SNOA 10-K Fiscal year ended March 31, 2010

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we were the first to invent the inventions described in patent applications;

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we were the first to file patent applications for inventions;

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others will not independently develop similar or alternative technologies or duplicate our products without infringing our intellectual property rights;

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any patents licensed or issued to us will provide us with any competitive advantages;

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we will develop proprietary technologies that are patentable; or

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the patents of others will not have an adverse effect on our ability to do business.

We may face intellectual property infringement claims that could be time-consuming, costly to defend and could result in our loss of significant rights and, in the case of patent infringement claims, the assessment of treble damages.

Our ability to generate revenue will be diminished if we are unable to obtain acceptable prices or an adequate level of reimbursement from third-party payors of healthcare costs.

We could be required to indemnify third parties for alleged infringement, which could cause us to incur significant costs.

Some of our distribution agreements contain commitments to indemnify our distributors against liability arising from infringement of third party intellectual property such as patents. We may be required to indemnify our customers for claims made against them or license fees they are required to pay. If we are forced to indemnify for claims or to pay license fees, our business and financial condition could be substantially harmed.

A significant part of our business is conducted outside of the United States, exposing us to additional risks that may not exist in the United States, which in turn could cause our business and operating results to suffer.

We have international operations in Mexico and Europe. During the years ended March 31, 2010 and 2009, approximately 69% and 76% of our total revenues were generated from sales outside of the United States. Our business is highly regulated for the use, marketing and manufacturing of our Microcyn-based products both domestically and internationally. Our international operations are subject to risks, including:

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local political or economic instability;

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changes in governmental regulation;

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changes in import/export duties;

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trade restrictions;

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lack of experience in foreign markets;

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difficulties and costs of staffing and managing operations in certain foreign countries;

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work stoppages or other changes in labor conditions;

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difficulties in collecting accounts receivables on a timely basis or at all; and

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adverse tax consequences or overlapping tax structures.

Our sales in international markets subject us to foreign currency exchange and other risks and costs which could harm our business.

A substantial portion of our revenues are derived from outside the United States; primarily from Mexico. We anticipate that revenues from international customers will continue to represent a substantial portion of our revenues for the foreseeable future. Because we generate revenues in foreign currencies, we are subject to the effects of exchange rate fluctuations. The functional currency of our Mexican subsidiary is the Mexican Peso. For the preparation of our consolidated financial statements, the financial results of our foreign subsidiaries are translated into U.S. dollars on average exchange rates during the applicable period. If the U.S. dollar appreciates against the Mexican Peso or the Euro, as applicable, the revenues we recognize from sales by our subsidiaries will be adversely impacted. Foreign exchange gains or losses as a result of exchange rate fluctuations in any given period could harm our operating results and negatively impact our revenues. Additionally, if the effective price of our products were to increase as a result of fluctuations in foreign currency exchange rates, demand for our products could decline and adversely affect our results of operations and financial condition.

We rely on a number of key customers who may not consistently purchase our products in the future and if we lose any one of these customers, our revenues may decline.

Although we have a significant number of customers in each of the geographic markets that we operate in, we rely on certain key customers for a significant portion of our sales.  During the year ended March 31, 2010 three customers represented 23% of sales, and during the year ended March 31, 2009, three customers represented 21% of sales.  In the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period. These customers may not consistently purchase our products at a particular rate over any subsequent period. A loss of any of these customers could adversely affect our revenues.

Negative economic conditions increase the risk that we could suffer unrecoverable losses on our customers’ accounts receivable which would adversely affect our financial results.

We grant credit to our business customers, which are primarily located in Mexico, Europe and the United States. Collateral is generally not required for trade receivables.  We maintain allowances for potential credit losses. Three customers represented a total of 42% of our net accounts receivable balance at March 31, 2010, and two customers represented 29% of our net accounts receivable balance at March 31, 2009.  While we believe we have a varied customer base and have experienced strong collections in the past, if current economic conditions disproportionately impact any one of our key customers, including reductions in their purchasing commitments to us or their ability to pay their obligations, it could have a material adverse effect on our revenues and liquidity. We have not purchased insurance on our accounts receivable balances.

The loss of key members of our senior management team, one of our directors or our inability to retain highly skilled scientists, technicians and salespeople could adversely affect our business.

The wound care industry is highly competitive and subject to rapid technological change. If our competitors are better able to develop and market products that are less expensive or more effective than any products that we may develop, our commercial opportunity will be reduced or eliminated.

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develop and patent processes or products earlier than we will;

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develop and commercialize products that are less expensive or more efficient than any products that we may develop;

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obtain regulatory approvals for competing products more rapidly than we will; and

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improve upon existing technological approaches or develop new or different approaches that render our technology or products obsolete or non-competitive.

As a result, we may not be able to successfully commercialize any future products.

The success of our research and development efforts may depend on our ability to find suitable collaborators to fully exploit our capabilities. If we are unable to establish collaborations or if these future collaborations are unsuccessful, our research and development efforts may be unsuccessful, which could adversely affect our results of operations and financial condition.

If we are unable to comply with broad and complex federal and state fraud and abuse laws, including state and federal anti-kickback laws, we could face substantial penalties and our products could be excluded from government healthcare programs.

Our efforts to discover and develop potential products may not lead to the discovery, development, commercialization or marketing of actual drug products.

We must maintain expensive finance and accounting systems, procedures and controls to accommodate growth of our business and organization and to satisfy public company reporting requirements, which will increase our costs and require additional management resources.

We may not be able to maintain sufficient product liability insurance to cover claims against us.

Risks Related to Our Common Stock

Our operating results may fluctuate, which could cause our stock price to decrease.

Fluctuations in our operating results may lead to fluctuations, including declines, in our share price. Our operating results and our share price may fluctuate from period to period due to a variety of factors, including:

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demand by physicians, other medical staff and patients for our Microcyn-based products;

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reimbursement decisions by third-party payors and announcements of those decisions;

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clinical trial results and publication of results in peer-reviewed journals or the presentation at medical conferences;

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the inclusion or exclusion of our Microcyn-based products in large clinical trials conducted by others;

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actual and anticipated fluctuations in our quarterly financial and operating results;

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developments or disputes concerning our intellectual property or other proprietary rights;

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issues in manufacturing our product candidates or products;

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new or less expensive products and services or new technology introduced or offered by our competitors or us;

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the development and commercialization of product enhancements;

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changes in the regulatory environment;

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delays in establishing new strategic relationships;

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costs associated with collaborations and new product candidates;

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introduction of technological innovations or new commercial products by us or our competitors;

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litigation or public concern about the safety of our product candidates or products;

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changes in recommendations of securities analysts or lack of analyst coverage;

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failure to meet analyst expectations regarding our operating results;

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additions or departures of key personnel; and

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general market conditions.

If an active, liquid trading market for our common stock does not develop, you may not be able to sell your shares quickly or at or above the price you paid for it.

Although our common stock is listed on the NASDAQ Capital Market, an active and liquid trading market for our common stock has not yet and may not ever develop or be sustained. You may not be able to sell your shares quickly or at or above the price you paid for our stock if trading in our stock is not active.

Anti-takeover provisions in our charter and by-laws and under Delaware law may make it more difficult for stockholders to change our management and may also make a takeover difficult.

Our corporate documents and Delaware law contain provisions that limit the ability of stockholders to change our management and may also enable our management to resist a takeover. These provisions include:

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the ability of our board of directors to issue and designate the rights of, without stockholder approval, up to 5,000,000 shares of convertible preferred stock, which rights could be senior to those of common stock;

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limitations on persons authorized to call a special meeting of stockholders; and

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advance notice procedures required for stockholders to make nominations of candidates for election as directors or to bring matters before meetings of stockholders.

These provisions might discourage, delay or prevent a change of control in our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and cause us to take other corporate actions. In addition, the existence of these provisions, together with Delaware law, might hinder or delay an attempted takeover other than through negotiations with our board of directors.

Our stockholders may experience substantial dilution in the value of their investment if we issue additional shares of our capital stock or other securities convertible into common stock.

Our charter allows us to issue up to 100,000,000 shares of our common stock and to issue and designate the rights of, without stockholder approval, up to 5,000,000 shares of convertible preferred stock. In the event we issue additional shares of our capital stock, dilution to our stockholders could result. In addition, if we issue and designate a class of convertible preferred stock, these securities may provide for rights, preferences or privileges senior to those of holders of our common stock.

ITEM 2. Properties

We currently lease approximately 12,000 square feet of office, research and manufacturing space in Petaluma, California, which serves as our principal executive offices. We also leased 8,534 square feet of office space in an adjacent building for research and development.  The lease was scheduled to expire on September 30, 2007. On September 13, 2007, we entered into Amendment No. 4 to the property lease agreement for our facility in Petaluma, California. The amendment extended the lease expiration date to September 30, 2010. On May 18, 2009, we entered into Amendment No. 5 for our facility in Petaluma, California. Pursuant to the amendment, we agreed to surrender 8,534 square feet of office space and extended the lease expiration on the remaining lease to September 30, 2011.

We lease approximately 12,000 square feet of office and manufacturing space and approximately 5,000 square feet of warehouse space in Zapopan, Mexico, under leases that were set to expire in April 2011 and April 2010, respectively. On May 1, 2010, we extended the lease on the office and manufacturing space to April 2013, and on May 1, 2010, we extended the lease on the warehouse space to April 2011.  We lease approximately 5,000 square feet of office space and approximately 14,000 square feet of manufacturing and warehouse space in Sittard, the Netherlands, under a lease that was scheduled to expire on January 31, 2009. On February 15, 2008, we extended this lease to January 2011 and on February 1, 2009 we amended this lease to expire on September 1, 2009. On August 17, 2009, we entered into a one year lease for 800 square feet of sales office space in Herten, the Netherlands.  The lease will automatically renew on August 17, 2010.  As we expand, we may need to establish manufacturing facilities in other countries.

We believe that our properties will be adequate to meet our needs through March 31, 2011.

ITEM 3. Legal Proceedings

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

From time to time, we are involved in legal matters arising in the ordinary course of business including matters involving proprietary technology. While we believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are or could become involved in litigation, will not have a material adverse effect on our business, financial condition or results of operations.

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is traded on the NASDAQ Capital Market under the symbol “OCLS” and has been trading since our initial public offering on January 25, 2007. The following table sets forth the range of high and low sales prices for our common stock, based on the last daily sale, in each of the quarters since our stock began trading:

Holders

As of May 26, 2010, we had approximately 613 holders of record of our common stock. Holders of record include nominees who may hold shares on behalf of multiple owners.

Dividends

We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

During the three months ended March 31, 2010, we did not sell equity securities that were not registered under the Securities Act.

ITEM 6. Selected Financial Data

As a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

We are a commercial, health care company that develops, manufactures and markets a family of tissue care products, based on our platform called Microcyn Technology, intended to prevent and treat infections in open wounds and in skin care  and through a unique and separate mechanism of action, enhance healing while reducing the need for antiobiotics.   Microcyn Technology is a non-irritating oxychlorine compound designed to treat a wide range of pathogens, including antibiotic-resistant strains of bacteria, viruses, fungi and spores.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to exercise its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the consolidated financial statements.

On an ongoing basis, we evaluate our estimates and judgments. Areas in which we exercise significant judgment include, but are not necessarily limited to, our valuation of accounts receivable, inventory, income taxes, equity transactions (compensatory and financing) and contingencies. We have also adopted certain polices with respect to our recognition of revenue that we believe are consistent with the guidance provided under Securities and Exchange Commission Staff Accounting Bulletin No. 104.

We base our estimates and judgments on a variety of factors including our historical experience, knowledge of our business and industry, current and expected economic conditions, the attributes of our products, regulatory environment, and in certain cases, the results of outside appraisals. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary.

While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.

A description of significant accounting policies that require us to make estimates and assumptions in the preparation of our consolidated financial statements is as follows:

Stock-based Compensation

We account for share-based awards exchanged for employee services at the estimated grant date fair value of the award. We estimate the fair value of employee stock awards using the Black-Scholes option pricing model. We amortize the fair value of employee stock options on a straight-line basis over the requisite service period of the awards.  Compensation expense includes the impact of an estimate for forfeitures for all stock options.

We account for equity instruments issued to non-employees at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instrument vests or becomes non-forfeitable. Non-employee stock-based compensation charges are amortized over the vesting period or as earned.

Revenue Recognition and Accounts Receivable

We generate product revenues from sales of our products to hospitals, medical centers, doctors, pharmacies, distributors and strategic partners. We sell our products directly to third parties and to distributors through various cancelable distribution agreements. We have also entered into an agreement to license our products.

We record revenues when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability of the sale is reasonably assured.

We require all of our product sales to be supported by evidence of a sale transaction that clearly indicates the selling price to the customer, shipping terms and payment terms. Evidence of an arrangement generally consists of a contract or purchase order approved by the customer. We have ongoing relationships with certain customers from which we customarily accept orders by telephone in lieu of a purchase order.

We recognize revenues at the time in which we receive a confirmation that the goods were either tendered at their destination when shipped “FOB destination,” or transferred to a shipping agent when shipped “FOB shipping point.” Delivery to the customer is deemed to have occurred when the customer takes title to the product. Generally, title passes to the customer upon shipment, but could occur when the customer receives the product based on the terms of the agreement with the customer.

While we have a policy of investigating the creditworthiness of our customers, we have, under certain circumstances, shipped goods in the past and deferred the recognition of revenues when available information indicates that collection is in doubt. We establish allowances for doubtful accounts when available information causes us to believe that a credit loss is probable.

Our treatment for recognizing revenue related to distributors that have the inability to provide inventory or product sell-through reports on a timely basis, is to defer and recognize revenue when payment is received.  We believe the receipt of payment is the best indication of product sell-through.  We have entered into distribution agreements in Europe. Recognition of revenue and related cost of revenue from product sales is deferred until the product is sold from the distributors to their customers.

Service revenues are recorded upon performance of the service contracts. Revenues generated from testing contracts are recorded when the test is completed and the final report is sent to the customer.

Inventory

Inventories are stated at the lower of cost, cost being determined on a standard cost basis (which approximates actual cost on a first-in, first-out basis), or market.  Due to changing market conditions, estimated future requirements, age of the inventories on hand and production of new products, we regularly reviews inventory quantities on hand and records a provision to write down excess and obsolete inventory to its estimated net realizable value.

Income Taxes

We are required to determine the aggregate amount of income tax expense or loss based upon tax statutes in jurisdictions in which we conduct business. In making these estimates, we adjust our results determined in accordance with generally accepted accounting principles for items that are treated differently by the applicable taxing authorities. Deferred tax assets and liabilities resulting from these differences, are reflected on our balance sheet for temporary differences in loss and credit carryforwards that will reverse in subsequent years. We also establish a valuation allowance against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. Valuation allowances are based, in part, on predictions that management must make as to our results in future periods. The outcome of events could differ over time which would require that we make changes in our valuation allowance.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. These estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-term assets, deferred taxes and related valuation allowances and valuation of equity instruments.

Recent Accounting Pronouncements

In December 2008, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Codification or ASC 815-40 “Contracts in Entity’s own Equity.” This issue addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock. This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We have included the impact of ASC 815-40 in our  consolidated financial statements for the year ended March 31, 2010.

In April 2009, the FASB issued ASC 820-10-65 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with Statement of Financial Accounting Standards ASC 820-10 “Fair Value Measurements”. This is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The adoption has no impact on our consolidated financial statements.

In April 2009, the FASB issued ASC 825, “Financial Instruments.” This standard extends the disclosure requirements concerning the fair value of financial instruments to interim financial statements of publicly traded companies. This guidance is effective for interim or annual financial periods ending after June 15, 2009, and as such, became effective in the quarter ended June 30, 2009. The adoption of ASC 825 had no material impact on our consolidated financial position, results of operations or cash flows.

In May 2009, the FASB issued guidance now codified as ASC Topic 855, “Subsequent Events.” ASC Topic 855 establishes standards for the disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. ASC Topic 855 introduces the concept of financial statements being “available to be issued.” It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. We adopted ASC Topic 855 for the period ended June 30, 2009. The adoption of ASC Topic 855 had no impact on our consolidated financial position, results of operations or cash flows.

In January 2010, the FASB issued Accounting Standards Update, or ASU No. 2010-6, “Improving Disclosures About Fair Value Measurements,” which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. ASU 2010-6 is effective for fiscal years beginning after December 15, 2009.  The adoption of this ASU will not have an impact on our consolidated financial position, results of operations or cash flows.

In February 2010, the FASB issued ASU No. 2010-09, "Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements." ASU 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. ASC 2010-09 was effective upon issuance. The adoption of this standard had no effect on our consolidated financial position or results of operations.

In March 2010, the FASB issued ASU No. 2010-17, Revenue Recognition— Milestone Method (Topic 605): Milestone Method of Revenue Recognition.This standard  provides that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved. Determining whether a milestone is substantive requires judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. The new standard is effective for interim and annual periods beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard did not have any impact on the Company’s consolidated financial position and results of operations.

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

Comparison of the Year Ended March 31, 2010 and 2009

Revenues

Total revenues were $7,364,000 during the year ended March 31, 2010, up 37%, compared to $5,388,000 in the prior year period. Product revenue increased $1,883,000, or 43%, compared to the same period last year primarily due to higher sales in the U.S., Europe, Mexico, China, Middle East and India.  Adjusted for the 10% drop in the value of the peso during the year ended March 31, 2010, product growth in Mexico would have been 30% and worldwide product growth would have been 51%.  Increased revenue related to the sale of our 240-milliliter presentation in Mexico, sold primarily to pharmacies, was the result of increased demand from the swine flu epidemic in Mexico and normal sales growth.  Unit sales of our 240-milliliter presentation in Mexico for the year ended March 31, 2010, increased 25% to a monthly average of 40,000 units, up from 32,000 in the same period last year; unit sales of our 5-liter presentation increased 12%, partially offset by lower selling prices.  Europe/Rest of World revenue increased $378,000, up 45%, over the prior year with higher sales from China, India, Netherlands, Slovakia, Singapore and Middle East.  Product revenue in the U.S. in the year ended March 31, 2010 increased $898,000 with strong increases in human and animal wound care, primarily related to television advertising and other sales initiatives sponsored by our strategic partner Innovacyn, Inc. and payments from Union Springs Pharmaceuticals for sales related to MyClyns, a first-responder, germ protection spray.

The following table shows our product revenues by geographic region (in thousands):

Service revenue was $93,000 higher when compared to the same period last year due to an increase in the number of tests provided by our services business.

Gross Profit

We reported gross profit from our Microcyn-based products business of $3,665,000, or 58% of product revenues, during the year ended March 31, 2010, compared to a gross profit of $2,742,000, or 62%, in the prior year period. Our margins in Mexico improved to 79% during the year ended March 31, 2009, compared to 75% in the prior year period with a higher unit volume in the first quarter of fiscal year 2010 due to increased sales related to the swine flu epidemic. During the year ended March 31, 2010, gross margins in Europe and U.S. were relatively low as we have been transferring our manufacturing from Europe to the U.S., sustaining costs in multiple locations, and incurring severance and higher shipping costs in the European cost of goods sold.

Research and Development Expense

Research and development expense declined $4,256,000, or 68%, to $1,996,000 for the year ended March 31, 2010, compared to $6,252,000 in the prior year period. Most of the decrease was attributed to the elimination of the larger clinical team and related expenses during the year ended March 31, 2009, which supported the completion of the Phase II clinical trial. As a result of shifting our strategy to commercializing and growing our product revenues, we significantly reduced the number of people in research and development and clinical activities.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased $3,959,000, or 29%, to $9,898,000 during the year ended March 31, 2010, from $13,857,000 during the year ended March 31, 2009. Primarily, this decrease was due to an $833,000 reduction in stock compensation charges, lower legal and accounting fees and an overall reduction in headcount and related expenses. These decreases were partially offset by higher sales and marketing expenses associated with our wound care product launches in the U.S. and Mexico.

Interest income and expense and other income and expense, net

Interest expense decreased $428,000 to $9,000 for the year ended March 31, 2010, from $437,000 in the prior year period, due to the decreased interest payments on debt over the prior year period and $304,000 related to the amortization of debt issue costs in the prior year period. Total outstanding debt decreased to $314,000 at March 31, 2010, from $329,000 at March 31, 2009. Interest income decreased $150,000 from the prior year period, primarily due to a decline in our interest bearing cash balances.

Other income and expense, net decreased $4,000 to net other expense of $60,000 for the year ended March 31, 2010, from other expense of $64,000 for the same period last year.

Derivative liability

During the year ended March 31, 2010 we incurred an increase in the fair value of our derivative liabilities of $149,000 and as a result we recorded this amount as a loss for the period.  For the year ended March 31, 2009 we did not record a loss or gain related to derivative liabilities.

Net Loss

Net loss for the year ended March 31, 2010 was $8,232,000, down $9,424,000 from $17,656,000 for the same period in the prior year. Stock compensation expense for the year ended March 31, 2010 and 2009 was $1,432,000 and $2,263,000, respectively.   Also, our loss on our derivative instruments of $149,000 was a non-cash charge.

Liquidity and Capital Resources

We incurred a net loss of $8,232,000 for the year ended March 31, 2010. At March 31, 2010, our accumulated deficit amounted to $117,037,000. We had working capital of $6,315,000 as of March 31, 2010. In the future, we may raise additional capital from external sources in order to continue the longer term efforts contemplated under our business plan. We expect to continue incurring losses for the foreseeable future and may raise additional capital to pursue our product development initiatives, penetrate markets for the sale of our products and continue as a going concern. We cannot provide any assurance that we will raise additional capital. Our management believes that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, we have not secured any commitment for new financing at this time.

Sources of Liquidity

As of March 31, 2010, we had cash and cash equivalents of $6,258,000. Since our inception, substantially all of our operations have been financed through sales of equity securities. Other sources of financing that we have used to date include our revenues, as well as various loans.

Since our inception, substantially all of our operations have been financed through the sale of $114,440,000 (net proceeds) of our common and convertible preferred stock. This includes:

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net proceeds $21,936,000 raised in our initial public offering on January 30, 2007;

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net proceeds of $9,124,000 raised in a private placement of common shares on August 13, 2007;

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net proceeds of $12,613,000 raised through a registered direct placement from March 31, 2008 to April 1, 2008;

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net proceeds of $1,514,000 raised through a private placement on February 6, 2009;

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net proceeds of $948,000 from a private placement on February 24, 2009;

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net proceeds of $2,000,000 from a private placement on June 1, 2009;

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net proceeds of $5,411,000 from a registered direct offering on July 30, 2009; and

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$4,223,000 received from the exercise of common stock purchase warrants and options during the year ended March 31, 2010.

In June 2006, we entered into a loan and security agreement with a financial institution to borrow a maximum of $5,000,000. Under this facility we borrowed $4,182,000, of which $1,829,000 was paid in the year ended March 31, 2009. The loan was repaid in full at March 31, 2009.

On May 1, 2010, we entered into a loan and security agreement with a financial institution to borrow a maximum of $3,000,000.  On May 3, 2010, we borrowed $2,000,000 under this facility.

Cash Flows

As of March 31, 2010, we had unrestricted cash and cash equivalents of $6,258,000 compared to $1,921,000 at March 31, 2009.

Net cash used in operating activities during the year ended March 31, 2010 was $6,639,000, primarily due to the $8,232,000 net loss for the period along with increases in accounts receivables and inventory, offset in part by non-cash charges, including $149,000 loss on the fair value of derivative instruments, $1,432,000 of stock-based compensation, and $433,000 of depreciation and amortization.

Net cash used in investing activities was $184,000 and $424,000 for the year ended March 31, 2010 and 2009, respectively, primarily for the purchase of equipment.

Net cash provided by financing activities was $11,084,000 for the year ended March 31, 2010. We received net proceeds from the sale of common stock during this period of $7,155,000.  Additionally, we received proceeds of $4,223,000 related to the exercise of common stock purchase warrants and stock options.  Net cash provided by financing activities was $376,000 for the year ended March 31, 2009. Common stock was issued resulting in net proceeds of $2,499,000 and outstanding debt in the amount of $2,119,000 was paid during the year ended March 31, 2009.

Contractual Obligations

As of March 31, 2010, we had contractual obligations as follows (long-term debt and capital lease amounts include principal payments only) (in thousands):

On May 1, 2010, we entered into a Loan and Security Agreement and a Supplement to the Loan and Security Agreement with Venture Lending & Leasing , Inc. to borrow up to an aggregate of $3,000,000 (collectively, the “Agreements”).  On May 3, 2010, we borrowed $2,000,000.

We lease approximately 12,000 square feet of office and manufacturing space and approximately 5,000 square feet of warehouse space in Zapopan, Mexico, under leases that were set to expire in April 2011 and April 2010, respectively. On May 1, 2010, we extended the lease on the office and manufacturing space to April 2013, and on May 1, 2010, we extended the lease on the warehouse space to April 2011.  In connection with the lease extensions, we will incur additional payments of $211,000, of which $22,000 will be paid in less than one year and $189,000 will be paid in years one to three.

Future principal payments related to the loan and payments related to the lease extension are as follows: