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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended October 31, 2004

For the transition period from              to             

Commission File Number: 2-31909

SYNTHETIC BLOOD INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

3189 Airway Avenue, Building C, Costa Mesa, California 92626

(Address of Principal Executive Office)

714-427-6363

(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 (the “Exchange Act”) 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  x    NO  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of December 15, 2004. 125,513,042 shares of common stock, par value $0.01.

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FORM 10-Q

SYNTHETIC BLOOD INTERNATIONAL, INC.

INDEX

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Part I-Financial Information

ITEM 1. FINANCIAL STATEMENTS.

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

BALANCE SHEETS

See accompanying condensed notes to financial statements.

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SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS

See accompanying condensed notes to financial statements.

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SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

Non-cash investing and financing activities during the six months ended October 31, 2004:

The Company issued 500,000 incentive stock options to a Director of the Company. Deferred compensation of $95,000 has been recorded for the difference between the market value of the shares at the date of grant of $.34 per share over the strike price of $.15 per share and will be amortized to compensation expense over the 2 year vesting period.

See accompanying condensed notes to financial statements

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SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Company)

CONDENSED NOTES TO FINANCIAL STATEMENTS

The accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of October 31, 2004, and the results of its operations for the three months and six months ended October 31, 2004 and 2003, and for the period from May 26, 1967 (inception) to October 31, 2004, and its cash flows for the six months ended October 31, 2004 and 2003, and for the period from May 26, 1967 (inception) to July 31, 2004. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission (the “Commission”). The Company believes that the disclosures in the financial statements are adequate to make the information presented not misleading. However, the financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2004 filed with the Commission on August 13, 2004.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company is in the development stage and, at October 31, 2004, has an accumulated deficit of $22,023,311, continues to sustain operating losses on a monthly basis, and expects to incur operating losses for the foreseeable future. Since the Company is in the pre-clinical and clinical trial stages of its products, these products must undergo considerable development and testing prior to submission to the FDA for approval to market the products. The Company’s continuation as a going concern is dependent on its ability to obtain additional financing sufficient to fund the required additional development and testing and to meet its obligations on a timely basis. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern for a reasonable period of time.

The Company accounts for stock-based employee compensation as prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and has adopted Statement of Financial Accounting Standards 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”), that amends Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). APB 25 provides that compensation expense relative to the Company’s employee stock options is measured based on the intrinsic value of stock options granted. SFAS 123 and 148 require pro forma disclosures of net income (loss) and net income (loss) per share as if the fair value based method of accounting for stock-based awards had been applied for employee grants. They also require disclosure of option status on a more prominent and

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frequent basis. The Company accounts for stock options and warrants issued to non-employees based on the fair value method, but has not elected this treatment for grants to employees and board members. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.

The fair value of each option grant was estimated at the grant date using the Black-Scholes option-pricing model. The Black–Scholes option-pricing valuation model was developed for use in estimating the fair value of traded options and warrants that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options and warrants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options and warrants.

The Company’s calculations are based on a single option valuation approach and forfeitures are recognized as they occur.

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested employee awards:

During the quarter ended October 31, 2004, the Company issued 2,266,666 shares of common stock for $680,000 received from investors during in the quarter ended July 31, 2004.

In May 2004, the Company accepted a subscription agreement covering the sale of

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7,733,334 shares of common stock, 7,733,334 Series A Warrants, 3,400,000 Series B Warrants, and 3,400,000 Series C Warrants for $2,350,000. To date, the Company has not received payment for the shares and warrants. The Company intends to continue discussions with the subscriber in an effort to collect the subscription price, but due to the lack of performance the Company is not relying on this subscription as a potential source of capital and is proceeding with its fund raising and product development efforts assuming no funds will ever be collected under the subscription. Should the Company receive the full purchase price for the shares, it will pay a total of $235,000 to a foreign financial consultant as compensation for his assistance with the offering, in addition to three percent of the funds derived from exercise of the warrants issued.

During December 2004, the Company received $1,800,000 and issued 9,000,000 shares of common stock to six investors at $.20 per share. Each investor also received three-year warrants for the purchase of 9,000,000 shares of common stock at $.275, callable by the Company at $.55 per share. The shares were issued in reliance on the exemption afforded by Regulation S adopted under the Securities Act of 1933. Synthetic Blood will pay a total of $255,000 to a foreign financial consultant as compensation for his assistance with this placement.

Also in December 2004, the Company received $87,500 issued 437,500 shares of common stock to seven investors at $.20 per share. Each investor also received three-year warrants for the purchase of 437,500 shares of common stock at $.275, callable by the Company at $.55 per share. The shares were issued in reliance on the exemption afforded by Regulation D adopted under the Securities Act of 1933. Synthetic Blood will issue a total of 21,875 shares of common stock as compensation for assistance with this placement.

In December 2004, the Company approved the issuance of two-year warrants to six investors to purchase 5,500,000 shares of common stock at a price of $.40 per share in consideration of the delayed registration of their stock.

In October 2004, the Company entered into a stock purchase agreement with a foreign investor for the purchase of 2,500,000 shares of common stock at $.185 per share, plus 6,000,000 shares of common stock at $.20 per share. The agreement expired on November 30, 2004; however, in consideration for this investor’s efforts in assisting the Company in raising additional capital, the agreement has been extended to February 2005. The Company has accounted for the substance of this transaction as a stock option, and therefore, the estimated fair value of the option of $922,000 has been offset against Additional Paid-In Capital as a reduction of the proceeds from the private placement.

During the three months ended October 31, 2004 and 2003, the Company paid $45,050 and $59,020, respectively, and during the six months ended October 31, 2004 and 2003, the Company paid $53,160 and $87,100, respectively, to a specialty contract manufacturer of pharmaceutical products to manufacture Oxycyte, the Company’s perfluorocarbon-based blood substitute and therapuetic oxygen carrier, for upcoming clinical trials. An officer of the Company is a minority shareholder and director of this specialty manufacturer. At October 31, 2004, the Company has $24,000 in outstanding purchase orders with this specialty manufacturer.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Synthetic Blood International, Inc., is a New Jersey corporation that, since 1990, has pursued the development of medical products based on perfluorocarbon technology. Since 1993, Synthetic Blood has also pursued development of a glucose biosensor implant.

Perfluorocarbons are biologically inert compounds containing carbon and fluorine. The chemical composition of perfluorocarbons allows them to readily absorb and give up oxygen and carbon dioxide. This property creates opportunities for developing blood substitutes that act as oxygen carriers for human tissue and fluids that carry oxygen to the lungs for remedial uses.

Synthetic Blood developed Oxycyte as a synthetic blood substitute. We received approval of our Investigational New Drug application filed with the U.S. Food and Drug Administration (FDA) and began Phase I clinical studies in October 2003, which were completed in December 2003. The results of the Phase I study were in line with our expectations for the performance of Oxycyte.

A New York State University Medical Center clinical site has received local Institutional Review Board (IRB) approval to participate in the first Phase II trial with Oxycyte. Patient enrollment will follow an IRB site initiation visit, which is expected to be completed by the end of the year. IRB approval is expected at two additional study sites in the first part of 2005. In the first Phase II trial, orthopedic surgery patients who lose modest amounts of blood during surgery will receive Oxycyte to prevent tissue hypoxia. Patients usually do not receive blood transfusions during these surgical procedures, however the amount of blood loss may result in post-operative complications caused by tissue hypoxia.

We expect to commit a substantial portion of our financial and business resources over the next 3 years to testing Oxycyte and advancing this product to commercial distribution.

Fluorovent is an oxygen exchange fluid for facilitating the treatment of lung conditions, which is currently under development. We have not filed any applications on this product with the FDA and do not expect we will do so for at least one year.

Our biosensor product uses an enzyme process for measuring the glucose level in the blood stream. It is a subcutaneous implant programmed to measure the glucose level and transmit the results to a wearable receiver. This product is also under development and we do not expect we will file any applications with the FDA for at least the next 2 years.

RESULTS OF OPERATIONS

Three months ended October 31, 2004 and 2003

Research and Development expenses for the three months ended October 31, 2004 were $309,614, compared to $265,630 for the same period in the prior year. During the quarter ended October 31, 2004, we continued to concentrate our research activities on our Oxycyte product in an effort to begin Phase II clinical trials during calendar 2005. Because of the nature of our ongoing research and development activities, accounting periods may reflect significant changes in expenses resulting from the timing of research related to our developmental products.

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General and Administrative expenses for the three months ended October 31, 2004 were $291,286, compared to $202,003 for the same period in the prior year. Consulting fees increased $31,000 from the previous year as a result of the retention of an investor relations firm in 2004. Additionally, management fees increased $50,000 during the current quarter resulting primarily from the amortization of deferred compensation resulting from the issuance of incentive stock options.

The net loss for the three months ended October 31, 2004 was $599,956, compared to a net loss of $460,426 for the same period in the prior year. Total expenses increased $133,267 during the three months ended October 31, 2004 over the comparable period in 2003, as discussed above. In addition, other income, consisting principally of interest income, decreased $6,263, resulting from a decline in interest rates on invested funds and a decline in invested balances over the same period in 2003.

Six months ended October 31, 2004 and 2003

Research and Development expenses for the six months ended October 31, 2004 were $529,081, compared to $498,710 for the same period in the prior year. During the six months ended October 31, 2004, we continued to concentrate our research activities on our Oxycyte product in an effort to begin Phase II clinical trials during calendar 2005. Because of the nature of our ongoing research and development activities, accounting periods may reflect significant changes in expenses resulting from the timing of research related to our developmental products.

General and Administrative expenses for the six months ended October 31, 2004 were $546,899, compared to $428,301 for the same period in the prior year. Consulting fees increased $33,000 from the previous year as a result of the retention of a investor relations firm in 2004. Additionally, management fees increased $55,667 during the current six-month period resulting primarily from the amortization of deferred compensation resulting from the issuance of incentive stock options.

The net loss for the six months ended October 31, 2004 was $1,073,378, compared to a net loss of $912,336 for the same period in the prior year. Total expenses increased $148,969 during the six months ended October 31, 2004 over the comparable period in 2003, as discussed above. In addition, other income, consisting principally of interest income, decreased $12,073, resulting from a decline in interest rates on invested funds and a decline in invested balances over the same period in 2003.

LIQUIDITY AND CAPITAL RESOURCES

Synthetic Blood has financed its operations since September 1990 through the issuance of debt and equity securities and loans from stockholders. As of October 31, 2004, we had $130,841 of total current assets and a working capital deficit of $289,546. Our practice is to invest excess cash in short-term money market investment instruments.

We have had and continue to have difficulty raising additional capital for research and development activities.

Nevertheless, during December 2004, Synthetic Blood received $1,800,000 and issued

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9,000,000 shares of common stock to six investors at $.20 per share. Each investor also received warrants for the purchase of 9,000,000 shares of common stock at $.275, callable by the Company at $.55 per share. The shares were issued in reliance on the exemption afforded by Regulation S adopted under the Securities Act of 1933. Synthetic Blood will pay a total of $255,000 to a foreign financial consultant as compensation for his assistance with this placement.

Also in December 2004, Synthetic Blood received $87,500 and issued 437,500 shares of common stock to seven investors at $.20 per share. Each investor also received warrants for the purchase of 437,500 shares of common stock at $.275, callable by the Company at $.55 per share. The shares were issued in reliance on the exemption afforded by Regulation D adopted under the Securities Act of 1933. Synthetic Blood will issue a total of 21,875 shares of common stock as compensation for assistance with this placement.

Management believes that this new funding together with the Company’s cash and cash equivalents at October 31, 2004, will be sufficient to fund the Company’s clinical studies and general and administrative expenses for at least the next 12 months.

We are in the pre-clinical and clinical trial stages in the development of our products. Under an Investigational New Drug application filed with the FDA, we completed Phase I clinical studies on Oxycyte in December 2003. The results of the Phase I study were in line with our expectations for the performance of Oxycyte. We are in the process of completing our report on the test results for submission to the FDA, together with written protocols for two Phase II clinical studies on Oxycyte. We estimate that pursuing the review process with the FDA and implementing the Phase II clinical study will take approximately one year and cost approximately $2 million. Even if we are successful with our Phase II study, we must then conduct Phase III clinical studies and, if they are 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 products, Fluorovent and the glucose biosensor, 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. 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 the end of calendar year 2005 depends on obtaining outside financial resources, and there is no assurance we will succeed in obtaining the necessary resources.

Cash used in operating activities during the six months ended October 31, 2004 was $723,027, compared to $805,561 for the comparable period of the prior year. Operating activities consisted primarily of product research and development and the general operation of our corporate office. Cash used in operating activities is primarily dependent on the timing and extent of our research and development activities.

Cash used in investing activities during the six months ended October 31, 2004 was $81,142, compared to $26,312 for the comparable period of the prior year. Investing

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activities consisted primarily of the purchase of laboratory equipment and expenditures related to the Company’s patent rights. Synthetic Blood does not anticipate significant future capital expenditures in the near term.

Cash provided by financing activities during the three months ended October 31, 2004 was $612,000, compared to cash provided by financing activities of $1,126,226 for the comparable period of the prior year. Cash provided by financing activities consists primarily of the sale of our common stock to outside investors. As discussed earlier in this quarterly report, Synthetic Blood is attempting to raise additional funds that may take the form of equity or debt securities.

CRITICAL ACCOUNTING POLICIES

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:

Stock-Based Compensation - We account for stock-based employee compensation as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and, effective April 30, 2003, we adopted Statement of Financial Accounting Standards (“SFAS”) 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS 148”) that supercedes Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 148 requires pro forma disclosures of net income and net income per share as if the fair value based method of accounting for stock-based awards had been applied for both employee and non-employee grants. It also requires disclosure of option status on a more prominent and frequent basis. We account for stock options and warrants issued to non-employees based on the fair value method, but have not elected this treatment for grants to employees and board members. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.

The fair value of each option grant was estimated at the grant date using the Black-Scholes option-pricing model. The Black–Scholes option valuation model was developed for use in estimating the fair value of traded options and warrants that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our employee stock options and warrants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

Long-Lived Assets - Our intangible assets consist of patents related to our various technologies. These assets are amortized on a straight-line method over their estimated useful life, which ranges from eight to ten years. We review these intangible assets for impairment on a quarterly basis in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). At October 31, 2004, management believes no indications of impairment existed.

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FORWARD LOOKING STATEMENTS

Except for the historical information contained herein, the discussion and information presented in this report contain forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those presented in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section and those discussed in the Company’s Annual Report on Form 10-K for the year ended April 30, 2004 and subsequent filings made with the Securities and Exchange Commission.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of performance or achievements. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. The Company is under no obligation to update any of the forward-looking statements after the filing of this report to conform such statements to actual results or changes in expectations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company has no derivative financial instruments and no exposure to foreign currency exchange rates or interest rate risk.

ITEM 4. CONTROLS AND PROCEDURES.

Management is responsible for maintaining effective disclosure controls and procedures. As of the end of the period covered by this report, we evaluated the effectiveness and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective and provide for timely collection and evaluation of information that may need to be disclosed to investors. There have been no significant changes in internal controls or other factors that could significantly affect internal controls subsequent to the date of our evaluation. Accordingly, no corrective actions with regard to significant deficiencies and material weaknesses were required or undertaken.

Part II-Other Information

ITEM 6. EXHIBITS.

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

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