TENAX THERAPEUTICS, INC. - Quarter Report: 2012 January (Form 10-Q)

oxbt_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED January 31, 2012

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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 001-34600

OXYGEN BIOTHERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices)

(919) 855-2120

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of March 13, 2012, the registrant had outstanding 29,019,253 shares of Common Stock.

TABLE OF CONTENTS

		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Unaudited Financial Statements		3
	Balance Sheets as of January 31, 2012 and as of April 30, 2011		3
	Statements of Operations for the Three and Nine Months Ended January 31, 2012 and 2011		4
	Statements of Cash Flows for the Nine Months Ended January 31, 2012 and 2011		6
	Notes to Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		37
Item 4.	Controls and Procedures		37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		38
Item 1A.	Risk Factors		38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3.	Defaults Upon Senior Securities		40
Item 4.	Mine Safety Disclosures		40
Item 5.	Other Information		40
Item 6.	Exhibits		41

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

BALANCE SHEETS

	January 31, 2012			April 30, 2011
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	3,281,502		$	951,944
Accounts receivable		19,400			138,867
Government grant receivable		147,153			-
Inventory		116,707			257,382
Prepaid expenses		561,645			275,876
Other current assets		206,468			8,142
Total current assets		4,332,875			1,632,211
Property and equipment, net		317,422			442,586
Debt issuance costs, net		310,813			-
Intangible assets, net		863,510			699,951
Other assets		65,666			147,608
Total assets	$	5,890,286		$	2,922,356
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable	$	650,351		$	889,376
Accrued liabilities		1,137,748			1,250,573
Convertible preferred stock		3,916,696			-
Current portion of notes payable, net		104,178			43,295
Total current liabilities		5,808,973			2,183,244
Long-term portion of notes payable, net		952,777			4,463,635
Total liabilities		6,761,750			6,646,879



Stockholders' deficit
Preferred stock, undesignated, authorized 10,000,000 shares; see Note 6.		-			-
Common stock, par value $.0001 per share; authorized 400,000,000 shares; issued and outstanding 28,235,467 and 23,393,307, respectively		2,824			2,339
Additional paid-in capital		104,139,192			88,189,012
Deficit accumulated during the development stage		(105,013,480	)		(91,915,874	)
Total stockholders’ deficit		(871,464	)		(3,724,523	)
Total liabilities and stockholders' deficit	$	5,890,286		$	2,922,356

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

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

STATEMENTS OF OPERATIONS

	Period from May 26, 1967 (Inception) to January 31,			Three months ended January 31,						Nine months ended January 31,
	2012			2012			2011			2012			2011
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Product revenue	$	461,300		$	4,673		$	52,562		$	91,565		$	95,543
Cost of sales		305,831			2,512			25,973			47,616			36,718
Net product revenue		155,469			2,161			26,589			43,949			58,825
Government grant revenue		224,345			146,101			-			224,345			-
Total net revenue		379,814			148,262			26,589			268,294			58,825

Operating expenses
Selling, general, and administrative		45,701,164			1,422,103			2,282,823			4,883,903			5,677,105
Research and development		21,353,147			599,935			498,521			1,740,473			2,216,413
Loss on impairment of long-lived assets		334,157			-			-			-			-
Total operating expenses		67,388,468			2,022,038			2,781,344			6,624,376			7,893,518

Net operating loss		67,008,654			1,873,776			2,754,755			6,356,082			7,834,693

Interest expense		38,961,063			5,341,988			43,093			6,649,554			49,682
Loss on extinguishment of debt		250,097			-			-			-			-
Other expense (income)		(1,206,334	)		82,850			(253,661	)		91,970			(285,952	)
Net loss	$	105,013,480		$	7,298,614		$	2,544,187		$	13,097,606		$	7,598,423

Net loss per share, basic				$	(0.26	)	$	(0.11	)	$	(0.53	)	$	(0.33	)

Weighted average number of common shares outstanding, basic					27,558,532			23,391,155			24,922,512			23,331,614


Net loss per share, diluted				$	(0.39	)	$	(0.11	)	$	(0.65	)	$	(0.33	)

Weighted average number of common shares outstanding, diluted					29,731,481			23,391,155			26,630,311			23,331,614

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

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

STATEMENTS OF CASH FLOWS


	Period from May 26, 1967 (Inception) to January 31,			Nine months ended January 31,
	2012			2012			2011
	(Unaudited)			(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(105,013,480	)	$	(13,097,606	)	$	(7,598,423	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		2,030,265			166,134			255,057
Amortization of deferred compensation		336,750			-			-
Interest on debt instruments		38,554,616			6,635,979			49,681
Loss (gain) on debt settlement and extinguishment		163,097			-			-
Loss on impairment, disposal and write down of long-lived assets		763,415			95,760			-
Issuance and vesting of compensatory stock options and warrants		8,278,580			53,292			111,802
Issuance of common stock below market value		695,248			-			-
Issuance of common stock as compensation		661,191			106,190			56,318
Issuance of common stock for services rendered		1,265,279			-			-
Issuance of note payable for services rendered		120,000			-			-
Contributions of capital through services rendered by stockholders		216,851			-			-
Changes in operating assets and liabilities
Accounts receivable, prepaid expenses and other assets		(1,060,414	)		(341,637	)		95,139
Inventory		197,410			(40,616	)		85,978
Accounts payable and accrued liabilities		1,911,548			(434,954	)		291,920
Net cash used in operating activities		(50,879,644	)		(6,857,458	)		(6,652,528	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(1,755,462	)		(11,371	)		(187,509	)
Capitalization of patent costs and license rights		(1,710,168	)		(195,829	)		(183,118	)
Net cash used in investing activities		(3,465,630	)		(207,200	)		(370,627	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock and exercise of stock options and warrants, net of related expenses and payments		44,363,845			8,619,181			4,901,400
Repurchase of outstanding warrants		(2,836,520	)		-			-
Proceeds from stockholder notes payable		977,692			-			-
Proceeds from issuance of notes payable, net of issuance costs		7,518,521			837,692			2,088,701
Proceeds from convertible notes, net of issuance costs		13,321,447			4,514,162			-
Proceeds from convertible preferred stock		3,500,000			3,500,000			-
Payments on notes - short-term		(1,218,209	)		(76,819	)		(77,312	)
Payments on notes - long-term		(8,000,000	)		(8,000,000	)		-
Net cash provided by financing activities		57,626,776			9,394,216			6,912,789

Net change in cash and cash equivalents		3,281,502			2,329,558			(110,366	)
Cash and cash equivalents, beginning of period		-			951,944			632,706
Cash and cash equivalents, end of period	$	3,281,502		$	3,281,502		$	522,340

Cash paid for:
Interest	$	264,180		$	13,574		$	2,262
Income taxes	$	27,528		$	-		$	-

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

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

STATEMENT OF CASH FLOWS, Continued

Non-cash financing activities during the nine months ended January 31, 2012:

(1)	The Company issued 161,438 shares of restricted common stock for the payment of interest accrued on convertible notes. The shares were issued at a conversion price of $2.255 for the payment of $364,042 interest payable on convertible notes with a gross carrying value of $4,900,000.

(2)	The Company issued 14,342 shares of its common stock as payment for $20,808 of convertible preferred stock dividends.

(3)	The Company issued 446,496 shares of its common stock to redeem 583 shares of convertible preferred stock with a gross carrying value of $583,000.

Non-cash financing activities during the nine months ended January 31, 2011:

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

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

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. DESCRIPTION OF BUSINESS

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

Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has an accumulated deficit during the development stage of $105 million and $91.9 million at January 31, 2012 and April 30, 2011, respectively, and stockholders’ deficit of $(871,464) and $(3,724,523) as of January 31, 2012 and April 30, 2011, respectively. The Company requires substantial additional funds to complete clinical trials and pursue regulatory approvals. Management is actively seeking additional sources of equity and/or debt financing; however, there is no assurance that any additional funding will be available.

In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying January 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 the classification and amounts of liabilities that might be necessary should the Company be unable to continue in existence.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Reclassification

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

Deferred financing costs

Deferred financing costs represent legal, due diligence and other direct costs incurred to raise capital or obtain debt. Direct costs include only “out-of-pocket” or incremental costs directly related to the effort, such as a finder’s fee and accounting and legal fees. These costs will be capitalized if the efforts are successful, or expensed when unsuccessful. Indirect costs are expensed as incurred. Deferred financing costs related to debt are amortized over the life of the debt. Deferred financing costs related to issuing equity are charged to Paid in Capital. The treatment of issuance costs on liability for which the Company has elected the fair value option is further described in “Debt or derivative liabilities recorded at fair value” below.

Derivative financial instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under FASB ASC 815, Derivatives and Hedging (“ASC 815”) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.

Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments, and are evaluated and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability. In December 2011, the Company issued warrants to purchase 788,290 shares of Common Stock as part of the Series A Preferred Stock offering. In accordance with ASC 815, these warrants are classified as equity and their calculated fair value of $1,170,311 was recognized as a discount on the related preferred stock in the current period.

Debt or derivative liabilities recorded at fair value

The outstanding Series A Convertible Preferred Stock, par value $0.0001 per share (the “Preferred Stock”) has mandatorily redeemable installments with the remainder outstanding at maturity also subject to mandatory redemption, which meets the definition of a “mandatorily redeemable financial instrument” and thus is recorded as a liability at fair value in accordance with ASC 480, Distinguishing Liabilities From Equity. Costs related to the issuance of debt for which we have elected the fair value option are recognized in current earnings. We determine fair value of the outstanding Preferred Stock as of the end of each reporting period, and we reduce the amount outstanding for any redemptions, exercises, or conversions at the fair value determined at the end of the prior reporting period. The fair value adjustment is charged or credited to Interest expense. On January 31, 2012, the Company recognized approximately $2.2 million as non-cash interest expense for the adjustment to the fair value of the outstanding Preferred Stock on that date.

The certificate of designations governing the rights and preferences of the Preferred Stock contains several embedded features that would be required to be considered for bifurcation. The Company has elected the fair value option, and as such, will value the host preferred stock certificate of designations and embedded features as one instrument. Changes in the fair value of the Preferred Stock will be recorded as interest expense on the Statement of Operations.

Redemptions: The Company expects to redeem the Preferred Stock by issuing shares of the Company’s common stock, par value $0.0001 (the “Common Stock”). The difference between the fair value of the Preferred Stock and the fair value of the Common Stock on the date the Common Stock issued is charged or credited to interest expense.

Conversions: Investors in the Preferred Stock can voluntarily convert their preferred shares to Common Stock at a conversion price defined in the preferred stock certificate of designations. The difference between the fair value of the Preferred Stock and the fair value of the Common Stock given in conversion is recognized as a gain or loss on the extinguishment of debt.

Dividends: Dividends paid with scheduled redemptions are expected to be paid in Common Stock. When an investor voluntarily converts its preferred shares, we are required to pay the investor for the dividends that would have been earned had the shares been held to maturity. The portion of those dividends that have not been accrued may be paid in cash or Common Stock, and are referred to as “make whole” payments. Dividends paid in stock are valued at the fair value of the Common Stock as of the date of issuance and are charged to interest expense.

Beneficial conversion and warrant valuation

In accordance with FASB ASC 470-20, Debt with Conversion and Other Options, the Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that have conversion features at fixed rates that are in-the-money when issued and the fair value of warrants issued in connection with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants, based on their relative fair value, and as a reduction to the carrying amount of the convertible debt equal to the intrinsic value of the conversion feature. The discount recorded in connection with the BCF and warrant valuation is recognized as non-cash interest expense and is being amortized over the life of the convertible note. The significant terms of the Company’s convertible notes are described in Note 5. At January 31, 2012 the notes had a gross carrying value of $4.9 million with unamortized discounts totaling approximately $3.9 million.

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. It is not practicable for the Company to estimate the fair value of its convertible notes as such estimates cannot be made without incurring excessive costs, but management believes the difference between fair value and carrying value to not be material.

The Preferred Stock embodies an unconditional obligation to issue a variable number of common shares based on a changes in the fair value of the Company’s common stock. As futher discussed in Note 6 below, the Preferred Stock also embodies obligations that characterize the shares as mandatorily redeemable. As such, the outstanding Preferred Stock is carried as a liability and reported at fair value. Due to the short-term maturity of the obligation, the Company estimates the fair value based on the weighted-average fair value of its common stock over the measurement period and adjusts the carrying amount of the liability to the estimated conversion price at the report date. In accordance with ASC 480, upon issuance of the shares to settle the obligation, equity is increased by the amount of the liability and any gain or loss is recognized as non-cash interest expense at the date of conversion.

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 potentially issuable shares under outstanding options, warrants, convertible preferred stock and convertible notes. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows.

	Three months ended January 31,						Nine months ended January 31,
	2012			2011			2012			2011
Historical net loss per share:
Numerator
Net loss, as reported	$	(7,298,614	)	$	(2,544,187	)	$	(13,097,606	)	$	(7,598,423	)
Less: Effect of amortization of interest expense on convertible notes		(4,258,037	)		-			(4,258,037	)		-

Net loss attributed to common stockholders (diluted)		(11,556,651	)		(2,544,187	)		(17,355,643	)		(7,598,423	)
Denominator
Weighted-average common shares outstanding		27,558,532			23,391,155			24,922,512			23,331,614
Effect of dilutive securities		2,172,949			-			1,707,799			-

Denominator for diluted net loss per share		29,731,481			23,391,155			26,630,311			23,331,614

Basic net loss per share	$	(0.26	)	$	(0.11	)	$	(0.53	)	$	(0.33	)

Diluted net loss per share	$	(0.39	)	$	(0.11	)	$	(0.65	)	$	(0.33	)

The following outstanding options, warrants, convertible preferred shares 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.

	Nine months ended January 31,
	2012		2011
Warrants to purchase common stock		5,759,247		4,026,352
Convertible preferred shares outstanding		1,490,783		-
Options to purchase common stock		397,823		855,181
Convertible note shares outstanding		1,942		1,942

Recent Accounting Pronouncements

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

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

NOTE 3. BALANCE SHEET COMPONENTS

Inventory

The Company operates in an industry characterized by rapid improvements and changes to its technology and products. The introduction of new products by the Company or its competitors can result in its inventory being rendered obsolete or it being required to sell items at a discount. The Company evaluates the recoverability of its inventory by reference to its internal estimates of future demands and product life cycles. If the Company incorrectly forecasts demand for its products or inadequately manages the introduction of new product lines, the Company could materially impact its financial statements by having excess inventory on hand. The Company's future estimates are subjective and actual results may vary. During the nine months ended January 31, 2012, the Company reclassified approximately $90,000 of Perfluorocarbon raw material out of raw materials inventory into other current assets as it continues its reformulation of the Dermacyte cosmetic line.

Inventories are recorded at cost using the First-In-First-Out ("FIFO") method. Ending inventories are comprised of raw materials and direct costs of manufacturing and are valued at the lower of cost or market. Inventories consisted of the following as of January 31, 2012 and April 30, 2011:

	January 31, 2012		April 30, 2011
Raw materials	$	49,220	$	107,271
Work in process		-		124,308
Finished goods		67,487		25,803
	$	116,707	$	257,382

Other current assets

Other current assets consist of the following as of January 31, 2012 and April 30, 2011:

	January 31, 2012		April 30, 2011
R&D materials	$	159,349	$	-
Dermacyte samples		19,529		1,052
Other		27,590		7,090
	$	206,468	$	8,142

Property and equipment, net

Property and equipment consist of the following as of January 31, 2012 and April 30, 2011:

	January 31, 2012			April 30, 2011
Laboratory equipment	$	963,580		$	970,463
Office furniture and fixtures		140,255			140,255
Computer equipment and software		152,024			153,234
Leasehold improvements		4,810			4,810
		1,260,669			1,268,762
Less: Accumulated depreciation and amortization		(943,247	)		(826,176	)
	$	317,422		$	442,586

Depreciation expense was approximately $36,000 and $49,000 for the three months ended January 31, 2012 and 2011, respectively, and approximately $134,000 and $132,000 for the nine months ended January 31, 2012 and 2011, respectively.

Other assets

Other assets consist of the following as of January 31, 2012 and April 30, 2011:

	January 31, 2012		April 30, 2011
Prepaid royalty fee	$	50,000	$	50,000
Other		15,666		15,086
Reimbursable patent expenses- Glucometrics		-		82,522
	$	65,666	$	147,608

Accrued liabilities

Accrued liabilities consist of the following as of January 31, 2012 and April 30, 2011:

	January 31, 2012		April 30, 2011
Section 409A tax liability	$	532,350	$	532,350
Deferred government grant revenue		298,533		-
Employee related		176,528		493,640
Preferred stock dividend payable		21,479		-
Legal		16,715		-
Other		92,143		74,583
Clinical trial related		-		150,000
	$	1,137,748	$	1,250,573

NOTE 4. INTANGIBLE ASSETS

The following table summarizes the Company’s intangible assets as of January 31, 2012:

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

Patents	$	503,122		11.4	$	-	$	(227,905	)	$	275,217
License Rights		527,424		17.1		-		(82,600	)		444,824
Trademarks		143,469		N/A		-		-			143,469

Total	$	1,174,015			$	-	$	(310,505	)	$	863,510

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

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

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

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

For the three months ended January 31, 2012 and 2011, the aggregate amortization expense on the above intangibles was approximately $11,000 and $16,000, respectively.

For the nine months ended January 31, 2012 and 2011, the aggregate amortization expense on the above intangibles was approximately $32,000 and $123,000, respectively.

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

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

NOTE 5. NOTES PAYABLE

The following table summarizes the Company’s outstanding notes payable as of January 31, 2012 and April 30, 2011:

	January 31, 2012			April 30, 2011

Current portion of notes payable	$	96,983		$	36,100
Current portion of convertible notes payable		7,195			7,195
Current portion of notes payable, net	$	104,178		$	43,295

Long-term portion of notes payable	$	-		$	6,881,600
Less: Unaccreted premium		-			(2,417,965	)
		-			4,463,635


Long-term portion of convertible notes payable	$	4,900,001		$	-
Less: Unamortized discount		(3,947,224	)		-
		952,777			-

Long-term portion of notes payable, net	$	952,777		$	4,463,635

Note Purchase Agreement

On October 12, 2010 the Company entered into a Note Purchase Agreement with JP SPC 1 Vatea, Segregated Portfolio (“Vatea Fund”) whereby it agreed to issue and sell to Vatea Fund an aggregate of $5,000,000 of senior unsecured promissory notes (the “Vatea Notes”) on or before December 31, 2010. The Vatea Notes will mature on October 31, 2013, unless the holders of a majority of the Vatea Notes consent in writing to a later maturity date. Interest does not accrue on the outstanding principal balance of the Vatea Notes (other than following the maturity date or earlier acceleration). Instead, on the maturity date, the Company must pay the holders of the Vatea Notes a final payment premium aggregating $3,000,000, in addition to the principal balance then otherwise outstanding under the Vatea Notes. The Vatea Notes provide that the Company has the option, at its sole discretion and without penalty, to prepay the outstanding balance under the Vatea Notes plus the amount of the final payment premium prior to the maturity date. In addition, the holders of majority of the Vatea Notes may request that the Company prepay the Vatea Notes in an amount equal to the proceeds of any subsequent closings under the Securities Purchase Agreement with Vatea Fund, dated June 8, 2009, and subsequently amended.

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

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

Convertible Note

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

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

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

The Company recorded interest expense of $628,320 and $1,464,967 for the three and nine months ended January 31, 2012, respectively. These amounts include amortization of the associated debt issue costs of $32,154 and $75,026 and amortization of the debt discount of $408,333 and $952,777 for the three and nine months ended January 31, 2012, respectively.

NOTE 6. 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 our 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.

The table below sets forth a summary of the designation, powers, preferences and rights of the Preferred Stock.

Maturity	The shares of Preferred Stock will mature on the one year anniversary of issuance of such shares.

Amortization	On each one month anniversary of issuance of the Preferred Stock, the Company will redeem, subject to certain exceptions, one-sixth of the initial stated value of the Preferred Stock.

Amortization Payments	The Company may elect to pay the monthly amortization payments in cash or, subject to certain conditions, in shares of Common Stock by delivering that number of shares of Common Stock equal to the amount of the monthly amortization payment divided by a per share amortization price, which shall be the lesser of (i) the then-existing conversion price, which is initially $2.22 per share of common stock and (ii) 90% of the calculated market price per share of Common Stock.

Dividends	The shares of Preferred Stock will carry a dividend equal to 7% per annum, paid monthly in arrears. The Company may elect to pay dividends in cash or, subject to certain conditions, in shares of Common Stock. If the Company pays dividends in shares of Common Stock, the shares will be valued at a calculated per share market price. Dividends shall be subject to a make-whole through maturity upon any earlier conversion, redemption or amortization.

Market Price	For purposes of the amortization or dividend payments on the Preferred Stock as described above, the market price shall be equal to the average of the volume weighted average prices (the “VWAP”) for the five lowest trading days, excluding the two lowest trading days of such period, ending on the 23rd trading day prior to the applicable payment date, subject to a “true up” based on the five lowest trading days during the twenty consecutive trading days ending on the trading day immediately prior to the applicable payment date.

Conversion	Holders may elect to convert shares of Preferred Stock into shares of Common Stock at the then-existing conversion price at any time. The initial conversion price is $2.22 per share of Common Stock, and is subject to certain adjustments, including an anti-dilution provision that reduces the conversion price upon the issuance of any Common Stock or securities convertible into Common Stock at an effective price per share less than the conversion price.

Redemption	If any shares of Preferred Stock remain outstanding on the maturity date after giving effect to any conversions on such date, the Company is required to redeem such preferred shares in cash in an amount equal to the then-existing conversion amount for each preferred share. Additionally, after a triggering event, the holders of the shares of Preferred Stock have the right, at their option, to require the Company to redeem all or a portion of the then outstanding preferred shares in cash at the triggering event redemption price. Triggering events include, among other events, certain breaches by the Company of its agreements, failures to pay amounts when due, failures to maintain any registration statement as required, failure to keep its Common Stock listed on any of the specified eligible markets (including the OTC Bulletin Board), and failure to keep a sufficient number of authorized shares reserved for issuance on conversion of the Preferred Stock or exercise of the 2011 Warrants. The triggering event redemption price will be the greater of (i) 125% of the then-existing conversion amount, or (ii) the product of the then-existing conversion amount and the greatest closing sales price of the Company’s Common Stock beginning on the last trading day prior to the triggering event and ending on the date the holder of the Preferred Stock delivers a notice of redemption. In addition, the Company is required to pay to the holders of the Preferred Stock any additional make-whole amounts accrued at the date of the triggering event.

Liquidation preference	In the event of the Company’s voluntary or involuntary dissolution, liquidation or winding up, each holder of Preferred Stock will be entitled to be paid a liquidation preference equal to the initial stated value of such holder’s Preferred Stock of $2.22 per share, plus accrued and unpaid dividends and any other payments that may be due on such shares, before any distribution of assets may be made to holders of capital stock ranking junior to the Preferred Stock.

Voting rights	Shares of Preferred Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding. Preferred Stock will be required to amend the terms of the Preferred Stock.

Equity Conditions	The “Equity Conditions” will be satisfied on any date if: (i) on each day during the 30 trading days prior to such measurement date, all shares of Common Stock issued and issuable upon conversion of the Preferred Stock , as dividends on the Preferred Stock and upon exercise of the 2011 Warrants will have been issued or, to the extent not yet issued will be eligible for sale without restriction and without the need for registration under the securities laws; (ii) on each such day, the Common Stock is listed on The NASDAQ Capital Market, on one of several named alternative markets and, if subject to certain delisting proceedings or a failure to meet the maintenance standards of such an exchange, the Company must meet the minimum listing conditions of one of the other permitted markets (including the OTC Bulletin Board); (iii) on each such day, the Company has delivered Common Stock upon conversion by holders of Preferred Stock on a timely basis, as and if required; (iv) any applicable shares to be issued in connection with the determination may be issued in full without violating the ownership limitations described below or the rules of the Company’s principal market (except that the ownership limitations will not prevent the Company from delivering Common Stock in amounts up to such limits); (v) during such period, the Company has made timely payments as required; (vi) there has been no triggering event or potential triggering event under the certificate of designations; (vii) the Company has no knowledge of any fact that would cause the shares of Common Stock issuable in connection with the Preferred Stock or Preferred Warrants not to be eligible for sale without restriction; (viii) the Company meets certain minimum average trading volume qualifications on its principal market (i.e., a $375,000 aggregate dollar volume over the applicable 20 trading days); and (ix) we are otherwise in material compliance with our covenants and representations in the related Preferred Stock transaction documents, including the certificate of designations.

We 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 our Common Stock in excess of 4.99% of the Common Stock immediately preceding the conversion.

While the Preferred Stock is outstanding, we may not incur any additional indebtedness, with the exception of ordinary course equipment leases, obligations to vendors and similar exceptions. We are 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.

As of January 31, 2012, the following is a summary of the non-cash interest related to the Preferred Stock:

Non-cash interest:	Amount
Dividends paid in common stock with conversions	$	-
Dividends paid in common stock with redemptions		20,808
Interest expense on redemption of preferred stock		133,849
Fair value adjustment to preferred stock		2,170,007
Accrued dividends payable		21,479
Non-cash interest expense as of January 31, 2012	$	2,346,143

On January 10, 2012, the Company elected to make the scheduled February 13, 2012 installment and dividend payment in shares of Common Stock and on that date issued 454,002 shares of Common Stock under the pre-delivery procedures described in the certificate of designation. On February 13, 2012, the Company was not required to issue any additional shares based upon the comparison of the market price on January 10, 2012 and the market price on February 13, 2012. 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.

The scheduled conversions and actual activity for the Preferred Stock as of January 31, 2012 is as follows:

Installement Date	Pre-delivery Date	Preferred Shares Redeemedable		Less: Preferred Shares Redeemed / Converted at 1/31/12			Balance of Preferred Stock at 1/31/12		Fair Value of Preferred Stock at 1/31/12

1/12/2012	12/12/2011		583		(583	)		-	$	-
2/13/2012	1/10/2012		583					583		782,802
3/12/2012	2/10/2012		583					583		782,802
4/12/2012	3/10/2012		583					583		782,802
5/12/2012	4/10/2012		583					583		782,802
6/12/2012	5/10/2012		585					585		785,488
Convertible preferred stock			3,500		(583	)		2,917	$	3,916,696

As shown above, 583 shares of Preferred Stock were converted into 446,496 shares of Common Stock as of January 31, 2012. The Company recorded interest expense of approximately $133,849 related to these conversions. The interest expense was calculated as the difference between the fair value of the preferred shares and the fair value of the Common Stock on the date of the conversion. The weighted average fair value of Common Stock for the January conversions was $1.61 per share. Additionally, between February 1, 2012 and March 15, 2012, 1,166 preferred shares were converted into 845,912 shares of common stock. The Company expects to report interest expense related to these conversions of approximately $480,677 in the fourth quarter of 2012. The weighted average fair value of the Common Stock for the fourth quarter 2012 conversions was $2.35 per share. As of March 15, 2012, there were 1,751 shares of Preferred Stock outstanding.

NOTE 7. SEGMENT REPORTING

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

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

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

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

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

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

	For the three months ending January 31,						For the nine months ending January 31,

	2012			2011			2012			2011
Product revenue
United States	$	4,673		$	26,712		$	65,565		$	69,693
Latin America		-			-			26,000			-
Europe		-			25,850			-			25,850
Total product revenue	$	4,673		$	52,562		$	91,565		$	95,543


Segment (income) loss
United States	$	(1,335	)	$	283,888		$	330,830		$	466,154
Latin America		-			-			(10,585	)		-
Europe		-			9,771			-			9,771
Unallocated revenues
Government grant revenue		(146,101	)		-			(224,345	)		-
Unallocated expenses
General and administrative		1,421,277			1,962,575			4,519,709			5,142,355
Research and development		599,935			498,521			1,740,473			2,216,413
Net interest and other expense (income)		5,424,838			(210,568	)		6,741,524			(236,270	)
Net loss	$	7,298,614		$	2,544,187		$	13,097,606		$	7,598,423

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 8. COMMITMENTS AND CONTINGENCIES

Operating Leases—The Company leases its laboratory space under an operating lease that includes fixed annual increases and expires in July 2015. The Company leases its office space under an operating lease that includes fixed annual increases and expires in February 2016. Total rent expense was $216,651 and $250,902 for the nine months ended January 31, 2012 and 2011, respectively.

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

The agreement also requires the Company to pay royalties to VCU at specified rates based on annual net sales derived from the licensed technology. Pursuant to the agreement, the Company must make minimum annual royalty payments to VCU totaling $70,000 as long as the agreement is in force. These payments are fully creditable against royalty payments due for sales and sublicense revenue earned during the fiscal year as described above. This fee is recorded as an other current asset and is amortized over the fiscal year. Amortization expense was $52,500 for the nine months ended January 31, 2012 and 2011.

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

Litigation—The Company is subject to litigation in the normal course of business, none of which management believes will have a material adverse effect on the Company’s financial statements.

On August 30, 2011, Tenor Opportunity Master Fund Ltd., Aria Opportunity Fund, Ltd., and Parsoon Opportunity Fund, Ltd (collectively, “Tenor”) filed a lawsuit in the United States District Court for the Southern District of New York alleging that a right of first offer held by Tenor was breached in connection with the Company’s June 2011 financing. The complaint seeks compensatory damages, attorneys’ fees and costs. The Company filed an Answer to the Complaint on October 4, 2011 and pre-trial discovery is currently underway. The Company believes the facts do not support a finding in Tenor’s favor and, accordingly, has not accrued for any amounts for a contingent liability related to this claim as of January 31, 2012.

Registration Requirement—During the fiscal year ended April 30, 2008, the Company issued warrants as part of a convertible note offering. These warrants were issued with a requirement that the Company file a registration statement with the SEC to register the underlying shares, and that it be declared effective on or before January 9, 2009. In the event that the Company does not have an effective registration statement as of that date, or if at some future date the registration ceases to be effective, then the Company is obligated to pay liquidated damages to each holder in the amount of 1% of the aggregate market value of the stock, as measured on January 9, 2009 or at the date the registration statement ceases to be effective. As an additional remedy for non-registration of the shares, the holders would also receive the option of a cashless exercise of their warrant or conversion shares. As of January 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 (the “IRC”), including options granted with an exercise price below fair market value on the date of grant and options that were modified such that they may have become non-compliant with Section 409A.

In February 2011, after management conducted a preliminary, limited scope review of certain of the Company’s stock option granting practices, the Audit Committee commenced a voluntary, independent investigation of the Company’s historical stock option granting practices and related accounting during the period from February 1998 through April 2009. The Company’s outside legal counsel assisted the Audit Committee in this investigation. As of January 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.

In addition to adverse consequences for option holders, the Company has determined that certain payroll taxes, interest and penalties may apply to the Company under various sections of the IRC (and, as applicable similar state and foreign tax statutes) related to the potential Section 409A non-compliance. As of January 31, 2012, the Company has accrued approximately $550,000, which represents the Company’s best estimate of the potential liability, in other current liabilities for the contingent liability. The Company’s investigation of the matter is still on-going and there exists the possibility of adverse outcomes that the Company estimates could reach approximately $500,000 beyond its recorded amount.

NOTE 9. STOCKHOLDERS’ EQUITY

During the nine months ended January 31, 2012:

(1)	The Company issued 14,093 shares of Common Stock upon vesting of outstanding restricted stock grants.

(2)	The Company issued 9,655 shares of Common Stock as compensation to employees under an employee share program. These shares had a grant date fair value of $20,179.

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

(4)	The Company received $619,181 and issued 366,379 shares of Common Stock from the exercise of warrants.

(5)	The Company recorded $139,303 for the computed fair value of share based grants issued to employees, nonemployee directors, and consultants.

(6)	The Company issued 161,438 shares of restricted common stock for the payment of interest accrued on convertible notes.

(7)

The Company recorded $1,960,497 for the computed fair value of 2,172,949 warrants issued with convertible notes issued on June 29, 2011 and July 1, 2011. In addition, the Company recorded $2,939,504 for the computed beneficial conversion features for the intrinsic value of the notes at the commitment date.

(8)

The Company received $8,000,000 and issued 2,807,018 shares of Common Stock as part of the final closing of the Securities Purchase Agreement on November 14, 2011. An additional 561,404 shares of Common Stock were issued as compensation for services provided in closing the Securities Purchase Agreement.

(9)	The Company issued 14,342 shares of Common Stock as payment of Preferred Stock dividends.

(10)	The Company issued 446,496 shares of Common Stock to redeem 583 shares of the Preferred Stock.

(11)	The Company issued 454,002 shares of Common Stock in accordance with the pre-delivery requirements of the Series A Convertible Preferred Stock Certificate of Designations for dividends payable and preferred shares redeemable on February 13, 2012.

During the nine months ended January 31, 2011:

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

(2)

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

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

(4)

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

(5)	The Company issued 19,275 shares of its common stock as compensation. These shares had a fair value at the grant date of $56,318.

(6)	The company recorded $111,802 for the computed fair value of options issued to employees, nonemployee directors, and consultants.

1999 Amended Stock Plan

In October 2000, the Company adopted the 1999 Stock Plan (the “Plan”), as amended and restated on June 17, 2008. Under the Plan, with the approval of the Compensation Committee of the Board of Directors, the Company may grant stock options, restricted stock, stock appreciation rights and new shares of Common Stock upon exercise of stock options. On September 30, 2011, the Company’s stockholders approved amendment 1 to the Plan which increased the amount of shares authorized for issuance under the Plan to 6,000,000, up from 800,000 previously authorized. Stock options granted under the Plan may be either incentive stock options (“ISOs”), or nonqualified stock options (“NSOs”). ISOs may be granted only to employees. NSOs may be granted to employees, consultants and directors. Stock options under the Plan may be granted with a term of up to ten years and at prices no less than fair market value for ISOs and no less than 85% of the fair market value for NSOs. To date, stock options granted generally vest over one to three years and vest at a rate of 34% upon the first anniversary of the vesting commencement date and 33% on each anniversary thereafter. As of January 31, 2012 the Company had 5,484,318 shares of Common Stock available for grant under the Plan.

The following table summarizes the shares available for grant under the Plan for the nine months ended January 31, 2012:

	Shares Available for Grant
Balances, at April 30, 2011		243,832
Additional shares reserved		5,200,000
Options granted		(58,309	)
Options cancelled/forfeited		168,224
Restricted stock granted		(209,461	)
Restricted stock cancelled/forfeited		140,032
Balances, at January 31, 2012		5,484,318

Plan Stock Options

The following table summarizes the outstanding stock options under the Plan for the nine months ended January 31, 2012:

	Outstanding Options
	Number of Shares			Weighted Average Exercise Price
Balances, at April 30, 2011		515,071		$	4.54
Options granted		43,000		$	2.03
Options cancelled		(3,556	)	$	5.81
Balances, at July 31, 2011		554,515		$	4.33
Options granted		2,500		$	2.50
Options exercised		(7,333	)	$	1.96
Options cancelled		(95,334	)	$	3.62
Balances, at October 31, 2011		454,348		$	4.51
Options granted		12,809		$	1.80
Options cancelled		(69,334	)	$	3.69
Balances, at January 31, 2012		397,823		$	4.57

The following table summarizes the grant date fair value stock-based compensation expense for stock options granted during the nine months ended January 31, 2012 and 2011, respectively:

	For the the nine months ended January 31
	2012		2011

Research and development	$	65,598	$	81,331
General and administrative		16,677		15,813
Marketing and sales		2,024		3,615
	$	84,299	$	100,759

The Company used the following assumptions to estimate the fair value of options granted under its stock option plans for the nine months ended January 31, 2012 and 2011:

	For the nine months ended January 31
	2012			2011

Risk-free interest rate (weighted average)		2.16	%		2.00	%
Expected volatility (weighted average)		78.65	%		84.46	%
Expected term (in years)		7			6
Expected dividend yield		0.00	%		0.00	%

Risk-Free Interest Rate	The risk-free interest rate assumption was based on U.S. Treasury instruments with a term that is consistent with the expected term of the Company’s stock options.

Expected Volatility	The expected stock price volatility for the Company’s Common Stock was determined by examining the historical volatility and trading history for its Common Stock over a term consistent with the expected term of its options.

Expected Term	The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. It was calculated based on the historical experience that the Company has had with its stock option grants.

Expected Dividend Yield	The expected dividend yield of 0% is based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not anticipate paying any dividends in the near future.

Forfeitures	Stock compensation expense recognized in the statements of operations for the nine months ended January 31, 2012 and 2011 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 718, Compensation – Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on the Company’s historical experience.

As of January 31, 2012, there were unrecognized compensation costs of approximately $27,227 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 0.94 years.

Restricted Stock Grants

The following table summarizes the restricted stock grants under the Plan for the nine months ended January 31, 2012:

	Outstanding Restricted Stock
	Number of Shares			Weighted Average Grant Date Fair Value
Balances, at April 30, 2011		-
Restricted stock granted		132,900		$	1.96
Restricted stock exercised		(9,238	)	$	1.96
Restricted stock cancelled		(7,322	)	$	1.96
Restricted stock forfeited		-
Balances, at July 31, 2011		116,340		$	1.96
Restricted stock granted		35,412		$	2.48
Restricted stock exercised		(3,217	)	$	1.96
Restricted stock cancelled		(19,636	)	$	1.96
Restricted stock forfeited		(106,616	)	$	2.04
Balances, at October 31, 2011		22,283		$	2.40
Restricted stock granted		41,149		$	2.07
Restricted stock exercised		(11,293	)	$	2.08
Restricted stock cancelled		(6,458	)	$	1.96
Restricted stock forfeited		-
Balances, at January 31, 2012		45,681		$	2.25

Pursuant to their respective employment contracts, the Company granted the following restricted stock awards on May 19, 2011 with a fair value of $1.96 per share on the grant date.

-	The Chief Executive Officer was granted 100,000 shares of restricted common stock, vesting quarterly over a three-year period and 16,800 shares of restricted common stock vesting monthly over a 12-month period.

-	The Chief Financial Officer was granted 8,600 shares of restricted common stock vesting over a 12-month period, of which 3,600 shares will only vest so long as he continues serving as the Company's Corporate Secretary and/or Treasurer.

-	The Chief Medical Officer was granted 7,500 shares of restricted common stock, vesting monthly over a 12-month period.

Pursuant to the Company’s Board of Directors compensation agreements, the Company granted 31,812 shares of restricted common stock, vesting annually over a three-year period and 26,149 shares of restricted common stock vesting quarterly over a one-year period. These awards were granted with a weighted average fair value of $2.31 on the grant date.

For the nine months ended January 31, 2012, the Company granted an additional 18,600 restricted stock awards to employees with a weighted average fair value of $2.09 on the grant date.

For the nine months ended January 31, 2012, the Company recorded $53,602 as compensation expense for these restricted stock grants. As of January 31, 2012, there were unrecognized compensation costs of approximately $24,536 related to the non-vested restricted stock grants that will be recognized on a straight-line basis over the remaining vesting period.

Other Stock Options

In the past, the Company issued options outside the 1999 Amended Stock Plan. These options were granted with an exercise price of $3.68 and a 10 year term. As of January 31, 2012, there were no non-qualified options outstanding.

Warrants

As further described in Note 6 above, on December 12, 2011, the Company issued warrants to purchase 788,290 shares of common stock as part of the Series A Convertible Preferred Stock Offering. The warrants were issued at an initial exercise price of $2.22. The warrants were issued with a six-year term and are exercisable beginning December 12, 2012.

As further described in Note 5 above, on June 29 and July 1, 2011, the Company issued warrants to purchase 133,038 and 2,039,911shares of restricted common stock respectively, as part of the convertible note offering. The warrants were issued in three equal tranches with a weighted average exercise price of $2.50. The warrants were issued with a five-year term and were exercisable upon issuance.

During the nine months ended January 31, 2012, the Company received $619,181 and issued 366,379 shares of Common Stock from the exercise of outstanding warrants.

The following table summarizes its warrant activity for the nine months ended January 31, 2012:

	Warrants					Weighted Average Exercise Price
Outstanding at April 30, 2011		3,581,347				$	3.90
Granted		2,961,239					2.45
Exercised		(366,379	)				1.69
Forfeited		(1,224,478	)				3.68
Other		807,518		(1	)
Outstanding at January 31, 2012		5,759,247				$	2.19	(1)

______________

(1)

The Company has warrants outstanding that contain anti-dilution clauses requiring a repricing in the event of subsequent equity sales. Subsequent to the closing of the Series A Preferred Stock Offering, the repricing of these warrants resulted in an increase of 807,518 potentially issuable shares and a $0.79 reduction in the weighted average exercise price of the Company’s outstanding warrants.

NOTE 10. SUBSEQUENT EVENTS

On February 28, 2012, the Company received $114,448 and issued 87,365 shares of Common Stock for the exercise of outstanding warrants.

ITEM 2.

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

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

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

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

Overview

Oxygen Biotherapeutics is engaged in the business of developing biotechnology products with a focus on oxygen delivery to specific target tissues. We are currently developing Oxycyte®, a systemic perfluorocarbon, or PFC product we believe is a safe and effective oxygen carrier for use in situations of acute ischemia. In addition, we have developed a family of perfluorocarbon-based oxygen carriers for use in personal care, topical wound healing, and other topical indications. While we continue to move forward with Oxycyte as a potential treatment for traumatic brain injury or TBI, our focus for the next twelve months will be to develop our most advanced topical products: Dermacyte® and Wundecyte™, as we believe these products have a greater opportunity for nearer-term commercialization.

Oxycyte

Our Oxycyte oxygen carrier product is a PFC-based oil in water emulsion, which is provided to the patient intravenously. The physical-chemical properties of PFCs enable our product to concentrate oxygen from the lungs and transport it through the body releasing it along the way. Over a period of days Oxycyte is gradually exhaled through the lungs during the normal process of respiration. Oxycyte requires no cross matching, so it is immediately available and compatible with all patients’ blood types. Oxycyte has an extended shelf life compared to blood and is provided as a sterile emulsion ready for intravenous administration. Because it contains no biological components, there is no risk of transmission of blood-borne viruses from human blood products. Further, since Oxycyte is based on readily available inert compounds, we believe it can be manufactured on a cost-effective basis in amounts sufficient to meet demand.

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

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

Dermacyte

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

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

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

Dermatology

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

Wundecyte

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

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

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes in critical accounting policies during the three months ended January 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, 2011.

Financial Overview

Results of Operations- Comparison of the Three and Nine months Ended January 31, 2012 and 2011

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

	Three months ended January 31,					Increase/ (Decrease)			% Increase/ (Decrease)		Nine months ended January 31,					Increase/ (Decrease)			% Increase/ (Decrease)
	2012		2011								2012		2011

Wholesale & retail revenue	$	4,673	$	52,562		$	(47,889	)		(91) %	$	65,565	$	95,543		$	(29,978	)		(31) %
Distibutor revenue		-		-			-			— %		26,000		-			26,000			— %
Product revenue		4,673		52,562			(47,889	)		(91) %		91,565		95,543			(3,978	)		(4) %
Cost of sales		2,512		25,973			(23,461	)		(90) %		47,616		36,718			10,898			30 %
Gross profit		2,161		26,589			(24,428	)		(92) %		43,949		58,825			(14,876	)		(25) %

Government grant revenue		146,101		-			146,101			— %		224,345		-			224,345			— %
Total net revenue		148,262		26,589			121,673			458 %		268,294		58,825			209,469			356 %

Operating expenses:
Sales and Marketing		826		298,472			(297,646	)		(100) %		364,194		512,975			(148,781	)		(29) %
General and administrative		1,421,277		1,984,351			(563,074	)		(28) %		4,519,709		5,164,130			(644,421	)		(12) %
Research and development		599,935		498,521			101,414			20 %		1,740,473		2,216,413			(475,940	)		(21) %
Total Operating expenses		2,022,038		2,781,344			(759,306	)		(27) %		6,624,376		7,893,518			(1,269,142	)		(16) %

Net operating loss		1,873,776		2,754,755			(880,979	)		(32) %		6,356,082		7,834,693			(1,478,611	)		(19) %

Interest expense		5,341,988		43,093			5,298,895			12,296 %		6,649,554		49,682			6,599,872			13,284 %
Other expense (income)		82,850		(253,661	)		336,511			(133) %		91,970		(285,952	)		377,922			(132) %
Net loss	$	7,298,614	$	2,544,187		$	4,754,427			187 %	$	13,097,606	$	7,598,423		$	5,499,183			72 %

Product Revenue and Gross Profit

We generate product revenue from the sale of Dermacyte through on-line retailers, physician and medical spa facilities, and through distribution agreements with unrelated companies. Product revenue, including percentage changes, for the three and nine months ended January 31, 2012 and 2011, respectively, are as follows:

	Three months ended January 31,				Increase/			% Increase/		Nine months ended January 31,				Increase/			% Increase/
	2012		2011		(Decrease)			(Decrease)		2012		2011		(Decrease)			(Decrease)

Wholesale & retail revenue	$	4,673	$	52,562	$	(47,889	)		(91) %	$	65,565	$	95,543	$	(29,978	)		(31) %
Distibutor revenue		-		-		-			— %		26,000		-		26,000			— %
Product revenue		4,673		52,562		(47,889	)		(91) %		91,565		95,543		(3,978	)		(4) %
Cost of sales		2,512		25,973		(23,461	)		(90) %		47,616		36,718		10,898			30 %
Gross profit		2,161		26,589		(24,428	)		(92) %		43,949		58,825		(14,876	)		(25) %

Product revenue decreased for the three months and nine months ended January 31, 2012 approximately $48,000 and $4,000, respectively, compared to the same periods in the prior year. During the three months ended January 31, 2012, we suspended our existing marketing program and focused our efforts on reformulating and repackaging our existing retail products. We had no active sales force during the period and our revenues earned during the period were primarily through on-line purchases.

Gross profit as a percentage of revenue was 46% and 48% for the three and nine months ended January 31, 2012, respectively, as compared to 51% and 62% for the three and nine months ended January 31, 2011. The decrease for the nine months ended January 31, 2012 was primarily due to sales through distribution channels.

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 the direct costs of labor, travel, and supplies, as well as the pass-through costs of subcontracts with third-party CROs.

	Three months January 31,				Increase/		% Increase/		Nine months January 31,				Increase/		% Increase/
	2012		2011		(Decrease)		(Decrease)		2012		2011		(Decrease)		(Decrease)
Government grant revenue	$	146,101	$	-	$	146,101		— %	$	224,345	$	-	$	224,345		— %

For the three and nine months ended January 31, 2012, we recorded approximately $146,000 and $224,000 in revenue under the grant program. This revenue was primarily the result of reimbursements for the direct labor costs, travel, and supplies associated with study design and initiation for a series of preclinical studies designed to enhance the safety and toxicity profile of Oxycyte.

Marketing and Sales Expenses

Marketing and sales expenses consisted primarily of personnel-related costs, including salaries, commissions, and the costs of marketing programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. Marketing and sales expenses and percentage changes for the three and nine months ended January 31, 2012 and 2011, respectively, are as follows:

	Three months January 31,				Increase/			% Increase/		Nine months January 31,				Increase/			% Increase/
	2012		2011		(Decrease)			(Decrease)		2012		2011		(Decrease)			(Decrease)
Marketing and sales expense	$	826	$	298,472	$	(297,646	)		(100) %	$	364,194	$	512,975	$	(148,781	)		(29) %

The decrease in marketing and sales expenses for the three and nine months ended January 31, 2012 compared to the same periods in the prior year were driven by our decision to suspend our existing marketing program and focus our efforts on reformulating and repackaging our existing retail products.

We reduced the costs associated with direct marketing and advertising approximately $200,000 and $206,000 for the three and nine months ended January 31, 2012, respectively, compared to the same periods in the prior year. These costs include attendance at trade shows and conferences, fees paid to a third party public relations firm, the costs of product samples distributed to potential customers, and the costs of direct print and online advertisements.

-	We reduced travel and entertainment costs approximately $27,000 and $18,000 for the three and nine months ended January 31, 2012, respectively, compared to the same periods in the prior year.

-	We reduced compensation costs by approximately $70,000 during the three months ended January 31, 2012 compared to the same period in the prior year.

-	We incurred an increase in compensation costs of approximately $75,000 during the nine months ended January 31, 2012 compared to the same period in the prior year due to significantly higher headcount in the fourth quarter of the prior year and the first quarter of the current year.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation for executive, finance, legal and administrative personnel, including stock-based compensation. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, legal and accounting services, other professional services, and consulting fees. General and administrative expenses and percentage changes for the three and nine months ended January 31, 2012 and 2011, respectively, are as follows:

	Three months January 31,				Increase/			% Increase/		Nine months January 31,				Increase/			% Increase/
	2012		2011		(Decrease)			(Decrease)		2012		2011		(Decrease)			(Decrease)
General and administrative expense	$	1,421,277	$	1,984,351	$	(563,074	)		(28) %	$	4,519,709	$	5,164,130	$	(644,421	)		(12) %

The decrease in general and administrative expenses for the three months ended January 31, 2012 was driven primarily by a decrease in compensation expense, travel related expenses consulting costs and investor relations fees; partially offset by a increase in, legal and accounting fees.

-	We reduced compensation expenses approximately $875,000 compared to the same period in the prior year due to a reduction in headcount and the prior year severance accrual for a departed officer.

-	We reduced administrative travel costs by approximately $44,000 compared to the same period in the prior year due to a reduction in headcount and international travel.

-	We reduced consulting and Board of Director fees by approximately $60,000 compared to the same period in the prior year due to the reduction in our Board of Directors and fees paid to a third-party recruiter in the prior year.

We incurred an increase of approximately $485,000 in legal and accounting fees due primarily to $465,000 in fees incurred for the closing of the December 2011 preferred stock financing and an increase of approximately $35,000 in fees for general corporate matters offset by a reduction of approximately $15,000 in fees associated with our intellectual property.

The decrease in general and administrative expenses for the nine months ended January 31, 2012 was driven primarily by a decrease in compensation expense, travel related expense, investor relation fees and amortization of intangible assets; partially offset by an increase in legal fees and the severance accrual for a retired director.

-	We reduced compensation expenses approximately $1,348,000 compared to the same period in the prior year due to a reduction in headcount and the prior year severance accrual for a former officer.

-	We reduced administrative travel costs approximately $175,000 compared to the same period in the prior year due to a reduction in headcount and international travel.

-	We reduced depreciation and amortization costs approximately $81,000 compared to the same period in the prior year due to impairments to intangible assets recorded in the prior year.

-	We reduced investor relations costs by approximately $157,000 compared to the same period in the prior year due to a reduction in presentations and costs associated with international marketing firms.

We incurred an increase of approximately $907,000 in legal and accounting fees due primarily to $465,000 in fees incurred for the closing of the December 2011 preferred stock financing, and an increase of approximately $435,000 in accounting and legal fees associated with our filings and other corporate matters.

-	We incurred an increase in consulting and Board of Director fees of approximately $215,000 compared to the same period in the prior year due to the accrual of severance payments due to a retired Director and fees paid to a third-party recruiter.

Research and Development Expenses

Research and development expenses include, but are not limited to, (i) expenses incurred under agreements with CROs and investigative sites, which conduct our clinical trials and a substantial portion of our pre-clinical studies; (ii) the cost of manufacturing and supplying clinical trial materials; (iii) payments to contract service organizations, as well as consultants; (iv) employee-related expenses, which include salaries and benefits; and (v) facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, depreciation of leasehold improvements, equipment, laboratory and other supplies. All research and development expenses are expensed as incurred. Research and development expenses and percentage changes for the three and nine months ended January 31, 2012 and 2011, respectively, are as follows:

	Three months January 31,				Increase/		% Increase/		Nine months January 31,				Increase/			% Increase/
	2012		2011		(Decrease)		(Decrease)		2012		2011		(Decrease)			(Decrease)
Research and development expense	$	599,935	$	498,521	$	101,414		20 %	$	1,740,473	$	2,216,413	$	(475,940	)		(21) %

The increase in research and development expenses for the three months ended January 31, 2012 was driven primarily by an increase in compensation, consulting fees, product development costs, and lab costs; partially offset by a decrease in CRO costs.

-	We incurred an increase in compensation expenses of approximately $18,000 compared to the same period in the prior year due to personnel additions to manage clinical and preclinical trials and increased laboratory activities.

-	We incurred an increase of approximately $136,000 in Oxycyte development costs compared to the same period in the prior year due to costs incurred for scale-up manufacturing and preclinical studies.

-	We incurred an increase of approximately $52,000 in Dermacyte development costs compared to the same period in the prior year due to costs incurred for clinical trials for dermatologic indications.

-	We incurred an increase of approximately $70,000 in consulting costs compared to the same period in the prior year primarily due to the consulting agreement with our retired Chief Operating Officer entered into in the fourth quarter of the prior year.

-	We incurred an increase of approximately $21,000 in lab operating costs compared to the same period in the prior year due to costs incurred to scale up activities in our California lab to support manufacturing and clinical trials.

-	We reduced CRO costs approximately $188,000 compared to the same period in the prior year due to the completion of the first cohort of the TBI trials in the prior year and a $42,000 credit for overbillings recognized in the current period.

The decrease in research and development expenses for the nine months ended January 31, 2012 was driven primarily by a reduction in CRO costs, Oxycyte development costs and travel costs; partially offset by an increase in consulting fees, Dermacyte development costs and lab operating costs.

-	We reduced CRO costs approximately $675,000 compared to the same period in the prior year due to the completion of the first cohort of the TBI trials in the prior year and a $42,000 credit for overbillings recognized in the current period.

-	We reduced travel costs by approximately $50,000 compared to the same period in the prior year due to a reduction in headcount, conferences and seminars, and international travel.

-	We reduced Oxycyte development costs by approximately $74,000 compared to the same period in the prior year due to a credit for billings under a prior year development agreement offset by an increase in costs incurred for scale-up manufacturing and preclinical studies.

-	We incurred an increase of approximately $188,000 in consulting costs compared to the same period in the prior year primarily due to the consulting agreement with our retired Chief Operating Officer entered into in the fourth quarter of the prior year.

-	We incurred an increase of approximately $114,000 in Dermacyte development costs compared to the same period in the prior year due to costs incurred for reformulating our existing cosmetic product line and clinical trials for dermatologic indications.

-	We incurred an increase of approximately $21,000 in lab operating costs compared to the same period in the prior year due to costs incurred to scale up activities in California lab to support manufacturing and clinical trials.

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

Other Income and Expense

Other income and expenses and percentage changes for the three and nine months ended January 31, 2012 and 2011, respectively, are as follows:

	Three months January 31,					Increase/		% Increase/		Nine months January 31,					Increase/		% Increase/
	2012		2011			(Decrease)		(Decrease)		2012		2011			(Decrease)		(Decrease)
Other expense (income), net	$	82,850	$	(253,661	)	$	336,511		(133) %	$	91,970	$	(285,952	)	$	377,922		(132) %

During the three and nine months ended January 31, 2012, other expense increased approximately $337,000 and $378,000, respectively, compared to the same period in the prior year.

During the three months ended January 31, 2012, we wrote-off of approximately $85,000 in receivables from Glucometrics, Inc. for reimbursable patent fees. Glucometrics, Inc. previously held license rights for the use of our patents related to glucose monitoring technology. The license agreement was terminated in the fourth quarter of fiscal year 2011 while they attempted to restructure and obtain additional financing to support the development of their technology. Their restructuring efforts failed during the three months ended January 31, 2012 and management determined the receivable to be uncollectible in the current period.

-	During the three months ended January 31, 2012, other income decreased approximately $250,000. This decrease is attributed to an award of $244,489 under the Patient Protection and Affordable Care Act of 2010, or PPACA, received in the third fiscal quarter of the prior year.

Interest Expense

Interest expense and percentage changes for the three and nine months ended January 31, 2012 and 2011, respectively, are as follows:

	Three months January 31,				Increase/		% Increase/		Nine months January 31,				Increase/		% Increase/
	2012		2011		(Decrease)		(Decrease)		2012		2011		(Decrease)		(Decrease)
Interest expense	$	5,341,988	$	43,093	$	5,298,895		12296 %	$	6,649,554	$	49,682	$	6,599,872		13284 %

During the three and nine months ended January 31, 2012, interest expense increased approximately $5.3 million and $6.6 million, respectively, compared to the same period in the prior year.

-	During the three and nine months ended January 31, 2012, we recognized approximately $2.4 million and $2.8 million, respectively, for the accretion of the final payment premium due on the long-term notes payable as further described in Note 5 above.

-	During the three and nine months ended January 31, 2012, we recognized approximately $600,000 and $1.5 million, respectively, for the accretion of the discount and amortization of deferred financing cost attributed to the Convertible notes issued in June 2011 as further described in Note 5 above.

-	During the three months ended January 31, 2012, we recognized approximately $1.2 million in interest expense for the computed fair value of warrants issued with the Series A Convertible Preferred Stock purchase agreement as further described in Note 6 above.

During the three months ended January 31, 2012, we recognized approximately $200,000 in non-cash interest expense for the conversion of dividends and preferred stock into common stock and approximately $1.0 million in non-cash interest expense for the change in computed fair value of the outstanding Series A Convertible Preferred Stock as further described in Note 6 above.

Liquidity, Capital Resources and Plan of Operation

We have incurred losses since our inception and as of January 31, 2012 we had an accumulated deficit of $105 million. We will continue to incur losses until we generate sufficient revenue to offset our expenses, and we anticipate that we will continue to incur net losses for at least the next several years. We expect to incur increased expenses related to our development and potential commercialization of Oxycyte and other product candidates and, as a result, we will need to generate significant net product sales, royalty and other revenues to achieve profitability.

Liquidity

We have financed our operations since September 1990 through the issuance of debt and equity securities and loans from stockholders. We had $4,332,875 and $1,632,211of total current assets and working capital of $(1,476,098) and $(551,033) as of January 31, 2012 and April 30, 2011, respectively. Our practice is to invest excess cash, where available, in short-term money market investment instruments.

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

On December 8, 2011, we entered into a Securities Purchase Agreement with certain institutional investors, consisting of an aggregate $7.5 million of Series A Convertible Preferred Stock and warrants to purchase approximately 1,689,192 shares of common stock (“the Offering”). The Offering is scheduled to fund in two installments. The first installment of the Offering was completed on December 12, 2011. At closing, the investors purchased $3.5 million of newly issued Preferred Stock and related warrants. Subject to our meeting certain conditions, including conditions that are outside our control, there is a second mandatory installment whereby we may issue up to an additional $4 million of Preferred Stock and warrants. The second installment would fund when the first installment is fully redeemed, at approximately the six month anniversary of the initial closing.

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

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

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

Based on our working capital at January 31, 2012 and the net proceeds from the registered direct offering described in Note 9 of our financial statements above, we believe we have sufficient capital on hand to continue to fund operations through July 31, 2012. In the event that we satisfy all of the equity conditions under the Offering described above and in further detail in Note 6, we believe the funds received under the second closing, in addition to our working capital at January 31, 2012, will be sufficient to fund operations through January 31, 2013.

Cash Flows

The following table shows a summary of our cash flows for the nine months ended January 31, 2012 and 2011:

	For the nine months ended January 31,
	2012			2011
Net cash used in operating activities		(6,857,458	)		(6,652,528	)
Net cash used in investing activities		(207,200	)		(370,627	)
Net cash provided by financing activities		9,394,216			6,912,789

Net cash used in operating activities. Net cash used in operating activities was $6.9 million for the nine months ended January 31, 2012 compared to net cash used in operating activities of $6.6 million for the nine months ended January 31, 2011. The increase of cash used for operating activities was due primarily to costs incurred in closing on the December Preferred Stock Securities Purchase Agreement partially offset by an increase in revenue earned under our government grant and reduced operating costs.

Net cash used in investing activities. Net cash used in investing activities was $207,200 for the nine months ended January 31, 2012 compared to net cash used in investing activities of $370,627 for the nine months ended January 31, 2011. The decrease of cash used for investing activities was due to a reduction in capitalized legal fees incurred for filing and maintaining our patent portfolio and a reduction in capital equipment expenditures.

Net cash provided by financing activities. Net cash provided by financing activities was $9.4 million for the nine months ended January 31, 2012 compared to net cash provided by financing activities of $6.9 million for the nine months ended January 31, 2011. Net cash provided by financing activities for the nine months ended January 31, 2012 was due primarily to net proceeds of approximately $4.5 million received from the issuance of the convertible notes in June 2011, approximately $0.6 million from the exercise of outstanding warrants in August 2011, and approximately $0.7 million proceeds from the issuance of promissory notes payable in May 2011 under the Note Purchase Agreement with Vatea Fund and approximately $3.5 million received from the closing of the Preferred Stock Securities Purchase Agreement in December 2011.

Operating Capital and Capital Expenditure Requirements

Our future capital requirements will depend on many factors that include, but are not limited to the following:

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

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

·	delays that may be caused by changing regulatory requirements;

·	the number of product candidates that we pursue;

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

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

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

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

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

·	the possible costs of litigation.

As a result of our recently completed financing, described in Note 6 above, we believe that our existing cash and cash equivalents will be sufficient to fund our projected operating requirements through July 31, 2012. In the event that we satisfy all of the equity conditions under the Certificate of Designation, we believe the funds received under the second closing, in addition to our working capital at January 31, 2012, will be sufficient to fund operations through January 31, 2013.

We will need substantial additional capital in the future in order to complete the development and commercialization of Oxycyte and to fund the development and commercialization of our future product candidates. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Such funding, if needed, may not be available on favorable terms, if at all. In the event we are unable to obtain additional capital, we may delay or reduce the scope of our current research and development programs and other expenses.

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

Recent Accounting Pronouncements

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

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

Off-Balance Sheet Arrangements

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We believe that there have been no significant changes in our market risk exposures for the three and nine months ended January 31, 2012.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by paragraph (b) of Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, for the Exchange Act, our management, including our Interim Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of January 31, 2012, the period covered by this report in that they provide reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the SEC.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We routinely review our internal controls over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal controls over financial reporting on an ongoing basis and will take action as appropriate.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

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

We depend on the services of a limited number of key personnel.

Our success is highly dependent on the continued services of a limited number of scientists and support personnel. The loss of any of these individuals could have a material adverse effect on us. In addition, our success will depend, among other factors, on the recruitment and retention of additional highly skilled and experienced management and technical personnel. There is a risk that we will not be able to retain existing employees or to attract and retain additional skilled personnel on acceptable terms given the competition for such personnel among numerous large and well-funded pharmaceutical and health care companies, universities, and non-profit research institutions, which could negatively affect our financial condition, results of operations and cash flows. As of August 24, 2011, Michael B. Jebsen is serving as both our Chief Financial Officer and our interim Chief Executive Officer. While we continue to search for a permanent Chief Executive Officer, we can give no assurances as to when, or if, we will locate a suitable candidate, and we may be adversely affected if we are unable to identify a qualified permanent Chief Executive Officer in a timely manner.

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

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

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

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

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

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

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

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

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

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

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the fiscal quarter ended January 31, 2012, we issued 83,241 shares of unregistered common stock as payment of $187,708 of accrued interest 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 of 1933.

The following table lists all repurchases during the third quarter of fiscal 2012 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
Period	Total Number of Shares Purchased(1)		Average Price Paid per Share(2)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
November 1, 2011 – November 30, 2011		279	$	2.11		-		-
December 1, 2011 – December 31, 2011		5,345		2.09		-		-
January 1, 2012 – January 31, 2012		834		1.68		-		-
Total		6,458	$	2.04		-		-

___________

(1)	Represents shares repurchased in connection with tax withholding obligations under the 2008 Stock Option Plan.

(2)	Represents the average price paid per share for the shares repurchased in connection with tax withholding obligations under the 2008 Stock Option Plan.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

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

____________

(1)	This document was filed as an exhibit to the quarterly report on Form 10-Q filed by Oxygen Biotherapeutics with the SEC on December 15, 2011, and is incorporated herein by reference.

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

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

(4)

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

SIGNATURES

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

	OXYGEN BIOTHERAPEUTICS, INC.

Date: March 15, 2012	By:	/s/ Michael B. Jebsen
		Michael B. Jebsen
		Interim Chief Executive Officer, President and Chief Financial Officer
		(Principal Executive Officer)