TENAX THERAPEUTICS, INC. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - TENAX THERAPEUTICS, INC.	Financial_Report.xls
EX-3.1 - AMENDED AND RESTATED BYLAWS - TENAX THERAPEUTICS, INC.	oxbt_ex31.htm
EX-10.9 - RESTRICTED STOCK AWARD AGREEMENT - TENAX THERAPEUTICS, INC.	oxbt_ex109.htm
EX-31.1 - CERTIFICATION - TENAX THERAPEUTICS, INC.	oxbt_ex311.htm
EX-32.1 - CERTIFICATION - TENAX THERAPEUTICS, INC.	oxbt_ex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED October 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 001-34600

OXYGEN BIOTHERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

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

ONE Copley Parkway, Suite 490, Morrisville, North Carolina 27560

(Address of principal executive offices)

(919) 855-2120

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of December 13, 2011, the registrant had outstanding 27,395,858 shares of Common Stock.

TABLE OF CONTENTS

		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Unaudited Financial Statements		3
	Balance Sheets as of October 31, 2011 and as of April 30, 2011		3
	Statements of Operations for the Three and Six months Ended October 31, 2011 and 2010		4
	Statements of Cash Flows for the Six Months Ended October 31, 2011 and 2010		5
	Notes to Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29
Item 4.	Controls and Procedures		29

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		30
Item 1A.	Risk Factors		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		30
Item 4.	(Removed and Reserved)		30
Item 5.	Other Information		30
Item 6.	Exhibits		31

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

BALANCE SHEETS

	October 31, 2011			April 30, 2011
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	2,004,257		$	951,944
Accounts receivable		7,559			138,867
Government grant receivable		375,725			-
Inventory		95,720			257,382
Prepaid expenses		106,983			275,876
Other current assets		283,280			8,142
Total current assets		2,873,524			1,632,211
Property and equipment, net		351,070			442,586
Debt issuance costs, net		342,967			-
Intangible assets, net		831,407			699,951
Other assets		149,652			147,608
Total assets	$	4,548,620		$	2,922,356

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities
Accounts payable	$	781,509		$	889,376
Accrued liabilities		1,307,203			1,250,573
Current portion of notes payable, net		7,195			43,295
Total current liabilities		2,095,907			2,183,244
Long-term portion of notes payable, net		6,178,470			4,463,635
Total liabilities		8,274,377			6,646,879

Stockholders' deficit
Preferred stock, undesignated, authorized 10,000,000 shares; none issued or outstanding		-			-
Common stock, par value $.0001 per share; authorized 400,000,000 shares; issued and outstanding 23,857,671 and 23,393,307, respectively		2,386			2,339
Additional paid-in capital		93,986,723			88,189,012
Deficit accumulated during the development stage		(97,714,866	)		(91,915,874	)
Total stockholders’ deficit		(3,725,757	)		(3,724,523	)
Total liabilities and stockholders' deficit	$	4,548,620		$	2,922,356

The accompanying notes are an integral part of these Financial Statements.

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

STATEMENTS OF OPERATIONS

	Period from May 26, 1967 (Inception) to			Three months ended October 31,						Six months ended October 31,
	October 31, 2011			2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Product revenue	$	456,627		$	27,415		$	36,083		$	86,892		$	42,981
Cost of sales		303,319			10,500			8,957			45,104			10,745
Net product revenue		153,308			16,915			27,126			41,788			32,236
Government grant revenue		78,244			78,244			-			78,244			-
Total net revenue		231,552			95,159			27,126			120,032			32,236

Operating expenses
Selling, general, and administrative		44,279,060			1,660,810			1,511,214			3,461,799			3,394,282
Research and development		20,753,212			488,577			572,649			1,140,538			1,717,892
Loss on impairment of long-lived assets		334,157			-			-			-			-
Total operating expenses		65,366,429			2,149,387			2,083,863			4,602,337			5,112,174

Net operating loss		65,134,877			2,054,228			2,056,737			4,482,305			5,079,938

Interest expense		33,619,075			871,768			5,383			1,307,566			6,589
Loss on extinguishment of debt		250,097			-			-			-			-
Other (income) expense		(1,289,183	)		3,927			(10,183	)		9,121			(32,291	)
Net loss	$	97,714,866		$	2,929,923		$	2,051,937		$	5,798,992		$	5,054,236

Net loss per share, basic				$	(0.12	)	$	(0.09	)	$	(0.25	)	$	(0.22	)

Weighted average number of common shares outstanding, basic					23,805,323			23,387,979			23,604,502			23,301,844

Net loss per share, diluted				$	(0.29	)	$	(0.09	)	$	(0.42	)	$	(0.22	)

Weighted average number of common shares outstanding, diluted					25,980,214			23,387,979			25,081,668			23,301,844

The accompanying notes are an integral part of these Financial Statements.

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

STATEMENTS OF CASH FLOWS

	Period from May 26, 1967 (Inception) to			Six months ended October 31,
	October 31, 2011			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(97,714,866	)	$	(5,798,992	)	$	(5,054,236	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		1,982,995			118,864			190,738
Amortization of deferred compensation		336,750			-			-
Interest on debt instruments		33,214,178			1,295,541			-
Loss (gain) on debt settlement and extinguishment		163,097			-			6,588
Loss on impairment, disposal and write down of long-lived assets		670,326			2,671			-
Issuance and vesting of compensatory stock options and warrants		8,276,193			50,905			92,124
Issuance of common stock below market value		695,248			-			-
Issuance of common stock as compensation		606,339			51,338			53,250
Issuance of common stock for services rendered		1,265,279			-			-
Issuance of note payable for services rendered		120,000			-			-
Contributions of capital through services rendered by stockholders		216,851			-			-
Changes in operating assets and liabilities
Accounts receivable, prepaid expenses and other assets		(890,193	)		(171,416	)		153,977
Inventory		218,397			(19,629	)		52,364
Accounts payable and accrued liabilities		2,233,766			(112,736	)		115,399
Net cash used in operating activities		(48,605,640	)		(4,583,454	)		(4,389,796	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(1,752,960	)		(8,869	)		(138,798	)
Capitalization of patent costs and license rights		(1,666,945	)		(152,606	)		(118,504	)
Net cash used in investing activities		(3,419,905	)		(161,475	)		(257,302	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock and exercise of stock options and warrants, net of related expenses and payments		36,363,844			619,181			4,901,400
Repurchase of outstanding warrants		(2,836,520	)		-			-
Proceeds from stockholder notes payable		977,692			-			-
Proceeds from issuance of notes payable, net of issuance costs		7,380,829			700,000			-
Proceeds from convertible notes, net of issuance costs		13,321,447			4,514,161			-
Payments on notes - short-term		(1,177,490	)		(36,100	)		(49,841	)
Net cash provided by financing activities		54,029,802			5,797,242			4,851,559

Net change in cash and cash equivalents		2,004,257			1,052,313			204,461
Cash and cash equivalents, beginning of period		-			951,944			632,706
Cash and cash equivalents, end of period	$	2,004,257		$	2,004,257		$	837,167

Cash paid for:
Interest	$	262,631		$	12,025		$	863
Income taxes	$	27,528		$	-		$	-

The accompanying notes are an integral part of these Financial Statements.

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

STATEMENT OF CASH FLOWS, Continued

Non-cash financing activities during the six months ended October 31, 2011:

(1)	The Company issued 7,333 shares of common stock for the cashless exercise of 40,000 stock options with an exercise price of $1.96.

(2)	The Company issued 78,197 shares of restricted common stock for the payment of interest accrued on convertible notes. The shares were issued at a conversion price of $2.255 for the payment of $176,333 interest payable on convertible notes with a gross carrying value of $4,600,000.

Non-cash financing activities during the six months ended October 31, 2010:

(1)	The Company issued 2,350 shares of common stock for the conversion of notes payable with a gross carrying value of $8,707 at a conversion price of $3.705 per share. The notes included a discount totaling $5,206 that was recognized as interest expense upon conversion.

The accompanying notes are an integral part of these Financial Statements.

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. DESCRIPTION OF BUSINESS

Oxygen Biotherapeutics, Inc. (the “Company”) was originally formed as a New Jersey corporation in 1967 under the name Rudmer, David & Associates, Inc., and subsequently changed its name to Synthetic Blood International, Inc. On June 17, 2008, the stockholders of Synthetic Blood International approved the Agreement and Plan of Merger dated April 28, 2008, between Synthetic Blood International and Oxygen Biotherapeutics, Inc., a Delaware corporation. Oxygen Biotherapeutics was formed on April 17, 2008, by Synthetic Blood International to participate in the merger for the purpose of changing the state of domicile of Synthetic Blood International from New Jersey to Delaware. Certificates of Merger were filed with the states of New Jersey and Delaware and the merger was effective June 30, 2008. Under the Plan of Merger, Oxygen Biotherapeutics is the surviving corporation and each share of Synthetic Blood International common stock outstanding on June 30, 2008 was converted to one share of Oxygen Biotherapeutics common stock.

Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has an accumulated deficit during the development stage of $97.7 million and $91.9 million at October 31, 2011 and April 30, 2011, respectively, and stockholders’ deficit of $(3,725,757) and $(3,724,523) as of October 31, 2011 and April 30, 2011, respectively. The Company requires substantial additional funds to complete clinical trials and pursue regulatory approvals. Management is actively seeking additional sources of equity and/or debt financing; however, there is no assurance that any additional funding will be available.

In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying October 31, 2011 balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, to maintain present financing, and to generate cash from future operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company has prepared the accompanying interim financial statements in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these financial statements and accompanying notes do not include all of the information and disclosures required by GAAP for complete financial statements. The financial statements include all adjustments (consisting of normal recurring adjustments) that management believes are necessary for the fair statement of the balances and results for the periods presented. These interim financial statement results are not necessarily indicative of the results to be expected for the full fiscal year or any future interim period.

Reclassification

For comparability purposes, certain figures for prior periods have been reclassified, where appropriate, to conform to the financial statement presentation used in fiscal year 2012. These reclassifications had no effect on the reported net loss.

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 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.

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. The discount recorded in connection with the BCF and warrant valuation is recognized as non-cash interest expense and is being amortized over the life of the convertible note.

Fair Value Measurements

The Company's balance sheet includes the following financial instruments: cash and cash equivalents, short-term and long-term notes payable and convertible debentures. 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. It is not practicable for the Company to estimate the fair value of its convertible debentures as such estimates cannot be made without incurring excessive costs, but management believes the difference between fair value and carrying value to not be material. The significant terms of the Company's convertible debentures are described in Note 5. At October 31, 2011 the debentures had a gross carrying value of $4.9 million with unamortized discounts totaling approximately $4.4 million.

Net 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.

	Three months ended October 31,						Six months ended October 31,
	2011			2010			2011			2010
Historical net loss per share:
Numerator
Net loss, as reported	$	(2,929,923	)	$	(2,051,937	)	$	(5,798,992	)	$	(5,054,236	)
Less: Effect of amortization of interest expense on convertible notes		(4,637,024	)		-			(4,637,024	)		-

Net loss attributed to common stockholders (diluted)		(7,566,947	)		(2,051,937	)		(10,436,016	)		(5,054,236	)
Denominator
Weighted-average common shares outstanding		23,805,323			23,387,979			23,604,502			23,301,844
Effect of dilutive securities		2,174,891			-			1,477,166			-

Denominator for diluted net loss per share		25,980,214			23,387,979			25,081,668			23,301,844

Basic net loss per share	$	(0.12	)	$	(0.09	)	$	(0.25	)	$	(0.22	)

Diluted net loss per share	$	(0.29	)	$	(0.09	)	$	(0.42	)	$	(0.22	)

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.

	Six months ended October 31,
	2011		2010
Options to purchase common stock		721,015		976,233
Convertible note shares outstanding		-		1,942
Warrants to purchase common stock		4,983,855		4,199,466

Recent Accounting Pronouncements

On May 1, 2011, the Company adopted ASU 2011-04, Fair Value Measurement (Topic 820). The guidance requires the disclosure of roll forward activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The adoption of ASU 2011-04 did not have a material impact on its financial statements.

On May 1, 2011, the Company adopted ASU 2010-17, Revenue Recognition—Milestone Method (Topic 605). The guidance establishes a revenue recognition model for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of the ASU is limited to research or development arrangements and requires an entity to record the milestone payment in its entirety in the period received if the milestone meets all the necessary criteria to be considered substantive. The adoption of ASU 2010-17 did not have a material impact on its financial statements.

NOTE 3. BALANCE SHEET COMPONENTS

Inventory

The Company operates in an industry characterized by rapid improvements and changes to its technology and products. The introduction of new products by the Company or its competitors can result in its inventory being rendered obsolete or it being required to sell items at a discount. The Company evaluates the recoverability of its inventory by reference to its internal estimates of future demands and product life cycles. If the Company incorrectly forecasts demand for its products or inadequately manages the introduction of new product lines, the Company could materially impact its financial statements by having excess inventory on hand. The Company's future estimates are subjective and actual results may vary. During the three months ended October 31, 2011, the Company reclassified approximately $90,000 of Perfluorocarbon raw material out of raw materials inventory into other current assets as it continues its reformulation of the Dermacyte cosmetic line.

Inventories are recorded at cost using the First-In-First-Out ("FIFO") method. Ending inventories are comprised of raw materials and direct costs of manufacturing and are valued at the lower of cost or market. Inventories consisted of the following as of October 31, 2011 and April 30, 2011:

	October 31, 2011		April 30, 2011
Raw materials	$	25,855	$	107,271
Work in process		-		124,308
Finished goods		69,865		25,803
	$	95,720	$	257,382

Other current assets

Other current assets consist of the following as of October 31, 2011 and April 30, 2011:

	October 31, 2011		April 30, 2011
R&D materials	$	145,714	$	-
Dermacyte samples		53,957		1,052
Other		83,609		7,090
	$	283,280	$	8,142

Property and equipment, net

Property and equipment consist of the following as of October 31, 2011 and April 30, 2011:

	October 31, 2011			April 30, 2011
Laboratory equipment	$	961,078		$	970,463
Office furniture and fixtures		140,255			140,255
Computer equipment and software		152,024			153,234
Leasehold improvements		4,810			4,810
		1,258,167			1,268,762
Less: Accumulated depreciation and amortization		(907,097	)		(826,176	)
	$	351,070		$	442,586

Depreciation and amortization expense was approximately $50,000 and $40,000 for the three months ended October 31, 2011 and 2010, respectively, and approximately $100,000 and $80,000 for the six months ended October 31, 2011 and 2010, respectively.

Other assets

Other assets consist of the following as of October 31, 2011 and April 30, 2011:

	October 31, 2011		April 30, 2011
Reimbursable patent expenses- Glucometrics	$	88,087	$	82,522
Prepaid royalty fee		50,000		50,000
Other		11,565		15,086
	$	149,652	$	147,608

Accrued liabilities

Accrued liabilities consist of the following as of October 31, 2011 and April 30, 2011:

	October 31, 2011		April 30, 2011
Section 409A tax liability	$	532,350	$	532,350
Deferred government grant revenue		310,000		-
Employee related		303,237		493,640
Legal		27,248		-
Clinical trial related		41,908		150,000
Other		92,460		74,583
	$	1,307,203	$	1,250,573

NOTE 4. INTANGIBLE ASSETS

The following table summarizes the Company's intangible assets as of October 31, 2011:

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

Patents	$	471,918		11.4	$	-	$	(223,221	)	$	248,697
License Rights		523,970		17.1		-		(76,164	)		447,806
Trademarks		134,904		N/A		-		-			134,904

Total	$	1,130,792			$	-	$	(299,385	)	$	831,407

The following table summarizes the Company's intangible assets as of April 30, 2011:

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

Patents	$	566,564		10.1	$	(202,934	)	$	(214,840	)	$	148,790
License Rights		558,532		17.6		(68,602	)		(63,395	)		426,535
Trademarks		155,134		N/A		(30,508	)		-			124,626

Total	$	1,280,230			$	(302,044	)	$	(278,235	)	$	699,951

For the three months ended October 31, 2011 and 2010, the aggregate amortization expense on the above intangibles was approximately $10,000 and $15,000, respectively.

For the six months ended October 31, 2011 and 2010, the aggregate amortization expense on the above intangibles was approximately $21,000 and $108,000, respectively.

Patents and License Rights—The Company currently holds, has filed for, or owns exclusive rights to, US and worldwide patents covering 13 various methods and uses of its PFC technology. It capitalizes amounts paid to third parties for legal fees, application fees and other direct costs incurred in the filing and prosecution of its patent applications. These capitalized costs are amortized on a straight-line method over their useful life or legal life, whichever is shorter.

Trademarks—The Company currently holds, or has filed for, trademarks to protect the use of names and descriptions of its products and technology. It capitalizes amounts paid to third parties for legal fees, application fees and other direct costs incurred in the filing and prosecution of its trademark applications. These trademarks are evaluated annually in accordance with ASC 350, Intangibles – Goodwill and other. The Company evaluates (i) its expected use of the underlying asset, (ii) any laws, regulations, or contracts that may limit the useful life, (iii) the effects of obsolescence, demand, competition, and stability of the industry, and (iv) the level of costs to be incurred to commercialize the underlying asset.

NOTE 5. NOTES PAYABLE

The following table summarizes the Company’s outstanding notes payable as of October 31, 2011 and April 30, 2011:

	October 31, 2011			April 30, 2011

Current portion of notes payable	$	-		$	36,100
Current portion of convertible notes payable		7,195			7,195
Current portion of notes payable, net	$	7,195		$	43,295

Long-term portion of notes payable	$	8,001,600		$	6,881,600
Less: Unaccreted premium		(2,367,574	)		(2,417,965	)
		5,634,026			4,463,635


Long-term portion of convertible notes payable	$	4,900,001		$	-
Less: Unamortized discount		(4,355,557	)		-
		544,444			-

Long-term portion of notes payable, net	$	6,178,470		$	4,463,635

Note Purchase Agreement

On October 12, 2010 the Company entered into a Note Purchase Agreement with Vatea Fund whereby it agreed to issue and sell to Vatea Fund an aggregate of $5,000,000 of senior unsecured promissory notes (the “Vatea Notes”) on or before December 31, 2010. The Vatea Notes will mature on October 31, 2013, unless the holders of a majority of the Vatea Notes consent in writing to a later maturity date. Interest does not accrue on the outstanding principal balance of the Vatea Notes (other than following the maturity date or earlier acceleration). Instead, on the maturity date, the Company must pay the holders of the Vatea Notes a final payment premium aggregating $3,000,000, in addition to the principal balance then otherwise outstanding under the Vatea Notes. The Vatea Notes provide that the Company has the option, at its sole discretion and without penalty, to prepay the outstanding balance under the Vatea Notes plus the amount of the final payment premium prior to the maturity date. In addition, the holders of majority of the Vatea Notes may request that the Company prepay the Vatea Notes in an amount equal to the proceeds of any subsequent closings under the Securities Purchase Agreement with Vatea Fund, dated June 8, 2009, and subsequently amended. The following table summarizes the activity under the Note Purchase Agreement during the six months ended October 31, 2011.

Date issued	Note principal		Accumulated Accretion		Unaccreted premium		Effective interest rate
Balance at April 30, 2011	$	4,301,000	$	568,360	$	2,012,240		17.17	%

May 9, 2011		400,000		37,959		202,041		18.83	%
May 20, 2011		100,000		8,996		51,004		19.06	%
May 23, 2011		200,000		17,711		102,289		19.12	%

	$	5,001,000	$	633,026	$	2,367,574

Interest accreted on these notes was $243,146 and $0 for the three months ended October 31, 2011 and 2010, respectively.

Interest accreted on these notes was $470,391 and $0 for the six months ended October 31, 2011 and 2010, respectively.

Convertible Note

On June 16, 2011, the Company entered into a Convertible Note and Warrant Purchase Agreement with an institutional investor pursuant to which the Company agreed to issue and sell to the Purchaser in a private placement a subordinated convertible promissory note (the "Note") with a principal amount of $4.6 million and warrants (the "Warrants") to purchase 2,039,911 shares of the Company's common stock, par value $0.0001. On June 29, 2011, the Company increased the offering by approximately $0.3 million and additional warrants to purchase 133,038 shares of common stock; for a total offering size of approximately $4.9 million (the "Offering") and warrants to purchase an aggregate of 2,172,949 shares of common stock.

Interest on the Notes accrues at a rate of 15% annually and will be paid in quarterly installments commencing on the third month anniversary of issuance. The Notes will mature 36 months from the date of issuance. The Note may be converted into shares of common stock at a conversion price of $2.255 per share (subject to adjustment for stock splits, dividends and combinations, recapitalizations and the like) (the "Conversion Price") at any time, in whole or in part, at any time at the option of the holders of the Notes. The Notes also will automatically convert into shares of common stock at the Conversion Price at the election of a majority-in-interest of the holders of notes issued under the purchase agreement or upon the acquisition or sale of all or substantially all of the assets of the Company. The Company may make each applicable interest payment or payment of principal in cash, shares of common stock at the Conversion Price, or any combination thereof. The Company may elect to prepay all or any portion of the Note without prepayment penalties only with the approval of a majority-in-interest of the note holders under the Purchase Agreement at the time of the election. The Notes contain various events of default such as failing to timely make any payment under the Note when due, which may result in all outstanding obligations under the Note becoming immediately due and payable. The Warrants were issued in three approximately equal tranches, with exercise prices of $2.15, $2.60 and $2.85, respectively, per share of common stock (in each case subject to adjustment for stock splits, dividends and combinations, recapitalizations and the like). The Warrants are exercisable on or after the date of issuance and expire on the earlier to occur of the five year anniversary of the date of issuance or an acquisition or sale of all or substantially all of the assets of the Company. The exercise prices of shares of common stock underlying the Warrants are subject to adjustment in the event of future issuances of common stock or equivalents by the Company at a price less than the applicable exercise price, but in no event shall a Warrant exercise price be adjusted to less than $2.255 per share (subject to adjustment for stock splits, dividends and combinations, recapitalizations and the like) of common stock.

On June 29, 2011, the Company issued a Note with a principal amount of approximately $300,000 and Warrants to purchase 133,038 shares of common stock. On July 1, 2011, the Company issued a separate Note with a principal amount of $4,600,000 and Warrants to purchase 2,039,911 shares of common stock. The aggregate gross proceeds to the Company from the Offering were approximately $4.9 million, excluding any proceeds from the exercise of any Warrants. The aggregate placement agent fees were $297,000 and legal fees associated with the offering were $88,839. These costs have been capitalized as debt issue costs and will be amortized as interest expense over the life of the Note. The total value allocated to the warrants was approximately $1,960,497 and was recorded as a debt discount against the proceeds of the notes. In addition, the beneficial conversion features related to the notes were determined to be approximately $2,939,504. As a result, the aggregate discount on the notes totaled $4.9 million, and is being amortized over term of the notes.

The Company recorded interest expense of $628,569 and $836,648 for the three and six months ended October 31, 2011, respectively. These amounts include amortization of the associated debt issue costs of $32,154 and $42,872 and amortization of the debt discount of $408,333 and $544,444 for the three and six months ended October 31, 2011, respectively.

NOTE 6. SEGMENT REPORTING

In the Company’s operation of its business, management, including its chief operating decision maker, the Company’s Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP.

The Company operates in a single market consisting of the design, development, marketing, sales and support of its Dermacyte® cosmetic segment. The Company's commercial revenues are derived from sales of the Dermacyte line of topical cosmetic products in the United States, Latin America and Europe. The Company does not engage in intercompany revenue transfers between segments.

The Company's management evaluates performance based primarily on revenues in the geographic locations in which the Company operates. Segment profit or loss for each segment includes certain sales and marketing expenses directly attributable to the segment and excludes certain expenses that are managed outside the reportable segments.

Costs that are identifiable are allocated to the segments that benefit. Allocated costs may include those relating to development and marketing of products and services from which multiple segments benefit, or those costs relating to services performed by one segment on behalf of other segments. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain other corporate-level activity is not allocated to the Company’s segments, including costs of: human resources; legal; finance; information technology; corporate development and procurement activities; research and development; and employee severance.

The Company has recast certain prior period amounts within this note to conform to the way it internally managed and monitored segment performance during the current fiscal year.

Net revenues and segment profit, classified by the Company's reportable segments are as follows:

	For the three months ending October 31,						For the six months ending October 31,
	2011			2010			2011			2010
Product revenue
United States	$	27,415		$	36,083		$	60,892		$	42,981
Latin America		-			-			26,000			-
Europe		-			-			-			-
Total product revenue	$	27,415		$	36,083		$	86,892		$	42,981


Segment loss (income)
United States	$	117,120		$	133,077		$	332,165		$	233,043
Latin America		-			-			(10,585	)		-
Europe		-			-			-			-
Unallocated revenues
Government grant revenue		(78,244	)		-			(78,244	)		-
Unallocated expenses
General and administrative		1,526,775			1,351,011			3,098,431			3,129,003
Research and development		488,577			572,649			1,140,538			1,717,892
Net interest and other expense (income)		875,695			(4,800	)		1,316,687			(25,702	)
Net loss	$	2,929,923		$	2,051,937		$	5,798,992		$	5,054,236

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation may be included with various other costs in an overhead allocation to each segment and it is impracticable for the Company to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Operating Leases—The Company leases its laboratory space under an operating lease that includes fixed annual increases and expires in July 2015. The Company leases its office space under an operating lease that includes fixed annual increases and expires in February 2016. Total rent expense was $147,322 and $164,859 for the six months ended October 31, 2011 and 2010, respectively.

Agreement with Virginia Commonwealth University—In May 2008 the Company entered into a license agreement with Virginia Commonwealth University ("Licensor", "VCU") whereby it obtained a worldwide, exclusive license to valid claims under three of the Licensor's patent applications that relate to methods for non-pulmonary delivery of oxygen to tissue and the products based on those valid claims used or useful for therapeutic and diagnostic applications in humans and animals. The license includes the right to sub-license to third parties. The term of the agreement is the life of the patents covered by the patent applications unless the Company elects to terminate the agreement prior to patent expiration.

The agreement also requires the Company to pay royalties to VCU at specified rates based on annual net sales derived from the licensed technology. Pursuant to the agreement, the Company must make minimum annual royalty payments to VCU totaling $70,000 as long as the agreement is in force. These payments are fully creditable against royalty payments due for sales and sublicense revenue earned during the fiscal year as described above. This fee is recorded as an other current asset and is amortized over the fiscal year. Amortization expense was $35,000 for the six months ended October 31, 2011 and 2010.

Exfluor Manufacturing Agreement— The Company entered into a Supply Agreement with Exfluor for the manufacturing and supply of FtBu. Under the terms of the Agreement, Exfluor is to supply FtBu exclusively to the Company, and no other party. The fee for this exclusivity is a non-refundable, non-creditable fee of $25,000 each quarter for the term of the Agreement. The term of the Agreement is three years, beginning from January 1, 2010. The process of manufacturing FtBu is a trade secret owned by Exfluor. Therefore, the Agreement also contains a provision requiring Exfluor to maintain documentation of the entire manufacturing process in an Escrow Account, to be released to the Company only upon the occurrence of a triggering event, which includes dissolution, acquisition by another company who is not a successor, bankruptcy or creditors take action to secure rights against the manufacturing technology to satisfy a financial obligation.

Litigation—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 financial statements.

On August 30, 2011, Tenor Opportunity Master Fund Ltd., Aria Opportunity Fund, Ltd., and Parsoon Opportunity Fund, Ltd (collectively, “Tenor”) filed a lawsuit in the United States District Court for the Southern District of New York alleging that a right of first offer held by Tenor was breached in connection with the Company’s June 2011 financing. The complaint seeks compensatory damages, attorneys’ fees and costs. The Company filed an Answer to the Complaint on October 4, 2011 and pre-trial discovery is currently underway. The Company believes the facts do not support a finding in their favor and, accordingly, has not accrued for any amounts for a contingent liability related to this claim as of October 31, 2011.

Registration Requirement—During the fiscal year ended April 30, 2008, the Company issued warrants as part of a convertible note offering. These warrants were issued with a requirement that the Company file a registration statement with the SEC to register the underlying shares, and that it be declared effective on or before January 9, 2009. In the event that the Company does not have an effective registration statement as of that date, or if at some future date the registration ceases to be effective, then the Company is obligated to pay liquidated damages to each holder in the amount of 1% of the aggregate market value of the stock, as measured on January 9, 2009 or at the date the registration statement ceases to be effective. As an additional remedy for non-registration of the shares, the holders would also receive the option of a cashless exercise of their warrant or conversion shares. As of October 31, 2011, approximately 76,975 of these warrants are subject to the registration requirement.

ASC 825-20, Financial Instruments, Registration Payment Arrangements, provides guidance to proper recognition, measurement, and classification of certain freestanding financial instruments that are indexed to, and potentially settled in, any entity's own stock. ASC 825-20-25 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with ASC 450, Accounting for Contingencies. The Company has accounted for these warrants as equity instruments in the accompanying financial statements. The Company does not believe the registration payments are probable, and as such, has not recorded any amounts with respect to the separately measured registration rights agreement.

Contingent Liabilities Related to Internal Revenue Code Section 409A— In November, 2010, management conducted an independent review of certain option grants made by the Company between February 1998 and April 2009. This voluntary review was not in response to any governmental investigation. During the course of the Company’s review, management identified certain options granted in prior years that may have been non-compliant with Section 409A (“Section 409A”) of the Internal Revenue Code of 1986, as amended (the “IRC”), including options granted with an exercise price below fair market value on the date of grant and options that were modified such that they may have become non-compliant with Section 409A.

In February 2011, after management conducted a preliminary, limited scope review of certain of the Company’s stock option granting practices, the Audit Committee commenced a voluntary, independent investigation of the Company’s historical stock option granting practices and related accounting during the period from February 1998 through April 2009. The Company’s outside legal counsel assisted the Audit Committee in this investigation. As of October 31, 2011, none of the Company’s current officers or directors has exercised any of the potentially non-compliant options. The primary adverse tax consequence of Section 409A non-compliance is that the holders of non-compliant options are taxed on the value of such options as they vest, and annually thereafter until they are exercised. In addition to ordinary income taxes, holders of non-compliant options are subject to a 20% penalty tax under Section 409A (and, as applicable, similar excise taxes under state laws). Because virtually all holders of stock options granted by the Company were not involved in or aware that the pricing and/or modification of their options raised these issues, the Company intends to take actions to address certain of the adverse tax consequences that may apply to these holders. In addition, on March 17, 2011 the Company entered into indemnification agreements with its executive officers that indemnify those officers from potential Section 409A tax liabilities arising from their prior option awards,

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

NOTE 8. STOCKHOLDERS’ EQUITY

During the six months ended October 31, 2011:

(1)	The Company received $4,401,400 (net of closing costs) from the issuance of 1,724,138 shares of common stock as part of the registered direct offering in May 2010.

(2)	The Company recorded $22,398 for the fair value of restricted stock grants issued to nonemployee directors.

(3)	The Company issued 7,333 shares of common stock from the cashless exercise of 40,000 stock options.

(4)	The Company issued 366,379 shares of common stock from the exercise of warrants. The shares were issued at an exercise price of $1.69 for a payment of $619,181.

(5)	As further discussed below, the company recorded $50,905 for the computed fair value of options issued to employees, nonemployee directors, and consultants.

(6)	The Company issued 78,197 shares of common stock for the payment of interest accrued on convertible notes. The shares were issued at a conversion price of $2.255 for the payment of $176,333 interest payable on convertible notes with a gross carrying value of $4,600,000.

(7)

As further discussed in note 5 above, the Company recorded $1,960,497 for the computed fair value of 2,172,949 warrants issued with convertible notes issued on June 29, 2011 and July 1, 2011. In addition, the Company recorded $2,939,504 for the computed beneficial conversion features for the intrinsic value of the notes at the commitment date. The total value allocated to the warrants and beneficial conversion features was approximately $4.9 million and was recorded as additional paid in capital.

During the six months ended October 31, 2010:

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

(2)

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

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

(4)

The Company issued 2,350 shares of common stock for the conversion of notes payable with a gross carrying value of $8,707, at a conversion price of $3.705 per share. These notes included a discount totaling $868, and thus had a net carrying value of $7,839. The unamortized discount of $868 was recognized as interest expense upon conversion. The remaining unamortized discount of $4,859 was also recognized as interest expense.

(5)	The Company issued 17,782 shares of its common stock as compensation. These shares had a fair value at the grant date of $53,250.

(6)	The company recorded $91,931 for the computed fair value of options issued to employees, nonemployee directors, and consultants.

Warrants

On June 29 and July 1, 2011, the Company issued 133,038 and 2,039,911, respectively, warrants to purchase restricted common stock as part of the Offering further described in Note 5 above.

On August 2, 2011, the Company received $619,181 and issued 366,379 shares of common stock for the exercise of certain outstanding warrants. The warrants were issued in May 2010 and had an exercise price of $1.69, as adjusted for anti-dilution provisions triggered by the Offering further described in Note 5 above.

The following table summarizes its warrant activity for the six months ended October 31, 2011:

	Warrants				Weighted Average Exercise Price
Outstanding at April 30, 2011		3,581,347			$	3.90
Granted		2,172,949				2.53
Exercised		(366,379	)			1.69
Forfeited		(636,144	)			3.68
Other		232,082		(1)		2.15	(1)
Outstanding at October 31, 2011		4,983,855			$	2.82	(2)

(1)

The Company has a class of warrants outstanding that contain an anti-dilution clause requiring a repricing in the event of a capital raise whereby the equity shares sold were priced below the exercise price of the outstanding warrants. Subsequent to the convertible note issuance in June 2011, the repricing of these warrants resulted in an increase of 232,082 potentially issuable shares. The exercise price of these warrants was $2.90 prior to the issuance.

(2)

The Company has a class of warrants outstanding that contain a price protection clause requiring a repricing in the event of a capital raise whereby the equity shares sold were priced below the exercise price of the outstanding warrants. Subsequent to the convertible note issuance in June 2011, resulted in repricing these warrants to $2.15. The exercise price of these warrants was $5.32 prior to the issuance.

1999 Amended Stock Plan

In October 2000, the Company adopted the 1999 Stock Plan (the "Plan"), as amended and restated on June 17, 2008. Under the Plan, with the approval of the Compensation Committee of the Board of Directors, the Company may grant stock options, restricted stock, stock appreciation rights and new shares of common stock upon exercise of stock options. On September 30, 2011, the Company’s shareholders approved amendment 1 to the Plan which increased the amount of shares authorized for issuance under the Plan to 6,000,000, up from 800,000 previously authorized. Stock options granted under the Plan may be either incentive stock options ("ISOs"), or nonqualified stock options ("NSOs"). ISOs may be granted only to employees. NSOs may be granted to employees, consultants and directors. Stock options under the Plan may be granted with a term of up to ten years and at prices no less than fair market value for ISOs and no less than 85% of the fair market value for NSOs. To date, stock options granted generally vest over one to three years and vest at a rate of 34% upon the first anniversary of the vesting commencement date and 33% on each anniversary thereafter. As of October 31, 2011 the Company had 5,462,484 shares of common stock available for grant under the Plan.

Plan Stock Options and Restricted Stock

Stock option and restricted stock activity under the Plan for the six months ended October 31, 2011 is as follows:

				Outstanding Options
	Shares Available for Grant			Number of Shares			Weighted Average Exercise Price
Balances, at April 30, 2011		243,832			515,071		$	4.54
Options granted		(43,000	)		43,000		$	2.03
Options cancelled		3,556			(3,556	)	$	5.81
Restricted stock granted		(132,900	)
Restricted stock cancelled		7,322

Balances, at July 31, 2011		78,810			554,515		$	4.33
Additional shares reserved		5,200,000
Options granted		(2,500	)		2,500		$	2.50
Options exercised					(7,333	)	$	1.96
Options cancelled		95,334			(95,334	)	$	3.62
Restricted stock granted		(35,412	)
Restricted stock cancelled		126,252

Balances, at October 31, 2011		5,462,484			454,348		$	4.51

The following table summarizes the grant date fair value stock-based compensation expense for stock options and the restricted stock issued during the six months ended October 31, 2011 and 2010, respectively:

	For the the six months ended October 31
	2011		2010

Research and development	$	63,532	$	19,428
Marketing and sales		2,174		-
General and administrative		2,024		47,566
	$	67,730	$	66,994

The Company used the following assumptions to estimate the fair value of options granted under its stock option plans for the six months ended October 31, 2011 and 2010:

	For the the six months ended October 31
	2011			2010

Risk-free interest rate (weighted average)		2.38	%		1.83	%
Expected volatility (weighted average)		78.47	%		86.44	%
Expected term (in years)		7			6
Expected dividend yield		0.00	%		0.00	%

Risk-Free Interest Rate	The risk-free interest rate assumption was based on U.S. Treasury instruments with a term that is consistent with the expected term of the Company’s stock options.
Expected Volatility	The expected stock price volatility for the Company’s common stock was determined by examining the historical volatility and trading history for its common stock over a term consistent with the expected term of its options.
Expected Term	The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. It was calculated based on the historical experience that the Company has had with its stock option grants.
Expected Dividend Yield	The expected dividend yield of 0% is based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not anticipate paying any dividends in the near future.
Forfeitures	Stock compensation expense recognized in the statements of operations for the six months ended October 31, 2011 and 2010 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on the Company’s historical experience.

As of October 31, 2011, there were unrecognized compensation costs of approximately $19,500 related to non-vested stock option awards granted after May 1, 2004 that will be recognized on a straight-line basis over the weighted average remaining vesting period of 1.03 years.

Restricted Stock Grants

Pursuant to certain officer employment contracts, on May 19, 2011, the CEO was granted 100,000 shares of restricted common stock, vesting quarterly over a three-year period and 16,800 shares of restricted common stock vesting monthly over a 12-month period. The Chief Financial Officer was granted 8,600 shares of restricted common stock vesting over a 12-month period, of which 3,600 shares will only vest so long as he continues serving as the Company's Corporate Secretary. The Chief Medical Officer was granted 7,500 shares of restricted common stock, vesting monthly over a 12-month period.

For the six months ended October 31, 2011, the Company recorded $84,748 as compensation expense for these restricted stock grants.

Pursuant to certain Board of Directors compensation agreements, on June 24, 2011, the Board Members were granted 31,812 shares of restricted common stock, vesting annually over a three-year period and 19,076 shares of restricted common stock granted on September 30, 2011, vesting quarterly over a one-year period.

For the six months ended October 31, 2011, the Company recorded $22,398 as compensation expense for these restricted stock grants.

As of October 31, 2011, there were unrecognized compensation costs of approximately $75,800 related to the non-vested restricted stock grants that will be recognized on a straight-line basis over the remaining vesting period.

Other Stock Options

In the past, the Company issued options outside the 1999 Amended Stock Plan. These options were granted with an exercise price of $3.68, and a 10 year term. As of October 31, 2011, there were 266,667 non-qualified options outstanding.

NOTE 9. SUBSEQUENT EVENTS

Amendment to Securities Purchase Agreement

On November 11, 2011, the Company entered into Amendment No. 3 to the Securities Purchase Agreement, dated June 8, 2009 (the "SPA"), between the Company and JP SPC 1 Vatea, Segregated Portfolio ("Vatea Fund"). Amendment No. 3 deemed all milestones under the SPA achieved in exchange for a reduction in the purchase price for shares of the Company's common stock under the SPA to $2.85 per share.

On November 14, 2011, following entry into Amendment No. 3 to the SPA, the final closing (the "Final Closing") under the SPA occurred pursuant to which the Company delivered 2,807,018 shares of its common stock to the holders of the SPA against payment to the Company of an aggregate of $8,000,000. In connection with the Final Closing, the Company paid fees to Melixia SA for services provided as facilitating agent, which consisted of 561,404 shares of the Company's common stock. All issuances were made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 thereunder. Pursuant to the terms of the Note Purchase Agreement with Vatea Fund, dated October 12, 2010 and amended on December 29, 2010, the Company used the proceeds from the Final Closing to prepay the outstanding balance under the notes, including $2,367,574 of unaccreted final payment premium thereunder. Following the Final Closing, no securities remain available for purchase under the SPA and no outstanding balance remains under the Note Purchase Agreement.

2011 Registered Direct Offering

On December 8, 2011, the Company entered into a placement agency agreement with William Blair & Company, L.L.C. relating to a $7.5 million registered direct offering (the “2011 Offering”), of units (the “Units”) by the Company to certain institutional investors, consisting of an aggregate $7.5 million of Series A Convertible Preferred Stock, $0.0001 par value per share (the “Preferred Stock”) and warrants (the “2011 Warrants”) to purchase approximately 1,689,192 shares of common stock, par value $0.0001 per share.

The sale of the Units was made pursuant to a Securities Purchase Agreement, dated December 8, 2011, entered into with each of the investors. The 2011 Offering is scheduled to fund in two installments. The first installment of the Offering was completed on December 12, 2011. At closing, the investors purchased $3.5 million of newly issued Preferred Stock and related 2011 Warrants. Subject to the Company meeting certain conditions, including conditions that are outside its control, there is a second mandatory installment whereby the Company may issue up to an additional $4 million of Preferred Stock and 2011 Warrants. The second installment would fund when the first installment is fully redeemed by the Company, at approximately the six month anniversary of the initial closing.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to them. In some cases you can identify forward-looking statements by words such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements regarding: the implications of interim or final results of our clinical trials, the progress of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates, the potential of such product candidates to lead to the development of commercial products, our anticipated timing for initiation or completion of our clinical trials for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and development, and the sufficiency of our cash resources. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form 10-Q, Part I, Item IA of our Annual Report on Form 10-K and our other filings with the SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from those we expect. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended April 30, 2011.

All references in this Quarterly Report to “Oxygen Biotherapeutics”, “we”, “our” and “us” means Oxygen Biotherapeutics, Inc.

Overview

Oxygen Biotherapeutics is engaged in the business of developing biotechnology products with a focus on oxygen delivery to specific target tissues. We are currently 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. While we continue to move forward with Oxycyte as a potential treatment for traumatic brain injury or TBI, our focus for the next twelve months will be to develop our most advanced topical products: Dermacyte® and Wundecyte™, as we believe these products have a greater opportunity for nearer-term commercialization.

Audit Committee Investigation

As we previously disclosed, during the three months ended October 31, 2011, our Audit Committee, which is composed entirely of independent directors, conducted an investigation into the conduct of Chris J. Stern, our former Chairman and Chief Executive Officer, and the potential impact of his conduct on us. The Audit Committee’s findings were disclosed in “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Quarterly Report on Form 10-Q for the quarter ended July 31, 2011.

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 no risk of transmission of blood-borne viruses from human blood products. Further, since Oxycyte is based on readily available inert compounds, we believe it can be manufactured on a cost-effective basis in amounts sufficient to meet demand.

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

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

Dermacyte®

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

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

Since June 2010 we have marketed and sold these products through www.buydermacyte.com and to dermatologists and medical spas with a combination of in-house sales, independent sales agents and exclusive distributors. We have hired a sales director based in North Carolina, and added sales people in South Florida, and Southern California. During the current period, we adjusted our growth strategy to focus exclusively on the North Carolina and South Florida markets while we focus on reformulating the product line to include Dermacyte night cream and brightening serum.

Dermatology

We are developing clinical research protocols and conducting proof-of-concept studies for the topical indications of pruritis and atopic dermatitis. We intend to develop additional studies for the treatment of acne and rosacea. We believe that we will need the support of partners specializing in this sector to further develop and commercialize these dermatologic product candidates. We can provide no assurance that the topical indications we have under development will prove their claims and be successful commercial products.

Wundecyte™

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

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

Critical Accounting Policies and Significant Judgments and Estimates

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

Financial Overview

Results of Operations- Comparison of the Three and Six Months Ended October 31, 2011 and 2010

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

	Three months ended October 31,					Increase/ (Decrease)			% Increase/ (Decrease)			Six months ended October 31,					Increase/ (Decrease)			% Increase/ (Decrease)
	2011		2010									2011		2010

Wholesale & retail revenue	$	27,415	$	36,083		$	(8,668	)		-24	%	$	60,892	$	42,981		$	17,911			42	%
Distibutor revenue		-		-			-			0	%		26,000		-			26,000			0	%
Product revenue		27,415		36,083			(8,668	)		-24	%		86,892		42,981			43,911			102	%
Cost of sales		10,500		8,957			1,543			17	%		45,104		10,745			34,359			320	%
Gross profit		16,915		27,126			(10,211	)		-38	%		41,788		32,236			9,552			30	%

Government grant revenue		78,244		-			78,244			-	%		78,244		-			78,244			-	%
Total net revenue		95,159		27,126			68,033			251	%		120,032		32,236			87,796			272	%

Operating expenses:
Sales and Marketing		134,035		160,203			(26,168	)		-16	%		363,368		265,279			98,089			37	%
General and administrative		1,526,775		1,351,011			175,764			13	%		3,098,431		3,129,003			(30,572	)		-1	%
Research and development		488,577		572,649			(84,072	)		-15	%		1,140,538		1,717,892			(577,354	)		-34	%
Total Operating expenses		2,149,387		2,083,863			65,524			3	%		4,602,337		5,112,174			(509,837	)		-10	%

Net operating loss		2,054,228		2,056,737			(2,509	)		0	%		4,482,305		5,079,938			(597,633	)		-12	%

Interest expense		871,768		5,383			866,385			16095	%		1,307,566		6,589			1,300,977			19745	%
Other (income) expense		3,927		(10,183	)		14,110			-139	%		9,121		(32,291	)		41,412			-128	%
Net loss	$	2,929,923	$	2,051,937		$	877,986			43	%	$	5,798,992	$	5,054,236		$	744,756			15	%

Revenue

We generate product revenue from the sale of Dermacyte through on-line retailers, physician and medical spa facilities, and through distribution agreements with unrelated companies. In addition to the revenue earned through sales of Dermacyte, we also earn revenues through a cost-reimbursement grant sponsored by the United States Army, or Grant Revenue. Grant Revenue is recognized as milestones under the Grant program are achieved. Grant Revenue is earned through the direct costs of labor, supplies, and the pass-through costs of subcontracts with third-party CROs. Product revenue and Grant Revenue, including percentage changes, for the three and six months ended October 31, 2011 and 2010, respectively, are as follows:

	Three months October 31,				Increase/ (Decrease)			% Increase/ (Decrease)			Six months October 31,				Increase/ (Decrease)		% Increase/ (Decrease)
	2011		2010								2011		2010
Product revenue	$	27,415	$	36,083	$	(8,668	)		-24	%	$	86,892	$	42,981	$	43,911		102	%
Government grant revenue	$	78,244	$	-	$	78,244			100	%	$	78,244	$	-	$	78,244		100	%

Product revenue decreased for the three months ended October 31, 2011 compared to the same period in the prior year due to the reduction in direct sales from our internal sales force. During the three months ended October 31, 2011, we reduced the size of our sales force to focus selling efforts in specific geographical markets.

Product revenue increased for the six months ended October 31, 2011 compared to the same period in the prior year due to shipments to our distributor in Mexico and direct sales from our internal sales force.

Grant revenue for the three and six months ended October was approximately $78,000. This revenue was primarily the result of reimbursements for the direct labor costs associated with study design and initiation for a series of preclinical studies designed to enhance the safety and toxicity profile of Oxycyte.

Gross Profit

Gross margin as a percent of revenue was 62% and 48% for the three and six months ended October 31, 2011, respectively, as compared to 75% for the three and six months ended October 31, 2010. This decrease was primarily due to changes in the product mix and sales through distribution channels in the six months ended October 31, 2011.

Marketing and Sales Expenses

Marketing and sales expenses consisted primarily of personnel-related costs, including salaries, commissions, and the costs of marketing programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. Marketing and sales expenses and percentage changes for the three and six months ended October 31, 2011 and 2010, respectively, are as follows:

	Three months October 31,				Increase/ (Decrease)			% Increase/ (Decrease)			Six months October 31,				Increase/ (Decrease)		% Increase/ (Decrease)
	2011		2010								2011		2010
Marketing and sales expense	$	134,035	$	160,203	$	(26,168	)		-16	%	$	363,368	$	265,279	$	98,089		37	%

The decrease in marketing and sales expenses for the three months ended October 31, 2011 compared to the same period in the prior year was driven primarily by a reduction in costs incurred for direct advertising partially offset by an increase in the costs incurred for compensation.

We reduced the costs associated with direct marketing and advertising approximately $60,000. These costs include attendance at trade shows and conferences, fees paid to a third party public relations firm, the costs of product samples distributed to potential customers, and the costs of direct print and online advertisements topical product line Dermacyte. These costs include salaries, commissions, and employee benefits.

-	We incurred an increase of approximately $30,000 in compensation costs related to marketing and selling the cosmetic topical product line Dermacyte. These costs include salaries, commissions, and employee benefits.

The increase in marketing and sales expenses for the six months ended October 31, 2011 compared to the same period in the prior was driven primarily by an increase in the costs incurred for compensation offset by a slight reduction in costs for direct advertising.

-	We incurred an increase of approximately $95,000 in compensation costs and $10,000 in travel costs related to marketing and selling the cosmetic topical product line Dermacyte. These costs include salaries, commissions, employee benefits, and entertainment.

We reduced the costs related to direct marketing and advertising approximately $6,000 compared to the same period in the prior year. These costs include attendance at trade shows and conferences, fees paid to a third party public relations firm, the costs of product samples distributed to potential customers, and the costs of direct print and online advertisements.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation for executive, finance, legal and administrative personnel, including stock-based compensation. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, legal and accounting services, other professional services, and consulting fees. General and administrative expenses and percentage changes for the three and six months ended October 31, 2011 and 2010, respectively, are as follows:

	Three months October 31,				Increase/ (Decrease)		% Increase/ (Decrease)			Six months October 31,				Increase/ (Decrease)			% Increase/ (Decrease)
	2011		2010							2011		2010
General and administrative expense	$	1,526,775	$	1,351,011	$	175,764		13	%	$	3,098,431	$	3,129,003	$	(30,572	)		-1	%

The increase in general and administrative expenses for the three months ended October 31, 2011 was driven primarily by an increase in legal fees, consulting costs and the severance accrual for a retired director; partially offset by a decrease in compensation expense, travel related expenses, and amortization of intangible assets.

-	We reduced compensation expenses approximately $195,000 compared to the same period in the prior year due to a reduction in headcount.

-	We reduced administrative travel costs by approximately $51,000 compared to the same period in the prior year due to a reduction in headcount and international travel.

-	We reduced depreciation and amortization costs approximately $27,000 compared to the same period in the prior year due to impairments to intangible assets recorded in the prior year.

-	We incurred an increase of approximately $213,000 in legal and accounting fees associated with our filings and other corporate matters compared to the same period in the prior year.

-	We incurred and increase in consulting and Board of Director fees of approximately $230,000 compared to the same period in the prior year due to the accrual of severance payments due to a retired Director and fees paid to a third-party recruiter.

The decrease in general and administrative expenses for the six months ended October 31, 2011 was driven primarily by a decrease in compensation expense, travel related expense, and amortization of intangible assets; partially offset by an increase in legal fees, consulting costs and the severance accrual for a retired director.

-	We reduced compensation expenses approximately $474,000 compared to the same period in the prior year due to a reduction in headcount.

-	We reduced depreciation and amortization costs approximately $67,000 compared to the same period in the prior year due to impairments to intangible assets recorded in the prior year.

-	We reduced investor relations costs by approximately $108,000 compared to the same period in the prior year due to a reduction in presentations and costs associated with international marketing firms.

-	We incurred an increase of approximately $422,000 in legal and accounting fees associated with our filings and other corporate matters compared to the same period in the prior year.

-	We incurred and increase in consulting and Board of Director fees of approximately $275,000 compared to the same period in the prior year due to the accrual of severance payments due to a retired Director and fees paid to a third-party recruiter.

Research and Development Expenses

Research and development expenses include, but are not limited to, (i) expenses incurred under agreements with CROs and investigative sites, which conduct our clinical trials and a substantial portion of our pre-clinical studies; (ii) the cost of manufacturing and supplying clinical trial materials; (iii) payments to contract service organizations, as well as consultants; (iv) employee-related expenses, which include salaries and benefits; and (v) facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, depreciation of leasehold improvements, equipment, laboratory and other supplies. All research and development expenses are expensed as incurred. Research and development expenses and percentage changes for the three and six months ended October 31, 2011 and 2010, respectively, are as follows:

	Three months October 31,				Increase/ (Decrease)			% Increase/ (Decrease)			Six months October 31,				Increase/ (Decrease)			% Increase/ (Decrease)
	2011		2010								2011		2010
Research and development expense	$	488,577	$	572,649	$	(84,072	)		-15	%	$	1,140,538	$	1,717,892	$	(577,354	)		-34	%

The decrease in research and development expenses for the three months ended October 31, 2011 was driven primarily by a reduction in compensation and CRO costs; partially offset by an increase in consulting costs and Oxycyte development costs.

-	We reduced compensation expenses approximately $43,000 compared to the same period in the prior year due to a reduction in headcount.

-	We reduced travel costs by approximately $10,000 compared to the same period in the prior year due to a reduction in headcount and international travel.

-	We reduced CRO costs approximately $104,000 compared to the same period in the prior year due to the completion of the first cohort of the TBI trials in the prior year.

-	We incurred an increase of approximately $32,000 in consulting costs compared to the same period in the prior year primarily due to the consulting agreement with our retired Chief Operating Officer entered into in the fourth quarter of the prior year.

-	We incurred an increase of approximately $52,000 in Oxycyte development costs compared to the same period in the prior year due to costs incurred for manufacturing and preclinical studies.

The decrease in research and development expenses for the six months ended October 31, 2011 was driven primarily by a reduction in CRO, compensation and product development costs; partially offset by an increase in consulting costs.

-	We reduced compensation expenses approximately $16,000 compared to the same period in the prior year due to a reduction in headcount.

-	We reduced travel costs by approximately $35,000 compared to the same period in the prior year due to a reduction in headcount, conferences and seminars, and international travel.

-	We reduced CRO costs approximately $487,000 compared to the same period in the prior year due to the completion of the first cohort of the TBI trials in the prior year.

We incurred a decrease of approximately $148,000 in product development costs compared to the same period in the prior year due to impairment costs recognized in the prior year for expired clinical drug material offset by development costs associated with Dermacyte and Oxycyte manufacturing and preclinical studies incurred in the current year.

-	We incurred an increase of approximately $112,000 in consulting costs compared to the same period in the prior year primarily due to the consulting agreement with our retired Chief Operating Officer entered into in the fourth quarter of the prior year.

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

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

Other Income and Expense

During the three and six months ended October 31, 2011, other income decreased approximately $14,000 and $41,000, respectively, compared to the same period in the prior year. This decrease was due primarily to the expiration of the sublease agreement in our California laboratory and fluctuations in currency exchange rates.

Interest Expense

During the three and six months ended October 31, 2011, interest expense increased approximately $866,000 and $1,301,000, respectively, compared to the same period in the prior year. This increase is due to the accretion of the premium due on the promissory notes outstanding under the Note Purchase Agreement, dated October 21, 2010, as amended on December 29, 2010, with JP SPC 1 Vatea Segregated Portfolio, or Vatea Fund, and the amortization of the discounts, debt issue costs, and interest expense on the notes issued under the Convertible Note and Warrant Purchase Agreements described in “Liquidity, Capital Resources and Plan of Operation – Liquidity” below.

Liquidity, Capital Resources and Plan of Operation

We have incurred losses since our inception and as of October 31, 2011 we had an accumulated deficit of $97.7 million. We will continue to incur losses until we generate sufficient revenue to offset our expenses, and we anticipate that we will continue to incur net losses for at least the next several years. We expect to incur increased expenses related to our development and potential commercialization of Oxycyte and other product candidates and, as a result, we will need to generate significant net product sales, royalty and other revenues to achieve profitability.

Liquidity

We have financed our operations since September 1990 through the issuance of debt and equity securities and loans from stockholders. We had $2,873,524 and $1,632,211of total current assets and working capital of $777,617 and $(551,033) as of October 31, 2011 and April 30, 2011, respectively. Our practice is to invest excess cash, where available, in short-term money market investment instruments.

We are in the preclinical and clinical trial stages in the development of our product candidates. We are currently conducting Phase II-b clinical trials for the use of Oxycyte in the treatment of severe traumatic brain injury. Even if we are successful with our Phase II-b study, we must then conduct a Phase III clinical study and, if that is successful, file with the FDA and obtain approval of a Biologics License Application to begin commercial distribution, all of which will take more time and funding to complete. Our other product candidates must undergo further development and testing prior to submission to the FDA for approval to initiate clinical trials, which also requires additional funding. Management is actively pursuing private and institutional financing, as well as strategic alliances and/or joint venture agreements to obtain the necessary additional financing and reduce the cost burden related to the development and commercialization of our products though we can give no assurance that any such initiative will be successful. We expect our primary focus will be on funding the continued testing of Oxycyte, since this product is the furthest along in the regulatory review process. Our ability to continue to pursue testing and development of our products beyond July 31, 2012 depends on obtaining license income or outside financial resources. There is no assurance that we will obtain any license agreement or outside financing or that we will otherwise succeed in obtaining the necessary resources.

On August 2, 2011, the Company received $619,181 and issued 366,379 shares of common stock for the exercise of certain outstanding warrants.

In June 2011, we entered into a Convertible Note and Warrant Purchase Agreement with two institutional investors for the issuance and sale in a private placement of an aggregate $4.9 million in subordinated convertible promissory notes and warrants. The aggregate gross proceeds to the Company from the private placement were approximately $4.9 million, excluding any proceeds from the exercise of any Warrants, and the aggregate placement agent fees were approximately $386,000.

In May 2011, we issued the remaining $700,000 in promissory notes under the October 2010 Note Purchase Agreement with Vatea Fund.

Based on our working capital at October 31, 2011 and the net proceeds from the registered direct offering described in Note 9 of our Financial statements above, we believe we have sufficient capital on hand to continue to fund operations through July 31, 2012.

Cash Flows

The following table shows a summary of our cash flows for the six months ended October 31, 2011 and 2010:

	For the six months ended October 31,
	2011			2010
Net cash used in operating activities		(4,583,454	)		(4,389,796	)
Net cash used in investing activities		(161,475	)		(257,302	)
Net cash provided by financing activities		5,797,242			4,851,559

Net cash used in operating activities. Net cash used in operating activities was $4.6 million for the six months ended October 31, 2011 compared to net cash used in operating activities of $4.4 million for the six months ended October 31, 2010. The increase of cash used for operating activities was due primarily to an increase in costs associated with marketing and selling our cosmetic products offset by a reduction in costs associated with development of Oxycyte and overall administrative expenses.

Net cash used in investing activities. Net cash used in investing activities was $161,474 for the six months ended October 31, 2011 compared to net cash used in investing activities of $257,302 for the six months ended October 31, 2010. The decrease of cash used for investing activities was due to a reduction in capitalized legal fees incurred for filing and maintaining our patent portfolio.

Net cash provided by financing activities. Net cash provided by financing activities was $5.8 million for the six months ended October 31, 2011 compared to net cash provided by financing activities of $4.9 million for the six months ended October 31, 2010. The increase of net cash provided by financing activities for the six months ended October 31, 2011 was due primarily to net proceeds of approximately $4.5 million received from the issuance of the convertible notes in June 2011, approximately $0.6 million from the exercise of outstanding warrants in August 2011, and approximately $0.7 million proceeds from the issuance of promissory notes payable in May 2011 under the Note Purchase Agreement with Vatea Fund.

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.

As a result of our recently completed financing, described in Note 9 above, we believe that our existing cash and cash equivalents will be sufficient to fund our projected operating requirements through July 31, 2012. We will need substantial additional capital in the future in order to complete the development and commercialization of Oxycyte and to fund the development and commercialization of our future product candidates. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Such funding, if needed, may not be available on favorable terms, if at all. In the event we are unable to obtain additional capital, we may delay or reduce the scope of our current research and development programs and other expenses.

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

Recent Accounting Pronouncements

On May 1, 2011, we adopted ASU 2011-04, Fair Value Measurement (Topic 820). The guidance requires the disclosure of roll forward activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The adoption of ASU 2011-04 did not have a material impact on our financial statements.

On May 1, 2011, we adopted ASU 2010-17, Revenue Recognition—Milestone Method (Topic 605). The guidance establishes a revenue recognition model for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of the ASU is limited to research or development arrangements and requires an entity to record the milestone payment in its entirety in the period received if the milestone meets all the necessary criteria to be considered substantive. The adoption of ASU 2010-17 did not have a material impact on our financial statements.

Off-Balance Sheet Arrangements

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We routinely review our internal controls over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. In light of the conduct discovered during the Audit Committee investigation described in “Management’s Discussion & Analysis – Audit Committee Investigation” of our Form 10-Q for the quarter ended July 30, 2011, we adopted the following additional measures in order to improve our control environment: (i) strengthening our procedures with respect to review and verification of officer and director credentials and biographical disclosure, (ii) adopting a written related-party transaction review policy, to be administered by the Audit Committee, and (iii) revising our Code of Ethics and Business Conduct to explicitly confirm that providing false or misleading information in response to a corporate investigation is a violation of the Code subject to discipline. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal controls over financial reporting on an ongoing basis and will take action as appropriate.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

On August 30, 2011, Tenor Opportunity Master Fund Ltd., Aria Opportunity Fund, Ltd., and Parsoon Opportunity Fund, Ltd (collectively, “Tenor”) filed a lawsuit in the United States District Court for the Southern District of New York alleging that a right of first offer held by Tenor was breached in connection with our June 2011 financing. The complaint seeks compensatory damages, attorneys’ fees and costs. We filed an Answer to the Complaint on October 4, 2011 and pre-trial discovery is currently underway. We believe the facts do not support a finding in their favor and intend to vigorously defend against this lawsuit.

ITEM 1A.

RISK FACTORS

We are supplementing the risk factors disclosed in our Annual Report on Form 10-K for the year ended April 30, 2011 with the risk factors below.

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 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. As of August 24, 2011, Michael B. Jebsen is serving as both our Chief Financial Officer and our interim Chief Executive Officer. While we continue to search for a permanent Chief Executive Officer, we can give no assurances as to when, or if, we will locate a suitable candidate, and we may be adversely affected if we are unable to identify a qualified permanent Chief Executive Officer in a timely manner.

The redemption by us of Convertible Preferred Stock in stock or the conversion of such Preferred Stock by the holders could result in a substantial number of additional shares being issued, with the number of such shares increasing if and to the extent our market price declines, diluting the ownership percentage of our existing stockholders.

In December 2011, we completed a registered direct offering (the “2011 Offering”) consisting of Series A Convertible Preferred Stock, $0.0001 par value per share (the “Preferred Stock”) and warrants (the “2011 Warrants”) to purchase shares of common stock, par value $0.0001 per share. The Preferred Stock is convertible at the option of the holders at an initial conversion price of $2.22. We will make amortization and dividend payments on the Preferred Stock, with the principal amount being amortized in six payments payable over the six months following the issue date of the Preferred Stock payable at our option in cash and/or stock, subject to certain conditions being met. If we elect to make the payments in shares of our common stock, the price used to determine the number of shares to be issued will be calculated using the lesser of (i) the-then existing conversion price, which is initially $2.22 per share and (ii) a 10% discount to a calculated market price. Accordingly, the lower the market price of our common stock at the time at which we make amortization payments in stock, the greater the number of shares we will be obliged to issue and the greater the dilution to our existing stockholders. Such issuances could adversely affect the market price of our common stock.

The Preferred Stock contains covenants that may limit our business flexibility.

The Preferred Stock imposes significant restrictions on us that may restrict our ability to pursue our business strategies. These restrictions prohibit or limit, among other things:

·	the incurrence of additional indebtedness without the consent of the holders of the Preferred Stock;

·	the issuance of additional securities, subject to standard exceptions; and

·	the payment of cash dividends on shares of capital stock outstanding.

We are subject to substantial penalties if we breach the terms of the Preferred Stock

The Certificate of Designations that governs the Preferred Stock provides for various and severe penalties under various circumstances, including breach of the terms of the Certificate of Designations and any of the transaction documents relating to the 2011 Offering. These penalties include, but are not limited to, an increase in the dividend rate from 7% to 15%, and repayment of 125% of the then-outstanding stated value of the Preferred Stock in cash. In the event that any of these penalties are triggered, we may have insufficient funds to pay such penalties, which may adversely impact our ability to continue as a going concern.

The second closing of our December 2011 registered direct offering may not occur.

While our 2011 Offering provided for an aggregate amount of up to $7.5 million, only $3.5 million of the offered securities were purchased initially. The remainder of the 2011 Offering, which may be up to $4 million, is currently scheduled to be completed in a second closing in June 2012. However, the second closing is subject to various conditions, including conditions that are outside of our control, including, but not limited to, a minimum stock price prior to the second closing and a minimum trading volume limitation. In the event that the second closing does not occur, we would need to find alternative sources of capital to continue as a going concern, and there can be no assurance that such funding would be available on favorable terms or at all.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the fiscal quarter ended October 31, 2011, we did not sell any unregistered equity securities that have not previously been disclosed in a current report on Form 8-K.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

(REMOVED AND RESERVED)

None.

ITEM 5.

OTHER INFORMATION

On December 15, 2011, the Board of Directors adopted an amendment to the Company’s Non-Employee Director Compensation Policy, which is described under the heading 2011 Director Compensation in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on September 6, 2011, to provide that restricted stock awards will vest 25% per quarter, rather than vesting over a three-year period.

On December 15, 2011, the Board of Directors of the Company appointed Chris A. Rallis and Anthony A. DiTonno to serve as directors, effective immediately. Mr. Rallis will serve on the Audit Committee of the Company’s Board of Directors and serve as the Audit Committee’s financial expert. Mr. DiTonno will serve on the Compensation Committee and Strategic Alternatives Committee of the Company’s Board of Directors. Mr. DiTonno will also serve as the Strategic Alternatives Committee’s chair. The Company’s Board of Directors has determined that each of Mr. Rallis and Mr. DiTonno is an independent director.

There is no arrangement or understanding between Messrs. Rallis and DiTonno and any other persons pursuant to which they were to be appointed as directors, and Messrs. Rallis and DiTonno are not, have not been, and are not currently proposed to be a participant in any related person transactions with the Company or any related person that would require disclosure under Item 404(a) of Regulation S-K.

Messrs. Rallis and DiTonno will be compensated in accordance with the Company’s Non-Employee Director Compensation Policy as described above.

On December 15, 2011, the Board of the Directors also approved Amended and Restated Bylaws, effective immediately, that included an amendment to Article III, Section 10 to the Company’s Bylaws to clarify that directors may take action without a meeting either by consent in writing or by electronic transmission. A copy of the Bylaws, as amended and restated, is filed as Exhibit 3.1 to this Quarterly Report and is incorporated herein by reference.

ITEM 6.

EXHIBITS

No.		Description
3.1		Amended and Restated Bylaws
10.1		Amendment No. 3 to Securities Purchase Agreement between the Company and Vatea Fund, dated November 14, 2011 (1)
10.2		Task Order between the Company and NextPharma, dated November 15, 2011 (1)
10.3		Termination Agreement between the Company and Hospira, dated August 30, 2011 (1)
10.4		Placement Agency Agreement, dated December 8, 2011, between Oxygen Biotherapeutics, Inc. and William Blair & Company, L.L.C., as placement agent (2)
10.5		Form of Warrant (2)
10.6		Form of Certificate of Designations (2)
10.7		Form of Securities Purchase Agreement (2)
10.8		Form of Lock-up Agreement (2)
10.9		Restricted Stock Award Agreement
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document (3)
101.SCH		XBRL Taxonomy Extension Schema Document (3)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (3)
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (3)

______________

(1)	This document was filed as an exhibit to the current report on Form 8-K filed by Oxygen Biotherapeutics with the SEC on November 16, 2011, and is incorporated herein by reference.

(2)	This document was filed as an exhibit to the current report on Form 8-K filed by Oxygen Biotherapeutics with the SEC on December 9, 2011, and is incorporated herein by reference.

(3)

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

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

	OXYGEN BIOTHERAPEUTICS, INC.

Date: December 15, 2011	By:	/s/ Michael B. Jebsen
		Michael B. Jebsen,
		Interim Chief Executive Officer, President and Chief Financial Officer
		(Principal Executive Officer)

Attached files

TENAX THERAPEUTICS, INC. Reports

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