, and Ruthigen cannot sell any device or product that competes with the Company’s products being sold or developed as of the effective date of the license and supply agreement.

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Ruthigen will be required to make a total of $5,000,000 in milestone payments to the Company for the first product only, as follows: upon completion of Ruthigen’s first meeting with the U.S. Food and Drug Administration (FDA) following completion of Ruthigen’s first pivotal clinical trial and upon first patient enrollment in Ruthigen’s second pivotal clinical trial. In addition, as further consideration under the agreement, Ruthigen will be required to make royalty payments to the Company based on Ruthigen’s annual net sales of the product from the date of first commercial sale to the date that Ruthigen ceases to commercialize the product, which percentage royalty rate will vary between 3% and 20% and will increase based on various net sales thresholds and will differ depending on the country in which the sales are made. Ruthigen also agreed to purchase certain research and development and manufacturing equipment from the Company for approximately $3 million following the completion of Ruthigen’s intended initial public offering.

Shared Services Agreement

The Company also entered into a shared services agreement with Ruthigen that would take effect upon the completion of Ruthigen’s proposed initial public offering, if any should occur, pursuant to which it will provide Ruthigen with general services, including general accounting, human resources, laboratory personnel and shared R&D resources while Ruthigen plans to establish an independent facility and systems. As a wholly owned subsidiary of the Company, Ruthigen will be financed by the Company until the completion of the proposed initial public offering, if any should occur, and after such event, Ruthigen would become responsible for its own expenses.

Separation Agreement

The Company entered into a separation agreement with Ruthigen that contains key provisions relating to its ongoing relationship with Ruthigen following the completion of Ruthigen’s intended initial public offering. The separation agreement takes effect upon the closing of Ruthigen’s intended initial public offering and terminates on the earlier of 8.5 years following the closing of the offering, or when the parties mutually agree to terminate it. The separation agreement also contains a series of restrictions on the Company’s ability to transfer the Ruthigen shares it owns. The Company is restricted from transferring any of the Ruthigen shares it owns during the first year (the “lock up period”) immediately following Ruthigen’s intended initial public offering.

Following the one-year lock up period, transfers by the Company of the Ruthigen shares it owns must be conducted with the consent of Ruthigen’s board of directors or within the prescribed requirements for such transfers set forth in the separation agreement. These prescribed requirements include that the transfers must be in private placement transactions, the purchase price discount may not exceed certain percentages depending on the transferee, the amount of shares transferred in a given transfer (or series of transfers comprising a single transaction) may not exceed the greater of 5% of Ruthigen’s outstanding shares or $1.5 million in net proceeds to the Company, as well as certain other requirements set forth in the separation agreement. In addition to the prescribed manner for the Company to conduct transfers described above, if, following a minimum of 41.5 months following the closing of Ruthigen’s initial public offering have lapsed under the separation agreement and the Company has not consummated transfers of the Ruthigen shares it owns resulting in at least $3.8 million in net proceeds to the Company, then the Company has a one-time transfer and registration right to transfer the Ruthigen shares it owns in an amount equal to the difference between $3.8 million and the Ruthigen shares transferred by the Company pursuant to the separation agreement as of the time the Company elects to exercise its one-time right. Transfers conducted using this one-time right must be conducted with the consent of Ruthigen’s board of directors or within the prescribed requirements for such transfers set forth in the separation agreement, including, for example, that the purchase price discount may not exceed certain percentages, the amount of shares transferred may not exceed $3.8 million in net proceeds to the Company, as well as certain other requirements set forth in the separation agreement.

The separation agreement also provides for certain cooling off periods between market attempts and/or successful transfers, the length of which are dependent upon whether and how many Ruthigen shares the Company transfers. The majority of the material restrictions and obligations contained in the separation agreement lapse if and when the Company and its subsidiaries (other than Ruthigen) own less than 19.9% of the outstanding shares of Ruthigen’s common stock.

The separation agreement also sets forth the methodology for the allocation of the operational and offering related expenses incurred prior to and in connection with Ruthigen’s intended initial public offering for which Ruthigen is required to reimburse the Company. Ruthigen will also reimburse the Company for expenses such as salaries and benefits advanced or paid on Ruthigen’s behalf, or for Ruthigen’s benefit, during a transition period following the closing of Ruthigen’s intended initial public offering.

The separation agreement provides that each party will indemnify, defend and hold harmless the other party and its affiliates for third party claims asserted against the other party. This includes an indemnification by the Company to Ruthigen related to obligations that the Company has under certain loan and security agreements entered into by the Company with Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc. The separation agreement also provides that, so long as the Company shall maintain a directors’ and officers’ insurance program covering the past and present officers and directors of the Company, the program shall be standard in the Company’s industry and the Company shall not exclude any former director of the Company from any insurance policy coverage if such coverage is made available to the Company’s then existing directors and officers.

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Note 5. Stockholders’ Equity

Common Stock Issued to Non-Employees For Services

On April 24, 2009, the Company entered into an agreement with Advocos LLC, a contract sales organization that serves as part of the Company’s sales force, for the sale of the Company’s wound care products in the United States. Pursuant to the agreement, the Company agreed to pay the contract sales organization a monthly fee and potential bonuses that will be based on achievement of certain levels of sales. The Company agreed to issue the contract sales organization cash or shares of common stock as compensation for its services. During the three months ended September 30, 2013 and 2012, the Company issued 8,139 and 3,728 shares of common stock, respectively, in connection with this agreement. During the six months ended September 30, 2013 and 2012, the Company issued 38,447 and 14,392 shares of common stock, respectively, in connection with this agreement. The Company has determined that the fair value of the common stock, which was calculated as shares were issued, was more readily determinable than the fair value of the services rendered. Accordingly, the Company recorded the fair value of the stock as compensation expense. During the three months ended September 30, 2013 and 2012, the Company recorded $22,000 and $20,000 of expense related to this agreement, respectively. During the six months ended September 30, 2013 and 2012, the Company recorded $134,000 and $112,000 of expense related to this agreement, respectively. The expense was recorded as selling, general and administrative expense in the accompanying condensed consolidated statements of comprehensive loss.

On December 17, 2009, the Company entered into an agreement with Windsor Corporation.  Windsor Corporation provides financial advisory services to the Company. Pursuant to the agreement, the Company agreed to pay Windsor Corporation, on a quarterly basis, cash or common stock as compensation for services provided.  The Company determined that the fair value of the common stock was more readily determinable than the fair value of the services rendered. Accordingly, the Company recorded the fair value of the stock as compensation expense. During the six months ended September 30, 2013, the Company issued 12,097 shares of common stock. During the six months ended September 30, 2013, the Company recorded $49,000 of stock compensation expense related to this agreement. Additionally, during the three months ended September 30, 2013, the Company accrued $30,000 of expense for services provided which was settled with shares of common stock on October 2, 2013 (See Note 10). The expense was recorded as selling, general and administrative expense in the accompanying condensed consolidated statements of comprehensive loss.

Note 6. Stock-Based Compensation

The Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the award. The Company amortizes the fair value of employee stock options on a straight-line basis over the requisite service period of the awards.  Compensation expense includes the impact of an estimate for forfeitures for all stock options. The estimated forfeiture rates used during the six months ended September 30, 2013 ranged from 1.63% to 4.77%.

Employee stock-based compensation expense is as follows (in thousands):

	Three Months				Six Months
	Ended				Ended
	September 30,				September 30,
	2013		2012		2013		2012
Cost of service revenue	$	30	$	34	$	56	$	66
Research and development		45		63		78		130
Selling, general and administrative		221		275		349		484
Total stock-based compensation	$	296	$	372	$	483	$	680

At September 30, 2013, there were unrecognized compensation costs of $1,403,000 related to stock options which are expected to be recognized, over a weighted-average amortization period of 2.54 years.

The Company estimated the fair value of employee stock options using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service periods of the respective awards. The fair value of employee stock options was estimated using the following weighted-average assumptions:

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
Expected life	5.89 years		5.85 years		5.89 years		5.85 years
Risk-free interest rate		1.42%		0.73%		1.42%		0.73%
Dividend yield		0.00%		0.00%		0.00%		0.00%
Volatility		86%		88%		86%		88%
Fair value of options granted	$	2.10	$	4.76	$	2.10	$	4.76

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The expected term of stock options represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by the Securities and Exchange Commission's Staff Accounting Bulletin No. 110 for “plain vanilla” options. The expected stock price volatility for the Company’s stock options was determined by examining the historical volatility of the Company and the historical volatilities of the Company’s industry peers. The Company will continue to analyze the stock price volatility and expected term assumptions as more data for the Company’s common stock and exercise patterns become available. The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company estimates forfeitures based on historical experience and reduces compensation expense accordingly.

A summary of all option activity as of September 30, 2013 and changes during the six months then ended is presented below:

	Number of Shares (in thousands)			Weighted- Average Exercise Price		Weighted- Average Contractual  Term		Aggregate Intrinsic Value
Outstanding at March 31, 2013		975		$	15.08
Options granted		335			2.95
Options exercised		–			–
Options forfeited or expired		(81	)		15.86
Outstanding at September 30, 2013		1,229		$	11.72		7.42	$	–
Exercisable at September 30, 2013		816		$	15.32		6.35	$	–
Options available for grant as of September 30, 2013		848

The aggregate intrinsic value is calculated as the difference between the exercise price of the stock options and the underlying fair value of the Company’s common stock ($2.74) for stock options that were in-the-money as of September 30, 2013.

The Company did not capitalize any cost associated with stock-based compensation.

No income tax benefit has been recognized related to stock-based compensation expense and no tax benefits have been realized from exercised stock options.

The Company issues new shares of common stock upon exercise of stock options.

Note 7. Income Taxes

The Company completed a study during the year ended March 31, 2013 to assess whether a change in control had occurred or whether there have been multiple changes of control since the Company’s formation.  The Company determined, based on the results of the study, no change in control occurred for purposes of Internal Revenue Code section 382.  In addition, the Company is not aware of any changes in ownership during the six months ended September 30, 2013 that would result in a change in control under Internal Revenue Code section 382.  The Company, after considering all available evidence, fully reserved against its deferred tax assets since it is more likely than not that such benefits will not be realized in future periods. The Company incurred losses for both financial reporting and income tax purposes for the six months ended September 30, 2013. Accordingly, the Company is continuing to fully reserve for its deferred tax assets. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s deferred income tax assets satisfy the realization standards, the valuation allowance will be reduced accordingly.

As a result of certain realization requirements of Accounting Standards Codification Topic 718, the Company’s deferred tax assets and liabilities do not include certain deferred tax assets at September 30, 2013 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting purposes.  Equity will be increased by approximately $533,000 if and when such deferred tax assets are ultimately realized. 

Note 8. Segment and Geographic Information

The Company generates revenues from tissue care products which are sold into the human and animal healthcare markets and the Company also generates revenues from laboratory testing services which are provided to medical device manufacturers. The Company operates a single segment business for product sales which consists of three geographical sales territories as follows:

	Three Months				Six Months
	Ended				Ended
	September 30,				September 30,
	2013		2012		2013		2012
U.S.	$	1,898,000	$	1,898,000	$	3,221,000	$	3,931,000
Mexico		1,352,000		1,862,000		2,776,000		3,240,000
Europe and Other		603,000		504,000		1,010,000		909,000
	$	3,853,000	$	4,264,000	$	7,007,000	$	8,080,000

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For the three months ended September 30, 2013 and 2012, the Company received licensing revenues of $397,000 and $374,000, respectively. Such revenues are included in the Company’s calculation of product revenues and are reflected in the table above under the respective geographic region where such licensing revenues were earned. For the six months ended September 30, 2013 and 2012, the Company received licensing revenues of $830,000 and $406,000, respectively. Such revenues are included in the Company’s calculation of product revenues and are reflected in the table above under the respective geographic region where such licensing revenues were earned.

The Company’s service revenues amounted to $236,000 and $262,000 for the three months ended September 30, 2013 and 2012, respectively, and the Company’s service revenues amounted to $454,000 and $497,000 for the six months ended September 30, 2012 and 2011, respectively.

Note 9.  Significant Customer Concentrations

For the three months ended September 30, 2013, one customer represented 33% of net revenue and one customer represented 32% of net revenue. For the three months ended September 30, 2012, one customer represented 27% of net revenue.

For the six months ended September 30, 2013, one customer represented 37% of net revenue and one customer represented 27% of net revenue. For the six months ended September 30, 2012, one customer represented 28% of net revenue. 

At September 30, 2013, one customer represented 33%, one customer represented 30%, and one customer represented 11% of the net accounts receivable balance. At March 31, 2013, one customer represented 34%, one customer represented 26%, and one customer represented 15% of the net accounts receivable balance.

Note 10. Subsequent Events  

Common Stock Issued to Non-Employee For Services

On October 2, 2013, the Company issued 11,070 shares of common stock, with a value of $30,000, to Windsor Corporation in consideration for services provided during the three months ended September 30, 2013. The Company registered the issuance under its previously filed and currently effective shelf registration statement on Form S-3 (File No. 333-171411) and the related prospectus supplement dated and filed on October 2, 2013.

Amendments No. 1 and No. 2 to the License and Supply Agreement with Ruthigen, Inc.

On October 9, 2013, the Company entered into Amendment No. 1 to the License and Supply Agreement with the Company’s wholly owned subsidiary, Ruthigen, Inc. Pursuant to the terms of the License and Supply Agreement, Ruthigen is required to make milestone payments to the Company upon certain milestone events. Amendment No. 1 amended the second milestone event set forth in Section 7.1 of the License and Supply Agreement. On November 6, 2013, the Company entered into Amendment No. 2 to the License and Supply Agreement with Ruthigen to further amend the certain milestone events set forth in Section 7.1 of the License and Supply Agreement and to amend the terms of the manufacturing equipment purchases set forth in Section 6.13 of the License and Supply Agreement. Pursuant to the terms of Amendment No. 2, Ruthigen will be required to make a total of $5,000,000 in milestone payments to the Company for the first product only, as follows: upon completion of Ruthigen’s first meeting with the U.S. Food and Drug Administration (FDA) following completion of Ruthigen’s first pivotal clinical trial and upon first patient enrollment in Ruthigen’s second pivotal clinical trial. Ruthigen also agreed to purchase certain research and development and manufacturing equipment from the Company for approximately $3 million following the completion of Ruthigen’s intended initial public offering. All other terms and conditions of the License and Supply Agreement remain unmodified and in full force and effect.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q as of September 30, 2013 and our audited consolidated financial statements for the year ended March 31, 2013 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on June 25, 2013.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words “expects,” “anticipates,” “suggests,” “believes,” “intends,” “estimates,” “plans,” “projects,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would,” “proposal,” and similar expressions are intended to identify forward-looking statements.

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Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to the risks described in our Annual Report on Form 10-K including: our ability to become profitable; the effect of the general decline in the economy on our business; the progress and timing of our development programs and regulatory approvals for our products; the benefits and effectiveness of our products; the ability of our products to meet existing or future regulatory standards; the progress and timing of clinical trials and physician studies; our expectations related to the use of our cash reserves; our expectations and capabilities relating to the sales and marketing of our current products and our product candidates; our ability to gain sufficient reimbursement from third-party payors; our ability to compete with other companies that are developing or selling products that are competitive with our products; the establishment of strategic partnerships for the development or sale of products; the risk our research and development efforts do not lead to new products; the timing of commercializing our products; our ability to penetrate markets through our sales force, distribution network, and strategic business partners to gain a foothold in the market and generate attractive margins; the expansion of our sales force and distribution network; the ability to attain specified revenue goals within a specified time frame, if at all, or to reduce costs; the outcome of discussions with the U.S. Food and Drug Administration, or FDA, and other regulatory agencies; the content and timing of submissions to, and decisions made by, the FDA and other regulatory agencies, including demonstrating to the satisfaction of the FDA the safety and efficacy of our products; our ability to manufacture sufficient amounts of our product candidates for clinical trials and products for commercialization activities; our ability to protect our intellectual property and operate our business without infringing on the intellectual property of others; our ability to continue to expand our intellectual property portfolio; our expectations about the outcome of litigation and controversies with third parties; the risk we may need to indemnify our distributors or other third parties; our ability to attract and retain qualified directors, officers and employees; our expectations relating to the concentration of our revenue from international sales; our ability to expand to and commercialize products in markets outside the wound care market; and the impact of the Sarbanes-Oxley Act of 2002 and any future changes in accounting regulations or practices in general with respect to public companies. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, except as required by law.

Additional Information

Investors and others should note that we announce material financial information using our company website (www.oculusis.com), our investor relations website (ir.oculusis.com), SEC filings, press releases, public conference calls and webcasts. Information about Oculus, our business, and our results of operations may also be announced by posts on the following social media channels:

· Oculus corporate blog (http://oculusis.com/dialogue/)

· Oculus Facebook page (www.facebook.com/oculusinnovativesciences)

· Dan McFadden’s Twitter feed (http://twitter.com/dmcfaddenocls). Mr. McFadden is the Vice President of Public and Investor Relations of our Company.

The information that we post on these social media channels could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in Oculus to review the information that we post on these social media channels. These social media channels may be updated from time to time on Oculus’ investor relations website. The information on or accessible through our websites and social media channels is not incorporated by reference in this Quarterly Report on Form 10-Q.

Our Business

We are a global healthcare company that designs, produces, and markets prescription and non-prescription products in 27 countries. We are pioneering innovative products for the dermatology, surgical, advanced wound and tissue care, and animal healthcare markets. Our primary focus is on the commercialization of our proprietary technology platform called Microcyn® Technology. This technology is based on electrically charged oxychlorine small molecules designed to target a wide range of organisms that cause disease (pathogens). These organisms include viruses, fungi, spores and antibiotic-resistant strains of bacteria, such as methicillin-resistant Staphylococcus aureus, or MRSA, and vancomycin-resistant Enterococcus, or VRE, as well as Clostridium difficile, or C. diff, a highly contagious bacteria spread by human contact. Several Microcyn® Technology tissue care products are designed to treat infections and enhance healing while reducing the need for antibiotics. Infection is a serious potential complication in both chronic and acute wounds, and controlling infection is a critical step in wound healing.

We do not have the necessary regulatory approvals to market Microcyn® as a drug or as a medical device with an antimicrobial or wound healing indication in the United States. Through our wholly owned subsidiary, Ruthigen, Inc., we expect to apply to the U.S. Food and Drug Administration, or FDA, for clearance as an antimicrobial drug.

Outside the United States, our Microcyn® Technology products have a CE Mark device approval in Europe for debriding, irrigating and moistening acute and chronic wounds in comprehensive wound treatment through potential local antimicrobial effect in the wound bed and creating a moist environment. In Mexico, we are approved as a drug for antiseptic and were granted a Mexican patent for the use of our novel antimicrobial surgical solution in the treatment and prevention of peritonitis. In India, our technology has a drug license for cleaning and debriding in wound management.  In China, we have obtained a medical device approval by the State Food and Drug Administration for reducing the propagation of microbes in wounds and creating a moist environment for wound healing.

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While we do not have the necessary regulatory clearance for an antimicrobial or wound healing indication in the United States, several factors, including our global product experience, clinical and laboratory testing, physician-led clinical studies based on our technology and scientific papers authored about our technology, suggest that our Microcyn® Technology may help reduce a wide range of pathogens in acute and chronic wounds, while curing or improving infection, and concurrently enhancing wound healing through modes of action unrelated to the treatment of infection. These physician-led clinical studies suggest that our Microcyn® Technology is safe, easy to use and complementary to many existing treatment methods in wound care. Physician-led clinical studies and usage of our products in the United States suggest that our 510(k) cleared products may shorten hospital stays, lower aggregate patient care costs and, in certain cases, reduce the need for systemic antibiotics.

Common methods of controlling infection, including topical antiseptics and antibiotics, have proven to be only moderately effective in combating infection in the wound bed. However, topical antiseptics tend to inhibit the healing process due to their toxicity and may require specialized preparation or handling. The use of antibiotics can lead to the emergence of resistant bacteria, such as MRSA and VRE. Systemic antibiotics may be less effective in controlling infection in patients with disorders affecting circulation, such as diabetes, which are commonly associated with chronic wounds. As a result, no single treatment is used across all types of wounds and stages of healing and we believe Microcyn® Technology can fill a niche in the skin care and chronic/acute wound care markets.

We believe Microcyn® Technology is a stable, anti-infective therapeutic that treats infections and enhances wound healing through increased blood flow to the wound bed and reduction of chronic inflammation. Also, we believe Microcyn® Technology provides significant advantages over current methods of care in the treatment of a wide range of chronic and acute wounds throughout all stages of treatment. These stages include cleaning, debridement, prevention and treatment of infections and wound healing. We believe that unlike antibiotics, antiseptics, growth regulators and other advanced wound care products, Microcyn® Technology is a stable wound care solution that is as safe as saline, and also treats infection while simultaneously accelerating wound healing. Also, unlike most antibiotics, we believe Microcyn® Technology does not target specific strains of bacteria, a practice which has been shown to promote the development of resistant bacteria. In addition, our products are shelf stable, non-toxic, require no special preparation and are easy to use.

Our goal is to become a worldwide leader as the standard of care in the treatment and irrigation of open wounds and skin care. We currently have, and intend to seek additional, regulatory clearances and approvals to market our Microcyn-based products worldwide. In July 2004, we first began selling Microdacyn60™ in Mexico after receiving approval from the Mexican Ministry of Health, for use as an antiseptic, disinfectant and sterilant. Since then, physicians and scientists in the United States, Europe, India, Pakistan, China and Mexico have conducted more than 40 clinical and scientific studies of Microcyn® Technology, generating data suggesting that the technology is non-irritating to healthy tissue, reduces microbial load, accelerates wound healing, reduces pain, shortens treatment time and may have the potential to reduce costs to healthcare providers and patients. Most of these studies were not intended to be rigorously designed or controlled clinical trials and, as such, did not have all of the controls required for clinical trials used to support a new drug application submission to the FDA, nor did the studies include blinding, randomization, predefined clinical end points, use of placebo and active control groups or U.S. Good Clinical Practice (GCP) requirements. We used the data generated from certain of these studies to support our CE Mark application with the European Union for certification of our Microcyn® Technology products for wound cleaning and reduction of microbial load in the European Economic Area. We received a Class II CE Mark in November 2004, subsequently upgraded to a Class III CE Mark in early 2013, and have also received additional international approvals in China, Canada, Mexico, India and select Latin America, Asian and Middle East countries. To date, our Microcyn-based products have received seven FDA 510(k) clearances in the United States. Many of these clearances are for use as a medical device in wound cleaning, or debridement, lubricating, moistening and dressing, including traumatic wounds and acute and chronic dermal lesions. We have also received FDA clearance for use in dermatology for management of atopic dermatitis and radiation dermatitis.

Sales and Marketing

We generate revenue through established and scalable commercial operations including manufacturing in Mexico and the United States, and product sales via our domestic and international strategic business partners.

We launched sales of Microcyn® Technology products in October 2008 and our initial sales were in the podiatry market in the United States. In the second quarter of 2009, we expanded our sales efforts to include wound care centers, hospitals, nursing homes, urgent care clinics and home healthcare, utilizing a contract sales organization to aid our sales force. We continue to seek opportunities to expand the applicability of our products into current and new markets. Our products are primarily purchased by, among others, hospitals, physicians, nurses, and other healthcare practitioners who are the primary caregivers to patients, both human and animal, being treated for acute or chronic wounds or undergoing surgical procedures as well as to dermatologists for treatment of various skin afflictions.

We currently make Microcyn-based human advanced wound and tissue care products available, both as prescription and over-the-counter products, under our seven 510(k) clearances in the United States, primarily through a combination of partnerships with Advocos LLC, a specialty U.S. contract sales organization, and in collaboration with such partners as Amneal Enterprises and Eloquest Healthcare, Inc., a subsidiary of Ferndale Pharma, Inc., as described in greater detail below. We commercialized a family of Microcyn® products for advanced wound care sold through a contract sales force and by Eloquest Healthcare, and have commercialized Microcyn® products for dermatology through a partnership with Quinnova Pharmaceuticals. 

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Through our animal healthcare partner Innovacyn, Inc., we currently make available Microcyn® Technology-based animal healthcare products, designed specifically for the care of horses, dogs, cats, exotic pets and farm/ranch animals and branded as Vetericyn®, in the United States and Europe. We are currently introducing Vetericyn®-branded products into Canada and Asia.

In addition to our current product registration and approvals, we intend to pursue additional regulatory approvals in Europe, China, India, Latin America, Asia, Middle East and Mexico for additional Microcyn® Technology-based products and plan to initiate commercialization upon obtaining these approvals.

Animal Healthcare

On January 26, 2009, we entered into a commercial agreement with VetCure, Inc., a California corporation, to market and sell our Microcyn® Technology-based animal healthcare products branded as Vetericyn® products. VetCure, Inc. later changed its name to Vetericyn, Inc. This agreement was amended on February 24, 2009, July 24, 2009, June 1, 2010, and November 1, 2010. Pursuant to the agreement, we provide Vetericyn, Inc. with bulk product and Vetericyn, Inc. bottles, packages, and sells Microcyn® Technology-based animal healthcare products branded as Vetericyn®. We receive a fixed amount for each bottle of Vetericyn® sold by Vetericyn, Inc. At the time of these 2009 transactions, Vetericyn, Inc. was wholly-owned by Robert Burlingame, who was also a director of our Company at that time. Mr. Burlingame resigned from our board of directors on February 10, 2010.

On September 15, 2009, we entered a commercial agreement with V&M Industries, Inc., a California corporation, to market and sell certain of our Microcyn over-the-counter liquid and gel products. V&M Industries, Inc. subsequently changed their name to Innovacyn, Inc.  On June 1, 2010, September 1, 2010, and November 1, 2010, we amended this agreement granting Innovacyn, Inc. the exclusive right to sell certain of our over-the-counter products. At the time of the 2009 transaction, V&M Industries, Inc. was wholly-owned by Robert Burlingame, who was also a director of our Company at that time. Mr. Burlingame resigned from our board of directors on February 10, 2010.

Additionally, on July 1, 2011, Vetericyn, Inc. and Innovacyn, Inc. began to share profits with us related to the Vetericyn® and Microcyn® over-the-counter sales, resulting in our receipt of about a 30% royalty of net revenue.

Dermatology

On February 14, 2011, we announced the formation of a broad multi-year collaboration with Amneal Enterprises. Amneal Enterprises is an affiliation of independent pharmaceutical marketing, discovery and development companies.  As a part of this collaboration, Quinnova Pharmaceuticals, Inc., an Amneal alliance member, licensed, with a $500,000 prepayment and ongoing double-digit royalties, the U.S. and Canadian rights to the Microcyn-based dermatology atopic dermatitis hydrogel that received FDA clearance in February 2011. Future prescription dermatology products can also be licensed for additional upfront payments.  In addition, Quinnova agreed to co-promote the current prescription Microcyn-based wound care products to podiatry professionals in the United States and Canada. Quinnova has a sales force of over 35 people, selling to dermatologists and podiatrists with a complete line of dermatology products.

We currently derive a significant portion of our revenues from our dermatology products, which are sold in partnership with Quinnova. We anticipate our presence in the market to continue to grow. Quinnova launched the Atrapro^TM family of products formulated from our Microcyn® Technology platform in late February 2012. In partnership with Quinnova, we now market the following products.:

· Atrapro™ Antipruritic Hydrogel, a non-oily, quick drying gel designed for the relief of pain, burning and itching associated with various dermatoses (pruritus), which may include the treatment of atopic dermatitis and radiation dermatitis.

· Atrapro™ Dermal Spray with Preservatives, a non-cytotoxic, non-irritating, and non-sensitizing spray for the management via debridement of wounds such as partial- and full-thickness wounds, post-surgical wounds, first- and second-degree burns, and grafted and donor sites.

· A convenience kit for the treatment of various dermatoses which packages together Quinnova’s Neosalus® Cream with Proderm Technology® and Atrapro™ Antipruritic Hydrogel, a product based on our Microcyn® Technology.

We also sold the option to exclusively sell and distribute our proprietary Microcyn-based acne drug candidate to AmDerma Pharmaceuticals, LLC, an Amneal alliance member, for a one-time non-refundable payment of $500,000. On June 23, 2011, AmDerma exercised its option to license rights to the drug candidate. On June 21, 2012, we entered into a collaboration agreement with AmDerma. Pursuant to the agreement, AmDerma is responsible for the development of a Microcyn-based acne drug candidate in the United States, including all activities required to gain regulatory approvals. AmDerma will also be responsible for all costs. Additionally, within one year of the first commercial sale by AmDerma, AmDerma shall identify at least one secondary indication that AmDerma will develop. If AmDerma declines to pursue such secondary indication, then the right to develop such secondary indication will revert back to us. We granted AmDerma an exclusive, royalty-bearing perpetual license in the United States and India, with the right to sublicense and subcontract in certain circumstances, and a right of first refusal to expand the territory of the license to include the European Union, Canada, Brazil, and Japan. We retained rights to the “rest of world.” Additionally, we agreed to credit $250,000 of the option payment of $500,000 against future milestone payments in the transaction.

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Acute Care in U.S. Hospitals

On August 1, 2011, we entered into a multi-year licensing agreement with Eloquest Healthcare, Inc., a subsidiary of Ferndale Pharma Group, Inc. Under this agreement, we granted Eloquest Healthcare an exclusive license to market certain Microcyn-based wound care products under the Microcyn brand to hospitals, ambulatory surgical and acute care centers in the United States. In March 2012, Ferndale/ Eloquest launched a family of Microcyn-based wound care products.

Critical Care

On August 22, 2011, we entered into an agreement to license the exclusive global rights to a unique endotracheal tube, or ETT, from the National Institutes of Health. We believe the ETT represents a potential breakthrough technology in mitigating ventilator-associated pneumonia. Under the licensing agreement, we paid a nonrefundable royalty of $20,000, and agreed to pay minimum annual royalties of $5,000, and additional royalties based off of net sales from use of the license. The patent term of the ETT expires on March 15, 2025. The ETT requires a device clearance in the United States and we expect to obtain such clearance in the near future.  

International Sales and Marketing by Our Strategic Business Partners

Europe

We currently rely on exclusive agreements with country-specific distributors for the sale of Microcyn-based products in Europe, including Italy, the Netherlands, Germany, Czech Republic, Slovakia, Sweden, Norway, Switzerland, Poland, Finland and Denmark. In July 2013, we added two new partners in the European Union to sell our Dermacyn® family of products in Finland and Serbia.

People’s Republic of China

On January 28, 2011, we entered into an agreement with Tianjin Ascent Import and Export Company, Ltd., a distributor in China, to sell certain of our liquid products, which are currently sold under the product name “Microcyn” in the United States, into the People’s Republic of China. Pursuant to the agreement, we received a $350,000 non-refundable upfront payment from the distributor in return for exclusivity to sell these liquid products for the first contract year. In order to maintain exclusivity in subsequent years, the distributor will need to meet minimum purchase requirements each contract year. The initial term of the contract is for five years and is cancellable if certain conditions are not met.

On June 26, 2011, we entered into an agreement with Shanghai Sunvic Technology Co. Ltd., a distributor in China, to sell certain of our gel products, which are currently sold under the product name “Microcyn” in the United States, into the People’s Republic of China. The initial term of the contract is for five years and is cancellable if certain conditions are not met.

Mexico, South and Central America, and the Caribbean

On August 9, 2012, we, along with our Mexican subsidiary and manufacturer Oculus Technologies of Mexico S.A. de C.V., entered into a license, exclusive distribution and supply agreement with More Pharma Corporation, S. de R.L. de C.V. (“More Pharma”). For a one-time payment of $500,000, we granted More Pharma an exclusive license, with the right to sublicense under certain conditions and with our consent, to all of our proprietary rights related to certain of our pharmaceutical products for human application that utilize our Microcyn® Technology within Mexico. For an additional one-time payment of $3,000,000, we also agreed to appoint More Pharma as the exclusive distributor of certain of our products in Mexico for the term of the agreement. Additionally, we granted More Pharma an exclusive license to certain of our then-held trademarks in exchange for a payment of $100,000. The term of the agreement is twenty-five years from the effective date of August 15, 2012. The term of the license agreement will automatically renew after the twenty-five year term for successive two year terms as long as More Pharma has materially complied with any and all of the obligations under the license agreement, including but not limited to, meeting the minimum purchase requirements set forth therein.

On August 9, 2012, we also entered into an exclusive distribution and supply agreement with More Pharma. For a one-time payment of $1,500,000, we granted More Pharma exclusive ability to market and sell certain of our pharmaceutical products for human application that utilize our Microcyn® Technology. We also appointed More Pharma as our exclusive distributor, with the right to execute sub-distribution agreements under certain conditions and with our consent, within the following countries: Antigua & Barbuda, Argentina, Aruba & Curacao, Bahamas, Barbados, Belize, Bolivia, Bonaire, Brazil, British Guyana, British Islands, Cayman Islands, Chile, Colombia, Cuba, Dominica, Dominican Republic, Ecuador, El Salvador, French Guyana, Grenada, Guadalupe, Guatemala, Haiti, Honduras, Jamaica, Martinique, Nicaragua, Paraguay, Peru, St. Bartolome, St. Vincent & Grenades, Surinam, Trinidad & Tobago, Turks & Caicos Islands, Uruguay, Venezuela and Virgin Islands.

In May 2013, we obtained, in close collaboration with our global partner More Pharma, new regulatory approvals for Microcyn®-based antiseptic products, under the brand name Microdacyn®, in Panama and El Salvador. More Pharma intends to begin commercialization of these new antiseptic products in both countries in the summer of 2013, and to continue to expand product offerings of Microcyn-based products into the other countries of South and Central America, and the Caribbean in the near future. In July 2013, we were granted a Mexican patent for the use of our novel antimicrobial surgical solution in the treatment and prevention of peritonitis. The term of the patent expires in 2027 and will allow More Pharma the opportunity to pursue a new drug candidate in Latin America. More Pharma has also received regulatory approval to market our Microdacyn60® family of products in Honduras.

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“Rest of World”

In India, we entered into an exclusive agreement with Alkem Laboratories, a large pharmaceutical company in India, for the sale of Microcyn-based products in India and Nepal.

Throughout the rest of the world, we intend to use strategic partners and distributors who have a significant sales, marketing and distribution presence in their respective countries. We have established partners and distribution channels for our wound care products in Bangladesh, Pakistan, Singapore, United Arab Emirates, Jordan, Kuwait, Yemen, Iraq, Malaysia, Indonesia and Saudi Arabia. We have also received approval to launch a new Microcyn-based medical device in Indonesia.

In April 2013, we announced that our Singapore business partner, Dyamed Biotech Pte. Ltd, is initiating the rollout of five new Microcyn® Technology-based products in Singapore and Malaysia, both in the hospital and consumer markets. The five products, which include Dermacyn™ BabyGuard, Dermacyn DermaGuard, Dermacyn SkinGuard Solution, Dermacyn SkinGuard Hydrogel and Dermacyn Wound Care Hydrogel, will be rolled out sequentially and all products are expected to be commercialized by year’s end.

In April 2013, we obtained new regulatory approvals in Dubai, United Arab Emirates, Kuwait, and Iraq for three new Microcyn®-based consumer products: Face Cool™, a hydrogel for the treatment of acne and various dermatoses; Baby Cool™, a hydrogel for treatment of baby rash; and Lady Cool™, a feminine hygiene wash. All products are targeted to be launched in the fall of 2013.

Ruthigen, Inc.

Our wholly owned subsidiary, Ruthigen, Inc., was incorporated in the State of Nevada on January 18, 2013, and reincorporated from Nevada to Delaware on September 25, 2013. Ruthigen has established offices in Santa Rosa, California.

On August 2, 2013, we entered into a separation agreement with Ruthigen that contains key provisions relating to our ongoing relationship with Ruthigen, and more specifically governs our relationship with Ruthigen following the completion of Ruthigen’s intended initial public offering. We previously announced our entry into a license and supply agreement and a shared services agreement with Ruthigen. Each of these agreements has been entered into in the overall context of Ruthigen’s separation from our Company. The effective date for all three agreements is the closing date of Ruthigen’s intended initial public offering, if any should occur.

License and Supply Agreement

Pursuant to the license and supply agreement, we agreed to exclusively license certain of our proprietary technology to Ruthigen to enable Ruthigen’s research and development and commercialization of the newly discovered RUT58-60, and any improvements to it, in the United States, Canada, European Union and Japan, referred to as the Territory, for certain invasive procedures in human treatment as defined in the license and supply agreement. On October 9, 2013, we entered into Amendment No. 1 to the license and supply agreement, which amended the second milestone event set forth in Section 7.1 of the license and supply agreement. On November 6, 2013, we entered into Amendment No. 2 to the license and supply agreement with Ruthigen to further amend the certain milestone events set forth in Section 7.1 of the license and supply agreement and to amend the terms of the manufacturing equipment purchases set forth in Section 6.13 of the license and supply agreement. All other terms and conditions of the license and supply agreement remain unmodified and in full force and effect.

The license and supply agreement provides Ruthigen with the exclusive option, exercisable within the first five years following the effective date of the agreement, to expand the license to certain other therapeutic indications upon payment of a license expansion fee of $10 million within the first two years following the effective date of the agreement or, after the two–year period, the same fee plus certain out-of-pocket costs we may incur in developing products for any of the indications. Additionally, we will be prohibited from using the licensed proprietary technology to sell products that compete with Ruthigen’s products within the Territory, and Ruthigen cannot sell any device or product that competes with our products being sold or developed as of the effective date of the license and supply agreement. 

Ruthigen will be required to make a total of $5,000,000 in milestone payments to us for the first product only, as follows: upon completion of Ruthigen’s first meeting with the U.S. Food and Drug Administration (FDA) following completion of Ruthigen’s first pivotal clinical trial and upon first patient enrollment in Ruthigen’s second pivotal clinical trial. In addition, as further consideration under the agreement, Ruthigen will be required to make royalty payments to us based on Ruthigen’s annual net sales of the product from the date of first commercial sale to the date that Ruthigen ceases to commercialize the product, which percentage royalty rate will vary between 3% and 20% and will increase based on various net sales thresholds and will differ depending on the country in which the sales are made. Ruthigen also agreed to purchase certain research and development and manufacturing equipment from us for approximately $3 million following the completion of Ruthigen’s intended initial public offering.

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Shared Services Agreement

We also entered into a shared services agreement with Ruthigen that would take effect upon the completion of Ruthigen’s proposed initial public offering, if any should occur, pursuant to which we will provide Ruthigen with general services, including general accounting, human resources, laboratory personnel and shared R&D resources while Ruthigen plans to establish an independent facility and systems. As a wholly owned subsidiary of our Company, Ruthigen will be financed by us until the completion of the proposed initial public offering, if any should occur, and after such event, Ruthigen would become responsible for its own expenses.

Separation Agreement

Effectiveness and Term – On August 2, 2013, we entered into a separation agreement with Ruthigen that contains key provisions relating to our ongoing relationship with Ruthigen, and more specifically governs our relationship with Ruthigen following the completion of Ruthigen’s intended initial public offering. Because we will continue to own, at least initially, the majority of Ruthigen’s outstanding common stock following Ruthigen’s intended initial public offering, the separation agreement contains certain limitations on our ability to control various aspects of Ruthigen’s business and operations in order for Ruthigen to operate as independently as possible from us to unlock the value proposition of RUT58-60, which Ruthigen expects to result in financial gain to us and Ruthigen, if Ruthigen is successful. The separation agreement takes effect upon the closing of Ruthigen’s intended initial public offering and terminates 8.5 years following the closing of Ruthigen’s intended initial public offering, unless the parties mutually agree to terminate it earlier, and, as a general matter, most of the material restrictions and obligations contained in the separation agreement lapse when we and our subsidiaries (other than Ruthigen) own less than 19.9%, or the ownership threshold for purposes of the agreement, of the outstanding shares of Ruthigen’s common stock.

Expense Allocation and Reimbursement – The separation agreement sets forth the methodology for the allocation of the operational and offering related expenses incurred prior to and in connection with Ruthigen’s intended initial public offering for which Ruthigen is required to reimburse us. Ruthigen will also reimburse us for expenses such as salaries and benefits advanced or paid on Ruthigen’s behalf, or for Ruthigen’s benefit, during a transition period following the closing of Ruthigen’s intended initial public offering.

Marketing and Transfer Restrictions – In order for the parties to control the flow of the Ruthigen shares held by us into the market to attempt to minimize price volatility and instability in the trading market for Ruthigen’s shares, the separation agreement contains a series of restrictions on our ability to transfer the Ruthigen shares we own. As a general matter, transfers of the Ruthigen shares we own are primarily expected to be conducted through private marketing efforts in private placement transactions, except in the cases prescribed in the separation agreement. For example, we are restricted from engaging in marketing efforts related to the transfer of the Ruthigen shares we own and we are required to refer indications of interest from third parties regarding the transfer of the Ruthigen shares we own to Ruthigen, in each case, except during certain prescribed periods set forth in the separation agreement. With respect to transfer restrictions, we are restricted from transferring any of the Ruthigen shares we own during the one-year lock up period immediately following Ruthigen’s intended initial public offering. Following the one-year lock up period, transfers by us of the Ruthigen shares we own must be conducted with the consent of Ruthigen’s board of directors or within the prescribed requirements for such transfers set forth in the separation agreement. These prescribed requirements include that the transfers must be in private placement transactions, that the purchase price discount may not exceed 15% or 20% of the prevailing market price depending on the type of transferee, the amount of shares transferred in a given transfer (or series of transfers comprising a single transaction) may not exceed the greater of 5% of Ruthigen’s outstanding shares or $1.5 million in net proceeds to us, as well as certain other requirements set forth in the separation agreement. Ruthigen has also agreed to assist us in consummating transfers of the Ruthigen shares we own, because Ruthigen expects to be well-informed as to where the investor demand for Ruthigen’s shares resides and Ruthigen believes its involvement may be beneficial to us and the trading market for Ruthigen’s shares. In addition to the prescribed manner for us to conduct transfers described above, if, following a minimum of 41.5 months following the closing of Ruthigen’s intended initial public offering, we have not consummated transfers of the Ruthigen shares we own resulting in at least $3.8 million in net proceeds to us, then we have a one-time transfer and registration right to transfer the Ruthigen shares we own in an amount equal to the difference between $3.8 million and the net proceeds received by us resulting from transfers of the Ruthigen shares we own as of the time we elect to exercise our one-time right. Transfers conducted using this one-time right must be conducted with the consent of Ruthigen’s board of directors or within the prescribed requirements for such transfers set forth in the separation agreement, including, for example, that the purchase price discount may not exceed 30% of the prevailing market price, the amount of shares transferred may not exceed $3.8 million in net proceeds to us, as well as certain other requirements set forth in the separation agreement. The separation agreement also provides for certain cooling off periods between marketing attempts and/or successful transfers, the length of which are dependent upon whether and how many Ruthigen shares we transfer.

Distribution - Ruthigen believes that a distribution of Ruthigen shares by us to our shareholders would be advantageous to the market for Ruthigen’s shares by increasing liquidity, would accelerate Ruthigen’s ability to become independent from us by decreasing our ownership of Ruthigen’s common stock and would be beneficial for our stockholders who would have a direct opportunity to participate in the Ruthigen value proposition. We have advised Ruthigen that, following the completion of Ruthigen’s intended initial public offering and subject to the expiration of any applicable lock-up periods or other agreements we have or may have with Ruthigen, we do not have any near term plans to distribute the Ruthigen shares held by us to our stockholders. The decision to conduct any such distribution is at the sole discretion of our board of directors. There is no assurance that such a distribution will ever occur. However, pursuant to the separation agreement, we have agreed, from time to time, to retain investment bankers and tax advisors to re-evaluate the advisability of conducting a plan of distribution of the Ruthigen shares we own and Ruthigen has agreed to register any shares that we may distribute in the future. Presently, it is expected that any potential distribution will be taxable to our Company and our stockholders.

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Registration Rights – The separation agreement provides us with certain “piggy back” registration rights if Ruthigen proposes to publicly register any of its common stock following the completion of Ruthigen’s intended initial public offering, subject to certain conditions and limitations, including cut back rights in the discretion of Ruthigen’s board of directors. In addition, following transfers by us of the Ruthigen shares, we have certain demand registration rights requiring Ruthigen to register all of the Ruthigen shares we have transferred. In addition, as described under “Marketing and Transfer Restrictions” above, if, following a minimum of 41.5 months following the closing of Ruthigen’s intended initial public offering have lapsed under the separation agreement and we have not consummated transfers of the Ruthigen shares we own resulting in at least $3.8 million in net proceeds to us, then we have a one-time transfer and registration right that requires Ruthigen, subject to certain conditions and limitations, to register the difference between $3.8 million and the Ruthigen shares transferred by us pursuant to the separation agreement as of the time we elect to exercise our one-time right.

Standstill – We have agreed that, subject to the ownership threshold, we shall not, and shall not act in concert with any person to, make or participate in a solicitation of proxies or powers of attorney or similar rights to vote any of the Ruthigen shares we own or to deposit the Ruthigen shares we own in a voting trust.

Restrictions Relating to Debt – We have agreed that, subject to the ownership threshold, we shall disclose in writing the existence of the transfer and other restrictions involving the Ruthigen shares we own, which are set forth in the separation agreement, to potential lenders in the context of our potential negotiations to incur debt in the future, where such debt would be collateralized by the Ruthigen shares we own.

WTI Loans – Ruthigen’s primary assets serve as collateral under certain loan and security agreements, or the WTI loan agreements, between us and Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc. The separation agreement provides that if we default under the WTI loan agreements and Ruthigen is required to make payments or transfer its assets to Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc. on our behalf, then Ruthigen is not required to make payments that it may owe to us until such time as we reimburse Ruthigen or Ruthigen is otherwise made whole after having met our obligations under the WTI loan agreements.

Voting – We have agreed that, subject to the ownership threshold, we shall vote or consent all of the Ruthigen shares we own in the same manner as the majority of the minority holders of Ruthigen’s common stock (non-Oculus holders).

Equity Plan, Oculus Equity and Corporate Governance – We and Ruthigen have agreed on the principal terms of Ruthigen’s equity incentive plan, including the formula for the number of shares reserved under the plan, the vesting schedule of awards under the plan, timing, size and award type of the initial grants to be made following the closing of Ruthigen’s intended initial public offering, and the formula for the evergreen refresh provision and other share caps on certain types of awards and future equity plans. The separation agreement clarifies that options for common stock of our Company held by employees and directors of Ruthigen shall continue to vest as long as the individuals continue in service to Ruthigen. In addition, the separation agreement provides that Ruthigen’s restated articles of incorporation and bylaws for purposes of operating as a public company will contain provisions for a staggered board of directors and plurality voting for the election of directors.

Indemnification – The separation agreement provides that each party will indemnify, defend and hold harmless the other party and its affiliates for third party claims asserted against the other party, and that we will indemnify, defend and hold harmless Ruthigen and its affiliates from and against any and all direct losses relating to the WTI loan agreements.

Directors’ and Officers’ Insurance – The separation agreement provides that, so long as we shall maintain a directors’ and officers’ insurance program covering the past and present officers and directors of our Company, the program shall be standard in our industry and if there is a change to the program, then we shall provide prior notice.  In addition, we have agreed not to exclude any former Oculus director from any insurance policy coverage if such coverage is made available to our Company’s then existing directors and officers.

Miscellaneous – The separation agreement also contains customary provisions regarding confidentiality, access to information, books and records, dispute resolution and the release of claims that pre-date the effective date of the separation agreement.

NVN Therapeutics

We established a nutritional products division in the beginning of 2012 to expand our product pipeline. NVN Therapeutics is based in Sacramento, California. This division aims to develop and manufacture medical foods that combine the best of science and nature to create products that provide patients with natural healthcare therapies. This division is currently focused on the development of products for the women’s health markets. Our primary medical food product, Glucorein™ PCOS, was launched and is intended for the dietary management of Polycystic Ovary Syndrome (PCOS). PCOS afflicts approximately 10% of women of reproductive age and is thought to be one of the leading causes of female infertility and the most frequent endocrine problem in women of reproductive age.

Our competition in this segment is generally from other consumer and healthcare manufacturers. Competitive factors include consumer advertising, formulation, packaging, scientific innovation, intellectual property, price and availability of product forms. A significant aspect of competition is the search for ingredient innovations. The introduction of new products by competitors, changes in medical practices and procedures, and regulatory changes can result in product obsolescence. In addition, private label and local manufacturers' products may increase competitive pressure.

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Contract Testing

We also operate a microbiology contract testing laboratory division that provides consulting and laboratory services to medical companies that design and manufacture biomedical devices and drugs, as well as testing on our products and potential products. Our testing laboratory complies with U.S. Current Good Manufacturing Practices (CGMPs) and Quality Systems Regulations.

Comparison of Three Months Ended September 30, 2013 and 2012

Revenues

Total revenues were $4,089,000 for the three months ended September 30, 2013, as compared to $4,526,000 for the same period in the prior year. Product revenues for the three months ended September 30, 2013 were down 10% from the same period in the prior year with reported decreases in revenues in Mexico, China and India, partially offset by increases in revenues in Europe, Middle East and Singapore.

Product revenue in the United States for the three months ended September 30, 2013 was essentially flat when compared to the same period in the prior year, with higher reported sales in dermatology, wound care and animal healthcare segments, offset by declines in sales related to the discontinuation of our partnerships with Union Springs Pharmaceuticals and Onset Pharmaceuticals. We recorded revenue in the amounts of $1,289,000 and $1,229,000, for the three months ended September 30, 2013 and 2012, respectively, from our partner Innovacyn, Inc., with a 6% increase for the three months ended September 30, 2013 over the same period in the prior year.

Revenue in Mexico for the three months ended September 30, 2013 decreased $510,000, or 27%, when compared to the same period in the prior year. The decrease in revenue was attributed to our transaction with More Pharma, our exclusive distributor in Mexico, which closed in August 2012. The impact of the transaction resulted in increased unit sales for the three months ended September 30, 2012 to existing customers prior to the close of the transaction, as well as sales made directly to More Pharma. Similar sales did not incur in the three months ended September 30, 2013. Further, the higher unit volume growth of 21% for the three months ended September 30, 2013 and the recognition of $378,000 related to the amortization of upfront fees paid by More Pharma was more than offset by a 52% reduction in the average overall sales price per unit. Finally, due to the transfer of our sales function in Mexico to More Pharma, our related operating expenses in Mexico were $678,000 lower for the three months ended September 30, 2013 than reported for the same period in the prior year.

Revenue in Europe and Rest of World for the three months ended September 30, 2013 increased $99,000, or 20%, as compared to the same period in the prior year, with increases in sales in Europe, Middle East and Singapore, partially offset by decreases in China and India.

The following table shows our product revenues by geographic region:

	Three Months Ended September 30,
	2013		2012		$ Change			% Change
United States	$	1,898,000	$	1,898,000	$	–			—%
Mexico		1,352,000		1,862,000		(510,000	)		(27)%
Europe and Rest of World		603,000		504,000		99,000			20%
Total	$	3,853,000	$	4,264,000	$	(411,000	)		(10)%

Licensing revenues were $397,000 and $374,000 for the three months ended September 30, 2013 and 2012, respectively. These amounts are included in our calculation of product revenues and are reflected in the table above under the respective geographic region where such licensing revenues were earned.

Service revenues for the three months ended September 30, 2013 decreased $26,000 when compared to the same period in the prior year due to a decrease in the number of tests provided by our services business.

Gross Profit

We reported gross profit related to our products of $2,650,000, or 69% of product revenues, during the three months ended September 30, 2013, compared to a gross profit of $3,172,000, or 74% of product revenues, for the same period in the prior year. Licensing revenues are included in our calculation of product revenues and gross profit for the quarters ended September 30, 2013 and 2012. Gross margins for the three months ended September 30, 2013 were down due to the decline of margins in Mexico related to the More Pharma transaction, partially offset by higher gross margins in the United States and Europe.

Research and Development Expense

Research and development expense increased $370,000 to $883,000 for the three months ended September 30, 2013, compared to $513,000 for the same period in the prior year, due to $495,000 of expenses incurred by our wholly owned subsidiary, Ruthigen, Inc. for certain costs including costs related to preclinical studies.

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We expect our research and development expenses to decrease over the next few quarters as we expect to incur lower expenses related to Ruthigen after its intended initial public offering.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased $411,000, or 12%, to $3,093,000 during the three months ended September 30, 2013, as compared to $3,504,000 for the same period in the prior year. The decrease for the three months ended September 30, 2013 was primarily due to a reduction in selling expenses in Mexico of $678,000 and lower non-Ruthigen expenses in the United States, including $199,000 of stock compensation charges, despite an increase in overall Ruthigen expenses of $499,000.

We expect our selling, general and administrative expenses to decrease in the next period as we expect expenses related to Ruthigen to decrease.

Interest Expense and Interest Income

Interest expense decreased $92,000 during the three months ended September 30, 2013 to $188,000, as compared to $280,000 for the same period in the prior year. The decrease for the three months ended September 30, 2013 related to a decrease of $26,000 of non-cash interest expense and a $66,000 reduction of cash interest incurred during the quarter. The cash and non-cash interest is primarily related to borrowings from Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc. and these amounts will continue to decrease as our outstanding debt moves closer to maturity. Interest income for the three months ended September 30, 2013 showed no material change as compared to the same period in the prior year.

Other Expense, Net

Other expense, net increased $13,000 to $39,000 for the three months ended September 30, 2013, compared to other expense, net of $26,000 for the same period in the prior year. The change in other expense, net for the three months ended September 30, 2013 was primarily related to foreign exchange gains and losses and tax expenses. 

Derivative Liabilities

During the three months ended September 30, 2012, we recorded a decrease in the fair value of our derivative liabilities of $397,000 and as a result, we recorded this amount as a non-cash loss. The change in the fair value of our derivative liabilities for the three months ended September 30, 2012 was primarily the result of increases in our stock price.

Fair Value of Common Stock Issued with Stock Purchase Agreement

During the three months ended September 30, 2013, we recorded a gain of $99,000 on the fair value of common stock issued pursuant to the terms of a stock purchase agreement we entered into with Venture Lending & Leasing V, LLC and Venture Lending & Leasing VI, LLC on October 30, 2012 for the issuance to the entities of shares of our common stock having an initial aggregate fair market value equal to $3,500,000. This gain was attributed to an increase in our stock price of $2.58 at June 30, 2013 to $2.74 at September 30, 2013.

Net Loss

Net loss for the three months ended September 30, 2013 was $1,399,000, a decrease of $120,000, as compared to net loss of $1,519,000 for the same period in the prior year.

Comparison of Six Months Ended September 30, 2013 and 2012

Revenues

Total revenues were $7,461,000 for the six months ended September 30, 2013, as compared to $8,577,000 for the same period in the prior year. Product revenues for the six months ended September 30, 2013 were down 13% from the same period in the prior year with reported decreases in revenues in the United States, Mexico and Middle East, partially offset by increases in revenues in Europe, China, India and Singapore.

Product revenue in the United States for the six months ended September 30, 2013 decreased $710,000, or 18%, as compared to the same period in the prior year due to decline in sales in the animal healthcare market and other markets. We recorded revenue from our partner Innovacyn, Inc. in the amounts of $2,030,000 and $2,365,000 for the six months ended September 30, 2013 and 2012, respectively. Although we experienced revenue growth for the animal healthcare market in the quarter ended September 30, 2013, our revenue recoded for the six months ended September 30, 2013 was lower as compared to the same period in the prior year due to a decline in revenue recorded in the quarter ended June 30, 2013 related to the late winter storms in the East and Midwest. The decline in revenue for the six months ended September 30, 2013 attributed to other products was partially due to a decrease in sales related to the discontinuation of our partnerships with Union Springs Pharmaceuticals and Onset Pharmaceuticals.

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Revenue in Mexico for the six months ended September 30, 2013 decreased $464,000, or 14%, when compared to the same period in the prior year. The decrease in revenue was attributed to our transaction with More Pharma, our exclusive distributor in Mexico, which closed in August 2012. The impact of the transaction resulted in increased unit sales for the six months ended September 30, 2012 to existing customers prior to the close of the transaction, as well as sales made directly to More Pharma. Similar sales did not incur in the six months ended September 30, 2013. Further, the higher unit volume growth of 35% for the six months ended September 30, 2013 and the recognition of $752,000 related to the amortization of upfront fees paid by More Pharma was more than offset by about a 49% reduction in the average overall sales price per unit. Finally, due to the transfer of our sales function in Mexico to More Pharma, our related operating expenses in Mexico were $1,072,000 lower than reported for the same period in the prior year.

Revenue in Europe and Rest of World for the six months ended September 30, 2013 increased $101,000, or 11%, as compared to the same period in the prior year, with increases in sales in Europe, China, India, and Singapore, partially offset by decreases in Middle East.

The following table shows our product revenues by geographic region:

	Six Months Ended September 30,
	2013		2012		$ Change			% Change
United States	$	3,221,000	$	3,931,000	$	(710,000	)		(18)%
Mexico		2,776,000		3,240,000		(464,000	)		(14)%
Europe and Rest of World		1,010,000		909,000		101,000			11%
Total	$	7,007,000	$	8,080,000	$	(1,073,000	)		(13)%

Licensing revenues were $830,000 and $406,000 for the six months ended September 30, 2013 and 2012, respectively. These amounts are included in our calculation of product revenues and are reflected in the table above under the respective geographic region where such licensing revenues were earned.

Service revenues for the six months ended September 30, 2013 decreased $43,000 when compared to the same period in the prior year due to a decrease in the number of tests provided by our services business.

Gross Profit

We reported gross profit related to our Microcyn® products of $4,783,000, or 68% of product revenues, during the six months ended September 30, 2013, compared to a gross profit of $6,000,000, or 74% of product revenues, for the same period in the prior year. Licensing revenues are included in our calculation of product revenues and gross profit for the six months ended September 30, 2013 and 2012. Gross margins for the six months ended September 30, 2013 were down due to the decline of margins in Mexico related to the More Pharma transaction, partially offset by higher gross margins in the United States and Europe.

Research and Development Expense

Research and development expense increased $345,000 to $1,390,000 for the six months ended September 30, 2013, compared to $1,045,000 for the same period in the prior year, with $670,000 of expenses incurred by our wholly owned subsidiary Ruthigen.

We expect our research and development expense will decrease over the next few quarters as we expect to incur lower expenses related to Ruthigen after its intended initial public offering.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased $439,000, or 7%, to $5,912,000 during the six months ended September 30, 2013, as compared to $6,351,000 for the same period in the prior year. The decrease for the six months ended September 30, 2013 was primarily due to a reduction in selling expenses in Mexico of $1,072,000 and $212,000 in stock compensation charges, partially offset by higher costs of $801,000 related to Ruthigen.

We expect selling, general and administrative expenses to decrease in the next period as we expect expenses related to Ruthigen to decrease.

Interest Expense and Interest Income

Interest expense decreased $130,000 during the six months ended September 30, 2013 to $438,000 as compared to $568,000 for the same period in the prior year. The decrease for the six months ended September 30, 2013 related to a decrease of $9,000 of non-cash interest expense, and a decrease of $121,000 of cash interest during the period. The cash and non-cash interest is primarily related to borrowings from Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc. and these amounts will continue to decrease as our outstanding debt moves closer to maturity. Interest income for the six months ended September 30, 2013 showed no material change as compared to the same period in the prior year.

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Other Expense, Net

Other expense, net increased $21,000 to $67,000 for the six months ended September 30, 2013, compared to other expense, net of $46,000 for the same period in the prior year. The change in other expense, net for the six months ended September 30, 2013 was primarily due to foreign exchange gains and losses and tax expenses. 

Derivative Liabilities

During the six months ended September 30, 2012, we recorded an increase in the fair value of our derivative liabilities of $850,000 and as a result, we recorded this amount as a non-cash gain. The change in the fair value of our derivative liability for the six months ended September 30, 2012 was primarily the result of decreases in our stock price and the issuance of warrants in connection with our registered direct offering that closed on April 22, 2012.

Fair Value of Common Stock Issued with Stock Purchase Agreement

During the six months ended September 30, 2013, we recorded a loss of $210,000 on the fair value of common stock issued pursuant to the terms of a stock purchase agreement we entered into with Venture Lending & Leasing V, LLC and Venture Lending & Leasing VI, LLC on October 30, 2012 for the issuance to the entities of shares of our common stock having an initial aggregate fair market value equal to $3,500,000. This loss was attributed to a decrease in our stock price of $3.08 at March 31, 2013 to $2.74 at September 30, 2013.

Net Loss

Net loss for the six months ended September 30, 2013 was $3,111,000 as compared to net loss of $1,074,000 for the same period in the prior year.

Liquidity and Capital Resources

We reported a net loss of $3,111,000 for the six months ended September 30, 2013. At September 30, 2013, our accumulated deficit amounted to $140,856,000. We had working capital of $2,175,000 as of September 30, 2013. We expect the need to raise additional capital from external sources in order to continue the longer term efforts contemplated under our business plan and repay our outstanding notes payable obligations. We expect to continue incurring losses for the foreseeable future and may need to raise additional capital to pursue our product development initiatives, to penetrate markets for the sale of our products and continue as a going concern. We cannot provide any assurances that we will be able to raise additional capital. Our management believes that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means, if needed; however, we have not secured any commitment for new financing at this time, nor can we provide any assurance that the Ruthigen initial public offering will be completed or that other new financings will be available on commercially acceptable terms, if needed.

Sources of Liquidity

As of September 30, 2013, we had cash and cash equivalents of $3,190,000. Since our inception, substantially all of our operations have been financed through sales of equity securities. Other sources of financing that we have used to date include our revenues, as well as various loans.

Since October 1, 2011, substantially all of our operations have been financed through the following transactions:

· proceeds of $222,000 received from the exercise of common stock purchase warrants and options;

· proceeds of $2,500,000 received from the issuance of a debt instrument in the year ended March 31, 2012;

· net proceeds of $1,894,000 received from a registered direct offering of common stock on December 28, 2011;

· net proceeds of $2,797,000 received from a registered direct offering on April 22, 2012; and

· net proceeds of $3,052,000 received from an underwritten offering on March 12, 2013.

Cash Flows

As of September 30, 2013, we had cash and cash equivalents of $3,190,000, compared to $7,900,000 at March 31, 2013.

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Net cash used in operating activities during the six months ended September 30, 2013 was $2,454,000, primarily due to our net loss of $3,111,000 for the period. Additionally, we had non-cash transactions during the six months ended September 30, 2013, including: $666,000 of stock-based compensation expenses; a $210,000 loss on the fair value adjustment of common stock issued to Venture Lending & Leasing V, LLC and Venture Lending & Leasing VI, LLC in connection with the stock purchase agreement dated October 30, 2012; and non-cash interest of $294,000.

Net cash provided by operating activities during the six months ended September 30, 2012 was $3,292,000 primarily due to the receipt of a $5,100,000 upfront payment from More Pharma offset by our net loss of $1,074,000 for the period. Additionally, we had non-cash transactions during the six months ended September 30, 2012, including $941,000 of stock-based compensation expenses, an $850,000 gain on the fair value adjustment of our derivative liabilities, and non-cash interest of $303,000.

Net cash used in investing activities was $312,000 for the six months ended September 30, 2013, primarily due to $338,000 related to equipment purchases.

Net cash used in investing activities was $205,000 for the six months ended September 30, 2012, consisting of $62,000 related to equipment purchases and $143,000 related to long-term prepaid expenses associated with the More Pharma transaction.

Net cash used in financing activities was $1,918,000 for the six months ended September 30, 2013, and consisted of principal payments on debt in the amount of $1,138,000 and $780,000 of deferred offering costs related to the intended initial public offering of our subsidiary, Ruthigen, Inc.

Net cash provided by financing activities was $1,874,000 for the six months ended September 30, 2012. During the six months ended September 30, 2012, we received net proceeds of $2,832,000 from our April 2012 registered direct offering of common and preferred stock. The offering proceeds were offset by principal payments on the debt in the amount of $974,000.

Operating Capital and Capital Expenditure Requirements

We reported a net loss of $3,111,000 for the six months ended September 30, 2013. At September 30, 2013, our accumulated deficit amounted to $140,856,000, and at March 31, 2013, our accumulated deficit amounted to $137,745,000. At September 30, 2013, our working capital amounted to $2,175,000.

We expect the need to raise additional capital from external sources in order to continue the longer term efforts contemplated under our business plan and repay our outstanding notes payable obligations. We expect to continue incurring losses for the foreseeable future and may need to raise additional capital to pursue our product development initiatives and to penetrate markets for the sale of our products. Upon the closing of the intended initial public offering by our subsidiary, Ruthigen, Inc., we will be repaid for certain costs incurred and advanced related to Ruthigen’s initial public offering and certain other agreed-upon expenses, pursuant to the terms of the separation agreement we entered into with Ruthigen. At September 30, 2013, these costs amounted to $911,000, of which $824,000 is reported as deferred offering costs in the accompanying condensed consolidated balance sheet and $87,000 was reported as selling, general and administrative expense.

In order for us to potentially commercialize Microcyn® as a drug product in the United States, we must conduct clinical trials, which can be costly. Therefore, commencement of such pivotal clinical trials will be delayed until we find a strategic partner to assist with funding. Without a strategic partner or additional capital, our pivotal clinical trials will be delayed for a period of time that is currently indeterminate.

Our future funding requirements will depend on many factors, including:

· the scope, rate of progress and cost of our clinical trials and other research and development activities;

· future clinical trial results;

· the terms and timing of any collaborative, licensing and other arrangements that we may establish;

· the cost and timing of regulatory approvals;

· the cost and delays in product development as a result of any changes in regulatory oversight applicable to our products;

· the cost and timing of establishing sales, marketing and distribution capabilities;

· the effect of competing technological and market developments;

· the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

· the extent to which we acquire or invest in businesses, products and technologies.

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Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to our deferred taxes, the valuation of equity and derivative instruments, debt discounts and the estimated amortization periods of upfront licensing fees received from customers. Periodically, we evaluate and adjust estimates accordingly.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information required by this Item.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Accordingly, our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective at the reasonable assurance level for the quarter ended September 30, 2013.

(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In June 2006, we received a written communication from the grantor of a license to an earlier version of our technology indicating that such license was terminated due to an alleged breach of the license agreement by us. The license agreement extends to our use of the technology in Japan only. While we do not believe that the grantor’s revocation is valid under the terms of the license agreement and no legal claim has been threatened to date, we cannot provide any assurance that the grantor will not take legal action to restrict our use of the technology in the licensed territory. While our management does not anticipate that the outcome of this matter is likely to result in a material loss, there can be no assurance that if the grantor pursues legal action, such legal action would not have a material adverse effect on our consolidated financial position or results of comprehensive loss. We have not accrued a loss reserve for this matter.

On July 25, 2011, we received notice of a lawsuit filed in Mexico by Cesar Mangotich Pacheco and Prodinnv, S.A. de C.V. represented by Cesar Mangotich Pacheco. The lawsuit appears to allege conversion of assets, tortious interference and defamation, among other claims. We are currently evaluating the lawsuit, conferring with local counsel and translating the documents we have received. Our preliminary assessment is that the lawsuit is completely without merit and intend to vigorously defend our position. We have not accrued a loss reserve for this matter.

Our Company, on occasion, may be involved in legal matters arising in the ordinary course of our business including matters involving proprietary technology. While management believes that such matters are currently insignificant, matters arising in the ordinary course of business for which we are or could become involved in litigation may have a material adverse effect on our business, financial condition or results of operations.

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Item 1A. Risk Factors

There have been no material changes from risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended March 31, 2013, as filed with the SEC on June 25, 2013, except as follows:

If we are unable to maintain compliance with the continued listing standards as set forth in the Nasdaq Listing Rules, our common stock could be delisted from The Nasdaq Capital Market, and if this were to occur, then the price and liquidity of our common stock, and our ability to raise additional capital may be adversely affected.

Our common stock is currently listed on The Nasdaq Capital Market. Continued listing of a security on The Nasdaq Capital Market is conditioned upon compliance with certain continued listing requirements and continued listing standards set forth in the Nasdaq Listing Rules for Nasdaq Capital Market companies.

As reported in our Form 10-Q for the quarter ended September 30, 2013, our stockholders’ equity was approximately $1,550,000. Under Nasdaq Listing Rule 5550(b)(1), we are required to maintain a minimum of $2,500,000 in stockholders’ equity. We anticipate the receipt of a letter from the Listing Qualifications staff of The Nasdaq Stock Market LLC that we will notify us of our non-compliance and grant us a certain period to regain compliance with the Rule.

As of the date of this 10-Q, there is no effect on the listing or trading of our common stock. However, there can be no assurance that we will be able to regain compliance with Listing Rule 5550(b)(1) or the other compliance alternatives under Listing Rule 5550(b). In the event we do not regain compliance with the Listing Rule prior to the expiration of the compliance period, if one is granted, we will likely receive written notification that our securities are subject to delisting, at which time we may appeal the delisting determination to a Hearings Panel.

If we are not able to regain compliance with the continued listing standards as set forth in the Nasdaq Listing Rules for Nasdaq Capital Market companies, our common stock will be delisted from The Nasdaq Capital Market and an associated decrease in liquidity in the market for our common stock may occur. In addition, the delisting of our common stock could materially adversely affect our access to the capital markets, and any limitation on liquidity or reduction in the price of our common stock could materially adversely affect our ability to raise capital on terms acceptable to us or at all. Delisting from The Nasdaq Capital Market could also result in the potential loss of confidence by our business partners and suppliers, the loss of institutional investor interest and fewer business development opportunities.

If the intended initial public offering by our subsidiary, Ruthigen, Inc. is not successful, then we will not be repaid certain deferred offerings costs advanced to Ruthigen, which may be substantial.

Pursuant to the terms of the separation agreement we entered into with our subsidiary, Ruthigen, Inc., upon the closing of the intended initial public offering by Ruthigen, we will be repaid for certain costs incurred and advanced related to Ruthigen’s initial public offering and certain other agreed-upon expenses. At September 30, 2013, these costs, which we expect to be repaid, amounted to $911,000, of which $824,000 is reported as deferred offering costs in our accompanying condensed consolidated balance sheet and $87,000 was reported as selling, general and administrative expense. Ruthigen’s intended initial public offering may be delayed or may not occur at all. In such case, we may not be reimbursed for such costs and expenses. In the event such reimbursement is delayed or never occurs, we will not receive cash that might have otherwise been deployed to grow our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On September 24, 2013, we issued 8,139 shares of common stock to Advocos, LLC as compensation for services provided, and such shares were valued at $22,000. We relied on the Section 4(a)(2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No advertising or general solicitation was employed in offering the securities. The securities were issued to an accredited investor. The securities were offered for investment purposes only and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by us.

Item 3. Default Upon Senior Securities

We did not default upon any senior securities during the quarter ended September 30, 2013.

Item 4. Mine Safety Disclosures

Not applicable.

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Item 5. Other Information

Amendments No. 1 and No. 2 to the License and Supply Agreement with Ruthigen, Inc.

On October 9, 2013, we entered into Amendment No. 1 to the License and Supply Agreement with our wholly owned subsidiary, Ruthigen, Inc. Pursuant to the terms of the License and Supply Agreement, Ruthigen is required to make milestone payments to us upon certain milestone events. Amendment No. 1 amended the second milestone event set forth in Section 7.1 of the License and Supply Agreement. On November 6, 2013, we entered into Amendment No. 2 to the License and Supply Agreement with Ruthigen to further amend the certain milestone events set forth in Section 7.1 of the License and Supply Agreement and to amend the terms of the manufacturing equipment purchases set forth in Section 6.13 of the License and Supply Agreement. Pursuant to the terms of Amendment No. 2, Ruthigen will be required to make a total of $5,000,000 in milestone payments to us for the first product only, as follows: upon completion of Ruthigen’s first meeting with the U.S. Food and Drug Administration (FDA) following completion of Ruthigen’s first pivotal clinical trial and upon first patient enrollment in Ruthigen’s second pivotal clinical trial. Ruthigen also agreed to purchase certain research and development and manufacturing equipment from us for approximately $3 million following the completion of Ruthigen’s intended initial public offering. All other terms and conditions of the License and Supply Agreement remain unmodified and in full force and effect.

Letter Agreement with Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc.

On November 6, 2013, we entered into a letter agreement with Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc. (collectively, the “Lenders”). We previously entered into a certain Loan and Security Agreement and Supplement thereto, both dated as of May 1, 2010 (together, the “VLL5 Loan Agreement”), with Venture Lending & Leasing V, Inc., as lender. We also entered into a certain Loan and Security Agreement and Supplement thereto, both dated as of June 29, 2011 (together, the “VLL6 Loan Agreement” and referred to with the VLL5 Loan Agreement, as the “Loan Agreements”). Pursuant to the letter agreement, we agreed to, prior to the pricing of Ruthigen’s intended initial public offering, cause a bank to issue, on our behalf, one or more irrevocable standby letters of credit for our account in favor of Lenders, in form and substance reasonably satisfactory to Lenders, in a total amount equal to all scheduled payments of principal and interest payable under the Loan Agreements at the time of execution of such letter of credit, to secure all of our obligations under the Loan Agreements. The letter of credit shall be maintained in effect for the period from the date of issuance and continuing until the date that all of our obligations under the Loan Agreements have been paid in full.

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Item 6. Exhibits

Exhibit Index

Exhibit No.	Description
3.1	Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc. (included as Exhibit 3.1 of the Company’s Annual Report on Form 10-K filed June 20, 2007, and incorporated herein by reference).
3.2	Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc. (included as Exhibit A in the Company’s Definitive Proxy Statement on Schedule 14A filed July 21, 2008, and incorporated herein by reference).
3.3	Amended and Restated Bylaws, as Amended of Oculus Innovative Sciences, Inc., effective November 3, 2010 (included as Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q filed November 4, 2010, and incorporated herein by reference).
3.4	Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended (included as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 22, 2013, and incorporated herein by reference).
4.1	Specimen Common Stock Certificate (included as Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
4.2	Form of Warrant to Purchase Common Stock of Oculus Innovative Sciences, Inc. (included as Exhibit 4.4 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
4.3	Form of Warrant to Purchase Common Stock of Oculus Innovative Sciences, Inc. (included as Exhibit 4.5 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
4.4	Form of Warrant to Purchase Common Stock of Oculus Innovative Sciences, Inc. (included as Exhibit 4.11 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
4.5	Form of Warrant to Purchase Common Stock of Oculus Innovative Sciences, Inc. (included as Exhibit 4.12 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
4.6	Form of Warrant to Purchase Common Stock of Oculus Innovative Sciences, Inc. (included as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed August 13, 2007, and incorporated herein by reference).
4.7	Form of Warrant to Purchase Common Stock of Oculus Innovative Sciences, Inc. (included as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed March 28, 2008, and incorporated herein by reference).
4.8	Form of Common Stock Purchase Warrant for April 2009 offering (included as Exhibit 4.15 to the Company’s Registration Statement on Form S-1 (File No. 333-158539) declared effective on July 24, 2009, and incorporated herein by reference).
4.9	Warrant issued to Dayl Crow, dated March 4, 2009 (included as Exhibit 4.16 to the Company’s Annual Report on Form 10-K filed June 11, 2009, and incorporated herein by reference).
4.10	Form of Common Stock Purchase Warrant for July 2009 offering (included as Exhibit 4.15 to the Company’s Registration Statement on Form S-1 (File No. 333-158539), as amended, declared effective on July 24, 2009, and incorporated herein by reference)
4.11	Form of Common Stock Purchase Warrant for April 2012 offering (included as Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed April 25, 2012, and incorporated herein by reference).
4.12	Certificate of Designation of Preferences, Rights and Limitations of Series A 0% Convertible Preferred Stock, filed with the Delaware Secretary of State on April 24, 2012 (included as Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed April 25, 2012, and incorporated herein by reference).
4.13	Form of Underwriters Warrant to be issued to the Underwriters in connection with the March 2013 Offering (included as Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed March 7, 2013, and incorporated herein by reference).
10.1	Form of Indemnification Agreement between Oculus Innovative Sciences, Inc. and its officers and directors (included as Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.2	Amended and Restated Oculus Innovative Sciences, Inc. 2006 Stock Incentive Plan and related form stock option plan agreements (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 2, 2007, and incorporated herein by reference).
10.3	Office Lease Agreement, dated October 26, 1999, between Oculus Innovative Sciences, Inc. and RNM Lakeville, L.P. (included as Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.4	Amendment No. 1 to Office Lease Agreement, dated September 15, 2000, between Oculus Innovative Sciences, Inc. and RNM Lakeville L.P. (included as Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.5	Amendment No. 2 to Office Lease Agreement, dated July 29, 2005, between Oculus Innovative Sciences, Inc. and RNM Lakeville L.P. (included as Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).

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10.6	Amendment No. 3 to Office Lease Agreement, dated August 23, 2006, between Oculus Innovative Sciences, Inc. and RNM Lakeville L.P. (included as Exhibit 10.23 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.7	Amendment No. 4 to Office Lease Agreement, dated September 13, 2007, by and between Oculus Innovative Sciences, Inc. and RNM Lakeville L.P. (included as Exhibit 10.43 to the Company’s Annual Report on Form 10-K filed June 13, 2008, and incorporated herein by reference).
10.8	Office Lease Agreement, dated May 18, 2006, between Oculus Technologies of Mexico, S.A. de C.V. and Antonio Sergio Arturo Fernandez Valenzuela (translated from Spanish) (included as Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.9	Office Lease Agreement, dated July 2003, between Oculus Innovative Sciences, B.V. and Artikona Holding B.V. (translated from Dutch) (included as Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.10	Amendment to Office Lease Agreement, effective February 15, 2008, by and between Oculus Innovative Sciences Netherlands B.V. and Artikona Holding B.V. (translated from Dutch) (included as Exhibit 10.44 to the Company’s Annual Report on Form 10-K filed June 13, 2008, and incorporated herein by reference).
10.11	Form of Director Agreement (included as Exhibit 10.20 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.12	Framework Agreement, dated June 16, 2005, by and among Javier Orozco Gutierrez, Quimica Pasteur, S de R.L., Jorge Paulino Hermosillo Martin, Oculus Innovative Sciences, Inc. and Oculus Technologies de Mexico, S.A. de C.V. (included as Exhibit 10.25 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.13	Mercantile Consignment Agreement, dated June 16, 2005, between Oculus Technologies de Mexico, S.A. de C.V., Quimica Pasteur, S de R.L. and Francisco Javier Orozco Gutierrez (included as Exhibit 10.26 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.14	Partnership Interest Purchase Option Agreement, dated June 16, 2005, by and between Oculus Innovative Sciences, Inc. and Javier Orozco Gutierrez (included as Exhibit 10.27 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.15	Termination of Oculus Innovative Sciences, Inc. and Oculus Technologies de Mexico, S.A. de C.V.’s Agreements with Quimica Pasteur, S de R.L. by Jorge Paulino Hermosillo Martin (translated from Spanish) (included as Exhibit 10.28 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.16	Termination of Oculus Innovative Sciences, Inc. and Oculus Technologies de Mexico, S.A. de C.V.’s Agreements with Quimica Pasteur, S de R.L. by Francisco Javier Orozco Gutierrez (translated from Spanish) (included as Exhibit 10.29 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.17	Purchase Agreement by and between Oculus Innovative Sciences, Inc. and Robert Burlingame, dated January 26, 2009 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 29, 2009, and incorporated herein by reference).
10.18	Revenue Sharing Distribution Agreement by and between Oculus Innovative Sciences, Inc. and VetCure, Inc., dated January 26, 2009 (included as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed January 29, 2009, and incorporated herein by reference).
10.19	Purchase Agreement by and between Oculus Innovative Sciences, Inc. and accredited investors, dated February 6, 2009 (refiled as Exhibit 10.32 to the Company’s Quarterly Report on Form 10-Q filed November 4, 2010, and incorporated herein by reference).
10.20	Purchase Agreement by and between Oculus Innovative Sciences, Inc., Robert Burlingame and Seamus Burlingame, dated February 24, 2009 (included as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed February 27, 2009, and incorporated herein by reference).
10.21	Amendment No. 1 to Revenue Sharing Distribution Agreement by and between Oculus Innovative Sciences, Inc. and VetCure, Inc., dated February 24, 2009 (included as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed February 27, 2009, and incorporated herein by reference).
10.22	Microcyn U.S. Commercial Launch Agreement by and between Oculus Innovative Sciences, Inc. and Advocos, dated April 24, 2009 (included as Exhibit 10.53 to the Company’s Annual Report on Form 10-K filed June 11, 2009, and incorporated herein by reference).
10.23	Amendment No. 5 to Office Lease Agreement by and between Oculus Innovative Sciences, Inc. and RNM Lakeville, LLC, dated May 18, 2009 (included as Exhibit 10.54 to the Company’s Annual Report on Form 10-K filed June 11, 2009, and incorporated herein by reference).
10.24	Loan and Security Agreement between Oculus Innovative Sciences, Inc. and Venture Lending & Leasing V, Inc., dated May 1, 2010 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 6, 2010, and incorporated herein by reference).
10.25	Supplement to the Loan and Security Agreement between Oculus Innovative Sciences, Inc., and Venture Lending & Leasing V, Inc., dated May 1, 2010 (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 6, 2010, and incorporated herein by reference).

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10.26†	Amendment No. 2 to Revenue Sharing, Partnership and Distribution Agreement between Oculus Innovative Sciences, Inc. and Vetericyn, Inc., dated July 24, 2009 (refiled as Exhibit 10.44 to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2010 filed April 29, 2011, and incorporated herein by reference).
10.27†	Amendment No. 3 to Revenue Sharing, Partnership and Distribution Agreement between Oculus Innovative Sciences, Inc. and Vetericyn, Inc., dated June 1, 2010 (refiled as Exhibit 10.44 to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2010 filed April 29, 2011, and incorporated herein by reference).
10.28†	Amendment No. 1 to Exhibit A to the Revenue Sharing Distribution Agreement and to the Revenue Sharing, Partnership and Distribution Agreement as Revised and Amended, June 1, 2010, dated September 1, 2010 (included as Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q filed November 4, 2010, and incorporated herein by reference).
10.29	Continuous Offering Program Agreement between Oculus Innovative Sciences, Inc. and Rodman & Renshaw, LLC, dated September 3, 2010 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 17, 2010, and incorporated herein by reference).
10.30†	Distribution Agreement between Oculus Innovative Sciences, Inc. and Tianjin Ascent Import and Export Company, Ltd., dated January 28, 2011 (included as Exhibit 10.47 to the Company’s Quarterly Report on Form 10-Q filed February 4, 2011, and incorporated herein by reference).
10.31†	Exclusive Sales and Distribution Agreement between Oculus Innovative Sciences, Inc. and Quinnova Pharmaceuticals, Inc., dated February 14, 2011 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 18, 2011, and incorporated herein by reference).
10.32†	Exclusive Co-Promotion Agreement between Oculus Innovative Sciences, Inc. and Quinnova Pharmaceuticals, Inc., dated February 14, 2011 (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 18, 2011, and incorporated herein by reference).
10.33	Product Option Agreement between Oculus Innovative Sciences, Inc. and AmDerma Pharmaceuticals, LLC, dated February 14, 2011 (included as Exhibit 10.3 to the Company's Current Report on Form 8-K filed February 18, 2011, and incorporated herein by reference).
10.34	Amendment No. 6 to Office Lease Agreement by and between Oculus Innovative Sciences, Inc. and RNM Lakeville, L.P., dated April 26, 2011 (included as Exhibit 10.52 to the Company’s Annual Report on Form 10-K filed June 3, 2011, and incorporated herein by reference).
10.35	Loan and Security Agreement between Oculus Innovative Sciences, Inc. and Venture Lending & Leasing VI, Inc., dated June 29, 2011 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 6, 2011, and incorporated herein by reference).
10.36	Supplement to the Loan and Security Agreement between Oculus Innovative Sciences, Inc. and Venture Lending & Leasing VI, Inc., dated June 29, 2011 (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed July 6, 2011, and incorporated herein by reference).
10.37	Amendment No. 1 to the Loan and Security Agreement and Supplement to the Loan and Security Agreement between Oculus Innovative Sciences, Inc. and Venture Lending & Leasing V, Inc., dated June 29, 2011 (included as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed July 6, 2011, and incorporated herein by reference).
10.38	Intellectual Property Security Agreement between Oculus Innovative Sciences, Inc. and Venture Lending & Leasing VI, Inc., dated June 29, 2011 (included as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed July 6, 2011, and incorporated herein by reference).
10.39	Intellectual Property Security Agreement between Oculus Innovative Sciences, Inc. and Venture Lending & Leasing V, Inc., dated June 29, 2011 (included as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed July 6, 2011, and incorporated herein by reference).
10.40†	Distribution Agreement between Oculus Innovative Sciences, Inc. and Shanghai Sunvic Technology Co. Ltd., dated June 26, 2011 (included as Exhibit 10.58 to the Company’s Quarterly Report on Form 10-Q filed August 4, 2011 and incorporated herein by reference).
10.41	Oculus Innovative Sciences, Inc. 2011 Stock Incentive Plan (included as Exhibit A in the Company’s Definitive Proxy Statement on Schedule 14A filed July 29, 2011, and incorporated herein by reference).
10.42	Securities Purchase Agreement by and between the Company and the Purchasers, dated April 22, 2012 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed April 25, 2012, and incorporated herein by reference).
10.43†	Patent License Agreement-Exclusive between Oculus Innovative Sciences, Inc. and agencies of the United States Public Health Service within the Department of Health and Human Services, dated August 22, 2011 (included as Exhibit 10.60 to the Company’s Quarterly Report on Form 10-Q filed November 3, 2011, and incorporated herein by reference).
10.44†	Collaboration Agreement between Oculus Innovative Sciences, Inc. and AmDerma Pharmaceuticals, LLC, dated June 21, 2012 (included as Exhibit 10.53 to the Company’s Annual Report on Form 10-K filed June 21, 2012 and incorporated herein by reference).
10.45†	License, Exclusive Distribution and Supply Agreement by and between Oculus Innovative Sciences, Inc. and Oculus Technologies of Mexico, S.A. de C.V., and, More Pharma Corporation, S. de R.L. de C.V., dated August 9, 2012 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed August 15, 2012, and incorporated herein by reference).
10.46†	Exclusive Distribution and Supply Agreement by and between Oculus Innovative Sciences, Inc. and Oculus Technologies of Mexico, S.A. de C.V., and, More Pharma Corporation, S. de R.L. de C.V., dated August 9, 2012 (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed August 15, 2012, and incorporated herein by reference).
10.47	Lease by and between Oculus Innovative Sciences, Inc. and KCKMC Properties, LLP for the property located at 3045 65th Street, Suite 13, Sacramento, CA 95820, dated October 31, 2011 (included as Exhibit 10.56 to the Company’s Quarterly Report on Form 10-Q filed November 8, 2012, and incorporated herein by reference).

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10.48	Amendment to Lease dated August 30, 2012 by and between Oculus Innovative Sciences, Inc. and KCKMC Properties, LLC for the property located at 3045 65th Street, Suite 13, Sacramento, CA 95820, dated September 6, 2012 (included as Exhibit 10.57 to the Company’s Quarterly Report on Form 10-Q filed November 8, 2012, and incorporated herein by reference).
10.49	Amendment No. 7 to Office Lease Agreement by and between Oculus Innovative Sciences, Inc. and 1125-1137 North McDowell, LLC, dated October 10, 2012 (included as Exhibit 10.58 to the Company’s Quarterly Report on Form 10-Q filed November 8, 2012, and incorporated herein by reference).
10.50	Stock Purchase Agreement by and between Oculus Innovative Sciences, Inc. and Venture Lending & Leasing V, LLC and Venture Lending & Leasing VI, LLC, dated October 30, 2012 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed November 1, 2012, and incorporated herein by reference).
10.51	Letter Agreement by and between Oculus Innovative Sciences, Inc. and Venture Lending & Leasing V, Inc., dated October 30, 2012 (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed November 1, 2012, and incorporated herein by reference).
10.52	Letter Agreement by and between Oculus Innovative Sciences, Inc. and Venture Lending & Leasing VI, Inc., dated October 30, 2012 (included as Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed November 1, 2012, and incorporated herein by reference).
10.53	Offer of Employment Letter between Oculus Innovative Sciences, Inc. and Sameer Harish, effective as of February 1, 2013 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed February 4, 2013, and incorporated herein by reference).
10.54	Employment Agreement by and between Ruthigen, Inc. and Hojabr Alimi, dated March 21, 2013 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed March 22, 2013, and incorporated herein by reference).
10.55††	License and Supply Agreement by and between Oculus Innovative Sciences, Inc. and Ruthigen, Inc., dated May 23, 2013 (refiled as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A, filed September 24, 2013, and incorporated herein by reference).
10.56	Shared Services Agreement by and between Oculus Innovative Sciences, Inc. and Ruthigen, Inc., dated May 23, 2013 (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed June 7, 2013, and incorporated herein by reference).
10.57	Amendment to Offer of Employment Letter between Oculus Innovative Sciences, Inc. and Sameer Harish, dated May 23, 2013 (included as Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed June 7, 2013, and incorporated herein by reference).
10.58	Employment Agreement by and between Oculus Innovative Sciences, Inc. and Hojabr Alimi, dated January 1, 2004 (included as Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.59	Employment Agreement by and between Oculus Innovative Sciences, Inc. and Jim Schutz, dated January 1, 2004 (included as Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.60	Employment Agreement by and between Oculus Innovative Sciences, Inc. and Robert Miller, dated June 1, 2004 (included as Exhibit 10.16 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.61	Employment Agreement by and between Oculus Innovative Sciences, Inc. and Jim Schutz, dated June 20, 2013 (included as Exhibit 10.68 to the Company’s Annual Report on Form 10-K, filed June 25, 2013, and incorporated herein by reference).
10.62	Employment Agreement by and between Oculus Innovative Sciences, Inc. and Robert Miller, dated June 20, 2013  (included as Exhibit 10.69 to the Company’s Annual Report on Form 10-K, filed June 25, 2013, and incorporated herein by reference).
10.63	Separation Agreement by and between Oculus Innovative Sciences, Inc. and Ruthigen, Inc., dated August 2, 2013 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed August 8, 2013, and incorporated herein by reference).
10.64*	Amendment No. 1 to License and Supply Agreement by and between Oculus Innovative Sciences, Inc. and Ruthigen, Inc., dated October 9, 2013.
10.65*	Amendment No. 2 to License and Supply Agreement by and between Oculus Innovative Sciences, Inc. and Ruthigen, Inc., dated November 6, 2013.
10.66*	Letter Agreement by and between Oculus Innovative Sciences, Inc., Venture Lending & Leasing V, Inc., and Venture Lending & Leasing VI, Inc., dated November 6, 2013.
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*#	XBRL Instance Document.
101.SCH*#	XBRL Taxonomy Extension Schema.
101.CAL*#	XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*#	XBRL Taxonomy Extension Definition Linkbase.
101.LAB*#	XBRL Taxonomy Extension Label Linkbase.
101.PRE*#	XBRL Taxonomy Extension Presentation Linkbase.

*	Filed herewith.
†	Confidential treatment has been granted with respect to certain portions of this agreement.
††	Confidential treatment has been requested with respect to certain portions of this agreement.
#	Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

35

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	OCULUS INNOVATIVE SCIENCES, INC.
Date:  November 19, 2013	By:	/s/ Jim Schutz
		Jim Schutz
		Chief Executive Officer
		(Principal Executive Officer)
Date:  November 19, 2013	By:	/s/ Robert Miller
		Robert Miller
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

36

EX-10.64

Exhibit 10.64

AMENDMENT NO. 1 TO LICENSE AND SUPPLY AGREEMENT

This AMENDMENT NO. 1 TO LICENSE AND SUPPLY AGREEMENT (this “Amendment”) is made and entered into as of October 9, 2013 and shall become effective upon the closing of an IPO (as defined in the License Agreement). This Amendment amends that certain License and Supply Agreement dated as of May 23, 2013 (the “License Agreement”), by and between Ruthigen, Inc., a Delaware corporation (“Ruthigen”) and Oculus Innovative Sciences, Inc., a Delaware corporation (“Oculus”). Capitalized terms used and not defined herein shall have the meanings given to them in the License Agreement.

WHEREAS, Section 15.13 of the License Agreement provides that the License Agreement may be amended, if such amendment is reduced to writing and signed by the authorized officers of both Parties to the License Agreement;

WHEREAS, the Parties wish to amend the second milestone event listed in Section 7.1 of the License Agreement as set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants, agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties agree as follows:

1. Amendment to Second Milestone Event. The second milestone event set forth in Section 7.1 of the License Agreement is hereby deleted in its entirety and the following inserted in lieu thereof:

2. Upon first clinical trial site selection for the Phase I/II    One Million Dollars ($1,000,000)

2. Effect of this Amendment. Except as specifically amended as set forth herein, each term and condition of the License Agreement shall continue in full force and effect.

3. Governing Law. This Amendment shall be governed by and construed in accordance with the laws in force in the State of California, without giving effect to the choice of laws provisions thereof.

4. Counterparts; Facsimile Signatures. This Amendment may be executed or consented to in counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument. This Amendment may be executed and delivered by facsimile or electronically and, upon such delivery, the facsimile or electronically transmitted signature will be deemed to have the same effect as if the original signature had been delivered to the other party.

[Remainder of page intentionally left blank.]

IN WITNESS WHEREOF, the Parties have caused this Amendment No. 1 to License and Supply Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

OCULUS OCULUS INNOVATIVE SCIENCES INC.	RUTHIGEN RUTHIGEN, INC.
By:      /s/ James Schutz	By:      /s/ Hojabr Alimi
Name: James Schutz	Name: Hojabr Alimi
Title:   Chief Executive Officer	Title:   Chief Executive Officer
Date:   10/9/13	Date:  10/9/13

EX-10.65

Exhibit 10.65

AMENDMENT NO. 2 TO LICENSE AND SUPPLY AGREEMENT

This AMENDMENT NO. 2 TO LICENSE AND SUPPLY AGREEMENT (this “Amendment”) is made and entered into as of November 6, 2013 and shall become effective upon the closing of an IPO (as defined in the License Agreement). This Amendment amends that certain License and Supply Agreement dated as of May 23, 2013, as amended from time to time (the “License Agreement”), by and between Ruthigen, Inc., a Delaware corporation (“Ruthigen”) and Oculus Innovative Sciences, Inc., a Delaware corporation (“Oculus”). Capitalized terms used and not defined herein shall have the meanings given to them in the License Agreement.

WHEREAS, Section 15.13 of the License Agreement provides that the License Agreement may be amended, if such amendment is reduced to writing and signed by the authorized officers of both Parties to the License Agreement;

WHEREAS, the Parties entered into Amendment No. 1 to License and Supply Agreement on October 9, 2013;

WHEREAS, the Parties now wish to amend certain sections of the License Agreement as set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants, agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties agree as follows:

1. Amendment to Milestones. The table listing the Milestone Events and Milestone Payments under the License Agreement, which is set forth in Section 7.1 of the License Agreement, is hereby deleted in its entirety and the following table listing the Milestone Events and Milestone Payments under the License Agreement is inserted in lieu thereof:

	Milestone Event	Milestone Payment
1.	Upon completion of Ruthigen’s first meeting with the FDA following completion of Ruthigen’s first pivotal clinical trial	Three Million Dollars ($3,000,000)
2.	Upon first patient enrollment in Ruthigen’s second pivotal clinical trial	Two Million Dollars ($2,000,000)

2. Amendment to Manufacturing Equipment Purchases. The introductory lead-in language and subsection (a) of Section 6.13 of the License Agreement is hereby deleted in its entirety and the following language is inserted in lieu thereof:

“6.13 Manufacturing Equipment.

(a)        Ruthigen shall purchase and pay in full for (i) at least One Million Dollars ($1,000,000) of Manufacturing Equipment, upon the Effective Date; (ii) at least One Million Two Hundred Fifty Thousand Dollars ($1,250,000) of additional Manufacturing Equipment, within thirty (30) days following the Effective Date; and (iii) at least Seven Hundred Fifty Thousand Dollars ($750,000) of additional Manufacturing Equipment, within forty five (45) days following the Effective Date (collectively, the “Equipment Purchase Price”). In each case, Oculus shall deliver the Manufacturing Equipment to Ruthigen, at Ruthigen’s expense, within sixty (60) days of receipt of payment therefor or at such other time as the Parties agree upon orally or in writing.”

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3. Effect of this Amendment. Except as specifically amended as set forth herein, each term and condition of the License Agreement shall continue in full force and effect.

4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws in force in the State of California, without giving effect to the choice of laws provisions thereof.

5. Counterparts; Facsimile Signatures. This Amendment may be executed or consented to in counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument. This Amendment may be executed and delivered by facsimile or electronically and, upon such delivery, the facsimile or electronically transmitted signature will be deemed to have the same effect as if the original signature had been delivered to the other party.

[Remainder of page intentionally left blank.]

2

IN WITNESS WHEREOF, the Parties have caused this Amendment No. 2 to License and Supply Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

OCULUS OCULUS INNOVATIVE SCIENCES INC.	RUTHIGEN RUTHIGEN, INC.
By: /s/ James Schutz	By: /s/ Hojabr Alimi
Name: James Schutz	Name: Hojabr Alimi
Title: Chief Executive Officer	Title: Chief Executive Officer
Date: November 6, 2013	Date: November 6, 2013

3

EX-10.66

Exhibit 10.66

Oculus Innovative Sciences, Inc.

1129 North McDowell Boulevard

Petaluma, CA 94954

November 6, 2013

VIA EMAIL

Venture Lending & Leasing V, Inc.

Venture Lending & Leasing VI, Inc.

104 La Mesa Drive, Suite 102

Portola Valley, CA 94028

Re: Letter of Credit

Ladies and Gentlemen:

Reference is hereby made to (i) that certain Loan and Security Agreement and Supplement thereto, both dated as of May 1, 2010 (together, as the same has been and may be amended, supplemented, extended, renewed or otherwise modified from time to time, the “VLL5 Loan Agreement”), between Oculus Innovative Sciences, Inc., a Delaware corporation (“Borrower”), and Venture Lending & Leasing V, Inc., as lender (“VLL5”), and (ii) that certain Loan and Security Agreement and Supplement thereto, both dated as of June 29, 2011 (together, as the same has been and may be amended, supplemented, extended, renewed or otherwise modified from time to time, the “VLL6 Loan Agreement” and sometimes referred to herein individually with the VLL5 Loan Agreement, as a “Loan Agreement” and together, as the “Loan Agreements”), between Borrower and Venture Lending & Leasing VI, Inc., as lender (“VLL6” and sometimes referred to herein individually with the VLL5, as a “Lender” and together, as “Lenders”). Except where the context otherwise requires, or unless this letter agreement (this “Letter Agreement”) otherwise provides, all words and expressions defined in the Loan Agreements when used or referred to in this Letter Agreement shall have the same meanings as those provided for in the Loan Agreements. For the purposes of clarity, the definition of “Collateral” shall have the meaning as set forth in the waiver agreement (the “Waiver”) made by and between the Lenders and the Borrower on August 10, 2012.

Borrower previously notified Lenders that Borrower’s wholly owned subsidiary, Ruthigen, Inc., a Delaware corporation (“Ruthigen”), intends to consummate an initial underwritten public offering of Ruthigen’s equity interests (the “Ruthigen Shares”) pursuant to a registration statement on Form S-1 filed with the Securities and Exchange Commission under the federal Securities Act of 1933, as amended (the “IPO”). All Ruthigen Shares issued on or after the date hereof to parties other than Borrower are hereinafter referred to as the “Applicable Ruthigen Shares.” To the extent that the Applicable Ruthigen Shares constitute Collateral for the Obligations under the Loan Agreements and the other Loan Documents, it is a condition precedent to the IPO that the Applicable Ruthigen Shares be free and clear of Lenders’ Liens thereon in order to consummate the IPO. In order to facilitate the IPO, Borrower and each of Lenders agree to the terms and conditions set forth in this Letter Agreement.

1. Prior to the pricing of the IPO, Wells Fargo Bank, N.A and its successors and assigns (“Wells Fargo”) shall issue one or more irrevocable standby letters of credit for Borrower’s account in favor of Lenders, in form and substance reasonably satisfactory to Lenders (individually and collectively, the “Letter of Credit”), in a total amount equal to all scheduled payments of principal and interest payable under the Loan Agreements at the time of execution of such Letter of Credit, to secure all of the Borrower’s Obligations under the Loan Agreements. The Letter of Credit shall be maintained in effect for the period from the date of issuance and continuing until the date that all of the Borrower’s Obligations under the Loan Agreements have been paid in full. Lenders are willing to accept such Letter of Credit as a condition to continuing the credit accommodations outstanding under the Loan Agreements and in consideration of the release and discharge by Lenders of all Liens which they have or have had in any or all of the Applicable Ruthigen Shares pursuant to the provisions of the Loan Agreements. Such waiver shall be given by Lenders concurrently with Lenders’ receipt of such Letter of Credit, in form substantially similar to Exhibit A attached hereto.

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2. Borrower hereby covenants and agrees that Borrower will take all action within its power and authority necessary or desirable to keep the Letter of Credit in full force and effect. Borrower further agrees that it will take all action within its power and authority necessary or desirable to cause Wells Fargo to pay in accordance with the terms and provisions of the Letter of Credit upon the occurrence of an Event of Default that gives rise to a contractual or legal right to draw upon the Letter of Credit. In furtherance of the foregoing, Borrower agrees that the Letter of Credit shall be honored by Wells Fargo upon the occurrence of such Event of Default.

3. Each of Lenders hereby covenants and agrees that (a) such Lender will draw upon such Letter of Credit only following the occurrence of an Event of Default and in accordance with the terms of the Loan Agreements, and (b) Borrower has the right to reduce the amount subject to such Letter of Credit as it pays down the Obligations owed under the Loan Agreements, however in no event will the Letter of Credit be less than the Obligations. Borrower hereby acknowledges and agrees that each Lender is entering into this Letter Agreement in material reliance upon the ability of such Lender to draw upon the Letter of Credit upon the occurrence of any Event of Default. If an Event of Default occurs, either Lender may, without notice to Borrower, draw upon the Letter of Credit, in part or in whole. Borrower agrees not to interfere in any way with payment to either Lender of the proceeds of the Letter of Credit, either prior to or following a draw by either Lender of any portion of the Letter of Credit. No condition or term of the Loan Documents shall be deemed to render the Letter of Credit conditional to justify the issuer of the Letter of Credit in failing to honor a drawing upon such Letter of Credit in a timely manner. Borrower agrees and acknowledges that (i) the Letter of Credit constitutes a separate and independent contract between each Lender and the Wells Fargo, (ii) Borrower is not a third party beneficiary of such contract, (iii) Borrower has no property interest whatsoever in the Letter of Credit or the proceeds thereof, and (iv) in the event Borrower becomes a debtor under any chapter of the Bankruptcy Code, neither Borrower, any trustee, nor Borrower’s bankruptcy estate shall have any right to restrict or limit either Lender’s claim and/or rights to the Letter of Credit and/or the proceeds thereof by application of any provision of the U. S. Bankruptcy Code or otherwise.

This Letter Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and there are no other agreements, understandings, representations or understandings, other than those expressly stated in this Letter Agreement. Except as expressly amended by this Letter Agreement, the Loan Agreements and the other Loan Documents remain unamended and in full force and effect. All legal fees and costs incurred by Lenders in connection with the preparation, negotiation and execution hereof shall be reimbursed by Borrower upon demand. This Letter Agreement may be executed in any number of counterparts, including counterparts transmitted by facsimile or electronic transmission, each of which shall be an original, but all of which together shall constitute one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document.

[Remainder of page intentionally left blank; signature page follows.]

2

Please indicate your agreement to the foregoing by executing and returning a copy of this Letter Agreement.

Very truly yours,

OCULUS INNOVATIVE SCIENCES, INC.

By: /s/ Jim Schutz                        

Name:  Jim Schutz

Title:    Chief Executive Officer

Acknowledged and agreed as of the date set forth above:

VENTURE LENDING & LEASING V, INC.

By: /s/ Maurice Werdegar

Name: Maurice Werdegar

Title: President and CEO

VENTURE LENDING & LEASING VI, INC.

By: /s/ Maurice Werdegar

Name: Maurice Werdegar

Title: President and CEO

3

Exhibit A

Venture Lending & Leasing V, Inc.

Venture Lending & Leasing VI, Inc.

104 La Mesa Drive, Suite 102

Portola Valley, CA 94028

________________, 2013

Via Email

Oculus Innovative Sciences, Inc.

1129 North McDowell Boulevard

Petaluma, CA 94954

Re: Release of Certain Conditions Applicable to Ruthigen, Inc.

Ladies and Gentlemen:

Reference is hereby made to (i) that certain Loan and Security Agreement and Supplement thereto, both dated as of May 1, 2010 (as the same has been and may be amended, supplemented, extended, renewed or otherwise modified from time to time, the “VLL5 Loan Agreement”), between Oculus Innovative Sciences, Inc., a Delaware corporation (“Borrower”), and Venture Lending & Leasing V, Inc., as lender (“VLL5”), and (ii) that certain Loan and Security Agreement and Supplement thereto, both dated as of June 29, 2011 (as the same has been and may be amended, supplemented, extended, renewed or otherwise modified from time to time, the “VLL6 Loan Agreement” and sometimes referred to herein individually with the VLL5 Loan Agreement, as a “Loan Agreement” and together, as the “Loan Agreements”), between Borrower and Venture Lending & Leasing VI, Inc., as lender (“VLL6” and sometimes referred to herein individually with the VLL5, as a “Lender” and together, as “Lenders”). Except where the context otherwise requires, or unless this letter (this “Agreement”) otherwise provides, all words and expressions defined in the Loan Agreements when used or referred to in this Agreement shall have the same meanings as those provided for in the Loan Agreements. For the purposes of clarity, the definition of “Collateral” shall have the meaning as set forth in the waiver agreement (the “Waiver”) made by and between the Lenders and the Borrower on August 10, 2012.

Initial Underwritten Public Offering of Ruthigen, Inc.

Borrower has notified Lenders that Borrower’s wholly owned subsidiary, Ruthigen, Inc., a Delaware corporation (“Ruthigen”), desires to consummate an initial underwritten public offering of Ruthigen’s equity interests (the “Ruthigen Shares”) pursuant to a registration statement on Form S-1 filed with the Securities and Exchange Commission under the federal Securities Act of 1933, as amended (the “IPO”). All Ruthigen Shares issued on or after the date hereof to parties other than Borrower are hereinafter referred to as the “Applicable Ruthigen Shares.” To the extent that the Applicable Ruthigen Shares constitute Collateral for the Obligations under the Loan Agreements and the other Loan Documents, it is a condition precedent to the IPO that the Applicable Ruthigen Shares be free and clear of Lenders’ Liens thereon in order to consummate the IPO.

In order to facilitate the IPO, Borrower wishes to obtain the release of all Lenders’ Liens on the Applicable Ruthigen Shares that Borrower granted to Lenders pursuant to the Loan Agreements, if any. Subject to the final sentence of this paragraph, each Lender hereby releases and discharges all Liens which it has or has had in any or all of the Applicable Ruthigen Shares pursuant to the provisions of the Loan Agreements, including without limitation Section 2.10(a). Each Lender agrees to execute and deliver (and authorize the execution and delivery of), prior to the pricing of the IPO and from time to time thereafter, all UCC financing statement amendments and other documents and instruments, in form and substance reasonably satisfactory to Borrower (collectively, the “Release Documentation”), and to take all other action as Borrower may from time to time reasonably request, to release and discharge any Liens that such Lender may have had or may have in any of the Applicable Ruthigen Shares; provided, however, that any and all such Release Documentation and such other documents related thereto and prepared in connection with the transactions contemplated by this Agreement shall be prepared, filed and recorded at Borrower’s sole cost and expense. Nothing in this Agreement shall be deemed to be a release of Lenders’ Liens on the Collateral, as defined in the Loan Agreements and amended by the Waiver, other than the Applicable Ruthigen Shares which are hereby included as an additional exclusion from the definition of “Collateral” in the Loan Agreements as amended by the Waiver, including, without limitation, (A) any Ruthigen Shares owned by Borrower that are not included in the IPO and (B) any Ruthigen Shares Borrower subsequently acquires after the IPO. This Agreement shall become effective upon execution by Lenders and Borrower.

4

Waiver of Issuance of Applicable Ruthigen Shares

Lenders hereby waive Section 6.14(b) with respect to the issuance of the Applicable Ruthigen Shares on or after the date hereof.

Consent for Exclusive License of Certain Intellectual Property to Ruthigen, Inc.

Borrower has also entered into a license and supply agreement with Ruthigen (the “License Agreement”), which will become effective upon the closing of the transaction contemplated by subsection (i) of the definition of IPO. Pursuant to the License Agreement, Borrower has agreed to exclusively license certain of its proprietary technology to Ruthigen to enable Ruthigen’s research and development and commercialization of the newly discovered RUT58-60, and any improvements to it, in the United States, Canada, European Union and Japan (the “Territory”) for certain invasive procedures in human treatment as defined in the License Agreement.

As part of its condition to undertake its agreements to make certain advances of money and to extend certain financial accommodations to Borrower, the Lenders required the execution of Intellectual Property Security Agreements by and between Borrower and each respective Lender, each dated June 29, 2011 (the “IP Agreements”), whereby Borrower granted to the Lenders a security interest in substantially all of Borrower’s intellectual property whether presently existing or hereafter acquired. By the terms of the IP Agreements, the VLL5 Loan Agreement, and the VLL6 Loan Agreement, Borrower is prohibited from entering into agreement to exclusively license or sell its intellectual property. In order to allow Borrower to pursue such exclusive licensing of certain of its intellectual property to Ruthigen, the Lenders are willing to waive such covenants in consideration of Borrower’s continued commitment to pay off the indebtedness outstanding under the VLL5 Loan Agreement and under the VLL6 Loan Agreement in a timely manner. Each Lender has agreed to waive the provisions of Section 6.5 (Sale of Assets) of each respective Loan Agreement solely as to Borrower’s anticipated entry into the License Agreement with Ruthigen, whereby Borrower intends to exclusively license certain of its proprietary technology to Ruthigen to enable Ruthigen’s research and development and commercialization of the newly discovered RUT58-60, and any improvements to it, in the Territory for certain invasive procedures in human treatment.

Therefore, pursuant to this Agreement, the following sentence shall be added to the end of the definition of “Collateral” of the Loan Agreements, as amended by the Waiver, as an additional exclusion from the definition of “Collateral”:

“and (viii) upon the closing date of the proposed initial underwritten public offering of Ruthigen, Inc., if any should occur, exclusive license of certain of Borrower’s proprietary technology to Ruthigen to enable Ruthigen’s research and development and commercialization of the newly discovered RUT58-60, and any improvements to it, in the United States, Canada, European Union and Japan for certain invasive procedures in human treatment pursuant to the License and Supply Agreement between Borrower and Ruthigen, Inc., dated May 23, 2013, and as such may be subsequently amended.”

5

Therefore, pursuant to this Agreement, the following sentence shall be added to the end of the definition of “Collateral” in the last paragraph of Section 1 of the IP Agreements, as amended by the Waiver, as an additional exclusion from the definition of “Collateral”:

“and (x) upon the closing date of the proposed initial underwritten public offering of Ruthigen, Inc., if any should occur, exclusive license of certain of Grantor’s proprietary technology to Ruthigen to enable Ruthigen’s research and development and commercialization of the newly discovered RUT58-60, and any improvements to it, in the United States, Canada, European Union and Japan for certain invasive procedures in human treatment pursuant to the License and Supply Agreement between Grantor and Ruthigen, Inc., dated May 23, 2013, and as such may be subsequently amended.”

General Provisions

This Agreement shall become effective upon execution by Lenders and Borrower. For avoidance of doubt, each Lender hereby consents to the Transfer (as defined in Section 6.5 of the applicable Loan Agreement) of the Applicable Ruthigen Shares on the terms and conditions set forth herein. Except as specifically amended by this Agreement, the Loan Agreements and the other Loan Documents and Security Documents shall remain in full force and effect and are hereby ratified and confirmed. The execution, delivery and performance of this Agreement shall not, except as expressly provided herein, constitute a waiver of any provision of the Loan Agreements or any of the other Loan Documents or Security Documents. Without limiting the generality of the provisions of Section 9.3 of the Loan Agreements, the consent set forth above shall be limited precisely as written solely for the purpose of permitting Borrower to Transfer the Applicable Ruthigen Shares and for the purposes of permitting Borrower to consummate the transactions contemplated by the License Agreement without violating the provisions of the Loan Agreements, including without limitation Sections 6.5, 6.14, 7.1(h) or 7.1(i) thereof, and this Agreement does not constitute, nor should it be construed as, a waiver of compliance by Borrower with respect to (i) Sections 6.5, 6.14, 7.1(h) and 7.1(i) of the Loan Agreements in any other instance or (ii) any other term, provision or condition of the Loan Agreements or any other instrument or agreement referred to therein.

This Agreement may be executed in any number of counterparts, including counterparts transmitted by facsimile or electronic transmission, each of which shall be an original, but all of which together shall constitute one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Agreement is the only agreement between the parties with respect to its subject matter, and there are no other agreements, understandings, representations or understandings other than those expressly stated in this Agreement. Borrower shall pay all costs and expenses in connection with the transactions contemplated by this Agreement, and the negotiation and documentation hereof. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA.

[Remainder of page intentionally left blank; signature page follows]

6

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.

LENDERS:

VENTURE LENDING & LEASING V, INC.

By:________________________________

Name:______________________________

Title:_______________________________

VENTURE LENDING & LEASING VI, INC.

By:________________________________

Name:______________________________

Title:_______________________________

BORROWER:

OCULUS INNOVATIVE SCIENCES, INC.

By:________________________________

Name:______________________________

Title:_______________________________

7

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Jim Schutz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Oculus Innovative Sciences, Inc. for the quarter ended September 30, 2013;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ Jim Schutz
Date: November 19, 2013		Jim Schutz
		Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Robert Miller, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Oculus Innovative Sciences, Inc. for the quarter ended September 30, 2013;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ Robert Miller
Date: November 19, 2013		Robert Miller
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officers of Oculus Innovative Sciences, Inc., a Delaware corporation (the “Company”), do hereby certify, to such officers’ knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 19, 2013	By:	/s/ Jim Schutz
		Jim Schutz Chief Executive Officer (Principal Executive Officer)
Date: November 19, 2013	By:	/s/ Robert Miller
		Robert Miller Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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1. Organization and Summary of Significant Accounting Policies (Tables)

6 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Potentially dilutive securities excluded from computation of net loss per share

	September 30,
	2013		2012
	(in thousands)
Options to purchase common stock		1,229		988
Warrants to purchase common stock		1,318		1,529
		2,547		2,517

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Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenues
Product	$ 3,456	$ 3,890	$ 6,177	$ 7,674
Product licensing fees	397	374	830	406
Service	236	262	454	497
Total revenues	4,089	4,526	7,461	8,577
Cost of revenues
Product	1,203	1,092	2,224	2,080
Service	181	234	332	413
Total cost of revenues	1,384	1,326	2,556	2,493
Gross profit	2,705	3,200	4,905	6,084
Operating expenses
Research and development	883	513	1,390	1,045
Selling, general and administrative	3,093	3,504	5,912	6,351
Total operating expenses	3,976	4,017	7,302	7,396
Loss from operations	(1,271)	(817)	(2,397)	(1,312)
Interest expense	(188)	(280)	(438)	(568)
Interest income	0	1	1	2
Gain (loss) due to change in fair value of common stock (See Note 3)	99	0	(210)	0
(Loss) gain due to change in fair value of derivative instruments	0	(397)	0	850
Other expense, net	(39)	(26)	(67)	(46)
Net loss	(1,399)	(1,519)	(3,111)	(1,074)
Preferred stock deemed dividend	0	0	0	(1,062)
Net loss available to common shareholders	(1,399)	(1,519)	(3,111)	(2,136)
Net loss per common share: basic and diluted	$ (0.21)	$ (0.33)	$ (0.47)	$ (0.47)
Weighted-average number of shares used in per common share calculations:
Basic and diluted	6,631	4,659	6,625	4,587
Other comprehensive loss
Net loss	(1,399)	(1,519)	(3,111)	(1,074)
Foreign currency translation adjustments	13	119	(86)	(1)
Other comprehensive loss	$ (1,386)	$ (1,400)	$ (3,197)	$ (1,075)

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5. Stockholders' Equity

6 Months Ended

Sep. 30, 2013

Stockholders' Equity

5. Stockholders' Equity

Common Stock Issued to Non-Employees For Services

On April 24, 2009, the Company entered into an agreement with Advocos LLC, a contract sales organization that serves as part of the Company’s sales force, for the sale of the Company’s wound care products in the United States. Pursuant to the agreement, the Company agreed to pay the contract sales organization a monthly fee and potential bonuses that will be based on achievement of certain levels of sales. The Company agreed to issue the contract sales organization cash or shares of common stock as compensation for its services. During the three months ended September 30, 2013 and 2012, the Company issued 8,139 and 3,728 shares of common stock, respectively, in connection with this agreement. During the six months ended September 30, 2013 and 2012, the Company issued 38,447 and 14,392 shares of common stock, respectively, in connection with this agreement. The Company has determined that the fair value of the common stock, which was calculated as shares were issued, was more readily determinable than the fair value of the services rendered. Accordingly, the Company recorded the fair value of the stock as compensation expense. During the three months ended September 30, 2013 and 2012, the Company recorded $22,000 and $20,000 of expense related to this agreement, respectively. During the six months ended September 30, 2013 and 2012, the Company recorded $134,000 and $112,000 of expense related to this agreement, respectively. The expense was recorded as selling, general and administrative expense in the accompanying condensed consolidated statements of comprehensive loss.

On December 17, 2009, the Company entered into an agreement with Windsor Corporation.  Windsor Corporation provides financial advisory services to the Company. Pursuant to the agreement, the Company agreed to pay Windsor Corporation, on a quarterly basis, cash or common stock as compensation for services provided.  The Company determined that the fair value of the common stock was more readily determinable than the fair value of the services rendered. Accordingly, the Company recorded the fair value of the stock as compensation expense. During the six months ended September 30, 2013, the Company issued 12,097 shares of common stock. During the six months ended September 30, 2013, the Company recorded $49,000 of stock compensation expense related to this agreement. Additionally, during the three months ended September 30, 2013, the Company accrued $30,000 of expense for services provided which was settled with shares of common stock on October 2, 2013 (See Note 10). The expense was recorded as selling, general and administrative expense in the accompanying condensed consolidated statements of comprehensive loss.

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3. Inventories (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Inventory, gross	$ 825	$ 1,162
Less: inventory allowances	(76)	(170)
Inventories, net	749	992
Raw Materials
Inventory, gross	591	835
Finished Goods
Inventory, gross	$ 234	$ 327

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3. Condensed Consolidated Balance Sheets (Tables)

6 Months Ended

Sep. 30, 2013

Balance Sheet Related Disclosures [Abstract]

Inventories

	September 30,			March 31,
	2013			2013
Raw materials	$	591		$	835
Finished goods		234			327
		825			1,162
Less: inventory allowances		(76	)		(170	)
	$	749		$	992

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5. Stockholders' Equity (Details Narrative) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Stock compensation expense			$ 666	$ 941
Advocos
Shares issued for services, shares	8,139	3,728	38,447	14,392
Shares issued for services, value	22	20	134	112
Windsor Corporation
Shares issued for services, shares			12,097
Shares issued for services, value	30
Stock compensation expense			$ 49

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4. Commitments and Contingencies (Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Mar. 31, 2013
Potential severance under certain employment agreements	$ 1,843		$ 1,843
Aggregated annual salaries under certain employment agreements	1,310		1,310
Product revenue	3,456	3,890	6,177	7,674
Innovacyn
Accounts receivable	801		801		264
Product revenue	1,289	1,229	2,030	2,365
More Pharma
Accounts receivable	717		717		580
Product revenue	$ 378	$ 183	$ 752	$ 183

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9. Significant Customer Concentrations (Narrative)	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Mar. 31, 2013
One Customer
Revenues
Significant customer concentration	33.00%	27.00%	37.00%	28.00%
Accounts Receivable
Significant customer concentration	33.00%		33.00%		34.00%
Second Customer
Revenues
Significant customer concentration	32.00%		27.00%
Accounts Receivable
Significant customer concentration	30.00%		30.00%		26.00%
Third Customer
Accounts Receivable
Significant customer concentration	11.00%		11.00%		15.00%

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6. Stock-Based Compensation (Narrative) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Sep. 30, 2013
Unrecognized compensation costs related to stock options	$ 1,403
Weighted-average amortization period of unrecognized compensation costs	2 years 6 months 14 days
Minimum [Member]
Estimated forfeiture rates	1.63%
Maximum [Member]
Estimated forfeiture rates	4.77%

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3. Notes Payable (Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Non-cash interest expense			$ 294	$ 303
VLL5 Agreements
Interest payments made	7	50	27	109
Principal payments made	24	288	556	566
VLL5 Warrants
Non-cash interest expense	24	63	90	125
Note payable balance	138		138
VLL6 Agreements
Interest payments made	53	75	114	151
Principal payments made	228	148	449	266
VLL6 Warrants
Non-cash interest expense	104	91	204	178
Note payable balance	1,367		1,367
Discount on loan	$ 474		$ 474

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1. Organization and Summary of Significant Accounting Policies

6 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

1. Organization and Summary of Significant Accounting Policies

Organization

Oculus Innovative Sciences, Inc. (the “Company”) was incorporated under the laws of the State of California in April 1999 and was reincorporated under the laws of the State of Delaware in December 2006. The Company’s principal office is located in Petaluma, California. The Company is a global healthcare company that designs, produces, and markets prescription and non-prescription products in 27 countries. It is pioneering innovative products for the dermatology, surgical, advanced wound and tissue care, and animal healthcare markets. The Company’s primary focus is on its proprietary technology platform called Microcyn® Technology. This technology is based on electrically charged oxychlorine small molecules designed to target a wide range of organisms that cause disease (pathogens). Several Microcyn® Technology tissue care products are designed to treat infections and enhance healing while reducing the need for antibiotics.

Reverse Stock Split

Effective as of the open of business on April 1, 2013, the Company effected a reverse stock split of its common stock, par value $0.0001 per share. Every 7 shares of common stock were reclassified and combined into one share of common stock. No fractional shares were issued as a result of the reverse stock split. Instead, each resulting fractional share of common stock was rounded up to one whole share. The reverse stock split reduced the number of shares of the Company’s common stock outstanding from 46,080,513 to 6,583,150. The total number of authorized shares of common stock was also proportionally decreased by a ratio of 1:7 and the par value per share of the common stock continued to be $0.0001.

All common shares and per share amounts contained in the condensed consolidated financial statements have been retroactively adjusted to reflect a 1 for 7 reverse stock split, effective April 1, 2013.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2013 and for the three and six months then ended have been prepared in accordance with the accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The unaudited condensed consolidated balance sheet as of September 30, 2013, the condensed consolidated statements of comprehensive loss for the three and six months ended September 30, 2013 and 2012, and the condensed consolidated statements of cash flows for the six months ended September 30, 2013 and 2012 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and six months ended September 30, 2013 are not necessarily indicative of results to be expected for the year ending March 31, 2014 or for any future interim period. The condensed consolidated balance sheet at March 31, 2013 has been derived from audited consolidated financial statements. However, it does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2013, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on June 25, 2013.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Aquamed Technologies, Inc. (“Aquamed”), Oculus Technologies of Mexico S.A. de C.V. and Oculus Innovative Sciences Netherlands, B.V. and Ruthigen, Inc. (“Ruthigen”). All significant intercompany accounts and transactions have been eliminated in consolidation. Aquamed has no current operations.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred taxes, the valuation of equity and derivative instruments, and debt discounts and the estimated amortization periods of upfront licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly. The allowance for uncollectible accounts receivable balances amounted to $9,000 and $22,000, which are included in accounts receivable, net in the accompanying September 30, 2013 and March 31, 2013 condensed consolidated balance sheets, respectively. The reserve for excess and obsolete inventory balances amounted to $76,000 and $170,000, which are included in inventories, net in the accompanying September 30, 2013 and March 31, 2013 condensed consolidated balance sheets, respectively.

Reclassifications

Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2014 presentation. These reclassifications have no impact on the Company’s previously reported net loss.

Net Loss per Share

The Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic net loss per share for the three and six months ended September 30, 2013 and 2012 (adjusted if applicable for the reverse stock split effective April 1, 2013) excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.

	September 30,
	2013		2012
	(in thousands)
Options to purchase common stock		1,229		988
Warrants to purchase common stock		1,318		1,529
		2,547		2,517

Common Stock Purchase Warrants and Other Derivative Financial Instruments

The Company classifies common stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement, or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies 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), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions as either an asset or a liability. The Company assesses classification of its freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required. The Company determined that its freestanding derivatives, which principally consist of warrants to purchase common stock, satisfied the criteria for classification as equity instruments at September 30, 2013, other than certain warrants that contain reset provisions and certain warrants that require net-cash settlement that the Company classified as derivative liabilities.

Fair Value of Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The fair value of capital lease obligations and equipment loans approximates their carrying amounts as a market rate of interest is attached to their repayment. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)

Financial liabilities measured at fair value on a recurring basis are summarized below:

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer. 

Level 3 Valuation Techniques:

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

The Company uses the Black-Scholes option valuation model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility.

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in “(Loss) gain due to change in fair value of derivative instruments” in the Company’s condensed consolidated statements of comprehensive loss.

As of September 30, 2013, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

Subsequent Events

Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued (Note 10).

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This guidance improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income.  In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of Accumulated Other Comprehensive Income in both net income and Other Comprehensive Income on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.  While the adoption of this standard required the Company to change the format of its condensed consolidated financial statements, it did not have a material impact on the Company’s consolidated financial position and results of operations.

The FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

Accounting standards that have been issued or proposed by the FASB, SEC and/or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the condensed consolidated financial statements upon adoption.

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3. Condensed Consolidated Balance Sheets

6 Months Ended

Sep. 30, 2013

Balance Sheet Related Disclosures [Abstract]

3. Condensed Consolidated Balance Sheets

Inventories

Inventories consisted of the following (in thousands):

	September 30,			March 31,
	2013			2013
Raw materials	$	591		$	835
Finished goods		234			327
		825			1,162
Less: inventory allowances		(76	)		(170	)
	$	749		$	992

Notes Payable

Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc.

On May 1, 2010, the Company entered into a loan and security agreement and a supplement to the loan and security agreement with Venture Lending & Leasing V, Inc. (“VLL5”) to borrow up to an aggregate of $3,000,000 (collectively, the “VLL5 Agreements”). On May 3, 2010, the Company borrowed $2,000,000 on the first tranche and on November 17, 2010, the Company borrowed $1,000,000 on the second tranche.  The loan is secured by all assets of the Company excluding intellectual property under certain circumstances. Related to the first tranche, the Company made eight monthly interest-only payments of $16,660 through December 1, 2010. Thereafter, the Company made interest and principal payments of $75,000 per month through June 1, 2013. Related to the second tranche, the Company paid monthly interest only payments of $8,330 through May 1, 2012. Thereafter, the Company made interest and principal payments of $37,500 per month through November 1, 2013. The Company made a final balloon payment related to the first tranche of $132,000 prior to the June 1, 2013 deadline, and made a final balloon payment related to the second tranche of $66,000 on or prior to November 1, 2013. The effective interest rate on the first and second tranche is 13.3%. During the three months ended September 30, 2013 and 2012, the Company made interest payments of $7,000 and $50,000, respectively, and principal payments of $24,000 and $288,000, respectively. During the six months ended September 30, 2013 and 2012, the Company made interest payments of $27,000 and $109,000, respectively, and principal payments of $556,000 and $566,000, respectively.

In connection with the VLL5 Agreements, the Company issued two warrants to Venture Lending & Leasing V, LLC, a Delaware limited liability company (“LLC5”), which, in the aggregate, had a total put option cash value of $750,000 (the “VLL5 Warrants”). The $750,000 cash value of the VLL5 Warrants was recorded as a cash settlement liability and a corresponding amount of $750,000 was recorded as a discount on the note payable.  The discount is being accreted to non-cash interest expense over the term of the loan using the effective interest method.  During the three months ended September 30, 2013 and 2012, the Company recorded $24,000 and $63,000, respectively, of non-cash interest expense related to the loans. During the six months ended September 30, 2013 and 2012, the Company recorded $90,000 and $125,000, respectively, of non-cash interest expense related to the loans. The remaining balance of the loans amounted to $138,000 at September 30, 2013, which is included in the current portion of long-term debt, net of debt discount in the accompanying condensed consolidated balance sheet.

On June 29, 2011, the Company entered into a loan and security agreement and a supplement to the loan and security agreement with Venture Lending & Leasing VI, Inc. (“VLL6”) to borrow up to an aggregate of up to $2,500,000 (collectively, the “VLL6 Agreements”).  The VLL6 Agreements provided for a first tranche of $1,500,000 and, upon meeting certain financial milestones, a second tranche of $1,000,000. The loan is secured by the assets of the Company including intellectual property. On June 29, 2011, the Company borrowed $1,500,000 on the first tranche. On September 30, 2011, the Company met the financial milestones to borrow the second tranche. On November 10, 2011, the Company borrowed the second tranche.  The cash interest or “streaming” rate on the loan is 10%. In connection with the first tranche, for the first nine months, the Company made monthly interest-only payments set at $12,500 through March 1, 2012. The Company now makes principal and interest payments of $56,250 per month through September 1, 2014. Additionally, the Company will make a final balloon payment of $116,505 on September 29, 2014. In connection with the second tranche, for the first nine months, the Company made monthly interest-only payments set at $8,333 through August 31, 2012. The Company now makes principal and interest payments of $37,500 per month through February 1, 2015. Additionally, the Company will make a final balloon payment of $77,670 on February 1, 2015, resulting in an effective interest rate of 13%. During the three months ended September 30, 2013 and 2012, the Company made interest payments of $53,000 and $75,000, respectively and made principal payments of $228,000 and $148,000, respectively. During the six months ended September 30, 2013 and 2012, the Company made interest payments of $114,000 and $151,000, respectively and made principal payments of $449,000 and $266,000, respectively.

In connection with the VLL6 Agreements, the Company issued a warrant to Venture Lending & Leasing VI, LLC (individually referred to as “LLC6” and collectively referred to with LLC5 as “WTI”) for the purchase of 32,332 shares of its common stock at a purchase price per share equal to $11.592. Once the Company became eligible to draw the second tranche of the loan, the Company was required to issue a second warrant to LLC6 with coverage equal to $62,500 for the purchase of additional shares of the Company’s common stock at a strike price equal to the 10-day volume-weighted average price (“VWAP”) ending on the trading day prior to the date the Company satisfied the second tranche milestones. On September 30, 2011, the Company met the second tranche milestones and the Company issued the second warrant for the purchase of 5,586 shares of its common stock at a purchase price per share equal to $11.189. On November 10, 2011, the Company borrowed the second tranche and therefore the Company became obligated to issue a third warrant to LLC6 with coverage equal to $62,500 for the purchase of additional shares of its common stock at a strike price equal to the 10-day VWAP ending on the trading day prior to the borrowing date of the second tranche. In connection with borrowing the second tranche, the Company issued the third warrant for the purchase of 5,884 shares of its common stock at a purchase price per share equal to $10.623. The three warrants issued to LLC6 are hereinafter collectively referred to as the “VLL6 Warrants,” and had a total put option cash value, in the aggregate, of $1,250,000. The Company recorded the $1,250,000 cash value of the VLL6 Warrants as a cash settlement liability and a corresponding amount of $1,250,000 was recorded as a discount on the note payable. The discount is being accreted to non-cash interest expense over the term of the loan using the effective interest method. For the three months ended September 30, 2013 and 2012, the Company recorded $104,000 and $91,000 of non-cash interest related to the loan, respectively. For the six months ended September 30, 2013 and 2012, the Company recorded $204,000 and $178,000 of non-cash interest related to the loan, respectively. The remaining balance of the discount on the loan amounted to $474,000 at September 30, 2013. The remaining balance of the loan amounted to $1,367,000 at September 30, 2013, of which $821,000 is included in the current portion of long-term debt in the accompanying condensed consolidated balance sheet.

On October 30, 2012, the Company entered into respective letter agreements with VLL5 and VLL6 to amend the repayment terms of its outstanding debt obligations. Prior to the execution of these agreements, LLC5 and LLC6 held an aggregate of 79,517 warrants (adjusted for the reverse stock split effective April 1, 2013) to purchase common stock, which, in the aggregate, had a total put option cash value of $2,000,000 (the “Cash Settlement Liability”) and was included in long term liabilities on the Company’s condensed consolidated balance sheets.

On that same day, the Company also entered into a stock purchase agreement with WTI for the issuance to WTI of shares of its common stock having an aggregate grant date fair market value of $3,500,000, or approximately $5.67 per post-split share, in exchange for LLC5’s agreement to surrender the VLL5 Warrants, and LLC6’s agreement to surrender the VLL6 Warrants, and the surrender by WTI of the accompanying Cash Settlement Liability. Accordingly, on November 1, 2012, the Company issued an aggregate of 617,284 restricted shares of its post-split common stock (the “Shares”) to WTI, pursuant to the terms of the stock purchase agreement. The VLL5 Warrants and the VLL6 Warrants were surrendered on October 30, 2012.

If at any time between October 30, 2012 through either March 31, 2014 or July 31, 2015 (the “Settlement Dates”) WTI sells the Shares, then the proceeds from the sale of the Shares will be applied as follows (the “Grace Period”):

(a)	If and when the Shares are sold by WTI during the Grace Period, the fair value of the proceeds received will be retained by WTI as consideration for surrendering the Cash Settlement Liability, up to a maximum value of $2,000,000.
(b)	If and when the Shares are sold by WTI during the Grace Period, any additional proceeds received from the sale of the Shares in excess of $2,000,000 (approximately $3.22 per share) but up to $3,500,000 (approximately $5.67 per share) will be applied by WTI as a prepayment of a portion of the then outstanding debt based on the terms of the stock purchase agreement.
(c)	If and when the Shares are sold by WTI during the Grace Period, any additional proceeds received from the sale of the Shares in excess of $3,500,000 (approximately $5.67 per share) up to $4,500,000 (approximately $7.28 per share) shall be the sole possession and property of WTI, in accordance with the terms of the stock purchase agreement.
(d)	If and when the Shares are sold by WTI during the Grace Period for value in excess of $4,500,000 (approximately $6.72 per share), 50% of the amount of the proceeds in excess of the $4,500,000 will be the sole possession and property of WTI and 50% of the amount of the proceeds shall be applied as a prepayment of a portion of the then outstanding debt based on the terms of the stock purchase agreement.
(e)	If and when the Shares are sold by WTI during the Grace Period for value less than $2,000,000 (approximately $3.22 per share), the Company is required to make a cash payment to WTI until the total Cash Settlement Liability of $2,000,000 has been settled (“Cash Shortfall”).

If the Shares are not sold during the Grace Period, then the then fair value of the stock is to be determined at either of the Settlement Dates and the repayment of the Cash Settlement Liability, prepayment of outstanding, distribution of gains from the sale of the Shares, or calculation of the Cash Shortfall will consummate.

On October 30, 2012, upon the issuance of the Shares, the Company recorded a prepayment of $2,000,000 and $1,500,000 net against the Cash Settlement Liability and the outstanding notes payable, respectively, on that date.

At September 30, 2013 and June 30, 2013, the Shares had not yet been sold by WTI and the fair value of the Shares at September 30, 2013 and June 30, 2013 amounted to $1,691,000 and $1,592,000 (approximately $2.74 and $2.58 per share), respectively. Accordingly, in connection with the increase in fair market value of the Shares, the Company recorded a gain on the fair value in the amount of $99,000, which is included in the accompanying condensed consolidated statements of comprehensive loss for the three months ended September 30, 2013. The fair value of the Shares at March 31, 2013 amounted to $1,901,000 ($3.08 per share). Accordingly, in connection with the decrease in fair market value of the Shares from March 31, 2013 to September 30, 2013, the Company recorded a loss on the fair value in the amount of $210,000, which is included in the accompanying condensed consolidated statements of comprehensive loss for the six months ended September 30, 2013. The fair value of the Shares will continue to be marked to market with any gain or loss recorded in the statement of comprehensive loss until either the Shares are sold by the holder or the Settlement Dates, whichever is earlier. As of September 30, 2013, the net Cash Settlement Liability was $309,000, of which $116,000 is included in the current portion of the Cash Settlement Liability on the accompanying condensed consolidated balance sheet. As of September 30, 2013, the $1,691,000 fair value of the Shares has been recorded as a prepayment against the Cash Settlement Liability on the accompanying condensed consolidated balance sheet.

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6. Stock-Based Compensation

6 Months Ended

Sep. 30, 2013

Share-based Compensation Arrangement by Share-based Payment Award, Additional General Disclosures [Abstract]

6. Stock-Based Compensation

The Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the award. The Company amortizes the fair value of employee stock options on a straight-line basis over the requisite service period of the awards.  Compensation expense includes the impact of an estimate for forfeitures for all stock options. The estimated forfeiture rates used during the six months ended September 30, 2013 ranged from 1.63% to 4.77%.

Employee stock-based compensation expense is as follows (in thousands):

	Three Months				Six Months
	Ended				Ended
	September 30,				September 30,
	2013		2012		2013		2012
Cost of service revenue	$	30	$	34	$	56	$	66
Research and development		45		63		78		130
Selling, general and administrative		221		275		349		484
Total stock-based compensation	$	296	$	372	$	483	$	680

At September 30, 2013, there were unrecognized compensation costs of $1,403,000 related to stock options which are expected to be recognized over a weighted-average amortization period of 2.54 years.

The Company estimated the fair value of employee stock options using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service periods of the respective awards. The fair value of employee stock options was estimated using the following weighted-average assumptions:

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
Expected life	5.89 years		5.85 years		5.89 years		5.85 years
Risk-free interest rate		1.42%		0.73%		1.42%		0.73%
Dividend yield		0.00%		0.00%		0.00%		0.00%
Volatility		86%		88%		86%		88%
Fair value of options granted	$	2.10	$	4.76	$	2.10	$	4.76

The expected term of stock options represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by the Securities and Exchange Commission's Staff Accounting Bulletin No. 110 for “plain vanilla” options. The expected stock price volatility for the Company’s stock options was determined by examining the historical volatility of the Company and the historical volatilities of the Company’s industry peers. The Company will continue to analyze the stock price volatility and expected term assumptions as more data for the Company’s common stock and exercise patterns become available. The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company estimates forfeitures based on historical experience and reduces compensation expense accordingly.

A summary of all option activity as of September 30, 2013 and changes during the six months then ended is presented below:

	Number of Shares (in thousands)			Weighted- Average Exercise Price		Weighted- Average Contractual  Term		Aggregate Intrinsic Value
Outstanding at March 31, 2013		975		$	15.08
Options granted		335			2.95
Options exercised		–			–
Options forfeited or expired		(81	)		15.86
Outstanding at September 30, 2013		1,229		$	11.72		7.42	$	–
Exercisable at September 30, 2013		816		$	15.32		6.35	$	–
Options available for grant as of September 30, 2013		848

The aggregate intrinsic value is calculated as the difference between the exercise price of the stock options and the underlying fair value of the Company’s common stock ($2.74) for stock options that were in-the-money as of September 30, 2013.

The Company did not capitalize any cost associated with stock-based compensation.

No income tax benefit has been recognized related to stock-based compensation expense and no tax benefits have been realized from exercised stock options.

The Company issues new shares of common stock upon exercise of stock options.

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4. Commitments and Contingencies

6 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

4. Commitments and Contingencies

Legal Matters

In June 2006, the Company received a written communication from the grantor of a license to an earlier version of its technology indicating that such license was terminated due to an alleged breach of the license agreement by the Company. The license agreement extends to its use of the technology in Japan only. While the Company does not believe that the grantor’s revocation is valid under the terms of the license agreement and no legal claim has been threatened to date, the Company cannot provide any assurance that the grantor will not take legal action to restrict its use of the technology in the licensed territory. While the Company's management does not anticipate that the outcome of this matter is likely to result in a material loss, there can be no assurance that if the grantor pursues legal action, such legal action would not have a material adverse effect on its consolidated financial position or results of comprehensive loss. The Company has not accrued a loss reserve for this matter.

On July 25, 2011, the Company received notice of a lawsuit filed in Mexico by Cesar Mangotich Pacheco and Prodinnv, S.A. de C.V. represented by Cesar Mangotich Pacheco. The lawsuit appears to allege conversion of assets, tortious interference and defamation, among other claims. The Company is currently evaluating the lawsuit, conferring with local counsel and translating the documents it has received. The Company’s preliminary assessment is that the lawsuit is completely without merit and intends to vigorously defend its position. The Company has not accrued a loss reserve for this matter.

The Company, from time to time, is involved in legal matters arising in the ordinary course of its business including matters involving proprietary technology. While management believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation, will not have a material adverse effect on its business, financial condition or results of comprehensive loss.

Employment Agreements

As of September 30, 2013, the Company had employment agreements in place with five of its key executives. The agreements provide, among other things, for the payment of nine to twenty-four months of severance compensation for terminations under certain circumstances. With respect to these agreements, at September 30, 2013, potential severance amounted to $1,843,000 and aggregated annual salaries amounted to $1,310,000.

Commercial Agreements

On January 26, 2009, the Company entered into a commercial agreement with VetCure, Inc., a California corporation, to market and sell the Company’s Microcyn® Technology-based animal healthcare products branded as Vetericyn®. VetCure, Inc. later changed its name to Vetericyn, Inc. This agreement was amended on February 24, 2009, July 24, 2009, June 1, 2010, and November 1, 2010. Pursuant to the agreement, the Company provides Vetericyn, Inc. with bulk product and Vetericyn, Inc. bottles, packages, and sells Microcyn® Technology-based animal healthcare products branded as Vetericyn®. The Company receives a fixed amount for each bottle of Vetericyn® sold by Vetericyn, Inc. At the time of these 2009 transactions, Vetericyn, Inc. was wholly-owned by Robert Burlingame, who was also a director of the Company at that time. Mr. Burlingame resigned from the Company’s board of directors on February 10, 2010. 

On September 15, 2009, the Company entered a commercial agreement with V&M Industries, Inc., a California corporation, to market and sell certain of the Company’s Microcyn® over-the-counter liquid and gel products. V&M Industries, Inc. subsequently changed its name to Innovacyn, Inc. On June 1, 2010, September 1, 2010, and November 1, 2010, the Company amended this agreement granting Innovacyn, Inc. the exclusive right to sell certain of its over-the-counter products. At the time of the 2009 transaction, V&M Industries, Inc. was wholly-owned by Robert Burlingame, who was also a director of the Company at that time. Mr. Burlingame resigned from the Company’s board of directors on February 10, 2010.  

On July 1, 2011, Vetericyn, Inc. and Innovacyn, Inc. began to share profits with the Company related to the Vetericyn® and Microcyn® over-the-counter sales, resulting in the Company receiving about a 30% royalty of net revenue. During the three months ended September 30, 2013 and 2012, the Company recorded revenue related to these agreements in the amounts of $1,289,000 and $1,229,000, respectively. During the six months ended September 30, 2013 and 2012, the Company recorded revenue related to these agreements in the amounts of $2,030,000 and $2,365,000, respectively. The revenue is recorded in product revenues in the accompanying condensed consolidated statements of comprehensive loss . At September 30, 2013 and March 31, 2013, the Company had outstanding accounts receivable of $801,000 and $264,000, respectively, related to Innovacyn, Inc.

On August 9, 2012, the Company, along with its Mexican subsidiary and manufacturer Oculus Technologies of Mexico S.A. de C.V., entered into a license, exclusive distribution and supply agreement with More Pharma Corporation, S. de R.L. de C.V. (“More Pharma”) (the “License Agreement”). For a one-time payment of $500,000, the Company granted More Pharma an exclusive license, with the right to sublicense under certain conditions and with the Company’s consent, to all of the Company’s proprietary rights related to certain of its pharmaceutical products for human application that utilize the Company’s Microcyn® Technology within Mexico. For an additional one-time payment of $3,000,000, the Company also agreed to appoint More Pharma as the exclusive distributor of certain of its products in Mexico for the term of the agreement. Additionally, the Company granted More Pharma an exclusive license to certain of the Company’s then-held trademarks in exchange for a payment of $100,000. The Company has the ability to terminate the agreement if certain annual purchase minimums are not met. The term of the agreement is twenty-five years from the effective date of August 15, 2012. The term of the License Agreement will automatically renew after the twenty-five year term for successive two year terms as long as More Pharma has materially complied with any and all of the obligations under the License Agreement, including but not limited to, meeting the minimum purchase requirements set forth therein.

Additionally, on August 9, 2012, the Company entered into an exclusive distribution and supply agreement with More Pharma (the “Distribution Agreement”). For a one-time payment of $1,500,000, the Company granted More Pharma exclusive ability to market and sell certain of its pharmaceutical products for human application that utilize the Company’s Microcyn® Technology. The Company also appointed More Pharma as its exclusive distributor, with the right to execute sub-distribution agreements under certain conditions and with the Company’s consent, within the following countries: Antigua & Barbuda, Argentina, Aruba & Curacao, Bahamas, Barbados, Belize, Bolivia, Bonaire, Brazil, British Guyana, British Islands, Cayman Islands, Chile, Colombia, Cuba, Dominica, Dominican Republic, Ecuador, El Salvador, French Guyana, Grenada, Guadalupe, Guatemala, Haiti, Honduras, Jamaica, Martinique, Nicaragua, Paraguay, Peru, St. Bartolome, St. Vincent & Grenades, Surinam, Trinidad & Tobago, Turks & Caicos Islands, Uruguay, Venezuela and Virgin Islands.

The Company is recognizing the $5,100,000 related to the License Agreement and the Distribution Agreement as revenue on a straight line basis consistent with the Company’s historical experience with contracts with similar terms, which is typically over three to five years of the contract. Additionally, the Company capitalized $214,000 of its transaction costs related to the License Agreement and the Distribution Agreement, which will be amortized by the Company as expense on a straight line basis consistent with the related revenue recognition practices. At September 30, 2013 and March 31, 2013, the Company had outstanding accounts receivable of $717,000 and $580,000, respectively, due from More Pharma. During three months ended September 30, 2013 and 2012, the Company recognized $378,000 and $183,000, respectively, related to the amortization of the upfront fees received in the transaction. During six months ended September 30, 2013 and 2012, the Company recognized $752,000 and $183,000, respectively, related to the amortization of the upfront fees received in the transaction. The Company recognizes product sales on a sell-through basis as More Pharma sells products through to its customers.

Other Matters

Ruthigen, Inc.

The Company’s wholly owned subsidiary, Ruthigen, Inc., was incorporated in the State of Nevada on January 18, 2013, and reincorporated from Nevada to Delaware on September 25, 2013. Ruthigen has established offices in Santa Rosa, California.

On August 2, 2013, the Company entered into a separation agreement with Ruthigen that contains key provisions relating to the Company’s ongoing relationship with Ruthigen, and more specifically governs its relationship with Ruthigen following the completion of Ruthigen’s intended initial public offering. The Company previously announced its entry into a license and supply agreement and a shared services agreement with Ruthigen. Each of these agreements has been entered into in the overall context of the separation of the Company’s business and its novel biotechnology business into two separate, publicly-traded companies. The effective date for all three agreements is the closing date of Ruthigen’s intended initial public offering, if any should occur.

License and Supply Agreement

Pursuant to the license and supply agreement, the Company agreed to exclusively license certain of its proprietary technology to Ruthigen to enable Ruthigen’s research and development and commercialization of the newly discovered RUT58-60, and any improvements to it, in the United States, Canada, European Union and Japan, referred to as the Territory, for certain invasive procedures in human treatment as defined in the license and supply agreement. On October 9, 2013, the Company entered into Amendment No. 1 to the license and supply agreement, which amended the second milestone event set forth in Section 7.1 of the license and supply agreement. On November 6, 2013, the Company entered into Amendment No. 2 to the license and supply agreement with Ruthigen to further amend the certain milestone events set forth in Section 7.1 of the license and supply agreement and to amend the terms of the manufacturing equipment purchases set forth in Section 6.13 of the license and supply agreement. All other terms and conditions of the license and supply agreement remain unmodified and in full force and effect.

The license and supply agreement provides Ruthigen with the exclusive option, exercisable within the first five years following the effective date of the agreement, to expand the license to certain other therapeutic indications upon payment of a license expansion fee of $10 million within the first two years following the effective date of the agreement or, after the two–year period, the same fee plus certain out-of-pocket costs the Company may incur in developing products for any of the indications. Additionally, the Company will be prohibited from using the licensed proprietary technology to sell products that compete with Ruthigen’s products within the Territory, and Ruthigen cannot sell any device or product that competes with the Company’s products being sold or developed as of the effective date of the license and supply agreement.

Ruthigen will be required to make a total of $5,000,000 in milestone payments to the Company for the first product only, as follows: upon completion of Ruthigen’s first meeting with the U.S. Food and Drug Administration (FDA) following completion of Ruthigen’s first pivotal clinical trial and upon first patient enrollment in Ruthigen’s second pivotal clinical trial. In addition, as further consideration under the agreement, Ruthigen will be required to make royalty payments to the Company based on Ruthigen’s annual net sales of the product from the date of first commercial sale to the date that Ruthigen ceases to commercialize the product, which percentage royalty rate will vary between 3% and 20% and will increase based on various net sales thresholds and will differ depending on the country in which the sales are made. Ruthigen also agreed to purchase certain research and development and manufacturing equipment from the Company for approximately $3 million following the completion of Ruthigen’s intended initial public offering.

Shared Services Agreement

The Company also entered into a shared services agreement with Ruthigen that would take effect upon the completion of Ruthigen’s proposed initial public offering, if any should occur, pursuant to which it will provide Ruthigen with general services, including general accounting, human resources, laboratory personnel and shared R&D resources while Ruthigen plans to establish an independent facility and systems. As a wholly owned subsidiary of the Company, Ruthigen will be financed by the Company until the completion of the proposed initial public offering, if any should occur, and after such event, Ruthigen would become responsible for its own expenses.

Separation Agreement

The Company entered into a separation agreement with Ruthigen that contains key provisions relating to its ongoing relationship with Ruthigen following the completion of Ruthigen’s intended initial public offering. The separation agreement takes effect upon the closing of Ruthigen’s intended initial public offering and terminates on the earlier of 8.5 years following the closing of the offering, or when the parties mutually agree to terminate it. The separation agreement also contains a series of restrictions on the Company’s ability to transfer the Ruthigen shares it owns. The Company is restricted from transferring any of the Ruthigen shares it owns during the first year (the “lock up period”) immediately following Ruthigen’s intended initial public offering.

Following the one-year lock up period, transfers by the Company of the Ruthigen shares it owns must be conducted with the consent of Ruthigen’s board of directors or within the prescribed requirements for such transfers set forth in the separation agreement. These prescribed requirements include that the transfers must be in private placement transactions, the purchase price discount may not exceed certain percentages depending on the transferee, the amount of shares transferred in a given transfer (or series of transfers comprising a single transaction) may not exceed the greater of 5% of Ruthigen’s outstanding shares or $1.5 million in net proceeds to the Company, as well as certain other requirements set forth in the separation agreement. In addition to the prescribed manner for the Company to conduct transfers described above, if, following a minimum of 41.5 months following the closing of Ruthigen’s initial public offering have lapsed under the separation agreement and the Company has not consummated transfers of the Ruthigen shares it owns resulting in at least $3.8 million in net proceeds to the Company, then the Company has a one-time transfer and registration right to transfer the Ruthigen shares it owns in an amount equal to the difference between $3.8 million and the Ruthigen shares transferred by the Company pursuant to the separation agreement as of the time the Company elects to exercise its one-time right. Transfers conducted using this one-time right must be conducted with the consent of Ruthigen’s board of directors or within the prescribed requirements for such transfers set forth in the separation agreement, including, for example, that the purchase price discount may not exceed certain percentages, the amount of shares transferred may not exceed $3.8 million in net proceeds to the Company, as well as certain other requirements set forth in the separation agreement.

The separation agreement also provides for certain cooling off periods between market attempts and/or successful transfers, the length of which are dependent upon whether and how many Ruthigen shares the Company transfers. The majority of the material restrictions and obligations contained in the separation agreement lapse if and when the Company and its subsidiaries (other than Ruthigen) own less than 19.9% of the outstanding shares of Ruthigen’s common stock.

The separation agreement also sets forth the methodology for the allocation of the operational and offering related expenses incurred prior to and in connection with Ruthigen’s intended initial public offering for which Ruthigen is required to reimburse the Company. Ruthigen will also reimburse the Company for expenses such as salaries and benefits advanced or paid on Ruthigen’s behalf, or for Ruthigen’s benefit, during a transition period following the closing of Ruthigen’s intended initial public offering.

The separation agreement provides that each party will indemnify, defend and hold harmless the other party and its affiliates for third party claims asserted against the other party. This includes an indemnification by the Company to Ruthigen related to obligations that the Company has under certain loan and security agreements entered into by the Company with Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc. The separation agreement also provides that, so long as the Company shall maintain a directors’ and officers’ insurance program covering the past and present officers and directors of the Company, the program shall be standard in the Company’s industry and the Company shall not exclude any former director of the Company from any insurance policy coverage if such coverage is made available to the Company’s then existing directors and officers.

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6. Stock-Based Compensation (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Total stock-based compensation	$ 296	$ 372	$ 483	$ 680
Cost of revenues
Total stock-based compensation	30	34	56	66
Research and development
Total stock-based compensation	45	63	78	130
Selling general and administrative
Total stock-based compensation	$ 221	$ 275	$ 349	$ 484

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8. Segment and Geographic Information (Details) (USD $)	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Sales revenue from geographical territories	$ 3,853,000	$ 4,264,000	$ 7,007,000	$ 8,080,000
U.S.
Sales revenue from geographical territories	1,898,000	1,898,000	3,221,000	3,931,000
Mexico
Sales revenue from geographical territories	1,352,000	1,862,000	2,776,000	3,240,000
Europe and Other
Sales revenue from geographical territories	$ 603,000	$ 504,000	$ 1,010,000	$ 909,000

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Statement of Financial Position [Abstract]
Debt discount, current portion of long-term debt	$ 430	$ 521
Debt discount, long-term portion of long-term debt	$ 45	$ 248
Convertible preferred stock par value (in Dollars per share)	$ 0.0001	$ 0.0001
Convertible preferred stock shares authorized	5,000,000	5,000,000
Convertible preferred stock shares issued	0	0
Convertible preferred stock shares outstanding	0	0
Common stock par value (in Dollars per share)	$ 0.0001	$ 0.0001
Common stock shares authorized	14,285,715	14,285,715
Common stock shares issued	6,633,694	6,583,150
Common stock shares outstanding	6,633,694	6,583,150

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9. Significant Customer Concentrations

6 Months Ended

Sep. 30, 2013

Risks and Uncertainties [Abstract]

9. Significant Customer Concentrations

For the three months ended September 30, 2013, one customer represented 33% of net revenue and one customer represented 32% of net revenue. For the three months ended September 30, 2012, one customer represented 27% of net revenue.

For the six months ended September 30, 2013, one customer represented 37% of net revenue and one customer represented 27% of net revenue. For the six months ended September 30, 2012, one customer represented 28% of net revenue. 

At September 30, 2013, one customer represented 33%, one customer represented 30%, and one customer represented 11% of the net accounts receivable balance. At March 31, 2013, one customer represented 34%, one customer represented 26%, and one customer represented 15% of the net accounts receivable balance.

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities
Net loss	$ (3,111)	$ (1,074)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	136	136
Stock-based compensation	666	941
Change in fair value of derivative liability	0	(850)
Loss due to change in fair value of common stock (See Note 3)	210	0
Non-cash interest expense	294	303
Foreign currency transaction gains	(5)	7
Changes in operating assets and liabilities:
Accounts receivable, net	(738)	(705)
Inventories, net	215	70
Prepaid expenses and other current assets	369	84
Accounts payable	225	(28)
Accrued expenses and other liabilities	76	(71)
Deferred revenue	(791)	4,479
Net cash (used in) provided by operating activities	(2,454)	3,292
Cash flows from investing activities:
Purchases of property and equipment	(338)	(62)
Long-term deposits	26	(143)
Net cash used in investing activities	(312)	(205)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs	0	1,925
Proceeds from the issuance of convertible preferred stock, net of offering costs	0	907
Proceeds from the exercise of common stock options and warrants	0	16
Deferred offering costs	(780)	0
Principal payments on long-term debt	(1,138)	(974)
Net cash (used in) provided by financing activities	(1,918)	1,874
Effect of exchange rate on cash and cash equivalents	(26)	(2)
Net (decrease) increase cash and cash equivalents	(4,710)	4,959
Cash and cash equivalents, beginning of period	7,900	3,351
Cash and cash equivalents, end of period	3,190	8,310
Supplemental disclosure of cash flow information:
Cash paid for interest	143	265
Non-cash operating and financing activities
Warrants issued as derivative liabilities in connection with registered direct offering	$ 0	$ 2,347

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Current assets:
Cash and cash equivalents	$ 3,190	$ 7,900
Accounts receivable, net	2,424	1,707
Inventories, net	749	992
Prepaid expenses and other current assets	549	935
Total current assets	6,912	11,534
Property and equipment, net	987	800
Deferred offering costs	824	44
Other assets	159	187
Total assets	8,882	12,565
Current liabilities:
Accounts payable	1,027	808
Accrued expenses and other current liabilities	699	703
Current portion of cash settlement liability (See Note 3)	116	37
Deferred revenue	2,322	2,320
Current portion of long-term debt, net of debt discount of $430 (unaudited) and $521 at September 30, 2013 and March 31, 2013, respectively	573	1,259
Total current liabilities	4,737	5,127
Deferred revenue	1,883	2,619
Long-term debt, net of debt discount of $45 (unaudited) and $248 at September 30, 2013 and March 31, 2013, respectively, less current portion	519	676
Cash settlement liability, less current portion (See Note 3)	193	62
Total liabilities	7,332	8,484
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, $0.0001 par value; 5,000,000 shares authorized, none issued and outstanding at September 30, 2013 (unaudited) and March 31, 2013, respectively	0	0
Common stock, $0.0001 par value; 14,285,715 shares authorized, 6,633,694 and 6,583,150 shares issued and outstanding at September 30, 2013 (unaudited) and March 31, 2013, respectively	1	1
Additional paid-in capital	145,482	144,816
Accumulated other comprehensive loss	(3,077)	(2,991)
Accumulated deficit	(140,856)	(137,745)
Total stockholders' equity	1,550	4,081
Total liabilities and stockholders' equity	$ 8,882	$ 12,565

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6. Option Assumptions (Details) (USD $)	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Share-based Compensation Arrangement by Share-based Payment Award, Additional General Disclosures [Abstract]
Expected life	5 years 10 months 20 days	5 years 10 months 6 days	5 years 10 months 20 days	5 years 10 months 6 days
Risk-free interest rate	1.42%	0.73%	1.42%	0.73%
Dividend yield	0.00%	0.00%	0.00%	0.00%
Volatility	86.00%	88.00%	86.00%	88.00%
Fair value of options granted	$ 2.10	$ 4.76	$ 2.10	$ 4.76

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2. Liquidity and Financial Condition (Narrative) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Liquidity And Financial Condition
Working capital	$ 2,175	$ 6,407

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8. Segment and Geographic Information

6 Months Ended

Sep. 30, 2013

Segment Reporting [Abstract]

8. Segment and Geographic Information

The Company generates revenues from tissue care products which are sold into the human and animal healthcare markets and the Company also generates revenues from laboratory testing services which are provided to medical device manufacturers. The Company operates a single segment business for product sales which consists of three geographical sales territories as follows:

	Three Months				Six Months
	Ended				Ended
	September 30,				September 30,
	2013		2012		2013		2012
U.S.	$	1,898,000	$	1,898,000	$	3,221,000	$	3,931,000
Mexico		1,352,000		1,862,000		2,776,000		3,240,000
Europe and Other		603,000		504,000		1,010,000		909,000
	$	3,853,000	$	4,264,000	$	7,007,000	$	8,080,000

For the three months ended September 30, 2013 and 2012, the Company received licensing revenues of $397,000 and $374,000, respectively. Such revenues are included in the Company’s calculation of product revenues and are reflected in the table above under the respective geographic region where such licensing revenues were earned. For the six months ended September 30, 2013 and 2012, the Company received licensing revenues of $830,000 and $406,000, respectively. Such revenues are included in the Company’s calculation of product revenues and are reflected in the table above under the respective geographic region where such licensing revenues were earned.

The Company’s service revenues amounted to $236,000 and $262,000 for the three months ended September 30, 2013 and 2012, respectively, and the Company’s service revenues amounted to $454,000 and $497,000 for the six months ended September 30, 2012 and 2011, respectively.

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6. Options Outstanding (Details) (USD $) In Thousands, except Share data, unless otherwise specified	6 Months Ended
	Sep. 30, 2013
Options
Outstanding at beginning of period	975,000
Granted	335,000
Exercised	0
Forfeited or expired	(81,000)
Outstanding at end of period	1,229,000
Exercisable at end of period	816,000
Options available for grant, ending	848,000
Weighted Average Exercise Price
Outstanding at beginning of period	$ 15.08
Granted	$ 2.95
Forfeited or expired	$ 15.86
Outstanding at end of period	$ 11.72
Exercisable at end of period	$ 15.32
Weighted Average Contractual Term
Outstanding at end of period	7 years 5 months 1 day
Exercisable at end of period	6 years 4 months 6 days
Aggregate Intrinsic Value
Outstanding at end of period	$ 0
Exercisable at end of period	$ 0

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1. Organization and Summary of Significant Accounting Policies (Policies)

6 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization

Organization

Oculus Innovative Sciences, Inc. (the “Company”) was incorporated under the laws of the State of California in April 1999 and was reincorporated under the laws of the State of Delaware in December 2006. The Company’s principal office is located in Petaluma, California. The Company is a global healthcare company that designs, produces, and markets prescription and non-prescription products in 27 countries. It is pioneering innovative products for the dermatology, surgical, advanced wound and tissue care, and animal healthcare markets. The Company’s primary focus is on its proprietary technology platform called Microcyn® Technology. This technology is based on electrically charged oxychlorine small molecules designed to target a wide range of organisms that cause disease (pathogens). Several Microcyn® Technology tissue care products are designed to treat infections and enhance healing while reducing the need for antibiotics.

Reverse Stock Split

Reverse Stock Split

Effective as of the open of business on April 1, 2013, the Company effected a reverse stock split of its common stock, par value $0.0001 per share. Every 7 shares of common stock were reclassified and combined into one share of common stock. No fractional shares were issued as a result of the reverse stock split. Instead, each resulting fractional share of common stock was rounded up to one whole share. The reverse stock split reduced the number of shares of the Company’s common stock outstanding from 46,080,513 to 6,583,150. The total number of authorized shares of common stock was also proportionally decreased by a ratio of 1:7 and the par value per share of the common stock continued to be $0.0001.

All common shares and per share amounts contained in the condensed consolidated financial statements have been retroactively adjusted to reflect a 1 for 7 reverse stock split, effective April 1, 2013.

Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2013 and for the three and six months then ended have been prepared in accordance with the accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The unaudited condensed consolidated balance sheet as of September 30, 2013, the condensed consolidated statements of comprehensive loss for the three and six months ended September 30, 2013 and 2012, and the condensed consolidated statements of cash flows for the six months ended September 30, 2013 and 2012 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and six months ended September 30, 2013 are not necessarily indicative of results to be expected for the year ending March 31, 2014 or for any future interim period. The condensed consolidated balance sheet at March 31, 2013 has been derived from audited consolidated financial statements. However, it does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2013, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on June 25, 2013.

Principles of Consolidation

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Aquamed Technologies, Inc. (“Aquamed”), Oculus Technologies of Mexico S.A. de C.V. and Oculus Innovative Sciences Netherlands, B.V. and Ruthigen, Inc. (“Ruthigen”). All significant intercompany accounts and transactions have been eliminated in consolidation. Aquamed has no current operations.

Use of Estimates

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred taxes, the valuation of equity and derivative instruments, and debt discounts and the estimated amortization periods of upfront licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly. The allowance for uncollectible accounts receivable balances amounted to $9,000 and $22,000, which are included in accounts receivable, net in the accompanying September 30, 2013 and March 31, 2013 condensed consolidated balance sheets, respectively. The reserve for excess and obsolete inventory balances amounted to $76,000 and $170,000, which are included in inventories, net in the accompanying September 30, 2013 and March 31, 2013 condensed consolidated balance sheets, respectively.

Reclassifications

Reclassifications

Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2014 presentation. These reclassifications have no impact on the Company’s previously reported net loss.

Net Loss per Share

Net Loss per Share

The Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic net loss per share for the three and six months ended September 30, 2013 and 2012 (adjusted if applicable for the reverse stock split effective April 1, 2013) excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.

	September 30,
	2013		2012
	(in thousands)
Options to purchase common stock		1,229		988
Warrants to purchase common stock		1,318		1,529
		2,547		2,517

Common Stock Purchase Warrants and Other Derivative Financial Instruments

Common Stock Purchase Warrants and Other Derivative Financial Instruments

The Company classifies common stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement, or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies 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), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions as either an asset or a liability. The Company assesses classification of its freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required. The Company determined that its freestanding derivatives, which principally consist of warrants to purchase common stock, satisfied the criteria for classification as equity instruments at September 30, 2013, other than certain warrants that contain reset provisions and certain warrants that require net-cash settlement that the Company classified as derivative liabilities.

Fair Value of Financial Assets and Liabilities

Fair Value of Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The fair value of capital lease obligations and equipment loans approximates their carrying amounts as a market rate of interest is attached to their repayment. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)

Financial liabilities measured at fair value on a recurring basis are summarized below:

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer. 

Level 3 Valuation Techniques:

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

The Company uses the Black-Scholes option valuation model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility.

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in “(Loss) gain due to change in fair value of derivative instruments” in the Company’s condensed consolidated statements of comprehensive loss.

As of September 30, 2013, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

Subsequent Events

Subsequent Events

Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued (Note 10).

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This guidance improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income.  In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of Accumulated Other Comprehensive Income in both net income and Other Comprehensive Income on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.  While the adoption of this standard required the Company to change the format of its condensed consolidated financial statements, it did not have a material impact on the Company’s consolidated financial position and results of operations.

The FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

Accounting standards that have been issued or proposed by the FASB, SEC and/or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the condensed consolidated financial statements upon adoption.

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7. Income Taxes

6 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

7. Income Taxes

The Company completed a study during the year ended March 31, 2013 to assess whether a change in control had occurred or whether there have been multiple changes of control since the Company’s formation.  The Company determined, based on the results of the study, no change in control occurred for purposes of Internal Revenue Code section 382.  In addition, the Company is not aware of any changes in ownership during the six months ended September 30, 2013 that would result in a change in control under Internal Revenue Code section 382.  The Company, after considering all available evidence, fully reserved against its deferred tax assets since it is more likely than not that such benefits will not be realized in future periods. The Company incurred losses for both financial reporting and income tax purposes for the six months ended September 30, 2013. Accordingly, the Company is continuing to fully reserve for its deferred tax assets. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s deferred income tax assets satisfy the realization standards, the valuation allowance will be reduced accordingly.

As a result of certain realization requirements of Accounting Standards Codification Topic 718, the Company’s deferred tax assets and liabilities do not include certain deferred tax assets at September 30, 2013 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting purposes.  Equity will be increased by approximately $533,000 if and when such deferred tax assets are ultimately realized. 

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2. Liquidity and Financial Condition

6 Months Ended

Sep. 30, 2013

Liquidity And Financial Condition

2. Liquidity and Financial Condition

The Company reported a net loss of $3,111,000 for the six months ended September 30, 2013. At September 30, 2013 and March 31, 2013, the Company’s accumulated deficit amounted to $140,856,000 and $137,745,000, respectively. The Company had working capital of $2,175,000 and $6,407,000 as of September 30, 2013 and March 31, 2013, respectively. The Company expects the need to raise additional capital from external sources in order to continue the longer term efforts contemplated under its business plan and repay its outstanding notes payable obligations. The Company expects to continue incurring losses for the foreseeable future and may need to raise additional capital to pursue its product development initiatives, penetrate markets for the sale of its products and continue as a going concern. Upon the closing of the intended initial public offering by the Company’s subsidiary, Ruthigen, Inc., the Company will be repaid for certain costs incurred and advanced related to Ruthigen’s initial public offering and certain other agreed-upon expenses, pursuant to the terms of the separation agreement the Company entered into with Ruthigen (See Note 4). At September 30, 2013, these costs amounted to $911,000, of which $824,000 is reported as deferred offering costs in the accompanying condensed consolidated balance sheet and $87,000 was reported as selling, general and administrative expense.

The Company currently anticipates that its cash and cash equivalents will be sufficient to meet its working capital requirements to continue its sales and marketing and research and development efforts through at least October 1, 2014. However, in order to execute the Company’s long-term Microcyn® product development strategy and to penetrate new and existing markets, the Company may need to raise additional funds through public or private equity offerings, debt financings, corporate collaborations or other means and potentially reduce operating expenditures.

Management believes that the Company has access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, the Company has not secured any commitment for new financing at this time, nor can it provide any assurance that the Ruthigen initial public offering will be completed or that other new financings will be available on commercially acceptable terms, if needed. If the Company is unable to secure additional capital, it may be required to curtail its research and development initiatives and take additional measures to reduce costs in order to conserve its cash.

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8. Segment and Geographic Information (Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Segment Reporting [Abstract]
Service revenues	$ 236	$ 262	$ 454	$ 497
Product licensing revenues	$ 397	$ 374	$ 830	$ 406

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6. Stock-Based Compensation (Tables)

6 Months Ended

Sep. 30, 2013

Share-based Compensation Arrangement by Share-based Payment Award, Additional General Disclosures [Abstract]

Employee stock-based compensation expense

	Three Months				Six Months
	Ended				Ended
	September 30,				September 30,
	2013		2012		2013		2012
Cost of service revenue	$	30	$	34	$	56	$	66
Research and development		45		63		78		130
Selling, general and administrative		221		275		349		484
Total stock-based compensation	$	296	$	372	$	483	$	680

Weighted-average assumptions of fair value of employee stock options

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
Expected life	5.89 years		5.85 years		5.89 years		5.85 years
Risk-free interest rate		1.42%		0.73%		1.42%		0.73%
Dividend yield		0.00%		0.00%		0.00%		0.00%
Volatility		86%		88%		86%		88%
Fair value of options granted	$	2.10	$	4.76	$	2.10	$	4.76

Summary of option activity

	Number of Shares (in thousands)			Weighted- Average Exercise Price		Weighted- Average Contractual  Term		Aggregate Intrinsic Value
Outstanding at March 31, 2013		975		$	15.08
Options granted		335			2.95
Options exercised		–			–
Options forfeited or expired		(81	)		15.86
Outstanding at September 30, 2013		1,229		$	11.72		7.42	$	–
Exercisable at September 30, 2013		816		$	15.32		6.35	$	–
Options available for grant as of September 30, 2013		848

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10. Subsequent Events

6 Months Ended

Sep. 30, 2013

Subsequent Events [Abstract]

10. Subsequent Events

Common Stock Issued to Non-Employee For Services

On October 2, 2013, the Company issued 11,070 shares of common stock, with a value of $30,000, to Windsor Corporation in consideration for services provided during the three months ended September 30, 2013. The Company registered the issuance under its previously filed and currently effective shelf registration statement on Form S-3 (File No. 333-171411) and the related prospectus supplement dated and filed on October 2, 2013.

Amendments No. 1 and No. 2 to the License and Supply Agreement with Ruthigen, Inc.

On October 9, 2013, the Company entered into Amendment No. 1 to the License and Supply Agreement with the Company’s wholly owned subsidiary, Ruthigen, Inc. Pursuant to the terms of the License and Supply Agreement, Ruthigen is required to make milestone payments to the Company upon certain milestone events. Amendment No. 1 amended the second milestone event set forth in Section 7.1 of the License and Supply Agreement. On November 6, 2013, the Company entered into Amendment No. 2 to the License and Supply Agreement with Ruthigen to further amend the certain milestone events set forth in Section 7.1 of the License and Supply Agreement and to amend the terms of the manufacturing equipment purchases set forth in Section 6.13 of the License and Supply Agreement. Pursuant to the terms of Amendment No. 2, Ruthigen will be required to make a total of $5,000,000 in milestone payments to the Company for the first product only, as follows: upon completion of Ruthigen’s first meeting with the U.S. Food and Drug Administration (FDA) following completion of Ruthigen’s first pivotal clinical trial and upon first patient enrollment in Ruthigen’s second pivotal clinical trial. Ruthigen also agreed to purchase certain research and development and manufacturing equipment from the Company for approximately $3 million following the completion of Ruthigen’s intended initial public offering. All other terms and conditions of the License and Supply Agreement remain unmodified and in full force and effect.

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1. Organization and Summary of Significant Accounting Policies (Narrative) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Allowance for uncollectible accounts receivable	$ 9	$ 22
Reserve for excess and obsolete inventory	$ 76	$ 170

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8. Segment and Geographic Information (Tables)

6 Months Ended

Sep. 30, 2013

Segment Reporting [Abstract]

Segment and Geographic Information

	Three Months				Six Months
	Ended				Ended
	September 30,				September 30,
	2013		2012		2013		2012
U.S.	$	1,898,000	$	1,898,000	$	3,221,000	$	3,931,000
Mexico		1,352,000		1,862,000		2,776,000		3,240,000
Europe and Other		603,000		504,000		1,010,000		909,000
	$	3,853,000	$	4,264,000	$	7,007,000	$	8,080,000

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Document and Entity Information	6 Months Ended
	Sep. 30, 2013	Nov. 15, 2013
Document And Entity Information
Entity Registrant Name	Oculus Innovative Sciences, Inc.
Entity Central Index Key	0001367083
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--03-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		6,644,764
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2014

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1. Potentially Dilutive Securites Table (Details)	6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Total securities excluded from computation of basic net loss per share	2,547,000	2,517,000
Stock Options
Total securities excluded from computation of basic net loss per share	1,229,000	988,000
Warrants
Total securities excluded from computation of basic net loss per share	1,318,000	1,529,000