TENX

Business Context and Reporting Period

Company: Oxygen Biotherapeutics, Inc. (formerly Synthetic Blood International, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 31, 2009
Status: Development Stage Company / Smaller Reporting Company

The Company is a biotechnology firm focused on developing medical products based on perfluorocarbon technology, primarily Oxycyte (a synthetic oxygen carrier) and topical wound healing therapies. The Company has no product revenue and relies entirely on external financing. Management has raised substantial doubt about the Company's ability to continue as a going concern due to an accumulated deficit of $54.3 million and the need for additional funding to complete clinical trials.

Key Financial Metrics

Note: The Company reported no revenue for the periods presented. Significant interest expense was driven by the amortization of debt discounts upon the conversion of convertible notes to equity.

Material Changes vs. Prior Period

• Net Loss Increase: Net loss for the nine months ended Jan 31, 2009, increased to $16.5 million from $4.3 million in the prior year period. This was primarily due to a $7.7 million increase in interest expense resulting from the conversion of convertible debt instruments into common stock, which triggered the recognition of unamortized discounts as interest expense.
• Operating Expenses: General and Administrative (G&A) expenses rose significantly to $5.5 million (nine months) from $1.0 million in the prior year. Increases were attributed to stock-based compensation ($1.4 million) and professional consulting fees ($2.3 million) related to regulatory issues and FDA trial management.
• Research & Development: R&D expenses increased to $972,534 (nine months) from $492,505, driven by costs associated with the Phase II-A and Phase II-B Traumatic Brain Injury (TBI) studies for Oxycyte.
• Debt Structure: The Company converted $7.1 million of notes payable into 27.3 million shares of common stock during the period, reducing debt obligations but increasing share count and interest expense recognition.

Outlook, Risks, and Management Commentary

• Going Concern: The Company explicitly states that its ability to continue as a going concern is dependent on obtaining additional financing. Management believes current cash reserves will fund operations through the first quarter of calendar year 2010, but additional funding is required by mid-to-late 2009.
• Regulatory Status (Oxycyte): The Company is in Phase II-B trials for Traumatic Brain Injury. The FDA identified two deficiencies in the proposal in January 2009. The Company has submitted a rebuttal and requested mediation via the FDA Ombudsman. A parallel dosing study is being planned in Switzerland.
• Strategic Shifts: The Company is increasing focus on topical wound healing therapies (licensed from Virginia Commonwealth University) and has licensed its glucose biosensor technology to Glucometrics, Inc. in exchange for a 10% equity interest and royalty rights.
• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of January 31, 2009, citing material weaknesses including incompatible duties in cash disbursements, lack of sufficient accounting personnel, and inconsistent maintenance of executed contracts.
• Subsequent Events: A new employment agreement with the CEO was approved in February 2009. The Company also signed a Memorandum of Understanding with Virginia Commonwealth University to establish the Purple Heart Injury Lab and filed a request for $15 million in federal funding.

Investor Verification Checklist

• Cash Runway: Verify the accuracy of the projection that cash reserves ($4.1M) will sustain operations only through Q1 2010, necessitating immediate capital raises.
• FDA Resolution: Monitor the status of the FDA mediation regarding the Oxycyte Phase II-B protocol deficiencies and the timeline for the Swiss study.
• Dilution Risk: Assess the impact of the 27.3 million shares issued for debt conversion and the 121 million outstanding warrants on future equity value.
• Internal Controls: Review the progress of remediation efforts for the identified material weaknesses in financial reporting and cash disbursement processes.
• Financing Terms: Scrutinize the terms of any new debt or equity financing, given the history of high original issue discounts and warrant issuance that have historically inflated interest expenses.