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, 1998 ------------------------------------------------- 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 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. (1) YES (X) NO ( ) (2) YES (X) NO ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 1998. 51,024,302 shares of common stock par value $0.01 - -------------------------------------------------------------------------------- 1 2 SYNTHETIC BLOOD INTERNATIONAL, INC. (A Development Stage Company) BALANCE SHEETS October 31, April 30, 1998 1998 (Unaudited) (Audited) ------------ ------------ Current Assets: Cash $ 249,149 $ 740,215 Prepaid Expenses 16,990 19,525 ------------ ------------ Total Current Assets $ 266,139 $ 759,740 Property & Equipment, net 72,073 84,653 Other Assets: Patents and Technology 150,134 141,521 ------------ ------------ Total Assets $ 488,346 $ 985,914 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of notes payable $ 82,510 $ 59,972 Accounts payable 293,929 339,540 Stockholders loans 14,900 15,000 Accrued expenses 106,777 116,828 ------------ ------------ Total Current Liabilities $ 498,116 $ 531,340 Notes Payable, less current portion 50,000 103,021 ------------ ------------ Total Liabilities $ 548,116 $ 634,361 ------------ ------------ Stockholders' Equity: Common Stock $0.01 par Value: Authorized 100,000,000 shares Issued & outstanding 51,024,302 & 50,729,302 510,243 507,293 Additional Paid-in Capital 9,463,774 9,412,424 Deficit Accumulated since Development Stage (10,033,787) (9,568,164) ------------ ------------ Total Stockholders' (Deficit) Equity $ (59,770) $ 351,553 ------------ ------------ Total Liabilities & Stockholders' (Deficit)Equity $ 488,346 $ 985,914 ============ ============ See accompanying notes to financial statements. 2 3 SYNTHETIC BLOOD INTERNATIONAL, INC. (A Development Stage Company) STATEMENTS OF OPERATIONS Accumulated during the Three Months Ended Six Months Ended development October 31, October 31, stage 1998 1997 1998 1997 ------------ ------------ ------------ ------------ ------------ Unaudited Unaudited Unaudited Expenses: Research and development $ 2,977,054 $ 47,873 $ 37,986 $ 72,855 $ 83,533 General and administrative 6,978,861 189,335 337,813 392,723 508,659 Interest 139,103 3,986 2,497 9,906 3,289 ------------ ------------ ------------ ------------ ------------ Total Expense 10,095,018 241,194 378,296 475,484 595,481 Other income (61,231) (3,233) (779) (9,861) (893) ------------ ------------ ------------ ------------ ------------ NET LOSS $(10,033,787) $ (237,961) $ (377,517) $ (465,623) $ (594,588) ============ ============ ============ ============ ============ NET LOSS PER SHARE, BASIC AND DILUTED $ (0.005) $ (0.009) $ (0.009) $ (0.014) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED 50,974,411 44,122,787 50,891,259 43,472,610 ============ ============ ============ ============ See accompanying notes to financial statements 3 4 SYNTHETIC BLOOD INTERNATIONAL, INC. STATEMENT OF CASH FLOWS Accumulated during the Six months Six months development ended October 31, ended October 31 stage 1998 1997 ------------ ----------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(10,033,787) $ (465,623) $ (594,588) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 337,965 28,408 46,588 Write down other assets 126,800 Issuance of compensatory stock options 248,906 Issuance of stock for services 1,018,816 29,300 Issuance of stock below FMV 695,248 180,000 Contribution of capital by stockholders 216,851 Changes in operating assets & liabilities: Prepaid expenses & other assets (16,990) 2,535 7,780 Accounts payable & accrued expenses 588,599 (30,762) 98,789 ------------ ------------ ------------ Net cash used in operating activities (6,817,592) (436,142) (261,431) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of other assets (371,643) (17,395) (23,716) Proceeds from sale of equipment 15,457 Purchase of property and equipment (278,448) (7,046) ------------ ------------ ------------ Net cash used in investing activities (634,634) (24,441) (23,716) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock 6,138,221 260,000 Payments on capital lease obligations (52,338) Proceeds from stockholder notes payable 915,792 31,000 Contribution of capital by stockholder 40,700 Proceeds from convertible debentures 811,000 Repayment of notes payable (152,000) (30,483) 39,909 ------------ ------------ ------------ Net cash provided by (used in) financing activities 7,678,837 (30,483) 330,909 NET CHANGE IN CASH AMD CASH EQUIVALENTS 249,149 (491,066) 45,762 CASH AND CASH EQUIVALENTS, beginning of period 740,215 53,857 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 249,149 $ 249,149 $ 99,619 ============ ============ ============ Cash paid for Interest $ 97,871 $ 9,590 $ 3,287 Taxes 6,400 800 800 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES- Issuance of common stock in settlement of accounts payable $ 25,000 $ 25,000 ============ ============ See accompanying notes to financial statements. 4 5 SYNTHETIC BLOOD INTERNATIONAL, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS October 31, 1998 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, 1998, and the results of its operations for the three and six months periods ended October 31, 1997 and 1998 and its cash flows for the six month periods ended October 31, 1997 and 1998. 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, 1998 filed with the Securities and Exchange Commission on August 28, 1998. 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, 1998 has accumulated losses from operations amounting to $10,033,787 and a working capital deficit of $231,977. 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 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 5 6 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, derived from recent issuance of common stock to unrelated parties and/or from common stock market quotations. 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 evaluates 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. 3. COMMITMENTS AND CONTINGENCIES Employment Contracts - The Company has employment agreements with a certain officer with aggregate future commitments of $302,000 through March 2001. 6 7 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, 1998. STOCKHOLDERS' EQUITY During the period ending October 31, 1998, the Company issued 125,000 shares of the Company's common stock in satisfaction of a $26,250 liability due for rent of the Company's research facility. The stock was valued at the fair market value at the date of issuance. During the period ending October 31, 1998, the Company issued 170,000 shares of the Company's common stock to a director/stockholder in exchange for services rendered. As a result of this transaction the Company recognized an expense of $28,050, representing the fair market value of the common stock issued. 7 8 SYNTHETIC BLOOD INTERNATIONAL, INC. (A Development Stage Company) Part I- Financial Information ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those projected 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. RESULTS OF OPERATIONS- Three months ended October 31, 1997 and 1998: The Research and Development expenses for the three months period ended October 31, 1998 was $ 47,873, compared to $ 37,986 for the same period in the prior year. This increase was due to a increase in research supplies and the addition of a research laboratory in California. General and Administrative expenses for the three months period ended October 31, 1998 were $189,335, compared to $337,813 for the same period in the prior year. This decrease was due primarily to an expense related to stock issued below fair market value of $180,000 incurred in the prior year. The net loss for the three months ended October 31, 1998 was $237,961, compared to $377,517 for the same period in the prior year. This decrease represented the difference between a decrease in administrative expense offset by an increase in research expense. Six months ended October 31, 1997 and 1998 The Research and Development expenses for the six months period ended October 31, 1998 was $ 72,855, compared to $ 83,533 for the same period in the prior year. This decrease was due to a reduction in research personnel and supplies. 8 9 General and Administrative expenses for the six months period ended October 31,1998 were $392,723, compared to $508,659 for the same period in the prior year. This decrease was due primarily to an expense related to stock issued below fair market value of $180,000 incurred in the prior year offset by an increase in personnel costs and legal fees. The net loss for the six months ended October 31, 1998 was $465,623, compared to $594,588 for the same period in the prior year. This decrease represented the combined effect of a decrease in administrative expense and a decrease in research expense. 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, 1998 the Company had $266,139 in total current assets and a working capital deficit of $231,977. 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. 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. 9 10 SYNTHETIC BLOOD INTERNATIONAL, INC. (A Development Stage Company) Part II-Other Information Item 1. Legal Proceedings. Described in Financial Statement Note 3. Item 2. Changes in Securities. In June 1998, the Company issued 125,000 shares of common stock to one party in satisfaction of a $26,250 liability for rent of the Company research facility. The common stock was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act of 1933 and/or Regulation D. In August 1998, the Company issued 170,000 shares of common stock to a director of the Company in exchange for services rendered, and recorded a expense of $28,050 which represents the fair market value of the common stock. The common stock was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act of 1933 and/or Regulation D. 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. None. 10 11 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. SYNTHETIC BLOOD INTERNATIONAL, INC. ------------------------------------------ (Registrant) 12/10/98 /S/ DAVID H. JOHNSON - ---------------- ------------------------------------------ (Date) David H. Johnson, Chief Financial Officer 11