UNITED STATES




SECURITIES AND EXCHANGE COMMISSION




WASHINGTON, D.C. 20549




FORM 10-Q




xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES




EXCHANGE ACT OF 1934




For the quarterly period ended September 30, 2009




 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES




EXCHANGE ACT OF 1934




For the transition period from __________ to __________




COMMISSION FILE NUMBER 000-51334


HEMOBIOTECH, INC.


(Exact name of Registrant as Specified in Its Charter)





Delaware
33-0995817(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)5001 Spring Valley Rd, Suite 1040 - West, Dallas, Texas 75244(Address of principal executive offices and Zip Code)(972) 455-8950(Registrant's telephone number, including area code)




Identify by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).


Yes o   No o




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).




Large accelerated filer    ̈                                                                                                                          Accelerated
Filer    ̈




Non-accelerated filer  ̈                                                      (Do
not check if a smaller reporting company.)   Smaller reporting company   x




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ̈ No x




As of November 24, 2009, the registrant had outstanding 21,192,600 shares of common stock, $0.001 par value per share.



























HEMOBIOTECH, INC.


(a development stage company)





TABLE OF CONTENTS





ITEM

PAGEPART I – FINANCIAL INFORMATION

4Item 1. Financial Statements (unaudited)

3Condensed Balance Sheets

3Condensed Statements of Operations

4Condensed Statements of Changes in Stockholders’(Deficiency) Equity

5Condensed Statements of Cash Flows

6Notes to Condensed Financial Statements

8Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk

13

30Item 4T. Controls and Procedures

30PART II – OTHER INFORMATION

33Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

33Item 6. Exhibits

33SIGNATURES

34





1


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS




In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward looking statements as statements containing the words
"believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words. All statements in this report regarding our future strategy, future operations, projected financial position, estimated future revenues, projected costs, future prospects, and results that might be obtained by pursuing management's current plans and objectives are forward-looking statements. You should not place undue reliance
on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the Securities and Exchange Commission (the "SEC"). We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent
events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders. Many important factors that could cause such a difference are described in our Annual Report on Form 10-K, filed with the SEC on April
15, 2009, under the caption "Risk Factors," all of which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this report.


2


PART I -- FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




HEMOBIOTECH, INC.




(a development stage company)




CONDENSED BALANCE SHEETS







September 30


December 31,2009
(unaudited)


2008
(Derived from audited financial statements)ASSETSCurrent assets:Cash and cash equivalents

$
15,000


$
443,000Prepaid expenses


105,000



294,000Total current assets


120,000



737,000Equipment, net


34,000



41,000Restricted cash


55,000



55,000Total Assets

$
209,000


$
833,000LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses

$
544,000


$
389,000Total current liabilities


544,000



389,000Deferred Rent


39,000



38,000Total Liabilities


583,000



427,000STOCKHOLDERS’ (DEFICIENCY) EQUITY
Common stock ----- $.001 par value 55,000,000 sharesauthorized; 21,192,600 as of September 30, 2009 and 20,642,125 at  December 31, 2008 (includes 779,000 shares subject to forfeiture) shares issued and outstanding


21,000



21,000Additional paid-in capital


16,385,000



15,838,000Treasury stock, at (130,334 shares at September 30, 2009 and December 31, 2008)


(130,000
)


(130,000
)Deficit accumulated during the development stage


(16,650,000
)


(15,323,000
)Total (Deficiency) Equity


(374,000
)


406,000$
209,000


$
833,000







See Notes to Condensed Financial Statements.


3


HEMOBIOTECH, INC.


(a development stage company)




CONDENSED STATEMENTS OF OPERATIONS




(UNAUDITED)





THREE MONTHS ENDED

NINE MONTHS ENDED

October 3, 2001(INCEPTION)SEPTEMBER 30

SEPTEMBER 30

THROUGHSEPTEMBER 30,2009

2008

2009

2008

2009Revenue
$
-
$
-
$
-
$
-
$
-Operating expense
$

$

$

$

$Research and development

66,000

276,000

251,000

1,606,000

4,036,000General and administrative

297,000

365,000

1,079,000

1,472,000

10,865,000Other (income) expenseInterest expense

-

-

-

-

2,111,000Interest income

-

(5,000)

(3,000)

(31,000)

(362,000)Net loss
$
(363,000)
$
(636,000)
$
(1,327,000)
$
(3,047,000)
$
(16,650,000)Basic and diluted loss per common share
$
(0.02)
$
($0.03)
$
(0.07)
$
(0.16)Weighed average number of shares outstanding -- basic and diluted

20,413,600

19,341,791

20,169,008

18,716,725










See Notes to Condensed Financial Statements.


4


HEMOBIOTECH, INC.


(a development stage company)





CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDER'S (DEFICIENCY) EQUITY





Common Shares

Amount

Additional Paid-In Capital



Deficit Accumulated During the Development Stage

TotalTreasury StockBalance –
20,642,125

21,000

15,838,000



(15,323,000)

406,000December 31, 2008
$
$
$
(130,000)
$
$Net Loss for the period








(1,327,000)

(1,327,000)Stock based compensation relating to shares and warrants issued to consultants , See Note G[2]
28,333



34,000





34,000Stock based compensation relating to warrants issued to consultant  See Note G[2]




73,000





73,000Stock based compensation relating to shares issued to executive of the Company
65,000



46,000





46,000Stock based compensation – board of advisors and consultants




55,000





55,000Stock based compensation – employees and directors




83,000





83,000Issuance of shares and warrants in private placement to shareholders of the Company  ($0.56 per share)  See Note F[1]
457,142

-

256,000

-

-

256,000BalanceSeptember 30, 2009 unaudited
21,192,600
$
21,000
$
16,385,000
$
(130,000)
$
(16,650,000)
$
(374,000)




See Notes to Condensed Financial Statements.


5


HEMOBIOTECH, INC.


(a development stage company)





CONDENSED STATEMENTS OF CASH FLOWS


(UNAUDITED)


October 3, 2001(INCEPTION)THROUGH


NINE MONTHS ENDED2009





2008





September 30, 2009CASH FLOWS FROM OPERATING ACTIVITIES:$
(1,327,000
)





(3,047,000
)





(16,650,000
)Net Loss





$



$Adjustments to reconcile net loss to net cash used    inoperating activities:Fair value of options, compensatory stockand warrants






245,000







393,000







2,920,000Conversion charge – interest expense






-







-







43,000Notes issued for services – related party






-







-







354,000Expenses paid by stockholder






-







-







14,000Amortization of deferred financing costs






-







-







1,023,000Amortization of debt discount






-







-







789,000Depreciation






7,000







7,000







26,000Deferred Rent






1,000







(9,000
)






39,000Contribution of salary






-







-







11,000Research and Development - Purchase of new technology














645,000







645,000Changes in:Accounts payable and accrued expenses






201,000







34,000







1,303,000Accrued interest






-







-







139,000Prepaid expenses






189,000







283,000







(104,000
)Net cash used in operating activities





$
(684,000
)





$
(1,694,000
)






(9,448,000
)$CASH FLOWS FROM INVESTING ACTIVITIES:Sale/(Purchase) of Short-Term Investments





$
-






$
-







(55,000
)$Purchase of property and equipment






-







-







(59,000
)Net cash used in investing activities





$
-






$
-







(114,000
)$CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of common stock and debt, net of expenses





$
256,000






$
412,000






$
5,121,000Payment of Notes






-







-







(734,000
)Exercise of warrants, net






-







-







5,190,000Net cash provided by financing activities





$
256,000






$
412,000






$
9,577,000(DECREASE) / INCREASE IN CASH ANDCASH EQUIVALENTS





$
(428,000
)





$
(1,282,000
)





$
15,000Cash and cash equivalents – beginning of period






443,000







2,015,000







-CASH AND CASH EQUIVALENTS – END OF PERIOD





$
15,000







733,000







15,000$



$SUPPLEMENTARY CASH FLOW INFORMATION:Interest Paid






-






$
-






$
112,000SUPPLEMENTARY NON-CASH INVESTING AND FINANCING ACTIVITIES:Accrued salary exchanged for Note






-







-






$
150,000Employees / stockholders contribution of salary






-







-






$
564,000Stockholders contribution of convertible note payableand related interest





$
-







-






$
280,000Conversion of carrying value of convertible notespayable and accrued interest of $18,000 (2006) and $97,000 (2005) into common stock





$
-






$
-







1,815,000$Issuance of shares for acquisition of new technology





$
-






$
645,000






$
645,000Shares returned to treasury by officer





$
-






$
-






$
130,000Cashless exercise of stock options





$
-






$
-






$
131,000Shares issued in settlement of liability





$
46,000







-






$
46,000








6




NOTES TO CONDENSED FINANCIAL STATEMENTS




(UNAUDITED)




NOTE A - THE COMPANY





We were founded in 2001 as “HemoBioTech, Inc.,” a Texas corporation.  In 2003, we incorporated a sister corporation named “HemoBioTech, Inc.,” in the state of Delaware.  On December 1, 2003, HemoBioTech, Inc. (Texas) was merged with and into HemoBioTech, Inc., (Delaware), with HemoBioTech, Inc.
(Delaware) as the surviving entity.  This entity is referred to herein as the “Company”.





The accompanying financial statements include the predecessor operations of the Texas corporation from its inception on October 3, 2001. The historical basis of accounting was carried over in the merger, including the deficit accumulated in the development stage. The Company is researching and developing human blood substitute patented
technology licensed exclusively from Texas Tech University Health Services Center ("TTUHSC") (See Note D). The Company is in the development stage and its efforts have been principally devoted to capital raising, organizational infrastructure development and research and development.







NOTE B - BASIS OF PRESENTATION AND SUBSTANTIAL DOUBT ON GOING CONCERN





The accompanying condensed financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 have not been audited, but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X.  The condensed balance sheet at December 31, 2008 has been derived from audited financial statements.  These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2008 as presented in our Annual Report on Form 10-K.  In the opinion of management, this interim information includes all material adjustments which are of a normal and recurring nature, necessary for a
fair presentation.  The results for the 2009 interim period are not necessarily indicative of results to be expected for the entire year.





The financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of $16,650,000 from inception through September 30, 2009, has not generated any revenue,
and has been dependent on funding operations through the private sale of convertible debt and equity securities. These conditions indicate that there is substantial doubt about the company’s ability to continue as a going concern. Management believes our cash available of $15,000 at September 30, 2009 will not be sufficient to fund our immediate current operations. On December 2, 2009, the Company had approximately $170,000 in cash and cash equivalents. This cash position will not be sufficient to carry
on current operations beyond two to three months.




7


Management’s plans include continuing to fund operations through one or more public or private offerings of equity or debt securities, although there is no assurance they will be able to do so in the future, and monitoring and reducing discretionary expenses.







All amounts have been rounded to the nearest thousand.







NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





(1) RESEARCH AND DEVELOPMENT:





Research and development costs are charged to expense as incurred. Costs include the amortization of payments made to TTUHSC for the Sponsored Research Agreement, spending with outside laboratories and consultants.





(2) LOSS PER COMMON SHARE:





Basic and diluted loss per common share is based on the net loss divided by the weighted average number of common shares outstanding during the period. No effect has been given to the following outstanding potential common shares such as options, warrants and outstanding shares subject to forfeiture issued to a financial services consultant
during September 2006, as described in Note G(3) in the diluted computation as their effect would be antidilutive:





NINE MONTHS ENDED
SEPTEMBER 30,2009


2008Stock Options


1,853,031



2,312,990Warrants


4,893,589



4,236,447Common shares subject to forfeiture(1)


779,000



779,000Total


7,525,620



7,328,437





(1)Common shares not included in basic earnings per share since subject to forfeiture.





(3) FAIR VALUE OF FINANCIAL INSTRUMENTS:





The carrying value of cash equivalents, accounts payable and accrued expenses approximates their fair value due to the short period to maturity of these instruments.





(4) USE OF ESTIMATES:





The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Such estimates include the selection of assumptions underlying the calculation of the fair value of options. Actual results could differ from those estimates.








8


(5) RECENT ACCOUNTING PRONOUNCEMENTS:





In June 2009, FASB released the Codification which became the source of authoritative GAAP recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. For all financial statements issued
after September 15, 2009, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification does not change how we account for our transactions or the nature of related disclosures made. However, when referring to guidance issued by the FASB, we will refer to topics in the Codification rather than the superseded standards. The adoption of the Codification
did not have an impact on the condensed financial position, results of operations, cash flows or financial statement disclosures.





In April 2009, FASB established general standards of accounting for, and the disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, the Subsequent Event Topic of the Codification sets forth: (1) the period after the balance sheet date
during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of these standards did not have a material impact
on the condensed financial position, results of operations or cash flows.





In April 2009, the FASB issued additional guidance for estimating fair value in accordance with ASC Topic 820.  The additional guidance addresses determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly.  The
Company adopted the provisions of this guidance for the quarter ended September 30, 2009.  The adoption of these standards did not have a material impact on the financial position, results of operations or cash flows.





In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments (ASC 825-10-65) to change the reporting requirements on certain fair value disclosures of financial instruments to include interim reporting periods. The Company
adopted ASC 825-10-65 in the second quarter of 2009. The adoption of these standards did not have a material impact on the financial position, results of operations or cash flows.





During the first quarter of 2009, the Company adopted FASB ASC 825, Financial Instruments (formerly referenced as SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115), which allows companies to choose to measure eligible financial instruments and certain
other items at fair value that are not required to be measured at fair value. The Company has not elected the fair value option for any eligible financial instruments and therefore


9


there was no impact on the Company’s financial position, results of operations or cash flows.





In June 2008, FASB established that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarified the impact of foreign currency denominated
strike prices and market-based employee stock option valuation instruments on the evaluation. The standard was effective as of January 1, 2009.  The adoption of these standards did not have a material impact on the financial position, results of operations or cash flows.





In December 2007, the FASB issued guidance which is included in the Codification in ASC 808, “Collaborative Arrangements” (ASC 808), which is effective for calendar-year companies beginning January 1, 2009. ASC 808 clarified the manner in which costs, revenues and sharing payments made to, or received by, a partner in a
collaborative arrangement should be presented in the income statement and set forth certain disclosures that should be required in the partners’ financial statements. The adoption of these standards did not have a material impact on the financial position, results of operations or cash flows.







NOTE D - AGREEMENTS WITH TEXAS TECH UNIVERSITY HEALTH SCIENCES CENTER ("TTUHSC")





On January 22, 2002, the Company entered into an exclusive license agreement with TTUHSC with respect to receiving certain patented rights.  The Company is committed to the exploitation of such patented rights.





In consideration for entering into the agreement, the Company issued 678,820 shares of common stock to TTUHSC (subject to anti-dilution protection).  These shares issued were valued at approximately $1,000, their estimated fair value, and charged to operations.  The Company has agreed to reimburse TTUHSC for all intellectual
property protection costs and patent maintenance fees.  On May 20, 2004, TTUHSC agreed to waive its anti-dilution protection in exchange for 135,765 additional shares of common stock.  Such shares were valued at approximately $115,000, their estimated fair value, and charged to operations. In addition, subject to obtaining FDA approval of a blood substitute product, the Company has agreed to fund, over a four-year period, $1.2 million to support efforts in incubating and commercializing other
TTUHSC technologies.  As of September 30, 2009, such approval had not been obtained.  Under the agreement, the Company reserves the right of first refusal on licensing and commercializing other technology developed from such funding. In addition, in July 2002, the Company entered into a Sponsored Research Agreement (“SRA”) with TTUHSC for the period September 1, 2002 through August 31, 2006.  In December 2004, the Company paid a fee of approximately $231,000 to fund the
next phase of its research under the SRA through December 31, 2005.





In January 2006, the Company entered into a Stage III SRA with TTUHSC for the period January 1, 2006, to December 31, 2006.  In connection therewith, the Company made an initial payment of approximately $287,000 which was amortized during 2006.


10


In January 2007, the Company entered into a Stage IV SRA with TTUHSC for the period beginning January 1, 2007. In connection therewith, the Company made an initial payment of approximately $780,000. This amount will be charged to operations as incurred based on monthly reporting to the Company by TTUHSC.  As of September 30, 2009,
approximately $67,000 is included in prepaid expenses on the accompanying balance sheet. Additional payments may be made to TTUHSC under the agreement based on mutually agreed upon budgets.





On May 5, 2008 the Company agreed to license certain technology from TTUHSC titled Orthogonal Method for the Removal of Transmissible Spongiform Encephalopathy Agents from Biological Fluids (“ORTH Technology”). This is a technology that results in the removal and inactivation of infectious agents such as prions (which can cause
Mad Cow Disease) and viruses.  Such removal and inactivation is critical in the purification of animal products for human use.  It can be used not only for HemoTech production but also has the potential for generating sublicensing revenue from pharmaceutical, biotechnology and the cosmetic industries.





The term of the agreement extends to the full end of the term or terms for which patent rights have not expired or, if only technology rights are licensed and no patent rights are applicable, for a term of 15 years. The license agreement calls for a nonrefundable license documentation fee of $10,000 and 500,000 shares of the Company’s
common stock.  The price per share of the Company’s common stock on May 5, 2008 was $1.29 per share.  Accordingly, the Company recorded a charge to research and development expense for $655,000. The agreement also contains an annual renewal fee of $10,000 per year and a royalty based on net sales of Licensed Products (as defined by the agreement) sold by the Company that contain the patented ORTH Technology.  The royalty percentage will be lower if Licensed Products are not
protected by a valid patent. The agreement calls for a minimum royalty beginning six months after approval of a Licensed Product by the FDA. No royalty applies to the embedded ORTH Technology in the sale of our HemoTech product. The Company is permitted to sublicense the ORTH Technology and TTUHSC will receive a portion of both cash and non cash remuneration received by the Company for a sublicense.  Additionally, the Company will pay a portion of any royalty received to TTUHSC.





The Company has also agreed to issue up to 275,000 additional shares of the Company’s common stock in the event TTUHSC purchases certain equipment used in the HemoTech process. The equipment will be owned by TTUHSC, will be used to further the development of HemoTech, and will be charged to research and development expense when purchased.  As
of September 30, 2009, no such equipment has been purchased by TTUHSC.





The agreement may be terminated by either party by mutual written agreement upon 180 days notice, or by TTUHSC based on certain provisions relating to defaults according to the agreement.





The Sponsored Research Agreements may be terminated by either party on 90 days written notice.





11






NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES





Accounts payable and accrued expenses consist of the following:





September 30,2009

December 31, 2008Professional Fees
$
379,000
$
265,000Liquidated Damages

38,000

38,000Other

127,000

86,000Total
$
544,000
$
389,000







NOTE F - STOCKHOLDERS' EQUITY





(1) PRIVATE PLACEMENTS:





During December 2007 the Company circulated a Private Placement Term Sheet and Exhibits (“the 2007 Private Placement”) for the purpose of raising additional capital. Our Private Placement offering of units consists of one share of HemoBioTech, Inc. common stock (“Share”) and one warrant (Warrant”) to purchase
one share of common stock (collectively, the “Unit”) may  result in up to $6,000,000 in gross proceeds, subject to an over-allotment option  for up to an additional $1,000,000 in gross proceeds.  The purchase price per Unit is based on the average of the closing price of our common stock on the OTC bulletin Board for the ten trading days immediately preceding the date of the initial closing of the 2007 Private Placement, discounted by 20%. Each Warrant is exercisable
for the purchase of one share of our common stock at 150% ($1.68) of the per Unit price for a period of five years from the effective registration date of the shares underlying the Warrants. The warrants may be redeemed in whole or in part by the Company, upon 30 day’s written notice, at price of $.01 share, provided the weighted average closing price of the Common Stock exceeds 185% of the per-Unit purchase price for a period of 20 consecutive trading days ending within 15 days prior to the date on which
the notice of redemption is given and the registration statement for underlying shares is effective.





In addition, the Company is obligated to issue warrants to its placement agent in the amount of 30% of the total warrants issued to investors on essentially the same terms; however, these warrants are only callable when the Company provides a notice of redemption and a registration statement for the underlying shares is effective. This
offering closed on October 31, 2008.





On December 31, 2007 the Company completed an initial close of the 2007 Private Placement consisting of gross proceeds of approximately $792,000 at the per Unit price of $1.12. As a result of this closing 707,120 shares of our common stock was issued


12


along with warrant agreements for the issuance of 707,120 additional shares upon exercise of the warrants at an exercise price of $1.68. Net of expenses, primarily to our financial advisor, the Company received net proceeds of $686,000. In addition, 212,136 warrants were issued to our placement agent with essentially the same terms as our
investor warrants; however, these warrants are only callable when the Company provides a notice of redemption and a registration statement for the underlying shares is effective. The warrants were valued at December 31, 2007 using the Black-Scholes stock option valuation model and totaled $621,000 and $186,000 for the investors and placement agents respectively.





For the twelve months ended December 31, 2008, the Company raised additional funds associated with its December 2007 Private Placement consisting of gross proceeds of $534,000 at the per unit selling price of $1.12.  As a result, 476,784 shares of our common stock were issued along with warrant agreements for the issuance of 476,784
additional shares upon exercise of the warrants at an exercise price of $1.68.  Net of expenses, including $72,000 to a significant shareholder, the Company received net proceeds of $412,000.  In addition, 143,035 warrants were issued to our placement agent, who is also a shareholder of the Company. The warrants were valued using the Black-Scholes stock option valuation model and totaled $301,000 and $90,000 for the investors and placement agents respectively.





On October 27, 2004, the Company completed a Private Placement (“the 2004 Private Placement”) of 45 units, priced at $100,000 per unit, and raised gross proceeds of $4,500,000. Each unit consists of a $50,000 unsecured convertible promissory note, 58,824 shares of common stock and 117,648 warrants. The notes bear interest at
10% per annum (an effective rate of 77%) and are convertible at the option of the holder into common stock or convertible securities to be sold by the Company in its next financing, as defined, at a conversion price equal to the per share offering price of such financing.





Based on negotiations with the placement agent, the Company agreed to a fair value for the common stock of $.85 per share and calculated the fair value of each warrant to be $.53 using the Black-Scholes option pricing model.  Prior to the revision in the method of valuing the common stock, the Company used Black-Scholes to value
both common stock and warrants. The gross proceeds from the sale of each unit were allocated based on the relative fair values to each of the components.











Convertible notes payable
$            31,000Common stock
$            31,000Stock Warrants
$            38,000Total
$           100,000





Based on the allocation of the relative fair values to the components of the 2004 Private Placement offering, the debt discount was calculated to be $855,000, which was amortized as expense to interest expense over the term of the notes.





13


The Company agreed to file a registration statement within 60 days of final closing of the 2004 Private Placement and to use commercially reasonable efforts to cause the registration statement to be effective within 120 days of final closing.  In the event the registration statement was not filed and declared effective within
the required time, the Company would incur liquidated damages of 2% per month based on the subscription amount of each purchaser in the Company October 2004 Private Placement. In connection therewith, during 2005, the Company incurred liquidated damages aggregating approximately $48,000. As of September 30, 2009, the Company owes $38,000 of such damages. (See Note E).





During February 2009 the Company engaged the advisory services of a consultant for the purpose of assisting with short and long term strategic needs of the Company, assisting in the development of a business plan, providing general advice and assist in providing the capital structure of the Company and assisting with staffing and recruiting.
The consultant will assist the Company in its effort to obtain equity investment and related financing including potential federal funding. The consultant will also identify and help negotiate with potential strategic and joint venture partners, identify and assist in negotiations with potential acquisition and merger candidates and assist in addressing the HIV/AIDS community and potential benefits of HemoTech. The agreement is for one year and may be terminated for cause by either party on 60 days written notice.
The company has agreed to pay the consultant 100,000 shares of the Company’s common stock and has agreed to register these shares with the next registration statement of the Company. Additionally the Company will provide to the consultant five year warrants which vested immediately to purchase up to 100,000 shares of the Company’s common stock at $1.50 per share and 100,000 shares of the Company’s common stock at $2.25 per share. The Company has also agreed to reimburse the consultant on a monthly
basis for its reasonable out of pocket expenses not to exceed $4,000 per month. The per share price of the Company’s common stock on the date of the agreement was approximately $0.70 per share.





During the second quarter of 2009, the Company received $256,000 from two shareholders of the Company in exchange for 457,142 shares and warrants representing an equal number of shares.  These warrants are exercisable at $0.84 per share through the fifth anniversary of the effectiveness of a registration statement of shares underlying
the warrants. The warrants are subject to redemption, at the Company’s sole option, after one year from the date of effectiveness of the registration statement of common stock underlying the warrants if the common stock price equals or exceeds $1.04 for a period of at least 20 consecutive trading days at a redemption price of $.01 per warrant.





(2) STOCK WARRANTS:





In connection with the 2007 Private Placement, through the closing, the Company issued 1,183,904 Class A warrants to investors exercisable at $1.68 per share through the fifth anniversary of the effectiveness of a registration statement of shares underlying the warrants. The warrants are subject to redemption, at the Company’s sole
option, after one year from the date of effectiveness of the registration statement of common stock underlying the warrants if the common stock price equaled or exceeded $2.07 for a period of at least 20 consecutive trading days at a redemption price of $.01 per warrant.


14





In addition, the Company issued to its placement agent warrants totaling 30% of the total warrants issued to investors. Accordingly, the Company issued 355,171 warrants to the placement agent as of the closing date of the Private Placement, October 31, 2008.





During the fourth quarter 2007, the Company granted 120,000 warrants to a service provider as compensation. These warrants became fully vested during 2008.  In connection therewith, the Company valued all 120,000 vested warrants using the Black-Scholes option pricing model and recorded a total compensation charge of $83,000 of
which $16,000 is for the nine months ended September 30, 2008.





In May 2008, the Company granted 135,000 warrants at prices ranging from $1.60 to $2.50 to two service providers as compensation.  These warrants vest over nine months beginning in November 2008. General and administrative expenses were charged $18,000 (of which $4,000 is included in accrued expenses at September 30, 2009) and
$0 for the nine months ended September 30, 2009 and 2008, respectively.





The following assumptions were used for all compensatory warrants issued to service providers:





September 30, 2009Range of Exercise Price
$0.90-$2.50Maturity
5 YearsRisk Free Interest Rate
1.67%-4.0%Volatility
80-88%





At September 30, 2009, the Company had the following warrants outstanding:





Exercise Price
Expiration Date
Number of Shares ReservedPlacement Agent – 2004
$0.90
May 13, 2010
2,382,372Other
$1.00
July 28, 2009
50,000Other
$1.06
September 13, 2009
10,000Other
$1.90
September 28, 2011
120,000(1)Class A- 2007
$1.68
December 30, 2013
1,183,904(2)Placement Agent – 2007
$1.68
December 30, 2013
355,171Other
$1.50-$2.25
March 6, 2014
200,000Other
$1.60-$2.50
May, 2013
135,000Class A- 2009
$0.84
May, 2014
457,142Total


4,893,589








(1)
Subject to vesting.(2)
Subject to redemption (see Note F(1)).








(3) STOCK OPTION/STOCK ISSUANCE PLAN:





During 2003, the Board of Directors of the Company approved a Stock Option/Stock Issuance Plan (the "Old Plan") which provides for the granting of options or stock to purchase up to 1,629,168 shares of common stock, under which directors, employees and


15


independent contractors are eligible to receive incentive and non-statutory stock options and common shares (employees). The Company's stockholders approved the Old Plan in August 2004. On June 9, 2006, the Company’s stockholders approved an increase of 1,500,000 shares of common stock from the 1,629,168 shares of common stock available
to be granted under the Plan, increasing the number of shares to 3,129,168.





Additional information on shares subject to options is as follows:





At September 30, 2009, 595,463 options were available for grant under the Plan. The following tables present information relating to stock options under the Plan as of September 30, 2009.








NINE MONTHS ENDEDSEPTEMBER 30, 2009Shares

Aggregate Intrinsic Value

Weighted Average Exercise PriceOptions outstanding at beginning of period
1,668,031



$0.88Granted during the period
185,000

-

$0.50Options outstanding at end of period
1,853,031

79,503

$0.84Options exercisable at end of period
1,690,147

79,503

$0.82Options Not Vested at end of period
162,884

-

$1.10Options vested or expected to vest
1,853,031

79,503

$0.84







September
30, 2009Options Outstanding

Options  ExercisableRange of Exercise Price

Shares

Weighted Average Exercise Price

Weighted Average Remaining Life in Yrs

SharesWeighted Average Exercise Price$0.18$-0.33

697,526

$                     0.19

5.0

697,526

$              0.19$ 0.51-$.94

353,645

$                     0.73

7.2

316,145

$              0.74$1.00-$1.65

566,860

$                     1.25

6.9

452,412

$              1.26$1.75-$2.42

235,000

$                     2.03

6.8

224,064

$              2.041,853,031

$                     0.84

6.20

1,690,147

$              0.82


As of September 30, 2009, 1,690,147 options were fully vested. A summary of the status of the Company’s nonvested options as of September 30, 2009 and changes during the nine months ended September 30, 2009 is presented below.











Stock Options

Weighted Average Grant Date Fair ValueNonvested at January 1, 2009
223,866

$     1.02Options granted

185,000

$     0.41Options vested

(245,982)

$     0.65Nonvested at September 30, 2009
162,884

$     0.84


The unrecognized compensation cost related to non vested employee and director share-based compensation granted under the Plan for the nine months ended September 30, 2009 and 2008 were $63,000 and $142,000 respectively. The weighted average period for recognizing the cost for the nine months ended September 30, 2009 and 2008 were
1.41 and 2.27 years respectively. There have been no material forfeitures of stock options for the nine months ended September 30, 2009.




16






The weighted-average fair values at date of grant for options granted during the nine months ended September 30, 2009 and 2008 were $0.42 and $0.94 respectively. The value of the options was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:




September 30,2009

2008Expected life in years
5-10

5-10Interest rate
1.79%-3.52%

2.51%-4.03%Volatility
88%

80-88%Dividend yield
0%

0%
 
 NOTE G – COMMITMENTS AND OTHER MATTERS
 
 (1) LEASES:


During February 2007 the Company moved into new office space and agreed to a sixty-six month office lease.  The lease agreement includes rent abatement for approximately ten months during 2007 and 2008.  Provisions of the lease include a security deposit of approximately $5,800 and a thirty six month letter of credit in
the amount of approximately $55,000.  In addition, if the Company cancels this lease after December, 2010, and prior to its full sixty-six month term, the Company will be obligated to pay a cancellation charge of approximately $46,000. The estimated minimum lease payments for the next five years are:  In 2009 - $17,000; in 2010 - $67,000; in 2011 - $68,000; in 2012 - $70,000 and none thereafter.








(2) CONSULTING AGREEMENTS:





On October 14, 2004, the Company entered into an advisory agreement with a member of our scientific advisory board to receive technical advisory services. The agreement can be terminated by either party on 30 days' written notice. The agreement provides for $1,500 per month and the issuance of an option under the Plan to purchase 15,000
shares of common stock of the Company at an exercise price of $0.85 per share. In addition, at the end of each year of service on the advisory board, the company will grant an additional non-qualified stock option to purchase 5,000 shares of Common Stock at an exercise price equal to the then fair market value of the Common Stock. Such options vest 25% on the first anniversary and then monthly thereafter over a period of thirty six months. During the nine months ended September 30, 2009 and 2008, $2,000 and $20,000
were charged to operations as stock based compensation respectively.





On July 13, 2005, the Company entered into an advisory agreement with its Acting Vice President and Principal Investigator of Research and Development to receive advisory services on technical, medical and market issues related to HemoBioTech, including its second generation blood substitute, HemoTech. The agreement provides for non-qualified
stock options to purchase 271,528 shares of Common Stock of HemoBioTech at an exercise price per share of $0.18, subject to vesting through July 13, 2009. In connection therewith, the Company recorded a charge of $12,000 and $27,000 for the nine months ended September 30, 2009 and 2008 respectively. As of September 30, 2009, all options are fully vested and immediately exercisable.  .





On January 16, 2008, the Company granted stock options to two scientific consultants employed by TTUSHC.  Each grant provides for 75,000 non-qualified stock options to purchase shares of the Company’s stock at an exercise price of $1.19 which was the fair market value of the Company’s shares on the grant date.  The
options vest 25% immediately and the remaining 75% vest monthly over the next 36 months.  Accordingly, the Company recorded a charge of $13,000 and $60,000 to stock based compensation for the nine months ended September 30, 2009 and 2008 respectively.





During January 2009 the Company engaged the advisory services of a consultant for the purpose of assisting with press releases or announcements related to the Company, assist with telephone conferences with investor groups, and provide information in the industry in which the company conducts business. The agreement does not have a termination
date and may be terminated by either party with 30 days written notice.  The consultant was required to sign a confidentiality agreement and during February 2009, was paid 20,000 shares of the Company’s unregistered common stock.  The per share price of the Company’s common stock on the date of the agreement approximated $0.70 per share. Accordingly, the Company recorded a charge of $14,000 to stock based compensation.




17




During February 2009 the Company engaged the advisory services of a consultant for the purpose of assisting with short and long term strategic needs of the Company, assist in the development of a business plan, provide general advice and assist in providing the capital structure of the Company, assist with staffing and recruiting. The consultant
will assist the Company in its effort to obtain equity investment and related financing including potential federal funding. The consultant will also identify and help negotiate with potential strategic and joint venture partners, identify and assist in negotiations with potential acquisition and merger candidates and assist in addressing the HIV/AIDS community and potential benefits of HemoTech. The agreement is for one year and may be terminated for cause by either party on 60 days written notice. The company
has agreed to pay the consultant 100,000 shares of the Company’s common stock and has agreed to register these shares with the next registration statement of the Company. The stock will be earned in twelve equal monthly installments of 8,333 shares per month. The Company issued 8,333 shares in February 2009 and charged operations $6,000. The Company has not issued any additional shares since February 2009. The Company accrued $37,000 of stock based compensation for the March through September vesting. Accordingly,
the Company recorded a charge of $43,000 to stock based compensation for the nine months ended September 30, 2009.





Additionally the Company will provide to the consultant warrants to purchase up to 100,000 shares of the Company’s common stock at $1.50 per share and 100,000 shares of the Company’s common stock at $2.25 per share exercisable for five years. The warrants vested 100% on the grant date and were valued using Black Scholes pricing
model. Accordingly, the company charged stock based compensation of $73,000 during the first quarter of 2009. The Company has also agreed to reimburse the consultant on a monthly basis for its reasonable out of pocket expenses not to exceed $4,000 per month. The per share price of the Company’s common stock on the date of the agreement approximated $0.70 per share.





During March, 2009 the Company added a new member to its Scientific Advisory Board. The terms of the agreement call for at least one year of service and may be terminated by either party at any time with 45 days notice. The advisor will provide the company services on technical and medical issues related to the development and use of HemoTech
for prevention of HIV and company matters. Upon signing the agreement the company granted 100,000 non qualified stock options at an exercise price per share of $0.51. The options will vest 25% immediately and the balance over twelve months. Stock based compensation expense for the nine months ended September 30, 2009 using the Black Scholes option pricing model was $28,000.








(3) FINANCIAL ADVISOR AGREEMENT:





On September 12, 2006, the Company entered into a three year agreement with its placement agent and financial advisor for consulting services related to corporate finance and other financial services. The financial advisor is also a significant shareholder in the Company. The services shall include assisting the Company in evaluating and
negotiating particular contracts or transactions, if requested to do so by the Company and to raise for


18


the Company its next financing of up to $10 million with a minimum of $6 million in the next 18 months from the date of the agreement.   As compensation for such services, the Company agreed to issue 1,500,000 shares of its common stock. The agreement states that 500,000 shares would vest to the consultant on the one year
anniversary of the agreement.  Accordingly, on September 12, 2007, 500,000 shares vested to the financial consultant. The remaining 1,000,000 shares are subject to forfeiture in the event that the consultant fails to achieve certain performance criteria, including assisting the Company in raising additional capital, set forth in the agreement. The December 2007 Private Placement closed on October 31, 2008 and raised gross proceeds of $1,326,000.  The September 12, 2006 agreement expired on
September 12, 2009.





In August 2008, the Company had agreed to award the financial advisor approximately 221,000 of the 1,000,000 shares that were subject to forfeiture. Accordingly, the Company recorded $61,000 in charges for the full year 2008 for the cost of those financial services. This offering closed on October 31, 2008. There are currently no contractual
amounts due to the financial advisor under this agreement.





(4) OTHER AGREEMENT





During March, 2009 the Company signed a Modification, Settlement and Release Agreement to amend the employment agreement of its Chief Financial Officer and Secretary (the “Executive”).  The agreement calls for a lump sum payment to the Executive of $25,000 and 65,000 shares of the Company’s common stock in exchange
for a reduction to the Executive’s salary. The per share price of the Company’s common stock on the date of the agreement approximated $0.70 per share (aggregate of $46,000). The Company charged $71,000 to operations in 2008 related to this agreement.





Note H - Subsequent Events





During October and through November 30, 2009, the Company received $385,000 in gross proceeds, coincident with a short term bridge financing (“Bridge Notes”). In exchange for this amount, the Company issued 10% Promissory Notes that may convert into shares of the Company’s common stock at the earlier of one year from the
date of issue or upon the Company’s issuance of at least $1,500,000 in a Private Placement financing. The Bridge Notes are payable in either cash or the Company’s common stock, at the Company’s discretion. Additionally the Bridge Note investors will receive four shares of the Company’s common stock for each $1.00 invested in the Bridge Notes. Accordingly, during the fourth quarter, the Company will issue 1,540,000 shares of common stock. The net proceeds from the Bridge Notes was approximately
$312,000. The value associated with the 1,540,000 common shares is expected to approximate $516,000 and will be charged to operations during the fourth quarter of 2009.




The Placement Agent in the Bridge Notes is also a financial advisor to the Company and a significant shareholder of the Company (Note G(3)). The Placement Agent received approximately $55,000 in fees and expenses coincident with the Bridge Notes.





The Bridge Notes will convert to common stock at a price determined by a contemplated $3,000,000 Private Placement financing.  The Private Placement terms include a conversion price of the Bridge Notes to the company’s common stock at the lower of $.25 or a 25% discount to the 10 day trading weighted average of the closing
price of the Company’s common stock prior to the first closing.


19


The beneficial conversion feature from the conversion of the Bridge Notes to common stock and the debt discount, which is expected to approximate $300,000, will be amortized to interest expense over the life of the Bridge Notes.





The Company has evaluated events and transactions between September 30, 2009 and the date the financial statements were filed, which is December 2, 2009.










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







PLAN OF OPERATIONS




We are primarily engaged in the research and development of human blood substitute technology exclusively licensed from Texas Tech University Health Sciences Center (“TTUHSC”). Since October 27, 2004 most of our working capital was used to pay for general and administrative costs, salaries, legal and accounting fees and the
cost of raising money. After reviewing the blood substitute technology developed by researchers at Texas Tech, in January 2002 we licensed from Texas Tech the exclusive rights to various alternative compositions of HemoTech, a novel blood substitute that is based on hemoglobin (which is the key protein in red blood cells that carries oxygen) of both bovine (cow) and human origin, as well as methods for its production and use. What makes HemoTech a novel potential blood substitute product is the fact that it is
comprised of hemoglobin that has been isolated from bovine blood and then chemically modified to make the product non-toxic. For HemoTech production, hemoglobin is modified with ATP. Adenosine and Glutathione(GSH).We also have an agreement with Texas Tech that any patent issued from its patent application relating to the induction of erythropoiesis (which is the production of red blood cells by the body) will be included under our exclusive license with Texas Tech. In addition to our license and patent agreement
with Texas Tech, beginning in July 2002, we have entered into a series of Sponsored Research Agreements (“SRA”) with TTUHSC under which we are entitled to use certain of Texas Tech's production and research and development facilities in Lubbock, Texas.




In January 2007, the Company entered into a Stage IV SRA with TTUHSC for the period beginning January 1, 2007. In connection therewith, the Company made an initial payment of approximately $780,000. This amount will be charged to operations over the period of the research (see Note D to the Condensed Financial Statements). Additional payments
may be made to TTUHSC under the agreement based on mutually agreed upon budgets. The SRA IV activities include maintaining the animal facility which houses a controlled herd of Hereford cows needed for the production of HemoTech and assistance in the implementation of FDA recommendations received at a Pre-IND meeting with the FDA in April 2006.  The SRA IV activities also include the manufacture of HemoTech. The product will be made at the production facility at TTUHSC and will be used for pre-clinical
and clinical studies upon acceptance of the IND.  The agreement will also involve further research and development with a focus on additional uses of HemoTech and expanded patent protection.




20


At September 30, 2009, approximately $67,000 remained as available funds at TTUHSC and are included in the company’s prepaid assets.




Our goal is to address an increasing demand for a safe and inexpensive human blood substitute product in the United States and around the world through our licensed technology. We believe that certain initial pre-clinical and early stage human trials undertaken outside the U.S. by prior holders of this technology suggest that our licensed
technology may possess properties that diminish the intrinsic toxic effects of hemoglobin and help reduce or eliminate the abnormal reaction associated with hemorrhagic shock (which is the loss of blood pressure and the lowering of vital signs resulting from the loss of blood).




The FDA has cited the Adenosine/GSH modified hemoglobin strategy used in HemoTech as a viable strategy for a needed new generation red blood cell substitute. The FDA indicated at a meeting on April 29, 2008 the toxicity of previous first generation substitutes and the need for a new generation substitute. Our Adenosine/GSH modified
hemoglobin, HemoTech, is protected by issued patents in 21 countries.





We have a limited operating history, no customer base and no revenues to date. Our plan of operations for the next twelve months is focused primarily on the development of our licensed technology and business, production of our product, HemoTech, for use in Phase I U.S. clinical trials, filing of an IND with the FDA, continuing and enlarging
the animal facility at Texas Tech University, upgrading our existing production facility based on FDA recommendations and furthering our intellectual property position through the introduction of additional patents and initiation of Phase I U.S. clinical studies if the IND is accepted.




Management believes our cash available of $15,000 at September 30, 2009 will not be sufficient to fund our immediate current operations. On December 2, 2009, the Company had approximately $170,000 in cash and cash equivalents. This cash position will not be sufficient to carry on current operations beyond two to three months.




During October and through November 30, 2009, the Company received $385,000 in gross proceeds, coincident with a short term bridge financing (“Bridge Notes”). In exchange for this amount, the Company issued 10% Promissory Notes that may convert into shares of the Company’s common stock at the earlier of one year from the
date of issue or upon the Company’s issuance of at least $1,500,000 in a Private Placement financing. The Bridge Notes are payable in either cash or the Company’s common stock, at the Company’s discretion. Additionally the Bridge Note investors will receive four shares of the Company’s common stock for each $1.00 invested in the Bridge Notes. Accordingly, during the fourth quarter, the Company will issue 1,540,000 shares of common stock. The net proceeds from the Bridge Notes was approximately
$312,000. The value associated with the 1,540,000 common shares is expected to approximate $516,000 and will be charged to operations during the fourth quarter of 2009.







The Placement Agent in the Bridge Notes is also a financial advisor to the Company and a significant shareholder of the Company (Note G(3). The Placement Agent received approximately $55,000 in fees and expenses coincident with the Bridge Notes.





The Bridge Notes will convert to common stock at a price determined by a contemplated $3,000,000 Private Placement financing.  The Private Placement terms include a conversion


21


price of the Bridge Notes to the company’s common stock at the lower of $.25 or a 25% discount to the 10 day trading weighted average of the closing price of the Company’s common stock prior to the first closing.







The beneficial conversion feature from the conversion of the Bridge Notes to common stock and the debt discount, which is expected to approximate $300,000, will be amortized to interest expense over the life of the Bridge Notes.







The Company recently significantly reduced its actual and projected expenses and plans to aggressively manage cash costs. Management's plans include continuing to finance operations through one or more private or public offerings of equity or debt securities and monitoring and reducing discretionary expenditures. In order to complete our
planned operations which includes implementing certain FDA recommendations including upgrading the production facility, and performing complimentary toxicology studies; collectively at a cost ranging from $3,000,000 to $4,000,000, we will need to raise at least $3 million in the near term, although there can be no assurance that we can raise these funds. If we fail to generate enough working capital, either from future debt or equity offerings, we will have to further curtail our planned operations.




The financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of $16,650,000 from inception through September 30, 2009, has not generated any revenue,
and has been dependent on funding operations through the private sale of convertible debt and equity securities. These conditions indicate that there is substantial doubt upon the company’s ability to continue as a going concern. Management’s plans include continuing to fund operations through one or more public or private offerings of equity securities, although there is no assurance they will be able to do so in the future, and monitoring and reducing discretionary expenses.









RECENT DEVELOPMENTS




During February 2009 the Company announced that R.E. “Corky” Dragoo, Jr. has joined its Board of Directors. Mr. Dragoo is Executive Assistant to the Chancellor of Texas Tech University and is Director of Policy for Texas Tech University. Mr. Dragoo was formerly Ernst and Young National Director for the energy industry and was
a Senior Partner of Ernst and Young’s Center for Business Innovation located in Cambridge, Massachusetts. Mr. Dragoo received 15,000 stock options upon joining our board and will receive compensation of $15,000 per year plus 7,000 options per quarter. All stock options vest immediately. Stock based compensation expense for the nine months ended September 30, 2009 using the Black Scholes option pricing model was $16,000.




In February 2009, the Company engaged an advisor who is a major HIV/AIDS advocate to help the company in the development of HemoTech to address the global need for safe blood substitute. About 10% of new HIV/AIDS cases result from HIV contaminated blood. Also, in March 2009, the Company added a new member to its Scientific Advisory Board.
The new member is a former U.S. Assistant and Surgeon General with experience in national and global medical needs. Both advisors will help the company in advocating congressional leaders in the need for a safe blood substitute and exploring federal and private funding opportunities.




22


On March 10, 2009, the Company reported results from the testing of its ORTH technology for the clearance of prions (which can cause mad cow disease) and viruses from biological fluids. Since a component of HemoTech is bovine hemoglobin, it is necessary to have a high clearance of prions and viruses. This analysis was one of the recommendations
from the FDA. Our technology resulted in the clearance of prions during the purification process of bovine hemoglobin that was 10-10 which is approximately 100,000 times better than required by the FDA. This ORTH technology could also be used for other products from bovine sources and human plasma. The Company is marketing the ORTH technology for potential sub-licensing clients.




A presentation entitled “Developing Blood substitutes for the prevention of HIV Transmission” was made by HemoBioTech representatives at the “5th International AIDS Society Conference on HIV Prevention and Treatment”  held in
Cape Town,  South Africa during July 2009.




A presentation entitled “Commercial development Status of HemoTech, the hemoglobin-ATP-adenosine-Glutathione based blood substitute”, was made by HemoBioTech and Texas Tech university representatives at the XII International Symposium on Blood Substitutes held in Parma, Italy during August 2009.




On August 10, 2009 Congressman Ed Towns (D- N.Y.) sent a letter to all members of the House of Representatives that there is a need for a blood substitute to prevent 10% of new global HIV-AIDS cases caused by HIV contaminated blood.  He indicated that our Adenosine/GSH modified hemoglobin (our HemoTech patented technology) is a promising new generation blood substitute to address
this need. He recommended financial support from Congress and accelerated development of the technology.










RESEARCH AND DEVELOPMENT




We currently have two licensed technologies, “HemoTech” and “ORTH”. We expect that the remaining production, development, testing and FDA approval of HemoTech, could occur over a period of approximately four years. Our ORTH technology is essentially ready for commercialization during 2009 and requires minimal additional
research and development.




HemoTech must undergo several major stages of production, development, and clinical testing before being in a position to submit its New Drug Application (“NDA”) to the FDA, as follows:




·
PRODUCTION OF HEMOTECH. In order to produce HemoTech for Phase I U.S. clinical trials, we must complete certain upgrades of the current HemoTech production facilities located at TTUHSC. A portion of these upgrades have been completed during 2006 and through 2007 and were based on recommendations from the FDA.









·
PREPARATION AND SUBMISSION OF U.S. IND APPLICATION. We started preparing material for our U.S. IND application on December 13, 2004, when we entered into our Stage II Sponsored Research Agreement with TTUHSC. We are




23


·
actively planning and implementing the FDA recommendations including upgrading the production facility, preparing for clinical trials and the production of HemoTech, collectively at a cost estimated to range from $5,000,000 to $8,000,000, which are necessary for submission of our U.S. IND application and production of the product, although there can be
no assurance that we will be able to meet a specified timetable or budgeted amount. We currently do not have sufficient funds available to pay this amount.  We will need to raise at least $7,000,000 in the near term in order to complete the above mentioned activities.




·
INDIA STRATEGY. During June 2007 we engaged a U.S. based clinical research organization to assist the Company in submitting technical information to the Drug Controller General of India (DCGI) for the purpose of obtaining regulatory authority to conduct clinical trials in India. A goal is to establish clinical trials in India and if successful commercialize
HemoTech in India.




·
PHASE I OF OUR U.S. CLINICAL TRIALS. Once our U.S. IND application has been accepted by the FDA, we expect to be able to commence our Phase I U.S. clinical trials of HemoTech. Depending on whether the FDA accepts our U.S. IND application, we believe that we could begin Phase I U.S. clinical trials soon thereafter although there is no guarantee that we
can meet this goal. We estimate that our Phase I U. S. clinical trials (including the costs of doing additional research and development of HemoTech during our Phase I U.S. clinical trials and the operational and overhead costs that we will incur during our Phase I U. S. clinical trials) could cost approximately $10.0 million, although the final cost could be more or less than this estimate, which includes the following:




·
approximately $1.4 million for the production of HemoTech;




·
approximately $1.6 million for the testing of HemoTech on humans;




·
approximately $1.9 million for personnel, administrative, and operational expenses that we expect to incur during our Phase I U. S. clinical trials;




·
approximately $1.7 million for legal, accounting, consulting, technical and other professional fees that we expect to incur during our Phase I U. S. clinical trials;




·
approximately $1.6 million for research and development costs that we expect to incur during our Phase I U. S. clinical trials; and




·
approximately $2.0 million for preparation of Phase II clinical trials.




We expect that our Phase I U. S. clinical trials would take approximately six to nine months to complete from the date we start such trials, though such trials could take significantly longer to complete, depending on, and among other things, the rate of production of HemoTech and the availability of patients. We estimate that we will be
required to raise additional capital (although there can be no assurance that we can meet this timeframe) in order to fund our Phase I U.S. clinical trials, as well as preparation for Phase II clinical trials from start to finish and to cover the related expenses described above. If submission or acceptance of our U.S. IND application is delayed for any reason and if we are unable to raise such additional capital in a timely manner, commencement of our Phase I U. S. clinical trials would also be delayed.




·
PHASE II OF OUR U.S. CLINICAL TRIALS. A Phase II clinical trial could commence subsequent to a successful Phase I trial.  We estimate that our Phase II




24


·
U.S. clinical trials (including the costs of doing additional research and development of HemoTech during our Phase II U.S. clinical trials and the operational and overhead costs that we will incur during our Phase II U.S. clinical trials) will cost approximately $20.0 million, which includes the following:




·
further production of HemoTech;




·
further testing of HemoTech and related activities;




·
personnel, administrative, and operational expenses that we expect to incur during our Phase II U. S. clinical trials;




·
legal, accounting, consulting, technical and other professional fees that we expect to incur during our Phase II U. S. clinical trials; and




·
research and development costs that we expect to incur during our Phase II U. S. clinical trials.




The exact cost of each step will be determined in the future and will depend on various factors including FDA regulatory guidance and the availability of resources of TTUHSC.




We expect that our Phase II U.S. clinical trials could be completed within approximately one year from the date we start such trials, though such trials could take significantly longer to finish, depending on, among other things, the timely completion of necessary upgrades to the HemoTech production facility and the availability of patients.
If commencement or completion of our Phase I U.S. clinical trials are delayed for any reason, or if we are unable to raise sufficient funds to begin our Phase II U.S. clinical trials immediately following completion of our Phase I U.S. clinical trials, our Phase II U.S. clinical trials will be delayed.




·
PHASE III OF OUR U.S. CLINICAL TRIALS. If we are able to complete our Phase II U.S. clinical trials, we will seek approval from the FDA for our Phase III U. S. clinical trials soon thereafter.




At such time, and in order to cut the costs of conducting and completing our Phase III U.S. clinical trials, we anticipate that we will seek to enter into a partnership with a biopharmaceutical company that has expertise in the production and marketing of biological products, although there can be no assurance that we will be able to do
so.




Alternatively, if we are not able to enter into such a partnership, we may seek to enter into a manufacturing arrangement with an experienced pharmaceutical manufacturer, under which such manufacturer would produce HemoTech, which would significantly reduce the costs of our Phase III U.S. clinical trials by eliminating the need to build
a production facility that meets the FDA's standards for Phase III U.S. clinical trials.




If we are not able to enter into a partnership or find a manufacturer that is willing to manufacture HemoTech for us, we may be required to perform all aspects of the Phase III U. S. clinical trials independently. In this case, we estimate that our Phase III U.S. clinical trials (including the costs of doing additional research and development
of HemoTech during our Phase III U.S. clinical trials and the operational and overhead costs that we will incur during our Phase III U.S. clinical trials) could cost approximately $195.0 million, which includes the following:




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approximately $100.0 million to build a production facility for HemoTech that is suitable for such advanced testing and that meets the standards of the FDA as a product testing facility;




·
approximately $70.0 million for the further testing and production of HemoTech;









·
approximately $10.0 million for personnel, administrative, and operational expenses that we expect to incur during our Phase III U.S. clinical trials;









·
approximately $5.0 million for legal, accounting, consulting , technical and other professional fees that we expect to incur during our Phase III U.S. clinical trials; and









·
approximately $5.0 million for research and development costs that we expect to incur during our Phase III U.S. clinical trials.




We expect that our Phase III U.S. clinical trials could be finished within fifteen to eighteen months from the date we start such trials, though such trials could take significantly longer to complete, depending on, among other things, the timely completion of a suitable production facility for HemoTech and the availability of patients.
If we are unable to partner with a pharmaceutical company, we estimate that we will be required to raise the approximately $200 million (or such lesser amount as may be required if we are successfully able to enter into a partnership) that we will need in order to fund our Phase III U.S. clinical trials from start to finish and to cover the related expenses described above. If commencement or completion of our Phase II U.S. clinical trials are delayed for any reason, or if we are unable to raise sufficient funds
to begin our Phase III U.S. clinical trials immediately following completion of our Phase II U.S. clinical trials, our Phase III U.S. clinical trials will be delayed.




The estimated costs of each of the phases of our clinical trials set forth above represent our best estimate of such expenses based on, among other things, current economic conditions and availability of materials and personnel. Since many of these phases will not even be commenced by us for another two to three years, we cannot offer any
assurance that such estimates will reflect the actual amounts that we may be required to incur during each phase of our clinical trials based on, among other things, then-current economic conditions, availability of materials and personnel, and other factors that may be relevant at the time. The amounts we may actually be required to expend during any phase of our clinical trials may be significantly more than the amounts estimated by us above.




If our clinical trials are successful and we are able to meet the timelines set forth above, it is possible that an NDA could be approved by the FDA as early as mid-2010, although there can be no assurance that an NDA would be approved by such time, if ever. There can also be no assurance that we will be able to complete our clinical trials
under the schedule described above, or ever, or that we will be able to develop a viable and marketable human blood substitute, even if we are able to complete our clinical trials.




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Further, we do not expect to generate any revenues until after such time as HemoTech has received FDA approval, if ever.




Our ORTH technology can be used not only for HemoTech production but also has the potential for generating sublicensing revenue from pharmaceutical, biotechnology and the cosmetic industries. There can be no assurance that regulatory approval, if required, for this product will be obtained on a timely basis.









RESULTS OF OPERATIONS




We are a development stage company and have not generated any revenue from inception through September 30, 2009. To date, our efforts have been principally devoted to evaluating the HemoTech technology, negotiating and entering into our license agreement and Sponsored Research Agreements with TTUHSC, hiring employees and consultants, establishing
our Board of Advisors, raising capital, and engaging in other organizational and infrastructure development. In addition, during 2007 the Company upgraded the production facility at Texas Tech University and maintained an animal donor facility.




Total expenses, and thus our losses, totaled $16,650,000 from October 3, 2001 (inception) through September 30, 2009.









THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2008









Total expenses, and thus our losses, for the three months ended September 30, 2009, were $363,000 compared with $636,000 for the same period a year ago resulting from significantly lower research and development and general and administrative costs.




Research and Development expenses were $66,000 for the 2009 period, a decrease of $210,000 compared with the same period in 2008, resulting from significantly lower costs paid to outside laboratories, consultants and Texas Tech University in the current period.  The Company’s weakened cash position during the quarter caused
the Company to curtail work performed with outside consultants.




General and Administrative costs were $297,000 for the three months ended September 30, 2009, compared with $365,000 in the year ago period resulting from lower overall compensation costs including lower cash compensations by approximately $56,000, lower stock based compensation by $27,000 and lower office related expenditures including
lower investor relations costs collectively by $25,000. Professional fees increased approximately $36,000 primarily due from legal fees related to patents. Lower stock based compensation in the current period resulted from both issuing fewer warrants and options and a lower share price in the current period when compared to the prior year.




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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2008




Total expenses, and thus our losses, for the nine months ended September 30, 2009 were $1,327,000 compared with $3,047,000 for the same period a year ago resulting from both


significantly lower research and development costs and general and administrative expenses.




Research and Development expenses were $251,000 for the 2009 period, decreasing $1,355,000 from the $1,606,000 in the same period in 2008 resulting from the acquisition of a new TSE technology that removes and inactivates infectious agents (which can cause Mad Cow disease) and viruses valued at $655,000 (See also Note D of the Company’s
Notes to Condensed Financial Statements) in 2008; and from significantly lower cash spending to  outside laboratories and consultants and lower costs related to our Stage IV Sponsored Research Agreement with Texas Tech Health Sciences Center. Charges related to the Sponsored Research Agreement with TTUHSC were approximately $180,000 lower resulting from increased spending on laboratory upgrades in 2008 which did not repeat in the current period. Additionally, approximately $400,000 of costs associated
with outside laboratories incurred in 2008 did not repeat in the current period due somewhat to the Company’s weakened cash position.









General and Administrative costs were $1,079,000 for the nine months ended September 30, 2009, a decrease of $393,000 from the prior year amount of $1,472,000 resulting from  significantly lower compensation costs of approximately $295,000 and lower professional fees of approximately $46,000. Lower compensation costs included both
non cash stock based compensation of $115,000 and reduced salary spending of $180,000.




Interest income decreased $28,000 in the 2009 period compared to the prior period due to lower cash balances in the current year.









Liquidity and Capital Resources









During the nine months ended September 30, 2009, net cash used in operating activities was $684,000 compared to $1,694,000 in the same period during 2008. This 60% reduction in operating cash spending resulted primarily from lower cash spending related to outside research laboratories, cash compensation costs and reduced professional fees.   During
May 2008, the Company purchased the TSE technology from TTUHSC at a cost of 500,000 shares of the Company’s common stock valued at $1.29 per share and a $10,000 cash cost, a total of $655,000.




On December 2, 2009, the company had approximately $170,000 in cash and cash equivalents. This cash position will not be sufficient to carry on current
operations beyond two to three months.




The Company recently significantly reduced its actual and projected expenses and plans to aggressively manage cash costs. While the Company has been able to obtain such funding in the past, there can be no assurance that they will be able to do so in the future. Management's plans include continuing to finance operations through one or
more private or public offerings of equity securities and monitoring and reducing discretionary expenditures. In order to complete our planned operations which includes implementing FDA recommendations necessary for submitting our IND to the FDA, upgrading the production facility, preparing for a toxicology study on primates, the production of HemoTech; collectively at a cost ranging from $2,000,000 to $4,000,000, we will need to raise at least $3 million in the near term, although there can be no assurance that
we can




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raise these funds. If we fail to generate enough working capital, either from future debt or equity offerings, we will have to further curtail our planned operations.




The financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of $16,650,000 from inception through September 30, 2009, has not generated any revenue,
and has been dependent on funding operations through the private sale of convertible debt and equity securities. These conditions indicate that the Company may not be able to continue as a going concern. Management’s plans include continuing to fund operations through one or more public or private offerings of equity securities, although there is no assurance they will be able to do so in the future, and monitoring and reducing discretionary expenses.









OFF-BALANCE SHEET ARRANGEMENTS









We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.









ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have established policies and business practices intended to protect against these and other exposures. As a result, we do not anticipate material
potential losses in these areas.





As of September 30, 2009, we had cash and cash equivalents of $15,000. Declines of interest rates over time will, however, reduce our interest income.





ITEM 4T. CONTROLS AND PROCEDURES





The chief executive officer and the chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e); collectively, "Disclosure Controls") as of the end of the period covered by this quarterly report (the "Evaluation
Date") have concluded that as of the Evaluation Date, our Disclosure Controls were not effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to our company and any consolidated subsidiaries is made known to management, including the chief executive officer and chief financial
officer, particularly during the period when our periodic reports are being prepared to allow timely decisions regarding required disclosure.


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Management evaluated the effectiveness of our internal control over financial reporting based on criteria for effective internal control over financial reporting described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, management
has determined that as of the Evaluation Date, there were material weaknesses in our internal control over financial reporting.  The material weaknesses identified during management’s assessment were (i) a lack of sufficient internal accounting resources; and (ii) a lack of segregation of duties to ensure adequate review of financial statement preparation. In light of these material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting
at December 31, 2008.





In connection with the evaluation referred to in the foregoing paragraph, we have identified no change in our internal control of financial reporting that occurred during the quarter ended  September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  As defined by the Public Company Accounting Oversight Board Auditing Standard No. 5, a material weakness is a deficiency or a combination of deficiencies, such that there is a reasonable possibility that
a material misstatement of the annual or interim financial statements will not be prevented or detected. A clear and concise segregation of duties is important to maximize checks and balances so that no single individual has control over two or more phases of a transaction or operation. A strong segregation of duty also is critical to reduce effectively the risk of mistakes and inappropriate actions preventing fraud and discourages collusion. It can be difficult for small businesses to always have a clear separation
of duties because there simply are not enough personnel to cover each and every process and procedure. Ultimately, checks and balances need to be in place as a supportive measure to the business operations, but also as a fraud prevention measure as well. Because we have limited financial personnel, and limited resources, compliance with segregation of duties and proper oversight of control requirements is extremely difficult.





We are a non-accelerated filer and are required to comply with the internal control reporting and disclosure requirements of Section 404 of the Sarbanes-Oxley Act for fiscal years ending December 31, 2009. Although we are working to comply with these requirements, we have limited financial personnel, making compliance with Section 404 –
especially with segregation of duty control requirements – very difficult and cost ineffective, if not impossible.





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PART II -- OTHER INFORMATION




Items 1A, 3, 4 and 5 are not applicable and have been omitted.





ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.





During the nine months ended September 30, 2009, the Company sold 120,000 shares of unregistered equity securities to two service providers.








ITEM 6. EXHIBITS





Exhibit No.
Description31.1
Certification of Principal Executive Officer required under Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as amended.31.2
Certification of Principal Financial Officer required under Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as amended.32.1
*Certification of Principal Executive Officer required under Rule 13a-14(b) or Rule 15d-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.32.2
*Certification of Principal Financial Officer required under Rule 13a-14(b) or Rule 15d-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.*
The certifications attached as Exhibits 32.1 and 32.2 accompany this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by HemoBioTech, Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.







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SIGNATURES




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.




HEMOBIOTECH, INC.







Date: December 2, 2009
By:
/s/ ARTHUR P. BOLLON, PH.D.Arthur P. Bollon, Ph.D.Chairman of the Board of Directors, President and Chief Executive OfficerDated: December 2, 2009
By:
/s/ MARK J. ROSENBLUMMark J. RosenblumChief Financial Officer and Secretary