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OXBT > SEC Filings for OXBT > Form 10-K on 26-Jun-2013All Recent SEC Filings

Show all filings for OXYGEN BIOTHERAPEUTICS, INC.

Form 10-K for OXYGEN BIOTHERAPEUTICS, INC.


26-Jun-2013

Annual Report


ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with the financial statements and the related notes to those statements included in "Item
8 - Financial Statements and Supplementary Data." This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.


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Results of operations- Comparison of the year ended April 30, 2013 and 2012

Revenue

Product Revenue and Gross Profit

We generate revenue through the sale of DermacyteŽ through, distribution agreements, on-line retailers and direct sales to physician and medical spa facilities. Product revenue and percentage changes for the year ended April 30, 2013 and 2012, respectively, are as follows:

                                                                           Increase/         % Increase/
                                             Year ended April 30,         (Decrease)         (Decrease)
                                              2013           2012
Product revenue                            $    92,683     $ 100,519     $      (7,836 )                (8 ) %
Cost of sales                                   43,111        51,253            (8,142 )               (16 ) %
Gross profit                               $    49,572     $  49,266     $         306                   1 %

The decrease in product revenue for the year ended April 30, 2013 was primarily due to the elimination of our internal sales force and the suspension of our direct marketing and advertising programs.

Gross profit as a percentage of revenue was 53% and 49% for the years ended April 30, 2013 and 2012, respectively. The increase for the year ended April 30, 2013 was due to changes in product mix sold to our direct sales customers.

Government Grant Revenue

We earn revenues through a cost-reimbursement grant sponsored by the United States Army, or Grant Revenue. Grant Revenue is recognized as milestones under the grant program are achieved. Grant Revenue is earned through reimbursements for the direct costs of labor, travel, and supplies, as well as the pass-through costs of subcontracts with third-party CROs.

Increase/ % Increase/ Year ended April 30, (Decrease) (Decrease) 2013 2012 Government grant revenue $ 1,141,356 $ 314,515 $ 826,841 263 %

For the year ended April 30, 2013, we recorded an increase of approximately $827,000 in revenue under the grant program as compared to the prior year. This increase is due to the progress of the underlying studies and the achievement of contractual milestones under the grant.

In addition to the revenue earned, we have recorded approximately $160,000 in deferred revenue associated with the grant. Deferred revenue under the grant represents pass-through costs that have been reimbursed in advance of performing the studies underlying the subcontracts.


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Marketing and Sales Expenses

Marketing and sales expenses consisted primarily of personnel-related costs, including salaries, commissions, and the costs of marketing programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. During the current year, we suspended our direct marketing and development programs and entered into an exclusive license and distribution agreement for the sales of our cosmetics line. Marketing and sales expenses and percentage changes for the year ended April 30, 2013 and 2012, respectively, are as follows:

Increase/ % Increase/ Year ended April 30, (Decrease) (Decrease) 2013 2012 Marketing and sales expense $ 108,165 $ 393,922 $ (285,757 ) (73 ) %

The decrease in marketing and sales expenses for the year ended April 30, 2013 compared to the prior year was driven primarily by a decrease in the costs incurred for compensation and direct marketing.

- We reduced compensation costs related to marketing and selling the cosmetic topical product line Dermacyte by approximately $160,000 compared to the prior year. These costs include salaries, commissions, and employee benefits.

- Costs related to direct marketing and advertising, including travel and sample expense, decreased by approximately $125,000 compared to the prior year. These costs include attendance at trade shows and conferences, fees paid to a third party public relations firm, the costs of product samples distributed to potential customers, and the costs of direct print and online advertisements.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation for
executive, finance, legal and administrative personnel, including stock-based
compensation. Other general and administrative expenses include facility costs
not otherwise included in research and development expenses, legal and
accounting services, other professional services, and consulting fees. General
and administrative expenses and percentage changes for the year ended April 30,
2013 and 2012, respectively, are as follows:

                                                                             Increase/        % Increase/
                                              Year ended April 30,          (Decrease)         (Decrease)
                                              2013            2012
Legal and professional fees                $ 2,005,311     $ 3,063,595     $  (1,058,284 )              (35 ) %
Personnel costs                              1,490,752       1,747,055          (256,303 )              (15 ) %
Facilities                                     167,693         284,788          (117,095 )              (41 ) %
Depreciation and amortization                  111,012         165,581           (54,569 )              (33 ) %
Other costs                                   (206,788 )       436,865          (643,653 )             (147 ) %


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Legal and professional fees:

Legal and professional fees include the costs of external audit and tax preparation fees, external legal counsel, banking fees, investor relations and NASDAQ listing fees, payments to our board of directors and recruiting and other consulting fees incurred. Legal and professional fees decreased approximately $1.1 million for the year ended April 30, 2013 compared to the prior year. This decrease was primarily due to decreases of approximately $680,000 in legal fees, $200,000 in consulting fees, $175,000 in costs related to our board of directors and $40,000 in auditing and tax preparation costs; partially offset by an increase of approximately $36,000 in costs incurred for investor relations and exchange listing fees.

- The decrease in legal expenses was due to a reduction in the costs incurred for securities matters and SEC filings, general employment matters, intellectual property and our SIX listing, as well as proceeds received from our previous insurance carrier related to the Tenor litigation and fees associated with the closing of the Series A Preferred Stock offering in the prior year; partially offset by the costs incurred to defend and the accrual for the settlement of the Tenor matter described in Note J to the financial statements.

- The decrease in consulting fees was due to a reduction in executive recruiting fees and the elimination of other executive consulting expenses in the current period.

- The decrease in fees paid to our directors was due to approximately $200,000 in severance costs related to our former President's resignation from our Board of Directors in the prior year, partially offset by an increase of $44,000 in fees and travel costs associated with directors' retainers and meetings

- The decrease in accounting and filing fees was due primarily to a reduction in audit fees associated with the closing of the Series A Preferred Stock offering and other filings made with the SEC in the prior year.

- The increase in investor relations and listing fees was due primarily to an increase of approximately $60,000 in fees incurred for public and investor relations services, partially offset by approximately $24,000 in costs related to our SIX listing in the prior year.

Personnel costs:

Personnel costs decreased approximately $256,000 for the year ended April 30, 2013 compared to the prior year. The decrease was due primarily to reductions in executive and management headcount and the recorded cost of outstanding stock options and restricted stock.

Facilities:

Facilities include costs paid for rent and utilities at our corporate headquarters in North Carolina, the allocation of lease costs not otherwise included in Research and Development expenses, and the costs incurred for third party Information Technology support services. Facilities expense decreased approximately $117,000 due to reductions of $87,000 in allocated lease costs related to the closure of our California facility, and $30,000 in costs for utilities and fees paid to outside service providers for network and computer maintenance services in the prior year.

Depreciation and Amortization:

Depreciation and amortization expense decreased approximately $55,000 for the year ended April 30, 2013 compared to the prior year due primarily to the disposal of fixed assets related to the closure of the California facility and assets becoming fully depreciated in the current period.


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Other costs:

Other costs include costs incurred for travel, supplies, insurance and other miscellaneous charges. The $644,000 reduction in other costs was due primarily to a $533,000 reduction in our estimate of the accrued liability related to potential 409A violations, a $60,000 reduction in travel costs and an overall decrease of $86,000 in administrative and office expenses as a result of headcount reductions, partially offset by an increase of $35,000 in insurance premiums as compared to the prior year.

Research and Development Expenses

Research and development expenses include, but are not limited to, (i) expenses incurred under agreements with CROs and investigative sites, which conduct our clinical trials and a substantial portion of our pre-clinical studies; (ii) the cost of manufacturing and supplying clinical trial materials; (iii) payments to contract service organizations, as well as consultants; (iv) employee-related expenses, which include salaries and benefits; and (v) facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, depreciation of leasehold improvements, equipment, laboratory and other supplies. All research and development expenses are expensed as incurred. Research and development expenses and percentage changes for the years ended April 30, 2013 and 2012, respectively, are as follows:

                                                                          Increase/         % Increase/
                                             Year ended April 30,         (Decrease)        (Decrease)
                                              2013           2012
Clinical and preclinical development       $ 1,569,594     $ 814,646     $    754,948                  93 %
Personnel costs                                637,685       947,374         (309,689 )               (33 ) %
Consulting                                     117,211       382,374         (265,163 )               (69 ) %
Other costs                                     32,652        95,900          (63,248 )               (66 ) %
Depreciation                                    42,968        74,589          (31,621 )               (42 ) %
Facilities                                      55,706       147,755          (92,049 )               (62 ) %

Clinical and preclinical development:

Clinical and preclinical development costs include the costs associated with our pre-clinical safety studies and cGMP, development for Oxycyte, costs incurred to resume our Phase II-b clinical trials, and development costs for Dermacyte. The increase of approximately $755,000 in clinical and preclinical development costs for the year ended April 30, 2013 as compared to the prior year was primarily due to increases in costs associated with our TBI clinical trials and other pre-clinical studies; partially offset by decreases in the costs incurred for the manufacturing and quality assurance for Oxycyte and a reduction in costs associated with Dermacyte development.

- We incurred an increase of approximately $592,000 in pre-clinical study costs. These costs are the result of CRO fees for the completion of milestones under the Grant-funded preclinical program to assess the safety of Oxycyte for the treatment of patients with TBI.

- We incurred an increase of approximately $522,000 in clinical study costs for our Phase II-b clinical trials for TBI. These costs include the manufacture of clinical drug material and CRO fees incurred to initiate sites and resume enrollment in the second cohort.

- We decreased Oxycyte development costs by approximately $159,000 due primarily to the costs to develop cGMP supply and manufacturing capabilities and validated release methods for our clinical drug product incurred in the prior year that were not incurred in the year ended April 30, 2013.

- We decreased Dermacyte development costs by approximately $200,000 due primarily to the costs to develop additional cosmetic formulations and to design and conduct proof of concept preclinical trials in prior year that were not incurred in the year ended April 30, 2013.


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Personnel costs:

Personnel costs decreased approximately $310,000 for the year ended April 30, 2013 compared to the prior year, primarily due to headcount reductions related to the closure of our California lab facility during the current period and the resignation of our Chief Medical Officer in the prior year.

Consulting fees:

Consulting fees decreased approximately $265,000 for the year ended April 30, 2013 compared to the prior year, primarily due to charges under the consulting and separation agreement for our former President and Chief Operating Officer that were not incurred in the year ended April 30, 2013; partially offset by an increase in costs paid to regulatory consultants.

Other costs:

Other costs decreased approximately $63,000 for the year ended April 30, 2013 as compared to the prior year, due primarily to a decreases of $22,000 in travel cost and $40,000 in the cost of lab supplies related to the closure our California facility.

Depreciation:

Depreciation expense decreased approximately $32,000 for the year ended April 30, 2013 compared to the prior year due to the disposal of fixed assets related to the closure of our California facility.

Facilities:

Facilities expense decreased approximately $92,000 for the year ended April 30,
2013 compared to the prior year primarily due to the closure of our California
facility.

Restructuring expense

                                                                                  Increase/             % Increase/
                                                 Year ended April 30,            (Decrease)              (Decrease)
                                                2013                2012
Restructuring expense                      $       220,715       $        -     $     220,715                     - %

During the year ended April 30, 2013, the Company recorded one-time charges of approximately $54,000 for severance and benefits related charges, $135,000 for net future lease obligations and $31,000 for other exit costs related to the closure of our California facility.

Interest expense

Interest expense includes the interest payments due under our long-term debt, amortization of debt issuance costs and accretion of discounts recorded against our outstanding convertible notes. Interest expense also includes dividends and fair-value adjustments to the carrying value of our Series A Convertible Preferred Stock. Interest expense and percentage changes for the years ended April 30, 2013 and 2012, respectively, are as follows:


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                                                                             Increase/         % Increase/
                                              Year ended April 30,          (Decrease)         (Decrease)
                                              2013            2012
Interest expense                           $ 4,238,456     $ 7,412,054     $  (3,173,598 )               (43 ) %

Long-term notes payable:

Interest expense for our long-term notes payable was $0 and approximately $2.8 million for the years ended April 30, 2013 and 2012, respectively. These notes were repaid in full in November 2011.

Convertible notes payable:

Interest expense on our outstanding convertible notes was approximately $2.5 million and $2.1 million for the years ended April 30, 2013 and 2012, respectively. The recorded interest for the year ended April 30, 2013 was comprised of approximately $738,000 for quarterly interest payments, $1,633,000 for amortization of debt discounts and $129,000 for amortization of debt issue costs.

Series A Convertible Preferred Stock:

Interest expense on our outstanding Series A Convertible Preferred Stock was approximately $1.7 million and $2.5 million for the years ended April 30, 2013 and 2012, respectively. The recorded interest for the year ended April 30, 2013 was comprised of approximately $656,000 for the calculated fair value of the warrants issued with the Series A Convertible Preferred Stock and $763,000 for the excess of the fair-value of the shares issued upon conversion over the fair value of the Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock matured on January 31, 2013 and all of the outstanding shares were redeemed by conversion into common stock at maturity.

Preferred Stock Dividends:

Interest expense recorded for the payment of dividends on the Series A Convertible Preferred Stock was approximately $310,000 and $103,000 for the years ended April 30, 2013 and 2012, respectively.

Other income and expense

Other income and expense includes non-operating income and expense items not otherwise recorded in our statement of operations. These items include, but are not limited to, revenue earned under sublease agreements for our California facility, prior to exiting the facility on September 1, 2012, recognized gains and losses on foreign currency translations, interest income earned and fixed asset disposals. Other (income) expense for the year ended April 30, 2013 and 2012, respectively, is as follows:

Year ended April 30, Increase/ (Decrease) 2013 2012 Other (income) expense, net $ (11,683 ) $ 80,159 $ (91,842 )

Other expense decreased approximately $92,000 for the year ended April 30, 2013 compared to the prior year, primarily due to the write off of receivables from Glucometrics, Inc, or Glucometrics. Glucometrics previously held license rights for the use of our patents related to glucose monitoring technology. The receivable was determined to be uncollectible during the third quarter of fiscal 2012 and we recognized approximately $100,000 as a non-operating expense.


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During the year ended April 30, 2013 compared to the prior year, we recorded income from sublease agreements and interest of approximately $20,000 and $29,000, respectively. We recorded losses of approximately $8,000 in each of the years ended April 30, 2013 and 2012 from the disposal of fixed assets and recognized losses on foreign currency translations.

Liquidity, capital resources and plan of operation

We have incurred losses since our inception and as of April 30, 2013 we had an accumulated deficit of approximately $117 million. We will continue to incur losses until we generate sufficient revenue to offset our expenses, and we anticipate that we will continue to incur net losses for at least the next several years. We expect to incur increased expenses related to our development and potential commercialization of Oxycyte and other product candidates and, as a result, we will need to generate significant net product sales, royalty and other revenues to achieve profitability.

Liquidity

We have financed our operations since September 1990 through the issuance of debt and equity securities and loans from stockholders. We had $1,842,251 and $2,631,032 total current assets and working capital of $(67,326) and $(495,838) as of April 30, 2013 and April 30, 2012, respectively. Our practice is to invest excess cash, where available, in short-term money market investment instruments.

Based on our working capital at April 30, 2013 we believe we have sufficient capital on hand to continue to fund operations through July 31, 2013.

Clinical and Preclinical Product Development

We are in the preclinical and clinical trial stages in the development of our product candidates. We are currently conducting Phase II-b clinical trials for the use of Oxycyte in the treatment of severe traumatic brain injury. Even if we are successful with our Phase II-b study, we must then conduct a Phase III clinical study and, if that is successful, file with the FDA and obtain approval of a Biologics License Application to begin commercial distribution, all of which will take more time and funding to complete. Our other product candidates must undergo further development and testing prior to submission to the FDA for approval to initiate clinical trials, which also requires additional funding. Management is actively pursuing private and institutional financing, as well as strategic alliances and/or joint venture agreements to obtain the necessary additional financing and reduce the cost burden related to the development and commercialization of our products though we can give no assurance that any such initiative will be successful. We expect our primary focus will be on funding the continued testing of Oxycyte, since this product is the furthest along in the regulatory review process. Our ability to continue to pursue testing and development of our products beyond July 31, 2013 depends on obtaining license income or outside financial resources. There is no assurance that we will obtain any license agreement or outside financing or that we will otherwise succeed in obtaining the necessary resources.

Series A Convertible Preferred Stock Offering

In December 2011, we entered into a Securities Purchase Agreement with certain institutional investors that provided for the sale and issuance of units ("Units") consisting of Series A Convertible Preferred Stock and warrants in aggregate amount of up to $7.5 million in two installments (the "2011 Offering"). The first installment of $3.5 million closed on December 12, 2011, and the second installment of $4.0 million was scheduled to have occurred in June 2012, subject to certain closing conditions. Because certain closing conditions for the second installment were not satisfied, on June 14, 2012, we entered into an Amendment Agreement with each of the institutional investors that, among other things, divided the remaining installment into two installments, the first additional installment to occur in June 2012 in the amount of $2.5 million and the second additional installment to occur in September 2012 in the amount of $1.5 million.


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On June 15, 2012, we sold 2,500 Units for net proceeds of approximately $2.3 million upon the closing of the first additional installment. The remainder of the 2011 Offering, which may be up to $1.5 million, was scheduled to be completed in an additional closing in September 2012. However, as our stock was trading at a level below the minimum price, the additional closing did not occur.

Series B Convertible Preferred Stock Offering

On February 22, 2013, the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement") with an institutional investor (the "Investor")
providing for the issuance and sale by the Company (the "Offering") of $1.6 million of shares of the Company's Series B-1 convertible preferred stock (the "Series B-1 Stock") and $0.5 million of shares of the Company's Series B-2 convertible preferred stock (the "Series B-2 Stock" and, together with the Series B-1 Stock, the "Series B Preferred Stock") which are convertible into a combined total of 420,000 shares of common stock (the "Conversion Shares"). In connection with the purchase of shares of Series B Preferred Stock in the Offering, the Investor will receive warrants to purchase a number of shares of common stock equal to 150% of the number of Conversion Shares at an exercise price equal to $10.00 (the "Warrants"). Each Warrant was immediately exercisable upon issuance, with one-half exercisable for six years and the other half exercisable for two years.

Pursuant to the above agreement, on February 27, 2013, the Company sold 2,100 units for net proceeds of approximately $1.9 million. Each unit sold consisted of (i) one share of the Company's Series B Preferred Stock and (ii) a Warrant representing the right to purchase 6,000 shares of Common Stock at a price of $1,000 per unit, less issuance costs. The shares of Series B Preferred Stock were immediately convertible and the Warrants were immediately exercisable upon issuance.

Cash Flows

The following table shows a summary of our cash flows for the periods indicated:

                                              For the year ended December,
                                                 2013                2012
Net cash used in operating activities       $    (4,921,283 )    $ (8,278,366 )
Net cash used in investing activities              (147,987 )        (261,146 )
Net cash provided by financing activities         3,972,926         9,467,440

Net cash used in operating activities. Net cash used in operating activities was approximately $4.9 million for the year ended April 30, 2013 compared to net cash used in operating activities of $8.3 million for the year ended April 30, 2012. The decrease in cash used for operating activities compared to the prior year was due primarily to a decrease in selling, general and administrative expenses of approximately $2.4 million and an increase of approximately $800,000 . . .

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