Filing summary
Important identity and period mismatch: The request identifies TENAX THERAPEUTICS, INC. and 2010 Q1, but the supplied filing is Oxygen Biotherapeutics, Inc.’s Form 10-Q for the quarter ended July 31, 2011, filed September 19, 2011. The summary below reflects the supplied filing, not a Tenax filing.
Business context and reporting period
Oxygen Biotherapeutics was a development-stage biotechnology company developing Oxycyte, an investigational oxygen carrier, and topical products including Dermacyte and Wundecyte. Management said its nearer-term commercial focus was Dermacyte and Wundecyte, while Oxycyte remained its leading clinical-development program. The financial comparisons are for the three months ended July 31, 2011 and 2010; balance-sheet amounts compare July 31, 2011 with April 30, 2011.
Key financial metrics
| Metric | Quarter ended July 31, 2011 | Comparable 2010 quarter or balance-sheet comparison |
|---|---|---|
| Product revenue | $59,477 | $6,900 |
| Cost of sales / gross profit | $34,604 / $24,873 | $1,790 / $5,110 |
| Gross margin | 42% | 74% |
| Operating expenses | $2,452,950 | $3,028,311 |
| Net loss | $2,869,308 | $3,002,300 |
| Basic / diluted loss per share | $(0.12) / $(0.33) | $(0.13) / $(0.13) |
| Cash and cash equivalents | $3,998,147 | $951,944 at April 30, 2011 |
| Working capital | $2,234,203 | $(551,033) at April 30, 2011 |
| Total liabilities | $7,793,584 | $6,646,879 at April 30, 2011 |
| Notes payable, net | $5,543,290 | $4,506,930 at April 30, 2011 |
Quarterly cash flows were $2.05 million used in operations, $86,684 used in investing, and $5.19 million provided by financing. Cash increased by approximately $3.05 million during the quarter. The company reported a $94.8 million accumulated development-stage deficit and a $1.62 million stockholders’ deficit at July 31, 2011.
Material changes versus the prior comparable period
- Revenue rose $52,577, or 762%, driven by additional Dermacyte products, higher sales through the internal sales force, and shipments to a Mexican distributor. Revenue remained small relative to operating costs.
- Gross margin declined from 74% to 42%, which management attributed mainly to product mix and distributor-channel sales.
- Operating expenses fell 19%; research and development declined 43% as Oxycyte development and clinical-trial costs decreased, while sales and marketing expenses increased 118%.
- Net loss narrowed by $132,992, or 4%. Interest expense increased to $435,798 from $1,206, principally because of accretion on Vatea notes and discount and issuance-cost amortization on new convertible notes.
- The company raised approximately $4.9 million gross through a June/July 2011 subordinated convertible-note and warrant offering and issued an additional $700,000 of Vatea notes in May. The convertible notes bear 15% annual interest, mature in 36 months, and are convertible at $2.255 per share. The warrants cover approximately 2.17 million shares.
Outlook, risks, contingencies, and unusual items
- Liquidity and going concern: Management said available cash was expected to fund operations through December 31, 2011, but continuing development beyond that date depended on license income or additional financing. The filing states that substantial doubt exists about the company’s ability to continue as a going concern; management was seeking financing, alliances, or joint ventures and gave no assurance of success.
- Clinical and regulatory risk: Oxycyte’s U.S. Phase II protocol remained on FDA clinical hold over safety concerns. A Phase II-b study was underway in Switzerland and Israel, with expansion into India planned. Further clinical trials and regulatory review would require substantial time and funding. The company reported a $2.07 million, two-year U.S. Army cost-reimbursement award for Oxycyte safety studies.
- Governance investigation: The Audit Committee completed an investigation into former CEO Chris J. Stern, reporting inaccurate biographical claims, an undisclosed related-party warrant transaction, and a purported consulting arrangement used to disguise securities-sale commissions. The company terminated Stern for cause on August 24, 2011, and informed SEC and Nasdaq staff. It reported additional planned control measures; management said disclosure controls were effective as of July 31.
- Legal and contingent exposures: On August 30, 2011, investors sued over an alleged breach of a right of first offer in connection with the 2011 financing; the company said it intended to defend the claim. It accrued about $550,000 for potential Section 409A payroll-tax liabilities and estimated possible additional exposure of approximately $500,000. Certain older warrants also carried potential registration-related liquidated damages, for which the company recorded no liability because it considered payment not probable.
- Subsequent financing: On August 2, 2011, the company received $619,181 from warrant exercises and issued 366,379 common shares.
- Loss-per-share presentation: Diluted loss per share was $(0.33), versus basic loss per share of $(0.12), reflecting the filing’s treatment of convertible-note interest in the diluted calculation. Investors should review the detailed reconciliation.
Important facts for investors to verify
- Confirm the issuer and reporting period: the supplied filing is Oxygen Biotherapeutics’ July 31, 2011 Form 10-Q, not a Tenax 2010 Q1 filing.
- Review financing terms, debt discounts and premiums, interest accretion, conversion and warrant dilution, and whether cash or further financing was available after the stated December 31, 2011 runway.
- Check subsequent disclosures on Oxycyte’s clinical hold, trial progress, and the company’s ability to fund development and regulatory work.
- Track the outcome of the Tenor lawsuit, the Section 409A investigation and potential liability, and any consequences of the Audit Committee’s findings.
- Reconcile the reported diluted loss-per-share calculation and assess the continuing decline in gross margin against growth in product revenue.