Business Context and Reporting Period
Company: Oxygen Biotherapeutics, Inc. (formerly Synthetic Blood International, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: April 30, 2011
Business Overview: A development-stage biotechnology company focused on oxygen delivery to specific target tissues. The company's primary clinical candidate is Oxycyte (a perfluorocarbon-based oxygen carrier) for traumatic brain injury (TBI) and decompression sickness. Commercially, the company is developing and selling Dermacyte (topical cosmetic products) and Wundecyte (wound healing gel). The company has no approved drug products for sale and relies on equity and debt financing to fund operations.
Key Financial Metrics
| Metric | Fiscal Year 2011 | Fiscal Year 2010 |
|---|---|---|
| Total Product Revenue | $322,349 | $47,386 |
| Gross Profit | $103,167 | $8,353 |
| Gross Margin | 32% | 17% |
| Total Operating Expenses | $10,665,844 | $10,209,849 |
| Net Loss | $(10,448,296) | $(10,507,376) |
| Net Loss Per Share (Basic & Diluted) | $(0.45) | $(0.54) |
| Cash and Cash Equivalents (End of Period) | $951,944 | $632,706 |
| Working Capital | $(551,033) | $785,485 |
| Accumulated Deficit | $(91,915,874) | $(81,467,578) |
| Net Cash Used in Operating Activities | $(8,403,142) | $(8,587,272) |
| Net Cash Provided by Financing Activities | $9,186,319 | $7,205,828 |
Material Changes vs. Prior Period
- Revenue Growth: Product revenue increased 580% to $322,349, driven by the launch of new Dermacyte products (Concentrate Gel and Eye Serum), the establishment of an internal sales force, and distributor shipments to Dermacyte Switzerland Ltd. (DSL).
- Expense Shifts:
- Sales and Marketing: Increased 209% to $875,634 due to higher compensation costs ($165k) and direct marketing/advertising ($430k).
- General and Administrative: Increased 2% to $7.1 million, primarily due to a $550,000 accrual for contingent Section 409A tax liabilities and a $300,000 impairment charge on intangible assets.
- Research and Development: Decreased 10% to $2.68 million, reflecting reduced development costs for Oxycyte and Dermacyte, partially offset by Phase II-b clinical trial costs.
- Liquidity Position: Working capital turned negative from $785,485 in 2010 to $(551,033) in 2011, despite an increase in cash on hand, due to a significant rise in current liabilities (including accrued tax liabilities and accounts payable).
- Other Income: Other income increased significantly due to a $244,489 award under the Patient Protection and Affordable Care Act (PPACA) and the reversal of prior-year investment impairments.
Guidance, Outlook, Risks, and Contingencies
- Going Concern: The company's independent auditors have included an explanatory paragraph regarding substantial doubt about the company's ability to continue as a going concern. Management believes existing cash and recent financing will fund operations through December 31, 2011, but substantial additional capital is required thereafter.
- Financing Activities:
- Issued $5 million in senior unsecured promissory notes to Vatea Fund (maturity Oct 2013) with a $3 million final payment premium.
- Subsequent to period end (June/July 2011), closed a convertible note offering raising approximately $4.5 million.
- Regulatory Status:
- Oxycyte: Phase II-b clinical trials for TBI are underway in Switzerland, Israel, and India. The FDA previously placed a clinical hold on a U.S. protocol due to safety concerns; the company is addressing these concerns.
- Wundecyte: FDA classified the product as a combination device/drug, requiring extensive preclinical and clinical studies.
- Contingent Liabilities:
- Section 409A Tax Liability: The company accrued approximately $550,000 for potential payroll taxes, interest, and penalties related to non-compliant stock option grants. Management estimates potential additional adverse outcomes could reach $500,000 beyond the recorded amount.
- Manufacturing: Reliance on third-party manufacturers (Hospira, Exfluor). Hospira received an FDA warning letter in 2010 regarding cGMP violations, though issues were remediated.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $4.5 million convertible note proceeds (closed post-period) to extend operations beyond the stated December 31, 2011 horizon.
- Section 409A Exposure: Confirm the final determination of the tax liability, as the current accrual of $550,000 may be understated by up to $500,000.
- Debt Obligations: Review the terms of the $5 million Vatea Fund notes, specifically the $3 million final payment premium due at maturity in 2013, and assess refinancing risks.
- Regulatory Progress: Monitor the status of the FDA clinical hold on Oxycyte and the results of the ongoing Phase II-b trials in international jurisdictions.
- Revenue Sustainability: Assess the durability of Dermacyte revenue growth, which is currently the only significant revenue source, and the performance of new distribution agreements (DSL and CU2).