OXYGEN BIOTHERAPEUTICS, INC. (Form: 10-Q, Received: 03/21/2011 16:40:30)

Overview

We are engaged in the business of developing biotechnology products with a focus on oxygen delivery to tissue. We are currently developing Oxycyte®; a product we believe is a safe and effective oxygen carrier for use in surgical and similar medical situations. We have developed a family of perfluorocarbon-based oxygen carriers, or PFC, for use in personal care, topical wound healing, and other topical indications. In addition, we also have under development Vitavent (formerly called Fluorovent), an oxygen exchange fluid for facilitating the treatment of lung conditions.

Oxycyte

Our Oxycyte oxygen carrier product is a PFC emulsified with water and a surfactant, which is provided to the patient intravenously. The physical properties of PFC enable our product to gather oxygen from the lungs and transport the oxygen through the body releasing it along the way. Over a period of days Oxycyte gradually evaporates in the lungs from where it is exhaled. Oxycyte requires no cross matching, so it is immediately available and compatible with all patients’ blood types. Oxycyte has an extended shelf life compared to blood. Oxycyte is provided as a sterile emulsion ready for intravenous administration. Because it contains no biological components, there is no risk of transmission of blood-borne viruses from human blood products. Further, since Oxycyte is based on readily available inert compounds, we believe it can be manufactured on a cost-effective basis in amounts sufficient to meet demand.

We received approval of our Investigational New Drug application, or IND, for severe traumatic brain injury, or TBI, filed with the U.S. Food and Drug Administration, or FDA, and began Phase I clinical studies in October 2003, which were completed in December 2003. We submitted a report on the results to the FDA along with a Phase II protocol in 2004. Phase II-A clinical studies began in the fourth quarter 2004, and were completed in 2006. A further Phase II study protocol was filed with the FDA in the spring of 2008, but remained on clinical hold by the FDA due to safety concerns raised by the regulatory agency. We are continuing to respond to the FDA’s requests for data required to address their concerns. After receiving this clinical hold, we filed a revised protocol as a dose-escalation study with the regulatory authorities in Switzerland and Israel. The protocol received Ethic Commission approval in Switzerland and Israel. The relevant Swiss regulatory body approved the protocol in August 2009, and the Israel Ministry of Health approved the protocol in September 2009. The new study began in October 2009 and is currently under way both in Switzerland and Israel. In March 2010, we determined that it is feasible to simplify the trial design and also reduce the number of patients to be enrolled. In May 2010, we entered into a relationship with a contract research organization, or CRO, to assist us as we expand our study into India to initiate five to ten new sites for our Phase II-b clinical trial. Study objectives, safety and efficacy endpoints would remain unchanged, and we feel with these optimizations the study could be concluded faster and more economically. In March 2011 we received confirmation of a $2.07M, two-year cost reimbursement award from the U.S. Army to conduct safety related studies for Oxycyte. Perfluorocarbon (PFC) emulsions, as a therapeutic class, are known to interact with the reticuloendothelial system as part of the clearance mechanism, as well as affect the number of circulating platelets. The studies supported by this grant will examine the effects of Oxycyte on the immune system, platelet function and distribution, as well as the safety and efficacy of platelet transfusion, which can be necessary for patients with TBI and related polytrauma. Additional studies under this grant will be conducted to evaluate the pharmacokinetics of PFCs in relevant species. The results of these studies will support the safety profile of Oxycyte PFC emulsion. We expect to commit a substantial portion of our financial and business resources over the next three years to testing Oxycyte and advancing this product to regulatory approval for use in one or more medical applications.

Should Oxycyte successfully progress in clinical testing and if it appears regulatory approval for one or more medical uses is likely, either in the United States or in another country, we intend to evaluate our options for commercializing the product. These options include licensing Oxycyte to a third party for manufacture and distribution, manufacturing Oxycyte ourselves for distribution through third party distributors, manufacturing and selling the product ourselves, or establishing some other form of strategic relationship for making and distributing Oxycyte with a participant in the pharmaceutical industry. We are currently investigating and evaluating all options.

Dermacyte ®

The Dermacyte line of topical cosmetic products employs our patented perfluorocarbon technology, or PFC technology, and other known cosmetic ingredients to promote the appearance of skin health and other desirable cosmetic benefits. Dermacyte is designed to provide a moist and oxygen-rich environment for the skin when it is applied topically, even in small amounts. Dermacyte Concentrate has been formulated as a cosmetic in our lab and Dermacyte Eye Complex was created by a contract formulator, with the patent held by Oxygen Biotherapeutics. Both formulas have passed all safety and toxicity tests, and we have filed a Cosmetic Product Ingredient Statement, or CPIS with the FDA. The market for oxygen-carrying cosmetics includes anti-aging, anti-wrinkle, skin abrasions and minor skin defects.

In September 2009, we started production of our first commercial product under our topical cosmetic line, Dermacyte Concentrate. We produced and sold a limited pre-production batch in November 2009 as a market acceptance test. The product was sold in packs of 8 doses of 0.4ml. Based on the test market results we identified specific market opportunities for this product and reformulated Dermacyte Concentrate for better product stability. Marketing and shipments of the new Dermacyte Concentrate formulation began in April 2010. We worked with a contract formulator in California to develop the Dermacyte Eye Complex which contains PFC technology as well as other ingredients beneficial to the healthy appearance of the skin around the eyes.

Since June 2010 we have marketed and sold these products through www.buydermacyte.com and to dermatologists and medical spas with a combination of in-house sales, independent sales agents and exclusive distributors. We have hired a sales director based in North Carolina, and added sales people in South Florida, and Southern California. We intend to add additional in-house sales people in other major markets. We intend to add more territories with agents or distributors.

In December 2010 we entered into an agreement with the newly formed, independently owned and operated Dermacyte Switzerland Ltd. (“DSL”) of Zurich for the sale of Dermacyte products. Per the terms of the agreement, DSL has exclusive rights to sell our Dermacyte skin care products throughout the European Union, Switzerland and Russia. Under the agreement, DSL must purchase a minimum of 40,000 units of Dermacyte products by December 31, 2011, of which 1,000 units have already been purchased. After December 31, 2011, the agreement requires an annual compounding growth rate in minimum purchase quantities of 10 percent. The agreement also grants DSL the option to add South America as an exclusive territory if purchase volume milestones are achieved. DSL has been granted the rights to use our product trademarks in their exclusive territories.

In March 2011 we entered into an agreement with the independently owned and operated Comercial Uni2, SA de C.V.(“CU2”) of Col del Valle, Mexico for the sale of Dermacyte products. Per the terms of the agreement, CU2 has exclusive rights to sell our Dermacyte skin care products throughout Mexico. Under the agreement, CU2 must purchase a minimum of 10,000 units of Dermacyte products by December 31, 2011, increasing to 20,000 and 35,000 units by December 31, 2012 and 2013, respectively. The agreement also grants CU2 the option to add Central America as an exclusive territory if purchase volume milestones are achieved. CU2 has been granted the rights to use our product trademarks in their exclusive territories.

Additional potential topical applications of our PFC technology that are under development include Dermacyte moisturizing lotion with SPF, night cream, day cream, and brightening serum.

Wundecyte™

Our wound product, Wundecyte, is a novel gel developed under a contract agreement with a lab in Virginia. Wundecyte is designed to be used as a wound-healing gel. In July 2009, we filed a 510K medical device application for Wundecyte with the FDA. Several oxygen-producing and oxygen-carrying devices were cited as predicate devices. The FDA response was that the application likely would be classified as a combination device. The drug component of the combination device will require extensive preclinical and clinical studies to be conducted prior to potential commercialization of the product.

We have also developed an oxygen-generating bandage that can be combined with Wundecyte gel. Wundecyte gel and the oxygen-generating bandage both entered preclinical testing in our first quarter of fiscal 2011. The studies were designed to measure factors such as time to wound closure and reduction in scar tissue formation as compared to a control group. Results showed an apprent increase in epithelial thickness versus the control. The treatment did not cause adverse effects and the models tolerated the treatment well. Our current product development plan is for Wundecyte to emerge into more complex wound-healing indications, also in combination with oxygen-producing technologies based on hydrogen peroxide. In December 2010 we signed a binding letter of intent with Sarasota Medical Products, Inc. (SMP) of Sarasota, FL to determine the feasibility of pursuing a joint research and development venture for treating chronic ischemic wounds. The venture will be based on combining Wundecyte with SMP’s topical medical devices.

Additionally, we are developing preclinical research protocols for the treatment of burns and other topical indication based on our PFC. We intend to develop additional clinical research protocols for topical indications, including the treatment of acne, rosacea, and dermatitis. However, we can provide no assurance that the topical indications we have under development will prove their claims and be successful commercial products.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes in critical accounting policies during the nine months ended January 31, 2011, as compared to the critical accounting policies described in “ Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Summary of Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2010.

Financial Overview

Results of operations- Comparison of the three and nine months ended January 31, 2011 and 2010

The following table sets forth our condensed statement of operations data and presentation of that data as amount of change from period-to-period.

	Three months ended January 31,						Nine months ended January 31,
	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Product revenue	$	52,562		$	30,768		$	95,543		$	37,329
Cost of sales		25,973			18,603			36,718			18,603
Gross profit		26,589			12,165			58,825			18,726

Operating expenses:
Sales and Marketing		320,248			118,880			534,750			118,880
General and administrative		1,962,575			1,634,835			5,142,355			5,360,047
Research and development		498,521			1,011,061			2,216,413			2,169,435
Total Operating expenses		2,781,344			2,764,776			7,893,518			7,648,362

Net operating loss		2,754,755			2,752,611			7,834,693			7,629,636

Interest expense		43,093			2,612			49,682			153,311
Other income		(253,661	)		(1,511	)		(285,952	)		(43,345	)
Net loss	$	2,544,187		$	2,753,712		$	7,598,423		$	7,739,602

Revenue

Product revenue and percentage changes for the three and nine months January 31, 2011, as compared to the same periods in prior year, are as follows:

	Three months ended January 31,				Increase/ (Decrease)		% Increase/ (Decrease)			Nine months ended January 31,				Increase/ (Decrease)		% Increase/ (Decrease)
	2011		2010							2011		2010
Product revenue	$	52,562	$	30,768	$	21,794		71	%	$	95,543	$	37,329	$	58,214		156	%

We generate revenue through the sale of Dermacyte through on-line retailers, physician and medical spa facilities, and through distribution agreements with unrelated companies.

Product revenue increased during the three months ended January 31, 2011 over the same period in the prior year primarily due to the $25,850 initial order placed by DERMACYTE Switzerland, or DSL under the Master Agreement we entered into with DSL on December 15, 2010; offset by a slight decrease in direct sales.

Product revenue increased for the nine months ended January 31, 2011 over the same period in the prior year primarily due to the addition of Dermacyte Concentrate Gel and Eye Serum as well as an increase in direct to consumer sales.

Gross Margin

Gross margin as a percent of revenue was 51% and 62% for the three and nine months ended January 31, 2011, respectively, as compared to 40% and 50% for the three and nine months ended January 31, 2010. These increases were primarily due to the additional products available for sale. We expect that our gross margin will trend slightly downwards for the remainder of 2011 as we believe sales to distributors will continue to increase.

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.

Marketing and sales expenses and percentage changes as compared to the prior year are as follows:

	Three months ended January 31,				Increase/ (Decrease)		% Increase/ (Decrease)			Nine months ended January 31,				Increase/ (Decrease)		% Increase/ (Decrease)
	2011		2010							2011		2010
Marketing and sales expense	$	320,248	$	118,880	$	201,368		169	%	$	534,750	$	118,880	$	415,870		350	%

The increases in marketing and sales expenses for the three and nine months ended January 31, 2011 were driven primarily by an increase in the costs incurred for compensation and direct advertising.

We incurred approximately $70,000 and $119,000 in compensation costs related to marketing and selling the cosmetic topical product line Dermacyte for the three and nine months ended January 31, 2011, respectively, that were not incurred in the same periods in 2010. These costs include salaries, commissions, and employee benefits.

We incurred an increase of approximately $132,000 and $297,000 in costs related to direct marketing and advertising for the three and nine months ended January 31, 2011, respectively, as compared to the same period in 2010. These costs include attendace at trade shows and conferences, fees paid to a third party PR 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 as compared to the prior year are as follows:

	Three months ended January 31,				Increase/ (Decrease)		% Increase/ (Decrease)			Nine months ended January 31,				Increase/ (Decrease)			% Increase/ (Decrease)
	2011		2010							2011		2010
General and administrative expense	$	1,962,575	$	1,634,835	$	327,740		20	%	$	5,142,355	$	5,360,047	$	(217,692	)		-4	%

The increase in general and administrative expenses for the three months ended January 31, 2011 was driven primarily by a reduction in costs incurred for banking and investor relations, travel related costs, compensation and consulting fees, offset by accruals for contingent liabilities associated with potential 409A tax liabilities.

-	For the three months ended January 31, 2011, as compared to the same period in 2010, we incurred a decrease of approximately $45,000 for investment banking fees and $160,000 in investor relation costs.

For the three months ended January 31, 2011, as compared to the same period in 2010, compensation costs decreased approximately $225,000 due to a decrease in share-based compensation of approximately $275,000 and a decrease of approximately $130,000 in bonuses paid; offset by an increase of approximately $15,000 for salaries and a $170,000 severance payment that we made to a former executive officer.

-	For the three months ended January 31, 2011, as compared to the same period in 2010, travel costs decreased approximately $96,000 due to a reduction in international travel to Switzerland and Israel, road shows, and costs related to Board meetings and investor presentations.

For the three months ended January 31, 2011, as compared to the same period in 2010, consultant costs increased by approximately $273,000. This increase was due to a prior year reclassification of $495,000 in cost incurred for financing activities offset by a $220,000 reduction in costs incurred for recruiting, fees paid to third parties for Dermacyte marketing, and public relations firms.

-	For the three months ended January 31, 2011, the Company accrued approximately $550,000 for the contingent tax liabilities resulting from the ongoing stock option review.

The decrease in general and administrative expenses for the nine months ended January 31, 2011 was driven primarily by a reduction in costs incurred for stock-based compensation and consulting fees; partially offset by an increase in, depreciation and amortization, rent, compensation and accruals for contingent liabilities associated with potential 409A tax liabilities.

-	For the nine months ended January 31, 2011, as compared to the same period in 2010, we incurred an increase of approximately $165,000 in legal and accounting fees associated with our public filings, and listing fees for the NASDAQ Capital Market and Swiss Exchange.

For the nine months ended January 31, 2011, as compared to the same period in 2010, compensation costs decreased approximately $203,000 due to a decrease in share-based compensation of approximately $700,000 and a decrease of approximately $70,000 in bonuses paid; offset by an increase of approximately $395,000 for salaries and a $170,000 severance payment due to a former executive officer.

-	For the nine months ended January 31, 2011, as compared to the same period in 2010, rent expense increased approximately $50,000 due to expansion of our corporate offices in North Carolina.

-	For the nine months ended January 31, 2011, as compared to the same period in 2010, travel costs increased approximately $65,000 due to international travel to Switzerland and Israel, road shows, and costs related to Board meetings and investor presentations.

-	For the nine months ended January 31, 2011, as compared to the same period in 2010, consultant costs were reduced by approximately $690,000 due to a reduction in recruiting costs and fees paid to third parties for Dermacyte marketing, public relations firms, and financing activities.

-	For the nine months ended January 31, 2011, the Company accrued approximately $550,000 for the contingent tax liabilities resulting from the ongoing stock option review.

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 as compared to the prior year are as follows:

	Three months ended January 31,				Increase/ (Decrease)			% Increase/ (Decrease)			Nine months ended January 31,				Increase/ (Decrease)		% Increase/ (Decrease)
	2011		2010								2011		2010
Research and development expense	$	498,521	$	1,011,061	$	(512,540	)		-51	%	$	2,216,413	$	2,169,435	$	46,978		2	%

The decrease in research and development expenses for the three months ended January 31, 2011 was driven primarily by a reduction in the costs incurred for the development of Oxycyte and Dermacyte, consulting costs, and preclinical study costs partially offset by an increase in costs incurred in connection with the Phase II-b clinical trials and compensation.

-	For the three months ended January 31, 2011, as compared to the same period in 2010, we reported a decrease of approximately $530,000 in costs associated with the development and manufacture of Oxycyte and Dermacyte; including the costs of preclinical research.

For the three months ended January 31, 2011, as compared to the same period in 2010, the costs associated with the ongoing Phase II-b clinical trials for Oxycyte increased approximately $76,000. Included in these costs are site set-up fees, CRO costs, and supplying all of the sites with equipment and Oxycyte.

Also included in the increase in research and development costs for the three months ended January 31, 2011, as compared to the same period in 2010 were increases in payroll costs of approximately $25,000 as headcount was increased to manage the growth and development of the topical indications for Oxycyte and Dermacyte.

-	For the three months ended January 31, 2011, as compared to the same period in 2010, costs incurred for consultants and contract labor were reduced by approximately $85,000.

The slight increase in research and development expenses for the nine months ended January 31, 2011 was driven primarily by costs incurred for compensation and the costs associated with the Phase II-b clinical trials for Oxycyte, offset by a reduction in the costs incurred for the development of Oxycyte and Dermacyte, consulting costs, and preclinical research costs.

-	For the nine months ended January 31, 2011, as compared to the same period in 2010, we reported a decrease of approximately $432,000 in costs associated with the development and manufacture of Oxycyte and Dermacyte; including the costs of preclinical research.

For the nine months ended January 31, 2011, as compared to the same period in 2010, the costs associated with the ongoing Phase II-b clinical trials for Oxycyte increased approximately $507,000. Included in these costs are site set-up fees, CRO costs, and supplying all of the sites with equipment and Oxycyte.

-	For the nine months ended January 31, 2011, as compared to the same period in 2010, we incurred an increase in payroll costs of approximately $198,000 as headcount was increased to manage the growth and development of the topical indications for Oxycyte and Dermacyte.

-	For the nine months ended January 31, 2011, as compared to the same period in 2010, costs incurred for consultants and contract labor were reduced by approximately $255,000.

Conducting a significant amount of research and development is central to our business model. Product candidates in later-stage clinical development generally have higher development costs than those in earlier stages of development, primarily due to the significantly increased size and duration of clinical trials. We plan to incur substantial research and development expenses for the foreseeable future in order to complete development of our most advanced product candidate, Oxycyte, and to conduct earlier-stage research and development projects.

The process of conducting preclinical studies and clinical trials necessary to obtain FDA approval is costly and time consuming. The probability of success for each product candidate and clinical trial may be affected by a variety of factors, including, among other things, the quality of the product candidate’s early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. As a result of the uncertainties discussed above, uncertainty associated with clinical trial enrollment and risks inherent in the development process, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. We are currently focused on developing our most advanced product candidate, Oxycyte; however, we will need substantial additional capital in the future in order to complete the development and potential commercialization of Oxycyte and other product candidates.

Other income and expense

During the three and nine months ended January 31, 2011, as compared to the same periods in 2010, other income increased approximately $250,000 and $240,000, respectively, primarily due to an award of $244,489 under the Patient Protection and Affordable Care Act of 2010, or PPACA, received in November 2010; offset by approximately $2,000 in realized losses on foreign currency translation

Interest expense

Interest expense increased approximately $40,000 in the three months ended January 31, 2011, due to the amortization of debt discounts on the promissory notes issued under the Note Purchase Agreement with JP SPC 1 Vatea Segregated Portfolio, or Vatea Fund.

Interest expense decreased approximately $103,000 in the nine months ended January 31, 2011, due to the conversion of our notes payable and the related amortization of debt discounts and issue costs during the nine months ended January 31, 2010; offset by the amortization of debt discounts on the promissory notes issued under the Note Purchase Agreement during the nine months ended January 31, 2011..

Liquidity, capital resources and plan of operation

We have incurred losses since our inception and as of January 31, 2011 we had an accumulated deficit of $88.5million. 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, 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 $1,316,254 and $2,184,826 of total current assets and working capital of $(388,443) and $785,485 as of January 31, 2011 and April 30, 2010, respectively. Our practice is to invest excess cash, where available, in short-term money market investment instruments.

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 June 30, 2011 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.

Registered Direct Offering

On May 7, 2010 we closed a registered direct offering pursuant to which we sold to certain investors 1,724,138 shares of common stock at $2.90 per share and warrants to purchase 732,758 shares of common stock with an exercise price of $5.32 per share. The financing provided approximately $4.4 million in net proceeds to us after deducting the placement agent fee and offering expenses.

Pursuant to our Securities Purchase Agreement, as amended, with Vatea Fund, we issued 133,334 shares to, and received $500,000, net of facilitating agent fees, from, Vatea Fund on May 27, 2010.

Transactions with Vatea Fund

On October 12, 2010 we entered into a Note Purchase Agreement with Vatea Fund whereby we agreed to issue and sell to Vatea Fund an aggregate of $5,000,000 of senior unsecured promissory notes (the “Notes”) on or before December 31, 2010. The Notes will mature on October 31, 2013, unless the holders of a majority of the Notes consent in writing to a later maturity date. Interest does not accrue on the outstanding principal balance of the Notes (other than following the maturity date or earlier acceleration). Instead, on the maturity date, we must pay the holders of the Notes a final payment premium aggregating $3,000,000, in addition to the principal balance then otherwise outstanding under the Notes. The Notes provide that we have the option, at our sole discretion and without penalty, to prepay the outstanding balance under the Notes plus the amount of the final payment premium prior to the maturity date. In addition, the holders of majority of the Notes may request that we prepay the Notes in an amount equal to the proceeds of any subsequent closings under the Securities Purchase Agreement. The following table summarizes the promissory notes that have been issued under the Note Purchase Agreement.

Date issued	Note principal		Final payment premium		Effective interest rate
November 10, 2010	$	600,000	$	360,000		15.68	%
December 20, 2010		1,000,000		600,000		16.29	%
January 26, 2011		400,000		240,000		16.89	%
March 2, 2011		100,000		60,000		17.50	%
March 4, 2011		650,000		390,000		17.54	%
March 11, 2011		111,000		66,600		17.66	%
	$	2,861,000	$	1,716,600

Interest accreted on these notes was $41,694 for the three months and nine months ended January 31, 2011.

On November 5, 2010 we received an award of $244,489 under the PPACA. The award was given for our qualified investments under Section 48D of the PPACA for the clinical development of Oxycyte perfluorocarbon emulsion for traumatic brain injury, or TBI, and spinal cord injury.

Based on our working capital at January 31, 2011, the $861,000 of additional promissory notes issued under the Note Purchase Agreement, and the $2,139,000 remaining under the Note Purchase Agreement, we believe we have sufficient capital on hand to continue to fund operations through June 30, 2011.

Potential Section 409A Liability

As a result of our review of option grants made by us between February 1998 and April 2009, we have determined that certain options granted in prior years may have been non-compliant with Section 409A (“Section 409A”) of the Internal Revenue Code of 1986, as amended (the “IRC”), including options granted with an exercise price below fair market value on the date of grant and options that were modified such that they may have become non-compliant with Section 409A.

The primary adverse tax consequence of Section 409A non-compliance is that the holders of non-compliant options are taxed on the value of such options as they vest, and annually thereafter until they are exercised. In addition to ordinary income taxes, holders of non-compliant options are subject to a 20% penalty tax under Section 409A (and, as applicable, similar excise taxes under state laws). Because virtually all holders of stock options granted by us were not involved in or aware that the pricing and/or modification of their options raised these issues, we intend to take actions to address certain of the adverse tax consequences that may apply to these holders. As of March 17, 2011, none of the Company’s current officers or directors have exercised any of the potentially non-compliant options. In addition, on March 17, 2011 we entered into indemnification agreements with our executive officers that indemnify those officers from potential Section 409A tax liabilities arising from their prior option awards.

In addition to adverse consequences for option holders, we have determined that certain payroll taxes, interest and penalties may apply to us under various sections of the IRC (and, as applicable similar state and foreign tax statutes) related to the potential Section 409A non-compliance. As of January 31, 2011, the Company has accrued approximately $550,000 in other current liabilities for the contingent liability. The Company’s investigation of the matter is still on-going and there exists the possibility of adverse outcomes that the Company estimates could reach approximately $500,000 beyond our recorded amount.

Cash Flows

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

	For the nine months ended January 31,
	2011			2010
Net cash used in operating activities		(6,652,528	)		(6,294,037	)
Net cash used in investing activities		(370,627	)		(382,671	)
Net cash provided by financing activities		6,912,789			6,997,237

Net cash used in operating activities. Net cash used in operating activities was $6.7 million for the nine months ended January 31, 2011 compared to net cash used in operating activities of $6.3 million for the nine months ended January 31, 2010. The increase of cash used for operating activities was due primarily to:

-	the costs of conducting our Phase IIb clinical trials for TBI;

-	increased payroll costs associated with our expansion in North Carolina; and

-	increased costs associated with marketing and selling our cosmetic products.

Net cash used in investing activities . Net cash used in investing activities was $370,627 for the nine months ended January 31, 2011 compared to net cash used in investing activities of $382,671 for the nine months ended January 31, 2010. The cash used for investing activities was due primarily to the cost of maintaining our portfolio of patents and trademarks and in upgrading our information technology infrastructure.

Net cash provided by financing activities . We received $6.9 million from financing activities for the nine months ended January 31, 2011 compared to receiving $7.0 million for the nine months ended January 31, 2010. The net cash provided by financing activities was due primarily to net proceeds of $4.4 million received from the closing of our registered direct offering on May 4, 2010. We also received $2.0 million from the issuance of promissory notes under the Note Purchase Agreement with Vatea Fund.

Operating Capital and Capital Expenditure Requirements

Our future capital requirements will depend on many factors and include, but are not limited to the following:

●	the initiation, progress, timing and completion of clinical trials for our product candidates and potential product candidates;

●	the outcome, timing and cost of regulatory approvals and the regulatory approval process;

●	delays that may be caused by changing regulatory requirements;

●	the number of product candidates that we pursue;

●	the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;

●	the timing and terms of future in-licensing and out-licensing transactions;

●	the cost and timing of establishing sales, marketing, manufacturing and distribution capabilities;

●	the cost of procuring clinical and commercial supplies for our product candidates;

●	the extent to which we acquire or invest in businesses, products or technologies; and

●	the possible costs of litigation.

We believe that our existing cash and cash equivalents will be sufficient to fund our projected operating requirements through June 30, 2011. We will need substantial additional capital in the future in order to complete the development and commercialization of Oxycyte and to fund the development and commercialization of our future product candidates. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Such funding, if needed, may not be available on favorable terms, if at all. In the event we are unable to obtain additional capital, we may delay or reduce the scope of our current research and development programs and other expenses.

To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional significant dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital.

Recent Accounting Pronouncements

On April 29, 2010, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2010-17, Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition (a consensus of the FASB Emerging Issues Task Force). It establishes a revenue recognition model for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of the ASU is limited to research or development arrangements and requires an entity to record the milestone payment in its entirety in the period received if the milestone meets all the necessary criteria to be considered substantive. The ASU is effective for fiscal years (and interim periods within those fiscal years) beginning on or after June 15, 2010. Early application is permitted. Entities can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. As a result, it is effective for us in the first quarter of fiscal year 2012. We do not believe that the adoption of ASU 2010-17 will have a material impact on our financial statements.

In January 2010, the FASB issued guidance to amend the disclosure requirements related to fair value measurements as ASU 2010-06, Fair Value Measurements and Disclosures . The guidance requires the disclosure of roll forward activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance will become effective for us with the reporting period beginning May 1, 2011. Other than requiring additional disclosures, we do not believe that the adoption of ASU 2010-06 will have a material impact on our financial statements.

In September 2009, the FASB ratified Revenue Arrangements with Multiple Deliverables issued as ASU 2009-13 in early October. ASU 2009-13 updates the existing multiple-element arrangements guidance currently included in ASC 605-25, Revenue Recognition – Multiple-Element Arrangements . The revised guidance provides for two significant changes to the existing multiple-element arrangements guidance. The first relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. This change is significant as it will likely result in the requirement to separate more deliverables within an arrangement, ultimately leading to less revenue deferral. The second change modifies the manner in which the transaction consideration is allocated across the separately identifiable deliverables. These changes are likely to result in earlier recognition of revenue for multiple-element arrangements than under previous guidance. ASU 2009-13 also significantly expands the disclosures required for multiple-element revenue arrangements. The revised multiple-element arrangements guidance will be effective for the first annual reporting period beginning on or after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or modified after the adoption date. Early adoption is permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. If the guidance is adopted prospectively, certain transitional disclosures are required for each reporting period in the initial year of adoption. As a result, it is effective for us in the first quarter of fiscal year 2012. We do not believe that the adoption of ASU 2009-13 will have a material impact on our financial statements.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

ITEM 3 .

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management does not believe that we possess any instruments that are sensitive to market risk. Our debt instruments bear interest at fixed interest rates.

We believe that there have been no significant changes in our market risk exposures for the three months ended January 31, 2011.

ITEM 4 .

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures : As required by paragraph (b) of Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, for the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of January 31, 2011, the period covered by this report in that they provide reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the SEC.

Changes in Internal Control Over Financial Reporting : There were no significant changes in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We routinely review or internal control over financial reporting and, from time to time, make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal controls over financial reporting on an ongoing basis and will take action as appropriate.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are not presently involved in any legal proceedings and were not involved in any such legal proceedings during the three months ended January 31, 2011.

ITEM 1A. RISK FACTORS

We are supplementing the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2010 with the risk factors below.

Risks Related to Our Financial Position and Need for Additional Capital

We require substantial additional capital to continue as a going concern, and there can be no assurance that we will be able to obtain such capital on favorable terms, or at all.

To date, we have incurred significant net losses and negative cash flow in each year since our inception, including net losses of approximately $10.5 million and $33.2 million for the years ended April 30, 2010 and 2009, respectively and $7.1 million for the nine months ended January 31, 2011. As of January 31, 2011 our accumulated deficit was approximately $88.5 million. These amounts raise substantial doubt about our ability to continue as a going concern. We will need to raise additional capital through debt and/or equity offerings in order to continue to develop our drug products. Based on our working capital at January 31, 2011, the additional $861,000 received under the Note Purchase Agreement, and the $2,139,000 remaining under the Note Purchase agreement, we believe we have sufficient capital on hand to continue to fund operations through June 30, 2011.

The additional financing we will need to continue to develop our drug products, may not be available on favorable terms, if at all. If we are not able to raise sufficient funds in the future, we may be required delay, reduce the scope of, or eliminate one or more of our research and development activities. In addition, we may be forced to reduce or discontinue product development or product licensing, reduce or forego sales and marketing efforts and forego other business opportunities in order to improve our liquidity to enable us to continue operations.

As a result of the foregoing circumstances our independent registered public accounting firm has included, and is likely in the future to include, an explanatory paragraph in their audit opinions based on uncertainty regarding our ability to continue as a going concern. An audit opinion of this type may affect our ability to obtain debt or equity financing in the future.

We could incur significant tax liabilities under Section 409A of the Internal Revenue Code and other tax penalties.

As a result of our review of option grants made by us between February 1998 and April 2009, we have determined that certain options granted in prior years may have been non-compliant with Section 409A of the IRC, including options granted with an exercise price below fair market value on the date of grant and options that were modified such that they may have become non-compliant with Section 409A. The primary adverse tax consequence of Section 409A non-compliance is that the holders of non-compliant options are taxed on the value of such options as they vest, and annually thereafter until they are exercised. In addition to ordinary income taxes, holders of non-compliant options are subject to a 20% penalty tax under Section 409A (and, as applicable, similar excise taxes under state laws).

Because virtually all holders of stock options granted by us were not involved in or aware that the pricing and/or modification of their options raised these issues, we intend to take actions to address certain of the adverse tax consequences that may apply to these holders. In addition, on March 17, 2011 we entered into indemnification agreements with our executive officers that indemnify those officers from potential Section 409A tax liabilities arising from their prior option awards.

Risks Related to Commercialization and Product Development

We currently have no approved drug products for sale and we cannot guarantee that we will ever have marketable drug products.

We currently have no approved drug products for sale. The research, testing, manufacturing, labeling, approval, selling, marketing, and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, with regulations differing from country to country. We are not permitted to market our product in the United States until we receive approval of a new drug application, or an NDA, from the FDA for each product candidate. We have not submitted an NDA or received marketing approval for any of our product candidates. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. Markets outside of the United States also have requirements for approval of drug candidates which we must comply with prior to marketing. Accordingly, we cannot guarantee that we will ever have marketable drug products.

Any collaboration we enter with third parties to develop and commercialize our product candidates may place the development of our product candidates outside our control, may require us to relinquish important rights or may otherwise be on terms unfavorable to us.

We may enter into collaborations with third parties to develop and commercialize our product candidates, including Oxycyte. Our dependence on future partners for development and commercialization of our product candidates would subject us to a number of risks, including:

●	we may not be able to control the amount and timing of resources that our partners may devote to the development or commercialization of product candidates or to their marketing and distribution;

●	partners may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

●	disputes may arise between us and our partners that result in the delay or termination of the research, development or commercialization of our product candidates or that result in costly litigation or arbitration that diverts management’s attention and resources;

●	partners may experience financial difficulties;

●	partners may not properly maintain or defend our intellectual property rights, or may use our proprietary information, in such a way as to invite litigation that could jeopardize or invalidate our intellectual property rights or proprietary information or expose us to potential litigation;

●	business combinations or significant changes in a partner’s business strategy may adversely affect a partner’s willingness or ability to meet its obligations under any arrangement;

●	a partner could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; and

●	the collaborations with our partners may be terminated or allowed to expire, which would delay the development and may increase the cost of developing our product candidates.

Delays in the commencement, enrollment and completion of clinical testing could result in increased costs to us and delay or limit our ability to obtain regulatory approval for our product candidates.

Delays in the commencement, enrollment and completion of clinical testing could significantly affect our product development costs. We do not know whether planned clinical trials for Oxycyte will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials requires us to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs for the same indication as our product candidates or may be required to withdraw from our clinical trial as a result of changing standards of care or may become ineligible to participate in clinical studies. The commencement, enrollment and completion of clinical trials can be delayed for a variety of other reasons, including delays related to:

●	reaching agreements on acceptable terms with prospective CROs and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

●	obtaining regulatory approval to commence a clinical trial;

●	obtaining institutional review board, or IRB, approval to conduct a clinical trial at numerous prospective sites;

●	recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other clinical trial programs for the same indication as our product candidates;

●	retaining patients who have initiated a clinical trial but may be prone to withdraw due to the treatment protocol, lack of efficacy, personal issues or side effects from the therapy or who are lost to further follow-up;

●	maintaining and supplying clinical trial material on a timely basis; and

●	collecting, analyzing and reporting final data from the clinical trials.

In addition, a clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities due to a number of factors, including:

●	failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

●	inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

●	unforeseen safety issues or any determination that a trial presents unacceptable health risks; and

●	lack of adequate funding to continue the clinical trial, including unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties.

Changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities. Amendments may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in the completion of, or if we terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize our product candidates, other therapies for the same or similar indications may have been introduced to the market and established a competitive advantage.

We have little experience marketing a commercial product, and if we are unable to establish, or access an effective and focused sales force and marketing infrastructure, we will not be able to commercialize our product candidates successfully.

Commercializing our product candidates will require that we establish significant internal sales, distribution and marketing capabilities, which we do not currently have. For example, in order to commercialize Dermacyte, we intend to develop a focused sales force and marketing capabilities in the United States directed at dermatologists, medi-spas, and salons. The development of a focused sales and marketing infrastructure for our domestic operations will require substantial resources, will be expensive and time consuming and could negatively impact our commercialization efforts, including delay of any product launch. We may not be able to hire a focused sales force in the United States that is sufficient in size or has adequate expertise in the markets that we intend to target. If we are unable to establish our focused sales force and marketing capability for our products, we may not be able to generate any product revenue, may generate increased expenses and may never become profitable.

We expect intense competition with respect to our existing and future cosmetic product candidates.

The cosmetic industry is highly competitive, with a number of established, large companies, as well as many smaller companies. Many of these companies have greater financial resources and marketing capabilities for product candidates.

Competitors may seek to develop alternative formulations of our product candidates that address our targeted indications. The commercial opportunity for our cosmetic product candidates could be significantly harmed if competitors are able to develop alternative formulations outside the scope of our products. Compared to us, many of our potential competitors have substantially greater:

●	capital resources;

●	research and development resources, including personnel and technology;

●	expertise in prosecution of intellectual property rights;

●	manufacturing and distribution experience; and

●	sales and marketing resources and experience.

As a result of these factors, our competitors may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our cosmetic product candidates. Our competitors may also develop products that are more effective, useful and less costly than ours and may also be more successful than us in manufacturing and marketing their products.

Risks Related to Regulatory Matters

It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our product candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities.

We license certain intellectual property from third parties that covers our product candidates. We rely on certain of these third parties to file, prosecute and maintain patent applications and otherwise protect the intellectual property to which we have a license, and we have not had and do not have primary control over these activities for certain of these patents or patent applications and other intellectual property rights. We cannot be certain that such activities by third parties have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights. Our enforcement of certain of these licensed patents or defense of any claims asserting the invalidity of these patents would also be subject to the cooperation of the third parties.

The patent positions of pharmaceutical and biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biopharmaceutical patents has emerged to date in the United States. The biopharmaceutical patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents we own or to which we have a license from a third-party. Further, if any of our patents are deemed invalid and unenforceable, it could impact our ability to commercialize or license our technology.

The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

●	others may be able to make compositions or formulations that are similar to our product candidates but that are not covered by the claims of our patents;

●	we might not have been the first to make the inventions covered by our issued patents or pending patent applications;

●	we might not have been the first to file patent applications for these inventions;

●	others may independently develop similar or alternative technologies or duplicate any of our technologies;

●	it is possible that our pending patent applications will not result in issued patents;

●	our issued patents may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges by third parties;

●	we may not develop additional proprietary technologies that are patentable; or

●	the patents of others may have an adverse effect on our business.

We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our technology.

If we or our partners choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or company has the right to ask the court to rule that these patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources even if we were successful in stopping the infringement of these patents. In addition, there is a risk that the court will decide that these patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the ground that such other party’s activities do not infringe our rights to these patents.

Furthermore, a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party’s patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we or our commercialization partners are infringing the third party’s patents and would order us or our partners to stop the activities covered by the patents. In addition, there is a risk that a court will order us or our partners to pay the other party damages for having violated the other party’s patents. We have agreed to indemnify certain of our commercial partners against certain patent infringement claims brought by third parties. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications, or that we were the first to invent the technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications or patents, which could further require us to obtain rights to issued patents by others covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

Risks Related to Owning Our Common Stock

Our share price has been volatile and may continue to be volatile which may subject us to securities class action litigation in the future.

The market price of shares of our common stock has been, and may be in the future, subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

●	actual or anticipated fluctuations in our financial condition and operating results;

●	status and/or results of our clinical trials;

●	results of clinical trials of our competitors’ products;

●	regulatory actions with respect to our products or our competitors’ products;

●	actions and decisions by our collaborators or partners;

●	actual or anticipated changes in our growth rate relative to our competitors;

●	actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;

●	competition from existing products or new products that may emerge;

●	issuance of new or updated research or reports by securities analysts;

●	fluctuations in the valuation of companies perceived by investors to be comparable to us;

●	share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

●	market conditions for biopharmaceutical stocks in general; and

●	general economic and market conditions.

On April 30, 2010 the closing price of our common stock was $5.00 as compared with $2.05 as of January 31, 2011. During the twelve months ended April 30, 2010, the lowest closing price of our common stock was $2.25 and the highest closing price was $14.01.

Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. Such lawsuits, should they be filed against us in the future, could result in substantial costs and a diversion of management’s attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.

We are likely to attempt to raise additional capital through issuances of debt or equity securities, which may cause our stock price to decline, dilute the ownership interests of our existing stockholders, and/or limit our financial flexibility.

Historically we have financed our operations through the issuance of equity securities and debt financings, and we expect to continue to do so for the foreseeable future. Based on our working capital at January 31, 2011, the additional $861,000 received under the Note Purchase Agreement, and the $2,139,000 remaining under the Note Purchase agreement, we believe we have sufficient capital on hand to continue to fund operations through June 30, 2011. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution of their ownership interests. Debt financing, if available, may involve restrictive covenants that limit our financial flexibility or otherwise restrict our ability to pursue our business strategies. Additionally, if we issue shares of common stock, or securities convertible or exchangeable for common stock, the market price of our existing common stock may decline. There can be no assurance that we will be successful in obtaining any additional capital resources in a timely manner, on favorable terms, or at all.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In the third quarter of fiscal 2011, we issued to Christian Stern, our Chief Executive Officer, 1,493 shares of common stock as compensation pursuant to the terms of his compensation agreement. The shares were valued at $3,069 at the date of issue.

All of the securities described above were issued in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None .

ITEM 4. ( REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

On March 17, 2011, our Compensation Committee and Board of Directors performed their annual review of base salaries for our named executive officers, and determined to make no salary increases at this time.

Also on March 17, 2011, our Board of Directors determined that, effective May 1, 2011, the fees paid to our non-employee directors, which are currently paid fully in cash, will instead be paid 50% in cash and 50% in restricted stock vesting over a three-year period.

On March 21, 2011, we entered into indemnification agreements with each of Chris Stern, our Chief Executive Officer, and Michael Jebsen, our Chief Financial Officer, which provide that in respect of acts or omissions occurring prior to such time as the executive officer ceases to serve as our officer and/or director the applicable executive officer will receive (i) indemnification and advancement of expenses to the executive officer to the extent provided under our Certificate of Incorporation and to the fullest extent permitted by applicable law and (ii) indemnification against any adverse tax consequences in connection with prior option awards that may have been non-compliant with Section 409A of the IRC.

ITEM 6. EXHIBITS

No.		Description

10.1		Severance Agreement with Kirk Harrington dated December 6, 2010 (1)

10.2		Employment Agreement with Michael B. Jebsen dated December 7, 2010 (1)

10.3		First Amendment to Note Purchase Agreement, dated December 29, 2010, between Oxygen Biotherapeutics, Inc. and JP SPC 1 Vatea, Segregated Portfolio (2)

10.4		Master Agreement with Dermacyte Switzerland dated December 15, 2010

10.5		Amendment no. 1 to Master Agreement with Dermacyte Switzerland dated December 16, 2010

10.6		Lease Agreement for North Carolina corporate office dated January 27, 2011

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	These documents were filed as exhibits to the quarterly report on Form 10-Q filed by Oxygen Biotherapeutics with the SEC on December 9, 2010, and are incorporated herein by reference.

(2)	This document was filed as an exhibit to the current report on Form 8-K filed by Oxygen Biotherapeutics with the SEC on December 30, 2010, and is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	OXYGEN BIOTHERAPEUTICS, INC.

Date: March 21, 2011	By:	/s/ Chris J. Stern
		Chris J. Stern
		Chairman and Chief Executive Officer (Principal Executive Officer)



	By:	/s/ Michael B. Jebsen
		Michael B. Jebsen
		Secretary and Chief Financial Officer (Principal Financial Officer)

24. BANKRUPTCY .

a. Trustee’s Rights. Landlord and Tenant understand that, notwithstanding contrary terms in this Lease, a trustee or debtor in possession under the United States Bankruptcy Code, as amended, (the "Code") may have certain rights to assume or assign this Lease. This Lease shall not be construed to give the trustee or debtor in possession any rights greater than the minimum rights granted under the Code.

b. Adequate Assurance. Landlord and Tenant acknowledge that, pursuant to the Code, Landlord is entitled to adequate assurances of future performance of the provisions of this Lease. The parties agree that the term “adequate assurance” shall include at least the following:

i. In order to assure Landlord that any proposed assignee will have the resources with which to pay all Rent payable pursuant to the provisions of this Lease, any proposed assignee must have, as demonstrated to Landlord’s satisfaction, a net worth (as defined in accordance with generally accepted accounting principles consistently applied) of not less than the net worth of Tenant on the Effective Date (as hereinafter defined), increased by seven percent (7%), compounded annually, for each year from the Effective Date through the date of the proposed assignment. It is understood and agreed that the financial condition and resources of Tenant were a material inducement to Landlord in entering into this Lease.

ii. Any proposed assignee must have been engaged in the conduct of business for the five (5) years prior to any such proposed assignment, which business does not violate the Use provisions under Section 4 above, and such proposed assignee shall continue to engage in the Permitted Use under Section 4. It is understood that Landlord’s asset will be substantially impaired if the trustee in bankruptcy or any assignee of this Lease makes any use of the Premises other than the Permitted Use.

c. Assumption of Lease Obligations. Any proposed assignee of this Lease must assume and agree to be personally bound by the provisions of this Lease.

25. NOTICES .

a. Addresses. All notices, demands and requests by Landlord or Tenant shall be sent to the Notice Addresses set forth in Section 1l, or to such other address as a party may specify by duly given notice.

b. Form; Delivery; Receipt. ALL NOTICES, DEMANDS AND REQUESTS WHICH MAY BE GIVEN OR WHICH ARE REQUIRED TO BE GIVEN BY EITHER PARTY TO THE OTHER MUST BE IN WRITING UNLESS OTHERWISE SPECIFIED. Notices, demands or requests shall be deemed to have been properly given for all purposes if (i) delivered against a written receipt of delivery, (ii) mailed by express, registered or certified mail of the United States Postal Service, return receipt requested, postage prepaid, or (iii) delivered to a nationally recognized overnight courier service for next business day delivery to the receiving party's address as set forth above or (iv) delivered via telecopier or facsimile transmission to the facsimile number listed above, with an original counterpart of such communication sent concurrently as specified in subsection (ii) or (iii) above and with written confirmation of receipt of transmission provided. Each such notice, demand or request shall be deemed to have been received upon the earlier of the actual receipt or refusal by the addressee or three (3) business days after deposit thereof at any main or branch United States post office if sent in accordance with subsection (ii) above, and the next business day after deposit thereof with the courier if sent pursuant to subsection (iii) above.

c. Address Changes. The parties shall notify the other of any change in address, which notification must be at least fifteen (15) days in advance of it being effective.

d. Notice by Legal Counsel. Notices may be given on behalf of any party by such party's legal counsel.

26. HOLDING OVER . If Tenant holds over after the Expiration Date or other termination of this Lease, such holding over shall not be a renewal of this Lease but shall create a tenancy-at-sufferance. Tenant shall continue to be bound by all of the terms and conditions of this Lease, except that during such tenancy-at-sufferance Tenant shall pay to Landlord (i) Base Rent at the rate equal to two hundred percent (200%) of that provided for as of the expiration or termination date, and (ii) any and all Operating Expenses and other forms of Additional Rent payable under this Lease. The increased Rent during such holding over is intended to compensate Landlord partially for losses, damages and expenses, including frustrating and delaying Landlord's ability to secure a replacement tenant. If Landlord loses a prospective tenant because Tenant fails to vacate the Premises on the Expiration Date or any termination of the Lease after notice to do so, then Tenant will be liable for such damages as Landlord can prove because of Tenant's wrongful failure to vacate.

27. RIGHT TO RELOCATE .

a. Substitute Premises. Landlord, at its option, may substitute for the Premises other space (hereafter called "Substitute Premises") owned by Landlord or one of its affiliates in the same geographical vicinity before the Commencement Date or at any time during the Term or any extension of this Lease. Insofar as reasonably possible, the Substitute Premises shall be of comparable quality and shall have a comparable square foot area and a configuration substantially similar to the Premises. Such substitution must be approved by Tenant, such approval not to be unreasonably withheld, conditioned or delayed..

b. Notice. Landlord shall give Tenant at least sixty (60) days notice of its intention to relocate Tenant to the Substitute Premises. This notice will be accompanied by a floor plan of the Substitute Premises. After such notice, Tenant shall have ten (10) days within which to agree with Landlord on the proposed Substitute Premises and unless such agreement is reached within such period of time, Landlord may terminate this Lease at the end of the sixty (60) day period of time following the notice.

c. Upfit of Substitute Premises. Landlord agrees to construct or alter, at its own expense, the Substitute Premises as expeditiously as possible so that they are in substantially the same condition that the Premises were in immediately prior to the relocation. Landlord shall have the right to reuse the fixtures, improvements and alterations used in the Premises. Tenant agrees to occupy the Substitute Premises as soon as Landlord's work is substantially completed.

d. Relocation Costs. If relocation occurs after the Commencement Date, then Landlord shall pay Tenant's reasonable third-party costs of moving Tenant's furnishings, telephone and computer wiring, and other property to the Substitute Premises, and reasonable printing costs associated with the change of address.

e. Lease Terms. Except as provided herein, Tenant agrees that all of the obligations of this Lease, including the payment of Rent (to be determined on a per rentable square foot basis and applied to the Substitute Premises), will continue despite Tenant's relocation to the Substitute Premises. Upon substantial completion of the Substitute Premises, this Lease will apply to the Substitute Premises as if the Substitute Premises had been the space originally described in this Lease.

f. Limitation on Landlord’s Liability. Except as provided above, Landlord shall not be liable or responsible in any way for damages or injuries suffered by Tenant pursuant to the relocation in accordance with this provision including, but not limited to, the loss of goodwill, business, productivity or profits.

28. BROKER'S COMMISSIONS .

a. Broker. Each party represents and warrants to the other that it has not dealt with any real estate broker, finder or other person with respect to this Lease in any manner, except the Broker identified in Section 1m .

b. Landlord’s Obligation. Landlord shall pay any commissions or fees that are payable to the Broker with respect to this Lease pursuant to Landlord’s separate agreement with the Broker.

c. Indemnity. Each party shall indemnify and hold the other party harmless from any and all damages resulting from claims that may be asserted against the other party by any other broker, finder or other person (including, without limitation, any substitute or replacement broker claiming to have been engaged by indemnifying party in the future), claiming to have dealt with the indemnifying party in connection with this Lease or any amendment or extension hereto, or which may result in Tenant leasing other or enlarged space from Landlord. The provisions of this Section shall survive the termination of this Lease.

29. MISCELLANEOUS .

a. No Agency. Tenant is not, may not become, and shall never represent itself to be an agent of Landlord, and Tenant acknowledges that Landlord's title to the Building is paramount, and that it can do nothing to affect or impair Landlord's title.

b. Force Majeure. The term “ force majeure ” means: fire, flood, extreme weather, labor disputes, strike, lock-out, riot, government interference (including regulation, appropriation or rationing), unusual delay in governmental permitting, unusual delay in deliveries or unavailability of materials, unavoidable casualties, Act of God, or other causes beyond the Landlord’s reasonable control.

c. Building Standard Improvements. The term “Building Standard Improvements” shall mean the standards for normal construction of general office space within the Building as specified by Landlord, including design and construction standards, electrical load factors, materials, fixtures and finishes.

d. Limitation on Damages. Notwithstanding any other provisions in this Lease, Landlord shall not be liable to Tenant for any special, consequential, incidental or punitive damages.

e. Satisfaction of Judgments Against Landlord. If Landlord, or its employees, officers, directors, stockholders or partners are ordered to pay Tenant a money judgment because of Landlord's default under this Lease, said money judgment may only be enforced against and satisfied out of: (i) Landlord's interest in the Building in which the Premises are located including the rental income and proceeds from sale; and (ii) any insurance or condemnation proceeds received because of damage or condemnation to, or of, said Building that are available for use by Landlord. No other assets of Landlord or said other parties exculpated by the preceding sentence shall be liable for, or subject to, any such money judgment.

f. Interest. Should Tenant fail to pay any amount due to Landlord by the date such amount is due (whether Base Rent, Additional Rent, or any other payment obligation), then the amount due shall begin accruing interest at the rate of 18% per annum, compounded monthly, or the highest permissible rate under applicable usury law, whichever is less, until paid.

g. Legal Costs. Should Landlord prevail in any legal proceedings against the Tenant for breach of any provision in this Lease, then Tenant shall be liable for the costs and expenses of the Landlord, including its reasonable attorneys' fees (at all tribunal levels).

h. Sale of Premises or Building. Landlord may sell the Premises or the Building without affecting the obligations of Tenant hereunder; upon the sale of the Premises or the Building, Landlord shall be relieved of all responsibility for the Premises and shall be released from any liability thereafter accruing under this Lease.

i. Time of the Essence. Time is of the essence in the performance of all obligations under the terms of this Lease.

j. Transfer of Security Deposit. If any Security Deposit or prepaid Rent has been paid by Tenant, Landlord may transfer the Security Deposit or prepaid Rent to Landlord's successor and upon such transfer, Landlord shall be released from any liability for return of the Security Deposit or prepaid Rent.

k. Tender of Premises. The delivery of a key or other such tender of possession of the Premises to Landlord or to an employee of Landlord shall not operate as a termination of this Lease or a surrender of the Premises unless requested in writing by Landlord.

l. Tenant’s Financial Statements. Upon request of Landlord, Tenant agrees to furnish to Landlord copies of Tenant’s most recent annual, quarterly and monthly financial statements, audited if available. The financial statements shall be prepared in accordance with generally accepted accounting principles, consistently applied. The financial statements shall include a balance sheet and a statement of profit and loss, and the annual financial statement shall also include a statement of changes in financial position and appropriate explanatory notes. Landlord may deliver the financial statements to any prospective or existing mortgagee or purchaser of the Building.

m. Recordation. This Lease (including a memorandum thereof) may not be recorded without Landlord's prior written consent.

n. Severability. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws, the remainder of this Lease shall not be affected thereby, and in lieu of each clause or provision of this Lease which is illegal, invalid or unenforceable, there shall be added as a part of this Lease a clause or provision as nearly identical to the said clause or provision as may be legal, valid and enforceable.

o. Binding Effect. This Lease shall be binding upon the respective parties hereto, and upon their heirs, executors, successors and assigns.

p. Entire Agreement. This Lease supersedes and cancels all prior negotiations between the parties, and no changes shall be effective unless in writing signed by both parties. Tenant acknowledges and agrees that it has not relied upon any statements, representations, agreements or warranties except those expressed in this Lease, and that this Lease contains the entire agreement of the parties hereto with respect to the subject matter hereof.

q. Good Standing. If requested by Landlord, Tenant shall furnish appropriate legal documentation evidencing the valid existence in good standing of Tenant, and the authority of any person signing this Lease to act for the Tenant. If Tenant signs as a corporation, each of the persons executing this Lease on behalf of Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing corporation, that Tenant has and is qualified to do business in the State in which the Premises are located, that the corporation has a full right and authority to enter into this Lease and that each of the persons signing on behalf of the corporation is authorized to do so.

r. Terminology. The singular shall include the plural, and the masculine, feminine or neuter includes the other.

s. Headings. Headings of sections are for convenience only and shall not be considered in construing the meaning of the contents of such section.

t. Choice of Law. This Lease shall be interpreted and enforced in accordance with the laws of the State in which the Premises are located.

u. Effective Date. The submission of this Lease to Tenant for review does not constitute a reservation of or option for the Premises, and this Lease shall become effective as a contract only upon the execution and delivery by both Landlord and Tenant. The date of execution shall be entered on the top of the first page of this Lease by Landlord, and shall be the date on which the last party signed the Lease, or as otherwise may be specifically agreed by both parties. Such date, once inserted, shall be established as the final day of ratification by all parties to this Lease, and shall be the date for use throughout this Lease as the "Effective Date".

v. Landlord’s Lien . In addition to any statutory lien for rent in Landlord's favor, Landlord shall have and Tenant hereby grants to Landlord a continuing security interest for all rentals and other sums of money becoming due hereunder from Tenant, upon all goods, wares, equipment, fixtures, furniture, inventory, client files, accounts , contract rights, chattel paper and other personal property of Tenant situated on the Premises, and such property shall not be removed therefrom without the consent of Landlord until all arrearages in Base Rent and Additional Rent as well as any and all other sums of money then due to Landlord hereunder all first have been paid and discharged. In the event of a default under this Lease, Landlord shall have, in addition to any other remedies provided herein or by law, all rights and remedies under Uniform Commercial Code, including, without limitation, the right to sell the property described in this paragraph at public or private sale upon five (5) days notice to Tenant. Tenant hereby agrees that Landlord shall be entitled to prepare and file such financial statements and other instruments necessary or desirable in Landlord's discretion to perfect the security interest hereby created. Any statutory lien for rent is not hereby waived, the express contractual lien herein granted being in addition and supplementary thereto.

w. Joint and Several . If Tenant comprises more than one person, corporation, partnership or other entity, the liability hereunder of all such persons, corporations, partnerships or other entities shall be joint and several.

x. No Construction Against Preparer . No provision of this Lease shall be construed against or interpreted to the disadvantage of any party by any court or other governmental or judicial authority by reason of such party’s having or being deemed to have prepared or imposed such provision.

30. SPECIAL CONDITIONS . The following special conditions, if any, shall apply, and where in conflict with earlier provisions in this Lease shall control:

“None”

31. ADDENDA AND EXHIBITS. If any addenda are noted below, such addenda are incorporated herein and made a part of this Lease.

a. Lease Addendum Number One – Workletter

b. Lease Addendum Number Two – Operating Expense Pass Throughs

c. Exhibit A – Premises

d. Exhibit B – Rules and Regulations

e. Exhibit C – Commencement Agreement

f. Exhibit D – Insurance Certificate

32. RENEWAL OPTION. Tenant shall have the option to renew this Agreement under the same terms and conditions for an additional period of three years (“Renewal Term”), with an annual escalation of Rent of three percent (3%) per year from the rental amount in effect at the time the Renewal Option is exercised. Tenant shall notify Landlord of its intent to renew at least ninety (90) days prior to expiration of the Term.

IN WITNESS WHEREOF, Landlord and Tenant have executed this lease in four originals, all as of the day and year first above written.

TENANT:

Oxygen Biotherapeutics, Inc.

	By:
	Name:
	Title:
	Date:

	Affix Corporate Seal:

LANDLORD:

CONCOURSE ASSOCIATES, LLC
a North Carolina limited liability company

By:
	Name: Art E. Nivison
	Title: Manager

	[Company Seal]

A CKNOWLEDGMENT

STATE OF _______________________ (Corporation)

COUNTY OF _____________________

I, the undersigned Notary Public, certify that ____________________________________ personally came before me this day and acknowledged that ____he is _____________________ of Oxygen Biotherapeutics, Inc., a North Carolina corporation, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by _______________________, as its _________________ President, and sealed with its common corporate seal.

WITNESS my hand and notarial seal, this ____ day of __________________, 2010.

Notary Public: ______________________________

Name: ____________________________________

My Commission Expires: ______________________

LEASE ADDENDUM NUMBER ONE [WORKLETTER]

WORKLETTER. This Lease Addendum Number One (the “First Addendum”) sets forth the rights and obligations of Landlord and Tenant with respect to space planning, engineering, final workshop drawings, and the construction and installation of any improvements to the Premises to be completed before the Commencement Date ("Tenant Improvements"). This First Addendum contemplates that the performance of this work will proceed in four stages in accordance with the following schedule: (i) preparation of a space plan; (ii) final design and engineering and preparation of final plans and working drawings; (iii) preparation by the Contractor (as hereinafter defined) of an estimate of the additional cost of the initial Tenant Improvements; (iv) submission and approval of plans by appropriate governmental authorities and construction and installation of the Tenant Improvements by the Commencement Date.

In consideration of the mutual covenants hereinafter contained, Landlord and Tenant do mutually agree to the following:

1. Space Planning, Design and Working Drawings. Landlord shall designate architects and engineers who will comply with the following:

a. Attend a reasonable number of meetings with Tenant and Landlord's agent to define Tenant requirements. One complete space plan shall be prepared by the architect and Tenant shall approve such space plan within two business days after receipt of the space plan.

b. If Tenant makes any revision to the space plan after such plan has been approved by both Landlord and Tenant, then Tenant shall pay all additional costs and expenses incurred as a result of such revisions.

c. Complete construction drawings for Tenant's partition layout, reflected ceiling grid, telephone and electrical outlets, keying, and finish schedule (subject to the limitation expressed in Section 2 below).

d. Complete building standard mechanical plans where necessary (for installation of air conditioning system and duct work, and heating and electrical facilities) for the work to be done in the Premises.

e. All plans and working drawings for the construction and completion of the Premises shall be subject to Landlord's prior written approval (the “Plans”). Any changes or modifications Tenant desires to make to the Plans shall also be subject to Landlord's prior approval. Landlord agrees that it will not unreasonably withhold its approval of the Plans, or of any changes or modifications thereof; provided, however, Landlord shall have sole and absolute discretion to approve or disapprove any improvements that will be visible to the exterior of the Premises, or which may affect the structural integrity of the Building. Any approval of the Plans by Landlord shall not constitute approval of any Delays caused by Tenant and shall not be deemed a waiver of any rights or remedies that may arise as a result of such Delays.

f. If Tenant wants improvements in addition to those being provided by Landlord, then Tenant shall cause additional Plans to be prepared concurrently with the preparation of the original Plans. The additional Plans will be prepared by Landlord's architect or engineer or by an architect or engineer of Tenant's own selection; provided Landlord has the right to approve any architect or engineer selected by Tenant. All design fees and costs of preparing the additional Plans shall be paid by Tenant.

2. Building Standard Improvement. Landlord agrees, at its sole cost and expense, to design, engineer, install, supply and otherwise to construct the Building Standard Improvements in the Premises that will become a part of the Building as specified in Schedule One to this Lease Addendum Number One and shown on Exhibit A attached to this Lease as necessary to hire a licensed general contractor (the "Contractor") to provide for such work to be completed. Tenant agrees that the Contractor may be an affiliate of Landlord.

3. Signage and Keying. Door and/or directory signage and suite keying in accordance with building standards shall be provided and installed by the Landlord .

4. Work and Materials at Tenant's Expense .

a. Any additional improvements to those shown in Exhibit A or Non-standard finishes shall be made and provided at Tenant’s expense.

b. Prior to commencing and providing any improvements that will be provided at Tenant’s expense (including finishes), Landlord shall submit to Tenant written estimates of the cost of such improvements and Tenant shall provide written approval to the estimates within five (5) business days after the receipt thereof. Landlord shall not be authorized to proceed thereon until the estimate is mutually agreed upon and approved in writing and delivered to Landlord.

c. Tenant agrees to pay to Landlord, promptly upon being billed therefor, all costs and expenses that are its responsibility. Such costs and expenses shall include all amounts charged by the Contractor for performing such work and providing such materials (including the Contractor's general conditions, overhead and profit). Tenant will be billed for such costs and expenses as follows: (i) 50% of such costs and expenses shall be due and payable upon Tenant's approval of the cost estimates; (ii) 25% of such costs and expenses shall be due and payable when such work is substantially completed and the Premises are ready for delivery to Tenant; (iii) 25% of such costs and expenses shall be due and payable upon final completion of punch list items.

5. Tenant Plan Delivery Date.

a. Tenant covenants and agrees that although certain plans and drawings may be prepared by Landlord's architect or engineer, Tenant shall be solely responsible for the timely completion of the Plans and it is hereby understood time is of the essence.

b. Tenant covenants and agrees to deliver to Landlord final Plans on or before _____ N/A ____ (the "Tenant Plan Delivery Date"). It is vital that the final Plans be delivered to Landlord by the Tenant Plan Delivery Date in order to allow Landlord sufficient time to review such Plans, to discuss with Tenant any changes therein which Landlord believes to be necessary or desirable, to enable the Contractor to prepare an estimate of the additional cost of initial Tenant Improvements, and to substantially complete the Premises within the time frame provided in the Lease.

6. Commencement Date.

a. The Commencement Date shall be the date when the work to be performed by Landlord pursuant to the Plans approved by Landlord and Tenant has been substantially completed (excluding items of work and adjustment of equipment and fixtures that can be completed after the Premises are occupied without causing material interference with Tenant's use of the Premises -- i.e., "punch list items"), and the Landlord delivers possession of the Premises to Tenant in accordance with Section 3 of the Lease.

b. Notwithstanding the foregoing, if Landlord shall be delayed in delivering possession of the Premises as a result of:

i. Tenant’s failure to approve the space plan within the time specified;

ii. Tenant's failure to approve Landlord's cost estimates within the time specified;

iii. Tenant's changes to approved Plans (notwithstanding Landlord's approval of any such changes);

iv. Inability to obtain non-building standard materials, finishes or installations requested by Tenant; or

v. The performance of any work by any person, firm or corporation employed or retained by Tenant; or

vi. Any other act or omission by Tenant or its agents, representatives, and/or employees;

then, in any such event, for purposes of determining the Commencement Date, the Premises shall be deemed to have been delivered to Tenant on the date that Landlord and architect determine that the Premises would have been substantially completed and ready for delivery if such delay or delays had not occurred.

7. Materials and Workmanship. Landlord covenants and agrees that all work performed in connection with the construction of the Premises shall be performed in a good and workmanlike manner and in accordance with all applicable laws and regulations and with the final approved Plans. Landlord agrees to exercise due diligence in completing the construction of the Premises.

8. Repairs and Corrections. Landlord shall select a Contractor who will provide a one-year warranty from the date of delivery of the Premises, transferable to Tenant, for defective workmanship and materials. If with Tenant’s agreement, used equipment is installed as part of the Work, the used equipment shall be installed “as is” and without any warranties. Landlord shall transfer to Tenant all manufacturers’ and builders’ warranties with respect to the Work, without recourse to the Landlord. Tenant shall repair or correct any defective work or materials installed by Tenant or any contractor other than Landlord's Contractor, or any work or materials that prove defective as a result of any act or omission of Tenant or any of its employees, agents, invitees, licensees, subtenants, customers, clients, or guests.

9. Inspection of Premises; Possession by Tenant. Prior to taking possession of the Premises, Tenant and Landlord shall inspect the Premises and Tenant shall give Landlord notice of any defects or incomplete work (“Punchlist”). Tenant’s possession of the Premises constitutes acknowledgment by Tenant that the Premises are in good condition and that all work and materials provided by Landlord are satisfactory as of such date of occupancy, except as to (i) any defects or incomplete work set forth in the Punchlist, (ii) latent defects, and (iii) any equipment that is used seasonally if Tenant takes possession of the Premises during a season when such equipment is not in use.

10. Access During Construction. During construction of the Tenant Improvements and with prior approval of Landlord, Tenant shall be permitted reasonable access to the Premises for the purposes of taking measurements, making plans, installing trade fixtures, moving in office furniture, and doing such other work as may be appropriate or desirable to enable Tenant to assume possession of and operate in the Premises; provided, however, that such access does not interfere with or delay construction work on the Premises. Prior to any such entry, Tenant shall comply with all insurance provisions of the Lease. All waiver and indemnity provisions of the Lease shall apply upon Tenant’s entry of the Premises.

SCHEDULE ONE

LEASE ADDENDUM NUMBER ONE

Landlord agrees to make the following Building-standard Improvements at its own cost and expense, as shown on Exhibit A:

1) Patch and repaint the Premises using Building-standard paint;

2) Add two offices approximately 9’x11’;

3) Add a reception area;

4) Add an office/workroom with a viewing window;

5) Relocate the wall in breakroom;

6) Add cipher locks to the two doors;

7) Install new carpeting in the new rooms;

8) Install VCT flooring in the break/file room;

9) Add two new doors into the common area hallway;

10) Running water lines for refrigerator ice-maker and commercial coffee-maker.

11) Reimburse Tenant for fees incurred in setting up telecommunication system, such fees not to exceed three thousand ($3,000.00).dollars.

The above improvements will not include a construction supervision fee.

LEASE ADDENDUM NUMBER TWO [BASE YEAR calendar year]

ADDITIONAL RENT - OPERATING EXPENSE PASS THROUGHS. For the calendar year commencing on January 1, 2012 and for each calendar year thereafter, Tenant shall pay to Landlord, as Additional Rent, Tenant's Proportionate Share of any increase in Operating Expenses (as hereinafter defined) incurred by Landlord's operation or maintenance of the Building above the Operating Expenses Landlord incurred during the Base Year (as hereinafter defined). Notwithstanding the foregoing, in no event shall the increase in Operating Expenses exceed five percent (5%) of the controllable Operating Expenses of the prior year.

For purposes of calculating Tenant's Proportionate Share of real and personal property taxes, Landlord shall use the Base Year or the year in which the Building and improvements are completed and are fully assessed, whichever shall be later. Tenant's Proportionate Share shall be calculated by dividing the approximately 5,954 rentable square feet of the Premises by the approximately 131,553 net rentable square feet of the Building, which equals 5.525%. If during any calendar year the occupancy of the rentable area of the Building is less than 95% full, then Operating Expenses (as hereinafter defined) will be adjusted for such calendar year at a rate of 95% occupancy.

For the calendar year commencing on January 1, 2012 and for each calendar year thereafter during the Term, Landlord shall estimate the amount the Operating Expenses shall increase for such calendar year above the Operating Expenses incurred during the Base Year. Landlord shall send to Tenant a written statement of the amount of Tenant's Proportionate Share of any estimated increase in Operating Expenses and Tenant shall pay to Landlord, monthly, Tenant's Proportionate Share of such increase in Operating Expenses. Within one hundred and eighty (180) days after the end of each calendar year or as soon as possible thereafter, Landlord shall send a copy of the Annual Statement to Tenant. Pursuant to the Annual Statement, Tenant shall pay to Landlord Additional Rent as owed or Landlord shall adjust Tenant's Rent payments if Landlord owes Tenant a credit. After the Expiration Date, Landlord shall send Tenant the final Annual Statement for the Term, and Tenant shall pay to Landlord Additional Rent as owed or if Landlord owes Tenant a credit, then Landlord shall pay Tenant a refund. If there is a decrease in Operating Expenses in any subsequent year below Operating Expenses for the Base Year then no additional rent shall be due on account of Operating Expenses, but Tenant shall not be entitled to any credit, refund or other payment that would reduce the amount of other additional rent or Base Rent owed. If this Lease expires or terminates on a day other than December 31, then Additional Rent shall be prorated on a 365-day calendar year (or 366 if a leap year). All payments or adjustments for Additional Rent shall be made within thirty (30) days after the applicable Statement is sent to Tenant.

The term “Base Year” shall mean the twelve month period beginning on the January 1, 2011 and ending on December 31, 2011 .

The term "Operating Expenses" shall mean all direct costs incurred by Landlord in the provision of services to tenants and in the operation, repair and maintenance of the Building and Common Areas as determined by generally accepted accounting principles, including, but not limited to ad valorem real and personal property taxes, amortization of capital improvements that reduce Operating Expenses, hazard and liability insurance premiums, utilities, heat, air conditioning, janitorial service, labor, materials, supplies, equipment and tools, permits, licenses, inspection fees, management fees, and common area expenses; provided, however, the term "Operating Expenses" shall not include depreciation on the Building or equipment therein, interest, executive salaries, real estate brokers’ commissions, or other expenses that do not relate to the operation of the Building. The annual statement of Operating Expenses shall be accounted for and reported in accordance with generally accepted accounting principles (the "Annual Statement").

EXHIBIT A

PREMISES

EXHIBIT B

RULES AND REGULATIONS

Access to Building . On Saturdays, Sundays, legal holidays and weekdays between the hours of 6:00 P.M. and 8:00 A.M., access to the Building and/or to the halls, corridors, elevators or stairways in the Building may be restricted and access shall be gained by use of a key or electronic card to the outside doors of the Buildings. Landlord may from time to time establish security controls for the purpose of regulating access to the Building. Tenant shall be responsible for providing access to the Premises for its agents, employees, invitees and guests at times access is restricted, and shall comply with all such security regulations so established.

2.	Protecting Premises . The last member of Tenant to leave the Premises shall close and securely lock all doors or other means of entry to the Premises and shut off all lights and equipment in the Premises.

Building Directories . The directories for the Building in the form selected by Landlord shall be used exclusively for the display of the name and location of tenants. Any additional names and/or name change requested by Tenant to be displayed in the directories must be approved by Landlord and, if approved, will be provided at the sole expense of Tenant.

Large Articles . Furniture, freight and other large or heavy articles may be brought into the Building only at times and in the manner designated by Landlord and always at Tenant's sole responsibility. All damage done to the Building, its furnishings, fixtures or equipment by moving or maintaining such furniture, freight or articles shall be repaired at Tenant’s expense.

Signs . Tenant shall not paint, display, inscribe, maintain or affix any sign, placard, picture, advertisement, name, notice, lettering or direction on any part of the outside or inside of the Building, or on any part of the inside of the Premises which can be seen from the outside of the Premises, including windows and doors, without the written consent of Landlord, and then only such name or names or matter and in such color, size, style, character and material as shall be first approved by Landlord in writing. Landlord, without notice to Tenant, reserves the right to remove, at Tenant's expense, all matters other than that provided for above.

Compliance with Laws . Tenant shall comply with all applicable laws, ordinances, governmental orders or regulations and applicable orders or directions from any public office or body having jurisdiction, whether now existing or hereinafter enacted with respect to the Premises and the use or occupancy thereof. Tenant shall not make or permit any use of the Premises which directly or indirectly is forbidden by law, ordinance, governmental regulations or order or direction of applicable public authority, which may be dangerous to persons or property or which may constitute a nuisance to other tenants.

Hazardous Materials . Tenant shall not use or permit to be brought into the Premises or the Building any flammable oils or fluids, or any explosive or other articles deemed hazardous to persons or property, or do or permit to be done any act or thing which will invalidate, or which, if brought in, would be in conflict with any insurance policy covering the Building or its operation, or the Premises, or any part of either, and will not do or permit to be done anything in or upon the Premises, or bring or keep anything therein, which shall not comply with all rules, orders, regulations or requirements of any organization, bureau, department or body having jurisdiction with respect thereto (and Tenant shall at all times comply with all such rules, orders, regulations or requirements), or which shall increase the rate of insurance on the Building, its appurtenances, contents or operation.

Defacing Premises and Overloading . Tenant shall not place anything or allow anything to be placed in the Premises near the glass of any door, partition, wall or window that may be unsightly from outside the Premises. Tenant shall not place or permit to be placed any article of any kind on any window ledge or on the exterior walls; blinds, shades, awnings or other forms of inside or outside window ventilators or similar devices shall not be placed in or about the outside windows in the Premises except to the extent that the character, shape, color, material and make thereof is approved by Landlord. Tenant shall not do any painting or decorating in the Premises or install any floor coverings in the Premises or make, paint, cut or drill into, or in any way deface any part of the Premises or Building without in each instance obtaining the prior written consent of Landlord. Tenant shall not overload any floor or part thereof in the Premises, or any facility in the Building or any public corridors or elevators therein by bringing in or removing any large or heavy articles and Landlord may direct and control the location of safes, files, and all other heavy articles and, if considered necessary by Landlord may require Tenant at its expense to supply whatever supplementary supports necessary to properly distribute the weight.

Obstruction of Public Areas . Tenant shall not, whether temporarily, accidentally or otherwise, allow anything to remain in, place or store anything in, or obstruct in any way, any sidewalk, court, hall, passageway, entrance, or shipping area. Tenant shall lend its full cooperation to keep such areas free from all obstruction and in a clean and sightly condition, and move all supplies, furniture and equipment as soon as received directly to the Premises, and shall move all such items and waste (other than waste customarily removed by Building employees) that are at any time being taken from the Premises directly to the areas designated for disposal. All courts, passageways, entrances, exits, elevators, escalators, stairways, corridors, halls and roofs are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the judgment of Landlord, shall be prejudicial to the safety, character, reputation and interest of the Building and its tenants; provided, however, that nothing herein contained shall be construed to prevent such access to persons with whom Tenant deals within the normal course of Tenant's business so long as such persons are not engaged in illegal activities.

10.

Additional Locks . Tenant shall not attach, or permit to be attached, additional locks or similar devices to any door or window, change existing locks or the mechanism thereof, or make or permit to be made any keys for any door other than those provided by Landlord. Upon termination of this Lease or of Tenant's possession, Tenant shall immediately surrender all keys to the Premises.

11.

Communications or Utility Connections . If Tenant desires signal, alarm or other utility or similar service connections installed or changed, then Tenant shall not install or change the same without the approval of Landlord, and then only under direction of Landlord and at Tenant's expense. Tenant shall not install in the Premises any equipment which requires a greater than normal amount of electrical current for the permitted use without the advance written consent of Landlord. Tenant shall ascertain from Landlord the maximum amount of load or demand for or use of electrical current which can safely be permitted in the Premises, taking into account the capacity of the electric wiring in the Building and the Premises and the needs of other tenants in the Building, and Tenant shall not in any event connect a greater load than that which is safe.

12.	Office of the Building . Service requirements of Tenant will be attended to only upon application at the office of Highwoods Properties, Inc. Employees of Landlord shall not perform, and Tenant shall not engage them to do any work outside of their duties unless specifically authorized by Landlord.

13.

Restrooms . The restrooms, toilets, urinals, vanities and the other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant whom, or whose employees or invitees, shall have caused it.

14.	Intoxication . Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated, or under the influence of liquor or drugs, or who in any way violates any of the Rules and Regulations of the Building.

15.

Nuisances and Certain Other Prohibited Uses . Tenant shall not (a) install or operate any internal combustion engine, boiler, machinery, refrigerating, heating or air conditioning apparatus in or about the Premises; (b) engage in any mechanical business, or in any service in or about the Premises or Building, except those ordinarily embraced within the Permitted Use as specified in Section 3 of the Lease; (c) use the Premises for housing, lodging, or sleeping purposes; (d) prepare or warm food in the Premises or permit food to be brought into the Premises for consumption therein (heating coffee and individual lunches of employees excepted) except by express permission of Landlord; (e) place any radio or television antennae on the roof or on or in any part of the inside or outside of the Building other than the inside of the Premises, or place a musical or sound producing instrument or device inside or outside the Premises which may be heard outside the Premises; (f) use any power source for the operation of any equipment or device other than dry cell batteries or electricity; (g) operate any electrical device from which may emanate waves that could interfere with or impair radio or television broadcasting or reception from or in the Building or elsewhere; (h) bring or permit to be in the Building any bicycle, other vehicle, dog (except in the company of a blind person), other animal or bird; (i) make or permit any objectionable noise or odor to emanate from the Premises; (j) disturb, harass, solicit or canvass any occupant of the Building; (k) do anything in or about the Premises which could be a nuisance or tend to injure the reputation of the Building; (i) allow any firearms in the Building or the Premises except as approved by Landlord in writing.

16.

Solicitation . Tenant shall not canvass other tenants in the Building to solicit business or contributions and shall not exhibit, sell or offer to sell, use, rent or exchange any products or services in or from the Premises unless ordinarily embraced within the Tenant's Permitted Use as specified in Section 3 of the Lease.

17.

Energy Conservation . Tenant shall not waste electricity, water, heat or air conditioning and agrees to cooperate fully with Landlord to insure the most effective operation of the Building's heating and air conditioning, and shall not allow the adjustment (except by Landlord's authorized Building personnel) of any controls.

18.	Building Security . At all times other than normal business hours the exterior Building doors and suite entry door(s) must be kept locked to assist in security. Problems in Building and suite security should be directed to Landlord at 919/872-4924.

19.

Parking . Parking is in designated parking areas only. There shall be no vehicles in "no parking" zones or at curbs. Handicapped spaces are for handicapped persons only and the Police Department will ticket unauthorized (unidentified) cars in handicapped spaces. Landlord reserves the right to remove vehicles that do not comply with the Lease or these Rules and Regulations and Tenant shall indemnify and hold harmless Landlord from its reasonable exercise of these rights with respect to the vehicles of Tenant and its employees, agents and invitees.

20.

Janitorial Service . The janitorial staff will remove all trash from trashcans. Any container or boxes left in hallways or apparently discarded unless clearly and conspicuously labeled DO NOT REMOVE may be removed without liability to Landlord. Any large volume of trash resulting from delivery of furniture, equipment, etc., should be removed by the delivery company, Tenant, or Landlord at Tenant's expense. Janitorial service will be provided after hours five (5) days a week. All requests for trash removal other than normal janitorial services should be directed to Landlord at 919/872-4924.

21.

Construction . Tenant shall make no structural or interior alterations of the Premises. All structural and nonstructural alterations and modifications to the Premises shall be coordinated through Landlord as outlined in the Lease. Completed construction drawings of the requested changes are to be submitted to Landlord or its designated agent for pricing and construction supervision.

EXHIBIT C

COMMENCEMENT AGREEMENT AND LEASE AMENDMENT NUMBER ONE

This COMMENCEMENT AGREEMENT AND LEASE AMENDMENT NUMBER ONE (the “First Amendment”), made and entered into as of this _______ day of ________________, 200__, by and between CONCOURSE ASSOCIATES, LLC, a North Carolina limited liability company (“Landlord”) and Oxygen Biotherapeutics, Inc., a North Carolina corporation (“Tenant”);

W I T N E S S E T H :

WHEREAS, Tenant and Landlord entered into that certain Lease Agreement dated _____________ (the “Lease”), for space designated as Suite 490, comprising approximately 5,954 rentable square feet, in The Concourse Building, located at One Copley Parkway, City of Morrisville, County of Wake, State of North Carolina; and

WHEREAS, Tenant and Landlord have inspected the Premises and confirmed that all work included in the Workletter has been completed satisfactorily; and

WHEREAS, the parties desire to amend the Rent Schedule and further alter and modify said Lease in the manner set forth below,

NOW, THEREFORE, in consideration of the mutual and reciprocal promises herein contained, Tenant and Landlord hereby agree that said Lease hereinafter described be, and the same is hereby modified in the following particulars, effective as of _____________________:

1. Lease Term. The definition for “Term”, provided in Section One of the Lease, entitled “Basic Definitions and Provisions” shall be amended to provide that the Commencement Date is: March 1, 2011 and the Expiration Date is: February 29, 2016.

2. Base Rent . The definition for “Rent”, provided in Section One of the Lease, entitled “Basic Definitions and Provisions”, shall be amended as follows:

A. Base Rent. Subsection 1(e) entitled “Base Rent”, is amended to provide that the Base Rent for the Term shall be $ __________, instead of $______________.

B. Rent Schedule. The rent schedule provided in Subsection 1(e) shall be replaced with the following rent schedule:

3. Miscellaneous. Unless otherwise defined herein, all capitalized terms used in this First Amendment shall have the same definitions ascribed to them in the Lease.

4. Lease Effectiveness. Except as modified and amended by this First Amendment, the Lease shall remain in full force and effect.

IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be duly executed, as of the day and year first above written.

Tenant:

Oxygen Biotherapeutics, Inc.
a North Carolina corporation

	By:
	Name:
	Title:
	Date:
	Attest:
			Secretary

		Corporate Seal:

Landlord:

CONCOURSE ASSOCIATES, LLC
a North Carolina limited liability company

By:
Date:

EXHIBIT D

EXAMPLE OF INSURANCE CERTIFICATE

Delaware		26-2593535
(State of incorporation)		(I.R.S. Employer Identification No.)

Large accelerated filer	o	Accelerated filer	þ

Non-accelerated filer	o	Smaller reporting company	þ
(Do not check if a smaller reporting company)

		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Unaudited Financial Statements		3
	Balance Sheet as of January 31, 2011 and as of April 30, 2010		3
	Statement of Operations for the Three Months and the Nine months Ended January 31, 2011 and 2010		4
	Statement of Cash Flows for the Nine months Ended January 31, 2011 and 2010		5
	Notes to Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.	Controls and Procedures		35
Item 4.T	Controls and Procedures

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		36
Item 1A.	Risk Factors		36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3.	Defaults Upon Senior Securities		43
Item 4.	(Removed and Reserved)		43
Item 5.	Other Information		43
Item 6.	Exhibits		44

	January 31, 2011 (Unaudited)			April 30, 2010
ASSETS
Current assets
Cash and cash equivalents	$	522,340		$	632,706
Accounts receivable		7,812			72,055
Inventory		409,430			535,090
Prepaid expenses		340,065			249,780
Other current assets		36,607			695,195
Total current assets		1,316,254			2,184,826
Property and equipment, net		439,627			383,959
Intangible assets, net		967,612			907,710
Other assets		129,740			52,651
Total assets	$	2,853,233		$	3,529,146
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	724,114		$	499,044
Accrued liabilities		910,758			843,903
Notes payable		69,825			56,394
Total current liabilities		1,704,697			1,399,341
Long-term notes payable, net		2,041,694			-
Long-term portion of convertible debt, net		-			2,767
Total liabilities		3,746,391			1,402,108



Stockholders' equity
Preferred stock, undesignated, authorized 10,000,000 shares; none issued or outstanding		-			-
Common stock, par value $.0001 per share; authorized 400,000,000 shares; issued and outstanding 23,391,714 and 21,457,265, respectively		2,339			2,146
Stock subscripton receivable		-			500,000
Additional paid-in capital		88,170,504			83,092,470
Deficit accumulated during the development stage		(89,066,001	)		(81,467,578	)
Total stockholders’ (deficit) equity		(893,158	)		2,127,038
Total liabilities and stockholders' equity	$	2,853,233		$	3,529,146

	Period from May 26, 1967
	(Inception) to			Nine months ended January 31,
	January 31, 2011			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(89,066,001	)	$	(7,598,423	)	$	(7,739,602	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		1,808,162			255,057			91,273
Amortization of deferred compensation		336,750			-			-
Interest on debt instruments		31,796,755			49,681			151,723
Loss (gain) on debt settlement and extinguishment		163,097			-			-
Loss on impairment, disposal and write down of long-lived assets		365,611			-			-
Issuance and vesting of compensatory stock options and warrants		8,209,870			111,802			1,037,476
Issuance of common stock below market value		695,248			-			-
Issuance of common stock as compensation		551,910			56,318			138,798
Issuance of common stock for services rendered		1,265,279			-			-
Issuance of note payable for services rendered		120,000			-			-
Contributions of capital through services rendered by stockholders		216,851			-			-
Changes in operating assets and liabilities
Accounts receivable, prepaid expenses and other assets		(662,508	)		95,139			(647,368	)
Inventory		85,978			85,978			-
Accounts payable and accrued liabilities		1,841,426			291,920			673,663
Net cash used in operating activities		(42,271,572	)		(6,652,528	)		(6,294,037	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(1,690,776	)		(187,509	)		(174,549	)
Capitalization of patent costs and license rights		(1,474,342	)		(183,118	)		(208,122	)
Net cash used in investing activities		(3,165,118	)		(370,627	)		(382,671	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock and exercise of stock options and warrants, net of related expenses and payments		35,744,664			4,901,400			9,792,725
Repurchase of outstanding warrants		(2,836,520	)		-			(2,836,520	)
Proceeds from stockholder notes payable		977,692			-			-
Proceeds from issuance of notes payable, net of issuance costs		4,379,829			2,088,701			96,563
Proceeds from convertible notes, net of issuance costs		8,807,285			-			-
Payments on notes - short-term		(1,113,920	)		(77,312	)		(55,531	)
Net cash provided by financing activities		45,959,030			6,912,789			6,997,237

Net change in cash and cash equivalents		522,340			(110,366	)		320,529
Cash and cash equivalents, beginning of period		-			632,706			2,555,872
Cash and cash equivalents, end of period	$	522,340		$	522,340		$	2,876,401

Cash paid for:
Interest	$	249,665		$	2,262		$	1,588
Income taxes	$	27,528		$	-		$	-

	Period from May 26, 1967 (Inception) to January 31, 2011			Three months ended January 31,						Nine months ended January 31,
				2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenue	$	167,179		$	52,562		$	30,768		$	95,543		$	37,329
Cost of sales		87,022			25,973			18,603			36,718			18,603
Net revenue		80,157			26,589			12,165			58,825			18,726

Operating expenses
Selling, general, and administrative		38,812,279			2,282,823			1,753,715			5,677,105			5,478,927
Research and development		19,090,353			498,521			1,011,061			2,216,413			2,169,435
Loss on impairment of long-lived assets		32,113			-			-			-			-
Total operating expenses		57,934,745			2,781,344			2,764,776			7,893,518			7,648,362

Net operating loss		57,854,588			2,754,755			2,752,611			7,834,693			7,629,636

Interest expense		32,189,628			43,093			2,612			49,682			153,311
Loss on extinguishment of debt		250,097			-			-			-			-
Other income		(1,228,312	)		(253,661	)		(1,511	)		(285,952	)		(43,345	)
Net loss	$	89,066,001		$	2,544,187		$	2,753,712		$	7,598,423		$	7,739,602

Net loss per share, basic and diluted				$	(0.11	)	$	(0.13	)	$	(0.33	)	$	(0.41	)

Weighted average number of common shares outstanding, basic and diluted					23,391,155			20,614,082			23,331,614			18,845,881

	January 31, 2011		April 30, 2010
Raw materials	$	163,743	$	310,315
Work in process		33,635		-
Finished goods		212,052		224,775
		409,430	$	535,090

	January 31, 2011			April 30, 2010
Laboratory equipment	$	999,735		$	980,025
Office furniture and fixtures		118,370			32,900
Computer equipment and software		129,662			53,921
Leasehold improvements		4,810			4,810
		1,252,577			1,071,656
Less: Accumulated depreciation and amortization		(812,950	)		(687,697	)
	$	439,627		$	383,959

	January 31, 2011		April 30, 2010
Reimbursable patent expenses- Glucometrics	$	77,089	$
Prepaid royalty fee		50,000		50,000
Other		2,651		2,651
		129,740	$	52,651

	January 31, 2011		April 30, 2010
Clinical trial related	$	75,000	$	135,276
Employee related		215,617		254,485
Professional services		31,007		391,210
Other		589,134		62,932
	$	910,758	$	843,903

	January 31, 2011			April 30, 2010
Note payable	$	3,262,630		$	48,983
Convertible notes payable		7,195			15,903
		3,269,825			64,886
Less: Unamortized discount		(1,158,306	)		(5,725	)
	$	2,111,519		$	59,161

Asset Category	Value Assigned		Weighted Average Amortization Period (in Years)		Impairments		Accumulated Amortization			Carrying Value (Net of Impairments and Accumulated Amortization)

Patents	$	532,499		12.4	$	-	$	(214,360	)	$	318,139
License Rights		551,425		17.9		-		(58,262	)		493,163
Trademarks		156,310		N/A		-		-			156,310

Total	$	1,240,234			$	-	$	(272,622	)	$	967,612

(1)	The Company received $4,401,400 (net of closing costs) from the issuance of 1,724,138 shares of common stock as part of the registered direct offering (the "Offering") described below.

(2)	The Company received $500,000 (net of closing costs), from the issuance of 133,334 shares of restricted common stock in accordance with the Securities Purchase Agreement with Vatea Fund described below. An additional 53,334 shares of common stock were issued as compensation for services provided in closing the Securities Purchase Agreement.

(3)	The Company issued 2,018 shares of common stock from the cashless exercise of 6,333 stock options.

(4)	The Company issued 2,350 shares of common stock for the conversion of notes payable with a gross carrying value of $8,707, at a conversion price of $3.705 per share. These notes included a discount totaling $868, and thus had a net carrying value of $7,839. The unamortized discount of $868 was recognized as interest expense upon conversion.

(5)	The Company issued 19,275 shares of its common stock as compensation to its officers. These shares had a fair value at the grant date of $56,318.

(6)	As further discussed below, the Company recorded $111,802 for the computed fair value of options issued to employees, nonemployee directors, and consultants.

	Warrants			Weighted Average Exercise Price
Outstanding at April 30, 2010		3,322,154		$	3.89
Granted		732,758			5.32
Forfeited		(173,114	)		7.05
Other		144,554	( 1)		2.90	(1)
Outstanding at January 31, 2011		4,026,352		$	3.88

				Outstanding Options
	Shares Available for Grant			Number of Shares			Weighted Average Exercise Price
Balances, at April 30, 2010		182,424			585,172		$	4.67
Options granted		(10,670	)		10,670		$	3.27
Restricted stock granted		(7,500	)
Options exercised					(1,193	)	$	1.69
Options cancelled		31,142			(31,142	)	$	7.17

Balances, at July 31, 2010		195,396			563,507		$	4.51
Options granted		(22,503	)		22,503		$	2.63
Options cancelled		3,111			(3,111	)	$	6.31

Balances, at October 31, 2010		176,004			582,899		$	4.43
Options granted		(21,503	)		21,503		$	2.11
Options cancelled		75,888			(75,888	)	$	3.18

Balances, at January 31, 2011		230,389			528,514		$	4.52

	For the nine months ended January 31,
		2011		2010

Risk-free interest rate (weighted average)		2.00	%	1.73	%
Expected volatility (weighted average)		84.46	%	101.23	%
Expected term (in years)		6		3-10
Expected dividend yield		0.00	%	0.00	%

Risk-Free Interest Rate	The risk-free interest rate assumption was based on U.S. Treasury instruments with a term that is consistent with the expected term of the Company’s stock options.

Expected Volatility	The expected stock price volatility for the Company’s common stock was determined by examining the historical volatility and trading history for its common stock over a term consistent with the expected term of its options.

Expected Term	The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. It was calculated based on the historical experience with the Company’s stock option grants.

Expected Dividend Yield	The expected dividend yield of 0% is based on the Company’s history and expectation of dividend payouts. The Company has not paid and do not anticipate paying any dividends in the near future.

Forfeitures	As stock-based compensation expense recognized in the statement of operations for the nine months ended January 31, 2011 and 2010 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on the Company’s historical experience.

	OXYGEN BIOTHERAPEUTICS, INC.

	By:	/s/ Chris J. Stern
	Print Name:	Chris J. Stern
	Title:	Chairman & CEO

Product:
Quantity:
Delivery Date:
Special Instructions:
Total Amount Due to OBI:
Payment Wire Transfer#:

Oxygen Biotherapeutics, Inc.,		Dermacyte Switzerland, Ltd.

By:	/s/	By:	/s/
Name:		Name:
Title :		Title:
Date:		Date:

Section 1:		Basic Definitions and Provisions	1
	a.	Premises	1
	b.	Term	1
	c.	Permitted Use	1
	d.	Occupancy Limitation	1
	e	Base Rent	1
	f.	Rent Payment Address	2
	g.	Security Deposit	2
	h.	Business Hours	2
	i.	Electrical Service	2
	j.	After Hours HVAC Rate	2
	k.	Parking	2
	l.	Notice Addresses	2
	m.	Broker	2

Section 2.		Leased Premises
	a.	Premises	3
	b.	Rentable Square Foot Determination	3
	c.	Common Areas	3
			3
Section 3:		Term
	a.	Commencement and Expiration Dates	3
	b.	Adjustments to Commencement Date	3
	c.	Termination by Tenant for Failure to Deliver Possession	3
	d.	Delivery of Possession	3
	e.	Adjustment of Expiration Date	3
	f.	Right to Occupy	4
	g.	Commencement Agreement	4
			4
Section 4:		Use
	a.	Permitted Use	4
	b.	Prohibited Uses	4
	c.	Prohibited Equipment in Premises	4
			4
Section 5:		Rent
	a.	Payment Obligations	5
	b.	Base Rent	5
	c.	Additional Rent	5

Section 6:		Security Deposit	5
	a.	Amount of Deposit	5
	b.	Application of Deposit	5
	c.	Refund of Deposit	6

Section 7:		Services by Landlord	6
	a.	Base Services	6
	b.	Landlord's Maintenance	6
	c.	No Abatement	6
	d.	Tenant's Obligation to Report Defects	7
	e.	Limitation on Landlord's Liability	7

Section 8:		Tenant’s Acceptance and Maintenance of Premises	7
	a.	Acceptance of Premises	7
	b.	Move-in Obligations	7
	c.	Tenant's Maintenance	7
	d.	Alterations to Premises	7
	e.	Restoration of Premises	7
	f.	Landlord's Performance of Tenant's Obligations	8
	g.	Construction Liens	8
	h.	Communications Compliance	8
	i.	Mold	8


Section 9:		Property of Tenant	8
	a.	Property Taxes	8
	b.	Removal	8

Section 10:		Signs	9

Section 11:		Access to Premises	9
	a.	Tenant's Access	9
	b.	Landlord's Access	9
	c.	Emergency Access	9

Section 12:		Tenant’s Compliance	9
	a.	Laws	9
	b.	Rules and Regulations	9

Section 13:		ADA Compliance	9
	a.	Tenant's Compliance	9
	b.	Landlord's Compliance	9
	c.	ADA Notices	10

Section 14:		Insurance Requirements	10
	a.	Tenant's Liability Insurance	10
	b.	Tenant's Property Insurance	10
	c.	Certificates of Insurance	10
	d.	Insurance Policy Requirements	10
	e.	Landlord's Property Insurance	10
	f.	Mutual Waiver of Subrogation	10

Section 15:		Indemnity	11
	a.	Indemnity	11
	b.	Defense Obligation	11

Section 16:		Quiet Enjoyment	11

Section 17:		Subordination; Attornment; Non-Disturbance; and Estoppel Certificate	11
	a.	Subordination and Attornment	11
	b.	Non-Disturbance	11
	c.	Estoppel Certificates	12

Section 18:		Assignment – Sublease	12
	a.	Landlord Consent	12
	b.	Definition of Assignment	12
	c.	Permitted Assignments/Subleases	12
	d.	Notice to Landlord	12
	e.	Prohibited Assignments/Sublease	12
	f.	Limitation on Rights of Assignee/Sublessee	12
	g.	Tenant Not Released	12

h.	Landlord's Right to Collect Sublease Rents Upon Tenant Default	12
i.	Excess Rents	12
j.	Landlord's Fees	12
k.	Unauthorized Assignment or Sublease	13

Section 19:		Damages to Premises	13
	a.	Landlord's Restoration Obligations	13
	b.	Termination of Lease by Landlord	13
	c.	Termination of Lease by Tenant	13
	d.	Tenant's Restoration Obligations	13
	e.	Rent Abatement	13
	f.	Waiver of Claims	13

Section 20:		Eminent Domain	14
	a.	Effect on Lease	14
	b.	Right to Condemnation Award	14

Section 21:		Environmental Compliance	14
	a.	Environmental Laws	14
	b.	Tenant's Responsibility	14
	c.	Tenant's Liability	14
	d.	Limitation on Tenant's Liability	14
	e.	Inspections by Landlord	14
	f.	Landlord's Liability	15
	g.	Property	15
	h.	Tenant's Liability after Termination of Lease	15

Section 22:		Default	15
	a.	Tenant's Default	15
	b.	Landlord's Remedies	16
	c.	Attorneys Fees	17
	d.	No Accord and Satisfaction	17
	e.	No Reinstatement	17
	f.	Summary Ejectment	17

Section 23:		Multiple Defaults	17
	a.	Loss of Option Rights	17
	b.	Increased Security Deposit	17
	c.	Effect on Notice Rights and Cure Periods	17

Section 24:		Bankruptcy	18
	a.	Trustee's Rights	18
	b.	Adequate Assurance	18
	c.	Assumption of Lease Obligations	18

Section 25:		Notices	18
	a.	Addresses	18
	b.	Form; Delivery; Receipt	18
	c.	Address Changes	18
	d.	Notice by Legal Counsel	18

Section 26:		Holding Over	19

Section 27:		Right to Relocate	19

a.	Substitute Premises	19
b.	Notice	19
c.	Upfit of Substitute Premises	19
d.	Relocation Costs	19
e.	Lease Terms	19
f.	Limitation on Landlord's Liability	19