TENAX THERAPEUTICS, INC. annual report, FY2013

Filing identity and reporting period

Important discrepancy: The supplied filing is Oxygen Biotherapeutics, Inc.’s Form 10-K, filed July 29, 2014, for the fiscal year ended April 30, 2014. It is not a Tenax Therapeutics filing and does not cover 2012 Q4. The company’s listed ticker was OXBT.

Business context

Oxygen Biotherapeutics was a development-stage specialty pharmaceutical company focused on critical-care products. Its lead programs were levosimendan, licensed in the U.S. and Canada for cardiac-surgery patients at risk of low cardiac output syndrome (LCOS), and Oxycyte, an oxygen-carrier candidate being studied for traumatic brain injury (TBI). The company had no approved drug products for sale; its small commercial activity related to Dermacyte topical products.

Financial performance and position

Product revenue fell 72%, largely because the prior-year figure included Dermacyte distribution-agreement license fees. The company wrote down about $97,000 of cosmetics inventory that it did not expect to sell before expiration. Grant revenue declined 77% to about $263,000 as studies from the prior year were completed. Gross margin was negative in 2014 due to the inventory write-down.

SG&A rose sharply, principally reflecting approximately $8.3 million of stock-based compensation, including option and restricted-stock awards associated with the Phyxius transaction and management employment agreements. Net loss also included $2.212 million of interest expense and $718,436 of other expense, mainly from changes in warrant fair value. Preferred-stock dividends increased the loss attributable to common stockholders beyond the reported net loss.

At April 30, 2014, cash and cash equivalents were $58.321 million, compared with $783,528 a year earlier. Working capital was $56.395 million, versus a $67,326 deficit. Total assets were $93.429 million and total liabilities were $10.544 million, including a $7.962 million deferred tax liability and $954,876 warrant liability. Notes payable, net, totaled $346,890, all classified as current; the $4.6 million convertible note had been exchanged for preferred stock during the year. Accumulated deficit was $136.586 million. The company reported that $58.039 million of cash was uninsured by the FDIC.

Material changes and financing

• Operating cash use increased to $9.262 million from $4.921 million, reflecting higher clinical-program costs, personnel costs, acquisition-related costs and assumed-liability payments.
• Financing activities provided $66.946 million, mainly from a March 2014 common-stock offering yielding about $55 million net, preferred-stock financing and warrant exercises. The company issued 10,678,571 common shares in the offering and 3,161,145 shares upon warrant exercises during the year.
• The November 2013 Phyxius asset acquisition brought levosimendan U.S./Canada rights. Consideration was valued at $24.047 million; the balance sheet included $22.0 million of acquired in-process R&D and $11.265 million of goodwill.
• Stockholders’ equity improved to $82.885 million from a $1.778 million deficit. The share count rose substantially; the filing also notes a 1-for-20 reverse split effective May 10, 2013.

Outlook, risks and unusual items

• Management estimated existing cash would fund planned operations through the fiscal year ending April 30, 2017, while stating that substantial additional capital would be needed thereafter to complete development and commercialization. This is a forward-looking estimate, not a guarantee.
• The company planned a Phase 3 levosimendan trial, expected to enroll about 760 patients at roughly 50 North American centers, with enrollment anticipated to begin in calendar Q3 2014. The license could be terminated by Orion if the study was not started by July 31, 2014; as of July 24, the company said it was negotiating with clinical sites. The filing does not establish that the deadline was met or waived.
• Oxycyte’s U.S. clinical hold was lifted by the FDA on February 28, 2014, after the agency found the submitted nonclinical work addressed the hold issues. The Phase II-b TBI study remained in development; further clinical success and regulatory approval were uncertain.
• Key risks include clinical-trial failure or delay, regulatory uncertainty, dependence on external financing and third-party manufacturers, potential dilution, and reliance on a small number of programs. Orion was the sole levosimendan manufacturer. The company disclosed up to $13 million in sales-based milestones, approval milestones, and tiered royalties under the license.
• The independent auditor issued an unmodified opinion on the financial statements. The auditor did not audit internal control over financial reporting; management reported its controls were effective. The filing identifies no litigation management believed would materially affect the financial statements.

Important facts for investors to verify

• Confirm the issuer and period: this source is Oxygen Biotherapeutics’ FY2014 10-K, not a Tenax Therapeutics 2012 Q4 filing.
• Check subsequent filings for whether levosimendan’s clinical-trial start condition was met, waived or amended by July 31, 2014, and whether Orion’s license remained in force.
• Track actual cash burn and clinical spending against management’s projected runway through April 2017, including financing needs and potential dilution.
• Review trial enrollment, results, FDA interactions and manufacturing supply for levosimendan and Oxycyte; neither candidate was approved for sale.
• Assess the impact of stock-based compensation, acquisition accounting, warrant valuation and preferred-stock terms on reported losses, equity and future share count.