TENAX THERAPEUTICS, INC. - Annual Report: 2011 (Form 10-K)

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Delaware		26-2593535
(State of Incorporation)		(IRS Employer I.D. Number)

 

 

 

 

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share		The NASDAQ Stock Market LLC

 

 

 

 

 

 

 

 

Large Accelerated Filer	o	Accelerated Filer	o
Non-Accelerated Filer	o	Smaller Reporting Company	þ

 

 

 

 

 

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ITEM NUMBER AND CAPTION					Page
Part I
	1.		Business			3
	1A.		Risk Factors			9
	1B.		Unresolved Staff Comments			26
	2.		Properties			26
	3.		Legal Proceedings			26
	4.		(Removed and Reserved)			26
Part II
	5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			27
	6.		Selected Financial Data			28
	7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
	7A.		Quantitative and Qualitative Disclosures About Market Risk			38
	8.		Financial Statements and Supplementary Data			39
	9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			63
	9A.		Controls and Procedures			63
	9B.		Other Information			64
Part III
	10.		Directors, Executive Officers, and Corporate Governance			65
	11.		Executive Compensation			65
	12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			65
	13.		Certain Relationships and Related Transactions, and Director Independence			65
	14.		Principal Accountant Fees and Services			65
Part IV
	15.		Exhibits and Financial Statement Schedules			66

 

 

 

 

 

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To grow revenue by establishing a partnership with a company that specializes in the global cosmetic and beauty industry.  We believe this approach will enable us to commercialize our Dermacyte personal skin care products by providing access to top-line retail consumer point of sales.

 

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To grow revenue by selling our personal skin care products to medically oriented channels, such as dermatologists, plastic surgeons, and medical spas, via an internal hybrid sales model consisting of internal sales professionals and contract sales representatives.  We also intend to grow revenue via on-line sales to consumers.

 

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To develop and out-license topical formulations, mainly for wound healing, acne pruntis, dermatitis and rosacea.

 

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To provide medical alternatives to our military personnel and others.  Currently we are developing and supporting the development of new treatments for TBI and decompression sickness, or DCS, respectively.  We intend to complete our ongoing phase II-b clinical trial for Oxycyte emulsion in TBI, which has become one of the most prolific injuries faced by soldiers today. In addition, we support the U.S. Navy’s efforts to investigate using Oxycyte for the treatment of DCS by supplying the U.S. Navy with Oxycyte emulsion for their trials.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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three U.S. patents (5,824,703; 5,840,767; 6,167,887), three Australian patents (690,277; 722,417; 759,557), and two Canadian patents (2,239,170; 2,311,122) pertaining to the use and application of PFCs as gas transport agents in blood substitutes and liquid ventilation with an average remaining life of approximately 5 years;

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exclusive in-licenses to three fundamental gas transport patent applications that represent the core technology used in our products and product candidates with an average remaining life of approximately 17 years; and

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numerous patent applications for treatment of several medical and dermatological conditions such as TBI, acne, burns and wounds with an average remaining life of approximately 18 years.

 

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methods to treat certain diseases and conditions and for biological gas exchange;

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therapies for burn and wound victims;

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delivery of oxygenated PFC;

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various formulations containing PFC; and

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methods and compositions for controlled and sustained production and delivery of peroxide and/or oxygen for biological and industrial applications.

 

 

Our regulatory strategy is to pursue Phase II clinical testing and initial regulatory approval of Oxycyte in Switzerland and Israel. We then intend to use the results of these tests to pursue FDA approval for Phase III clinical tests and marketing approval of Oxycyte in the United States.

 

 

 

 

 

 

 

 

 

 

 

 

 

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our ability to obtain additional funding to develop our product candidates;

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the need to obtain regulatory approval of our most advanced product candidate, Oxycyte, for the potential treatment of TBI;

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potential risks related to any collaborations we may enter into for our product candidates, including Oxycyte;

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delays in the commencement, enrollment and completion of clinical testing, as well as the analysis and reporting of results from such clinical testing;

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the success of clinical trials of our Oxycyte product candidate or future product candidates;

 

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any delays in regulatory review and approval of product candidates in development;

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market acceptance of our cosmetic product candidates;

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our ability to establish an effective sales and marketing infrastructure;

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competition from existing products or new products that may emerge;

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the ability to receive regulatory approval or commercialize our products;

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potential side effects of our product candidates that could delay or prevent commercialization;

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potential product liability claims and adverse events;

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potential liabilities associated with hazardous materials;

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our ability to maintain adequate insurance policies;

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our dependency on third-party manufacturers to supply or manufacture our products;

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our ability to establish or maintain collaborations, licensing or other arrangements;

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our ability, our partners’ abilities, and third parties’ abilities to protect and assert intellectual property rights;

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costs related to and outcomes of potential intellectual property litigation;

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compliance with obligations under intellectual property licenses with third parties;

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our ability to adequately support future growth; and

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our ability to attract and retain key personnel to manage our business effectively.

 

 

 

 

 

 

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the scope, rate of progress and cost of our clinical trials and other research and development activities;

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the costs and timing of regulatory approval;

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the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

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the effect of competing technological and market developments;

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the terms and timing of any collaboration, licensing or other arrangements that we may establish;

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the cost and timing of completion of clinical and commercial-scale manufacturing activities; and

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the costs of establishing sales, marketing and distribution capabilities for our cosmetic products and any product candidates for which we may receive regulatory approval.

 

 

 

 

 

 

 

 

 

 

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capital resources;

 

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research and development resources, including personnel and technology;

 

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expertise in prosecution of intellectual property rights;

 

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manufacturing and distribution experience; and

 

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sales and marketing resources and experience.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

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

 

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partners may experience financial difficulties;

 

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

 

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

 

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

 

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

 

 

 

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

 

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obtaining regulatory approval to commence a clinical trial;

 

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

 

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

 

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

 

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

 

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

 

 

 

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

 

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

 

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

 

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

 

 

 

 

 

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The data obtained from laboratory testing and clinical trials are susceptible to varying interpretations, which could delay, limit or prevent FDA and other regulatory approvals

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Adverse events could cause the FDA and other regulatory authorities to halt trials

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At any time the FDA and other regulatory agencies could change policies and regulations that could result in delay and perhaps rejection of our products, and

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Even after extensive testing and clinical trials, there is no assurance that regulatory approval will ever be obtained for any of our products.

 

 

 

 

 

 

 

 

 

 

 

 

 

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The federal anti-kickback statute is a criminal statute that makes it a felony for individuals or entities knowingly and willfully to offer or pay, or to solicit or receive, direct or indirect remuneration, in order to induce the purchase, order, lease, or recommending of items or services, or the referral of patients for services, that are reimbursed under a federal health care program, including Medicare and Medicaid;

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The federal False Claims Act imposes liability on any person who knowingly submits, or causes another person or entity to submit, a false claim for payment of government funds. Penalties include three times the government’s damages plus civil penalties of $5,500 to $11,000 per false claim. In addition, the False Claims Act permits a person with knowledge of fraud, referred to as a qui tam plaintiff, to file a lawsuit on behalf of the government against the person or business that committed the fraud, and, if the action is successful, the qui tam plaintiff is rewarded with a percentage of the recovery;

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Health Insurance Portability and Accountability Act imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

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The Social Security Act contains numerous provisions allowing the imposition of a civil money penalty, a monetary assessment, exclusion from the Medicare and Medicaid programs, or some combination of these penalties; and

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Many states have analogous state laws and regulations, such as state anti-kickback and false claims laws. In some cases, these state laws impose more strict requirements than the federal laws. Some state laws also require pharmaceutical companies to comply with certain price reporting and other compliance requirements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

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The inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;

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The lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

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Unforeseen costs and expenses associated with creating and sustaining an independent sales and marketing organization.

 

 

 

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We may be required to relinquish important rights to our products or product candidates;

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We may not be able to control the amount and timing of resources that our distributors or collaborators may devote to the commercialization of our product candidates;

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Our distributors or collaborators may experience financial difficulties;

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Our distributors or collaborators may not devote sufficient time to the marketing and sales of our products; and

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Business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement.

 

 

 

 

 

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

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These agreements may be breached;

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These agreements may not provide adequate remedies for the applicable type of breach; or

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Our trade secrets or proprietary know-how will otherwise become known.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Decreased demand for our products and any product candidates that we may develop;

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Injury to our reputation;

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Withdrawal of clinical trial participants;

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Costs to defend the related litigation;

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Substantial monetary awards to trial participants or patients;

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Loss of revenue; and

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The inability to commercialize any products that we may develop.

 

 

 

 

 

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

 

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status and/or results of our clinical trials;

 

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results of clinical trials of our competitors’ products;

 

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

 

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actions and decisions by our collaborators or partners;

 

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

 

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

 

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competition from existing products or new products that may emerge;

 

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

 

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

 

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

 

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market conditions for biopharmaceutical stocks in general; and

 

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general economic and market conditions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Applicable.

 

 

 

 

 

 

 

 

 

 

 

 

 

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We incurred an increase of approximately $165,000 in compensation costs related to marketing and selling the cosmetic topical product line Dermacyte. These costs include salaries, commissions, and employee benefits.

 

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We incurred an increase of approximately $430,000 in costs related to direct marketing and advertising. These costs include attendance at trade shows and conferences, fees paid to a third party PR firm, the costs of product samples distributed to potential customers, and the costs of direct print and online advertisements.

 

 

 

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We incurred an increase of approximately $111,000 in legal and accounting fees associated with our public filings, and listing fees for the NASDAQ Capital Market and Swiss Exchange.

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We incurred an increase of approximately $550,000 in compensation costs due primarily to accruals for the contingent tax liabilities resulting from the ongoing stock option review.

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We incurred an increase of approximately $160,000 in non-cash depreciation and amortization costs.

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We reduced consultant costs by approximately $1,000,000 due to a reduction in recruiting fees, and fees paid to third parties for Dermacyte marketing, public and investor relations support, and financing activities.

 

 

 

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During 2011, costs associated with the development and manufacture of Oxycyte and Dermacyte, including the costs of preclinical research, were reduced by approximately $310, 000.

 

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We incurred an increase of approximately $55,000 in costs associated with the ongoing Phase II-b clinical trials.

 

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We incurred an increase of approximately $205,000 in compensation costs due primarily to the addition of our Chief Medical Officer.

 

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During 2011, the costs incurred for consultants were reduced by approximately $250,000.

 

 

 

 

 

 

 

 

 

 

Based on our working capital at April 30, 2011, the $700,000 of additional promissory notes issued under the Note Purchase Agreement, and the $4.5 million in proceeds from the convertible note offering, we believe we have sufficient capital on hand to continue to fund operations through December 31, 2011.

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

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delays that may be caused by changing regulatory requirements;

 

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the number of product candidates that we pursue;

 

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

 

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

 

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

 

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

 

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

 

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the possible costs of litigation.

 

 

 

 

 

 

 

 

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fees paid to CROs in connection with clinical trials,

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fees paid to research institutions in conjunction with preclinical research studies, and

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fees paid to contract manufacturers and service providers in connection with the production and testing of active pharmaceutical ingredients and drug materials for use in preclinical studies and clinical trials.

 

 

 

Laboratory equipment Office fumiture and fxitures Computer equipment and software Leasehold improvements

3-5years 7 years 3 years Shorter of use ful life or remaining lease term

 

 

Revenue Recognition—Revenues from merchandise sales are recognized upon transfer of ownership, including passage of title to the customer and transfer of the risk of loss related to those goods.  Revenues are reported on a net sales basis, which is computed by deducting from gross sales the amount of actual product returns received, discounts, incentive arrangements with retailers and an amount established for anticipated product returns.  Our practice is to accept product returns from retailers only if properly requested, authorized and approved.  As a percentage of gross sales, returns were less than 1% in both fiscal years 2011 and 2010.