TENAX THERAPEUTICS, INC. - Quarter Report: 2013 July (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 July 31, 2013

¨	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) 855-2100

(Registrant’s telephone number, including area code)

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

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

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


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

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

As of September 13, 2013, the registrant had outstanding 5,051,081 shares of Common Stock.

TABLE OF CONTENTS

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Balance Sheets (Unaudited) as of July 31, 2013 and April 30, 2013	2
	Statements of Operations (Unaudited) for the Three Months Ended July 31, 2013 and 2012	3
	Statements of Cash Flows (Unaudited) for the Three Months Ended July 31, 2013 and 2012	4
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OXYGEN BIOTHERAPEUTICS, INC.

(a development stage enterprise)

BALANCE SHEETS

	July 31, 2013			April 30, 2013
	(Unaudited)

ASSETS
Current assets
Cash and cash equivalents	$	4,073,041		$	783,528
Accounts receivable		96,786			445,237
Government grant receivable		23,789			96,226
Inventory		98,936			99,204
Prepaid expenses		124,440			247,646
Other current assets		169,591			170,410
Total current assets		4,586,583			1,842,251
Property and equipment, net		182,769			205,389
Debt issuance costs, net		117,889			150,043
Intangible assets, net		943,175			924,698
Other assets		58,262			58,262
Total assets	$	5,888,678		$	3,180,643

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable	$	969,568		$	977,162
Accrued liabilities		319,316			874,876
Current portion of notes payable, net		3,425,942			57,539
Total current liabilities		4,714,826			1,909,577
Other liabilities		43,728			54,660
Long-term portion of notes payable, net		-			2,994,442
Total liabilities		4,758,554			4,958,679


Commitments and contingencies; see Note 7.
Stockholders' equity (deficit)
Preferred stock, undesignated, authorized 9,985,031 and 9,990,400 shares; respectively. See Note 5 and Note 8.		-			-
Series B Preferred stock, par value $.0001, issued 2,100 shares; outstanding 133 and 987, respectively. See Note 8		1			1
Series C Preferred stock, par value $.0001, issued 5,369 shares; outstanding 4,425 and 0, respectively. See Note 8		1			-
Common stock, par value $.0001 per share; authorized 400,000,000 shares; issued and outstanding 3,062,190 and 1,930,078, respectively		306			193
Additional paid-in capital		120,419,172			115,265,854
Deficit accumulated during the development stage		(119,289,356	)		(117,044,084	)
Total stockholders’ equity (deficit)		1,130,124			(1,778,036	)
Total liabilities and stockholders' equity (deficit)	$	5,888,678		$	3,180,643

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 July 31,			Three months ended July 31,
	2013			2013			2012
	(Unaudited)			(Unaudited)			(Unaudited)

Product revenue	$	598,331		$	35,394		$	11,458
Cost of sales		380,089			27,510			5,911
Net product revenue		218,242			7,884			5,547
Government grant revenue		1,613,791			157,920			266,549
Total net revenue		1,832,033			165,804			272,096

Operating expenses
Selling, general, and administrative		51,567,733			982,521			1,262,790
Research and development		25,304,021			772,893			637,272
Restructuring expense		220,715			-			47,476
Loss on impairment of long-lived assets		390,970			-			-
Total operating expenses		77,483,439			1,755,414			1,947,538

Net operating loss		75,651,406			1,589,610			1,675,442

Interest expense		44,617,822			655,803			1,925,903
Loss on extinguishment of debt		250,097			-			-
Other (income) expense		(1,229,969	)		(141	)		(14,803	)
Net loss	$	119,289,356		$	2,245,272		$	3,586,542

Preferred stock dividend		3,052,622			2,094,551			-
Net loss attributable to common stockholders	$	122,341,978		$	4,339,823		$	3,586,542


Net loss per share, basic				$	(2.06	)	$	(2.38	)
Weighted average number of common shares outstanding, basic					2,102,771			1,509,361
Net loss per share, diluted				$	(3.36	)	$	(4.30	)
Weighted average number of common shares outstanding, diluted					2,210,251			1,618,106

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 July 31,			Three months ended July 31,
	2013			2013			2012
	(Unaudited)			(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(119,289,356	)	$	(2,245,272	)	$	(3,586,542	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		2,256,912			37,300			37,091
Amortization of deferred compensation		336,750			-			-
Interest on debt instruments		44,180,647			628,321			1,925,352
Loss on debt settlement and extinguishment		163,097			-			-
Loss on impairment, disposal and write down of long-lived assets		826,846			-			-
Issuance and vesting of compensatory stock options and warrants		8,408,999			34,071			18,242
Issuance of common stock below market value		695,248			-			-
Issuance of common stock as compensation		881,051			13,261			75,405
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		(360,240	)		679,044			(168,034	)
Inventory		210,786			268			(35,161	)
Accounts payable and accrued liabilities		1,302,153			(710,135	)		120,769
Net cash used in operating activities		(58,784,977	)		(1,563,142	)		(1,612,878	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(1,778,942	)		-			(12,719	)
Proceeds from the sale of property and equipment		8,307			-			-
Capitalization of patent costs and license rights		(1,930,084	)		(33,156	)		(21,409	)
Net cash used in investing activities		(3,700,719	)		(33,156	)		(34,128	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock and exercise of stock options and warrants, net of related expenses and payments		44,478,293			-			-
Repurchase of outstanding warrants		(3,216,520	)		-			-
Proceeds from stockholder notes payable		977,692			-			-
Proceeds from issuance of notes payable, net of issuance costs		7,621,192			-			-
Proceeds from convertible notes, net of issuance costs		13,321,447			-			-
Proceeds for issuance of convertible preferred stock		12,771,333			4,920,183			2,500,000
Payments on notes - short-term		(1,394,700	)		(34,372	)		(41,736	)
Payments on notes - long-term		(8,000,000	)		-			-
Net cash provided by financing activities		66,558,737			4,885,811			2,458,264

Net change in cash and cash equivalents		4,073,041			3,289,513			811,258
Cash and cash equivalents, beginning of period		-			783,528			1,879,872
Cash and cash equivalents, end of period	$	4,073,041		$	4,073,041		$	2,691,130

Cash paid for:
Interest	$	294,909		$	27,483		$	551
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 three months ended July 31, 2013:

(1) The Company issued 4,123 shares of restricted common stock for the payment of interest accrued on convertible notes. The shares were issued at a conversion price of $45.10 for the payment of $185,917 interest payable on convertible notes with a gross carrying value of $4,900,000.

(2) The Company issued 120,944 shares of its common stock for the payment of $226,560 of dividends on the Series C Convertible Preferred stock.

Non-cash financing activities during the three months ended July 31, 2012:

(2) The Company issued 61,713 shares of its common stock to redeem 1,835 shares of convertible preferred stock with a fair value of $2,180,218.

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.

Reverse Stock Split

On May 10, 2013, the Company filed a Certificate of Amendment to the Company’s Certificate of Incorporation to effect a reverse stock split of the Company’s common stock at a ratio of twenty-to-one with the Secretary of State of the State of Delaware. The Amendment did not change the number of authorized shares, or the par value, of the Company’s common stock. The Amendment provides that every twenty shares of the Company’s issued and outstanding common stock were automatically combined into one issued and outstanding share of the Company’s common stock. All shares and per share amounts in the financial statements and accompanying notes have been retroactively adjusted to give effect to the reverse stock split.

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 $119 million as of July 31, 2013, and stockholders’ equity (deficit) of $1,130,124 and $(1,778,036) as of July 31, 2013 and April 30, 2013, respectively. The Company requires substantial additional funds to complete clinical trials and pursue regulatory approvals. Management is actively seeking additional sources of equity and/or debt financing; however, there is no assurance that any additional funding will be available on commercially acceptable terms, or at all.

In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying July 31, 2013 balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, to maintain present financing, and to generate cash from future operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Use of Estimates

In preparing the unaudited financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the unaudited financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.

On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s results of operations and financial position could be materially impacted

Net Loss per Share

Basic loss per share, which excludes antidilutive securities, is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding for that particular period. In contrast, diluted loss per share considers the potential dilution that could occur from other equity instruments that would increase the total number of outstanding shares of common stock. Such amounts include shares potentially issuable under outstanding options, warrants, preferred stock and convertible notes. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows.

	Quarter ended July 31,
	2013			2012
Historical net loss per share:
Numerator
Net loss, attributable to common stockholders	$	(4,339,823	)	$	(3,586,542	)
Less: Effect of amortization of interest expense on convertible notes		(3,080,177	)		(3,377,063	)
Net loss attributable to common stockholders (diluted)		(7,420,000	)		(6,963,605	)
Denominator
Weighted-average common shares outstanding		2,102,771			1,509,361
Effect of dilutive securities		107,480			108,745
Denominator for diluted net loss per share		2,210,251			1,618,106

Basic net loss per share	$	(2.06	)	$	(2.38	)
Diluted net loss per share	$	(3.36	)	$	(4.30	)

The following outstanding options, warrants, preferred stock and convertible note shares were excluded from the computation of basic and diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect.

	Quarter ended July 31,
	2013		2012

Warrants to purchase common stock		3,564,636		287,943
Convertible preferred shares outstanding		2,417,101		71,262
Options to purchase common stock		51,103		18,725
Restricted stock grants		13,975		6,194
Convertible note shares outstanding		-		98

Fair Value

The Company records its financial assets and liabilities in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 Fair Value Measurements. The Company's balance sheet includes the following financial instruments: cash and cash equivalents, short-term notes payable, convertible preferred stock and convertible notes. The Company considers the carrying amount of its cash and cash equivalents and short-term notes payable to approximate fair value due to the short-term nature of these instruments. The Company did not elect the fair value option and records the carrying value of its convertible notes at amortized cost in accordance with ASC 470-20.

Accounting for fair value measurements involves a single definition of fair value, along with a conceptual framework to measure fair value, with a fair value defined as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." The fair value measurement hierarchy consists of three levels:

Level one	Quoted market prices in active markets for identical assets or liabilities;
Level two	Inputs other than level one inputs that are either directly or indirectly observable, and
Level three	Unobservable inputs developed using estimates and assumptions; which are developed by the reporting entity and reflect those assumptions that a market participant would use.

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 .

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires entities to present in the financial statements an unrecognized tax benefit, or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except to the extent such items are not available or not intended to be used at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position. In such instances, the unrecognized tax benefit is required to be presented in the financial statements as a liability and not be combined with deferred tax assets. This guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to 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.

Inventories are recorded at cost using the First-In-First-Out ("FIFO") method. Ending inventories are comprised of raw materials and direct costs of manufacturing and are valued at the lower of cost or market. Inventories consisted of the following as of July 31, 2013 and April 30, 2013:

	July 31, 2013		April 30, 2013
Raw materials	$	28,779	$	28,779
Finished goods		70,157		70,425
	$	98,936	$	99,204

Other current assets

Other current assets consist of the following as of July 31, 2013 and April 30, 2013:

	July 31, 2013		April 30, 2013
R&D materials	$	106,573	$	159,892
Deferred cost of sales		52,500		-
Other		7,090		7,090
Dermacyte samples		3,428		3,428
	$	169,591	$	170,410

Property and equipment, net

Property and equipment consist of the following as of July 31, 2013 and April 30, 2013:

	July 31, 2013			April 30, 2013
Laboratory equipment	$	768,252		$	768,252
Computer equipment and software		134,311			135,697
Office furniture and fixtures		130,192			130,192
		1,032,755			1,034,141
Less: Accumulated depreciation and amortization		(849,986	)		(828,752	)
	$	182,769		$	205,389

Depreciation and amortization expense was approximately $23,000 and $24,000 for the three months ended July 31, 2013 and 2012, respectively.

Accrued liabilities

Accrued liabilities consist of the following as of July 31, 2013 and April 30, 2013:

	July 31, 2013		April 30, 2013
Employee related	$	95,051	$	66,632
Convertible note interest payable		61,500		59,583
Government grant expenses		51,385		-
Deferred revenue		50,937		185,068
Restructuring liability		43,728		43,728
Other operating costs		16,715		19,865
Accrued settlement costs		-		500,000
	$	319,316	$	874,876

Other liabilities

As further discussed in Note 10 below, following the closing of the Company’s research and development facility in California, the Company entered into a long-term sublease agreement with an unrelated third party covering the vacated space which extends through the termination date. The Company recorded a liability for the remaining lease payments due under its long-term, non-cancelable operating lease for this facility, net of sublease payments, which expires in July 2015. The table below summarizes the net future minimum payments due under this lease agreement.

	July 31, 2013			April 30, 2013
Net non-cancelable operating lease obligation	$	87,456		$	98,388
Less: current portion		(43,728	)		(43,728	)
Long-term portion of net non-cancelable operating lease obligation	$	43,728		$	54,660

NOTE 4. INTANGIBLE ASSETS

The following table summarizes the Company’s intangible assets as of July 31, 2013:

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

Patents	$	644,597		11.1	$	-	$	(265,698	)	$	378,899
License Rights		583,548		15.4		-		(125,448	)		458,100
Trademarks		106,176		N/A		-		-			106,176
Total	$	1,334,321			$	-	$	(391,146	)	$	943,175

The following table summarizes the Company’s intangible assets as of April 30, 2013:

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

Patents	$	645,918		11.2	$	(27,279	)	$	(258,499	)	$	360,140
License Rights		572,370		15.6		-			(117,969	)		454,401
Trademarks		110,157		N/A		-			-			110,157
Total	$	1,328,445			$	(27,279	)	$	(376,468	)	$	924,698

For the three months ended July 31, 2013 and 2012, the aggregate amortization expense on the above intangibles was approximately $15,000 and $13,000, respectively.

Patents and License Rights

The Company currently holds, has filed for, or owns exclusive rights to, U.S. and worldwide patents covering 13 various methods and uses of its perfluorocarbon (“PFC”) technology. It capitalizes amounts paid to third parties for legal fees, application fees and other direct costs incurred in the filing and prosecution of its patent applications. These capitalized costs are amortized on a straight-line method over their useful life or legal life, whichever is shorter. The Company capitalized patent costs of approximately $37,000 and $20,000, for the three months ended July 31, 2013 and 2012, respectively.

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. The Company capitalized trademark costs of approximately $0 and $1,000, for the three months ended July 31, 2013 and 2012, respectively.

NOTE 5. SERIES A CONVERTIBLE PREFERRED STOCK

Under the Company’s Certificate of Incorporation, the Board of Directors is authorized, without further stockholder action, to provide for the issuance of up to 10,000,000 shares of preferred stock, par value $0.0001 per share, in one or more series, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof.

On December 8, 2011, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware designating 7,500 shares of its authorized but unissued shares of preferred stock as Series A Convertible Preferred Stock.

Series A Convertible Preferred Stock

On December 12, 2011, the Company sold 3,500 units for net proceeds of approximately $3.2 million. Each unit sold consisted of (i) one share of the Company’s Series A Convertible Preferred Stock and (ii) a warrant representing the right to purchase 11.275 shares of Common Stock (the “2011 Warrants”), at a price of $1,000 per unit, less issuance costs. The shares of Series A Convertible Preferred Stock were immediately convertible and the 2011 Warrants are exercisable on the one-year anniversary of the closing date.

On June 15, 2012, the Company sold an additional 2,500 units for net proceeds of approximately $2.3 million. Each unit sold consisted of (i) one share of the Company’s Series A Convertible Preferred Stock and (ii) a 2011 Warrant, at a price of $1,000 per unit, less issuance costs. The shares of Series A Convertible Preferred Stock were immediately convertible and the 2011 Warrants are exercisable beginning on the one-year anniversary of the closing date.

Interest expense on our outstanding Series A Convertible Preferred Stock was approximately $0 and $1.3 million for the three months ended July 31, 2013 and 2012, respectively. The recorded interest for the prior period was comprised of approximately $657,000 for the calculated fair value of the warrants issued with the Series A Convertible Preferred Stock, $266,000 for the excess of the fair-value of the shares issued upon conversion over the fair value of the Series A Convertible Preferred Stock and $204,000 for the fair value adjustment to the remaining Series A Convertible Preferred Stock outstanding at July 31, 2012.

Interest expense recorded for the payment of dividends on the Series A Convertible Preferred Stock was approximately $0 and $171,000 for the three months ended July 31, 2013 and 2012, respectively.

No Series A Convertible Preferred Stock was outstanding during the three months ended July 31, 2013.

NOTE 6. NOTES PAYABLE

The following table summarizes our outstanding notes payable as of July 31, 2013 and April 30, 2012:

	July 31, 2013			April 30, 2013
Current portion of notes payable, net	$	23,167		$	57,539
Current portion of convertible notes payable		4,900,001			-
Less: Unamortized discount		(1,497,226	)
Current portion of notes payable, net	$	3,425,942		$	57,539

Long-term portion of convertible notes payable	$	-		$	4,900,001
Less: Unamortized discount		-			(1,905,559	)
Long-term portion of notes payable, net	$	-		$	2,994,442

Convertible Note

On June 29, 2011, the Company issued a note (the “June Note”) with a principal amount of approximately $300,000 and Warrants to purchase 6,652 shares of Common Stock. On July 1, 2011, the Company issued a separate note (together with the June Note, the “Notes”) with a principal amount of $4,600,000 and warrants to purchase 101,996 shares of Common Stock. The aggregate gross proceeds to the Company from the offering were approximately $4.9 million, excluding any proceeds from the exercise of any warrants. The aggregate placement agent fees were $297,000 and legal fees associated with the offering were $88,839. These costs have been capitalized as debt issue costs and will be amortized as interest expense over the life of the Notes. The Company recorded amortization of debt issue costs of $32,154 for each of the three months ended July 31, 2013 and 2012.

Interest on the Notes accrues at a rate of 15% annually and will be paid in quarterly installments commencing on the third month anniversary of issuance. The Notes will mature 36 months from the date of issuance. The Notes may be converted into shares of Common Stock at a conversion price of $45.10 per share (subject to adjustment for stock splits, dividends and combinations, recapitalizations and the like) (the "Conversion Price") at any time, in whole or in part, at any time at the option of the holders of the Notes. The Notes also will automatically convert into shares of Common Stock at the Conversion Price at the election of a majority-in-interest of the holders of notes issued under the purchase agreement or upon the acquisition or sale of all or substantially all of the assets of the Company. The Company may make each applicable interest payment or payment of principal in cash, shares of Common Stock at the Conversion Price, or any combination thereof. The Company may elect to prepay all or any portion of the Notes without prepayment penalties only with the approval of a majority-in-interest of the note holders under the purchase agreement at the time of the election. The Notes contain various events of default such as failing to timely make any payment under the Note when due, which may result in all outstanding obligations under the Note becoming immediately due and payable. The Company recorded interest expense of $628,321 for the three months ended July 31, 2013 and 2012, respectively.

The total value allocated to the warrants was approximately $1,960,497 and was recorded as a debt discount against the proceeds of the notes. In addition, the beneficial conversion features related to the notes were determined to be approximately $2,939,504. As a result, the aggregate discount on the notes totaled $4,900,000, and is being amortized over term of the notes. The Company recorded interest expense for the amortization of debt discount of approximately $408,000 for each of the three months ended July 31, 2013 and 2012.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Agreement with Virginia Commonwealth University

In May 2008 the Company entered into a license agreement with Virginia Commonwealth University (“VCU”) whereby it obtained a worldwide, exclusive license to valid claims under three of the VCU's patent applications that relate to methods for non-pulmonary delivery of oxygen to tissue and the products based on those valid claims used or useful for therapeutic and diagnostic applications in humans and animals. The license includes the right to sub-license to third parties. The term of the agreement is the life of the patents covered by the patent applications unless the Company elects to terminate the agreement prior to patent expiration. Under the agreement the Company has an obligation to diligently pursue product development and pursue, at its own expense, prosecution of the patent applications covered by the agreement. As part of the agreement, the Company is required to pay to VCU nonrefundable payments upon achieving development and regulatory milestones. As of July 31, 2013, the Company has not met any of the developmental milestones.

The agreement with VCU also requires the Company to pay royalties to VCU at specified rates based on annual net sales derived from the licensed technology. Pursuant to the agreement, the Company must make minimum annual royalty payments to VCU totaling $70,000 as long as the agreement is in force. These payments are fully creditable against royalty payments due for sales and sublicense revenue earned during the fiscal year as described above. This fee is recorded as an other current asset and is amortized over the fiscal year. Amortization expense was $17,500 for the three months ended July 31, 2013 and 2012.

NOTE 8. STOCKHOLDERS’ EQUITY

Preferred Stock

Our Certificate of Incorporation authorizes us to issue 10,000,000 shares of $0.0001 par value preferred stock of which 9,990,400 are undesignated. On July 22, 2013, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware designating 5,369 shares of our authorized but unissued shares of preferred stock as Series C 8% Convertible Preferred Stock.

Series C 8% Convertible Preferred Stock

On July 21, 2013, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors providing for the issuance and sale by the Company (the “Offering”) of an aggregate of approximately $5.4 million of shares of the Company’s Series C 8% convertible preferred stock (the “Series C Stock”), which are convertible into a combined total of 2,753,348 shares of common stock (the “Conversion Shares”). In connection with the purchase of shares of Series C Stock in the Offering, each investor received a warrant to purchase a number of shares of common stock equal to 100% of the number of Conversion Shares at an exercise price equal to $2.60 (the “Warrants”). On July 23, 2013, the Company sold 5,369 units for net proceeds of approximately $4.9 million.

The table below sets forth a summary of the designation, powers, preferences and rights of the Series C 8% Convertible Preferred Stock.

Conversion	Subject to certain ownership limitations, the Series C Stock is convertible at any time at the option of the holder into shares of the Company’s common stock at a conversion ratio determined by dividing the stated value of the Series C Stock (or $1,000) by a conversion price of $1.95 per share. The conversion price is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. Until such time that for at least 25 trading days during any 30 consecutive trading days, the volume weighted average price of the Company’s common stock exceeds 250% of the initial conversion price, if the Company sells or grants any option to purchase or sell any common stock or common stock equivalents entitling any person to acquire shares of common stock at an effective price per share that is lower than the then conversion price, or the Base Conversion Price, then the conversion price shall be reduced to equal the Base Conversion Price
Dividends and Make-Whole Payment	Until the third anniversary of the date of issuance of the Series C Stock, each holder of the Series C Stock is entitled to receive dividends at the rate of 8% per annum of the stated value for each share of Series C Stock held by such holder payable quarterly on January 1, April 1, July 1 and October 1, beginning on the first such date after the original issue date, and on each dividend payment date. The Company can elect to pay the dividends in cash or in duly authorized, validly issued, fully paid and non-assessable shares of common stock, or a combination thereof. If the Company pays the dividends in shares of common stock, the shares used to pay the dividends will be valued at 90% of the average volume weighted average price for the 20 consecutive trading days ending on the trading day immediately prior to the applicable dividend payment date. From and after the third anniversary of the date of issuance of the Series C Stock, each holder of Series C Stock will be entitled to receive dividends equal, on an as-if-converted to common stock basis, to and in the same form as dividends actually paid on shares of common stock when, as, and if such dividends are paid on shares of common stock. The Company has never paid dividends on its common stock and the Company does not intend to do so for the foreseeable future. In the event a holder converts his, her or its Series C Stock prior to the third anniversary of the date of issuance of the Series C Stock, the Company must also pay to the holder in cash, or at the Company’s option in common stock valued as described above, or a combination of cash and shares of common stock, with respect to the Series C Stock so converted, an amount equal to $240 per $1,000 of the stated value of the Series C Stock, less the amount of any dividends paid in cash or in common stock on such Series C Stock on or before the date of conversion.
Liquidation	Upon any liquidation, dissolution or winding up of the Company after payment or provision for payment of debts and other liabilities of the Company, but before any distribution or payment is made to the holders of any junior securities, the holders of Series C Stock shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount equal to $1,000 per share, after which any remaining assets of the Company shall be distributed among the holders of the other class or series of stock in accordance with the Company’s Certificate of Incorporation.

Voting rights

Shares of Series C 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 Series C Stock will, among other things, be required to amend the terms of the Series C Stock.

The Company will not affect any conversion of the Series C Stock, nor shall a holder convert its shares of Series C Stock, to the extent that such conversion would cause the holder to have acquired, through conversion of the Series C Stock or otherwise, beneficial ownership of a number shares of Common Stock in excess of 4.99% of the Common Stock outstanding immediately preceding the conversion.

During the three months ended July 31, 2013, 944 shares of Series C Stock were converted into 484,099 shares of Common Stock, and the Company issued 120,944 shares of Common Stock in the form of Series C Stock dividends. As of July 31, 2013 there were 4,425 shares of Series C Stock outstanding.

Series B Convertible Preferred Stock

On February 22, 2013, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor providing for the issuance and sale by the Company (the “Offering”) of $1.6 million of shares of the Company’s Series B-1 convertible preferred stock (the “Series B-1 Stock”) and $0.5 million of shares of the Company's Series B-2 convertible preferred stock (the “Series B-2 Stock” and, together with the Series B-1 Stock, the “Series B Preferred Stock”) which are convertible into a combined total of 420,000 shares of common stock.

On February 27, 2013, the Company sold 2,100 units for net proceeds of approximately $1.9 million. Each unit sold consisted of (i) one share of the Company’s Series B Preferred Stock and (ii) a Warrant representing the right to purchase 300 shares of Common Stock at a price of $1,000 per unit, less issuance costs. The shares of Series B Preferred Stock were immediately convertible upon issuance.

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

Dividends	No dividends shall be paid on shares of Preferred Stock.
Conversion	Holders may elect to convert shares of Series B Preferred Stock into shares of Common Stock at the then-existing conversion price at any time. The initial conversion price is $5.00 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 and a one-time price reset following the effectiveness of a reverse split of the Company’s outstanding common stock.
Liquidation preference	In the event of the Company’s voluntary or involuntary dissolution, liquidation or winding up, each holder of Series B Preferred Stock will be entitled to be paid a liquidation preference equal to the initial stated value of such holder’s Series B Preferred Stock of $1,000 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 Series B Preferred Stock.
Voting rights	Shares of Series B 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 Series B Preferred Stock will among other things, be required to amend the terms of the Series B Preferred Stock.

The Company will not affect any conversion of the Series B Preferred Stock, nor shall a holder convert its shares of Series B Preferred Stock, to the extent that such conversion would cause the holder to have acquired, through conversion of the Series B Preferred Stock or otherwise, beneficial ownership of a number shares of Common Stock in excess of 4.99% of the Common Stock outstanding immediately preceding the conversion.

During the three months ended July 31, 2013, 854 shares of Series B Preferred Stock were converted into 497,045 shares of Common Stock. As of July 31, 2013 there were 133 shares of Series B Preferred Stock outstanding.

Common Stock

The Company’s Certificate of Incorporation authorizes it to issue 400,000,000 shares of $0.0001 par value common stock. As of July 31, 2013, there were 3,062,190 shares of common stock issued and outstanding.

Warrants

Series C Warrants

On July 23, 2013, the Company issued common stock warrants in connection with the issuance of Series C Stock (the “Series C Warrants”). As part of the offering, the Company issued 2,753,348 warrants at an exercise price of $2.60 per share and contractual term of 6 years. In accordance with ASC 815, these warrants are classified as equity and their relative fair-value of $1,867,991 was recognized as a deemed dividend on the Series C Stock during the three months ended July 31, 2013. The estimated fair value is determined using the Black-Scholes Option Pricing Model which is based on the value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock.

In connection with the Series C Stock Offering described above, the Company entered into a Placement Agency Agreement (the “Placement Agency Agreement”) with Ladenburg Thalmann & Co. Inc. (the “Placement Agent”) pursuant to which the Placement Agent agreed to act as the Company’s exclusive placement agent for the Offering. In accordance with the Placement Agency Agreement, on July 23, 2013 the Company issued to the Placement Agent warrants to purchase 53,539 shares of common stock at an exercise price of $2.4375 per share and a contractual term of 3 years.

The following table summarizes the Company’s warrant activity for the three months ended July 31, 2013:

	Warrants			Weighted Average Exercise Price
Outstanding at April 30, 2013		759,410		$	11.00
Issued		2,806,887			2.60
Forfeited		(1,661	)		126.00
Other		-			-
Outstanding at July 31, 2013		3,564,636		$	3.60

1999 Amended Stock Plan

In October 2000, the Company adopted the 1999 Stock Plan, as amended and restated on June 17, 2008 (the “Plan”). Under the Plan, with the approval of the Compensation Committee of the Board of Directors, the Company may grant stock options, restricted stock, stock appreciation rights and new shares of Common Stock upon exercise of stock options. On September 30, 2011, the Company’s stockholders approved an amendment to the Plan which increased the amount of shares authorized for issuance under the Plan to 300,000, up from 40,000 previously authorized. As of July 31, 2013 the Company had 230,901 shares of Common Stock available for grant under the Plan.

The following table summarizes the shares available for grant under the Plan for the three months ended July 31, 2013:

	Shares Available for Grant
Balances, at April 30, 2013		282,726
Options granted		(39,767	)
Options cancelled/forfeited		-
Restricted stock granted		(13,793	)
Restricted stock cancelled/forfeited		1,735
Balances, at July 31, 2013		230,901

Plan Stock Options

Stock options granted under the Plan may be either incentive stock options (“ISOs”), or nonqualified stock options (“NSOs”). ISOs may be granted only to employees. NSOs may be granted to employees, consultants and directors. Stock options under the Plan may be granted with a term of up to ten years and at prices no less than fair market value for ISOs and no less than 85% of the fair market value for NSOs. Stock options granted generally vest over one to three years.

The following table summarizes the outstanding stock options under the Plan for the three months ended July 31, 2013:

	Outstanding Options
	Number of Shares		Weighted Average Exercise Price
Balances, at April 30, 2013		11,336	$	57.00
Options granted		39,767	$	4.70
Balances, at July 31, 2013		51,103	$	16.30

The Company chose the “straight-line” attribution method for allocating compensation costs of each stock option over the requisite service period using the Black-Scholes Option Pricing Model to calculate the grant date fair value.

The Company used the following assumptions to estimate the fair value of options granted under its stock option plans for the three months ended July 31, 2013 and 2012:

	For the three months ended July 31
	2013			2012
Risk-free interest rate (weighted average)		1.11	%		1.31	%
Expected volatility (weighted average)		86.21	%		79.12	%
Expected term (in years)		7			7
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 Company’s historical experience 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 three months ended July 31, 2013 and 2012 is based on awards ultimately expected to vest, and it has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on the Company’s historical experience.

As of July 31, 2013, there were unrecognized compensation costs of approximately $114,890 related to non-vested stock option awards granted after May 1, 2004 that will be recognized on a straight-line basis over the weighted average remaining vesting period of 1.31 years.

Restricted Stock Grants

The following table summarizes the restricted stock grants under the Plan for the three months ended July 31, 2013.

	Outstanding Restricted Stock Grants
	Number of Shares			Weighted Average Grant Date Fair Value
Balances, at April 30, 2013		1,917		$	48.40
Restricted stock granted		13,793		$	4.51
Restricted stock vested		(1,384	)	$	35.75
Restricted stock cancelled		(351	)	$	28.82
Balances, at July 31, 2013		13,975		$	6.82

For the three months ended July 31, 2013, the Company recorded $14,282 as compensation expense for these restricted stock grants.

As of July 31, 2013, there were unrecognized compensation costs of approximately $54,474 related to the non-vested restricted stock grants that will be recognized on a straight-line basis over the remaining vesting period.

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 9. RESTRUCTURING EXPENSE

In May 2012, the Company decided to consolidate its operations and relocate its research and development function to North Carolina from Costa Mesa, California. To allow for this transition period, all existing development work had been completed and all of the manufacturing of the Company’s PFC-based products had been transferred to contract manufacturers. As part of these initiatives, the Company terminated all related research and development activities and a workforce reduction was implemented. In September 2012, the Company entered into a sublease agreement with an unrelated third party that extends throughout the remaining term of the existing lease for the vacated facility.

The following table summarizes the impact of the work force reductions and other associated costs on operating expenses and payments for the three months ended July 31, 2013, and the liability remaining on the balance sheet as of July 31, 2013.

		Charges Incurred During the Three Months Ended July 31, 2013				Amounts Paid Through July 31, 2013				Amounts Accrued at July 31, 2013
Future lease obligations, net of sublease revenue		$	-			$	54,428			$	87,456

The Company recorded all restructuring expenses as operating expenses on the statement of operations. All restructuring costs were paid by July 31, 2013, with the exception of approximately $87,000 of future lease obligations, net of sublease revenue.

NOTE 10. SUBSEQUENT EVENTS

On August 22, 2013, the Company closed its previously announced private placement of an aggregate of $4.6 million of shares of the Company’s Series D 8% convertible preferred stock (the “Series D Stock”) to JP SPC 3 obo OXBT FUND, SP (the “Investor”). In connection with the purchase of shares of Series D Stock, the Investor received a warrant to purchase 2,358,975 shares of common stock at an exercise price equal to $2.60 (the “Series D Warrant”). As consideration for the sale of the Series D Stock and Series D Warrant, $4.6 million in outstanding principal amount of a convertible promissory note issued by the Company on July 1, 2011 and held by the Investor (the “Note”) was cancelled. The Note carried interest at a rate of 15% per annum and matured on July 1, 2014. Mr. Gregory Pepin, one of the Company’s directors, is the investment manager of the Investor. Pursuant to the terms of a lock-up agreement (the “Lock-Up Agreement”) executed prior to the closing, the Investor and its affiliates are prohibited from engaging in certain transactions with respect to shares of the Company’s common stock and common stock equivalents until such time as the lead investor in the Company’s offering of Series C 8% Convertible Preferred Stock ceases to own at least 25% of the shares of Series C 8% Convertible Preferred Stock originally issued to such investor.

The rights, preferences and privileges of the Series D Stock are set forth in a Certificate of Designation of Series D 8% Convertible Preferred Stock that the Company filed with the Secretary of State of the State of Delaware on August 22, 2013. The Series D Stock accrues dividends at 8% per annum until August 22, 2016, payable quarterly in cash, or provided certain conditions are met, in common stock at the conversion price of $1.95 per share. If the Series D Stock is converted into common stock prior to August 22, 2016, and provided that shareholder approval of the transaction is obtained, the holder is entitled to a three-year dividend make-whole payment at the time of conversion. Shares of the Series D Stock have a liquidation preference equal to $1,000 per share and are convertible at any time at the option of the holder into shares of the Company’s common stock at a conversion price of $1.95 per share. The conversion price is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. In addition, the Series D Stock will be subject to anti-dilution provisions until such time that for at least 25 trading days during any 30 consecutive trading days, the VWAP of the Company’s common stock exceeds $4.88 and the daily dollar trading volume exceeds $350,000 per trading day; provided that unless shareholder approval for the transaction is obtained, the conversion price of the Series D Stock shall not be reduced below $1.635. If, for at least 20 consecutive trading days, the volume weighted average price of the Company’s common stock exceeds $4.88 and the daily dollar trading volume exceeds $350,000 per trading day, the Company will have the right to require conversion of any or all of the outstanding shares of Series D Stock into common stock at the then-current conversion price.

The Series D Warrant is exercisable beginning on the date of issuance and expires on August 22, 2019. The exercise price and the number of shares issuable upon exercise of Series D Warrant is subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Company’s common stock, and also upon any distributions of assets, including cash, stock or other property to the Company’s stockholders. In addition, if shareholder approval for the transaction is obtained, the Series D Warrant will be subject to anti-dilution provisions until such time that for 25 trading days during any 30 consecutive trading day period, the volume weighted average price of the Company’s common stock exceeds $6.50 and the daily dollar trading volume exceeds $350,000 per trading day.

The Series D Stock and the Series D Warrant were issued and sold without registration under the Securities Act of 1933 (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws. Accordingly, the Investor may exercise the Series D Warrant and sell the Series D Stock and underlying shares only pursuant to an effective registration statement under the Securities Act covering the resale of those securities, an exemption under Rule 144 under the Securities Act or another applicable exemption under the Securities Act.

On August 23, 2013, the Company entered into agreements with certain institutional investors to amend the terms of certain outstanding warrants to purchase an aggregate of 2,681,283 shares of the Company’s common stock issued by the Company on February 27, 2013 and July 27, 2013 (collectively, the “Warrant Amendments”). The Warrant Amendments replace the price protection anti-dilution provision of each warrant with a covenant that the Company will not issue common stock or common stock equivalents at an effective price per share below the exercise price of such warrant without prior written consent, subject to certain exceptions.

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

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended April 30, 2013.

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

Overview

Strategy

We are a development stage biomedical company focused on developing oxygen-carrying intravenous and topical products. Our principal business objective is to discover, develop, and commercialize novel therapeutic products for disease indications that represent significant areas of clinical need and commercial opportunity.

Our current strategy is to:

●	Efficiently conduct clinical development to establish clinical proof of concept with our lead product candidates;

●	Advance the development of the perfluorocarbon, or PFC, therapeutic modality and supporting capabilities;

●	Efficiently explore new high-potential therapeutic applications, leveraging third-party research collaborations and our results from related areas;

●	Continue to expand our intellectual property portfolio; and

●	Enter into licensing or product co-development arrangements in certain areas, while out-licensing opportunities in non-core areas.

We believe that this strategy will allow us to develop a portfolio of high quality product development opportunities, expand our clinical development and commercialization capabilities, and enhance our ability to generate value from our proprietary technologies

First Quarter 2014 Highlights

The following summarizes certain key financial measures for the three months ended July 31, 2013:

●	Raised approximately $4.9 million in net proceeds from the issuance of Series C Preferred Stock.

●	Cash and cash equivalents were $4.1 million at July 31, 2013.

●	Revenue earned under our research grant was $158,000 for the first quarter of 2014 compared to $267,000 for the three months ended July 31, 2012.

●	Our loss from operations was $1.6 million for the first quarter of 2014 compared to $1.7 million for the three months ended July 31, 2012.

●	Net cash used in operating activities was $1.6 million for each of the three months ended July 31, 2013 and 2012.

Consistent with our strategy, during the three months ended July 31, 2013, we (i) activated four of our five planned sites in Israel to support our Phase II-b STOP-TBI clinical trials, (ii) completed the immunocompetency studies requested by the FDA and funded under the U.S. Army cost reimbursement grant, and (iii) enrolled the first patient in the second cohort of our TBI clinical trials.

Opportunities and Trends

We continue to execute on our strategic plan, which calls for resuming our Phase II-B clinical trials for STOP-TBI; supporting our collaborations to gather proof-of-concept data for additional therapeutic areas with unmet medical needs; and continuing our business development efforts to expand our product portfolio. We also continue to progress Oxycyte through the regulatory approval process by conducting a comprehensive group of preclinical studies to confirm the safety profile of our product. These studies are particularly focused on platelet activity and immunocompetence. We believe these actions position us well to drive future growth and create stockholder value.

As we focus on the development of our existing products and product candidates, we also continue to position ourselves to execute upon licensing and other partnering opportunities. In order to do so, we will need to continue to maintain our strategic direction, manage and deploy our available cash efficiently and strengthen our collaborative research development and partner relationships.

During fiscal year 2014 we are focused on the following four key initiatives:

●	Conducting well-designed studies early in the clinical development process to establish a robust foundation for subsequent development, partnership and expansion into complementary areas;

●	Working with collaborators and partners to accelerate product development, reduce our development costs, and broaden our commercialization capabilities;

●	Gaining regulatory approval for the continued development and commercialization of Oxycyte in the United States; and

●	Developing new intellectual property that will enable us to file patent applications that cover new applications of our existing technologies and product candidates.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes in critical accounting policies during the three months ended July 31, 2013, 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, 2013.

Financial Overview

Results of Operations- Comparison of the Three Months Ended July 31, 2013 and 2012

Revenue

Product Revenue and Gross Profit

We generate revenue through the sale of Dermacyte® through distribution agreements, on-line retailers and direct sales to physician and medical spa facilities. Product revenue and percentage changes for the three months ended July 31, 2013 and 2012, are as follows:

	The three months ended July 31,
	2013		2012		Increase/ (Decrease)		% Increase/ (Decrease)
Product revenue	$	35,394	$	11,458	$	23,936		209	%
Cost of sales		27,510		5,911		21,599		365	%
Gross profit	$	7,884	$	5,547	$	2,337		42	%

The increase in product revenue for the three months ended July 31, 2013 was primarily due to license fees earned in accordance with our existing distribution agreement for Dermacyte.

Gross profit as a percentage of revenue was 22% and 48% for three months ended July 31, 2013 and 2012, respectively. The decrease for the three months ended July 31, 2013 was due to the cost of product shipped to our distributor and credited against license fee payments due in accordance with the existing Dermacyte distribution agreement.

Government Grant Revenue

We earn revenues through a cost-reimbursement grant sponsored by the United States Army, or Grant Revenue. Grant Revenue is recognized as milestones under the Grant program are achieved. Grant Revenue is earned through reimbursements for the direct costs of labor, travel, and supplies, as well as the pass-through costs of subcontracts with third-party contract research organizations or CROs.

	Three months ended July 31,
	2013		2012		Increase/ (Decrease)			% Increase/ (Decrease)
Government grant revenue	$	157,920	$	266,549	$	(108,629	)		(41	) %

For the three months ended July 31, 2013, we recorded approximately $158,000 in revenue under the grant program as compared to approximately $267,000 in revenue during the same period in the prior year. In addition to the revenue earned, we have recorded approximately $28,000 in deferred revenue associated with the grant. Deferred revenue under the grant represents pass-through costs that have been reimbursed in advance of performing the studies underlying the subcontracts. The decrease in revenue earned under the grant is due primarily to our completion of multiple studies in the prior year.

Marketing and Sales Expenses

Marketing and sales expenses consisted primarily of personnel-related costs, including salaries, commissions, and the costs of marketing programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. Marketing and sales expenses and percentage changes for the three months ended July 31, 2013 and 2012, respectively, are as follows:

	Three months ended July 31,
	2013		2012		Increase/ (Decrease)			% Increase/ (Decrease)
Marketing and sales expense	$	102	$	38,605	$	(38,503	)		(100	) %

The decrease in marketing and sales expenses for the three months ended July 31, 2013 was driven by the elimination of costs incurred for compensation and direct advertising following the execution of the distribution agreement in the prior year.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation for executive, finance, legal and administrative personnel, including stock-based compensation. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, legal and accounting services, other professional services, and consulting fees. General and administrative expenses and percentage changes for the three months ended July 31, 2013 and 2012, respectively, are as follows:

	Three months ended July 31,
	2013		2012		Increase/ (Decrease)			% Increase/ (Decrease)
Legal and professional fees	$	491,018	$	687,499	$	(196,481	)		(29	) %
Personnel costs		347,205		365,635		(18,430	)		(5	) %
Other costs		78,969		97,033		(18,064	)		(19	) %
Facilities		36,819		47,016		(10,197	)		(22	) %
Depreciation and amortization		28,408		27,002		1,406			5	%

Legal and professional fees:

Legal and professional fees decreased approximately $197,000 for the three months ended July 31, 2013 compared to the same period in the prior year. This decrease was primarily due to decreases of approximately $103,000 in fees associated with the second closing of the Series A Preferred Stock, and approximately $177,000 in legal expenses related to the costs to defend the Tenor matter in the same period in the prior year; partially offset by an increase of approximately $24,000 in accounting fees, and approximately $60,000 in consulting fees.

Personnel costs:

Personnel costs decreased approximately $18,000 for the three months ended July 31, 2013 compared to the same period in the prior year. The decrease was due primarily to the elimination of administrative positions in the current period.

Other costs:

Other costs include costs incurred for travel, supplies, insurance and other miscellaneous charges. The approximately $18,000 reduction in other costs was due primarily to a reduction in insurance premiums paid and supplies expenses.

Facilities:

Facilities include costs paid for rent and utilities at our corporate headquarters in North Carolina. The approximately $10,000 reduction during the three months ended July 31, 2013 compared to the same period in the prior year was the result of the elimination of allocated costs from the closure of the California lab facility in the prior year.

Depreciation and Amortization:

Depreciation and amortization costs remained relatively consistent for the three months ended July 31, 2013 and 2012.

Research and Development Expenses

Research and development expenses include, but are not limited to, (i) expenses incurred under agreements with CROs and investigative sites, which conduct our clinical trials and a substantial portion of our pre-clinical studies; (ii) the cost of manufacturing and supplying clinical trial materials; (iii) payments to contract service organizations, as well as consultants; (iv) employee-related expenses, which include salaries and benefits; and (v) facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, depreciation of leasehold improvements, equipment, laboratory and other supplies. All research and development expenses are expensed as incurred. Research and development expenses and percentage changes for the three months ended July 31, 2013 and 2012, respectively, are as follows:

	Three months ended July 31,
	2013		2012		Increase/ (Decrease)			% Increase/ (Decrease)
Clinical and preclinical development	$	495,115	$	347,021	$	148,094			43	%
Personnel costs		212,895		174,812		38,083			22	%
Consulting		45,343		37,989		7,354			19	%
Depreciation		9,831		10,090		(259	)		(3	) %
Other costs		6,782		19,288		(12,506	)		(65	) %
Facilities		2,927		48,072		(45,145	)		(94	) %

Clinical and preclinical development:

The increase of approximately $148,000 in clinical and preclinical development costs for the three months ended July 31, 2013 compared to the same period in the prior year was primarily due to increases of $326,000 associated with the Phase II-b trials for Oxycyte; partially offset primarily by a decrease of $117,000 in pre-clinical studies and $57,000 in development costs incurred for Dermacyte and Oxycyte.

Personnel costs:

Personnel costs increased approximately $38,000 for the three months ended July 31, 2013 compared to the same period in the prior year primarily due to the hiring of the Chief Medical Officer in the current period.

Consulting fees:

Consulting fees increased approximately $7,000 for the three months ended July 31, 2013 compared to the same period in the prior year primarily due to fees incurred to plan and prepare for regulatory submissions, clinical trial expansions and other clinical support activities.

Other costs:

Other costs decreased approximately $12,000 for the three months ended July 31, 2013 compared to the same period in the prior year primarily due to a reduction in expenses associated with travel and supplies.

Depreciation:

Depreciation expense remained relatively consistent for the three months ended July 31, 2013 and 2012.

Facilities:

Facilities expense decreased approximately $45,000 for the three months ended July 31, 2013 compared to the same period in the prior year primarily due to the closure of our California facility.

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

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

Restructuring expense

	Three months ended July 31,
	2013		2012		Increase/ (Decrease)			% Increase/ (Decrease)
Restructuring expense	$	-	$	47,476	$	(47,476	)		—	%

During the three months ended July 31, 2012, the Company recorded one-time charges of approximately $47,000 of severance and benefits related charges.

Interest expense

Interest expense includes the interest payments due under our long-term debt, amortization of debt issuance costs and accretion of discounts recorded against our outstanding convertible notes, and noncash interest charges related to our Series A Convertible Preferred Stock. Interest expense and percentage changes for the three months ended July 31, 2013 and 2012, respectively, are as follows:

	Three months ended July 31,
	2013		2012		Increase/ (Decrease)			% Increase/ (Decrease)
Interest expense	$	655,803	$	1,925,903	$	(1,270,100	)		(66	) %

During the three months ended July 31, 2013, interest expense decreased approximately $1.3 million compared to the same period in the prior year. The decrease was due primarily noncash interest charges recorded in the prior period related to our previously outstanding Series A Convertible Preferred Stock.

Other income and expense

Other income and expense includes non-operating income and expense items not otherwise recorded in our statement of operations. These items include, but are not limited to, revenue earned under sublease agreements for our California facility, recognized gains and losses on foreign currency translations, interest income earned and fixed asset disposals. Other expense for the three months ended July 31, 2013 and 2012, respectively, is as follows:

	Three months ended July 31,						Increase/
	2013			2012			(Decrease)
Other (income) expense, net	$	(141	)	$	(14,803	)	$	14,662

Other (income) expense decreased approximately $15,000 for the three months ended July 31, 2013 compared to the same period in the prior year primarily due to approximately $13,000 of sub lease income from our California facility and approximately $2,000 of interest earned in the prior period that were not earned in the same period during the current year. See Note 9 above for further explanation of the California facility closing.

Liquidity, Capital Resources and Plan of Operation

We have incurred losses since our inception and as of July 31, 2013 we had an accumulated deficit of $119 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 $4,586,583 and $1,842,251 of total current assets and working capital of $(128,243) and $(67,326) as of July 31, 2013 and April 30, 2013, 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 February 28, 2014 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 July 23, 2013, we sold 5,369 shares of Series C 8% convertible preferred stock for net proceeds of approximately $4.9 million. Additionally, on August 22, 2013 we issued 4,600 shares of Series D convertible preferred stock in exchange for $4.6 million of convertible notes that were scheduled to mature in June 2014. Based on our working capital at July 31, 2013 and the exchange of the short-term notes in August, we believe we have sufficient capital on hand to continue to fund operations through February 28, 2014.

Cash Flows

The following table shows a summary of our cash flows for the three months ended July 31, 2013 and 2012:

	For the three months ended July 31,
	2013			2012
Net cash used in operating activities	$	(1,563,142	)	$	(1,612,878	)
Net cash used in investing activities		(33,156	)		(34,128	)
Net cash provided by financing activities		4,885,811			2,458,264

Net cash used in operating activities. Net cash used in operating activities was $1.56 million for the three months ended July 31, 2013 compared to net cash used in operating activities of $1.61 million for the three months ended July 31, 2012. The decrease in cash used for operating activities was due primarily to a decrease in our overall administrative expenses and our costs associated with marketing and selling our cosmetic products.

Net cash used in investing activities. Net cash used in investing activities was $33,156 for the three months ended July 31, 2013 compared to net cash used in investing activities of $34,128 for the three months ended July 31, 2012. The cash used for investing activities, primarily capitalized legal fees incurred for filing and maintaining our patent portfolio, remained relatively consistent compared to the same period in the prior year.

Net cash provided by financing activities. Net cash provided by financing activities was $4.9 million for the three months ended July 31, 2013 compared to net cash provided by financing activities of $2.5 million for the three months ended July 31, 2012. The increase of net cash provided by financing activities was due primarily to net proceeds of $4.9 million received from the issuance of Series C 8% Convertible Preferred Stock on July 23, 2013 as compared to the $2.5 million received from the issuance Series B Preferred Stock on June 15, 2012.

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.

We believe that our existing cash and cash equivalents will be sufficient to fund our projected operating requirements through February 28, 2014. 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

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires entities to present in the financial statements an unrecognized tax benefit, or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except to the extent such items are not available or not intended to be used at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position. In such instances, the unrecognized tax benefit is required to be presented in the financial statements as a liability and not be combined with deferred tax assets. This guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not expect the adoption of this guidance to 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 months ended July 31, 2013.

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 Exchange Act, our management, including our Interim Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 31, 2013, the end of the period covered by this report in that they provide reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the SEC and is accumulated and communicated to our management, including the Interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

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, 2013 with the risk factors below.

RISKS RELATED TO OWNING OUR COMMON STOCK

If we cannot meet the NASDAQ Capital Market continued listing requirements, our common stock may be delisted which could have an adverse impact on the liquidity and market price of our common stock.

While our common stock is currently listed on the NASDAQ Capital Market, or NASDAQ, there can be no assurance it will continue to be listed in the future. Continued listing of a security on NASDAQ is conditioned upon compliance with various continued listing standards, which require, among other things, that for 30 consecutive trading days (i) the closing minimum bid price for our listed securities not be lower than $1.00 per share and (ii) our market capitalization not be lower than $35 million. The closing bid price for our shares fell below $1.00 per share on August 21, 2012 and our market capitalization has been less than $35 million since August 8, 2012.

On September 20, 2012 we received a deficiency notice from NASDAQ due to our market capitalization falling below $35 million for 30 consecutive days. We were required to regain compliance with this continued listing standard before March 19, 2013. On October 3, 2012 we received a deficiency notice from NASDAQ due to the closing bid price for our shares falling below $1.00 per share for 30 consecutive days. We were required to regain compliance with this continued listing standard before April 1, 2013.

However, we were not able to regain compliance with the market capitalization requirement by March 19, 2013. As a result NASDAQ notified us by letter dated March 20, 2013 of the Staff’s decision to delist our securities from NASDAQ. We appealed the Staff’s determination by requesting a hearing, or the Hearing, before a NASDAQ Hearings Panel, or the Panel, to seek continued listing pending our return to compliance with the minimum market value requirement under Rule 5550(b)(2). In addition, we were not able to regain compliance with the minimum bid price listing standard by April 1, 2013. As a result NASDAQ notified us by letter dated April 4, 2013 that our failure to comply with Rule 5550(a)(2) serves as an additional basis to delist our securities from The NASDAQ Capital Market, and that the Panel, in connection with the Hearing, would consider this matter in rendering a determination regarding our continued listing on The NASDAQ Capital Market.

On May 15, 2013, we received notice from the Panel that the Panel has determined to grant our request for continued listing on The NASDAQ Capital Market pursuant to an extension through June 3, 2013 to evidence compliance with the minimum $1.00 bid price requirement, as set forth in NASDAQ Listing Rule 5550(a), and through July 31, 2013 to evidence compliance with the alternate minimum $2.5 million stockholders’ equity requirement, as set forth in NASDAQ Listing Rule 5550(b), for continued listing on The NASDAQ Capital Market. As of June 3, 2013, we have regained compliance with the minimum $1.00 bid price requirement, due in part to our 20-to-1 reverse stock split effected on May 10, 2013, and as of the date hereof, our stockholders’ equity exceeds $2.5 million. While we believe we are currently in compliance with NASDAQ listing requirements, we have not yet received confirmation of our compliance status from NASDAQ. There can be no assurance that NASDAQ will agree with our assessment of our compliance status, and, accordingly, no assurance that we will remain listed on NASDAQ. Delisting from NASDAQ would negatively impact us and our stockholders by, among other things, reducing the liquidity and market price of our common stock and adversely affecting our ability to raise additional capital.

We are likely to attempt to raise additional capital through issuances of debt or equity securities, which may cause our stock price to decline, dilute the ownership interests of our existing stockholders, and/or limit our financial flexibility.

Historically we have financed our operations through the issuance of equity securities and debt financings, and we expect to continue to do so for the foreseeable future. As of September 16, 2013, we believe we have sufficient capital on hand to continue to fund operations through February 28, 2014. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution of their ownership interests. Debt financing, if available, may involve restrictive covenants that limit our financial flexibility or otherwise restrict our ability to pursue our business strategies. Additionally, if we issue shares of common stock, or securities convertible or exchangeable for common stock, the market price of our existing common stock may decline. There can be no assurance that we will be successful in obtaining any additional capital resources in a timely manner, on favorable terms, or at all.

We have issued in the past, and may issue in the future, substantial amounts of instruments that are convertible into or exercisable for common stock, and our existing stockholders may face substantial dilution if such instruments are converted or exercised.

As of September 16, 2013, we had outstanding convertible notes, warrants, options, securities purchase agreements, and other instruments that are convertible or exercisable into an aggregate of approximately 9,189,143 shares of our common stock, which, if converted or exercised, would represent approximately 65% of our current outstanding common stock. These instruments carry a wide variety of different terms and prices, and there can be no assurance as to when or whether conversions or exercises of these instruments may occur. If all or any substantial portion of these instruments are converted or exercised, our existing stockholders may face substantial dilution of their ownership interests.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchases of Common Stock

The following table lists all repurchases during the first quarter of fiscal 2014 of any of our securities registered under Section 12 of the Exchange Act by or on behalf of us or any affiliated purchaser.

Issuer Purchases of Equity Securities	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 August Yet Be Purchased Under the Plans or Programs
Period
May 1, 2013 - May 31, 2013		22	$	5.00		-	$	-
June 1, 2013 - June 30, 2013		22		3.73		-		-
July 1, 2013 - July 31, 2013		22		2.96		-		-

Total		66	$	3.90		-	$	-

(1)	Represents shares repurchased in connection with tax withholding obligations under the 1999 Amended Stock Plan.

(2)	Represents the average price paid per share for the shares repurchased in connection with tax withholding obligations under the 1999 Amended Stock Plan.

Unregistered Sales of Equity Securities

During the fiscal quarter ended July 31, 2013, we issued 4,123 shares of unregistered common stock as payment of $185,917 of interest due on our outstanding convertible notes.

All of the securities described above were issued in reliance on the exemption from registration set forth in Section 4(a) of the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Annual Meeting Date

We have scheduled our 2013 Annual Meeting of Stockholders, or the 2013 Annual Meeting, to be held on Wednesday, December 4, 2013, at 9:00 a.m., local time, at the offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. located at Wells Fargo Capitol Center, 150 Fayetteville Street, Suite 2300, Raleigh, North Carolina 27601. Stockholders of record as of the close of business on October 18, 2013 are entitled to notice of and to vote at the 2013 Annual Meeting.

The 2013 Annual Meeting is being held more than 30 days after the anniversary of our most recent annual meeting of stockholders, which was held on August 31, 2012. As a result, pursuant to Rule 14a-8 under the Exchange Act, we have set a new deadline for the receipt of any stockholder proposals submitted pursuant to Rule 14a-8 for inclusion in our proxy materials for the 2013 Annual Meeting. The new deadline for the submission of such stockholder proposals is the close of business on September 23, 2013. We believe that receiving Rule 14a-8 stockholder proposals by such date will provide us with a reasonable period of time for the review, consideration and, if appropriate, inclusion of any such proposals before we begin to print and send our proxy materials to stockholders for the 2013 Annual Meeting.

In addition, our bylaws, or the Bylaws, set forth when a stockholder must provide notice, or the Stockholder Notice, to us of nominations and other business proposals that the stockholder wants to bring before the 2013 Annual Meeting. The Bylaws generally prescribe the procedures that a stockholder must follow if the stockholder intends to nominate a person for election to our Board of Directors or to propose other business to be considered by stockholders at an annual meeting of the stockholders. These procedures include, among other things, that the stockholder give timely notice to our corporate secretary of the proposal, that the notice contain specified information, and that the stockholder comply with certain other requirements.

In accordance with the Bylaws, if the corresponding date on which notice of the annual meeting is sent to stockholders of record changes by more than 30 days from the date in the previous year, the Stockholder Notice must be received by the corporate secretary at our registered office not less than 30 days in advance of the date that we begin printing our notice of the annual meeting to be disseminated to stockholders. Accordingly, in order for stockholder business initiated by a stockholder to be brought before the 2013 Annual Meeting, the stockholder must deliver such notice no later than September 23, 2013, and must otherwise comply with the requirements of the Bylaws.

Notices should be addressed in writing to: Oxygen Biotherapeutics, Inc., Attn: Corporate Secretary, ONE Copley Parkway, Suite 490, Morrisville, North Carolina 27560. Notices should be mailed to us by certified mail, return receipt requested.

Resignation of Chief Medical Officer

On September 12, 2013, Charles L. Pamplin III, M.D. voluntarily resigned from his position as Chief Medical Officer, effective September 15, 2013.

ITEM 6. EXHIBITS

No.		Description

3.1		Certificate of Amendment of Certificate of Incorporation of Oxygen Biotherapeutics, Inc. (1)
4.1		Certificate of Designation of Series C 8% Convertible Preferred Stock (2)
4.2		Form of Warrant for Series C 8% Convertible Preferred Stock Offering (2)
10.1		Placement Agency Agreement, dated July 21, 2013, between Oxygen Biotherapeutics, Inc. and Ladenburg Thalmann & Co. Inc., as placement agent (2)
10.2		Form of Securities Purchase Agreement for Series C 8% Convertible Preferred Stock Offering (2)
31.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1		Certification of Chief Executive Officer and Chief Financial 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
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

(1)		This document was filed as an exhibit to the current report on Form 8-K filed by Oxygen Biotherapeutics with the SEC on May 15, 2013, 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 July 25, 2013, and is incorporated herein by reference.

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.

Date: September 17, 2013


OXYGEN BIOTHERAPEUTICS, INC.

By:		/s/ Michael B. Jebsen
		Michael B. Jebsen Chief Financial Officer and Interim Chief Executive Officer