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SYNTHETIC BLOOD INTERNATIONAL, INC.





FORM 10-Q





SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.





|xQ | UARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|-- | ----------------------------------------------------------------------------------------




For the quarterly period ended October 31, 2001





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)





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, 2001.





87,767,245 shares of common stock par value $0.01





---

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SYNTHETIC BLOOD INTERNATIONAL, INC.


(A Development Stage Company)





BALANCE SHEETS





October 31, 2001

April 30, 2001(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$   3,496,526


$   4,250,898Note receivable from director

30,000


30,000Prepaid expenses

57,791


83,373Total
Current Assets

3,584,317


4,364,271Property and Equipment, net

402,454


243,904Patents, net

238,527


234,121$   4,225,298


$   4,842,296LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Notes Payable

$       118,799


$       177,358Accounts payable

151,088


87,256Accrued liabilities

79,454


79,454Total
Current Liabilities

349,341


344,068Stockholders Equity:Common Stock, par value $.01 per share; authorized 100,000,000
shares;                issued and outstanding 87,767,245 and 84,474,547

877,672


844,745Deposits on common stock




94,231Additional paid-in capital

17,023,013


16,544,832Deficit accumulated during development stage

(14,024,728
)

(12,985,580
)Total
Stockholders Equity

3,875,957


4,498,228$   4,225,298


$   4,842,296





See accompanying notes to financial statements




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SYNTHETIC BLOOD INTERNATIONAL, INC.


(A Development Stage Company)





STATEMENTS OF OPERATIONS





Accumulated During the
Development Stage

Three Months Ended October 31,

Six Months Ended October 31,2001

2000

2001

2000(Unaudited)

(Unaudited)

(Unaudited)Expenses:Research and development

$   4,783,412


$350,444


$182,594


$      667,325


$285,038General and administrative

9,577,754


206,290


416,927


452,280


658,293Interest

172,611


3,150


262


6,067


1,070Total Expense

14,533,777


559,884


599,783


1,125,672


944,401Other Income

(509,049
)

(38,106
)

(91,333
)

(86,524
)

(182,268
)NET LOSS

$(14,024,728
)

$(521,778
)

$(508,450
)

$  (1,039,148
)

$(762,133
)NET LOSS PER SHARE, BASIC AND      DILUTED




$(0.006
)

$(0.006
)

$           (0.012
)

$(0.009
)WEIGHTED AVERAGE NUMBER OF      SHARES OUTSTANDING, BASIC
     AND DILUTED




87,595,032


86,706,915


86,367,366


84,312,412











See accompanying notes to financial statements




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SYNTHETIC BLOOD INTERNATIONAL, INC.


(A Development Stage
Company)





STATEMENT OF CASH FLOWS





Accumulated During Development Stage

Six Months Ended October 31,2001

2000(Unaudited)

(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$(14,024,728
)

$(1,039,148
)

$   (762,133
)Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization

539,461


52,283


37,079Loss on disposal of property and equipment

15,284





Disposal and write-down of other assets

126,800





Compensatory stock options/warrants issued

367,213





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





112,298Changes in operating assets and liabilities:Prepaid expenses and other assets

(57,791
)

25,582


47,592Accounts payable and accrued expense

407,134


63,831


(4,276
)Net cash
used in operating activities

(10,524,319
)

(897,452
)

(569,440
)CASH FLOW FROM INVESTING ACTIVITIES:Purchase of property and equipment

(734,557
)

(191,450
)

(162,362
)Amount due stockholder







(20,000
)Proceeds from the sale of equipment

15,457





Purchase of other assets

(581,088
)

(23,789
)

(22,902
)Net cash
used in investing activities

(1,300,188
)

(215,239
)

(205,264
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sale of common stock and exercise of common stock      options and warrants

13,746,590


416,878


452,038Repayments of amounts due stockholders

(121,517
)




Proceeds from stockholder notes payable

977,692





Contribution of capital by stockholder

40,700





Proceeds from notes, debentures and lease obligations

1,086,248


74,000


Payments on notes and lease obligations

(408,680
)

(132,559
)

(44,534
)Net cash provided by financing activities

15,321,033


358,319


407,504Net change in cash and cash equivalents

3,496,526


(754,372
)

(367,200
)Cash and cash equivalents, beginning of period




4,250,898


5,466,391Cash and cash equivalents, ending of period

$   3,496,526


$3,496,526


$5,099,191Cash paid for: Interest

$       133,097


$         6,067


$         1,070Taxes

$         14,380


$         5,640


$         1,250





See accompanying notes to financial statements




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SYNTHETIC BLOOD INTERNATIONAL, INC.


(A Development Stage Company)





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, 2001, and the results of its operations for the three month and six month periods ended October 31, 2001 and 2000 and its cash flows for the six month periods ended
October 31, 2001 and 2000. 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 with the 2001 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, 2001 filed with the Securities and Exchange Commission on July 26, 2001.





|2. |  | STOCKHOLDERS EQUITY
|-- |  | --------------------




During the three months ended October 31, 2001 the Company issued 416,936 shares of common stock resulting from the exercise of previously issued stock warrants. The shares were
issued at a weighted-average price of $0.14 per share. The proceeds received in connection with the exercise of the warrants were $58,371.




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|ITEM2.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, 2001 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 II 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 eliminate one or more product development programs,
or sell the rights to certain technologies or products.




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RESULTS OF OPERATIONS





Three months ended October 31, 2001 and 2000:





The Research and Development expenses for the three-month period ended October 31, 2001 were $350,444 compared to $182,594 for the same period in the prior
year. This increase is attributed to an increase in wages, salaries and contract consulting of $148,000 and an increase in lab supplies of $18,000. These increases reflect the substantial increase in product research and development activities over
the comparable period in 2000.





General and Administrative expenses
for the three-month period ended October 31, 2001 were $206,290 compared to $416,927 for the same period in the prior year. This decrease was the result of one-time expenditures in 2000 for outside professional services. Legal services decreased
$20,000, consulting services decreased $83,000, marketing research decreased $34,000 and investor relations expenses decreased $59,000.





The net loss for the three months ended October 31, 2001 was $521,778, compared to a net loss of $508,450 for the same period in the prior year. Although, as noted above, operating
expenses decreased $39,899 during the three-month period ended October 31, 2001 over the comparable period in 2000, the Companys net loss increased $13,328 due to an decrease in other income of $53,227, attributed to reduced interest income
earned on the Companys cash balances because of falling interest rates and smaller invested balances.





Six months
ended October 31, 2001 and 2000:





The Research and Development
expenses for the six-month period ended October 31, 2001 were $667,325, compared to $285,038 for the same period in the prior year. The addition of new lab equipment and increased research activity during the six-month period October 31, 2001 caused
wages and contract salaries to increase $345,000, laboratory supplies to increase $15,000 and equipment depreciation to increase $16,000, over the comparable period in 2000.





General and Administrative expenses for the six-month period ended October 31, 2001 were $452,280, compared to $658,293 for the same
period in the prior year. This decrease was the result of one-time expenditures in 2000 for outside professional services. Consulting services decreased $92,000, marketing research and promotion expenses decreased $69,000 and investor relations
expenses decreased $59,000.





The net loss for the six-month period
ended October 31, 2001 was $1,039,148 compared to $762,133 for the same period in the prior year. Although operating expenses increased $181,271, as discussed above, the Companys total loss for the six-months ended October 31, 2001 increased
$277,015 due to a decrease in other income of $95,744, attributed to reduced interest income earned on the Companys cash balances because of falling interest rates and smaller invested balances.




7


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LIQUIDITY AND CAPITAL RESOURCES





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, 2001, the Company had $3,584,317 in total current assets and working capital of $3,234,976. 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, 2001 will be sufficient to meet its liquidity needs for the next 12 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.





During the three-month period ended October 31, 2001, the Company entered into separate agreements with Abacus Ventures, LLC and with Stephen R. Lairmore for services relating to
the introduction of the Company to prospective financing sources and to advise, review, assist and/or negotiate financing transactions for the Company.





Abacus will be paid a quarterly retainer of $5,000 and will receive 20,000 options to purchase the Companys common stock at $0.195 per share. In
addition, Abacus will receive a fee for a successful financing transaction with any entity or person introduced to the Company by Abacus. The fee, of which up to 50% can be payable in the Companys common stock at the Companys option, is
computed as follows:





| | 5% of the first $1 million of consideration
| | -------------------------------------------

| | 4% of consideration between $1 million and $2 million
| | -----------------------------------------------------

| | 3% of consideration between $2 million and $3 million
| | -----------------------------------------------------

| | 2% of consideration between $3 million and $4 million
| | -----------------------------------------------------

| | 1% of consideration in excess of $4 million.
| | --------------------------------------------




Mr. Lairmore will receive a non-refundable retainer of $10,000 and will receive a fee of 4% of the Gross
Proceeds of any funding actually received from a Funder introduced to the Company by Mr. Lairmore. In addition the Company will grant Mr. Lairmore warrants exercisable within 7 years to purchase shares of the Companys common stock equal to 4%
of the shares provided to the Funding Source in consideration of the funding at an exercise price equal to the price per share to be paid for similar stock by the Funder.





The Company does not have any firm commitments for additional capital as of October 31, 2001.




8


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Financial Condition





| | October 31, 2001 compared to April 30, 2001:
| | --------------------------------------------




Cash used in operating activities during the six-month period ended October 31, 2001 was $897,452 compared to $569,440 for the comparable period of the prior
year, an increase of $328,012. Operating activities consisted primarily of product research and development and the general operation of corporate office.





Cash used in investing activities during the six-month period ended October 31, 2001 was $215,239 compared to $205,264 for the comparable period of the prior
year. Investing activities consisted primarily of the purchase of equipment and expenditures related to the patent rights.





Cash provided by financing activities during the six-month period ended October 31, 2001 was $358,319 compared to $407,504 for the comparable period of the prior year. Financing
activities consisted primarily of the sale of common stock.





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


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PART IIOTHER INFORMATION





Item 1.    Legal Proceedings.





None





Item
2.    Changes in Securities.





During
September 2001, pursuant to previously executed stock option agreements, the Company issued the following options for the purchase of the Companys common stock:





| | 3,500,000 options with an exercise price of $0.133
| | --------------------------------------------------

| | 2,000,000 options with an exercise price of $0.60
| | -------------------------------------------------

| | 14,286 options with an exercise price of $.01
| | ---------------------------------------------




During September 2001, pursuant to an agreement with a financial advisor, the Company issued warrants
for the purchase of 20,000 shares of the Companys common stock at an exercise price of $0.195 per share.





During September 2001, warrants were exercised for the purchase of 416,936 shares of common stock at an exercise price $0.14 per share by four individuals.





The registrant relied upon the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended (1933 Act) for the transactions described in the above paragraph. Restrictive legends were placed on the common stock certificates. The issuance was made in a private transaction with no public solicitation and no
commissions or fees were paid on the transactions.





Item 3.    Defaults Upon Senior Securities.





None





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





None





Item
5.    Other Information





The Company filed
an S-1 Registration Statement that became effective on September 12, 2001, registering 12,806,630 shares of the Companys common stock for selling shareholders. The Company will not receive any proceeds from any sales pursuant to the
Registration Statement. The Company intends to keep this Registration Statement effective for a period of two years.





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





(a)  Exhibits:





| | 1.    Agreement dated September 17, 2001 with Abacus Ventures, LLC Attached
| | ---------------------------------------------------------------------------




| | 2.    Agreement dated September 27, 2001 with Stephen R. Lairmore, Attached
| | ---------------------------------------------------------------------------




(b)  Reports on Form 8K:





| | None
| | ----



10


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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.





| | SY | NTHETIC BLOOD INTERNATIONAL, INC
| | -- | --------------------------------

| | (Re | gistrant)
| | --- | ---------




12/12/01

/s/    DAVID H.
JOHNSON(Date)

David H. Johnson,Chief Financial Officer




11