|• QUARTERLY REPORT • CERTIFICATION • CERTIFICATION • EX-101.INS • EX-101.SCH • EX-101.CAL • EX-101.DEF • EX-101.LAB • EX-101.PRE|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FOR THE QUARTERLY PERIOD ENDED July 31, 2012
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-34600
(Exact name of registrant as specified in its charter)
ONE Copley Parkway, Suite 490, Morrisville, North Carolina 27560
(Address of principal executive offices)
(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):
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 September 18, 2012, the registrant had outstanding 32,328,501 shares of Common Stock.
PART I - FINANCIAL INFORMATION
(a development stage enterprise)
The accompanying notes are an integral part of these Financial Statements.
OXYGEN BIOTHERAPEUTICS, INC.
(a development stage enterprise)
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these Financial Statements.
OXYGEN BIOTHERAPEUTICS, INC.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
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 three months ended July 31, 2012:
Non-cash financing activities during the three months ended July 31, 2011:
The accompanying notes are an integral part of these Financial Statements.
OXYGEN BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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 $111 million as of July 31, 2012, and stockholders’ deficit of $638,299 and $346,046 as of July 31, 2012 and April 30, 2012, respectively. The Company requires substantial additional funds to complete clinical trials and pursue regulatory approvals. Management is actively seeking additional sources of equity and/or debt financing; however, there is no assurance that any additional funding will be available on commercially acceptable terms, or at all.
In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying July 31, 2012 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.
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, preferred stock and convertible notes. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows.
The following outstanding options, warrants, preferred stock and convertible note shares were excluded from the computation of basic and diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect.
The Company records its financial assets and liabilities in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 Fair Value Measurements. The Company's balance sheet includes the following financial instruments: cash and cash equivalents, short-term notes payable, convertible preferred stock and convertible notes. The Company considers the carrying amount of its cash and cash equivalents and short-term notes payable to approximate fair value due to the short-term nature of these instruments. The Company did not elect the fair value option and records the carrying value of its convertible notes at amortized cost in accordance with ASC 470-20.
Accounting for fair value measurements involves a single definition of fair value, along with a conceptual framework to measure fair value, with a fair value defined as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." The fair value measurement hierarchy consists of three levels:
The Company applies valuation techniques that (1) place greater reliance on observable inputs and less reliance on unobservable inputs and (2) are consistent with the market approach, the income approach and/or the cost approach, and include enhanced disclosures of fair value measurements in our financial statements.
The following tables show information regarding assets and liabilities measured at fair value on a recurring basis as of July 31, 2012 and April 30, 2012:
There were no significant transfers between levels in the three months ended July 31, 2012.
Financial assets or liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The following table provides a summary of the changes in fair value of our financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended July 31, 2012:
The Preferred Stock is recorded at fair value with changes in fair value recorded as gains or losses within non-cash interest expense. The estimate of the fair value of the securities noted above, as of the valuation date, is based on the rights and privileges afforded to the Preferred Stock. The fair value of the Preferred Stock is determined at each reporting period by calculating the number of conversion shares underlying the outstanding Preferred Stock as described in the Series A Convertible Preferred Stock Certificate of Designations at the average volume weighted average price of our common stock on the valuation date (unobservable inputs).
Recent Accounting Pronouncements
On May 1, 2012, the Company adopted FASB Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments to Topic 220, Comprehensive Income, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The adoption of ASU 2011-05 did not have a material impact on its financial statements.
On May 1, 2012, the Company adopted ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRS”). Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this update will not result in a change in the application of the requirements in Topic 820. The adoption of ASU 2011-04 did not have a material impact on its financial statements.
NOTE 3. BALANCE SHEET COMPONENTS
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.
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 July 31, 2012 and April 30, 2012:
Other current assets
Other current assets consist of the following as of July 31, 2012 and April 30, 2012:
Property and equipment, net
Property and equipment consist of the following as of July 31, 2012 and April 30, 2012:
Depreciation and amortization expense was approximately $24,000 and $50,000 for the three months ended July 31, 2012 and 2011, respectively.
Other assets consist of the following as of July 31, 2012 and April 30, 2012:
Accrued liabilities consist of the following as of July 31, 2012 and April 30, 2012:
NOTE 4. INTANGIBLE ASSETS
The following table summarizes the Company’s intangible assets as of July 31, 2012:
The following table summarizes the Company’s intangible assets as of April 30, 2012:
For the three months ended July 31, 2012 and 2011, the aggregate amortization expense on the above intangibles was approximately $13,000 and $41,000, 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 perfluorocarbon (“PFC”) technology. It capitalizes amounts paid to third parties for legal fees, application fees and other direct costs incurred in the filing and prosecution of its patent applications. These capitalized costs are amortized on a straight-line method over their useful life or legal life, whichever is shorter.
The Company 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. SERIES A CONVERTIBLE PREFERRED STOCK
Under the Company’s Certificate of Incorporation, the Board of Directors is authorized, without further stockholder action, to provide for the issuance of up to 10,000,000 shares of preferred stock, par value $0.0001 per share, in one or more series, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof.
On December 8, 2011, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware designating 7,500 shares of its authorized but unissued shares of preferred stock as Series A Convertible Preferred Stock.
Series A Convertible Preferred Stock
On December 12, 2011, the Company sold 3,500 units for net proceeds of approximately $3.2 million. Each unit sold consisted of (i) one share of the Company’s Preferred Stock and (ii) a warrant representing the right to purchase 225.2 shares of Common Stock (the “2011 Warrants”), at a price of $1,000 per unit, less issuance costs. The shares of Preferred Stock were immediately convertible and the 2011 Warrants are exercisable on the one-year anniversary of the closing date.
On June 15, 2012, the Company sold an additional 2,500 units for net proceeds of approximately $2.3 million. Each unit sold consisted of (i) one share of the Company’s Preferred Stock and (ii) a 2011 Warrant, at a price of $1,000 per unit, less issuance costs. The shares of Preferred Stock were immediately convertible and the 2011 Warrants are exercisable beginning on the one-year anniversary of the closing date.
The table below sets forth a summary of the designation, powers, preferences and rights of the Preferred Stock.
The Company will not affect any conversion of the Preferred Stock, nor shall a holder convert its shares of Preferred Stock, to the extent that such conversion would cause the holder to have acquired, through conversion of the Preferred Stock or otherwise, beneficial ownership of a number shares of Common Stock in excess of 4.99% of the Common Stock outstanding immediately preceding the conversion.
While the Preferred Stock is outstanding, the Company may not incur any additional indebtedness, with the exception of ordinary course equipment leases, obligations to vendors and similar exceptions. The Company is also prohibited from issuing additional or other capital stock or from issuing variable rate securities, without the consent of holders of the Preferred Stock then outstanding.
The scheduled conversions and actual activity for the Preferred Stock as of July 31, 2012 is as follows:
During the three months ended July 31 2012, 1,835 shares of Preferred Stock were converted into 1,234,246 shares of Common Stock. The Company recorded interest expense of $265,974 related to these conversions. The interest expense was calculated as the difference between the fair value of the preferred shares converted and the fair value of the Common Stock on the date of the conversion.
As of July 31, 2012, the following is a summary of the non-cash interest related to the Preferred Stock:
On July 13, 2012, the Company elected to make the scheduled August 15, 2012 installment payment in shares of Common Stock and on that date issued 481,496 shares of Common Stock. The Company expects to make subsequent scheduled payments in shares of Common Stock to the extent the Preferred Stock has not been voluntarily converted by the holders.
On August 15, 2012, the Company issued an additional 221,792 shares of common stock upon the conversion of 667 preferred shares. The Company expects to report interest expense of $99,458 related to these conversions in the second quarter of fiscal year 2013.
NOTE 6. NOTES PAYABLE
The following table summarizes our outstanding notes payable as of July 31, 2012 and April 30, 2012:
On June 29, 2011, the Company issued a note (the “June 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 (together with the June Note, the “Notes”) 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 Notes. Amortization of debt issue costs of $32,154 and $10,718 was recorded for the three months ended July 31, 2012 and 2011, respectively.
Interest on the Notes accrues at a rate of 15% annually and will be paid in quarterly installments commencing on the third month anniversary of issuance. The Notes will mature 36 months from the date of issuance. The Notes may be converted into shares of Common Stock at a conversion price of $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 Notes without prepayment penalties only with the approval of a majority-in-interest of the note holders under the purchase agreement at the time of the election. The Notes contain various events of default such as failing to timely make any payment under the Note when due, which may result in all outstanding obligations under the Note becoming immediately due and payable. The Company recorded interest expense of $628,321 and $208,079 for the three months ended July 31, 2012 and 2011, respectively.
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 $4,900,000, and is being amortized over term of the notes. Amortization of debt discount of approximately $408,000 and $136,000 was recorded for the three months ended July 31, 2012 and 2011, respectively.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Agreement with Virginia Commonwealth University
In May 2008 the Company entered into a license agreement with Virginia Commonwealth University (“VCU”) whereby it obtained a worldwide, exclusive license to valid claims under three of the VCU's patent applications that relate to methods for non-pulmonary delivery of oxygen to tissue and the products based on those valid claims used or useful for therapeutic and diagnostic applications in humans and animals. The license includes the right to sub-license to third parties. The term of the agreement is the life of the patents covered by the patent applications unless the Company elects to terminate the agreement prior to patent expiration. Under the agreement the Company has an obligation to diligently pursue product development and pursue, at its own expense, prosecution of the patent applications covered by the agreement. As part of the agreement, the Company is required to pay to VCU nonrefundable payments upon achieving development and regulatory milestones. As of July 31, 2012, the Company has not met any of the developmental milestones.
The agreement with VCU also requires the Company to pay royalties to VCU at specified rates based on annual net sales derived from the licensed technology. Pursuant to the agreement, the Company must make minimum annual royalty payments to VCU totaling $70,000 as long as the agreement is in force. These payments are fully creditable against royalty payments due for sales and sublicense revenue earned during the fiscal year as described above. This fee is recorded as an other current asset and is amortized over the fiscal year. Amortization expense was $17,500 for the three months ended July 31, 2012 and 2011.
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 Securities and Exchange Commission (“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 July 31, 2012, approximately 126,000 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, 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 July 31, 2012, 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.
As of July 31, 2012, the Company has accrued $532,500, which represents the Company’s best estimate of the potential liability, in other current liabilities for the contingent liability.
NOTE 8. STOCKHOLDERS’ EQUITY
Our Certificate of Incorporation authorizes us to issue 400,000,000 shares of $0.0001 par value common stock. As of July 31, 2012, there were 31,066,462 shares of common stock issued and outstanding.
As further discussed in Note 5 above, on June 15, 2012, the Company issued 563,064 warrants as part of the second closing of the Series A Convertible Preferred Stock. The warrants were issued with an exercise price of $2.22 and a six-year term. The warrants become exercisable on the one-year anniversary of the issue date. The Company recorded non-cash interest expense of $656,535 during the three months ended July 31, 2012 for the calculated fair value of the warrants.
The following table summarizes the Company’s warrant activity for the three months ended July 31, 2012:
1999 Amended Stock Plan
In October 2000, the Company adopted the 1999 Stock Plan, as amended and restated on June 17, 2008 (the “Plan”). Under the Plan, with the approval of the Compensation Committee of the Board of Directors, the Company may grant stock options, restricted stock, stock appreciation rights and new shares of Common Stock upon exercise of stock options. On September 30, 2011, the Company’s stockholders approved an amendment to the Plan which increased the amount of shares authorized for issuance under the Plan to 6,000,000, up from 800,000 previously authorized. As of July 31, 2012 the Company had 5,407,685 shares of Common Stock available for grant under the Plan.
The following table summarizes the shares available for grant under the Plan for the three months ended July 31, 2012:
Plan Stock Options
Stock options granted under the Plan may be either incentive stock options (“ISOs”), or nonqualified stock options (“NSOs”). ISOs may be granted only to employees. NSOs may be granted to employees, consultants and directors. Stock options under the Plan may be granted with a term of up to ten years and at prices no less than fair market value for ISOs and no less than 85% of the fair market value for NSOs. Stock options granted generally vest over one to three years.
The following table summarizes the outstanding stock options under the Plan for the quarter ended July 31, 2012:
The Company chose the “straight-line” attribution method for allocating compensation costs of each stock option over the requisite service period using the Black-Scholes Option Pricing Model to calculate the grant date fair value.
The Company used the following assumptions to estimate the fair value of options granted under its stock option plans for the quarter ended July 31, 2012 and 2011, respectively:
As of July 31, 2012, there were unrecognized compensation costs of approximately $75,475 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 1.2 years.
Restricted Stock Grants
The following table summarizes the restricted stock grants under the Plan for the three months ended July 31, 2012.
For the three months ended July 31, 2012, the Company recorded $78,070 as compensation expense for these restricted stock grants.
As of July 31, 2012, there were unrecognized compensation costs of approximately $90,768 related to the non-vested restricted stock grants that will be recognized on a straight-line basis over the remaining vesting period.
NOTE 9. 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:
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 10. RESTRUCTURING EXPENSE
In May 2012, the Company decided to consolidate its operations and relocate its research and development function to North Carolina from Costa Mesa, California. As part of these initiatives, the Company terminated all related R&D activities and a workforce reduction was implemented. To allow for this transition period, all existing development work had been completed and all of the manufacturing of the Company’s PFC-based products had been transferred to contract manufacturers. As a result of the restructuring, during the three months ended July 31, 2012, the Company recorded one-time charges of approximately $47,000 of severance and benefits related charges. These costs include $14,000 which is accrued and unpaid as of July 31, 2012.
The Company expects to record additional charges of approximately $174,000, which includes future lease obligations, net of sublease revenue, of $135,000, additional severance and benefits related charges of approximately $7,000 and other exit costs of approximately $32,000.
All restructuring costs are expected to be paid by April 30, 2013, with the exception of approximately $93,000 of net future lease obligations.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to them. In some cases you can identify forward-looking statements by words such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements regarding: the implications of interim or final results of our clinical trials, the progress of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates, the potential of such product candidates to lead to the development of commercial products, our anticipated timing for initiation or completion of our clinical trials for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and development, and the sufficiency of our cash resources. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form 10-Q, Part I, Item IA of our Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission, or SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from those we expect. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion and analysis should be read in conjunction with the unaudited 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, 2012.
All references in this Quarterly Report to “Oxygen Biotherapeutics”, “we”, “our” and “us” means Oxygen Biotherapeutics, Inc.
We are a development stage biomedical company focused on developing oxygen-carrying intravenous and topical products. Our principal business objective is to discover, develop, and commercialize novel therapeutic products for disease indications that represent significant areas of clinical need and commercial opportunity.
Our current strategy is to:
We believe that this strategy will allow us to develop a portfolio of high quality product development opportunities, expand our clinical development and commercialization capabilities, and enhance our ability to generate value from our proprietary technologies
First Quarter 2013 Highlights
The following summarizes certain key financial measures for the three months ended July 31, 2012:
Consistent with our strategy, during the three months ended July 31, 2012, we (i) secured our long-term supply of GMP-grade Oxycyte to be used in ongoing STOP-TBI clinical trials and to support the research and development efforts our partners, (ii) completed the first proof-of-concept clinical trial for the topical application of a PFC-based gel to treat dermatologic indications and (iii) entered into a new research agreement with the U.S. Navy to evaluate Oxycyte for the treatment of hemorrhagic shock.
Opportunities and Trends
We continue to execute on our strategic plan, which calls for resuming our Phase II-B clinical trials for STOP-TBI; supporting our collaborations to gather proof-of-concept data for additional therapeutic areas with unmet medical needs; and continuing our business development efforts to expand our product portfolio. We also continue to progress Oxycyte through the regulatory approval process by conducting a comprehensive group of preclinical studies to confirm the safety profile of our product. These studies are particularly focused on platelet activity and immunocompetence. We believe these actions position us well to drive future growth and create stockholder value.
As we focus on the development of our existing products and product candidates, we also continue to position ourselves to execute upon licensing and other partnering opportunities. In order to do so, we will need to continue to maintain our strategic direction, manage and deploy our available cash efficiently and strengthen our collaborative research development and partner relationships.
During fiscal year 2013 we are focused on the following four key initiatives:
Critical Accounting Policies and Significant Judgments and Estimates
There have been no significant changes in critical accounting policies during the three months ended July 31, 2012, 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, 2012.
Results of Operations- Comparison of the Three Months Ended July 31, 2012 and 2011
Product Revenue and Gross Profit
We generate revenue through the sale of Dermacyte® through on-line retailers, physician and medical spa facilities, and through distribution agreements with unrelated companies. Product revenue and percentage changes for the three months ended July 31, 2012 and 2011, respectively, are as follows:
The decrease in product revenue for the three months ended July 31, 2012 was primarily due to the reduction in our internal sales force and the termination of existing distribution agreements in the prior year. During the three months ended July 31, 2011, we recorded $26,000 in revenue from sales to our distributer that did not occur in the current period. During the current period, we employed only one internal salesperson compared to three during the same period in the prior year.
Gross profit as a percentage of revenue was 48% and 42% for three months ended July 31, 2012 and 2011, respectively. The increase for the three months ended July 31, 2012 was due to a greater proportion of total sales through retail regional sales versus wholesale and distributor channels as compared to the same period in the prior year.
Government Grant Revenue
We earn revenues through a cost-reimbursement grant sponsored by the United States Army, or Grant Revenue. Grant Revenue is recognized as milestones under the Grant program are achieved. Grant Revenue is earned through reimbursements for the direct costs of labor, travel, and supplies, as well as the pass-through costs of subcontracts with third-party CROs.
For the three months ended July 31, 2012, we recorded approximately $267,000 in revenue under the grant program. In addition to the revenue earned, we have recorded approximately $235,000 in deferred revenue associated with the grant. Deferred revenue under the grant represents pass-through costs that have been reimbursed in advance of performing the studies underlying the subcontracts.
Marketing and Sales Expenses
Marketing and sales expenses consisted primarily of personnel-related costs, including salaries, commissions, and the costs of marketing programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. Marketing and sales expenses and percentage changes for the three months ended July 31, 2012 and 2011, respectively, are as follows:
The decrease in marketing and sales expenses for the three months ended July 31, 2012 was driven primarily by a decrease in the costs incurred for compensation and direct advertising.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation for executive, finance, legal and administrative personnel, including stock-based compensation. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, legal and accounting services, other professional services, and consulting fees. General and administrative expenses and percentage changes for the three months ended July 31, 2012 and 2011, respectively, are as follows:
Legal and professional fees:
Legal and professional fees decreased approximately $140,000 for the three months ended July 31, 2012 compared to the prior year. This decrease was primarily due to decreases of $116,000 in consulting fees, $85,000 in investor relations costs, and $38,000 in accounting fees; offset by an increase of $98,000 in legal fees. The increase in legal expenses was primarily related to the costs to defend the Tenor matter and fees associated with the second closing of the Series A Preferred Stock. The decrease in consulting fees was primarily related to Board of Director recruiting fees in the prior period. The decrease in investor relations costs was the result of terminating existing agreements with Swiss-based public relations firms and the decision to delist from the SIX Swiss Exchange.
Personnel costs decreased approximately $95,000 for the three months ended July 31, 2012 compared to the prior year. The decrease was due primarily to the elimination of three executive positions in the prior year.
Other costs include costs incurred for travel, supplies, insurance and other miscellaneous charges. The $24,000 reduction in other costs was due primarily to a $30,000 reduction in administrative travel costs partially offset by increases in insurance premiums and taxes paid.
Facilities include costs paid for rent and utilities at our corporate headquarters in North Carolina. The $36,000 reduction during the three months ended July 31, 2012 compared to the prior year was the result of our relocation from Durham, NC to Morrisville, NC in March 2011.
Depreciation and Amortization:
The $53,000 decrease in depreciation and amortization costs for the three months ended July 31, 2012 compared to the prior year was primarily due to assets becoming fully depreciated in the current period.
Research and Development Expenses
Research and development expenses include, but are not limited to, (i) expenses incurred under agreements with CROs and investigative sites, which conduct our clinical trials and a substantial portion of our pre-clinical studies; (ii) the cost of manufacturing and supplying clinical trial materials; (iii) payments to contract service organizations, as well as consultants; (iv) employee-related expenses, which include salaries and benefits; and (v) facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, depreciation of leasehold improvements, equipment, laboratory and other supplies. All research and development expenses are expensed as incurred. Research and development expenses and percentage changes for the three months ended July 31, 2012 and 2011, respectively, are as follows:
Clinical and preclinical development:
The increase of approximately $130,000 in clinical and preclinical development costs for the three months ended July 31, 2012 compared to the prior year was primarily due to increases of $218,000 and $50,000 in costs associated with the pre-clinical studies and Phase II-b trials for Oxycyte®, respectively; offset by decreases of $123,000 and $15,000 in development costs incurred for Dermacyte and Oxycyte, respectively.
Personnel costs decreased approximately $71,000 for the three months ended July 31, 2012 compared to the prior year primarily due to headcount reductions in the California lab facility.
Consulting fees decreased approximately $79,000 for the three months ended July 31, 2012 compared to the prior year primarily due to charges under the consulting and separation agreement for our former President and COO.
Other costs remained relatively consistent for the three months ended July 31, 2012 and 2011.
Depreciation expense remained relatively consistent for the three months ended July 31, 2012 and 2011.
Facilities expense remained relatively consistent for the three months ended July 31, 2012 and 2011.
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 on our topical applications.
The process of conducting preclinical studies and clinical trials necessary to obtain approval from the U.S. Food and Drug Administration, or the FDA, is costly and time consuming. The probability of success for each product candidate and clinical trial may be affected by a variety of factors, including, among other things, the quality of the product candidate’s early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. As a result of the uncertainties discussed above, uncertainty associated with clinical trial enrollment and risks inherent in the development process, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. We are currently focused on developing our most advanced product candidate, Oxycyte, and our topical dermatologic indications; 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.
During the three months ended July 31, 2012, the Company recorded one-time charges of approximately $47,000 of severance and benefits related charges.
During the three months ended July 31, 2012, interest expense increased approximately $1.5 million compared to the same period in the prior year.
Long-term notes payable:
Interest expense for our long-term notes payable was $0 and approximately $227,000 for the three months ended July 31, 2012 and 2011, respectively. The decrease in interest expense for the current year was primarily due to the prepayment of the notes in November 2011.
Convertible notes payable:
Interest expense on our outstanding convertible notes was approximately $628,000 and $208,000 for the three months ended July 31, 2012 and 2011, respectively. The recorded interest for the three months ended July 31, 2012 was comprised of approximately $188,000 for quarterly interest payable, $408,000 in amortization of debt discounts and $32,000 in amortization of debt issue costs.
Series A Convertible Preferred Stock:
Interest expense on our outstanding Preferred Stock was approximately $1.3 million for the three months ended July 31, 2012. The recorded interest was comprised of approximately $657,000 for the calculated fair value of the warrants issued with the Preferred Stock, $266,000 for the excess of the fair-value of the shares issued upon conversion over the fair value of the Preferred Stock and $204,000 for the fair value adjustment to the remaining Preferred Stock outstanding at July 31, 2012. No Preferred Stock was outstanding for the three months ended July 31, 2011.
Preferred Stock Dividends:
Interest expense recorded for the payment of dividends on the Preferred Stock was approximately $171,000 for the three months ended July 31, 2012. No Preferred Stock was outstanding for the three months ended July 31, 2011.
Other income and expense
Other expense (income) decreased approximately $20,000 for the three months ended July 31, 2012 compared to the prior year primarily due to $7,000 foreign currency exchange losses recognized in the prior year; offset by approximately $13,000 of sub lease income from our California facility in the current period that were not earned in the same period during the prior year.
Liquidity, Capital Resources and Plan of Operation
We have incurred losses since our inception and as of July 31, 2012 we had an accumulated deficit of $111.2 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.
We have financed our operations since September 1990 through the issuance of debt and equity securities and loans from stockholders. We had $3,654,234 and $2,631,032 of total current assets and working capital of $(344,641) and $(495,838) as of July 31, 2012 and April 30, 2012, 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 December 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.
In December 2011, we entered into a Securities Purchase Agreement with certain institutional investors that provided for the sale and issuance of units (“Units”) consisting of Series A Convertible Preferred Stock and warrants in aggregate amount of up to $7.5 million in two installments (the “2011 Offering”). The first installment of $3.5 million closed on December 12, 2011, and the second installment of $4.0 million was scheduled to have occurred in June 2012, subject to certain closing conditions. Because certain closing conditions for the second installment were not satisfied, on June 14, 2012, the Company entered into an Amendment Agreement with each of the institutional investors that, among other things, divided the remaining installment into two installments, the first additional installment to occur in June 2012 in the amount of $2.5 million and the second additional installment to occur in September 2012 in the amount of $1.5 million.
On June 15, 2012, the Company sold 2,500 Units for net proceeds of approximately $2.3 million upon the closing of the first additional installment. The remainder of the 2011 Offering, which may be up to $1.5 million, is currently scheduled to be completed in an additional closing in September 2012. However, the final 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 final closing and a minimum trading volume limitation. As of September 14, 2012, our stock was trading at a level below the minimum price. In the event that the final 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.
Based on our working capital at July 31, 2012, we believe we have sufficient capital on hand to continue to fund operations through December 31, 2012.
The following table shows a summary of our cash flows for the three months ended July 31, 2012 and 2011:
Net cash used in operating activities. Net cash used in operating activities was $1.6 million for the three months ended July 31, 2012 compared to net cash used in operating activities of $2.1 million for the three months ended July 31, 2011. The decrease in cash used for operating activities was due primarily to a decrease in our overall administrative expenses and our costs associated with marketing and selling our cosmetic products.
Net cash used in investing activities. Net cash used in investing activities was $34,128 for the three months ended July 31, 2012 compared to net cash used in investing activities of $86,684 for the three months ended July 31, 2011. The decrease in 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 $2.5 million for the three months ended July 31, 2012 compared to net cash provided by financing activities of $5.2 million for the three months ended July 31, 2011. The decrease of net cash provided by financing activities was due primarily to net proceeds of $2.3 million received from the issuance of Preferred Stock on June 15, 2012 as compared to the $4.5 million received from the issuance of the convertible notes and the $0.7 million proceeds from the issuance of promissory notes payable under the Note Purchase Agreement with Vatea Fund during the three months ended July 31, 2011.
Our future capital requirements will depend on many factors that include, but are not limited to the following:
We believe that our existing cash and cash equivalents will be sufficient to fund our projected operating requirements through December 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, 2012, we adopted FASB Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments to Topic 220, Comprehensive Income, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The adoption of ASU 2011-05 did not have a material impact on our financial statements.
On May 1, 2012, we adopted ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRS”). Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this update will not result in a change in the application of the requirements in Topic 820. The adoption of ASU 2011-04 did not have a material impact on its 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.
Management does not believe that we possess any instruments that are sensitive to market risk. Our debt instruments bear interest at fixed interest rates.
We believe that there have been no significant changes in our market risk exposures for the three months ended July 31, 2012.
Evaluation of Disclosure Controls and Procedures
As required by paragraph (b) of Rules 13a-15 and 15d-15 promulgated under 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 July 31, 2012, the end of 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 and is accumulated and communicated to our management, including the Interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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. 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
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. Discovery was completed and motions for summary judgment from both sides were filed, Plaintiffs filed on the matter of breach and we filed on the matter of damages. On July 11, 2012 the court entered an order on both summary judgment motions. The court found in favor of Plaintiff’s motion, holding that we did breach the agreement. The court did not find in favor of our motion regarding damages. The matter will now move to trial for a jury to determine what, if any, damages Plaintiff’s suffered from our breach of the agreement. The trial is scheduled to begin on October, 10, 2012.
We are supplementing the risk factors disclosed in our Annual Report on Form 10-K for the year ended April 30, 2012 with the risk factors below.
Our litigation with Tenor may have a materially adverse effect on our company.
On August 30, 2011, 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. On July 11, 2012, the court found in favor of Plaintiff’s motion for summary judgment, holding that we breached the agreement and that we are liable for at least some damages. The matter will now move to trial for a jury to determine what, if any more than nominal, damages Plaintiff’s suffered from our breach of the agreement.
We have incurred significant costs in defending this litigation, and we are likely to continue to do so until the matter is resolved. In addition, the litigation has resulted, and likely to continue to result, in a diversion of management’s attention and resources that could otherwise have been used to advance our business plan.
While we continue to believe that Tenor’s claims for damages are without merit, there can be no assurance that the jury will agree with our position. In that event, we may be held liable for significant monetary damages to Tenor, which would have a material adverse effect on our business, financial condition, or results of operations, and would potentially threaten our ability to continue as a going concern.
If we cannot meet the NASDAQ Capital Market continued listing requirements, our common stock may be delisted which could have an adverse impact on the liquidity and market price of our common stock.
Our common stock is currently listed on the NASDAQ Capital Market, or NASDAQ. Continued listing of a security on NASDAQ is conditioned upon compliance with various continued listing standards, which require, among other things, that for 30 consecutive trading days (i) the closing minimum bid price for the listed securities not be lower than $1.00 per share and (ii) our market capitalization not be lower than $35 million. The closing bid price for our shares has been less than $1.00 per share since August 21, 2012 and our market capitalization has been less than $35 million since August 8, 2012.There can be no assurances made that we will satisfy either or both of these requirements for continued listing of our common stock on NASDAQ. If we are not able to satisfy continued listing requirements, we will receive a deficiency notice from NASDAQ and will be required to regain compliance with continued listing standards within a specified period. There can be no assurance made that we will be able to regain compliance during that period, and, if we do not, our common stock will be subject to delisting from the NASDAQ. Delisting from NASDAQ would negatively impact us and our stockholders by, among other things, reducing the liquidity and market price of our common stock and adversely affecting our ability to raise additional capital.
The second additional 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. In June 2012, an additional $2.5 million of the offered securities were purchased.
The remainder of the 2011 Offering, which may be up to $1.5 million, is currently scheduled to be completed in an additional closing in September 2012. However, the final 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 final closing and a minimum trading volume limitation. As of September 14, 2012, our stock was trading at a level below the minimum price. In the event that the final 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.
Repurchases of Common Stock
The following table lists all repurchases during the first quarter of fiscal 2013 of any of our securities registered under Section 12 of the Exchange Act by or on behalf of us or any affiliated purchaser.
Issuer Purchases of Equity Securities
Unregistered Sales of Equity Securities
During the fiscal quarter ended July 31, 2012, we issued 82,447 shares of unregistered common stock as payment of $185,917 of interest due on our outstanding convertible notes.
All of the securities described above were issued in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act.
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.