1 SYNTHETIC BLOOD INTERNATIONAL, INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended October 31, 1997 --------------------------------------- Commission File Number 2-31909 ----------------------------------------------- SYNTHETIC BLOOD INTERNATIONAL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-3067701 - ------------------------- -------------------------- (State of Incorporation) (IRS Employer ID Number) 2685 Culver Avenue Kettering, Ohio 45429 937-298-6070 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by the 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). YES [X] NO [ ] and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 1997. 45,873,950 shares of common stock par value $0.01 - -------------------------------------------------------------------------------- 1 2 SYNTHETIC BLOOD INTERNATIONAL, INC. (A Development Stage Company) BALANCE SHEETS ASSETS October 31, April 30, 1997 1997 (Unaudited) (Audited) ----------- ----------- Current Assets: Cash $ 99,619 $ 53,857 Prepaid Expense 9,645 17,425 ----------- ----------- Total Current Assets $ 109,264 $ 71,282 Property & Equipment, net 111,021 137,433 Other Assets: Patents and Technology 112,988 109,448 ----------- ----------- Total Assets $ 333,273 $ 318,163 =========== =========== LIABILITIES AND STOCKHOLDERS'S EQUITY Current Liabilities: Accrued Expenses $ 471,215 $ 473,974 Stockholders loans 52,888 75,979 Accrued Payroll & Other 152,270 50,722 ----------- ----------- Total Current Liabilities $ 676,373 $ 600,675 Total Liabilities $ 676,373 $ 600,675 Stockholder's Equity: Common Stock $0.01 par Value: Authorized 100,000,000 shares Issued & outstanding 45,873,950 & 42,829,500 $ 458,739 $ 428,295 Additional Paid in capital 8,079,881 7,576,325 Deficit Accumulated since Development Stage (8,881,720) (8,287,132) ----------- ----------- Total Stockholder's Equity (Deficit) $ (343,100) $ (282,512) ----------- ----------- Total Liabilities & Stockholder's Equity $ 333,273 $ 318,163 =========== =========== See accompanying notes to financial statements 2 3 SYNTHETIC BLOOD INTERNATIONAL, INC. (A Development Stage Company) STATEMENTS OF OPERATIONS Three Months Ended Six Months Ended Accumulated during the October 31, October 31, development stage 1997 1996 1997 1996 -------------------- ---------------------------- ----------------------------- (Unaudited) (Unaudited) (Unaudited) Expenses: Research and development $ 2,876,784 $ 37,986 $ 149,071 $ 83,533 $ 284,047 General and administrative 5,949,169 337,813 523,123 508,659 724,946 Interest 104,961 2,497 2,755 3,289 4,323 ------------ ------------ ------------ ------------ ------------ Total Expense 8,930,914 378,296 674,949 595,481 1,013,316 OTHER INCOME (49,194) (779) (89) (893) (263) ------------ ------------ ------------ ------------ ------------ NET LOSS $ (8,881,720) $ (377,517) $ (674,860) $ (594,588) $ (1,013,053) ============ ============ ============ ============ NET LOSS PER SHARE $ (0.01) $ (0.01) $ (0.01) $ (0.03) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 44,122,787 32,274,295 43,472,610 32,274,295 ============ ============ ============ ============ See accompanying notes to financial statements 3 4 SYNTHETIC BLOOD INTERNATIONAL, INC. STATEMENT OF CASH FLOWS ACCUMULATED SIX MONTHS SIX MONTHS during the ended October 31, ended October 31 CASH FLOWS FROM OPERATING development 1997 1996 ACTIVITIES: stage Net loss $(8,881,720) $ (594,588) $(1,013,053) Adjustments to reconcile net cash used in operating activities: Depreciation and amortization 285,038 46,588 14,000 Write down other assets 126,800 Issuance of compensatory stk options 118,500 Contribution of capital through services rendered 30,000 Issuance of stock for services rendered 936,924 402,675 Issuance of stock below FMV 720,000 180,000 Changes in operating assets and liabilities: Prepaid expenses & other assets (9,645) (7,780) 20,686 Accounts payable and accrued expense 607,730 98,789 42,085 ----------- ----------- ----------- Net cash used in operating activities (6,066,373) (261,431) (533,607) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of other assets (328,326) (23,716) (2,937) Proceeds from the sale of equipment 15,457 Purchase of property and equipment (270,640) (3,452) ----------- ----------- ----------- Net cash used in investing activities (583,509) (23,716) (6,389) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock 5,218,221 260,000 619,500 Payments on capital lease obligations (35,765) (4,362) Proceeds from issuance of notes payable to stockholder 866,254 31,000 29,806 Contribution of capital stockholder 35,700 Proceeds from convertible debentures 780,000 Repayments of notes payable (114,909) 39,909 (42,500) ----------- ----------- ----------- Net cash provided by financing activities 6,749,501 330,909 602,444 NET DECREASE IN CASH AND CASH EQUIVALENTS: 99,619 45,762 62,448 CASH AND CASH EQUIVALENTS, beginning of period 53,857 76,312 CASH AND CASH EQUIVALENTS, 4 5 end of period $ 99,619 $ 99,619 $138,760 ======== ======== ======== Cash paid for Interest $ 90,458 $ 3,287 $ 4,322 Taxes 5,600 800 800 See accompanying notes to financial statements SYNTHETIC BLOOD INTERNATIONAL, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS October 31, 1997 1. BASIS OF PRESENTATION 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 at October 31, 1997 and the results of its operations and its cash flows for the three month and six month periods ended October 31, 1997 and 1996. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission although the Company believes that the disclosures in the financial statements are adequate to make the information presented not misleading. The financial statements included herein should be read in conjunction with the financial statements of the Company, included in the Company's Annual Report on Form 10-K for the year ended April 30, 1997 filed with the Securities and Exchange Commission on August 29, 1997. Going Concern - 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 financial statements, the Company is in the development stage and, at October 31, 1997 has accumulated losses from operations amounting to $8,881,720, a working capital deficit of $567,109. The Company is in the pre-clinical trial stage of its products. These products must undergo further 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 generate sufficient cash flow, to meet its obligations on a timely 5 6 basis, to obtain additional financing as may be required, and ultimately to attain successful operations. However, no assurance can be given at this time as to whether the Company will achieve any of these conditions or that the FDA approval will be granted, once applied for. 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. Additional funding will be necessary which will require future private placements and/or joint ventures to enable the Company to continue the required testing through Phase I, II and III human testing. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Development Stage - Because the Company has not commenced principal operations, it is considered a "Development Stage Enterprise" as defined by Statement of Financial Accounting Standards No. 7, Accounting and Reporting by Development Stage Enterprises. Pricing of Common Stock and Options to Purchase Common Stock - The Company's Board of Directors determines the issuance price of its common stock and options to purchase common stock to be fair market value, based on a good faith estimate which is derived from recent issuance of common stock to unrelated parties and/or from common stock market quotations, after giving effect to the restricted nature of the stock issued. Property and Equipment - Property is recorded at cost. Depreciation and amortization are computed using the straight-line method over the shorter of the estimated useful lives of the related assets, ranging from three to ten years, or lease term, if applicable. Patents - Patent costs are being amortized over the lesser of the remaining life of the patent or the estimated useful life of the related product, ranging from eight to ten years. The Company evaluated recoverability of patents on at least an annual basis by comparing the estimated resale value of the patents to the remaining carrying values. An adjustment to the carrying value of the patent rights would be made if the estimated resale value of the patents is determined to be insufficient to recover such value. 6 7 3. COMMITMENTS AND CONTINGENCIES Employment Contracts - The Company has employment agreements with certain officers and an employee with aggregate future commitments of $240,000 in 1998. During fiscal 1995, the Company entered into a consulting agreement with an unrelated party which required monthly payment of $5,000. This agreement expired in December 1995. In conjunction with this agreement, the Company issued warrants to purchase 100,000 shares of the Company's common stock at $1.00 per share, which exceeded the fair market value at the date of the agreement. The warrants expire in April 1999. Litigation - The Company is subject to litigation in the normal course of the business, none of which management believes will have a material adverse effect on the Company's financial statements as of October 31, 1997, except as follows: The Company has two legal matters pending at October 31, 1997. These legal actions were filed by former employees alleging unfair treatment during a temporary layoff in December 1995. These cases are presently in discovery. Company managements communications with legal counsel have indicated that the Company's exposure related to these legal actions could amount to $124,000. Thus, while the outcome of such litigation is uncertain, the Company has provided an accrual for such loss contingency using the best available estimate of $124,000, as initially disclosed in audited April 30, 1997 Financial Statements and included in the April 30, 1997 10K. 4. STOCKHOLDERS' EQUITY On August 1, 1997 convertible debentures were issued that are convertible into 516,667 shares of the Company's common stock, for an investment of $31,000 with an annual interest rate of 8%. An amount representing the fair market value of the Company's common stock as of the date of the debentures was recognized as an expense related to this issuance. On September 22, 1997 the Company issued 2,000,000 shares of its common stock under a Regulation S subscription agreement to Argos Invest Consult AG, a Zurich Switzerland asset manager, for an $260,000 investment. An amount representing the fair market value of the Company's common stock at the date of the agreement was recognized as expense related to this issuance. 7 8 On September 23, 1997 the Company issued 1,044,450 shares of its common stock under Regulation 144 to officers and directors for the cancellation of $94,000 of loans made to the corporation remaining unpaid as at September 23, 1997. An amount representing the fair market value of the Company's common stock at the date of the Board Resolution less the loan balance was recognized as expense. 5. RECENTLY ISSUED ACCOUNTING STANDARDS During 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" (FAS 128). FAS 128 requires the Company to disclose a basic and diluted earnings per share calculation. Basic earnings per share (EPS) excludes common stock equivalents from the EPS calculation, while diluted EPS is calculated consistent with the Company's primary earnings per share calculation. The Company will adopt the provisions of FAS 128 during the fiscal year ending April 30, 1998. Basic and diluted EPS, as computed under FAS 128, would not have been materially different than EPS determined in accordance with APB 15 for the periods presented. SYNTHETIC BLOOD INTERNATIONAL, INC (A Development Stage Company) Part I- Financial Information MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Second Quarter of 1997 and 1996. The Research and Development expenses for the three and six month periods ended October 31, 1997 were $37,986 and $83,533 respectively, compared to $149,071 and $284,047 for the same periods in the prior year. This decrease was due to a significant reduction in research personnel, outside laboratory confirmation of test results and the purchase of fewer animals and supplies. General and Administrative expenses for the three and six month periods ended October 31, 1997 were $337,813 and $508,659 respectively, compared to $523,123 and $724,946 for the same periods in the prior year. This decrease was due to a significant reduction in legal fees, licensing fees, and research staff. The net loss for the three and six month periods ended October 31, 1997 was $377,517 and $594,588, 8 9 compared to $674,860 and $1,013,053 for the same periods in the prior year. This represented a substantial reduction of research and general administrative expenses as the primary activity was writing patent applications during this period. LIQUIDITY AND CAPITAL SOURCES The Company has financed its operations since September 1990, when the current management became involved, through the issuance of debt and equity securities and loans from stockholders. As of October 31, 1997 the Company had $109,264 in total current assets and a working capital deficit of $567,109. The Company is in the pre-clinical trial stage in the development of its products. These products must undergo further development and testing prior to submission to the FDA for approval to market its products. This additional development and testing and if approved, the FDA required clinical testing will require significant additional financing. Management is actively pursuing strategic alliance and joint venture agreements to enable the Company to develop its products. There can be no assurance that FDA approval will be granted, once applied for, or that necessary funding will be obtained. SYNTHETIC BLOOD INTERNATIONAL, INC. (A Development Stage Company) Part II-Other Information Item 1. Legal Proceedings. Described in Financial Statement notes. Item 2. Changes in Securities. On September 22, 1997, the Company issued 2,000,000 shares of its common stock under 9 10 Rule 144, Section 4/2 of the Securities Act to Argos Invest Consult AG, a Zurich Switzerland asset manager for an $260,000 investment. An amount representing the fair market value of the Company's stock at the date of the agreement was recognized as expense related to this issuance. On September 23, 1997, the Company issued 1,044,450 shares of its common stock under Regulation 144, Section 4/2 of the Securities Act to officers and directors for the cancellation of $94,000 of loans made to the corporation remaining unpaid as of that date. An amount representing the fair market value of the Company's common stock at the date of the Board Resolution to issue stock less the loan balance was recognized as expense. Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matter to a Vote of Security Holders. None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K. Exhibit 10.1 Stock subscription agreement dated September 22, 1997. 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 hereunto duly authorized. 10 11 SYNTHETIC BLOOD INTERNATIONAL, INC. (Registrant) 9/14/97 //SS//SS// - ----------------- ------------------------------------- (Date) Robert J. Larsen, Secretary/Treasurer 11