UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C., 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended April 30, 2014
 
Commission File No. 001-34600
 
OXYGEN BIOTHERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
26-2593535
(State or other jurisdiction of Incorporation or organization)
(I.R.S. Employer Identification No.)
 
ONE Copley Parkway, Suite 490, Morrisville, NC 27560
(Address of Principal Executive Offices) (Zip Code)
 
Registrant’s Telephone Number and area code: (919) 855-2100
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share
The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act: NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
 
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 o
 
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 o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the this Form 10-K.   o
 
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
o
Accelerated filer
o
Non-accelerated filer
o
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 in Rule 12b-2 of the Exchange Act). Yes o No þ
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $19,682,675.
 
The number of shares outstanding of the registrant’s class of $0.0001 par value common stock as of July 24, 2014 was 28,107,206.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
Proxy Statement for the 2014 Annual Meeting of Stockholders is incorporated by reference in Part III to the extent described therein.
 


 
 
 
 
 
TABLE OF CONTENTS
 
PART I
    3  
     ITEM 1—BUSINESS
    8  
     ITEM 1A—RISK FACTORS
    21  
     ITEM 1B—UNRESOLVED STAFF COMMENTS
    21  
     ITEM 2—PROPERTIES
    22  
     ITEM 3—LEGAL PROCEEDINGS
    22  
     ITEM 4— MINE SAFETY DISCLOSURES
    23  
PART II
    23  
     ITEM 5—MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    23  
     ITEM 6—SELECTED FINANCIAL DATA
    24  
     ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    24  
     ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    31  
     ITEM 8—CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    31  
     ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    65  
     ITEM 9A—CONTROLS AND PROCEDURES
    65  
   I TEM 9B— OTHER INFORMATION
    66  
PART III
    66  
     ITEM 10— DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
    66  
     ITEM 11— EXECUTIVE COMPENSATION
    66  
     ITEM 12— SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    66  
     ITEM 13— CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
    66  
     ITEM 14— PRINCIPAL ACCOUNTANT FEES AND SERVICES
    66  
PART IV
    67  
     ITEM 15— EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    67  
 
 
 
2

 
 
PART I
 
FORWARD-LOOKING STATEMENTS
 
All statements contained in this report, other than statements of historical fact, which address activities, actions, goals, prospects, or new developments, that we expect or anticipate will or may occur in the future, including plans for clinical tests and other such matters pertaining to testing and development products, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including, but not limited to, progress in our product development and testing activities, obtaining financing for operations, development of new technologies and other competitive pressures, legal and regulatory initiatives affecting our products, conditions in the capital markets, the risks discussed in Item 1A – “Risk Factors,” and the risks discussed elsewhere in this report that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed or implied by such forward-looking statements.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of filing of this report or to conform such statements to actual results, except as may be required by law.
 
All references in this Annual Report to “Oxygen Biotherapeutics”, “we”, “our” and “us” means Oxygen Biotherapeutics, Inc.
 
ITEM 1—BUSINESS
 
Oxygen Biotherapeutics 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.  Effective June 30, 2008, we changed the domiciliary state of the corporation to Delaware and changed the company name to Oxygen Biotherapeutics, Inc.
 
Oxygen Biotherapeutics, Inc. is a specialty pharmaceutical company focused on developing and commercializing a portfolio of products for the critical care market. On November 13, 2013, through our wholly owned subsidiary, Life Newco, Inc., or Life Newco, we acquired a license granting Life Newco an exclusive, sublicenseable right in the United States and Canada to develop and commercialize pharmaceutical products containing levosimendan, 2.5 mg/ml concentrate for solution for infusion / 5ml vial, for use in the reduction of morbidity and mortality in cardiac surgery patients at risk for developing Low Cardiac Output Syndrome or LCOS. We plan to start a Phase 3 trial with levosimendan in that indication during the third quarter of calendar year 2014.
 
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. In addition, we have developed a family of perfluorocarbon-based oxygen carriers for use in personal care, topical wound healing, and other topical indications. 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.
 
Business Strategy
 
Our principal business objective is to discover, develop, and commercialize novel therapeutic products for disease indications that represent significant areas of clinical need and commercial opportunity. The key elements of our business strategy are outlined below.
 
 
3

 
 
Efficiently conduct clinical development to establish clinical proof of concept with our lead product candidates. Levosimendan and Oxycyte represent novel therapeutic modalities for the treatment of LCOS, TBI and other critical care conditions. We are conducting clinical development in a variety of clinical studies with the intent to establish proof of concept in a number of important disease areas where these therapeutics would be expected to have benefit. Our focus is on conducting well-designed studies early in the clinical development process to establish a robust foundation for subsequent development, partnership and expansion into complementary areas.
 
Efficiently explore new high potential therapeutic applications, leveraging third-party research collaborations and our results from related areas .  Our product candidates have shown promise in multiple disease areas. We are committed to exploring potential clinical indications where our therapies may achieve best-in-class profile, and where we can address significant unmet medical needs. In order to achieve this goal, we have established collaborative research relationships with investigators from research and clinical institutions and the United States Army and Navy. These collaborative relationships have enabled us to cost effectively explore where our product candidates may have therapeutic relevance, and how it may be utilized to advance treatment over current clinical care. Additionally, we believe we will be able to leverage clinical safety data and preclinical results from some programs to support accelerated clinical development efforts in other areas, saving substantial development time and resources compared to traditional drug development.
 
Continue to expand our intellectual property portfolio . Our intellectual property is important to our business and we take significant steps to protect its value. We have ongoing research and development efforts, both through internal activities and through collaborative research activities with others, which aim to develop new intellectual property and enable us to file patent applications that cover new applications of our existing technologies or product candidates.
 
Enter into licensing or product co-development arrangements in certain areas, while out-licensing opportunities in non-core areas . In addition to our internal development efforts, an important part of our product development strategy is to work with collaborators and partners to accelerate product development, reduce our development costs, and broaden our commercialization capabilities. We believe that this strategy will help us to develop a portfolio of high quality product development opportunities, enhance our clinical development and commercialization capabilities, and increase our ability to generate value from our proprietary technologies.
 
Our Current Programs
 
Levosimendan
 
Levosimendan was discovered and developed by Orion Pharma, a Finnish company. Levosimendan is a calcium sensitizer developed for intravenous use in hospitalized patients with acutely decompensated heart failure. It is currently approved in over 50 countries for this indication and not available in the United States or Canada. It is under development in North America for reduction in morbidity and mortality of cardiac surgery patients at risk of LCOS. Our acquisition of levosimendan brings to Oxygen Biotherapeutics not only the exclusive rights in the United States and Canada to develop and commercialize levosimendan for the specific indication of prevention and treatment of LCOS, but also the United States Food and Drug Administration’s, or FDA’s, approval of Fast Track status for a Phase 3 trial, and the FDA’s Special Protocol Assessment or SPA which represents agreement with the Phase III clinical trial’s study protocol. The FDA has also provided guidance that a single successful trial will be sufficient to support approval of levosimendan in this indication. Pursuant to our license to levosimendan, we are required to use the “Simdax®” trademark to commercialize this product.
 
The effects of levosimendan are mediated through:
 
-  
increased cardiac contractility by calcium sensitization of troponin C;
 
-  
vasodilation through the opening of potassium channels; and
 
-  
cardioprotection and antiapoptopic effect through the opening of mitochondrial potassium channel.
 
The physiologic effects of levosimendan have been very well characterized in clinical trials of acutely decompensated heart failure or ADHF patients and cardiac surgery patients. The collective findings of these clinical trials form the basis for developing levosimendan in cardiac surgery patients at risk for LCOS.
 
Current data in cardiac surgery suggest that levosimendan is superior to traditional inotropes (dobutamine, phosphodiesterase [PDE]-inhibitors) as it achieves:
 
-  
sustained hemodynamic improvement;
 
 
4

 
 
-  
diminished myocardial injury;
 
-  
improved tissue perfusion;
 
-  
better outcomes and fewer hospital days;
 
-  
effects most favorable in patients with low left ventricular ejection fraction (LVEF) (< 40%); and
 
-  
opportunity to initiate therapy pre-operatively due to increased cardiac contractility without increasing intracellular calcium, without increasing oxygen consumption, or affecting cardiac rhythm and relaxation.
 
We have selected Duke University’s Duke Clinical Research Institute, or DCRI, to conduct the Phase 3 trial of levosimendan. DCRI is the world’s largest academic clinical research organization, with substantial experience in conducting cardiac surgery trials. 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 is expected to 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 calendar year 2014, and will take approximately 18 months to complete. The protocol of the Phase 3 trial has been submitted to ClinicalTrials.gov.
 
Should levosimendan successfully progress in clinical testing and if it appears regulatory approval for one or more medical uses is likely, we intend to evaluate our options for commercializing the product. These options include licensing levosimendan to a third party for distribution, selling the product ourselves, or establishing some other form of strategic relationship for making and distributing levosimendan with a participant in the pharmaceutical industry. We are currently investigating and evaluating all options.
 
Oxycyte
 
Our Oxycyte oxygen carrier product is a PFC-based oil in water emulsion, which is provided to the patient intravenously. The physical-chemical properties of PFCs enable our product to concentrate oxygen from the lungs and transport it through the body releasing it along the way.  Over a period of days Oxycyte is gradually exhaled through the lungs during the normal process of respiration. Oxycyte requires no cross matching, so it is immediately available and compatible with all patients’ blood types. Oxycyte has an extended shelf life compared to blood and is provided as a sterile emulsion ready for intravenous administration.  Because it contains no biological components, there is reduced risk of transmission of blood-borne viruses from human blood products.  Further, since Oxycyte is based on readily available inert compounds, we believe it can be manufactured on a cost-effective basis in amounts sufficient to meet demand.
 
We received approval of our Investigational New Drug application, or IND, for severe TBI filed with FDA and began Phase I clinical studies in October 2003, which were completed in December 2003. We submitted a report on the results to the FDA along with a Phase II protocol in 2004. Phase II-A clinical studies began in the fourth quarter of 2004, and were completed in 2006. A further Phase II study protocol was filed with the FDA in the spring of 2008, but remained on clinical hold by the FDA due to safety concerns raised by the regulatory agency.
 
Despite the FDA’s postponement of Oxycyte trials in the United States, we filed a revised protocol as a dose-escalation study with the regulatory authorities in Switzerland and Israel. The relevant Swiss regulatory body approved the protocol in August 2009, and the Israel Ministry of Health approved the protocol in September 2009. The new study began in October 2009. In March 2010, we determined that it is feasible to simplify the trial design and also reduce the number of patients to be enrolled. We have completed the first of three cohorts and we were authorized by the Swiss and Israeli regulatory authorities to initiate the second cohort.  Despite their authorization, we stopped enrollment in order to reevaluate the protocol’s patient enrollment parameters, secure our Current Good Manufacturing Practice, or cGMP, supply of Oxycyte, review our contractor and clinical sites, and examine the possibility of opening clinical sites in other countries. In July 2013 we resumed enrollment in the second cohort. Upon completion of the Phase II trials, a Phase III trial will need to be implemented.  In that instance, we would seek a partner to either conduct the Phase III trials, or collaborate with us to conduct the trials.
 
In March 2011, we received confirmation of a $2.07 million, two-year cost reimbursement award from the U.S. Army to conduct safety related studies for Oxycyte.  PFC emulsions, as a therapeutic class, are known to interact with the reticuloendothelial system as part of the clearance mechanism, as well as affect the number of circulating platelets. The studies supported by this grant will examine the effects of Oxycyte on the immune system, platelet function and distribution, as well as the safety and efficacy of platelet transfusion, which can be necessary for patients with TBI and related polytrauma. Additional studies under this grant will be conducted to evaluate the pharmacokinetics of PFCs in relevant species. On September 12, 2013, we submitted to the FDA results from two series of animal studies designed to address Agency concerns regarding the use of Oxycyte in treating TBI patients. These studies were conducted to probe both the interactions between Oxycyte and the immune system as well as assess the PFC-based emulsion’s potential to increase the risk of intracerebral hemorrhage (ICH). We expect to complete the remaining studies over the next 12 months.
 
 
5

 
 
On February 28, 2014, we were notified that the FDA had completed its review of the September 2013 nonclinical submission and that we satisfactorily addressed all clinical hold issues identified by the agency. In connection with this notice, the FDA lifted the clinical hold on Oxycyte. Lifting of the clinical hold clears us to proceed with the clinical development program in the United States.
 
Should Oxycyte successfully progress in clinical testing and if it appears regulatory approval for one or more medical uses is likely, either in the United States or in another country, we intend to evaluate our options for commercializing the product. These options include licensing Oxycyte to a third party for manufacture and distribution, manufacturing Oxycyte ourselves for distribution through third party distributors, manufacturing and selling the product ourselves, or establishing some other form of strategic relationship for making and distributing Oxycyte with a participant in the pharmaceutical industry. We are currently investigating and evaluating all options.
 
We believe that important competitive factors in the market for oxygen carrier products will include the relative speed with which competitors can develop their respective products, complete the clinical testing and regulatory approval process, and supply commercial quantities of their products to the market. In addition to these factors, competition is expected to be based on the effectiveness of oxygen carrier products and the scope of the intended uses for which they are approved, the scope and enforceability of patent or other proprietary rights, product price, product supply, and marketing and sales capability. We believe that our competitive position will be significantly influenced by the timing of the clinical testing and regulatory filings for Oxycyte, our ability to maintain and enforce our proprietary rights covering Oxycyte and its manufacturing process, and our ability to develop capabilities for manufacturing and distributing the product ourselves or with others, should we obtain regulatory approval.
 
Other Products
 
In addition to our primary products described above, we have also developed our Dermacyte® line of topical cosmetic products, which contain our patented PFC technology and other known cosmetic ingredients to promote the appearance of skin health and other desirable cosmetic benefits, as well as Wundecyte™, a novel gel developed under a contract agreement with a lab in Virginia that is designed to be used as a wound-healing gel.  At this time, we do not expect that Dermacyte or Wundecyte constitute a material portion of our business going forward.
 
Suppliers
 
Pursuant to the terms of our license for levosimendan, Orion Corporation is our sole manufacturing source for levosimendan.
 
With respect to Oxycyte, we are actively pursuing agreements with multiple manufacturers to ensure we are able to consistently obtain our raw materials and topical products timely, within our defined specifications, and at competitive prices.
 
Our FtBu PFC currently is manufactured by Fluoromed. We have obtained exclusive manufacturing rights for our PFC, and we strengthened these rights with documentation of the manufacturer’s critical formulations and processes. This documentation is being held in escrow and will revert to us in the event the manufacturer undergoes a change-of-control or fails to remain a going concern.
 
In September 2011 we entered into a development and supply agreement with Bioserve, Inc. to manufacture our Oxycyte emulsion for clinical use under cGMP standards. In January 2012, Bioserve transferred the manufacturing process from Hospira, our previous supplier, to their cGMP facilities and demonstrated their ability to produce clinical grade Oxycyte.
 
Intellectual Property
 
We rely on a combination of patent applications, patents, trade secrets, proprietary know-how, trademarks, and contractual provisions to protect our proprietary rights. We believe that to have a competitive advantage, we must develop and maintain the proprietary aspects of our technologies. Currently, we require our officers, employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers, and other advisors to execute confidentiality agreements in connection with their employment, consulting, or advisory relationships with us, where appropriate. We also require our employees, consultants, and advisors who we expect to work on our products to agree to disclose and assign to us all inventions conceived during the work day, developed using our property, or which relate to our business.
 
To date, we own or in-license the rights to 9 U.S. and foreign patents. In addition, we have numerous U.S. patent applications pending that are complemented by the appropriate foreign patent applications related to our product candidates and proprietary processes, methods and technologies. Our issued and in-licensed patents, as well as our pending patents, expire between 2014 and 2030.
 
We have:
 
-  
three U.S. patents (5,824,703; 5,840,767; 6,167,887), three Australian patents (690,277; 722,417; 759,557), and two Canadian patents (2,239,170; 2,311,122) pertaining to the use and application of PFCs as gas transport agents in blood substitutes and liquid ventilation with an average remaining life of approximately 3 years;
 
 
6

 
 
-  
exclusive in-licenses to three fundamental gas transport patent applications that represent the core technology used in our products and product candidates (other than levosimendan) with an average remaining life of approximately 15 years; and
 
-  
one U.S. patent (8,513,309) and numerous patent applications for treatment of several medical and dermatological conditions such as TBI, acne, burns and wounds with an average remaining life of approximately 16 years.
 
Our patent and patent applications include claims covering:
 
-  
methods to treat certain diseases and conditions and for biological gas exchange;
 
-  
therapies for burn and wound victims;
 
-  
delivery of oxygenated PFC;
 
-  
various formulations containing PFC; and
 
-  
methods and compositions for controlled and sustained production and delivery of peroxide and/or oxygen for biological and industrial applications.
 
We have received U.S. trademark registrations for Oxycyte®, Dermacyte®, Defense Medicine® and Oxygen Biotherapeutics, Employing  O2, Preserving Life®. We have trademark applications pending for the following marks: Acnecyte™, Wundecyte™ and Vitavent™.  Simdax® is owned by Orion and is licensed to us for sales and marketing purposes in the United States and Canada.
 
In addition, we own numerous domain names relevant to our business, such as www.oxygenbiotherapeutics.com, www.DermacyteUS.com, www.oxybiomed.com, and others.
 
Government regulation
 
The manufacture and distribution of levosimendan and Oxycyte, as well as our other products, and the operation of our manufacturing facilities will require the approval of United States government authorities as well as those of foreign countries. In the United States, the FDA regulates medical products. The Federal Food, Drug and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our medical products. In addition to FDA regulations, we are also subject to other federal and state regulations, such as the Occupational Safety and Health Act and the Environmental Protection Act. Product development and approval within this regulatory framework requires a number of years and involves the expenditure of substantial funds.
 
Preclinical tests include evaluation of product chemistry and studies to assess the safety and effectiveness of the product and its formulation. The results of the preclinical tests are submitted to the FDA as part of the application. The goal of clinical testing is the demonstration in adequate and well-controlled studies of substantial evidence of the safety and effectiveness of the product in the setting of its intended use. The results of preclinical and clinical testing are submitted to the FDA from time to time throughout the trial process. In addition, before approval for the commercial sale of a product can be obtained, results of the preclinical and clinical studies must be submitted to the FDA. The testing and approval process requires substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. The approval process is affected by a number of factors, including the severity of the condition being treated, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Additional preclinical studies or clinical trials may be requested during the FDA review process and may delay product approval. After FDA approval for its initial indications, further clinical trials may be necessary to gain approval for the use of a product for additional indications. The FDA may also require post-marketing testing, which can involve significant expense, to monitor for adverse effects.
 
 
7

 
 
Our regulatory strategy is to pursue Phase III clinical testing for levosimendan in the United States. We then intend to use the results of these tests to pursue FDA marketing approval of levosimendan in the United States. In addition, we are continuing with our Phase II clinical testing and initial regulatory approval of Oxycyte in Switzerland and Israel.
 
Research and Development
 
Our research and development efforts will be focused on the development and commercialization of levosimendan for its use in clinical indications, primarily LCOS. We are also focusing on furthering the development and manufacture of Oxycyte for its use in clinical indications, primarily TBI, spinal cord injury, and decompression sickness. We spent approximately $3.0 million and $2.5 million on research and development during each of the fiscal years ended April 30, 2014 and 2013, respectively.
 
Employees
 
We believe that our success will be based on, among other things, the quality of our clinical programs, our ability to invent and develop superior and innovative technologies and products, and our ability to attract and retain capable management and other personnel. We have assembled a high quality team of scientists, clinical development managers, and executives with significant experience in the biotechnology and pharmaceutical industries.
 
As of April 30, 2014, we had 14 full-time employees. In addition to our employees, we also use the service and support of outside consultants and advisors. None of our employees are represented by a union, and we believe relationships with our employees are good.
 
ITEM 1A—RISK FACTORS
 
Risks Related to Our Financial Position and Need for Additional Capital
 
We have a limited operating history, and we expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.
 
Our operations, to date, have been primarily limited to organizing and staffing our company, developing our technology and undertaking preclinical studies and clinical trials of our product candidates. We have not yet obtained regulatory approvals for any of our clinical product candidates. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.
 
Specifically, our financial condition and operating results have varied significantly in the past and will continue to fluctuate from quarter-to-quarter and year-to-year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following factors, among others:
 
-  
our ability to obtain additional funding to develop our product candidates;
 
-  
the need to obtain regulatory approval of our most advanced product candidates;
 
-  
potential risks related to any collaborations we may enter into for our product candidates;
 
-  
delays in the commencement, enrollment and completion of clinical testing, as well as the analysis and reporting of results from such clinical testing;
 
-  
the success of clinical trials of our Oxycyte and levosimendan product candidates or future product candidates;
 
-  
any delays in regulatory review and approval of product candidates in development;
 
 
8

 
 
-  
our ability to establish an effective sales and marketing infrastructure;
 
-  
competition from existing products or new products that may emerge;
 
-  
the ability to receive regulatory approval or commercialize our products;
 
-  
potential side effects of our product candidates that could delay or prevent commercialization;
 
-  
potential product liability claims and adverse events;
 
-  
potential liabilities associated with hazardous materials;
 
-  
our ability to maintain adequate insurance policies;
 
-  
our dependency on third-party manufacturers to supply or manufacture our products;
 
-  
our ability to establish or maintain collaborations, licensing or other arrangements;
 
-  
our ability, our partners’ abilities, and third parties’ abilities to protect and assert intellectual property rights;
 
-  
costs related to and outcomes of potential litigation;
 
-  
compliance with obligations under intellectual property licenses with third parties;
 
-  
our ability to adequately support future growth; and
 
-  
our ability to attract and retain key personnel to manage our business effectively.
 
Due to the various factors mentioned above, and others, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.
 
We may need additional funding and if we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development programs.
 
Developing biopharmaceutical products, including conducting preclinical studies and clinical trials and establishing manufacturing capabilities, is expensive. We expect our research and development expenses to increase in connection with our ongoing activities, particularly as we focus on and proceed with our Phase III and Phase II-B clinical programs and begin clinical trials for our other products. In addition, our expenses could increase beyond expectations if applicable regulatory authorities, including the FDA, require that we perform additional studies to those that we currently anticipate, in which case the timing of any potential product approval may be delayed. As of April 30, 2014, we had $58.3 million of cash and cash equivalents on hand. Based on our current operating plans, we believe that our existing cash and cash equivalents will be sufficient to fund our projected operating requirements through the fiscal year ending April 30, 2017. We will need substantial additional capital in the future in order to complete the development and commercialization of levosimendan and Oxycyte and to fund the development and commercialization of future product candidates. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Such funding, if needed, may not be available on favorable terms, if at all. In the event we are unable to obtain additional capital, we may delay or reduce the scope of our current research and development programs and other expenses.
 
If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or our commercialization efforts. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional significant dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or to grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
 
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including, but not limited to:
 
-  
the scope, rate of progress and cost of our clinical trials and other research and development activities;
 
-  
the costs and timing of regulatory approval;
 
-  
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
 
 
9

 
 
-  
the effect of competing technological and market developments;
 
-  
the terms and timing of any collaboration, licensing or other arrangements that we may establish;
 
-  
the cost and timing of completion of clinical and commercial-scale manufacturing activities; and
 
-  
the costs of establishing sales, marketing and distribution capabilities for our cosmetic products and any product candidates for which we may receive regulatory approval.
 
Risks Related to Commercialization and Product Development
 
Orion may have the right to terminate our license for the levosimendan product, and, if the license is terminated, our business would be materially harmed.
 
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 in the United States and Canada.  Under the License, if we do not enroll a randomized patient in a human clinical trial using the levosimedan product by July 31, 2014, Orion will have the right to immediately terminate the License.  While we have commenced our clinical trial process, activated trial sites, and expect the enrollment of the first patient at any time, it is possible that the first patient will be enrolled by July 31, 2014.  Accordingly, we intend to seek a waiver or amendment to this condition in the License.  There can be no assurance that we will obtain such a waiver or amendment before July 31, 2014, or at all, which could potentially result in Orion’s termination of the License. If Orion terminates the License, we would not be able to develop or commercialize the levosimedan product.  The loss of our license with Orion with respect to the levosimedan product would have a material adverse effect on our business.
 
We are limited in the number of products we can simultaneously pursue and therefore our survival depends on our success with a small number of product opportunities.
 
We have limited financial resources, so at present we are primarily focusing these resources on developing levosimendan for the treatment of low cardiac output syndrome and our Oxycyte oxygen carrier product. We have delayed development on our Wundecyte topical wound product and Vitavent, our oxygen-carrying liquid, until we find a licensing partner willing to pursue development or obtain additional financing to pursue development ourselves. At present we intend to commit most of our resources to advancing levosimendan and Oxycyte to the point it receives regulatory approval for one or more medical uses, and if this effort is unsuccessful we may not have resources to pursue development of our other products and our business would terminate. Furthermore, by delaying development of Vitavent, this technology may become obsolete by the time we have sufficient capital to resume development and testing, so the funds expended on this product to date would be lost, as well as our opportunity to benefit if the product could be successfully developed.
 
Failure to integrate or realize the expected benefits of the Phyxius asset acquisition could adversely affect our business and results of operations.
 
On November 13, 2013, we completed our acquisition of certain assets of Phyxius Pharma, Inc., or Phyxius.  At the same time, three former employees of Phyxius became employees of our company. We conducted this transaction based on certain assumptions regarding our business, markets, cost structures and synergies. If we do not successfully integrate or realize the anticipated benefits of this transaction, instead of resulting in growth for and enhanced value to our company, our strategy may cause us to experience operational issues and expose us to operational and regulatory risk, each of which could have material adverse effects on our reputation, business, financial condition and results of operations.
 
We currently have no approved drug products for sale and we cannot guarantee that we will ever have marketable drug products.
 
We currently have no approved drug products for sale. The research, testing, manufacturing, labeling, approval, selling, marketing, and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, with regulations differing from country to country. We are not permitted to market our product in the United States until we receive approval of a new drug application, or an NDA, from the FDA for each product candidate. We have not submitted an NDA or received marketing approval for any of our product candidates. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. Markets outside of the United States also have requirements for approval of drug candidates which we must comply with prior to marketing. Accordingly, we cannot guarantee that we will ever have marketable drug products.
 
The development of levosimendan and Oxycyte is subject to a high level of technological risk.
 
We expect to devote a substantial portion of our financial and managerial resources to pursuing Phase III and Phase II clinical trials for levosimendan and Oxycyte over the next three years. The biomedical field has undergone rapid and significant technological changes. Technological developments may result in our products becoming obsolete or non-competitive before we are able to recover any portion of the research and development and other expenses we have incurred to develop and clinically test levosimendan and Oxycyte. As our opportunity to generate substantial product revenues within the next four to five years is most likely dependent on successful testing and commercialization of levosimendan and Oxycyte for surgical and oxygen delivery applications, any such occurrence would have a material adverse effect on our operations and could result in the cessation of our business.
 
 
10

 
 
We may be required to conduct additional clinical trials in the future, which are expensive and time consuming, and the outcome of the trials is uncertain.
 
We expect to commit a substantial portion of our financial and business resources over the next three years to clinical testing of levosimendan and Oxycyte and advancing these products to regulatory approval for use in one or more medical applications. All of these clinical trials and testing will be expensive and time consuming and the timing of the regulatory review process is uncertain. The applicable regulatory agencies may suspend clinical trials at any time if they believe that the subjects participating in such trials are being exposed to unacceptable health risks. We cannot ensure that we will be able to complete our clinical trials successfully or obtain FDA or other governmental or regulatory approval of our products, or that such approval, if obtained, will not include limitations on the indicated uses for which our products may be marketed. Our business, financial condition and results of operations are critically dependent on obtaining capital to advance our testing program and receiving FDA and other governmental and regulatory approvals of our products. A significant delay in or failure of our planned clinical trials or a failure to achieve these approvals would have a material adverse effect on us and could result in major setbacks or jeopardize our ability to continue as a going concern.
 
The market may not accept our products.
 
Even if regulatory approval is obtained, there is a risk that the efficacy and pricing of our products, considered in relation to our products’ expected benefits, will not be perceived by health care providers and third-party payers as cost-effective, and that the price of our products will not be competitive with other new technologies or products. Our results of operations may be adversely affected if the price of our products are not considered cost-effective or if our products do not otherwise achieve market acceptance.
 
Any collaboration we enter with third parties to develop and commercialize our product candidates may place the development of our product candidates outside our control, may require us to relinquish important rights or may otherwise be on terms unfavorable to us.
 
We may enter into collaborations with third parties to develop and commercialize our product candidates, including levosimendan and Oxycyte. Our dependence on future partners for development and commercialization of our product candidates would subject us to a number of risks, including:
 
-  
we may not be able to control the amount and timing of resources that our partners may devote to the development or commercialization of our product candidates or to their marketing and distribution;
 
-  
partners may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
 
-  
disputes may arise between us and our partners that result in the delay or termination of the research, development or commercialization of our product candidates or that result in costly litigation or arbitration that diverts management’s attention and resources;
 
-  
partners may experience financial difficulties;
 
-  
partners may not properly maintain or defend our intellectual property rights, or may use our proprietary information, in such a way as to invite litigation that could jeopardize or invalidate our intellectual property rights or proprietary information or expose us to potential litigation;
 
-  
business combinations or significant changes in a partner’s business strategy may adversely affect a partner’s willingness or ability to meet its obligations under any arrangement;
 
-  
a partner could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; and
 
-  
the collaborations with our partners may be terminated or allowed to expire, which would delay the development and may increase the cost of developing our product candidates.
 
Delays in the commencement, enrollment and completion of clinical testing could result in increased costs to us and delay or limit our ability to obtain regulatory approval for our product candidates.
 
Delays in the commencement, enrollment and completion of clinical testing could significantly affect our product development costs. We do not know whether planned clinical trials for levosimendan and Oxycyte will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials requires us to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs for the same indication as our product candidates or may be required to withdraw from our clinical trial as a result of changing standards of care or may become ineligible to participate in clinical studies. The commencement, enrollment and completion of clinical trials can be delayed for a variety of other reasons, including delays related to:
 
 
11

 
 
-  
reaching agreements on acceptable terms with prospective contract research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
 
-  
obtaining regulatory approval to commence a clinical trial;
 
-  
obtaining institutional review board, or IRB, approval to conduct a clinical trial at numerous prospective sites;
 
-  
recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other clinical trial programs for the same indication as our product candidates;
 
-  
retaining patients who have initiated a clinical trial but may be prone to withdraw due to the treatment protocol, lack of efficacy, personal issues or side effects from the therapy or who are lost to further follow-up;
 
-  
maintaining and supplying clinical trial material on a timely basis; and
 
-  
collecting, analyzing and reporting final data from the clinical trials.
 
In addition, a clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities due to a number of factors, including:
 
-  
failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
 
-  
inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
 
-  
unforeseen safety issues or any determination that a trial presents unacceptable health risks; and
 
-  
lack of adequate funding to continue the clinical trial, including unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties.
 
Changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities. Amendments may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in the completion of, or if we terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize our product candidates, other therapies for the same or similar indications may have been introduced to the market and established a competitive advantage.
 
Risks Relating to Regulatory Matters
 
Our activities are and will continue to be subject to extensive government regulation, which is expensive and time consuming, and we will not be able to sell our products without regulatory approval.
 
Our research, development, testing, manufacturing, marketing and distribution of levosimendan and Oxycyte are, and will continue to be, subject to extensive regulation, monitoring and approval by the FDA and other regulatory agencies. There are significant risks at each stage of the regulatory scheme.
 
Product approval stage
 
During the product approval stage we attempt to prove the safety and efficacy of our product for its indicated uses. There are numerous problems that could arise during this stage, including:
 
-  
The data obtained from laboratory testing and clinical trials are susceptible to varying interpretations, which could delay, limit or prevent FDA and other regulatory approvals;
 
-  
Adverse events could cause the FDA and other regulatory authorities to halt trials;
 
-  
At any time the FDA and other regulatory agencies could change policies and regulations that could result in delay and perhaps rejection of our products; and
 
-  
Even after extensive testing and clinical trials, there is no assurance that regulatory approval will ever be obtained for any of our products.
 
 
12

 
 
Commercialization approval stage
 
We will be required to file a BLA of an NDA with the FDA in order to obtain regulatory approval for the commercial production and sale of our product candidates in the United States and similar applications with regulatory authorities in countries where we seek to commercialize our product candidates. Under FDA guidelines, the FDA may comment upon the acceptability of the applicable application following its submission. After an application is submitted, there is an initial review to be sure that all of the required elements are included in the submission. There can be no assurance that the submission will be accepted for filing or that the FDA may not issue an RTF. If an RTF is issued, there is opportunity for dialogue between the sponsor and the FDA in an effort to resolve all concerns. There can be no assurance that such a dialogue will be successful in leading to the filing of the BLA or NDA. If the submission is filed, there can be no assurance that the full review will result in product approval.
 
Post-commercialization stage
 
Discovery of previously unknown problems with our products, or unanticipated problems with our manufacturing arrangements, even after FDA and other regulatory approvals of our products for commercial sale may result in the imposition of significant restrictions, including withdrawal of the product from the market.
 
Additional laws and regulations may also be enacted that could prevent or delay regulatory approval of our products, including laws or regulations relating to the price or cost-effectiveness of medical products. Any delay or failure to achieve regulatory approval of commercial sales of our products is likely to have a material adverse effect on our financial condition, results of operations and cash flows.
 
The FDA and other regulatory agencies continue to review products even after they receive agency approval. If and when the FDA or another regulatory agency outside the United States approves one of our products, its manufacture and marketing will be subject to ongoing regulation, which could include compliance with current good manufacturing practices, adverse event reporting requirements and general prohibitions against promoting products for unapproved or “off-label” uses. We are also subject to inspection and market surveillance by the FDA for compliance with these and other requirements. Any enforcement action resulting from failure, even by inadvertence, to comply with these requirements could affect the manufacture and marketing of Oxycyte or our other products. In addition, the FDA or other regulatory agencies could withdraw a previously approved product from the market upon receipt of newly discovered information. The FDA or another regulatory agency could also require us to conduct additional, and potentially expensive, studies in areas outside our approved indicated uses.
 
We must continually monitor the safety of our products once approved and marketed for signs that their use may elicit serious and unexpected side effects and adverse events, which could jeopardize our ability to continue marketing the products. We may also be required to conduct post-approval clinical studies as a condition to licensing a product.
 
As with all pharmaceutical products, the use of our products could sometimes produce undesirable side effects or adverse reactions or events (referred to cumulatively as adverse events). For the most part, we would expect these adverse events to be known and occur at some predicted frequency. When adverse events are reported to us, we will be required to investigate each event and circumstances surrounding it to determine whether it was caused by our product and whether it implies that a previously unrecognized safety issue exists. We will also be required to periodically report summaries of these events to the applicable regulatory authorities.
 
In addition, the use of our products could be associated with serious and unexpected adverse events, or with less serious reactions at a greater than expected frequency. This may be especially true when our products are used in critically ill or otherwise compromised patient populations. When these unexpected events are reported to us, we will be required to make a thorough investigation to determine causality and implications for product safety. These events must also be specifically reported to the applicable regulatory authorities. If our evaluation concludes, or regulatory authorities perceive, that there is an unreasonable risk associated with the product, we would be obligated to withdraw the impacted lot(s) of that product. Furthermore, an unexpected adverse event of a new product could be recognized only after extensive use of the product, which could expose us to product liability risks, enforcement action by regulatory authorities and damage to our reputation and public image.
 
A serious adverse finding concerning the risk of our products by any regulatory authority could adversely affect our reputation, business and financial results.
 
 
13

 
 
When a new product is approved, the FDA or other regulatory authorities may require post-approval clinical trials, sometimes called Phase IV clinical trials. If the results of such trials are unfavorable, this could result in the loss of the license to market the product, with a resulting loss of sales
 
After our products are commercialized, we expect to spend considerable time and money complying with federal and state laws and regulations governing their sale, and, if we are unable to fully comply with such laws and regulations, we could face substantial penalties.
 
Health care providers, physicians and others will play a primary role in the recommendation and prescription of our clinical products. Our arrangements with third-party payers and customers may expose us to broadly applicable fraud and abuse and other health care laws and regulations that may constrain the business or financial arrangements and relationships through which we will market, sell and distribute our products. Applicable federal and state health care laws and regulations are expected to include, but not be limited to, the following:
 
-  
The federal anti-kickback statute is a criminal statute that makes it a felony for individuals or entities knowingly and willfully to offer or pay, or to solicit or receive, direct or indirect remuneration, in order to induce the purchase, order, lease, or recommending of items or services, or the referral of patients for services, that are reimbursed under a federal health care program, including Medicare and Medicaid;
 
-  
The federal False Claims Act imposes liability on any person who knowingly submits, or causes another person or entity to submit, a false claim for payment of government funds. Penalties include three times the government’s damages plus civil penalties of $5,500 to $11,000 per false claim. In addition, the False Claims Act permits a person with knowledge of fraud, referred to as a qui tam plaintiff, to file a lawsuit on behalf of the government against the person or business that committed the fraud, and, if the action is successful, the qui tam plaintiff is rewarded with a percentage of the recovery;
 
-  
Health Insurance Portability and Accountability Act imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
 
-  
The Social Security Act contains numerous provisions allowing the imposition of a civil money penalty, a monetary assessment, exclusion from the Medicare and Medicaid programs, or some combination of these penalties; and
 
-  
Many states have analogous state laws and regulations, such as state anti-kickback and false claims laws. In some cases, these state laws impose more strict requirements than the federal laws. Some state laws also require pharmaceutical companies to comply with certain price reporting and other compliance requirements.
 
Our failure to comply with any of these federal and state health care laws and regulations, or health care laws in foreign jurisdictions, could have a material adverse effect on our business, financial condition, result of operations and cash flows.
 
Health care reform and controls on health care spending may limit the price we can charge for our products and the amount we can sell.
 
As a result of Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 (collectively, the “ACA”) enacted in March 2010, substantial changes have occurred and are expected to continue to occur in the system for paying for health care in the United States, including changes made in order to extend medical benefits to those who currently lack insurance coverage. This comprehensive health care reform legislation also included provisions to control health care costs and improve health care quality. Together with ongoing statutory and budgetary policy developments at a federal level, this health care reform legislation could include changes in Medicare and Medicaid payment policies and other health care delivery administrative reforms that could potentially negatively impact our business. Because not all the administrative rules implementing health care reform under the legislation have been finalized, and because of ongoing federal fiscal budgetary pressures not yet resolved for federal health programs, the full impact of the ACA and of further statutory actions to reform healthcare payment on our business is unknown, but there can be no assurances that health care reform legislation will not adversely impact either our operational results or the manner in which we operate our business. Cost of care could be reduced by reducing the level of reimbursement for medical services or products (including those biopharmaceuticals that we intend to produce and market), or by restricting coverage (and, thereby, utilization) of medical services or products. In either case, a reduction in the utilization of, or reimbursement for, our products could have a materially adverse impact on our financial performance.
 
 
 
14

 
 
Uncertainty of third-party reimbursement could affect our future results of operations.
 
Sales of medical products largely depend on the reimbursement of patients’ medical expenses by governmental health care programs and private health insurers. We will be required to report detailed pricing information, net of included discounts, rebates and other concessions, to the Centers for Medicare and Medicaid Services, or CMS, for the purpose of calculating national reimbursement levels, certain federal prices, and certain federal rebate obligations. If we report pricing information that is not accurate to the federal government, we could be subject to fines and other sanctions that could adversely affect our business. In addition, the government could change its calculation of reimbursement, federal prices, or federal rebate obligations which could negatively impact us. There is no guarantee that government health care programs or private health insurers will reimburse for the sales of our products, or permit us to sell our products at high enough prices to generate a profit.
 
Governments outside the United States tend to impose strict price controls and reimbursement approval policies, which may adversely affect our prospects for generating revenue outside the United States.
 
In some countries, particularly European Union countries, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time (6 to 12 months or longer) after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries with respect to any product candidate that achieves regulatory approval, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products upon approval, if at all, is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our prospects for generating revenue, if any, could be adversely affected which would have a material adverse effect on our business and results of operations. Further, if we achieve regulatory approval of any product, we must successfully negotiate product pricing for such product in individual countries. As a result, the pricing of our products, if approved, in different countries may vary widely, thus creating the potential for third-party trade in our products in an attempt to exploit price differences between countries. This third-party trade of our products could undermine our sales in markets with higher prices.
 
Risks Relating to Our Dependence on Third Parties
 
We depend on third parties to manufacture our products.
 
We do not own or operate any manufacturing facilities for the commercial-scale production of our products. Instead, we rely on third party manufacturers. For example, Orion produces levosimendan for us, Bioserve currently manufacturers Oxycyte for us and Fluoromed currently produces FtBu for us. Accordingly, a delay in achieving scale-up of commercial manufacturing capabilities when needed will have a material adverse effect on sales of our products. Additionally, the manufacture of our products will be subject to extensive government regulation. Among the conditions for marketing approval is that our quality control and manufacturing procedures conform to applicable good manufacturing practice regulations. There is a risk that we will not be able to obtain the necessary regulatory clearances or approvals to manufacture our products on a timely basis or at all.
 
A change in manufacturer likely would require formal approval by the FDA or other regulatory agencies before the new manufacturer could produce commercial supplies of our products. This approval process would likely take at least 12 to 18 months and, during that time, we could face a shortage of supply of our products, which could negatively affect our financial condition, results of operations and cash flows.
 
We depend on the services of a limited number of key personnel.
 
Our success is highly dependent on the continued services of a limited number of scientists and support personnel. The loss of any of these individuals, in particular, John P. Kelley, our Chief Executive Officer, could have a material adverse effect on us. In addition, our success will depend, among other factors, on the recruitment and retention of additional highly skilled and experienced management and technical personnel. There is a risk that we will not be able to retain existing employees or to attract and retain additional skilled personnel on acceptable terms given the competition for such personnel among numerous large and well-funded pharmaceutical and health care companies, universities, and non-profit research institutions, which could negatively affect our financial condition, results of operations and cash flows.
 
 
15

 
 
We have limited experience in the sale and marketing of medical products.
 
We have limited experience in the sale and marketing of approved medical products and marketing the licensing of such products before FDA or other regulatory approval. We have not decided upon a commercialization strategy in these areas. We do not know of any third party that is prepared to distribute our products should they be approved. If we decide to establish our own commercialization capability, we will need to recruit, train and retain a marketing staff and sales force with sufficient technical expertise. We do not know whether we can establish a commercialization program at a cost that is acceptable in relation to revenue or whether we can be successful in commercializing our product. Factors that may inhibit our efforts to commercialize our products directly and without strategic partners include:
 
-  
Our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
 
-  
The inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;
 
-  
The lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
 
-  
Unforeseen costs and expenses associated with creating and sustaining an independent sales and marketing organization.
 
Failure to successfully commercialize our products or to do so on a cost effective basis would likely result in failure of our business.
 
We may enter into distribution arrangements and marketing alliances for certain products and any failure to successfully identify and implement these arrangements on favorable terms, if at all, may impair our ability to commercialize our product candidates.
 
We do not anticipate having the resources in the foreseeable future to develop global sales and marketing capabilities for all of the products we develop, if any. We may pursue arrangements regarding the sales and marketing and distribution of one or more of our product candidates and our future revenues may depend, in part, on our ability to enter into and maintain arrangements with other companies having sales, marketing and distribution capabilities and the ability of such companies to successfully market and sell any such products. Any failure to enter into such arrangements and marketing alliances on favorable terms, if at all, could delay or impair our ability to commercialize our product candidates and could increase our costs of commercialization. Any use of distribution arrangements and marketing alliances to commercialize our product candidates will subject us to a number of risks, including the following:
 
-  
We may be required to relinquish important rights to our products or product candidates;
 
-  
We may not be able to control the amount and timing of resources that our distributors or collaborators may devote to the commercialization of our product candidates;
 
-  
Our distributors or collaborators may experience financial difficulties;
 
-  
Our distributors or collaborators may not devote sufficient time to the marketing and sales of our products; and
 
-  
Business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement.
 
We may need to enter into additional co-promotion arrangements with third parties where our own sales force is neither well situated nor large enough to achieve maximum penetration in the market. We may not be successful in entering into any co-promotion arrangements, and the terms of any co-promotion arrangements we enter into may not be favorable to us.
 
Risks Relating to Intellectual Property
 
It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.
 
Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our product candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities.
 
 
16

 
 
We license certain intellectual property from third parties that covers our product candidates. We rely on certain of these third parties to file, prosecute and maintain patent applications and otherwise protect the intellectual property to which we have a license, and we have not had and do not have primary control over these activities for certain of these patents or patent applications and other intellectual property rights. We cannot be certain that such activities by third parties have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights. Our enforcement of certain of these licensed patents or defense of any claims asserting the invalidity of these patents would also be subject to the cooperation of the third parties.
 
The patent positions of pharmaceutical and biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biopharmaceutical patents has emerged to date in the United States. The biopharmaceutical patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents we own or to which we have a license from a third-party. Further, if any of our patents are deemed invalid and unenforceable, it could impact our ability to commercialize or license our technology.
 
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
 
-  
others may be able to make compositions or formulations that are similar to our product candidates but that are not covered by the claims of our patents;
 
-  
we might not have been the first to make the inventions covered by our issued patents or pending patent applications;
 
-  
we might not have been the first to file patent applications for these inventions;
 
-  
others may independently develop similar or alternative technologies or duplicate any of our technologies;
 
-  
it is possible that our pending patent applications will not result in issued patents;
 
-  
our issued patents may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges by third parties;
 
-  
we may not develop additional proprietary technologies that are patentable; or
 
-  
the patents of others may have an adverse effect on our business.
 
We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
 
We rely on confidentiality agreements that, if breached, may be difficult to enforce and could have a material adverse effect on our business and competitive position.
 
Our policy is to enter agreements relating to the non-disclosure and non-use of confidential information with third parties, including our contractors, consultants, advisors and research collaborators, as well as agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we employ them. However, these agreements can be difficult and costly to enforce. Moreover, to the extent that our contractors, consultants, advisors and research collaborators apply or independently develop intellectual property in connection with any of our projects, disputes may arise as to the proprietary rights to the intellectual property. If a dispute arises, a court may determine that the right belongs to a third party, and enforcement of our rights can be costly and unpredictable. In addition, we rely on trade secrets and proprietary know-how that we seek to protect in part by confidentiality agreements with our employees, contractors, consultants, advisors or others. Despite the protective measures we employ, we still face the risk that:
 
-  
These agreements may be breached;
 
-  
These agreements may not provide adequate remedies for the applicable type of breach; or
 
-  
Our trade secrets or proprietary know-how will otherwise become known.
 
 
17

 
 
Any breach of our confidentiality agreements or our failure to effectively enforce such agreements would have a material adverse effect on our business and competitive position.
 
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our technology.
 
If we or our partners choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or company has the right to ask the court to rule that these patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources even if we were successful in stopping the infringement of these patents. In addition, there is a risk that the court will decide that these patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the ground that such other party’s activities do not infringe our rights to these patents.
 
Furthermore, a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party’s patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we or our commercialization partners are infringing the third party’s patents and would order us or our partners to stop the activities covered by the patents. In addition, there is a risk that a court will order us or our partners to pay the other party damages for having violated the other party’s patents. We have agreed to indemnify certain of our commercial partners against certain patent infringement claims brought by third parties. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either does not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.
 
Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications, or that we were the first to invent the technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications or patents, which could further require us to obtain rights to issued patents by others covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.
 
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
 
Our collaborations with outside scientists and consultants may be subject to restriction and change.
 
We work with chemists, biologists and other scientists at academic and other institutions, and consultants who assist us in our research, development, regulatory and commercial efforts, including the members of our scientific advisory board. These scientists and consultants have provided, and we expect that they will continue to provide, valuable advice on our programs. These scientists and consultants are not our employees, may have other commitments that would limit their future availability to us and typically will not enter into non-compete agreements with us. If a conflict of interest arises between their work for us and their work for another entity, we may lose their services. In addition, we will be unable to prevent them from establishing competing businesses or developing competing products. For example, if a key scientist acting as a principal investigator in any of our clinical trials identifies a potential product or compound that is more scientifically interesting to his or her professional interests, his or her availability to remain involved in our clinical trials could be restricted or eliminated.
 
 
18

 
 
Under current law, we may not be able to enforce all employees’ covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
 
We have entered into non-competition agreements with certain of our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. Under current law, we may be unable to enforce these agreements against certain of our employees and it may be difficult for us to restrict our competitors from gaining the expertise our former employees gained while working for us. If we cannot enforce our employees’ non-compete agreements, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
 
We may infringe or be alleged to infringe intellectual property rights of third parties.
 
Our products or product candidates may infringe on, or be accused of infringing on, one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may be subsequently issued and to which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the United States and abroad. These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.
 
If we are found to infringe the patent rights of a third party, or in order to avoid potential claims, we or our collaborators may choose or be required to seek a license from a third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms.
 
There have been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products. Our products, after commercial launch, may become subject to Paragraph IV certification under the Hatch-Waxman Act, thus forcing us to initiate infringement proceedings against such third-party filers. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.
 
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We try to ensure that our employees do not use the proprietary information or know-how of others in their work for us. We may, however, be subject to claims that we or these employees have inadvertently or otherwise used or disclosed intellectual property, trade secrets or other proprietary information of any such employee’s former employer. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we fail to defend any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.
 
Product liability lawsuits against us could cause us to incur substantial liabilities, limit sales of our existing products and limit commercialization of any products that we may develop.
 
Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, distribution, and sale of biotechnology products. We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and an even greater risk when we commercially sell any products. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
 
 
19

 
 
-  
Decreased demand for our products and any product candidates that we may develop;
 
-  
Injury to our reputation;
 
-  
Withdrawal of clinical trial participants;
 
-  
Costs to defend the related litigation;
 
-  
Substantial monetary awards to trial participants or patients;
 
-  
Loss of revenue; and
 
-  
The inability to commercialize any products that we may develop.
 
We currently maintain limited product liability insurance coverage for our clinical trials in the total amount of $3 million. However, our profitability will be adversely affected by a successful product liability claim in excess of our insurance coverage. There can be no assurance that product liability insurance will be available in the future or be available on reasonable terms.
 
Risks Related to Owning Our Common Stock
 
Our share price has been volatile and may continue to be volatile which may subject us to securities class action litigation in the future .
 
The market price of shares of our common stock has been, and may be in the future, subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
 
-  
actual or anticipated fluctuations in our financial condition and operating results;
 
-  
status and/or results of our clinical trials;
 
-  
status of ongoing litigation;
 
-  
results of clinical trials of our competitors’ products;
 
-  
regulatory actions with respect to our products or our competitors’ products;
 
-  
actions and decisions by our collaborators or partners;
 
-  
actual or anticipated changes in our growth rate relative to our competitors;
 
-  
actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;
 
-  
competition from existing products or new products that may emerge;
 
-  
issuance of new or updated research or reports by securities analysts;
 
-  
fluctuations in the valuation of companies perceived by investors to be comparable to us;
 
-  
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
 
-  
market conditions for biopharmaceutical stocks in general;
 
-  
status of our search and selection of future management and leadership; and
 
-  
general economic and market conditions.
 
On April 30, 2014 the closing price of our common stock was $4.88 as compared with $5.00 as of April 30, 2013. During the twelve months ended April 30, 2014, the lowest closing price of our common stock was $1.23 and the highest closing price was $8.38, all as adjusted for the 1-for-20 reverse stock split effective on May 10, 2013.
 
Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. Such lawsuits, should they be filed against us in the future, could result in substantial costs and a diversion of management’s attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.
 
We are likely to attempt to raise additional capital through issuances of debt or equity securities, which may cause our stock price to decline, dilute the ownership interests of our existing stockholders, and/or limit our financial flexibility.
 
Historically we have financed our operations through the issuance of equity securities and debt financings, and we expect to continue to do so for the foreseeable future.  As of April 30, 2014, we had $58.3 million of cash and cash equivalents on hand. Based on our current operating plans, we believe that our existing cash and cash equivalents are sufficient to continue to fund operations through our fiscal year ending April 30, 2017. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution of their ownership interests.  Debt financing, if available, may involve restrictive covenants that limit our financial flexibility or otherwise restrict our ability to pursue our business strategies. Additionally, if we issue shares of common stock, or securities convertible or exchangeable for common stock, the market price of our existing common stock may decline. There can be no assurance that we will be successful in obtaining any additional capital resources in a timely manner, on favorable terms, or at all.
 
 
20

 
 
We have issued in the past, and may issue in the future, substantial amounts of instruments that are convertible into or exercisable for common stock, and our existing stockholders may face substantial dilution if such instruments are converted or exercised.
 
As of July 24, 2014, we had outstanding warrants and options, securities purchase agreements, and other instruments that are exercisable into an aggregate of 6,267,850 shares of our common stock, which, if exercised, would represent approximately 18% of our current outstanding common stock.  These instruments carry a wide variety of different terms and prices, and there can be no assurance as to when or whether exercises of these instruments may occur.  If all or any substantial portion of these instruments are exercised, our existing stockholders may face substantial dilution of their ownership interests. 
 
Certain investors may be able to exercise significant influence over us.
 
As of July 24, 2014, SPC 1 Vatea Segregated Portfolio, or Vatea Fund, held 189,082 shares of our common stock and JP SPC 3 obo OXBT FUND, SP, or OXBT Fund, held 3,192,593 shares of our common stock, representing 12% of our outstanding common stock. As of July 24, 2014, OXBT Fund held warrants that are exercisable into an aggregate of up to 2,251,742 shares of our common stock, which, if exercised, would represent 18.6% of our current outstanding common stock. Mr. Gregory Pepin, one of our directors, is the investment manager of both Vatea Fund and OXBT Fund. In addition, as of July 24, 2014, each of John P. Kelly, Doug Randall and Douglas Hay, PhD, our Chief Executive Officer, Vice President, Business and Commercial Operations and Vice President, Regulatory Affairs, respectively, held 1,166,511 shares of our common stock, individually representing 4.2% of our outstanding common stock.  As of July 24, 2014, each of Mr. Kelley, Mr. Randall and Dr. Hay also hold options to purchase 893,220 shares of our common stock, individually representing 3.1% of our outstanding common stock. Accordingly, these parties, either individually or as part of a group, may have a strong ability to influence our business, policies and affairs.  We cannot be certain that their interests will be consistent with the interests of other holders of our common stock.
 
Risks Relating to Employee Matters and Managing Growth
 
We may need to increase the size of our company, and we may experience difficulties in managing growth.
 
As of July 24, 2014, we had 14 full-time employees. We may need to expand our managerial, operational, administrative, financial and other resources in order to manage and fund our operations and clinical trials, continue our development activities and commercialize our product candidates. To support this growth, we may hire additional employees within the next 12 months. Our management, personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires that we continue to improve our operational, financial and management controls, reporting systems and procedures.
 
We may not be able to attract or retain qualified management and scientific personnel in the future. If we are unable to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede our achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.
 
In addition, we have scientific and clinical advisors who assist us in our product development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the development of products that may compete with ours. Because our business depends on certain key personnel and advisors, the loss of such personnel and advisors could weaken our management team and we may experience difficulty in attracting and retaining qualified personnel and advisors. 
 
ITEM 1B—UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 2—PROPERTIES
 
We own no real property. We lease our principal executive office at ONE Copley Parkway, Suite 490, Morrisville, North Carolina 27560. The current rent is approximately $9,219 per month for the facility.
 
 
21

 
 
ITEM 3—LEGAL PROCEEDINGS
 
The Company is subject to litigation in the normal course of business, none of which management believes will have a material adverse effect on the Company’s Consolidated Financial Statements.
 
ITEM 4— MINE SAFETY DISCLOSURES
 
Not applicable
 
 
22

 
 
PART II
 
 
ITEM 5—MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Price and Number of Stockholders
 
Our common stock is listed on the NASDAQ Capital Market under the symbol “OXBT.” The following table sets forth, for the past two fiscal years, the range of high and low sales prices in each fiscal quarter for our common stock, all as adjusted for the 1-for-20 reverse stock split effective on May 10, 2013.
 
Year-Ended April 30, 2013
 
High
   
Low
 
First Quarter
  $ 45.00     $ 21.40  
Second Quarter
  $ 24.20     $ 10.40  
Third Quarter
  $ 22.00     $ 10.40  
Fourth Quarter
  $ 15.80     $ 3.60  
 
Year-Ended April 30, 2014
 
High
   
Low
 
First Quarter
  $ 5.69     $ 1.40  
Second Quarter
  $ 3.46     $ 1.19  
Third Quarter
  $ 11.40     $ 3.04  
Fourth Quarter
  $ 8.35     $ 4.46  
 
As of July 24, 2014, there were 1,360 holders of record of our common stock. In addition, we believe that a significant number of beneficial owners of our common stock hold their shares in nominee or in “street name” accounts through brokers.  On July 24, 2014, the last sale price reported on the NASDAQ Capital Market for our common stock was $3.98 per share.
 
Dividend Policy
 
Since our inception, we have not paid dividends on our common stock. We intend to retain any earnings for use in our business activities, so it is not expected that any dividends on our common stock will be declared and paid in the foreseeable future.
 
Repurchases of Common Stock
 
The following table lists all repurchases during the fourth quarter of fiscal 2014 of any of our securities registered under Section 12 of the Exchange Act by or on behalf of us or any affiliated purchaser.
 
Issuer Purchases of Equity Securities
 
Issuer Purchases of Equity Securities
 
Total Number of Shares Purchased (1)
   
Average Price Paid per Share (2)
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
 
Period
                       
February 1, 2014 - February 28, 2014
    20     $ 6.18       -     $ -  
March 1, 2014 - March 31, 2014
    20       6.47       -       -  
April 1, 2014 - April 30, 2014
    19       5.55       -       -  
Total
    59     $ 6.08       -     $ -  
 
(1)  
Represents shares repurchased in connection with tax withholding obligations under the 1999 Amended Stock Plan.
 
(2)   
Represents the average price paid per share for the shares repurchased in connection with tax withholding obligations under the 1999 Amended Stock Plan.
 
 
23

 
 
Unregistered Sales of Equity Securities
 
On March 31, 2014 we issued 250 shares of unregistered common stock as payment of $11,275 of interest due on our outstanding convertible notes.
 
All of the securities described above were issued in reliance on the exemption from registration set forth in Section 4(a)(2) of the Securities Act.
 
ITEM 6—SELECTED FINANCIAL DATA
 
Not Applicable.
 
ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis together with the Consolidated Financial Statements and the related notes to those statements included in “Item 8 – Consolidated Financial Statements and Supplementary Data.” This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.
 
Results of operations- Comparison of the year ended April 30, 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, cost of sales and gross profit, as well as corresponding percentage changes, for the years ended April 30, 2014 and 2013 are as follows:
 
   
Year ended April 30,
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
   
2014
   
2013
             
Product revenue
  $ 25,731     $ 92,683     $ (66,952 )     (72 ) %
Cost of sales
    129,800       43,111       86,689       201 %
Gross profit
  $ (104,069 )   $ 49,572     $ (153,641 )     (310 ) %
 
The decrease in product revenue for the year ended April 30, 2014 was primarily due to license fees earned in accordance with our distribution agreement for Dermacyte for the year ended April 30, 2013.
 
Gross profit as a percentage of revenue was (404) % and 53% for year ended April 30, 2014 and 2013, respectively. The decrease for the year ended April 30, 2014, as compared to the same period in the prior year, was due to the write-down of Dermacyte product in the current year that is no longer being marketed for sale.
 
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.
 
 
24

 
 
   
Year ended April 30,
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
   
2014
   
2013
             
Government grant revenue
  $ 262,995     $ 1,141,356     $ (878,361 )     (77 ) %
 
For the year ended April 30, 2014, we recorded approximately $263,000 in revenue under the grant program as compared to approximately $1.1 million 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 year ended April 30, 2014 and 2013, respectively, are as follows:
 
   
Year ended April 30,
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
   
2014
   
2013
             
Marketing and sales expense
  $ 102     $ 108,165     $ (108,063 )     (100 ) %
 
The decrease in marketing and sales expenses for the year ended April 30, 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 year ended April 30, 2014 and 2013, respectively, are as follows:
 
   
Year ended April 30,
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
   
2014
   
2013
             
Personnel costs
  $ 10,593,234     $ 1,490,752     $ 9,102,482       611 %
Legal and professional fees
    2,556,643       2,005,311       551,332       27 %
Other costs
    350,855       (206,788 )     557,643       270 %
Facilities
    157,449       167,693       (10,244 )     (6 ) %
Depreciation and amortization
    115,042       111,012       4,030       4 %
 
Personnel costs:
 
Personnel costs increased approximately $9.1 million for the year ended April 30, 2014 compared to the prior year. The increase was due primarily to the expense recognition of approximately $8.3 million for the granting and vesting of stock options and restricted stock, an increase of approximately $350,000 in salaries paid due to the addition of our new Chief Executive Officer and two other management positions and approximately $550,000 in performance bonuses paid and accrued for in the current year that were not paid in the prior year. The personnel costs attributable to Mr. Kelley, Mr. Jebsen, Mr. Randall and Dr. Hay reflect option grants made pursuant to their respective employment agreements, which were negotiated in connection with our acquisition of a license for levosimendan. In addition, Mr. Jebsen was paid a discretionary bonus consisting of $225,000 in cash and 32,143 shares of restricted common stock in recognition of his service as interim Chief Executive Officer from August 2011 through November 2013.
 
 
25

 
 
Legal and professional fees:
 
Legal and professional fees consist of the costs incurred for legal fees, accounting fees, recruiting costs and investor relations services, as well as fees paid to our Board of Directors. Legal and professional fees increased approximately $550,000 for the year ended April 30, 2014 compared to the prior year. This increase was primarily due to costs incurred for investor relations services and audit fees, partially offset by a decrease in legal and recruiting fees.
 
-  
Audit and accounting fees increased approximately $55,000 due to the costs incurred for valuation services related to the Phyxius acquisition and the filing of registration statements in the current year.
 
-  
Investor relation fees increased approximately $560,000 for the costs of outsourced corporate communications firms, road shows and attending investor conferences.
 
-  
Legal fees decreased approximately $40,000 due primarily to approximately $285,000 in fees incurred in the prior year for litigation defense costs, partially offset by an increase of approximately $245,000 in fees related to the Phyxius acquisition and the filing of registration statements in the current year.
 
-  
Recruiting fees decreased approximately $25,000 due to headcount additions in the prior year.
 
Other costs:
 
Other costs include costs incurred for travel, supplies, insurance and other miscellaneous charges. The approximately $558,000 increase in other costs was due primarily to the reversal of a contingent liability in the prior year related to potential liabilities in connection with non-compliance with Section 409A of the Internal Revenue Code.
 
Facilities:
 
Facilities include costs paid for rent and utilities at our corporate headquarters in North Carolina. The approximately $10,000 reduction compared to 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 years ended April 30, 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 years ended April 30, 2014 and 2013, respectively, are as follows:
 
   
Year ended April 30,
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
   
2014
   
2013
             
Clinical and preclinical development
  $ 1,947,461     $ 1,569,594     $ 377,867       24 %
Personnel costs
    818,264       637,685       180,579       28 %
Consulting
    153,506       117,211       36,295       31 %
Depreciation
    41,199       42,968       (1,769 )     (4 ) %
Other costs
    26,028       32,652       (6,624 )     (20 ) %
Facilities
    10,263       55,706       (45,443 )     (82 ) %
 
Clinical and preclinical development:
 
Clinical and preclinical development costs include the costs associated with our Phase III and Phase II clinical trials for levosimendan and Oxycyte and development costs for Dermacyte. The increase of approximately $378,000 in clinical and preclinical development costs for the year ended April 30, 2014 compared to the prior year was primarily due to increases of $634,000 associated with the Phase II-b trials for Oxycyte and $214,000 in clinical development costs of levosimendan, partially offset by a decrease of $477,000 in costs incurred for preclinical safety studies for Oxycyte.
 
 
26

 
 
Personnel costs:
 
Personnel costs increased approximately $181,000 for the year ended April 30, 2014 compared to the prior year primarily due to headcount increases and employee bonuses paid in the current year.
 
Consulting fees:
 
Consulting fees increased approximately $36,000 for the year ended April 30, 2014 compared to the same period in the prior year primarily due to approximately $131,000 of fees incurred to plan and prepare for regulatory submissions, clinical trial expansions and other clinical support activities, partially offset by a reduction of approximately $95,000 of consulting fees associated with Oxycyte development.
 
Depreciation:
 
Depreciation expense remained relatively consistent for the year ended April 30, 2014 and 2013.
 
Other costs:
 
Other costs decreased approximately $7,000 for the year ended April 30, 2014 compared to the prior year primarily due to a decrease in expenses associated with travel and supplies.
 
Facilities:
 
Facilities expense decreased approximately $45,000 for the year ended April 30, 2014 compared to the same period in the prior year primarily due to the closure of our California facility.
 
Restructuring expense
 
   
Year ended April 30,
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
   
2014
   
2013
             
Restructuring expense
  $ -     $ 220,715     $ (220,715 )     %
 
During the year ended April 30, 2013, the Company recorded one-time charges of approximately $54,000 for severance and benefits related charges, $135,000 for net future lease obligations and $31,000 for other exit costs related to the closure of our California facility that were not incurred in the year ended April 30, 2014
 
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 year ended April 30, 2014 and 2013, respectively, are as follows:
 
   
Year ended April 30,
   
Increase/ (Decrease)
   
% Increase/ (Decrease)
 
   
2014
   
2013
             
Interest expense
  $ 2,212,283     $ 4,238,456     $ (2,026,173 )     (48 ) %
 
During the year ended April 30, 2014, interest expense decreased approximately $2.0 million compared to the prior year. The decrease was due primarily to approximately $1.7 million of noncash interest charges recorded in the prior year related to our previously outstanding Series A Stock, and a decrease of approximately $326,000 in interest charges incurred on our convertible notes in the current year.
 
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 year ended April 30, 2014 and 2013, respectively, is as follows:
 
 
27

 
 
   
Year ended April 30,
   
Increase/ (Decrease)
 
   
2014
   
2013
       
Other expense (income), net
  $ 718,436     $ (11,683 )   $ 730,119  
 
Other expense increased approximately $730,000 for the year ended April 30, 2014 compared to the prior year primarily due to the change in the recognized fair value of our warrant liability in the current year.
 
Liquidity, capital resources and plan of operation
 
We have incurred losses since our inception and as of April 30, 2014 we had an accumulated deficit of approximately $137 million. We will continue to incur losses until we generate sufficient revenue to offset our expenses, and we anticipate that we will continue to incur net losses for at least the next several years. We expect to incur increased expenses related to our development and potential commercialization of levosimendan, Oxycyte and other product candidates and, as a result, we will need to generate significant net product sales, royalty and other revenues to achieve profitability.
 
Liquidity
 
We have financed our operations since September 1990 through the issuance of debt and equity securities and loans from stockholders. We had $58,966,033 and $1,842,251 total current assets and working capital (deficit) of $56,394,986 and $(67,326) as of April 30, 2014 and April 30, 2013, respectively. Our practice is to invest excess cash, where available, in short-term money market investment instruments.
 
Clinical and Preclinical Product Development
 
We are in the preclinical and clinical trial stages in the development of our product candidates. We are currently initiating a Phase III clinical trial for levosimendan and we are conducting Phase II-b clinical trials for the use of Oxycyte in the treatment of severe traumatic brain injury. We expect our primary focus will be on initiating the Phase III clinical trials for levosimendan and funding the continued testing of Oxycyte, since these products are the furthest along in the regulatory review process. Our ability to continue to pursue testing and development of our products beyond April 30, 2017 may depend on obtaining license income or outside financial resources. There is no assurance that we will obtain any license agreement or outside financing or that we will otherwise succeed in obtaining any necessary resources.
 
Financings
 
On July 23, 2013, we sold 5,369 shares of Series C 8% convertible preferred stock and warrants for net proceeds of approximately $4.9 million. Additionally, on August 22, 2013 we issued 4,600 shares of Series D convertible preferred stock and warrants in exchange for $4.6 million of convertible notes that were scheduled to mature in June 2014.
 
On March 21, 2014, we sold 9,285,714 shares of common stock for net proceeds of approximately $55 million.
 
During the year ended April 30, 2014, we received approximately $7.1 million and issued 3,161,145 shares of common stock upon the exercise of our outstanding warrants.
   
Cash Flows
 
The following table shows a summary of our cash flows for the periods indicated:
 
 
28

 
 
   
Year ended April 30,
 
   
2014
   
2013
 
Net cash used in operating activities
  $ (9,261,571 )   $ (4,921,283 )
Net cash used in investing activities
    (147,038 )     (147,987 )
Net cash provided by financing activities
    66,945,636       3,972,926  
 
Net cash used in operating activities.  Net cash used in operating activities was $9.26 million for the year ended April 30, 2014 compared to net cash used in operating activities of $4.92 million for the year ended April 30, 2013. The increase in cash used for operating activities was due primarily to an increase in our costs incurred for the Phase II-b TBI clinical trials, the costs incurred to initiate the Phase III clinical trials for LCOS, the payment of approximately $1.25 million in assumed liabilities during the year, the increase in personnel costs, and the costs associated with the Phyxius asset acquisition.
 
Net cash used in investing activities . Net cash used in investing activities was $147,038 for the year ended April 30, 2014 compared to net cash used in investing activities of $147,987 for the year ended April 30, 2013. The cash used for investing activities, primarily capitalized legal fees incurred for filing and maintaining our patent portfolio, remained relatively consistent compared to the same period in the prior year.
 
Net cash provided by financing activities . Net cash provided by financing activities was $66.9 million for the year ended April 30, 2014 compared to net cash provided by financing activities of $4.0 million for the year ended April 30, 2013. The increase of net cash provided by financing activities was due primarily to net proceeds of $55 million received from the issuance of common stock on March 21, 2014, $4.9 million received from the issuance of Series C 8% Convertible Preferred Stock on July 23, 2013 and proceeds of $7 million received from the exercise of certain warrants as compared to the $2.5 million received from the issuance Series A Preferred Stock and $1.9 million received from the issuance of Series B Preferred Stock in the prior year.
 
Operating Capital and Capital Expenditure Requirements
 
Our future capital requirements will depend on many factors that include, but are not limited to the following:
 
-
The initiation, progress, timing and completion of clinical trials for our product candidates and potential product candidates;
-
The outcome, timing and cost of regulatory approvals and the regulatory approval process;
-
Delays that may be caused by changing regulatory requirements;
-
The number of product candidates that we pursue;
-
The costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;
-
The timing and terms of future in-licensing and out-licensing transactions;
-
The cost and timing of establishing sales, marketing, manufacturing and distribution capabilities;
-
The cost of procuring clinical and commercial supplies of our product candidates;
-
The extent to which we acquire or invest in businesses, products or technologies; and
-
The possible costs of litigation.
 
Based on our working capital at April 30, 2014 we believe we have sufficient capital on hand to continue to fund operations through our fiscal year ending April 30, 2017.
 
We will need substantial additional capital in the future in order to complete the development and commercialization of levosimendan and Oxycyte, as well as to fund the development and commercialization of our future product candidates. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements.  Such funding, if needed, may not be available on favorable terms, if at all.  In the event we are unable to obtain additional capital, we may delay or reduce the scope of our current research and development programs and other expenses.
 
 
29

 
 
To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional significant dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital.
 
Off-Balance Sheet Arrangements
 
Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
 
Summary of Significant Accounting Policies
 
Use of Estimates The preparation of the accompanying Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
 
Preclinical Study and Clinical Accruals —We estimate our preclinical study and clinical trial expenses based on the services received pursuant to contracts with several research institutions and CROs that conduct and manage preclinical and clinical trials on our behalf. The financial terms of the agreements vary from contract to contract and may result in uneven expenses and payment flows. Preclinical study and clinical trial expenses include the following:
 
-
Fees paid to CROs in connection with clinical trials,
-
Fees paid to research institutions in conjunction with preclinical research studies, and
-
Fees paid to contract manufacturers and service providers in connection with the production and testing of active pharmaceutical ingredients and drug materials for use in preclinical studies and clinical trials.
 
Revenue Recognition —Revenues from merchandise sales are recognized upon transfer of ownership, including passage of title to the customer and transfer of the risk of loss related to those goods.  Revenues are reported on a net sales basis, which is computed by deducting from gross sales the amount of actual product returns received, discounts, incentive arrangements with retailers and an amount established for anticipated product returns.
 
Revenues from a cost-reimbursement grant sponsored by the United States Army, or Grant Revenue, are 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.
 
Stock-Based Compensation —Effective May 1, 2005, we adopted Accounting Standards Codification, or ASC, 718 Compensation — Stock Compensation, using the prospective transition method, which requires the measurement and recognition of compensation expense for all stock-based payment awards granted, modified and settled to our employees and directors after May 1, 2005. Our Consolidated Financial Statements reflect the impact of ASC 718. We chose the “straight-line” attribution method for allocating compensation costs and recognized the fair value of each stock option on a straight-line basis over the requisite service period.
 
We account for equity instruments issued to non-employees in accordance with ASC 505-50 Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Equity instruments issued to non-employees are recorded at their fair value on the measurement date and are subject to periodic adjustment as the underlying equity instruments vest.
 
Recent Accounting Pronouncements
 
In June 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-10, Development Stage Entities (Topic 915) . The objective of the amendments in this update is to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements for development stage entities. Users of financial statements of development stage entities told the Board that the development stage entity distinction, the inception-to-date information, and certain other disclosures currently required under U.S. GAAP in the financial statements of development stage entities provide information that has limited relevance and is generally not decision useful. As a result, the amendments in this update remove all incremental financial reporting requirements from US GAAP for development stage entities, thereby improving financial reporting by eliminating the cost and complexity associated with providing that information. The amendments are effective for annual reporting periods beginning after December 15, 2014, and interim reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company has elected to early adopt this guidance, and therefore is no longer presenting the financial statements in accordance with ASU 915, with inception to date disclosures.
 
 
30

 
 
In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09) providing a comprehensive new revenue recognition standard. ASU 2014-09 provides revised standards of recognition predicated on when an entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for us in our first quarter of fiscal 2018. ASU 2014-09 can be applied retrospectively with a modified retrospective application permitted. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.
 
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 adoption of ASU 2013-11 did not have a material impact on our Consolidated Financial Statements.
 
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
ITEM 8—CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
CONSOLIDATED BALANCE SHEETS
33
CONSOLIDATED STATEMENTS OF OPERATIONS
34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
36
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38
 
 
31

 

OXYGEN BIOTHERAPEUTICS, INC.
 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholders
Oxygen Biotherapeutics, Inc.
Morrisville, North Carolina
 
We have audited the accompanying consolidated balance sheets of Oxygen Biotherapeutics, Inc. and Subsidiary, formerly, Synthetic Blood International, Inc. (the Company), as of April 30, 2014 and 2013, and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for each of the years in the two-year period ended April 30, 2014. The Companys management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of April 30, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the two-year period ended April 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
 
For the period ended April 30, 2014, the Company recognized a net loss of approximately $19.5 million and, as of April 30, 2014, the Company had incurred cumulative net losses of approximately $136.6 million. Managements plans with regard to liquidity and capital resources are described in Note B.
 
As discussed in Note B to the consolidated financial statements, the Company has elected to early adopt Accounting Standards Update 2014-10, Development Stage Enterprises. Accordingly, the Company has eliminated inception-to-date information and certain other incremental development stage entity disclosures in the consolidated financial statements referred to above.
 
/s/ CHERRY BEKAERT LLP
 
Raleigh, North Carolina
July 29, 2014
 
 
32

 
OXYGEN BIOTHERAPEUTICS, INC.
 
CONSOLIDATED BALANCE SHEETS
 
   
April 30,
2014
   
April 30,
2013
 
             
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 58,320,555     $ 783,528  
Accounts receivable
    36,358       445,237  
Government grant receivable
    29,750       96,226  
Inventory
    -       99,204  
Prepaid expenses
    401,964       247,646  
Other current assets
    177,406       170,410  
Total current assets
    58,966,033       1,842,251  
Property and equipment, net
    124,374       205,389  
Debt issuance costs, net
    21,427       150,043  
Intangible assets, net
    22,999,744       924,698  
Goodwill
    11,265,100       -  
Other assets
    52,762       58,262  
Total assets
  $ 93,429,440     $ 3,180,643  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities
               
Accounts payable
  $ 411,145     $ 977,162  
Accrued liabilities
    858,136       874,876  
Warrant liabilities
    954,876       -  
Current portion of notes payable, net
    346,890       57,539  
Total current liabilities
    2,571,047       1,909,577  
Other liabilities
    10,932       54,660  
Deferred tax liability
    7,962,100       -  
Long-term portion of notes payable, net
    -       2,994,442  
Total liabilities
    10,544,079       4,958,679  
                 
                 
Commitments and contingencies; see Note I.
               
Stockholders' equity (deficit)
               
Preferred stock, undesignated, authorized 9,947,439 and 9,990,400 shares; respectively. See Note G.
               
Series B Preferred stock, par value $.0001, issued 2,100 shares; outstanding 0 and 987, respectively.
    -       1  
Common stock, par value $.0001 per share; authorized 400,000,000 shares; issued and outstanding 27,858,000 and 1,930,078,  respectively
    2,786       193  
Additional paid-in capital
    219,468,498       115,265,854  
Accumulated deficit
    (136,585,923 )     (117,044,084 )
Total stockholders’ equity (deficit)
    82,885,361       (1,778,036 )
Total liabilities and stockholders' equity (deficit)
  $ 93,429,440     $ 3,180,643  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
 
33

 
OXYGEN BIOTHERAPEUTICS, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Year ended April 30,
 
   
2014
   
2013
 
Product revenue
  $ 25,731     $ 92,683  
Cost of sales
    129,800       43,111  
Net product revenue
    (104,069 )     49,572  
Government grant revenue
    262,995       1,141,356  
Total net revenue
    158,926       1,190,928  
                 
Operating expenses
               
Selling, general, and administrative
    13,773,325       3,676,145  
Research and development
    2,996,721       2,455,816  
Restructuring expense
    -       220,715  
Loss on impairment of long-lived assets
    -       27,279  
Total operating expenses
    16,770,046       6,379,955  
                 
Net operating loss
    16,611,120       5,189,027  
                 
Interest expense
    2,212,283       4,238,456  
Other expense (income)
    718,436       (11,683 )
Net loss
  $ 19,541,839     $ 9,415,800  
                 
Preferred stock dividend
    5,803,362       958,071  
Net loss attributable to common stockholders
  $ 25,345,201     $ 10,373,871  
                 
                 
Net loss per share, basic
  $ (2.71 )   $ (6.29 )
Weighted average number of common shares outstanding, basic
    9,362,031       1,650,280  
Net loss per share,  diluted
  $ (2.71 )   $ (6.68 )
Weighted average number of common shares outstanding,  diluted
    9,362,031       1,759,025  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
 
34

 
OXYGEN BIOTHERAPEUTICS, INC.
 
CONOSLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 
   
Preferred Stock
   
Common Stock
                   
   
Number of Shares
   
Amount
   
Number of Shares
   
Amount
   
Additional paid-in capital
      Accumulated deficit    
Total stockholders' equity (deficit)
 
Balance at April 30, 2012
    -     $ -       1,470,890     $ 2,942     $ 107,279,296     $ (107,628,284 )   $ (346,046 )
Preferred stock sold, net of offering costs
    2,100       1                       1,851,149               1,851,150  
Common stock sold, net of offering costs
                                                    -  
Common stock issued for convertible preferred stock
    (1,113 )             400,708       804       4,509,184               4,509,988  
Common stock issued as interest on convertible debt
                    16,524       33       745,175               745,208  
Common stock issued as dividend on convertible preferred stock
                    17,409       32       331,366               331,398  
Compensation on options and restricted stock issued
                    4,465       9       269,522               269,531  
Issuance of warrants
                                    656,535               656,535  
Exchange of warrants
                    20,000       40       (380,040 )             (380,000 )
Beneficial conversion feature of convertible debt
                                                    -  
Fractional shares of common stock due to reverse stock split
                    82       (3,667 )     3,667               -  
Net loss
                                            (9,415,800 )     (9,415,800 )
                                                         
Balance at April 30, 2013
    987     $ 1       1,930,078     $ 193     $ 115,265,854     $ (117,044,084 )   $ (1,778,036 )
Preferred stock sold, net of offering costs
    5,369       1                       4,895,187               4,895,188  
Preferred stock issued for convertible debt
    4,600       3                       4,599,997               4,600,000  
Common and preferred stock issued for asset purchase
    32,992       3       1,366,844       137       24,046,860               24,047,000  
Common stock sold, net of offering costs
                    10,678,571       1,068       54,907,282               54,908,350  
Common stock issued for convertible preferred stock
    (43,948 )     (8 )     9,056,415       906       (898 )             -  
Common stock issued as interest on convertible debt
                    4,881       1       220,040               220,041  
Common stock issued as dividend on convertible preferred stock
                    1,407,485       140       (140 )             -  
Compensation on options and restricted stock issued
                    50,144       5       8,131,619               8,131,624  
Common stock issued for services rendered
                    198,668       20       499,980               500,000  
Exercise of warrants
                    3,161,145       316       7,135,753               7,136,069  
Reclassification of warrants from equity to derivative liability
                                    (233,036 )             (233,036 )
Fractional shares of common stock due to reverse stock split
                    3,769                               -  
Net loss
                                            (19,541,839 )     (19,541,839 )
Balance at April 30, 2014
    -     $ -       27,858,000     $ 2,786     $ 219,468,498     $ (136,585,923 )   $ 82,885,361  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
 
35

 
OXYGEN BIOTHERAPEUTICS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year ended April 30,
 
   
2014
   
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Loss
  $ (19,541,839 )   $ (9,415,800 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation and amortization
    150,489       148,804  
Interest on debt instruments
    2,181,955       4,236,332  
Loss on impairment, disposal and write down of long-lived assets
    2,519       35,673  
Issuance and vesting of compensatory stock options and warrants
    8,042,662       84,267  
Issuance of common stock as compensation
    651,460       185,264  
Change in the fair value of warrants
    721,840       -  
Changes in operating assets and liabilities
               
Accounts receivable, prepaid expenses and other assets
    519,255       (245,747 )
Inventory
    99,204       (20,228 )
Accounts payable and accrued liabilities
    (2,089,116 )     70,152  
Net cash used in operating activities
    (9,261,571 )     (4,921,283 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property and equipment
    (9,804 )     (17,199 )
Proceeds from the sale of property and equipment
    -       4,064  
Capitalization of patent costs and license rights
    (137,234 )     (134,852 )
Net cash used in investing activities
    (147,038 )     (147,987 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from sale of common stock and exercise of stock options and warrants, net of related expenses and payments
    62,044,419       -  
Repurchase of outstanding warrants
    -       (380,000 )
Proceeds from issuance of notes payable, net of issuance costs
    141,320       102,671  
Proceeds for issuance of convertible preferred stock, net of issuance costs
    4,895,188       4,351,150  
Payments on notes - short-term
    (135,291 )     (100,895 )
Net cash provided by financing activities
    66,945,636       3,972,926  
                 
Net change in cash and cash equivalents
    57,537,027       (1,096,344 )
Cash and cash equivalents, beginning of period
    783,528       1,879,872  
Cash and cash equivalents, end of period
  $ 58,320,555     $ 783,528  
                 
Cash paid for:
               
Interest
  $ 30,328     $ 2,123  
Income taxes
  $ -     $ -  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
 
36

 
OXYGEN BIOTHERAPEUTICS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
 
Non-cash financing activities during the year ended April 30, 2014:
 
-   The Company issued 4,881 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 $220,041 interest payable on convertible notes with a gross carrying value of $4,900,000.
 
-   The Company issued 831,401 shares of its common stock for the payment of $ 1,300,204 as dividends on the Series C 8% Convertible Preferred stock.
 
-   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.
 
-   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.
 
-   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 D to these consolidated financial statements. The Company recorded Goodwill of $11,265,100 as a result of this issuance.
 
Non-cash financing activities during the year ended April 30, 2013:
 
-   The Company issued 16,524 shares of restricted common stock for the payment of interest accrued on convertible notes. The shares were issued at a conversion price of $45.11 for the payment of $745,208 interest payable on convertible notes with a gross carrying value of $4,900,000.
 
-   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.
 
 
37

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of April 30, 2014 and 2013, and for the years then ended.
 
NOTE A—DESCRIPTION OF BUSINESS
 
Description of Business—Oxygen Biotherapeutics (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 D 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
 
The Company initiated a 1-for-20 reverse stock split effective May 10, 2013. All shares and per share amounts in these Consolidated Financial Statements and notes thereto have been retroactively adjusted to give effect to the reverse stock split.
 
NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates
 
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
 
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.
 
 
38

 
 
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.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid instruments with a maturity date of three months or less, when acquired, to be cash equivalents.
 
Cash Concentration Risk
 
On July 21, 2010, the Wall Street Reform and Consumer Protection Act permanently increased the FDIC insurance limits to $250,000 per depositor per insured bank. At April 30, 2014, the Company had $58,038,597 of cash balances uninsured by the FDIC.
 
Liquidity and Capital Resources
 
We have financed our operations since September 1990 through the issuance of debt and equity securities and loans from stockholders. We had $58,966,033 and $1,842,251 total current assets and working capital (deficit) of $56,394,986 and $(67,326) as of April 30, 2014 and April 30, 2013, respectively. Our practice is to invest excess cash, where available, in short-term money market investment instruments.
 
Cash resources as of April 30, 2014 were approximately $58.3 million, compared to approximately $784,000 as of April 30, 2013. Based on its resources at April 30, 2014, and the current plan of expenditure on continuing development of the Company’s current product candidates, the Company believes that it has sufficient capital to fund its operations through the fiscal year ending April 30, 2017. However, the Company will need substantial additional financing in order to fund its operations beyond such period and thereafter until it can achieve profitability, if ever. The Company depends on its ability to raise additional funds through various potential sources, such as equity and debt financing, or to license its product candidates to another pharmaceutical company. The Company will continue to fund operations from cash on hand and through sources of capital similar to those previously described. The Company cannot assure that it will be able to secure such additional financing, or if available, that it will be sufficient to meet its needs.
 
To the extent that the Company raises additional funds by issuing shares of its common stock or other securities convertible or exchangeable for shares of common stock, stockholders will experience dilution, which may be significant. In the event the Company raises additional capital through debt financings, the Company may incur significant interest expense and become subject to covenants in the related transaction documentation that may affect the manner in which the Company conducts its business. To the extent that the Company raises additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to its technologies or product candidates, or grant licenses on terms that may not be favorable to the Company. Any or all of the foregoing may have a material adverse effect on the Company’s business and financial performance.
 
Deferred financing costs
 
Deferred financing costs represent legal, due diligence and other direct costs incurred to raise capital or obtain debt. Direct costs include only “out-of-pocket” or incremental costs directly related to the effort, such as a finder’s fee and accounting and legal fees. These costs will be capitalized if the efforts are successful, or expensed when unsuccessful. Indirect costs are expensed as incurred. Deferred financing costs related to debt are amortized over the life of the debt. Deferred financing costs related to issuing equity are charged to Additional Paid-in Capital.
 
Derivative financial instruments
 
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments and other convertible equity instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under FASB ASC 815, Derivatives and Hedging (“ASC 815”) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.
 
Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments, and are evaluated and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.
 
 
39

 
 
Beneficial conversion and warrant valuation
 
In accordance with FASB ASC 470-20, Debt with Conversion and Other Options, the Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that have conversion features at fixed rates that are in-the-money when issued and the fair value of warrants issued in connection with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants, based on their relative fair value, and as a reduction to the carrying amount of the convertible debt equal to the intrinsic value of the conversion feature. As described in Note F, the discount recorded in connection with the BCF and warrant valuation is recognized as non-cash interest expense and is amortized over the life of the convertible note.
 
Preclinical Study and Clinical Accruals
 
The Company estimates its preclinical study and clinical trial expenses based on the services received pursuant to contracts with several research institutions and contract research organizations (“CROs”) that conduct and manage preclinical and clinical trials on its behalf. The financial terms of the agreements vary from contract to contract and may result in uneven expenses and payment flows. Preclinical study and clinical trial expenses include the following:
 
-
Fees paid to CROs in connection with clinical trials,
-
Fees paid to research institutions in conjunction with preclinical research studies, and
-
Fees paid to contract manufacturers and service providers in connection with the production and testing of active pharmaceutical ingredients and drug materials for use in preclinical studies and clinical trials.
 
Property and Equipment, Net
 
Property and equipment are stated at cost, subject to adjustments for impairment, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:
 
Laboratory equipment
3 – 5 years
Office equipment
5 years
Office furniture and fixtures
7 years
Computer equipment and software
3 years
Leasehold improvements
Shorter of useful life or remaining lease term
 
Maintenance and repairs are charged to expense as incurred, improvements to leased facilities and equipment are capitalized.
 
Impairment of Long-Lived Assets
 
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
 
Revenue Recognition
 
Revenues from merchandise sales are recognized upon transfer of ownership, including passage of title to the customer and transfer of the risk of loss related to those goods.  Revenues are reported on a net sales basis, which is computed by deducting from gross sales the amount of actual product returns received, discounts, incentive arrangements with retailers and an amount established for anticipated product returns.  The Company's practice is to accept product returns from retailers only if properly requested, authorized and approved.  As a percentage of gross sales, returns were less than 5% in fiscal years 2014 and 2013.
 
 
40

 
 
Revenues from a cost-reimbursement grant sponsored by the United States Army, or Grant Revenue, are 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.
 
Research and Development Costs
 
Research and development costs include, but are not limited to, (i) expenses incurred under agreements with contract research organizations and investigative sites, which conduct our clinical trials and a substantial portion of our preclinical 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 and equipment and laboratory and other supplies.  All research and development expenses are expensed as incurred.
 
Income Taxes
 
Deferred tax assets and liabilities are recorded for differences between the financial statement and tax bases of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period.
 
Stock-Based Compensation
 
The Company accounts for stock based compensation in accordance with ASC 718 Compensation — Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based payment awards granted, modified and settled to our employees and directors. The Company chose the “straight-line” attribution method for allocating compensation costs of each stock option on a straight-line basis over the requisite service period using the Black-Scholes Option Pricing Model to calculate the grant date fair value.
 
Loss Per Share
 
Basic loss per share, which excludes antidilutive securities, is computed by dividing loss available to common shareholders 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 and convertible debentures. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows.
 
 
41

 
 
   
Year ended April 30,
 
   
2014
   
2013
 
Historical net loss per share:
           
Numerator
           
Net loss, attributable to common stockholders
  $ (25,345,201 )   $ (10,373,871 )
Less: Effect of amortization of interest expense on convertible notes
    -       (1,382,537 )
Net loss attributable to common stockholders (diluted)
    (25,345,201 )     (11,756,408 )
Denominator
               
Weighted-average common shares outstanding
    9,362,031       1,650,280  
 Effect of dilutive securities
    -       108,745  
Denominator for diluted net loss per share
    9,362,031       1,759,025  
                 
Basic net loss per share
  $ (2.71 )   $ (6.29 )
Diluted net loss per share
  $ (2.71 )   $ (6.68 )
 
The following outstanding options, convertible note shares and warrants 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.
 
   
Year ended April 30,
 
   
2014
   
2013
 
             
Options to purchase common stock
    3,647,858       11,336  
Warrants to purchase common stock
    2,762,466       759,410  
Restricted stock grants
    42,478       1,917  
Convertible note shares outstanding
    6,652       98  
Convertible preferred shares outstanding
    -       97,400  
 
Operating Leases
 
The Company maintains operating leases for its office and laboratory facilities. The lease agreements may include rent escalation clauses and tenant improvement allowances. The Company recognizes scheduled rent increases on a straight-line basis over the lease term beginning with the date the company takes possession of the leased space. Differences between rental expense and actual rental payments are recorded as deferred rent liabilities and are included in “Other liabilities” on the consolidated balance sheets.
 
Fair Value
 
The Company records its financial assets and liabilities in accordance with ASC 820 Fair Value Measurements.  The Company's consolidated balance sheet includes the following financial instruments: cash and cash equivalents, short-term notes payable, convertible preferred stock 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.
 
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.
 
 
42

 
 
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 its Consolidated Financial Statements.
 
The following tables show information regarding assets and liabilities measured at fair value on a recurring basis as of April 30, 2014 and 2013 :
 
         
Fair Value Measurements at Reporting Date Using
 
   
Balance as of April 30, 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
  $ 58,320,555     $ 58,320,555     $ -     $ -  
                                 
Current Liabilities
                               
Warrant liabilities
  $ 954,876     $ -     $ -     $ 954,876  
 
         
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     $ -     $ -  
                                 
Current Liabilities
                               
Warrant liabilities
  $ -     $ -     $ -     $ -  
 
There were no significant transfers between levels in the years ended April 30 2014 and 2013. The Warrant liabilities are recorded at fair value with changes in fair value recorded as gains or losses within other expense (income).
 
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.
 
As further discussed in Note G below, on July 23, 2013, the Company issued common stock warrants (the “Series C Warrants”) in connection with the issuance of Series C 8% Convertible Preferred Stock (the “Series C Stock”).  The Series C warrants are measured using the Monte Carlo valuation model which is based, in part, upon inputs for which there is little or no observable market data, requiring the Company to develop its own assumptions.  The assumptions used in calculating the estimated fair value of the warrants represent the Company’s best estimates; however, these estimates involve inherent uncertainties and the application of management judgment.  As a result, if factors change and different assumptions are used, the warrant liabilities and the change in estimated fair value of the warrants could be materially different.
 
Inherent in the Monte Carlo valuation model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield.  The Company estimates the volatility of its common stock based on historical volatility that matches the expected remaining life of the warrants.  The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants.  The expected life of the warrants is assumed to be equivalent to their remaining contractual term.  The dividend rate is based on the historical rate, which the Company anticipates to remain at zero.
 
 
43

 
 
The Monte Carlo model is used for the Series C warrants to appropriately value the potential future exercise price adjustments triggered by the anti-dilution provisions. This requires Level 3 inputs which are based on the Company’s estimates of the probability and timing of potential future financings and fundamental transactions.  The other assumptions used by the Company are summarized in the following table for the Series C warrants that were outstanding as of April 30, 2014; no Series C warrants were outstanding as of April 30, 2013:
 
Series C Warrants
 
April 30,
2014
   
April 30,
2013
 
Closing stock price
  $ 4.88     $ -  
Expected dividend rate
    0 %     - %
Expected stock price volatility
    90.32 %     - %
Risk-free interest rate
    1.75 %     - %
Expected life (years)
    5.23       -  
 
Recent Accounting Pronouncements
 
In June 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-10, Development Stage Entities (Topic 915) . The objective of the amendments in this update is to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements for development stage entities. Users of financial statements of development stage entities told the Board that the development stage entity distinction, the inception-to-date information, and certain other disclosures currently required under U.S. GAAP in the financial statements of development stage entities provide information that has limited relevance and is generally not decision useful. As a result, the amendments in this update remove all incremental financial reporting requirements from US GAAP for development stage entities, thereby improving financial reporting by eliminating the cost and complexity associated with providing that information. The amendments are effective for annual reporting periods beginning after December 15, 2014, and interim reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company has elected to early adopt this guidance, and therefore is no longer presenting the financial statements in accordance with ASU 915, with inception to date disclosures.
 
In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09) providing a comprehensive new revenue recognition standard. ASU 2014-09 provides revised standards of recognition predicated on when an entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for us in our first quarter of fiscal 2018. ASU 2014-09 can be applied retrospectively with a modified retrospective application permitted. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.
 
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 adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated financial statements.
 
NOTE C—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 requiring it 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. As of April 30, 2014, due to development delays by the Company’s licensee, the Company does not believe the existing inventory will be sold prior to the expiration of its stability life and has recorded a charge of approximately $97,000 to cost of sales for the year ended April 30, 2014 equal to the carrying value of cosmetics inventory. The Company's future estimates are subjective and actual results may vary.
 
 
44

 
 
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 valued at the lower of cost or market. Inventories consisted of the following as of April 30, 2014 and 2013:
 
   
April 30,
2014
   
April 30,
2013
 
Raw materials
  $ -     $ 28,779  
Finished goods
    -       70,425  
    $ -     $ 99,204  
 
Other current assets
 
Other current assets consist of the following:
 
   
April 30,
2014
   
April 30,
2013
 
R&D materials
  $ 177,406     $ 159,892  
Other
    -       7,090  
Dermacyte samples
    -       3,428  
    $ 177,406     $ 170,410  
 
Property and equipment, net
 
Property and equipment consist of the following: