---




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, 2002





Commission File Number 2-31909





SYNTHETIC BLOOD INTERNATIONAL, INC.


(Exact name of registrant as specified in its charter)


New Jersey (State of
Incorporation)

22-3067701 (IRS Employer ID
Number)3189 Airway Avenue, Building C, Costa Mesa, California 92626 (Office of Principal Executive Office)





714-427-6363


(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, 2002.





88,613,874 shares of common stock par value $0.01





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SYNTHETIC BLOOD INTERNATIONAL, INC.


(A Development Stage Company)





BALANCE SHEETS





ASSETS





October 31, 2002


April 30, 2002(Unaudited)Current Assets:Cash and cash equivalents

$
1,035,062


$
2,442,015Prepaid expenses


23,090



89,537Total Current Assets


1,058,152



2,531,552Property and Equipment, net


472,982



485,614Patents, net


252,036



258,654$
1,783,170


$
3,275,820LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Notes Payable

$
19,776


$
105,569Accounts payable


71,151



41,174Accrued liabilities


22,504



32,335Total Current Liabilities


113,431



179,078Commitments and Contingencies






Stockholders Equity:Preferred Stock, undesignated, authorized 10,000,000 shares, none issued or outstanding






Common Stock, par value $.01 per share; authorized 200,000,000 shares; issued and outstanding 88,613,874 and
88,577,245 shares


886,139



885,772Additional paid-in capital


18,684,363



18,684,363Deficit accumulated during the development stage


(17,900,763
)


(16,473,393
)Total Stockholders Equity


1,669,739



3,096,742$
1,783,170


$
3,275,820





See accompanying condensed notes to financial statements.




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SYNTHETIC BLOOD INTERNATIONAL, INC.


(A Development Stage Company)





STATEMENTS OF OPERATIONS





Deficit Accumulated During the Development Stage


Three Months Ended October
31,


Six Months Ended October
31,2002


2001


2002


2001(Unaudited)


(Unaudited)


(Unaudited)Expenses:Research and development

$
6,497,214


$
837,257


$
350,444


$
1,013,547


$
667,325General and administrative


11,805,413



202,422



206,290



443,015



452,280Interest


182,486



808



3,150



2,347



6,067Total Expense


18,485,113



1,040,487



559,884



1,458,909



1,125,672Other Income


(584,350
)


(13,311
)


(38,106
)


(31,539
)


(86,524
)NET LOSS

$
(17,900,763
)

$
(1,027,176
)

$
(521,778
)

$
(1,427,370
)

$
(1,039,148
)NET LOSS PER SHARE, BASIC AND DILUTED





$
(0.012
)

$
(0.006
)

$
(0.016
)

$
(0.012
)WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED






88,595,161



87,595,032



88,586,203



86,367,366





See accompanying condensed notes to financial statements.







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SYNTHETIC BLOOD INTERNATIONAL, INC.


(A Development Stage Company)





STATEMENT OF CASH FLOWS





Deficit Accumulated During Development


Six Months Ended October 31,Stage


2002


2001(Unaudited)


(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(17,900,763
)

$
(1,427,370
)

$
(1,039,148
)Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization


666,198



68,758



52,283Loss on disposal and write-down of property and equipment and other assets


142,084







Compensatory stock options/warrants issued


1,916,263







Issuance of stock below market value


695,248







Contribution of capital through services rendered by stockholders


216,851







Issuance of stock for services rendered


1,190,209







Changes in operating assets and liabilities:Decrease in notes receivable


30,000







Prepaid expenses and other assets


(23,090
)


66,447



25,582Accounts payable and accrued liabilities


270,246



20,146



63,831Net cash used in operating activities


(12,796,754
)


(1,272,019
)


(897,452
)CASH FLOW FROM INVESTING ACTIVITIES:Purchase of property and equipment


(936,670
)


(32,517
)


(191,450
)Purchase of other assets


(574,290
)


(16,991
)


(23,789
)Net cash used in investing activities


(1,510,960
)


(49,508
)


(215,239
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sale of common stock and exercise of common stock options and warrants


13,908,056



367



416,878Repayments of amounts due stockholders


(121,517
)






Proceeds from stockholder notes payable


977,692







Proceeds from notes, debentures and lease obligations


1,276,065







74,000Payments on notes and capital lease obligations


(697,520
)


(85,793
)


(132,559
)Net cash provided by (used in) financing activities


15,342,776



(85,426
)


358,319Net change in cash and cash equivalents


1,035,062



(1,406,953
)


(754,372
)Cash and cash equivalents, beginning of period






2,442,015



4,250,898Cash and cash equivalents, end of period

$
1,035,062


$
1,035,062


$
3,496,526Cash paid for: Interest

$
142,973


$
2,347


$
6,067Taxes

$
13,890


$
4,350


$
5,640





See accompanying condensed notes to financial statements.




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SYNTHETIC BLOOD INTERNATIONAL, INC.


(A Development Stage Company)


CONDENSED NOTES TO FINANCIAL STATEMENTS





|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, 2002, and the results of its operations for the six month periods ended October 31, 2002 and 2001 and its cash flows for the six month periods ended October 31, 2002 and 2001. 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.





Certain amounts as previously reported have been
reclassified to conform to the 2002 presentation.





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, 2002 filed with the Securities and Exchange Commission on July 26, 2002.





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 accompanying financial statements, the Company is in the development stage and, at October 31, 2002 has an accumulated deficit of $17,900,763 and
continues to sustain operating losses on a monthly basis. Since the Company is in the pre-clinical trial stage of its products, these products must undergo considerable 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 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.




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|2. |  | COMMITMENTS AND CONTINGENCIES
|-- |  | -----------------------------




At October 31, 2002 the Company had ten outstanding research contracts for animal studies totaling $113,000 through January 2003.





|3. |  | STOCKHOLDERS EQUITY
|-- |  | --------------------




During the three months ended October 31, 2002 the Company issued 36,629 shares of common stock for cash proceeds of $367 resulting from the exercise of previously issued stock options. The Company
recorded an expense in a previous period for the fair value of the options at the date they were issued.





During the six months ended October 31, 2002, the Company granted employee incentive stock options under its 1999 Stock Option Plan totaling 300,000 shares with exercise prices ranging from $0.16 to $0.23 per share. The stock options
were granted with exercise prices equal to the fair market value of the Companys common stock at the date of grant, and no compensation expense was recorded. The stock options expire ten years from the date of grant.




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SYNTHETIC BLOOD INTERNATIONAL, INC


(A Development Stage Company)





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 10K for the year ended April 30, 2002 and the 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 can not 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 the Form 10-Q to conform such statements or actual results or to changes in expectations.





Potential risks and uncertainties include, but are not limited to: an inability to achieve results from the pre-clinical studies which are determined to merit requesting FDA approval to begin clinical
trials for one or more of the Companys products; an inability to receive FDA approval to begin clinical trials for one or more of its products; an inability to enter into or maintain the future strategic collaborative relationships the Company
believes are essential to further develop and commercialize the Companys products; uncertainties associated with the lengthy and complicated testing and regulatory approval process, in particular the risk that the Companys products,
assuming pre-clinical tests are successful, may be found ineffective during clinical trials, if any, or the Company is unable to obtain the necessary regulatory approvals to commercialize these products; uncertainties associated with obtaining and
enforcing patents for the Companys products and technology; the risks of infringing patents held by other parties; uncertainties associated with changing or new technology; difficulties in scaling up manufacturing operations to commercial
scale and in obtaining raw materials in a quantity and at prices necessary to produce profitable products; an inability to have the Companys products manufactured by future strategic partners or contract manufacturing companies; and failure to
obtain market acceptance, significant market share, or third party reimbursement at profitable price levels.





Significant risks and
uncertainties are associated with the Companys ability to obtain the required financing to develop its products. The Companys projected capital requirements are based on the expectation that strategic partners will assume further
development and regulatory costs for each product during Phase III clinical trials and thereafter. If that does not happen, the amount of financing the Company will be required to raise could increase substantially. If the Company is unable to raise
adequate financing, it may be required to delay, scale-back, or




7




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eliminate product development programs, sell the rights to certain technologies or products.





RESULTS OF OPERATIONS





Three months ended October 31, 2002 and 2001





The Research and Development expenses for the three-month period
ended October 31, 2002 were $837,257, compared to $350,444 for the same period in the prior year.





This increase is attributed to a
significant increase in animal research studies for Oxycyte, the Companys blood substitute product. As a result, contract consulting expenses increased $467,100 and laboratory supplies expense increased $19,600 during the current period.
Because of the nature of the Companys ongoing research and development activities, accounting periods may reflect significant changes in expenses resulting from the timing of research related to the Companys three developmental products.





General and Administrative expenses for the three-month period ended October 31, 2002 were $202,422, compared to $206,290 for the same
period in the prior year. There were no significant changes in office and administrative expenses, which consist principally of salaries and wages, professional and consulting fees and insurance expenses, between the three-month period ended October
31, 2002 and 2001.





The net loss for the three months ended October 31, 2002 was $1,027,176, compared to a net loss of $521,778 for the
same period in the prior year. Although total expenses increased $480,603 during the three-month period ended October 31, 2002 over the comparable period in 2001, the Companys net loss increased $505,398. This was due to a reduction in
interest income of $24,795, due to falling interest rates and smaller invested balances over the same period in 2001.





Six months
ended October 31, 2001 and 2000:





The Research and Development expenses for the six-month period ended October 31, 2002 were
$1,013,547, compared to $667,325 for the same period in the prior year. The increase is attributed to a significant increase in animal research studies during the six months ended October 31, 2002, resulting in increased contract consulting and
salary expenses of $311,500 and increased laboratory expenses of $25,500 over the same period in 2001. Because of the nature of the Companys ongoing research and development activities, accounting periods may reflect significant changes in
expenses resulting from the timing of research related to the Companys three developmental products.





General and Administrative
expenses for the six-month period ended October 31, 2002 were $443,015, compared to $452,280 for the same period in the prior year. There were no significant changes in office and administrative expenses, which consist principally of salaries and
wages, professional and consulting fees and insurance expenses, between the six-month period ended October 31, 2002 and 2001.





The net
loss for the six-month period ended October 31, 2002 was $1,427,370 compared to




8




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$1,039,148 for the same period in the prior year. Although operating expenses increased $333,237, as discussed above, the Companys total
loss for the six-months ended October 31, 2002 increased $388,222 due to a decrease in other income of $54,985, attributed to reduced interest income earned on the Companys cash balances because of falling interest rates and smaller invested
balances.





LIQUIDITY AND CAPITAL RESOURCES





The Company has financed its operations since September 1990, when it began operating as Synthetic Blood International, Inc., through the issuance of debt and equity securities and loans from stockholders. As of October 31,
2002, the Company had $1,058,152 of total current assets and working capital of $944,721. The Company has invested excess working capital in short-term money market investment instruments. The Company believes its cash and cash equivalents at
October 31, 2002 will be sufficient to meet its projected liquidity needs for the next 6 months.





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 initiate clinical trials. This additional development and testing and, if approved, the FDA
required clinical testing, will require significant additional financing. Management is actively pursuing private and institutional financing as well as strategic alliances and/or joint venture agreements to assist the Company in acquiring the
necessary additional financing.





If the Company raises additional funds through the issuance of equity securities, the percentage
ownership of existing stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences and privileges senior to those of the common stock.





There can be no assurance that FDA approval will be granted, if and when it is applied for one or more of the Companys products, or that necessary funding
will be obtained.





The Company does not have any firm commitments for additional capital as of October 31, 2002.





FINANCIAL CONDITION





October 31, 2002
compared to April 30, 2002





Cash used in operating activities during the six-month period ended October 31, 2002 was $1,272,019,
compared to $897,452 for the comparable period of the prior year, an increase of $374,567. Operating activities consisted primarily of product research and development and the general operation of the Companys corporate office. Cash used in
operating activities is dependent on the timing and extent of the Companys research and development activities.





Cash used in
investing activities during the six-month period ended October 31, 2002 was $49,508, compared to $215,239 for the comparable period of the prior year. Investing activities




9




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consisted primarily of the purchase of laboratory equipment and expenditures related to the patent
rights. The Company does not anticipate any significant future capital expenditures.





Cash used in financing activities during the
six-month period ended October 31, 2002 was $85,426, compared to cash provided by financing activities of $358,319 for the comparable period of the prior year. Cash provided by financing activities consists primarily of the sale of common stock and
the financing of equipment purchases through notes payable. During the six-month period ended October 31, 2002 cash used in financing activities was for the repayment of notes payable. The Company does not anticipate any significant future debt
financing and has no firm commitments for equity financing.





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





Within the 90-day period prior to the date of this report, we evaluated the effectiveness and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. There have been no significant changes in internal controls or other
factors that could significantly affect internal controls subsequent to the date we carried out our evaluation.








Part IIOther Information





Item 1.    Legal
Proceedings.





None





Item 2.    Changes in Securities.





During the three months
ended September, 2002 the Company issued 36,629 shares of common stock resulting from the exercise of previously issued stock options. The shares were issued at a price of $0.01 per share. The Company had recorded an expense in a previous period for
the fair value of the options at the date they were issued.





The securities were sold in a private transaction,
without registration in reliance on the exemption provided by Section 4(2) of the Securities Act. The investors had pre-existing relationships with the Company and had access to all material information pertaining to the Company and its financial
condition. No broker was involved and no commissions were paid in the transaction.





Item 3.    Defaults Upon
Senior Securities.





None





Item 4.    Submission of Matter to a Vote of Security Holders.





None




10




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Item 5.    Other Information.





None





Item
6.    Exhibits and Reports on Form 8-K.





(a)  Exhibits:





| | 99.1 |  | Statement Under Oath of Principal Executive Officer Regarding Facts, and Circumstances Relating to Exchange Act Filings
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------




| | 99.2 |  | Statement Under Oath of Principal Financial Officer Regarding Facts, and Circumstances Relating to Exchange Act Filings
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------




(b)  Reports on Form 8K:





None





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)12/13/02     (Date)



By:

/s/    DAVID H. JOHNSONDavid H. Johnson, Chief Financial Officer




11