Filing summary
Entity and period discrepancy: The request identifies TENAX THERAPEUTICS, INC., but the supplied filing is for OXYGEN BIOTHERAPEUTICS, INC. It reports the quarter ended January 31, 2012 (fiscal 2012 third quarter), not a 2010 quarter. The summary below reflects the supplied filing.
Business context and reporting period
Oxygen Biotherapeutics was a development-stage biotechnology company focused on oxygen-delivery products. Its lead therapeutic candidate, Oxycyte, was being developed for severe traumatic brain injury; management also identified topical products Dermacyte and Wundecyte as nearer-term commercialization opportunities. The unaudited filing covers the three and nine months ended January 31, 2012, compared with the corresponding 2011 periods.
Financial performance and position
| Metric | Three months ended Jan. 31, 2012 | Nine months ended Jan. 31, 2012 | Comparable 2011 period |
|---|---|---|---|
| Total net revenue | $148,262 | $268,294 | $26,589 quarter; $58,825 nine months |
| Product revenue | $4,673 | $91,565 | $52,562 quarter; $95,543 nine months |
| Government grant revenue | $146,101 | $224,345 | None reported |
| Operating expenses | $2,022,038 | $6,624,376 | $2,781,344 quarter; $7,893,518 nine months |
| Net loss | $7,298,614 | $13,097,606 | $2,544,187 quarter; $7,598,423 nine months |
| Basic loss per share | $0.26 | $0.53 | $0.11 quarter; $0.33 nine months |
Product gross profit was $2,161 for the quarter and $43,949 for the nine months; product gross margin was 46% and 48%, respectively, versus 51% and 62% in 2011. Grant revenue is separate from product sales and substantially explains the increase in reported total revenue.
Interest expense rose to $5.34 million for the quarter and $6.65 million for the nine months, from $43,093 and $49,682, respectively. The company attributed the increase principally to accretion of debt premiums, amortization of convertible-note discounts and financing costs, and non-cash fair-value and conversion-related charges on preferred stock.
At January 31, 2012, cash and cash equivalents were $3.28 million, total current assets $4.33 million, total current liabilities $5.81 million, and working capital negative $1.48 million. Total assets were $5.89 million, total liabilities $6.76 million, and stockholders’ deficit $871,464. Notes payable were reported net of discounts at $1.06 million in total; Series A preferred stock was carried as a current liability of $3.92 million.
For the nine months, operating cash use was $6.86 million, investing cash use $207,200, and financing cash provided $9.39 million. Cash increased by $2.33 million from $951,944 at April 30, 2011. Financing included proceeds from common-stock sales, convertible notes and preferred stock.
Material changes versus prior comparable periods
- Quarterly product revenue fell 91% to $4,673; nine-month product revenue declined 4% to $91,565. Management said it suspended its marketing program and focused on reformulating and repackaging products; there was no active sales force during the quarter.
- Operating expenses declined 27% for the quarter and 16% for the nine months, largely reflecting lower sales and marketing and general and administrative costs. Quarterly research and development expense increased 20%, while nine-month research and development expense declined 21%.
- Net losses increased 187% for the quarter and 72% for the nine months, primarily because of substantially higher interest expense, despite lower operating expenses.
- Cash rose from $951,944 at April 30, 2011 to $3.28 million at January 31, 2012, largely following financing activity. Current liabilities exceeded current assets at period end.
Outlook, risks, contingencies, and unusual items
- Funding and going concern: The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management said available capital was expected to fund operations through July 31, 2012. If conditions for a second preferred-stock financing installment were met, management estimated funding could extend through January 31, 2013; the filing gives no assurance that the installment or other financing would be available.
- Development outlook: Oxycyte’s U.S. Phase II protocol remained on FDA clinical hold over safety concerns, while a Phase II study was underway in Switzerland and Israel. A U.S. Army cost-reimbursement award of up to $2.07 million supported Oxycyte safety studies. Management expected continued significant spending on development and stated that additional capital would be required.
- Preferred-stock financing and dilution: The December 2011 offering initially raised $3.5 million, with up to $4 million more subject to conditions, including stock-price and trading-volume requirements. Preferred shares carried 7% annual dividends, scheduled redemptions, and conversion terms that could result in increased share issuance if the common-stock price declined. Covenants restrict additional borrowing and certain securities issuances; specified triggering events can require cash redemption at a premium.
- Debt and non-cash charges: The June 2011 convertible notes had approximately $4.9 million principal, a 15% annual interest rate, and a $2.255 conversion price. The filing reports substantial debt discounts and non-cash interest effects. The Vatea notes were prepaid using proceeds from the November 2011 equity closing.
- Contingencies: Tenor funds sued over an alleged breach of a right of first offer related to the June 2011 financing; discovery was underway, and no liability was accrued. The company had accrued approximately $550,000 for potential Section 409A-related tax liabilities and estimated possible additional exposure of approximately $500,000. It had not accrued for potential registration-payment damages on certain warrants because management did not consider payment probable.
- Other items: The company wrote off approximately $85,000 of receivables related to Glucometrics patent expenses. As of March 15, 2012, after additional preferred-stock conversions, 1,751 preferred shares remained outstanding; common shares outstanding were 29,019,253.
No specific profitability or revenue guidance is provided. Management’s forward-looking statements are subject to clinical, regulatory, financing, commercialization, and dilution risks.
Most important facts for investors to verify
- Confirm the issuer and reporting period: the supplied document is Oxygen Biotherapeutics’ 2012 third-quarter 10-Q, not a Tenax Therapeutics 2010 filing.
- Verify the status and conditions of the second preferred-stock financing installment and the company’s cash runway beyond July 31, 2012.
- Review the preferred-stock redemption, conversion, anti-dilution, covenant, and triggering-event provisions for potential cash obligations and dilution.
- Assess the drivers and recurrence of the unusually high interest expense, including debt-discount amortization and preferred-stock fair-value adjustments.
- Track Oxycyte’s FDA clinical hold and overseas trial progress, as well as the commercialization plans and sales performance for Dermacyte and Wundecyte.
- Monitor the Tenor litigation and the Section 409A exposure, including any changes to recorded or potential liabilities.