UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED January 31, 2014
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO              
 
Commission File Number 001-34600
 
OXYGEN BIOTHERAPEUTICS, INC .
(Exact name of registrant as specified in its charter)
 
Delaware
 
26-2593535
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 

ONE Copley Parkway, Suite 490, Morrisville, North Carolina 27560
(Address of principal executive offices)
 
(919) 855-2100
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   þ      No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ      No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
               
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
þ
       
(Do not check if a smaller reporting company)
     
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes   ¨     No   þ
 
As of March 14, 2014, the registrant had outstanding 17,153,510 shares of Common Stock.
 


 
 
 
 

TABLE OF CONTENTS
 
 
   
PAGE
PART I. FINANCIAL INFORMATION
 
Item 1.
Consolidated Financial Statements
3
 
Consolidated Balance Sheets (Unaudited) as of January 31, 2014 and April 30, 2013
3
 
Consolidated Statements of Operations (Unaudited) for the Three and Nine months Ended January 31, 2014 and 2013
4
 
Consolidated Statements of Cash Flows (Unaudited) for the Nine months Ended January 31, 2014 and 2013
5
 
Notes to Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
36
Item 4.
Controls and Procedures
36
     
PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
37
Item 1A.
Risk Factors
37
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
49
Item 3.
Defaults Upon Senior Securities
50
Item 4.
Mine Safety Disclosures
50
Item 5.
Other Information
50
Item 6.
Exhibits
50
 
 
 
2

 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1.       CONSOLIDATED FINANCIAL STATEMENTS
 
OXYGEN BIOTHERAPEUTICS, INC.
(a development stage enterprise)
CONSOLIDATED BALANCE SHEETS
 
   
January 31,
2014
   
April 30,
2013
 
   
(Unaudited)
       
             
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 6,339,657     $ 783,528  
Accounts receivable
    53,106       445,237  
Government grant receivable
    113,184       96,226  
Inventory
    97,437       99,204  
Prepaid expenses
    650,294       247,646  
Other current assets
    135,788       170,410  
Total current assets
    7,389,466       1,842,251  
Property and equipment, net
    149,365       205,389  
Debt issuance costs, net
    53,581       150,043  
Intangible assets, net
    22,982,535       924,698  
Goodwill
    3,303,000       -  
Other assets
    58,262       58,262  
Total assets
  $ 33,936,209     $ 3,180,643  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities
               
Accounts payable
  $ 668,671     $ 977,162  
Accrued liabilities
    1,493,198       874,876  
Warrant liabilities
    1,082,941       -  
Current portion of notes payable, net
    368,768       57,539  
Total current liabilities
    3,613,578       1,909,577  
Other liabilities
    21,864       54,660  
Long-term portion of notes payable, net
    -       2,994,442  
Total liabilities
    3,635,442       4,958,679  
                 
                 
Commitments and contingencies; see Note 7.
               
Stockholders' equity (deficit)
               
Preferred stock, undesignated, authorized 9,947,439 and 9,990,400 shares; respectively. See Note 8.
 
Series B Preferred stock, par value $.0001, issued 2,100 shares; outstanding 0 and 987, respectively.
    -       1  
Series C Preferred stock, par value $.0001, issued 5,369 shares; outstanding 255 and 0, respectively.
    1       -  
Series E Preferred stock, par value $.0001, issued 32,992 shares; outstanding 32,992 and 0, respectively.
    3       -  
Common stock, par value $.0001 per share; authorized 400,000,000 shares; issued and outstanding 13,671,105 and 1,930,078,  respectively
    1,367       193  
Additional paid-in capital
    156,471,160       115,265,854  
Deficit accumulated during the development stage
    (126,171,764 )     (117,044,084 )
Total stockholders’ equity (deficit)
    30,300,767       (1,778,036 )
Total liabilities and stockholders' equity (deficit)
  $ 33,936,209     $ 3,180,643  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
 
3

 
 
OXYGEN BIOTHERAPEUTICS, INC.
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Period from
May 26,
1967
(Inception) to
January 31,
   
Three months ended January 31,
   
Nine months ended January 31,
 
    2014    
2014
   
2013
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Product revenue
  $ 623,606     $ 590     $ 2,871     $ 60,669     $ 28,899  
Cost of sales
    383,854       410       1,534       31,275       16,578  
Net product revenue
    239,752       180       1,337       29,394       12,321  
Government grant revenue
    1,689,852       41,684       221,051       233,981       997,035  
Total net revenue
    1,929,604       41,864       222,388       263,375       1,009,356  
                                         
Operating expenses
                                       
Selling, general, and administrative
    54,772,734       1,783,596       1,441,500       4,187,522       3,127,133  
Research and development
    26,742,252       689,666       369,447       2,211,124       1,611,293  
Restructuring expense
    220,715       -       2,941       -       220,715  
Loss on impairment of long-lived assets
    390,970       -       -       -       -  
Total operating expenses
    82,126,671       2,473,262       1,813,888       6,398,646       4,959,141  
                                         
Net operating loss
    80,197,067       2,431,398       1,591,500       6,135,271       3,949,785  
                                         
Interest expense
    46,104,646       69,967       821,777       2,142,627       3,615,204  
Loss on extinguishment of debt
    250,097       -       -       -       -  
Other (income) expense
    67,442       849,556       (323 )     849,782       (8,215 )
Net loss
  $ 126,619,252     $ 3,350,921     $ 2,412,954     $ 9,127,680     $ 7,556,774  
                                         
Preferred stock dividend
    6,700,233       1,095,822               5,742,162       -  
Net loss attributable to common stockholders
  $ 133,319,485     $ 4,446,743     $ 2,412,954     $ 14,869,842     $ 7,556,774  
                                         
                                         
Net loss per share, basic
          $ (0.43 )   $ (1.45 )   $ (2.56 )   $ (4.75 )
Weighted average number of common shares outstanding, basic
      10,260,021       1,658,895       5,811,162       1,591,438  
Net loss per share,  diluted
          $ (0.44 )   $ (2.78 )   $ (2.58 )   $ (5.91 )
Weighted average number of common shares outstanding, diluted
      10,266,601       1,767,640       5,817,819       1,700,183  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
 
4

 
 
OXYGEN BIOTHERAPEUTICS, INC.
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Period from
May 26,
1967
(Inception) to
January 31,
   
Nine months ended January 31,
 
    2014    
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net Loss
  $ (126,171,764 )   $ (9,127,680 )   $ (7,556,774 )
Adjustments to reconcile net loss to net cash used in operating activities
                       
Depreciation and amortization
    2,330,844       111,232       110,744  
Amortization of deferred compensation
    336,750       -       -  
Interest on debt instruments
    45,666,003       2,113,677       3,614,137  
Loss on debt settlement and extinguishment
    163,097       -       -  
Loss on impairment, disposal and write down of long-lived assets
    826,846       -       11,563  
Issuance and vesting of compensatory stock options and warrants
    8,475,981       101,053       73,574  
Issuance of common stock below market value
    695,248       -       -  
Issuance of common stock as compensation
    1,121,292       253,502       169,294  
Issuance of common stock for services rendered
    1,440,279       175,000       -  
Issuance of note payable for services rendered
    120,000       -       -  
Contributions of capital through services rendered by stockholders
    216,851       -       -  
Change in the fair value of warrants
    849,905       849,905       -  
Changes in operating assets and liabilities
                       
Accounts receivable, prepaid expenses and other assets
    (669,188 )     370,096       (1,654 )
Inventory
    212,285       1,767       (28,962 )
Accounts payable and accrued liabilities
    882,083       (1,130,205 )     127,253  
Net cash used in operating activities
    (63,503,488 )     (6,281,653 )     (3,480,825 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchase of property and equipment
    (1,788,746 )     (9,804 )     (14,932 )
Proceeds from the sale of property and equipment
    8,307       -       -  
Capitalization of patent costs and license rights
    (2,000,168 )     (103,240 )     (91,003 )
Net cash used in investing activities
    (3,780,607 )     (113,044 )     (105,935 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from sale of common stock and exercise of stock options and warrants, net of related expenses and payments
    51,481,026       7,002,733       -  
Repurchase of outstanding warrants
    (3,216,520 )     -       -  
Proceeds from stockholder notes payable
    977,692       -       -  
Proceeds from issuance of notes payable, net of issuance costs
    7,762,512       141,320       102,671  
Proceeds from convertible notes, net of issuance costs
    13,321,447       -       -  
Proceeds for issuance of convertible preferred stock, net of issuance costs
    12,746,338       4,895,188       2,500,000  
Payments on notes - short-term
    (1,448,743 )     (88,415 )     (66,972 )
Payments on notes - long-term
    (8,000,000 )     -       -  
Net cash provided by financing activities
    73,623,752       11,950,826       2,535,699  
                         
Net change in cash and cash equivalents
    6,339,657       5,556,129       (1,051,061 )
Cash and cash equivalents, beginning of period
    -       783,528       1,879,872  
Cash and cash equivalents, end of period
  $ 6,339,657     $ 6,339,657     $ 828,811  
                         
Cash paid for:
                       
Interest
  $ 296,375     $ 28,949     $ 1,067  
Income taxes
  $ 27,528     $ -     $ -  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
 
5

 
 
OXYGEN BIOTHERAPEUTICS, INC.
(a development stage enterprise)
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
 
Non-cash financing activities during the nine months ended January 31, 2014:
 
  (1) The Company issued 4,631 shares of restricted common stock for the payment of interest accrued on convertible notes. The shares were issued at a conversion price of $45.10 for the payment of $208,792 interest payable on convertible notes with a gross carrying value of $4,900,000.
     
  (2) The Company issued 804,661 shares of its common stock for the payment of $1,227,360 as dividends on the Series C 8% Convertible Preferred stock.
     
  (3) The Company issued 4,600 shares of Series D 8% Convertible Preferred Stock as consideration for cancellation of $4.6 million in outstanding principal amount of a convertible promissory note issued by the Company on July 1, 2011.
     
  (4) The Company issued 576,084 shares of its common stock for the payment of $1,104,000 as dividends on the Series D 8% Convertible Preferred stock.
     
  (5)  The Company issued 1,366,844 shares of its common stock that had a fair value of approximately $8.7 million and 32,992 shares of its Series E Convertible Preferred Stock, which are convertible into an aggregate of 3,299,200 shares of common stock, that had a fair value of approximately $15.3 million in exchange for the assets of Phyxius Pharma, Inc., as further discussed in Note 4 to these consolidated financial statements. The Company recorded Goodwill of $3,303,000 as a result of this issuance.
 
Non-cash financing activities during the nine months ended January 31, 2013:
 
  (1) The Company issued 12,450 shares of restricted common stock for the payment of interest accrued on convertible notes. The shares were issued at a conversion price of $45.10 for the payment of $561,458 interest payable on convertible notes with a gross carrying value of $4,900,000.
     
  (2) The Company issued 191,934 shares of its common stock upon the conversion of 3,668 shares of Series A Convertible Preferred Stock with a fair value of $4,509,987.
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
 
6

 

OXYGEN BIOTHERAPEUTICS, INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

  NOTE 1.     DESCRIPTION OF BUSINESS
 
Oxygen Biotherapeutics, Inc. (the “Company”) was originally formed as a New Jersey corporation in 1967 under the name Rudmer, David & Associates, Inc., and subsequently changed its name to Synthetic Blood International, Inc. On June 17, 2008, the stockholders of Synthetic Blood International approved the Agreement and Plan of Merger dated April 28, 2008, between Synthetic Blood International and Oxygen Biotherapeutics, Inc., a Delaware corporation. Oxygen Biotherapeutics was formed on April 17, 2008, by Synthetic Blood International to participate in the merger for the purpose of changing the state of domicile of Synthetic Blood International from New Jersey to Delaware. Certificates of Merger were filed with the states of New Jersey and Delaware and the merger was effective June 30, 2008. Under the Plan of Merger, Oxygen Biotherapeutics is the surviving corporation and each share of Synthetic Blood International common stock outstanding on June 30, 2008 was converted to one share of Oxygen Biotherapeutics common stock.
 
On October 18, 2013, the Company created a wholly owned subsidiary, Life Newco, Inc., a Delaware corporation (“Life Newco”), to acquire certain assets of Phyxius Pharma, Inc., a Delaware corporation (“Phyxius”) pursuant to an Asset Purchase Agreement, dated October 21, 2013 (the “Asset Purchase Agreement”), by and among the Company, Life Newco, Phyxius and the stockholders of Phyxius (the “Phyxius Stockholders”).  As further discussed in Note 10 below, on November 13, 2013, under the terms and subject to the conditions of the Asset Purchase Agreement, Life Newco acquired certain assets, including a license granting Life Newco an exclusive, sublicenseable right to develop and commercialize pharmaceutical products containing Levosimedan, 2.5 mg/ml concentrate for solution for infusion / 5ml vial in the United States and Canada.
 
Reverse Stock Split
 
On May 10, 2013, the Company filed a Certificate of Amendment to the Company’s Certificate of Incorporation to effect a reverse stock split of the Company’s common stock at a ratio of twenty-to-one with the Secretary of State of the State of Delaware.  The Amendment did not change the number of authorized shares, or the par value, of the Company’s common stock.  The Amendment provides that every twenty shares of the Company’s issued and outstanding common stock were automatically combined into one issued and outstanding share of the Company’s common stock. All shares and per share amounts in the consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the reverse stock split.
 
Going Concern
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has an accumulated deficit during the development stage of $126 million as of January 31, 2014, and stockholders’ equity (deficit) of $30,300,767 and $(1,778,036) as of January 31, 2014 and April 30, 2013, respectively. The Company requires substantial additional funds to complete clinical trials and pursue regulatory approvals. Management is actively seeking additional sources of equity and/or debt financing; however, there is no assurance that any additional funding will be available on commercially acceptable terms, or at all.
 
In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying January 31, 2014 balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, to maintain present financing, and to generate cash from future operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
 
NOTE 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The Company has prepared the accompanying interim consolidated financial statements in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these consolidated financial statements and accompanying notes do not include all of the information and disclosures required by GAAP for complete consolidated financial statements. The consolidated financial statements include all adjustments (consisting of normal recurring adjustments) that management believes are necessary for the fair statement of the balances and results for the periods presented. These interim consolidated financial statements results are not necessarily indicative of the results to be expected for the full fiscal year or any future interim period
 
 
7

 
 
Use of Estimates
 
In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the unaudited consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
 
On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s results of operations and financial position could be materially impacted.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts and transactions of Oxygen Biotherapeutics, Inc. and Life Newco, Inc. All material intercompany transactions and balances have been eliminated in consolidation.
 
Goodwill
 
Acquired businesses are accounted for using the acquisition method of accounting, which requires that assets acquired, including identifiable intangible assets, and liabilities assumed be recorded at fair value, with limited exceptions. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. If the acquired net assets do not constitute a business, the transaction is accounted for as an asset acquisition and no goodwill is recognized.
 
Goodwill is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate potential impairment. The Company’s goodwill evaluation is based on both qualitative and quantitative assessments regarding the fair value of goodwill relative to its carrying value. The Company assesses qualitative factors to determine if its sole reporting unit’s fair value is more likely than not to exceed its carrying value, including goodwill. In the event the Company determines that it is more likely than not that its reporting unit’s fair value is less than its carrying amount, quantitative testing is performed comparing recorded values to estimated fair values. If the fair value exceeds the carrying value, goodwill is not impaired. If the carrying value exceeds the fair value, an impairment charge is recognized through a charge to operations based upon the excess of the carrying value of goodwill over the implied fair value.  There was no impairment to goodwill recognized during 2014.
 
Net Loss per Share
 
Basic loss per share, which excludes antidilutive securities, is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for that particular period. In contrast, diluted loss per share considers the potential dilution that could occur from other equity instruments that would increase the total number of outstanding shares of common stock. Such amounts include shares potentially issuable under outstanding options, warrants, preferred stock and convertible notes. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows.
 
   
Three months ended January 31,
   
Nine months ended January 31,
 
   
2014
   
2013
   
2014
   
2013
 
Historical net loss per share:
                       
Numerator
                       
Net loss, attributable to common stockholders
  $ (4,446,743 )   $ (2,412,954 )   $ (14,869,842 )   $ (7,556,774 )
Less: Effect of amortization of interest expense on convertible notes
    (38,105 )     (2,496,089 )     (133,363 )     (2,496,089 )
Net loss attributable to common stockholders (diluted)
    (4,484,848 )     (4,909,043 )     (15,003,205 )     (10,052,863 )
Denominator
                               
Weighted-average common shares outstanding
    10,260,021       1,658,895       5,811,162       1,591,438  
 Effect of dilutive securities
    6,580       108,745       6,657       108,745  
Denominator for diluted net loss per share
    10,266,601       1,767,640       5,817,819       1,700,183  
                                 
Basic net loss per share
  $ (0.43 )   $ (1.45 )   $ (2.56 )   $ (4.75 )
Diluted net loss per share
  $ (0.44 )   $ (2.78 )   $ (2.58 )   $ (5.91 )
 
The following outstanding options, warrants, convertible preferred stock and convertible note shares were excluded from the computation of basic and diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect.
 
 
8

 
 
   
Nine months ended January 31,
 
   
2014
   
2013
 
             
Convertible preferred shares outstanding
    3,429,969       -  
Warrants to purchase common stock
    2,813,749       237,780  
Options to purchase common stock
    50,728       11,536  
Restricted stock grants
    42,629       2,777  
Convertible note shares outstanding
    -       98  
 
Fair Value
 
The Company records its financial assets and liabilities in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 Fair Value Measurements. The Company's balance sheet includes the following financial instruments: cash and cash equivalents, short-term notes payable, warrant liabilities and convertible notes. The Company considers the carrying amount of its cash and cash equivalents and short-term notes payable to approximate fair value due to the short-term nature of these instruments. The Company did not elect the fair value option and records the carrying value of its convertible notes at amortized cost in accordance with ASC 470-20, but management believes the difference between carrying value and fair value not to be material.
 
Accounting for fair value measurements involves a single definition of fair value, along with a conceptual framework to measure fair value, with a fair value defined as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." The fair value measurement hierarchy consists of three levels:
 
Level one
Quoted market prices in active markets for identical assets or liabilities;
Level two
Inputs other than level one inputs that are either directly or indirectly observable, and
Level three
Unobservable inputs developed using estimates and assumptions; which are developed by the reporting entity and reflect those assumptions that a market participant would use.
 
The Company applies valuation techniques that (1) place greater reliance on observable inputs and less reliance on unobservable inputs and (2) are consistent with the market approach, the income approach and/or the cost approach, and include enhanced disclosures of fair value measurements in our consolidated financial statements.
 
The following tables show information regarding assets and liabilities measured at fair value on a recurring basis as of January 31, 2014 and April 30, 2013:
 
         
Fair Value Measurements at Reporting Date Using
 
   
Balance as of
January 31,
2014
   
Quoted prices in Active Markets for Identical Securities (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
Current Assets
                       
Cash and cash equivalents
  $ 6,339,657     $ 6,339,657     $ -     $ -  
                                 
Current Liabilities
                               
Warrant liabilities
  $ 1,082,941     $ -     $ -     $ 1,082,941  
 
         
Fair Value Measurements at Reporting Date Using
 
   
Balance as of
April 30,
2013
   
Quoted prices in Active Markets for Identical Securities (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
Current Assets
                       
Cash and cash equivalents
  $ 783,528     $ 783,528     $ -     $ -  
 
 
9

 
 
There were no transfers between levels in the three months ended January 31, 2014.
 
Financial assets or liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
 
The Warrant liabilities are recorded at fair value with changes in fair value recorded as gains or losses within non-cash interest expense. The estimate of the fair value of the securities noted above, as of the valuation date, is based on the Cox-Ross Binomial Lattice Model using the estimated value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock (unobservable inputs).
 
Recent Accounting Pronouncements
 
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires entities to present in the consolidated financial statements an unrecognized tax benefit, or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except to the extent such items are not available or not intended to be used at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position. In such instances, the unrecognized tax benefit is required to be presented in the consolidated financial statements as a liability and not be combined with deferred tax assets. This guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
 
NOTE 3.     BALANCE SHEET COMPONENTS
 
Inventory
 
The Company operates in an industry characterized by rapid improvements and changes to its technology and products. The introduction of new products by the Company or its competitors can result in its inventory being rendered obsolete or it being required to sell items at a discount. The Company evaluates the recoverability of its inventory by reference to its internal estimates of future demands and product life cycles. If the Company incorrectly forecasts demand for its products or inadequately manages the introduction of new product lines, the Company could materially impact its consolidated financial statements by having excess inventory on hand. The Company's future estimates are subjective and actual results may vary.
 
Inventories are recorded at cost using the First-In-First-Out ("FIFO") method. Ending inventories are comprised of raw materials and direct costs of manufacturing and are valued at the lower of cost or market. Inventories consisted of the following as of January 31, 2014 and April 30, 2013:
 
   
January 31,
2014
   
April 30,
2013
 
Raw materials
  $ 28,779     $ 28,779  
Finished goods
    68,658       70,425  
    $ 97,437     $ 99,204  
 
 
10

 
 
Other current assets
 
Other current assets consist of the following as of January 31, 2014 and April 30, 2013:
 
   
January 31,
2014
   
April 30,
2013
 
R&D materials
  $ 106,573     $ 159,892  
Deferred cost of sales
    17,500       -  
Other
    8,287       7,090  
Dermacyte samples
    3,428       3,428  
    $ 135,788     $ 170,410  
 
Property and equipment, net
 
Property and equipment consist of the following as of January 31, 2014 and April 30, 2013:
 
   
January 31,
2014
   
April 30,
2013
 
Laboratory equipment
  $ 768,252     $ 768,252  
Computer equipment and software
    144,115       135,697  
Office furniture and fixtures
    130,192       130,192  
      1,042,559       1,034,141  
Less: Accumulated depreciation and amortization
    (893,194 )     (828,752 )
    $ 149,365     $ 205,389  
 
Depreciation and amortization expense was approximately $21,000 and $23,000 for the three months ended January 31, 2014 and 2013, respectively; and $66,000 and $70,000 for the nine months ended January 31, 2014 and 2013, respectively.
 
Accrued liabilities
 
Accrued liabilities consist of the following as of January 31, 2014 and April 30, 2013:
 
   
January 31,
2014
   
April 30,
2013
 
Operating costs
  $ 1,101,493     $ 19,865  
Employee related
    220,066       66,632  
Deferred revenue
    123,786       185,068  
Restructuring liability
    43,728       43,728  
Convertible note interest payable
    4,125       59,583  
Accrued settlement costs
    -       500,000  
    $ 1,493,198     $ 874,876  
 
Other liabilities
 
As further discussed in Note 9 below, following the closing of the Company’s research and development facility in California, the Company entered into a long-term sublease agreement with an unrelated third party covering the vacated space which extends through the termination date. The Company recorded a liability for the remaining lease payments due under its long-term, non-cancelable operating lease for this facility, net of sublease payments, which expires in July 2015. The table below summarizes the net future minimum payments due under this lease agreement.
 
 
11

 
 
   
January 31,
2014
   
April 30,
2013
 
Net non-cancelable operating lease obligation
  $ 65,592     $ 98,388  
Less: current portion
    (43,728 )     (43,728 )
Long-term portion of net non-cancelable operating lease obligation
  $ 21,864     $ 54,660  
 
NOTE 4.     ACQUISITION
 
On November 13, 2013, the Company, through its wholly owned subsidiary, Life Newco, acquired certain assets of Phyxius pursuant to the Asset Purchase Agreement. The acquisition was accounted for under the acquisition method of accounting for business combinations in accordance with FASB ASC 805,   Business Combinations, which requires, among other things that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.  Acquisition-related costs are not included as a component of the acquisition accounting, but are recognized as expenses in the periods in which the costs are incurred.  Any changes within the measurement period resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recorded at the acquisition date.
 
Under the terms and subject to the conditions of the Asset Purchase Agreement, Life Newco acquired (the “Acquisition”) certain assets, including that certain License Agreement (the “License”), dated September 20, 2013 by and between Phyxius and Orion Corporation, a global healthcare company incorporated under the laws of Finland (“Orion”), and that certain Side Letter, dated October 15, 2013 by and between Phyxius and Orion.  The License grants Life Newco an exclusive, sublicenseable right to develop and commercialize pharmaceutical products containing Levosimedan, 2.5 mg/ml concentrate for solution for infusion / 5ml vial (the “Product”) in the United States and Canada (the “Territory”).  Pursuant to the License, Life Newco must use Orion’s “Simdax®” trademark to commercialize the Product.  The License also grants to Life Newco a right of first refusal to commercialize new developments of the Product, including developments as to the formulation, presentation, means of delivery, route of administration, dosage or indication.  Orion’s ongoing role under the License includes sublicense approval, serving as the sole source of manufacture, holding a first right to enforce intellectual property rights in the Territory, and certain regulatory participation rights.  Additionally, Life Newco must grant back to Orion a broad non-exclusive license to any patents or clinical trial data related to the Product developed by Life Newco under the License.  The License has a fifteen (15) year term, provided, however, that the License will continue after the end of the fifteen year term in each country in the Territory until the expiration of Orion’s patent rights in the Product in such country (the “Term”).  Orion may terminate the License if the human clinical trial using the Product and studying reduction in morbidity and mortality of cardiac surgery patients at risk of low cardiac output syndrome (LCOS) as described in the US Food and Drug Administration (the “FDA”) agreed upon clinical study protocol (the “Study”) is not started by July 31, 2014.
 
The following table summarizes the consideration transferred to acquire Phyxius and the amounts of identified assets acquired and liabilities assumed at the acquisition date.
 
Fair Value of Consideration Transferred:
 
Common stock     8,747,802  
Series E convertible preferred stock     15,299,198  
Total     24,047,000  
 
The Company issued 1,366,844 shares of its common stock that had a total fair value of approximately $8.7 million based on the closing market price on November 13, 2013, the acquisition date. The Company also issued 32,992 shares of its Series E Convertible Preferred Stock (the “Series E Stock”), which are convertible into an aggregate of 3,299,200 shares of common stock that had a total fair value of approximately $15.3 million.
 
The rights, preferences and privileges of the Series E Stock are set forth in the Certificate of Designation of Series E Convertible Preferred Stock that the Company filed with the Secretary of State of the State of Delaware on November 13, 2013.  Each share of Series E Stock will automatically convert into 100 shares of common stock following receipt of stockholder approval for the transaction.  Approximately 11% of the shares of converted common stock will vest immediately upon receipt of stockholder approval for the transaction, while the remainder will vest upon achievement of certain performance milestones related to the development and commercialization of the levosimendan product in North America.   In addition, all unvested converted common stock will vest if certain change of control transactions or significant equity financings occur within 24 months of the closing of the Acquisition.  The number of shares of common stock into which the Series E Stock converts is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions.  The Series E Stock does not carry dividend or a liquidation preference.  The Series E Stock carries voting rights aggregating 4.99% of the Company’s common stock voting power immediately prior to the closing of the Acquisition.
 
 
12

 
 
The Preferred E shares are convertible into restricted common shares using a 100-for-one ratio at anytime and in accordance with a vesting schedule contingent upon achievement of Company-specific non-financial conditions. As a result, the fair value of the Preferred Shares was inferred based on their common stock equivalent value given the conversion terms. The conditional vesting of the Preferred E Shares was accounted for by subtracting the fair value of an equal number of put options that would effectively protect the common stock equivalent stock value as of the closing date. The terms of the put options were as follows:
 
-  
Exercise price equal to the common stock price as of the Valuation Date
 
-  
Term based on Management’s risk-adjusted expected time to meeting the vesting condition, which was further increased by 6 months to reflect the marketability restriction of the unregistered stock, consistent with SEC Rule 144 of the Securities Act.
 
-  
Volatility was consistent with the term for the individual milestone payments derived from the median historical asset volatility for a set of comparable guideline companies. The volatility was then relevered to estimate the equity volatility of the Company.
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
IPR&D
    22,000,000  
Trade and other payables
    (256,000 )
Liability arising from a contingency
    (1,000,000 )
   Total identifiable net assets
    20,744,000  
Goodwill
    3,303,000  
 
The fair value of the acquired in-process research and development, (“IPR&D”), intangible asset of approximately $22.0 million was determined using the multi-period excess earnings method. The Company did not acquire any other class of assets as a result of the acquisition.
 
A liability arising from a contingency of $1 million has been recognized at fair value for expected license fee payments due under the acquired license. The Company expects that this expenditure will be payable in the fourth quarter of its fiscal year 2014. Pursuant to the terms of the License, the Company must pay to Orion a non-refundable up-front payment in the amount of $1 million within thirty (30) days of the Company receiving funding for the Study, but in no event later than April 1, 2014.  The License also includes the following development milestones for which the Company shall make non-refundable payments to Orion no later than twenty-eight (28) days after the occurrence of the applicable milestone event: (i) $2.0 million upon the grant of FDA approval, including all registrations, licenses, authorizations and necessary approvals, to develop and/or commercialize the Product in the United States; and (ii) $1.0 million upon the grant of regulatory approval for the Product in Canada. Once commercialized, the Company is obligated to make certain non-refundable commercialization milestone payments to Orion, aggregating up to $13.0 million, contingent upon achievement of certain cumulative net sales amounts in the Territory. The Company must also pay Orion tiered royalties based on net sales of the Product in the Territory made by the Company and its sublicensees. After the end of the Term, the Company must pay Orion a royalty based on net sales of the Product in the Territory for as long as the Company sells the Product in the Territory.
 
In connection with the closing of the Acquisition, Phyxius’ co-founder, Chief Executive Officer and stockholder, John Kelley, became the Company’s Chief Executive Officer and two other Phyxius employees and stockholders, Doug Randall and Douglas Hay, PhD became employees of the Company as Vice President, Business and Commercial Operations and Vice President, Regulatory Affairs, respectively.  Michael Jebsen, the Company’s prior Interim Chief Executive Officer and current Chief Financial Officer, continues serving as the Company’s Chief Financial Officer.  In addition, Mr. Kelley was subsequently appointed to the Company’s Board of Directors, while another designee will be appointed to the Board of Directors following receipt of stockholder approval for the transaction.  Pursuant to the Asset Purchase Agreement, the Company agreed to propose that its stockholders approve an amendment to the Company’s 1999 Stock Plan to increase the amount of stock options authorized for issuance under the 1999 Stock Plan to not less than 4,000,000 shares of common stock.
 
The common stock and Series E Stock issued as the consideration in the Acquisition were issued and sold without registration under the Securities Act of 1933 (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.  Accordingly, the Phyxius Stockholders may sell the shares of common stock and Series E Stock only pursuant to an effective registration statement under the Securities Act covering the resale of those securities, an exemption under Rule 144 under the Securities Act or another applicable exemption under the Securities Act.
 
 
13

 
 
The table below presents pro forma information as if the Company's acquisition of Phyxius had occurred at the beginning of the earliest period presented, which was May 1, 2012. The pro forma financial information is not indicative of the results of operations that would have occurred had the transaction been effected on the assumed date:
 
   
Three months ended January 31,
   
Nine months ended January 31,
 
   
2014
   
2013
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Total net revenue
    41,864       222,388       263,375       1,009,356  
                                 
Net loss
  $ 3,350,921     $ 2,412,954     $ 9,145,871     $ 7,559,369  
                                 
Net loss attributable to common stockholders
  $ 4,446,743     $ 2,412,954     $ 14,888,033     $ 7,559,369  
                                 
                                 
Net loss per share, basic
  $ (0.38 )   $ (0.80 )   $ (2.07 )   $ (2.56 )
Weighted average number of common shares outstanding, basic
    11,626,865       3,025,739       7,178,006       2,958,282  
Net loss per share,  diluted
  $ (0.39 )   $ (1.57 )   $ (2.08 )   $ (3.28 )
Weighted average number of common shares outstanding,  diluted
    11,633,445       3,134,484       7,184,662       3,067,027  
 
 
NOTE 5.     INTANGIBLE ASSETS
 
The following table summarizes the Company’s intangible assets as of January 31, 2014:
 
Asset Category
 
Value Assigned
   
Weighted Average Amortization Period (in Years)
   
Impairments
   
Accumulated Amortization
   
Carrying Value (Net of Impairments and Accumulated Amortization)
 
                               
IPR&D
  $ 22,000,000       N/A     $ -     $ -     $ 22,000,000  
Patents
    697,074       11.1       -       (281,136 )     415,938  
License Rights
    600,946       15.1       -       (140,735 )     460,211  
Trademarks
    106,386       N/A       -       -       106,386  
Total
  $ 23,404,406             $ -     $ (421,871 )   $ 22,982,535  
 
The following table summarizes the Company’s intangible assets as of April 30, 2013:
 
Asset Category
 
Value Assigned
   
Weighted Average Amortization Period (in Years)
   
Impairments
   
Accumulated Amortization
   
Carrying Value (Net of Impairments and Accumulated Amortization)
 
                               
Patents
  $ 645,918       11.2     $ (27,279 )   $ (258,499 )   $ 360,140  
License Rights
    572,370       15.6       -       (117,969 )     454,401  
Trademarks
    110,157       N/A       -       -       110,157  
Total
  $ 1,328,445             $ (27,279 )   $ (376,468 )   $ 924,698  
 
The aggregate amortization expense on the above intangibles was approximately $16,000 and $14,000, for the three months ended January 31, 2014 and 2013, respectively; and $45,000 and $41,000, for the nine months ended January 31, 2014 and 2013 respectively.
 
In Process Research and Development
 
The Simdax product in Phase III clinical trial represents an IPR&D asset. The IPR&D asset is a research and development project rather than a product or processes already in service or being sold. Research and development intangible assets are considered indefinite-lived until the abandonment or completion of the associated research and development efforts. If abandoned, the assets would be impaired. Research and development expenditures that are incurred after the acquisition, including those for completing the research and development activities related to the acquired intangible research and development assets, are generally expensed as incurred.
 
Patents and License Rights
 
The Company currently holds, has filed for, or owns exclusive rights to, U.S. and worldwide patents covering 13 various methods and uses of its perfluorocarbon (“PFC”) technology. It capitalizes amounts paid to third parties for legal fees, application fees and other direct costs incurred in the filing and prosecution of its patent applications. These capitalized costs are amortized on a straight-line method over their useful life or legal life, whichever is shorter. The Company capitalized patent costs of approximately $107,000 and $89,900, for the nine months ended January 31, 2014 and 2013, respectively.
 
Trademarks
 
The Company currently holds, or has filed for, trademarks to protect the use of names and descriptions of its products and technology. It capitalizes amounts paid to third parties for legal fees, application fees and other direct costs incurred in the filing and prosecution of its trademark applications. These trademarks are evaluated annually for impairment in accordance with ASC 350, Intangibles – Goodwill and other. The Company evaluates (i) its expected use of the underlying asset, (ii) any laws, regulations, or contracts that may limit the useful life, (iii) the effects of obsolescence, demand, competition, and stability of the industry, and (iv) the level of costs to be incurred to commercialize the underlying asset. The Company capitalized trademark costs of approximately $0 and $1,100, for the nine months ended January 31, 2014 and 2013, respectively.
 
 
14

 
 
NOTE 6.     NOTES PAYABLE
 
The following table summarizes our outstanding notes payable as of January 31, 2014 and April 30, 2013:
 
   
January 31,
2014
   
April 30,
2013
 
Current portion of notes payable, net
  $ 110,445     $ 57,539  
Current portion of convertible notes payable
    300,000       -  
Less: Unamortized discount
    (41,677 )        
Current portion of notes payable, net
  $ 368,768     $ 57,539  
                 
Long-term portion of convertible notes payable
  $ -     $ 4,900,001  
Less: Unamortized discount
    -       (1,905,559 )
Long-term portion of notes payable, net
  $ -     $ 2,994,442  

Convertible Note
 
On June 29, 2011, the Company issued a note (the “June Note”) with a principal amount of approximately $300,000 and Warrants to purchase 6,652 shares of common stock. On July 1, 2011, the Company issued a separate note (together with the June Note, the “Notes”) with a principal amount of $4,600,000 and warrants to purchase 101,996 shares of common stock. The aggregate gross proceeds to the Company from the offering were approximately $4.9 million, excluding any proceeds from the exercise of any warrants. The aggregate placement agent fees were $297,000 and legal fees associated with the offering were $88,839. These costs have been capitalized as debt issue costs and will be amortized as interest expense over the life of the Notes. The Company recorded amortization of debt issue costs of $32,154 the three months ended January 31, 2014 and 2013 and $96,462 for the nine months ended January 31, 2014 and 2013.
 
Interest on the Notes accrues at a rate of 15% annually and will be paid in quarterly installments commencing on the third month anniversary of issuance. The Notes will mature 36 months from the date of issuance. The Notes may be converted into shares of common stock at a conversion price of $45.10 per share (subject to adjustment for stock splits, dividends and combinations, recapitalizations and the like) (the "Conversion Price") at any time, in whole or in part, at any time at the option of the holders of the Notes. The Notes also will automatically convert into shares of common stock at the Conversion Price at the election of a majority-in-interest of the holders of notes issued under the purchase agreement or upon the acquisition or sale of all or substantially all of the assets of the Company. The Company may make each applicable interest payment or payment of principal in cash, shares of common stock at the Conversion Price, or any combination thereof. The Company may elect to prepay all or any portion of the Notes without prepayment penalties only with the approval of a majority-in-interest of the note holders under the purchase agreement at the time of the election.   The Notes contain various events of default such as failing to timely make any payment under the Note when due, which may result in all outstanding obligations under the Note becoming immediately due and payable.
 
As further discussed in Note 8 below, on August 22, 2013 holders of $4.6 million of the Notes received 4,600 shares of the Company’s Series D 8% Convertible Preferred Stock (the “Series D Stock”) as consideration for cancelling their outstanding Note. On that date, the Company recognized non-cash interest expense of $1,311,847 for the remaining unamortized debt discount associated with this Note.
 
The Company recorded interest expense of $68,653 and $628,321 for the three months ended January 31, 2014 and 2013, respectively; and $2,113,677 and $1,884,962 for the nine months ended January 31, 2014 and 2013, respectively.
 
The total value allocated to the warrants was $1,960,497 and was recorded as a debt discount against the proceeds of the notes.  In addition, the beneficial conversion features related to the notes were determined to be $2,939,504.  As a result, the aggregate discount on the notes totaled $4,900,001, and is being amortized over term of the notes.  The Company recorded interest expense for the amortization of debt discount of $24,999 and $408,333 for the three months ended January 31, 2014 and 2013, respectively; and $1,863,882 and $1,225,000 for the nine months ended January 31, 2014 and 2013, respectively.
 
 
15

 
 
NOTE 7.     COMMITMENTS AND CONTINGENCIES
 
Simdax license agreement
 
As further discussed in Note 4 above, on November 13, 2013 the Company acquired the License which granted it an exclusive, sublicenseable right to develop and commercialize pharmaceutical products containing Levosimedan in the United States and Canada.  Pursuant to the License, the Company must use Orion’s “Simdax®” trademark to commercialize the Product.  The License also grants to the Company a right of first refusal to commercialize new developments of the Product, including developments as to the formulation, presentation, means of delivery, route of administration, dosage or indication.  Orion’s ongoing role under the License includes sublicense approval, serving as the sole source of manufacture, holding a first right to enforce intellectual property rights in the Territory, and certain regulatory participation rights.  Additionally, the Company must grant back to Orion a broad non-exclusive license to any patents or clinical trial data related to the Product developed by the Company under the License.  The License has a fifteen (15) year term, provided, however, that the License will continue after the end of the fifteen year term in each country in the Territory until the expiration of Orion’s patent rights in the Product in such country.  Orion may terminate the License if the Study is not started by July 31, 2014.
 
Pursuant to the terms of the License, the Company must pay to Orion a non-refundable up-front payment in the amount of $1 million within thirty (30) days of the Company receiving funding for the Study, but in no event later than April 1, 2014.  The License also includes the following development milestones for which the Company shall make non-refundable payments to Orion no later than twenty-eight (28) days after the occurrence of the applicable milestone event: (i) $2.0 million upon the grant of FDA approval, including all registrations, licenses, authorizations and necessary approvals, to develop and/or commercialize the Product in the United States; and (ii) $1.0 million upon the grant of regulatory approval for the Product in Canada. Once commercialized, the Company is obligated to make certain non-refundable commercialization milestone payments to Orion, aggregating up to $13.0 million, contingent upon achievement of certain cumulative net sales amounts in the Territory.  The Company must also pay Orion tiered royalties based on net sales of the Product in the Territory made by the Company and its sublicensees. After the end of the Term, the Company must pay Orion a royalty based on net sales of the Product in the Territory for as long as Life Newco sells the Product in the Territory.
 
As of January 31, 2014, the Company has not met any of the developmental milestones and, accordingly, has not recorded any liability for the contingent payments due to Orion.
 
Agreement with Virginia Commonwealth University
 
In May 2008 the Company entered into a license agreement with Virginia Commonwealth University (“VCU”) whereby it obtained a worldwide, exclusive license to valid claims under three of the VCU's patent applications that relate to methods for non-pulmonary delivery of oxygen to tissue and the products based on those valid claims used or useful for therapeutic and diagnostic applications in humans and animals. The license includes the right to sub-license to third parties. The term of the agreement is the life of the patents covered by the patent applications unless the Company elects to terminate the agreement prior to patent expiration.  Under the agreement the Company has an obligation to diligently pursue product development and pursue, at its own expense, prosecution of the patent applications covered by the agreement. As part of the agreement, the Company is required to pay to VCU nonrefundable payments upon achieving development and regulatory milestones. As of January 31, 2014, the Company has not met any of the developmental milestones.
 
The agreement with VCU also requires the Company to pay royalties to VCU at specified rates based on annual net sales derived from the licensed technology. Pursuant to the agreement, the Company must make minimum annual royalty payments to VCU totaling $70,000 as long as the agreement is in force. These payments are fully creditable against royalty payments due for sales and sublicense revenue earned during the fiscal year as described above. This fee is recorded as an other current asset and is amortized over the fiscal year. Amortization expense was $17,500 and $52,500 for each of the three and nine months ended January 31, 2014 and 2013, respectively.
 
NOTE 8.     STOCKHOLDERS’ EQUITY
 
Preferred Stock
 
Under the Company’s Certificate of Incorporation, the Board of Directors is authorized, without further stockholder action, to provide for the issuance of up to 10,000,000 shares of preferred stock, par value $0.0001 per share, in one or more series, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. As of January 31, 2014, 9,947,439 shares of preferred stock are undesignated.
 
On November 13, 2013, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware designating 32,992 shares of its authorized but unissued shares of preferred stock as Series E Stock
 
On August 22, 2013, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware designating 4,600 shares of its authorized but unissued shares of preferred stock as Series D Stock
 
On July 22, 2013, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware designating 5,369 shares of its authorized but unissued shares of preferred stock as Series C 8% Convertible Preferred Stock (the “Series C Stock”).
 
 
 
16

 
 
On February 25, 2013, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware designating 1,600 shares and 500 shares of its authorized but unissued shares of preferred stock as Series B-1 Convertible Preferred Stock (the “Series B-1 Stock”) and Series B-2 Convertible Preferred Stock (the “Series B-2 Stock” and together with the Series B-1 Stock, the “Series B Stock”), respectively.
 
On December 8, 2011, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware designating 7,500 shares of its authorized but unissued shares of preferred stock as Series A Convertible Preferred Stock (the “Series A Stock”).
 
Series E Stock
 
As further discussed in Note 4 above, on November 13, 2013 the Company issued 32,992 shares of its Series E Stock, which are convertible into an aggregate of 3,299,200 shares of common stock, as partial consideration to acquire certain assets of Phyxius Pharma, Inc. pursuant to the Asset Purchase Agreement.
 
The rights, preferences and privileges of the Series E Stock are set forth in the Certificate of Designation of Series E Convertible Preferred Stock (the “Certificate of Designation”) that the Company filed with the Secretary of State of the State of Delaware on November 13, 2013.  Each share of Series E Stock will automatically convert into 100 shares of common stock following receipt of stockholder approval for the transaction.  Approximately 11% of the shares of converted common stock will vest immediately upon receipt of stockholder approval for the transaction, while the remainder will vest upon achievement of certain performance milestones related to the development and commercialization of the levosimendan product in North America.   In addition, all unvested converted common stock will vest if certain change of control transactions or significant equity financings occur within 24 months of the closing of the Acquisition.  The number of shares of common stock into which the Series E Stock converts is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions.  The Series E Stock does not carry dividend or a liquidation preference.  The Series E Stock carries voting rights aggregating 4.99% of the Company’s common stock voting power immediately prior to the closing of the Acquisition.
 
As of January 31, 2014 there were 32,992 shares of Series E Stock outstanding.
 
Series D Stock
 
On August 22, 2013, the Company closed its private placement of an aggregate of $4.6 million of shares of the Company’s Series D Stock to JP SPC 3 obo OXBT FUND, SP (“OXBT Fund”).  In connection with the purchase of shares of Series D Stock, OXBT Fund received a warrant to purchase 2,358,975 shares of common stock at an exercise price equal to $2.60 (the “Series D Warrant”).  As consideration for the sale of the Series D Stock and Series D Warrant, $4.6 million in outstanding principal amount of a Note issued by the Company on July 1, 2011 and held by OXBT Fund was cancelled.  The Note carried interest at a rate of 15% per annum and matured on July 1, 2014.  Mr. Gregory Pepin, one of the Company’s directors, is the investment manager of OXBT Fund.  Pursuant to the terms of a lock-up agreement (the “Lock-Up Agreement”) executed prior to the closing, OXBT Fund and its affiliates are prohibited from engaging in certain transactions with respect to shares of the Company’s common stock and common stock equivalents until such time as the lead investor in the Company’s offering of Series C Stock ceases to own at least 25% of the shares of Series C Stock originally issued to such investor.
 
The table below sets forth a summary of the designation, powers, preferences and rights of the Series D Stock.
 
Conversion
Subject to certain ownership limitations, the Series D Stock is convertible at any time at the option of the holder into shares of the Company’s common stock at a conversion ratio determined by dividing the stated value of the Series C Stock (or $1,000) by a conversion price of $1.95 per share. The conversion price is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions.
Until such time that for at least 25 trading days during any 30 consecutive trading days, the volume weighted average price of the Company’s common stock exceeds 250% of the initial conversion price, if the Company sells or grants any option to purchase or sell any common stock or common stock equivalents entitling any person to acquire shares of common stock at an effective price per share that is lower than the then conversion price, or the Base Conversion Price, then the conversion price shall be reduced to equal the Base Conversion Price
   
Dividends and Make-Whole Payment
 
Until the third anniversary of the date of issuance of the Series D Stock, the holder of the Series D Stock is entitled to receive dividends at the rate of 8% per annum of the stated value for each share of Series D Stock held by such holder payable quarterly on January 1, April 1, July 1 and October 1, beginning on the first such date after the original issue date, and on each dividend payment date.  The Company can elect to pay the dividends in cash or in duly authorized, validly issued, fully paid and non-assessable shares of common stock, or a combination thereof.  If the Company pays the dividends in shares of common stock, the shares used to pay the dividends will be valued at 90% of the average volume weighted average price for the 20 consecutive trading days ending on the trading day immediately prior to the applicable dividend payment date.  From and after the third anniversary of the date of issuance of the Series D Stock, the holder of Series D Stock will be entitled to receive dividends equal, on an as-if-converted to common stock basis, to and in the same form as dividends actually paid on shares of common stock when, as, and if such dividends are paid on shares of common stock.  The Company has never paid dividends on its common stock and the Company does not intend to do so for the foreseeable future.
In the event OXBT Fund converts its Series D Stock prior to the third anniversary of the date of issuance of the Series D Stock, the Company must also pay to OXBT Fund in cash, or at the Company’s option in common stock valued as described above, or a combination of cash and shares of common stock, with respect to the Series D Stock so converted, an amount equal to $240 per $1,000 of the stated value of the Series D Stock, less the amount of any dividends paid in cash or in common stock on such Series D Stock on or before the date of conversion.
 
 
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Liquidation
Upon any liquidation, dissolution or winding up of the Company after payment or provision for payment of debts and other liabilities of the Company, but before any distribution or payment is made to the holders of any junior securities, the holder of Series D Stock shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount equal to $1,000 per share, after which any remaining assets of the Company shall be distributed among the holders of the other class or series of stock in accordance with the Company’s Certificate of Incorporation.
   
Voting rights
Shares of Series D Stock will generally have no voting rights, except as required by law and except that the consent of the holder of the outstanding Series D Stock will, among other things, be required to amend the terms of the Series D Stock.

During the nine months ended January 31, 2014, 4,600 shares of Series D Stock were converted into 2,358,974 shares of Common Stock and the Company issued 576,084 shares of its common stock in the form of Series D Stock dividends. As of January 31, 2014 there were no shares of Series D Stock outstanding.
 
Series C Stock
 
On July 21, 2013, the Company entered into a Securities Purchase Agreement with certain investors providing for the issuance and sale by the Company (the “Series C Offering”) of an aggregate of approximately $5.4 million of shares of the Company’s Series C Stock, which are convertible into a combined total of 2,753,348 shares of common stock (the “Conversion Shares”).  In connection with the purchase of shares of Series C Stock in the Series C Offering, each investor will receive a warrant to purchase a number of shares of common stock equal to 100% of the number of Conversion Shares at an exercise price equal to $2.60 (the “Warrants”).  On July 23, 2013, the Company sold 5,369 units for net proceeds of approximately $4.9 million.
 
The table below sets forth a summary of the designation, powers, preferences and rights of the Series C Stock.
 
 Conversion
Subject to certain ownership limitations, the Series C Stock is convertible at any time at the option of the holder into shares of the Company’s common stock at a conversion ratio determined by dividing the stated value of the Series C Stock (or $1,000) by a conversion price of $1.95 per share. The conversion price is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions.
Until such time that for at least 25 trading days during any 30 consecutive trading days, the volume weighted average price of the Company’s common stock exceeds 250% of the initial conversion price, if the Company sells or grants any option to purchase or sell any common stock or common stock equivalents entitling any person to acquire shares of common stock at an effective price per share that is lower than the then conversion price, or the Base Conversion Price, then the conversion price shall be reduced to equal the Base Conversion Price
   
Dividends and Make-Whole Payment
 
Until the third anniversary of the date of issuance of the Series C Stock, each holder of the Series C Stock is entitled to receive dividends at the rate of 8% per annum of the stated value for each share of Series C Stock held by such holder payable quarterly on January 1, April 1, July 1 and October 1, beginning on the first such date after the original issue date, and on each dividend payment date.  The Company can elect to pay the dividends in cash or in duly authorized, validly issued, fully paid and non-assessable shares of common stock, or a combination thereof.  If the Company pays the dividends in shares of common stock, the shares used to pay the dividends will be valued at 90% of the average volume weighted average price for the 20 consecutive trading days ending on the trading day immediately prior to the applicable dividend payment date.  From and after the third anniversary of the date of issuance of the Series C Stock, each holder of Series C Stock will be entitled to receive dividends equal, on an as-if-converted to common stock basis, to and in the same form as dividends actually paid on shares of common stock when, as, and if such dividends are paid on shares of common stock.  The Company has never paid dividends on its common stock and the Company does not intend to do so for the foreseeable future.
In the event a holder converts his, her or its Series C Stock prior to the third anniversary of the date of issuance of the Series C Stock, the Company must also pay to the holder in cash, or at the Company’s option in common stock valued as described above, or a combination of cash and shares of common stock, with respect to the Series C Stock so converted, an amount equal to $240 per $1,000 of the stated value of the Series C Stock, less the amount of any dividends paid in cash or in common stock on such Series C Stock on or before the date of conversion.
   
Liquidation
Upon any liquidation, dissolution or winding up of the Company after payment or provision for payment of debts and other liabilities of the Company, but before any distribution or payment is made to the holders of any junior securities, the holders of Series C Stock shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount equal to $1,000 per share, after which any remaining assets of the Company shall be distributed among the holders of the other class or series of stock in accordance with the Company’s Certificate of Incorporation.
   
Voting rights
Shares of Series C Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series C Stock will, among other things, be required to amend the terms of the Series C Stock.
 
 
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The Company will not affect any conversion of the Series C Stock, nor shall a holder convert its shares of Series C Stock, to the extent that such conversion would cause the holder to have acquired, through conversion of the Series C Stock or otherwise, beneficial ownership of a number shares of common stock in excess of 4.99% of the common stock outstanding immediately preceding the conversion.
 
During the nine months ended January 31, 2014, 5,114 shares of Series C Stock were converted into 2,622,558 shares of common stock and the Company issued 804,661 shares of its common stock for the payment of $1,227,360 as dividends on the Series C Stock. As of January 31, 2014 there were 255 shares of Series C Stock outstanding.
 
Series B Stock
 
On February 22, 2013, the Company entered into a Securities Purchase Agreement with an institutional investor providing for the issuance and sale by the Company of $1.6 million of shares of the Company’s Series B-1 Stock and $0.5 million of shares of the Company's Series B-2 Stock which are convertible into a combined total of 420,000 shares of common stock, subject to adjustment for subsequent equity sales.
 
On February 27, 2013, the Company sold 2,100 units for net proceeds of approximately $1.9 million. Each unit sold consisted of (i) one share of the Company’s Series B Stock and (ii) a Warrant representing the right to purchase 300 shares of common stock at a price of $1,000 per unit, less issuance costs. The shares of Series B Stock were immediately convertible upon issuance.
 
The table below sets forth a summary of the designation, powers, preferences and rights of the Series B Stock.
 
Dividends
No dividends shall be paid on shares of Preferred Stock.
 
Conversion
Holders may elect to convert shares of Series B Stock into shares of common stock at the then-existing conversion price at any time.  The initial conversion price is $5.00 per share of common stock, and is subject to certain adjustments, including an anti-dilution provision that reduces the conversion price upon the issuance of any common stock or securities convertible into common stock at an effective price per share less than the conversion price and a one-time price reset following the effectiveness of a reverse split of the Company’s outstanding common stock.
 
Liquidation preference
In the event of the Company’s voluntary or involuntary dissolution, liquidation or winding up, each holder of Series B Stock will be entitled to be paid a liquidation preference equal to the initial stated value of such holder’s Series B Stock of $1,000 per share, plus accrued and unpaid dividends and any other payments that may be due on such shares, before any distribution of assets may be made to holders of capital stock ranking junior to the Series B Stock.
 
Voting rights
Shares of Series B Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series B Stock will among other things, be required to amend the terms of the Series B Stock.
 
 
 
 
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The Company will not affect any conversion of the Series B Stock, nor shall a holder convert its shares of Series B Stock, to the extent that such conversion would cause the holder to have acquired, through conversion of the Series B Stock or otherwise, beneficial ownership of a number shares of common stock in excess of 4.99% of the common stock outstanding immediately preceding the conversion.
 
During the nine months ended January 31, 2014, 987 shares of Series B Stock were converted into 644,915 shares of common stock.  As of January 31, 2014 there were no shares of Series B Stock outstanding.
 
 
Series A Stock
 
On December 12, 2011, the Company sold 3,500 units for net proceeds of approximately $3.2 million. Each unit sold consisted of (i) one share of the Company’s Series A Stock and (ii) a warrant representing the right to purchase 11.275 shares of common stock (the “2011 Warrants”), at a price of $1,000 per unit, less issuance costs. The shares of Series A Stock were immediately convertible and the 2011 Warrants are exercisable on the one-year anniversary of the closing date.
 
On June 15, 2012, the Company sold an additional 2,500 units for net proceeds of approximately $2.3 million. Each unit sold consisted of (i) one share of the Company’s Series A Stock and (ii) a 2011 Warrant, at a price of $1,000 per unit, less issuance costs. The shares of Series A Stock were immediately convertible and the 2011 Warrants are exercisable beginning on the one-year anniversary of the closing date.
 
Interest expense on the outstanding Series A Stock was approximately $0 and $1.7 million for the nine months ended January 31, 2014 and 2013, respectively. The recorded interest for the prior period was comprised of approximately $657,000 for the calculated fair value of the warrants issued with the Series A Stock and $763,000 for the excess of the fair-value of the shares issued upon conversion over the fair value of the Series A Stock.
 
Interest expense recorded for the payment of dividends on the Series A Stock was approximately $0 and $310,000 for the nine months ended January 31, 2014 and 2013, respectively.
 
No Series A Stock was outstanding during the nine months ended January 31, 2014.
 
Common Stock
 
The Company’s Certificate of Incorporation authorizes it to issue 400,000,000 shares of $0.0001 par value common stock. As of January 31, 2014, there were 13,671,105 shares of common stock issued and outstanding.
 
Warrants
 
Series D Warrants
 
On August 22, 2013, the Company closed its previously announced private placement of an aggregate of $4.6 million shares of the Company’s Series D Stock to OXBT Fund.  In connection with the purchase of shares of Series D Stock, OXBT Fund received the Series D Warrant to purchase 2,358,975 shares of common stock at an exercise price equal to $2.60 and contractual term of 6 years. In accordance with ASC 815, these warrants are classified as equity and their relative fair-value of $1,531,167 was recognized as a deemed dividend on the Series D Stock during the nine months ended January 31, 2014. The estimated fair value is determined using the Black-Scholes Option Pricing Model which is based on the value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock.  
 
 
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The Series D Warrant is exercisable beginning on the date of issuance and expires on August 22, 2019.  The exercise price and the number of shares issuable upon exercise of Series D Warrant is subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Company’s common stock, and also upon any distributions of assets, including cash, stock or other property to the Company’s stockholders.  In addition, if stockholder approval for the transaction is obtained, the Series D Warrant will be subject to anti-dilution provisions until such time that for 25 trading days during any 30 consecutive trading day period, the volume weighted average price of the Company’s common stock exceeds $6.50 and the daily dollar trading volume exceeds $350,000 per trading day.
 
On January 30, 2014, the Company entered into an agreement with the OXBT Fund to amend the terms of the outstanding Series D Warrants. The amendment replaced the price protection anti-dilution provision of each warrant with a covenant that the Company will not issue common stock or common stock equivalents at an effective price per share below the exercise price of such warrant without prior written consent, subject to certain exceptions.
 
The Series D Stock and the Series D Warrant were issued and sold without registration under the Securities Act in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.  Accordingly, OXBT Fund may exercise the Warrant and sell the Series D Stock and underlying shares only pursuant to an effective registration statement under the Securities Act covering the resale of those securities, an exemption under Rule 144 under the Securities Act or another applicable exemption under the Securities Act.
 
Series C Warrants
 
On July 23, 2013, the Company issued common stock warrants in connection with the issuance of Series C Stock (the “Series C Warrants”). As part of the offering, the Company issued 2,753,348 warrants at an exercise price of $2.60 per share and contractual term of 6 years. In accordance with ASC 815, these warrants are classified as equity and their relative fair-value of $1,867,991 was recognized as a deemed dividend on the Series C Stock during the nine months ended January 31, 2014. The estimated fair value is determined using the Black-Scholes Option Pricing Model which is based on the value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock.
 
In connection with the Series C Offering described above, the Company entered into a Placement Agency Agreement (the “Placement Agency Agreement”) with Ladenburg Thalmann & Co. Inc. (the “Placement Agent”) pursuant to which the Placement Agent agreed to act as the Company’s exclusive placement agent for the Series C Offering. In accordance with the Placement Agency Agreement, on July 23, 2013 the Company issued to the Placement Agent warrants to purchase 53,539 shares of common stock at an exercise price of $2.4375 per share and a contractual term of 3 years. In accordance with ASC 815, these warrants are classified as equity and their relative fair-value of $51,231 was recognized as additional paid in capital during the nine months ended January 31, 2014. The estimated fair value is determined using the Black-Scholes Option Pricing Model which is based on the value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock.
 
On August 23, 2013, the Company entered into agreements with certain institutional investors to amend the terms of certain outstanding warrants to purchase an aggregate of 2,681,283 shares of the Company’s common stock issued by the Company on February 27, 2013 and July 27, 2013 (collectively, the “Warrant Amendments”).  The Warrant Amendments replace the price protection anti-dilution provision of each warrant with a covenant that the Company will not issue common stock or common stock equivalents at an effective price per share below the exercise price of such warrant without prior written consent, subject to certain exceptions. As of January 31, 2014, none of these amended warrants remain outstanding.
 
During the nine months ended January 31, 2014, the Company received cash of approximately $6.4 million and issued 2,461,542 shares of common stock upon the exercise of outstanding Series C Warrants. As of January 31, 2014, 291,806 Series C Warrants are outstanding.
 
In accordance with ASC 815-40-35-8, the company reassessed the classification of the remaining Series C Warrants. On November 11, 2013, the Company satisfied certain contractual obligations pursuant to the Series C offering which caused certain “down-round” price protection clauses in the outstanding warrants to become effective on that date. In accordance with ASC 815-40-35-9, On November 11, 2013, the Company reclassified these warrants as a current liability and recorded a warrant liability of $1,380,883 which represents the fair market value of the warrants at that date. The initial fair value recorded as warrants within stockholders’ equity of $233,036 was reversed and the change in fair value was recorded as a component of other expense.
 
The estimated fair value is determined using the Cox-Ross Binomial Lattice Model which is based on the value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock.
 
 
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As of January 31, 2014, the fair value of the warrant liability was $1,082,941. The Company recorded a loss of $849,905 for the change in fair value on the consolidated statement of operations for the three months ended January 31, 2014.
 
The following table summarizes the Company’s warrant activity for the nine months ended January 31, 2014:
 
   
Warrants
   
Weighted Average Exercise Price
 
Outstanding at April 30, 2013
    759,410     $ 11.00  
Issued
    5,165,862       2.60  
Exercised
    (3,109,862 )     2.25  
Forfeited
    (1,661 )     126.00  
Outstanding at January 31, 2014
    2,813,749     $ 4.25  
 
During the three and nine months ended January 31, 2014, the Company received approximately $6.4 million and $7.0 million and issued 2,479,862 and 3,109,862 shares of common stock, respectively, upon the exercise of outstanding warrants.
 
1999 Amended Stock Plan
 
In October 2000, the Company adopted the 1999 Stock Plan, as amended and restated on June 17, 2008 (the “Plan”). Under the Plan, with the approval of the Compensation Committee of the Board of Directors, the Company may grant stock options, restricted stock, stock appreciation rights and new shares of common stock upon exercise of stock options. On September 30, 2011, the Company’s stockholders approved an amendment to the Plan which increased the amount of shares authorized for issuance under the Plan to 300,000, up from 40,000 previously authorized. As of January 31, 2014 the Company had 152,499 shares of common stock available for grant under the Plan.
 
The following table summarizes the shares available for grant under the Plan for the nine months ended January 31, 2014:
 
   
Shares Available for Grant
 
Balances, at April 30, 2013
    282,726  
Options granted
    (39,913 )
Options cancelled/forfeited
    550  
Restricted stock granted
    (135,662 )
Restricted stock cancelled/forfeited
    44,798  
Balances, at January 31, 2014
    152,499  
 
Plan Stock Options
 
Stock options granted under the Plan may be either incentive stock options (“ISOs”), or nonqualified stock options (“NSOs”). ISOs may be granted only to employees. NSOs may be granted to employees, consultants and directors. Stock options under the Plan may be granted with a term of up to ten years and at prices no less than fair market value for ISOs and no less than 85% of the fair market value for NSOs. Stock options granted generally vest over one to three years.
 
 
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The following table summarizes the outstanding stock options under the Plan for the nine months ended January 31, 2014:
 
   
Outstanding Options
 
   
Number of Shares
   
Weighted Average Exercise Price
 
Balances, at April 30, 2013
    11,336     $ 57.00  
Options granted
    39,942     $ 4.69  
Options cancelled
    (550 )   $ 38.76  
                 
Balances, at January 31, 2014
    50,728     $ 16.01  
 
The Company chose the “straight-line” attribution method for allocating compensation costs of each stock option over the requisite service period using the Black-Scholes Option Pricing Model to calculate the grant date fair value.
 
The Company used the following assumptions to estimate the fair value of options granted under its stock option plans for the nine months ended January 31, 2014 and 2013:
 
   
For the nine months ended January 31
 
   
2014
   
2013
 
Risk-free interest rate (weighted average)
    1.12 %     1.29 %
Expected volatility (weighted average)
    86.24 %     79.30 %
Expected term (in years)
    7       7  
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 Company’s historical experience with its 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 does not anticipate paying any dividends in the near future.
   
Forfeitures
Stock compensation expense recognized in the statements of operations for the nine months ended January 31, 2014 and 2013 is based on awards ultimately expected to vest, and 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.
 
As of January 31, 2014, there were unrecognized compensation costs of approximately $40,000 related to non-vested stock option awards granted after May 1, 2004 that will be recognized on a straight-line basis over the weighted average remaining vesting period of 3.78 years.
 
 
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Restricted Stock Grants
 
The following table summarizes the restricted stock grants under the Plan for the nine months ended January 31, 2014 .
 
   
Outstanding Restricted Stock Grants
 
   
Number of Shares
   
Weighted Average Grant Date Fair Value
 
Balances, at April 30, 2013
    1,917     $ 48.40  
Restricted stock granted
    135,662     $ 3.00  
Restricted stock vested
    (50,152 )   $ 2.30  
Restricted stock cancelled
    (31,435 )   $ 1.66  
Restricted stock forfeited
    (13,363 )   $ 4.49  
Balances, at January 31, 2014
    42,629     $ 6.37  
 
The Company recorded compensation expense for these restricted stock grants of $173,613 and $295,767 for the three and nine months ended January 31, 2014, respectively.
 
As of January 31, 2014, there were unrecognized compensation costs of approximately $66,000 related to the non-vested restricted stock grants that will be recognized on a straight-line basis over the remaining vesting period.
 
NOTE 9.     RESTRUCTURING EXPENSE
 
In May 2012, the Company decided to consolidate its operations and relocate its research and development function to North Carolina from Costa Mesa, California. To allow for this transition period, all existing development work had been completed and all of the manufacturing of the Company’s PFC-based products had been transferred to contract manufacturers. As part of these initiatives, the Company terminated all related research and development activities and a workforce reduction was implemented.  In September 2012, the Company entered into a sublease agreement with an unrelated third party that extends throughout the remaining term of the existing lease for the vacated facility.
 
The following table summarizes the impact of the work force reductions and other associated costs on operating expenses and payments for the nine months ended January 31, 2014, and the liability remaining on the balance sheet as of January 31, 2014.
 
   
Charges Incurred During the Nine Months Ended
January 31,
2014
 
Amounts Paid Through January 31,
2014
 
Amounts Accrued at January 31,
2014
 
Future lease obligations, net of sublease revenue
  $ -     $ 76,292     $ 65,592  
 
The Company recorded all restructuring expenses as operating expenses on the consolidated statement of operations. All restructuring costs were paid by January 31, 2014, with the exception of approximately $66,000 of future lease obligations, net of sublease revenue.
 
NOTE 10.     SUBSEQUENT EVENTS
 
On February 10, 2014, the remaining 255 shares of Series C Stock were converted into 130,796 shares of common stock and the Company issued 26,740 shares of its common stock for the payment of $61,200 as dividends on the Series C Stock.
 
On March 13, 2014, at a special meeting of stockholders, the Company received stockholder approval of the issuance of the Series E Stock to the Phyxius Stockholders, and pursuant to the terms of the Series E Stock, the 32,992 shares of Series E Stock were converted into an aggregate of 3,299,200 shares of common stock.
 
In addition, on March 13, 2014, at the special meeting of stockholders, the Company’s stockholders approved an amendment to the Plan to increase the number of shares of common stock authorized for issuance under the Plan to 4,000,000 shares of common stock.
 
 
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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to them. In some cases you can identify forward-looking statements by words such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements regarding: the implications of interim or final results of our clinical trials, the progress of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates, the potential of such product candidates to lead to the development of commercial products, our anticipated timing for initiation or completion of our clinical trials for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and development, and the sufficiency of our cash resources. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form 10-Q,and our other filings with the Securities and Exchange Commission, or SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from those we expect. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.
 
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended April 30, 2013.
 
All references in this Quarterly Report to “Oxygen Biotherapeutics”, “we”, “our” and “us” means Oxygen Biotherapeutics, Inc.
 
Overview
 
Strategy
 
We are a specialty pharmaceutical company focused on developing and commercializing drugs for critical care patients. Our principal business objective is to acquire, or discover, develop, and commercialize novel therapeutic products for disease indications that represent significant areas of clinical need and commercial opportunity. Our lead product is levosimendan, which was acquired in an asset purchase agreement with Phyxius Pharma, Inc., or Phyxius.  Levosimendan is a calcium sensitizer developed for intravenous use in hospitalized patients with acutely decompensated heart failure. The treatment is currently approved in more than 50 countries for this indication.  The United States Food and Drug Administration or FDA has granted Fast Track status for levosimendan for the reduction of morbidity and mortality in cardiac surgery patients at risk for developing Low Cardiac Output Syndrome or LCOS.  In addition, the FDA has agreed to the Phase 3 protocol design under Special Protocol Assessment (SPA), and provided guidance that a single successful trial will be sufficient to support approval of levosimendan in this indication.
 
We are also developing Oxycyte®, a systemic perfluorocarbon, or PFC, product we believe is a safe and effective oxygen carrier for use in situations of acute ischemia. Oxycyte has been successful in two clinical trials and is currently being evaluated in a Phase II-b clinical trial for the treatment of traumatic brain injury, or TBI.
 
Our current strategy is to:
 
  
Efficiently conduct clinical development to establish clinical proof of concept with our lead product candidates;
 
  
Advance the development of the perfluorocarbon, or PFC, therapeutic modality and supporting capabilities;
 
  
Efficiently explore new high-potential therapeutic applications, leveraging third-party research collaborations and our results from related areas;
 
  
Continue to expand our intellectual property portfolio; and
 
  
Enter into licensing or product co-development arrangements in certain areas, while out-licensing opportunities in non-core areas.
 
We believe that this strategy will allow us to develop a portfolio of high quality product development opportunities, expand our clinical development and commercialization capabilities, and enhance our ability to generate value from our proprietary technologies
 
 
25

 

Third Quarter 2014 Highlights
 
The following summarizes certain key financial measures for the three months ended January 31, 2014:
 
  
Warrants to purchase 2,479,862 shares of common stock were exercised for net proceeds of $6.44 million.
 
  
Cash and cash equivalents were $6.3 million at January 31, 2014.
 
  
Revenue earned under our research grant was $42,000 for the third quarter of 2014 compared to $221,000 for the three months ended January 31, 2013.
 
  
Our loss from operations was $2.4 million for the third quarter of 2014 compared to $1.6 million for the three months ended January 31, 2013.
 
  
Net cash used in operating activities was $6.3 million and $3.5 million for the nine months ended January 31, 2014 and 2013, respectively.
 
Consistent with our strategy, during the three months ended January 31, 2014, we (i) acquired the rights to develop and commercialize levosimendan, a calcium sensitizer developed for intravenous use in hospitalized patients with acutely decompensated heart failure , (ii) submitted the results of the immunocompetency studies funded under the U.S. Army cost reimbursement grant to the FDA, and (iii) continued with the enrollment of patients in the second cohort of our traumatic brain injury or TBI clinical trials.
 
Opportunities and Trends
 
We are moving forward with plans to initiate the phase 3 trial for levosimendan. Duke University’s Duke Clinical Research Institute or DCRI has been selected to conduct the Phase 3 trial. DCRI is the world’s largest academic clinical research organization, with substantial experience in conducting cardiac surgery trials. The DCRI will serve as the coordinating center and Drs. John H. Alexander and Rajendra Mehta as lead investigators for the Phase 3 trial.
 
The Phase 3 trial will be conducted in approximately 50 major cardiac surgery centers in North America.  The trial will enroll patients undergoing coronary artery bypass graphs, or CABG and/or mitral valve surgery who are at risk for developing LCOS.  The trial will be a double blind, randomized, placebo controlled study seeking to enroll 760 patients.  It is expected that enrollment will begin in the third quarter of 2014, and will take approximately 18 months to complete.  We are currently in the planning phase of the program.
 
We continue to execute on our strategic plan, which calls for resuming our Phase II-B clinical trials for STOP-TBI (Safety and Tolerability of Oxycyte in Patients with Severe non-Penetrating Traumatic Brain Injury); supporting our collaborations to gather proof-of-concept data for additional therapeutic areas with unmet medical needs; and continuing our business development efforts to expand our product portfolio. We also continue to progress Oxycyte through the regulatory approval process by conducting a comprehensive group of preclinical studies to confirm the safety profile of our product.  These studies are particularly focused on platelet activity and immunocompetence. We believe these actions position us well to drive future growth and create stockholder value.
 
As we focus on the development of our existing products and product candidates, we also continue to position ourselves to execute upon licensing and other partnering opportunities. In order to do so, we will need to continue to maintain our strategic direction, manage and deploy our available cash efficiently and strengthen our collaborative research development and partner relationships.
 
During fiscal year 2014 we are focused on the following four key initiatives:
 
  
Conducting well-designed studies early in the clinical development process to establish a robust foundation for subsequent development, partnership and expansion into complementary areas;
 
  
Working with collaborators and partners to accelerate product development, reduce our development costs, and broaden our commercialization capabilities;
 
  
Gaining regulatory approval for the continued development and commercialization of our products in the United States; and
 
  
Developing new intellectual property to enable us to file patent applications that cover new applications of our existing technologies and product candidates.
 
Critical Accounting Policies and Significant Judgments and Estimates
 
There have been no significant changes in critical accounting policies during the three months ended January 31, 2014, as compared to the critical accounting policies described in “ Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2013.
 
 
26

 
 
Financial Overview
 
Results of Operations- Comparison of the Three Months Ended January 31, 2014 and 2013
 
Revenue
 
Product Revenue and Gross Profit
 
We generate revenue through the sale of Dermacyte® through distribution agreements, on-line retailers and direct sales to physician and medical spa facilities.  Product revenue and percentage changes for the three months ended January 31, 2014 and 2013 are as follows:
 
   
The three months ended January 31,
             
   
2014
   
2013
    Increase/ (Decrease)     % Increase/ (Decrease)  
Product revenue
  $ 590     $ 2,871     $ (2,281 )     (79 ) %
Cost of sales
    410       1,534       (1,124 )     (73 ) %
Gross profit
  $ 180     $ 1,337     $ (1,157 )     (87 ) %
 
The decrease in product revenue for the three months ended January 31, 2014 was primarily due to our amendment to the terms of the license agreement for the development and commercialization of Dermacyte in the current period.
 
Government Grant Revenue
 
We earn revenues through a cost-reimbursement grant sponsored by the United States Army, or Grant Revenue. Grant Revenue is recognized as milestones under the Grant program are achieved. Grant Revenue is earned through reimbursements for the direct costs of labor, travel, and supplies, as well as the pass-through costs of subcontracts with third-party contract research organizations or CROs.
 
   
Three months ended January 31,
             
   
2014
   
2013
    Increase/ (Decrease)     % Increase/ (Decrease)  
Government grant revenue
  $ 41,684     $ 221,051     $ (179,367 )     (81 ) %
 
For the three months ended January 31, 2014, we recorded approximately $42,000 in revenue under the grant program as compared to approximately $221,000 in revenue during the same period in the prior year. In addition to the revenue earned, we have recorded approximately $124,000 in deferred revenue associated with the grant. Deferred revenue under the grant represents pass-through costs that have been reimbursed in advance of performing the studies underlying the subcontracts. The decrease in revenue earned under the grant is due primarily to our completion of multiple studies in the prior year.
 
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 for the three months ended January 31, 2014 and 2013, respectively, are as follows:
 
   
Three months ended January 31,
             
   
2014
   
2013
    Increase/ (Decrease)     % Increase/ (Decrease)  
Marketing and sales expense
  $ -     $ 14,121     $ (14,121 )     (100 ) %
 
The decrease in marketing and sales expenses for the three months ended January 31, 2014 was driven by the elimination of costs incurred for compensation and direct advertising following the execution of the Dermacyte distribution agreement in the prior year.
 
 
27

 
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of compensation for executive, finance, legal and administrative personnel, including stock-based compensation. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, legal and accounting services, other professional services, and consulting fees. General and administrative expenses and percentage changes for the three months ended January 31, 2014 and 2013, respectively, are as follows:
 
   
Three months ended January 31,
             
   
2014
   
2013
    Increase/ (Decrease)     % Increase/ (Decrease)  
Personnel costs
  $ 922,356     $ 371,027     $ 551,329       149 %
Legal and professional fees
    710,793       916,623       (205,830 )     (22 ) %
Other costs
    83,945       75,409       8,536       11 %
Facilities
    39,055       36,496       2,559       7 %
Depreciation and amortization
    27,447       27,824       (377 )     (1 ) %
 
Personnel costs:
 
Personnel costs increased approximately $551,000 for the three months ended January 31, 2014 compared to the same period in the prior year. The increase was due primarily to increases in headcount including the Chief Executive Officer, and executive bonuses paid in cash and stock.
 
Legal and professional fees:
 
Legal and professional fees decreased approximately $206,000 for the three months ended January 31, 2014 compared to the same period in the prior year. This decrease was primarily due to legal fees associated with the $600,000 accrual for settlement of the Tenor matter in the same period in the prior year partially offset by an increase in the current period of approximately $300,000 of fees associated with outsourced corporate communications and approximately $85,000 increase in legal fees associated with the acquisition of certain assets of Phyxius.
   
Other costs:
 
Other costs include costs incurred for travel, supplies, insurance and other miscellaneous charges. The approximately $8,500 increase in other costs was due primarily to travel expenses in the current period.
 
Facilities:
 
Facilities include costs paid for rent and utilities at our corporate headquarters in North Carolina. The approximately $2,600 increase during the three months ended January 31, 2014 compared to the same period in the prior year was the result of an increase in the pass-through costs for maintenance and utility charges.
 
Depreciation and Amortization:
 
Depreciation and amortization costs remained relatively consistent for the three months ended January 31, 2014 and 2013.
 
Research and Development Expenses
 
Research and development expenses include, but are not limited to, (i) expenses incurred under agreements with CROs and investigative sites, which conduct our clinical trials and a substantial portion of our pre-clinical studies; (ii) the cost of manufacturing and supplying clinical trial materials; (iii) payments to contract service organizations, as well as consultants; (iv) employee-related expenses, which include salaries and benefits; and (v) facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, depreciation of leasehold improvements, equipment, laboratory and other supplies. All research and development expenses are expensed as incurred. Research and development expenses and percentage changes for the three months ended January 31, 2014 and 2013, respectively, are as follows:
 
   
Three months ended January 31,
             
   
2014
   
2013
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
Clinical and preclinical development
  $ 511,426     $ 204,091     $ 307,335       151 %
Personnel costs
    156,110       143,333       12,777       9 %
Depreciation
    12,256       9,939       2,317       23 %
Consulting
    4,369       5,790       (1,421 )     (25 ) %
Other costs
    3,100       3,697       (597 )     (16 ) %
Facilities
    2,405       2,597       (192 )     (7 ) %
 
 
28

 
 
Clinical and preclinical development:
 
The increase of approximately $307,000 in clinical and preclinical development costs for the three months ended January 31, 2014 compared to the same period in the prior year was primarily due to increases of $223,000 associated with the Phase II-b trials for Oxycyte and $153,000 associated with FtBu and Oxycyte manufacturing related expenses, offset partially by a decrease of $108,000 in costs incurred for preclinical safety studies and quality assurance for Oxycyte.
 
Personnel costs:
 
Personnel costs increased approximately $13,000 for the three months ended January 31, 2014 compared to the same period in the prior year primarily due to personnel changes in the current period.
 
Depreciation:
 
Depreciation expense remained relatively consistent for the three months ended January 31, 2014 and 2013. 
 
Consulting fees:
 
Consulting fees decreased approximately $1,400 for the three months ended January 31, 2014 compared to the same period in the prior year primarily due to a reduction in fees incurred to plan and prepare for regulatory submissions, clinical trial expansions and other clinical support activities.
 
Other costs:
 
Other costs remained relatively consistent for the three months ended January 31, 2014 and 2013.
 
Facilities:
 
Facilities expense remained relatively consistent for the three months ended January 31, 2014 and 2013.
 
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, levosimendan, and to continue with the development of Oxycyte and other potential product candidates.
 
The process of conducting preclinical studies and clinical trials necessary to obtain approval from the FDA 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, levosimendan, however, we will need substantial additional capital in the future in order to complete the development and potential commercialization of levosimendan and to continue with the development of Oxycyte and other potential product candidates.
 
 
29

 
 
Restructuring expense
 
   
Three months ended January 31,
             
   
2014
   
2013
    Increase/ (Decrease)     % Increase/ (Decrease)  
Restructuring expense
  $ -     $ 2,941     $ (2,941 )     %
 
During the three months ended January 31, 2013, the Company recorded one-time charges of approximately $3,000 of severance and benefits related charges that were not incurred in the current period.
 
Interest expense
 
Interest expense includes the interest payments due under our long-term debt, amortization of debt issuance costs and accretion of discounts recorded against our outstanding convertible notes, and noncash interest charges related to our Series A Stock. Interest expense and percentage changes for the three months ended January 31, 2014 and 2013, respectively, are as follows:
 
   
Three months ended January 31,
             
   
2014
   
2013
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
Interest expense
  $ 69,967     $ 821,777     $ (751,810 )     (91 ) %
 
 
During the three months ended January 31, 2014, interest expense decreased approximately $752,000 compared to the same period in the prior year. The decrease was due primarily to approximately $559,000 of discount amortization associated with our convertible notes and $193,000 of noncash interest charges to our Series A Stock recorded in the prior period.
 
Other income and expense
 
Other income and expense includes non-operating income and expense items not otherwise recorded in our consolidated statement of operations. These items include, but are not limited to, revenue earned under sublease agreements for our California facility, changes in the fair value of financial assets and liabilities, interest income earned and fixed asset disposals. Other expense for the three months ended January 31, 2014 and 2013, respectively, is as follows:
 
   
Three months ended January 31,
       
   
2014
   
2013
    Increase/ (Decrease)  
Other (income) expense, net
  $ 849,556     $ (323 )   $ 849,879  
 
Other (income) expense increased approximately $850,000 for the three months ended January 31, 2014 compared to the same period in the prior year primarily due to change in fair value of our warrants in the current period.
 
Results of Operations- Comparison of the Nine months Ended January 31, 2014 and 2013
 
Revenue
 
Product Revenue and Gross Profit
 
We generate revenue through the sale of Dermacyte® through distribution agreements, on-line retailers and direct sales to physician and medical spa facilities.  Product revenue and percentage changes for the nine months ended January 31, 2014 and 2013 are as follows:
 
   
The nine months ended January 31,
             
   
2014
   
2013
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
Product revenue
  $ 60,669     $ 28,899     $ 31,770       110 %
Cost of sales
    31,275       16,578       14,697       89 %
Gross profit
  $ 29,394     $ 12,321     $ 17,073       139 %
 
 
30

 
 
The increase in product revenue for the nine months ended January 31, 2014 was primarily due to license fees earned in accordance with our distribution agreement for Dermacyte.
 
Gross profit as a percentage of revenue was 48% and 43% for nine months ended January 31, 2014 and 2013, respectively. The increase for the nine months ended January 31, 2014, as compared to the same period in the prior year, was due to license fee payments due in accordance with the existing Dermacyte distribution agreement.
 
Government Grant Revenue
 
Grant Revenue is recognized as milestones under the Grant program are achieved. Grant Revenue is earned through reimbursements for the direct costs of labor, travel, and supplies, as well as the pass-through costs of subcontracts with third-party CROs.
 
   
Nine months ended January 31,
             
   
2014
   
2013
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
Government grant revenue
  $ 233,981     $ 997,035     $ (763,054 )     (77 ) %
 
For the nine months ended January 31, 2014, we recorded approximately $234,000 in revenue under the grant program as compared to approximately $997,000 in revenue during the same period in the prior year. In addition to the revenue earned, we have recorded approximately $124,000 in deferred revenue associated with the grant. Deferred revenue under the grant represents pass-through costs that have been reimbursed in advance of performing the studies underlying the subcontracts. The decrease in revenue earned under the grant is due primarily to our completion of multiple studies in the prior year.
 
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 for the nine months ended January 31, 2014 and 2013, respectively, are as follows:
 
   
Nine months ended January 31,
             
   
2014
   
2013
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
Marketing and sales expense
  $ 102     $ 106,019     $ (105,917 )     (100 ) %
 
The decrease in marketing and sales expenses for the nine months ended January 31, 2014 was driven by the elimination of costs incurred for compensation and direct advertising following the execution of the Dermacyte distribution agreement in the prior year.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of compensation for executive, finance, legal and administrative personnel, including stock-based compensation. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, legal and accounting services, other professional services, and consulting fees. General and administrative expenses and percentage changes for the nine months ended January 31, 2014 and 2013, respectively, are as follows:
 
   
Nine months ended January 31,
             
   
2014
   
2013
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
Personnel costs
  $ 1,875,786     $ 1,121,660     $ 754,126       67 %
Legal and professional fees
    1,872,365       1,965,200       (92,835 )     (5 ) %
Other costs
    240,497       (275,046 )     515,543       187  %
Facilities
    114,136       127,312       (13,176 )     (10 ) %
Depreciation and amortization
    84,636       81,988       2,648       3 %
 
 
31

 
 
Personnel costs:
 
Personnel costs increased approximately $754,000 for the nine months ended January 31, 2014 compared to the same period in the prior year. The increase was due primarily to increases in headcount including the Chief Executive Officer, and executive bonuses paid in cash and stock.
 
Legal and professional fees:
 
Legal and professional fees decreased approximately $93,000 for the nine months ended January 31, 2014 compared to the same period in the prior year. This decrease was primarily due to legal fees associated with the $600,000 accrual for settlement of the Tenor matter and approximately $111,000 in board stock compensation recognized in the prior year, partially offset by an increase in the current period of approximately $433,000 of fees associated with outsourced corporate communications and approximately $193,000 increase in legal fees associated with the acquisition of certain assets of Phyxius.
 
Other costs:
 
Other costs include costs incurred for travel, supplies, insurance and other miscellaneous charges. The approximately $516,000 increase in other costs was due primarily to the reversal of a contingent liability in the prior period.
 
Facilities:
 
Facilities include costs paid for rent and utilities at our corporate headquarters in North Carolina. The approximately $13,000 reduction compared to the same period in the prior year was the result of the elimination of allocated costs from the closure of the California lab facility in the prior year.
 
Depreciation and Amortization:
 
Depreciation and amortization costs remained relatively consistent for the nine months ended January 31, 2014 and 2013.
 
Research and Development Expenses
 
Research and development expenses include, but are not limited to, (i) expenses incurred under agreements with CROs and investigative sites, which conduct our clinical trials and a substantial portion of our pre-clinical studies; (ii) the cost of manufacturing and supplying clinical trial materials; (iii) payments to contract service organizations, as well as consultants; (iv) employee-related expenses, which include salaries and benefits; and (v) facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, depreciation of leasehold improvements, equipment, laboratory and other supplies. All research and development expenses are expensed as incurred. Research and development expenses and percentage changes for the nine months ended January 31, 2014 and 2013, respectively, are as follows:
 
   
Nine months ended January 31,
             
   
2014
   
2013
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
Clinical and preclinical development
  $ 1,397,583     $ 925,795     $ 471,788       51 %
Personnel costs
    610,793       478,120       132,673       28 %
Consulting
    140,548       93,249       47,299       51 %