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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C., 20549

 


 

FORM 10-K

 


 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended April 30, 2004

 

Commission File No. 2-31909

 


 

SYNTHETIC BLOOD INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 


 

New Jersey   22-3067701
(State of Incorporation)   (IRS Employer I.D. Number)

 

3189 Airway Avenue, Building C, Costa Mesa, California 92626

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s Telephone Number and area code: (714) 427-6363

 

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   ¨

 

Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     x   

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: at July 15, 2004, 113,808,876 shares of $.01 par value common stock. The aggregate market value of the shares held by non-affiliates of the registrant (assuming officers, directors and 10% shareholders are affiliates) was approximately $44,602,011 based on the closing bid price of the Registrant’s Common Stock on July 31, 2004 of $0.40 per share.

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424 (b) or (c) under the Securities Act of 1933. None of the above-listed documents are incorporated by reference. None

 



Table of Contents

TABLE OF CONTENTS

 

ITEM NUMBER AND CAPTION


   Page

Part I

    

1.

  Business    3

2.

  Properties    14

3.

  Legal Proceedings    14

4.

  Submission of Matters to a Vote of Security Holders    14

Part II

    

5.

  Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    15

6.

  Selected Financial Data    16

7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    17

7A.

  Quantitative and Qualitative Disclosures About Market Risk    21

8.

  Financial Statements and Supplementary Data    22

9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    22

9A.

  Controls and Procedures    22

Part III

    

10.

  Directors, Executive Officers, and Key Employees    23

11.

  Executive Compensation    24

12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    27

13.

  Certain Relationships and Related Transactions    28

14.

  Principal Accountant Fees and Expenses    28

15.

  Exhibits, Financial Statement Schedules, and Reports on Form 8-K    28

 

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FORWARD-LOOKING STATEMENTS

 

This Form 10-K contains forward-looking statements in “Item 1 – Business,” “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined in the “Risk Factors” section of “Item 1. – Business” that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed or implied by such forward-looking statements.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-K or to conform such statements to actual results.

 

PART I

 

ITEM 1 – BUSINESS

 

General

 

Synthetic Blood International Inc. is engaged in the business of developing biotechnology products. We are currently focusing on developing Oxycyte , a product we believe is a safe and effective alternative to transfused blood for use in surgical and similar medical situations. In addition, we also have under development Fluorovent , an oxygen exchange fluid for facilitating the treatment of lung conditions, and a biosensor implant product that uses an enzyme process for measuring the glucose level in the blood stream.

 

We received approval of our Investigational New Drug application for Oxycyte filed with the U.S. Food and Drug Administration (FDA) and began Phase I clinical studies in October 2003, which were completed in December 2003. Our goal is to begin Phase II studies in 2004. We expect to commit a substantial portion of our financial and business resources over the next three years to testing Oxycyte and advancing this product to commercial distribution.

 

Fluorovent and our biosensor implant are still in the animal testing stage and we have not filed any applications with the FDA for human testing of these products. Since we will likely devote less of our time and resources to advancing these products because of the priority placed on Oxycyte, we do not expect we will be in a position to file any applications for these products with the FDA for at least another year.

 

Since our priority for the foreseeable future is Oxycyte, the following discussion of our business focuses primarily on that product.

 

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Blood substitute market

 

The principal function of human blood is to transport oxygen throughout the body. The lack of an adequate supply of oxygen as a result of blood loss can lead to organ dysfunction or death. The transfusion of human blood is presently the only effective means of immediately restoring diminished oxygen-carrying capacity resulting from blood loss. According to the National Blood Data Resource Center, 14 million units of whole blood and red blood cells were transfused in the United States in 2001 and the volume of blood transfused is increasing at the rate of 6 percent per year. This includes transfusions for trauma, surgery (emergency and elective), unexpected blood loss, chronic anemia, and other general medical applications.

 

The use of donated blood in transfusion therapy, while effective in restoring an adequate supply of oxygen in the body of the recipient, has several limitations. Although testing procedures exist to detect the presence of certain diseases in blood, these procedures cannot eliminate completely the risk of blood-borne disease. Transfused blood also can be used only in recipients having a blood type compatible with that of the donor. Delays in treatment, resulting from the necessity of blood typing prior to transfusion, together with the limited shelf life of blood and the limited availability of certain blood types, impose constraints on the immediate availability of compatible blood for transfusion. There is no commercially available blood substitute in this country that addresses these problems.

 

Oxycyte is intended as a transfusion substitute for blood transfusion that ordinarily would be applied in cases of trauma, surgery (emergency and elective), unexpected blood loss, chronic anemia, and other general medical applications. For trauma and emergency surgical procedures, the immediate availability and universal compatibility of Oxycyte are expected to provide significant advantages over transfused blood by avoiding the delay and opportunities for error associated with blood typing. The major benefit of Oxycyte in elective surgery is expected to be increased transfusion safety for patients and health care professionals.

 

In addition to the foregoing applications for which blood is currently used, there exist potential sources of demand for which blood is not currently utilized and for which Oxycyte may be suitable. These include applications in which the required blood type is not immediately available or in which transfusions are desirable but not given for fear of a transfusion reaction due to difficulty in identifying compatible blood. For example, we believe emergicenters and surgicenters both experience events where an oxygen-carrying volume expander may be useful. We also believe Oxycyte may be used by emergency medical technicians in ambulances, medical helicopters and other pre-hospital settings. In addition, the military has expressed a high level of interest in oxygen-carrying products for the resuscitation of battlefield casualties.

 

Based on these circumstances, we believe there may be a substantial and meaningful market for an effective blood substitute, and we believe Oxycyte is a viable candidate for exploiting that market.

 

Our product - Oxycyte

 

Our Oxycyte blood substitute product is a perfluorocarbon emulsified with water and a surfactant, which is provided to the patient intravenously. The physical properties of perfluorocarbon enable our product to gather oxygen from the lungs and transport the oxygen through the body releasing it along the way. Over a period of days Oxycyte gradually evaporates in the lungs from where it is exhaled. Oxycyte requires no cross matching, so it is immediately available and compatible with all blood types. Oxycyte has an extended shelf life compared to blood. Since Oxycyte is not based on any biological component, it

 

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is sterile and free of potential contamination from a donor. Further, since Oxycyte is based on readily available inert compounds, we believe we will be able to manufacture the product on a cost effective basis in amounts sufficient to meet demand.

 

We conducted a Phase I clinical study on Oxycyte after receiving clearance from the FDA, which was completed in December 2003. We are in the process of completing our report on the results, which were in line with our expectations, and preparing our protocol for Phase II of the clinical trials to submit to the FDA for approval. We intend to submit our report and protocol for the next test to the FDA in May 2004. If our protocol is approved and if we are successful in obtaining additional financing, our goal is to begin the Phase II clinical tests in 2004.

 

We use a proprietary process of perfluorocarbon production and emulsification to produce Oxycyte. We use contract manufacturers to produce Oxycyte for our clinical testing and we expect we will use contract manufacturers to produce the product should we be successful in obtaining FDA approval for commercial distribution. Currently, our contractors have the capability of producing 70,000 one-pint units annually. We believe we may need to increase this production capacity by a factor of 10 for commercial distribution.

 

Our contract manufacturer is PrimaPharm, Inc. located in San Diego, California. Based on production testing and inspection, the FDA has determined that PrimaPharm satisfies its good manufacturing practices standards with respect to the production of Oxycyte. Should Oxycyte successfully progress through the next stages of testing, we expect we will pursue negotiations with PrimaPharm on a long-term agreement for commercial production. Should these negotiations be unsuccessful, management believes there are a number of other manufacturers capable of producing Oxycyte in accordance with FDA regulations and in sufficient quantities for commercial distribution.

 

If approved for commercial sale, Oxycyte will compete directly with established therapies for acute blood loss and replacement and may compete with other technologies currently under development. We cannot ensure that Oxycyte will have advantages, which will be significant enough to cause medical professionals to adopt it rather than continue to use established therapies or other new technologies or products. We also cannot ensure that the price of Oxycyte, in light of Oxycyte’s potential advantages, will be competitive with the price of established therapies or other new technologies or products.

 

Several companies have developed or are in the process of developing technologies that are, or in the future may be, the basis for products that will compete with Oxycyte. Certain of these companies are pursuing different approaches or means of accomplishing the therapeutic effects sought to be achieved through the use of Oxycyte. Some of these companies have substantially greater financial resources, larger research and development staffs, more extensive facilities and more experience than Synthetic Blood in testing, manufacturing, marketing and distributing medical products. We cannot ensure that one or more other companies will not succeed in developing technologies and products that will be available for commercial use prior to Oxycyte, which will be more effective or less costly than Oxycyte, or which would otherwise render Oxycyte obsolete or non-competitive. A bovine-source hemoglobin-based oxygen-carrier has been approved for human use in South Africa and a Biologics License Application, or BLA, was submitted to the FDA for its use in the United States, which has not been approved but will likely be pursued by the product manufacturer. Further, a human hemoglobin based product is now in Phase III testing for emergency and traumatic blood loss applications.

 

We believe that important competitive factors in the market for blood substitute products will include the relative speed with which competitors can develop their respective products, complete the clinical testing and regulatory approval process, and supply commercial quantities of their products to the market. In addition to these factors, competition is expected to be based on the effectiveness of blood

 

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substitute products and the scope of the intended uses for which they are approved, the scope and enforceability of patent or other proprietary rights, product price, product supply, and marketing and sales capability. We believe that our competitive position will be significantly influenced by the timing of the clinical testing and regulatory filings for Oxycyte, our ability to expand our manufacturing capability to permit commercial production of Oxycyte, if approved, and our ability to maintain and enforce our proprietary rights covering Oxycyte and its manufacturing process.

 

Our other products

 

Fluorovent

 

Fluorovent is an oxygen-carrying perfluorocarbon liquid that, when dispensed directly into the lungs, acts as a surfactant and effective medium for gas exchange, which increases pulmonary function and the diffusion of oxygen and carbon dioxide through the lungs into the body. The development of this product capability has applications in the treatment of acute lung disease, such as infant respiratory distress syndrome and adult respiratory syndrome. Further development of this product is currently on hold until we obtain additional financing.

 

Implanted glucose biosensor

 

Synthetic Blood has developed an implanted glucose biosensor to monitor blood glucose. Termed a biosensor because it utilizes an enzyme specific for glucose, we believe it will provide glucose measurement significantly more accurate than possible from current portable measuring devices. Once implanted in subcutaneous tissue during a simple outpatient procedure, the biosensor provides continuous monitoring of glucose levels. A radio frequency signal from the implanted biosensor is transmitted to an external receiving device the size of a pager that displays glucose levels as a digital readout, has high and low glucose alarms, and stores data for downloading at the physician’s office. The external device can also be programmed to monitor glucose according to a preset schedule. It is anticipated the implant life of the biosensor will exceed one year. Further development of this product is currently on hold until we obtain additional financing.

 

The primary market for this product is diabetes sufferers. A study sponsored by the National Institutes of Diabetes and Digestive and Kidney Diseases, showed that “tight diabetes control” (keeping blood sugar levels close to normal by frequent blood sugar testing, several daily insulin shots, and lifestyle changes) was associated with a major reduction in diabetic complications. Current glucose testing devises are based on “finger sticking” to obtain a blood sample for testing, which we believe results in less frequent and less regular monitoring of glucose levels. Consequently, we believe a there is a meaningful market for a painless automatic monitoring product.

 

Our patents and intellectual property

 

Perfluorocarbon products

 

Synthetic Blood holds four U.S. patents (5,674,913; 5,824,703; 5,840,767; 6,167,887), three Australian patents (690,277; 722,417; 759,557), two Canadian Patents (2,239,170; 2,311,122) and, one European patent (EPO 8697678B1) pertaining to the use and application of perfluorocarbons as gas transport agents in blood substitutes and liquid ventilation. Additionally, through an exclusive supply agreement with our perfluorocarbon supplier, we benefit from eight perfluorocarbon manufacturing process patents that further protect the perfluorocarbons contained in our products.

 

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Biosensor

 

We have three U.S. patents (5,914,026; 5,964,993 6,343,225) and two Australian patents (720,712; 734,003) that protect what we believe are important design features of our implanted glucose biosensor. We also hold exclusive licenses to three fundamental biosensor patents that represent the core technology used on our product.

 

Government regulation

 

The manufacture and distribution of Oxycyte, as well as our other products, and the operation of our manufacturing facilities will require the approval of United States government authorities as well as those of foreign countries. In the United States, the FDA regulates medical products, including the category known as “biologicals” which includes Oxycyte. The Federal Food, Drug and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of Oxycyte. In addition to FDA regulations, we are also subject to other federal and state regulations, such as the Occupational Safety and Health Act and the Environmental Protection Act. Product development and approval within this regulatory framework requires a number of years and involves the expenditure of substantial funds.

 

The steps required before a biological product may be sold commercially in the United States include pre-clinical testing, the submission to the FDA of an Investigational New Drug application, clinical trials in humans to establish the safety and effectiveness of the product, the submission to the FDA of a BLA relating to the product and the manufacturing facilities to be used to produce the product for commercial sale, and FDA approval of a BLA. After a BLA is submitted there is an initial review by FDA to be sure that all of the required elements are included in the submission. There can be no assurance that the application will be accepted for filing or that the FDA may not issue a refusal to file, or RTF. If an RTF is issued, there is opportunity for dialogue between the sponsor and the FDA in an effort to resolve all concerns. There can be no assurance that such a dialogue will be successful in leading to the filing of the BLA. If the submission is filed, there can be no assurance that the full review will result in product approval.

 

Pre-clinical tests include evaluation of product chemistry and studies to assess the safety and effectiveness of the product and its formulation. The results of the pre-clinical tests are submitted to the FDA as part of the Investigational New Drug application. The goal of clinical testing is the demonstration in adequate and well-controlled studies of substantial evidence of the safety and effectiveness of the product in the setting of its intended use. The results of pre-clinical and clinical testing are submitted to the FDA from time to time throughout the trial process. In addition, before approval for the commercial sale of a product can be obtained, results of the pre-clinical and clinical studies must be submitted to the FDA in the form of a BLA. The testing and approval process requires substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. The approval process is affected by a number of factors, including the severity of the condition being treated, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Additional pre-clinical studies or clinical trials may be requested during the FDA review process and may delay product approval. After FDA approval for its initial indications, further clinical trials may be necessary to gain approval for the use of a product for additional indications. FDA may also require post-marketing testing, which can involve significant expense, to monitor for adverse effects.

 

Among the conditions for BLA approval is the requirement that the prospective manufacturer’s quality controls and manufacturing procedures conform to FDA requirements. In addition, domestic manufacturing facilities are subject to biennial FDA inspections and foreign manufacturing facilities are subject to periodic FDA inspections or inspections by the foreign regulatory authorities with reciprocal

 

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inspection agreements with FDA. Outside the United States, we are also subject to foreign regulatory requirements governing clinical trials and marketing approval for medical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.

 

Our regulatory strategy is to pursue clinical testing and FDA approval of Oxycyte in the United States. We intend to arrange for testing and seek regulatory approval of Oxycyte outside the United States through licensing or other arrangements with other foreign or domestic companies. To date, we have not conducted any clinical trials of Oxycyte outside of the United States.

 

Employees

 

We currently employ six individuals, three of whom are scientific personnel, two are executives, and one office manager/bookkeeper. Our employees are not represented by a union or any other form of collective bargaining unit.

 

Risk Factors

 

You should carefully consider the risks described below together with all of the other information included in this report on Form 10-K. An investment in Synthetic Blood’s common stock is very risky. If any of the following risks actually occur, our business, financial condition or results of operations could be harmed. In such an event, the trading price of Synthetic Blood’s common stock could decline, and you may lose part or all of your investment.

 

Risks related to our business

 

We are currently a one product company.

 

We have limited financial resources so at present we are using these resources solely on developing our Oxycyte blood substitute product. We have stopped development on Fluorovent, our oxygen carrying liquid, and our implantable glucose biosensor until additional financing is obtained. Consequently, we are focusing all our resources on advancing Oxycyte to commercialization, and if this effort is unsuccessful we may not have resources to pursue development of our other products and our business would terminate. Furthermore, by delaying development of Fluorovent and our implantable glucose biosensor, these technologies may become obsolete by the time we have sufficient capital to resume development and testing of these products, so the funds expended on these products to date would be lost, as well as our opportunity to benefit if the products could be successfully developed.

 

We are required to conduct additional clinical trials in the future.

 

We completed Phase I clinical trials on Oxycyte in December 2003. Based on the results of these trials we are preparing protocols for two Phase II clinical trials to submit to the FDA, which we hope to begin in 2004. If we are successful with our Phase II trials (of which there is no assurance) we will need to conduct further Phase III trials. All of these clinical trials and testing will be expensive and time-consuming and the timing of the FDA review process is uncertain. The FDA or we may in the future suspend clinical trials at any time if it is believed that the subjects participating in such trials are being exposed to unacceptable health risks. We cannot ensure that we will be able to complete our clinical trials successfully or obtain FDA approval of Oxycyte, or that FDA approval, if obtained, will not include limitations on the indicated uses for which Oxycyte may be marketed. Our business, financial condition and results of operations are critically dependent on receiving FDA approval of Oxycyte. A significant delay in our planned clinical trials or a failure to achieve FDA approval of commercial sales of Oxycyte would have a material adverse effect on us and could result in the cessation of our business.

 

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Our activities are and will continue to be subject to extensive government regulation.

 

Our research, development, testing, manufacturing, marketing and distribution of Oxycyte are, and will continue to be, subject to extensive regulation, monitoring and approval by the FDA. There are significant risks at each stage of the regulatory scheme.

 

Product approval stage

 

During the product approval stage we attempt to prove the safety and efficacy of our product for its indicated uses. There are numerous problems that could arise during this stage, including:

 

  The data obtained from clinical trials are susceptible to varying interpretations, which could delay, limit or prevent FDA regulatory approval.

 

  The lack of established criteria for evaluating the effectiveness of blood substitute products could delay or prevent FDA regulatory approval.

 

  At any time the FDA could change policies and regulations that could result in delay and perhaps rejection of our product.

 

  Even after extensive clinical trials, there is no assurance regulatory approval will ever be obtained for Oxycyte.

 

Commercialization approval stage

 

We will be required to file a Biologics License Application, or BLA, with the FDA in order to obtain regulatory approval for the commercial production and sale of Oxycyte in the United States. Under FDA guidelines, the FDA may comment upon the acceptability of a BLA following its submission. After a BLA is submitted there is an initial review by the FDA to be sure that all of the required elements are included in the submission. There can be no assurance that the submission will be accepted for filing or that the FDA may not issue a refusal to file, or RTF. If an RTF is issued, there is opportunity for dialogue between the sponsor and the FDA in an effort to resolve all concerns. There can be no assurance that such a dialogue will be successful in leading to the filing of the BLA. If the submission is filed, there can be no assurance that the full review will result in product approval.

 

Post-commercialization stage

 

Discovery of previously unknown problems with Oxycyte or unanticipated problems with our manufacturing arrangements, even after FDA approval of Oxycyte for commercial sale, may result in the imposition of significant restrictions, including withdrawal of Oxycyte from the market.

 

Additional laws and regulations may also be enacted which could prevent or delay regulatory approval of Oxycyte, including laws or regulations relating to the price or cost-effectiveness of medical products. Any delay or failure to achieve regulatory approval of commercial sales of Oxycyte is likely to have a material adverse effect on our financial condition.

 

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The FDA continues to review products even after they receive agency approval. If and when the FDA approves Oxycyte, its manufacture and marketing will be subject to ongoing regulation, including compliance with current good manufacturing practices, adverse event reporting requirements and the FDA’s general prohibitions against promoting products for unapproved or “off-label” uses. We are also subject to inspection and market surveillance by the FDA for compliance with these and other requirements. Any enforcement action resulting from failure, even by inadvertence, to comply with these requirements could affect the manufacture and marketing of Oxycyte. In addition, the FDA could withdraw a previously approved product from the market upon receipt of newly discovered information. The FDA could also require us to conduct additional, and potentially expensive, studies in areas outside our approved indicated uses.

 

We are a development stage company without revenues or profits.

 

Synthetic Blood began research and development activities in 1990 and is a development stage company. We have been engaged for the past 13 years in the development and testing of Oxycyte, Fluorovent, and our glucose biosensor. No revenues have been generated to date from commercial sales of any of our products. Our revenues to date have consisted solely of interest earned on funds held until applied in the development of our products. At April 30, 2004 our accumulated deficit during the development stage is $20,949,933 million. We will require substantial amounts of outside financing to fund future testing and development of our products. We cannot ensure that our clinical testing will be successful, that regulatory approval of Oxycyte or any of our other products will be obtained, that we will be able to manufacture Oxycyte or any of our other products at an acceptable cost and in appropriate quantities, or that we will be able to successfully market and sell any of our products. The foregoing factors raise substantial doubt about our ability to continue as a going concern.

 

We will need to raise additional capital to continue our business.

 

We will need to raise substantial amounts of additional capital to complete the clinical testing of Oxycyte and, if approved for commercial use, establish commercial production of Oxycyte. In addition, we will require funding to pursue development of Fluorovent and our glucose biosensor, and to cover our ongoing administrative and corporate obligations. Our future capital requirements will depend on many factors, including the scope and results of our clinical trials, the timing and outcome of regulatory reviews, administrative and legal expenses, the status of competitive products, the establishment of manufacturing capacity, and the establishment of collaborative relationships. We cannot ensure that this additional funding will be available or, if it is available, that it can be obtained on terms and conditions we will deem acceptable. As a result of these circumstances our independent accountants have, and are likely in the future to, include an explanatory paragraph in their audit opinions based on uncertainty regarding our ability to continue as a going concern. An audit opinion of this type may interfere with our ability to issue our securities to the public or in private transactions. Any additional funding derived from the sale of equity securities may result in significant dilution to our existing stockholders.

 

Presently we are focusing on developing Oxycyte, which is subject to a high level of technological risk.

 

We completed Phase I clinical trials on Oxycyte in December 2003, and we expect we will devote a substantial portion of our financial and managerial resources to pursuing Phase II and Phase III clinical trials on this product over the next three years. As our other products are not as far along in the development and approval process as Oxycyte, our opportunity to generate product revenues within the next four to five years is most likely dependent on successful testing and commercialization of Oxycyte for use in surgical and similar acute blood replacement situations. The biomedical field has undergone rapid and significant technological changes. Technological developments may result in Oxycyte

 

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becoming obsolete or non-competitive before we are able to recover any portion of the research and development and other expenses we have incurred to develop and clinically test Oxycyte. Any such occurrence would have a material adverse effect on our operations and could result in the cessation of our business.

 

We are not certain that we will be able to manufacture Oxycyte commercially.

 

Commercial-scale manufacturing of Oxycyte will require development of a manufacturing capability that is significantly larger than the capacity currently in place to produce Oxycyte for our clinical trials. We do not intend to build our own production facility, but instead will rely on third party manufacturers to produce our product. We have not established any arrangement for commercial production of Oxycyte with any manufacturer, and there can be no assurance that we will be able to establish such an arrangement on terms acceptable to us. Moreover, in order to seek FDA approval of the sale of Oxycyte produced at a third party manufacturing facility, we may be required to conduct a portion of our clinical trials with product manufactured at that facility. Accordingly, a delay in achieving scale-up of commercial manufacturing capabilities when needed will have a material adverse effect on sales of Oxycyte. Additionally, the manufacture of Oxycyte will be subject to extensive government regulation. Among the conditions for marketing approval is that our quality control and manufacturing procedures conform to the FDA’s good manufacturing practice regulations. We cannot ensure that we will be able to obtain the necessary regulatory clearances or approvals to manufacture Oxycyte on a timely basis or at all.

 

There are significant competitors developing similar products.

 

If approved for commercial sale, Oxycyte will compete directly with established therapies for acute blood loss and may compete with other technologies currently under development. We cannot ensure that Oxycyte will have advantages, which will be significant enough to cause medical professionals to adopt it rather than continue to use established therapies or to adopt other new technologies or products. We also cannot ensure that the cost of Oxycyte will be competitive with the cost of established therapies or other new technologies or products. The development of blood substitute products is a rapidly evolving field. As there is currently no blood substitute product on the market, competition to develop an efficacious and accepted product is intense. Several companies have developed or are in the process of developing technologies that are, or in the future may be, the basis for products that will compete with Oxycyte. Certain of these companies are pursuing different approaches or means of accomplishing the therapeutic effects sought to be achieved through the use of Oxycyte. One company developing a modified hemoglobin product derived from human blood is in the Phase III clinical testing stage, and another company has developed a bovine-source hemoglobin-based oxygen-carrier approved for human use in South Africa, which is the subject of a BLA under review by the FDA for its use in the United States. These companies and others have substantially greater financial resources, larger research and development staffs, more extensive facilities and more experience than Synthetic Blood in testing, manufacturing, marketing and distributing medical products. We cannot ensure that one or more other companies will not succeed in developing technologies or products that will become available for commercial use prior to Oxycyte, which could be more effective or less costly than Oxycyte or would render Oxycyte obsolete or non-competitive.

 

We do not have experience in the sale and marketing of medical products.

 

If approved for commercial sale, we intend to market Oxycyte in the United States using our own sales force. We have no experience in the sale or marketing of medical products. Our ability to implement our sales and marketing strategy for the United States will depend on our ability to recruit, train and retain a marketing staff and sales force with sufficient technical expertise. We do not know

 

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whether we can establish a marketing program at a cost that is acceptable in relation to revenue or whether we can be successful in marketing our product. Failure to successfully market Oxycyte or to do so on a cost effective basis would likely result in failure of our business.

 

We have a history of losses and our future profitability is uncertain.

 

Through the fiscal year ended April 30, 2004 we incurred a net loss of $2.2 million, and we incurred net losses of $2.2 million in fiscal year 2003 and $3.5 million in fiscal year 2002. We will not generate operating revenue unless and until one of our products is approved for commercial sale and sales activity begins. We will require substantial additional funds to complete clinical trials, pursue regulatory approval for our products, establish commercial scale manufacturing capabilities, and establish marketing, sales, and administrative capabilities. Expenditures for these purposes will result in substantial losses for at least the next several years. The expense and the time required to realize any product revenues or profitability are highly uncertain. We cannot ensure that we will be able to achieve product revenues or profitability on a sustained basis, or at all, and we may be unable to ever establish Synthetic Blood as a going concern.

 

The market may not accept our product.

 

Human blood collection, distribution, and medical application are well established and accepted. Competitors may develop new technologies or products, which are effective, competitively priced, and accepted for various medical uses. We cannot ensure that the efficacy and pricing of Oxycyte, considered in relation to Oxycyte’s expected benefits, will be perceived by health care providers and third party payers as cost-effective, or that the price of Oxycyte will be competitive with transfused blood or with other new technologies or products. Our results of operations may be adversely affected if the price of Oxycyte is not considered cost-effective or if Oxycyte does not otherwise achieve market acceptance.

 

Our patents and other proprietary rights may not protect our technology.

 

Our ability to compete effectively with other companies will depend, in part, on our ability to protect and maintain the proprietary nature of our technology. We cannot be certain as to the degree of protection offered by our patents or as to the likelihood that additional patents in the United States and certain other countries will be issued based upon pending patent applications. Patent applications in the United States are maintained in secrecy until patents are issued. We cannot be certain that we were the first creator of the inventions covered by our patents or pending patent applications or that we were the first to file patent applications for our inventions. The high costs of enforcing patent and other proprietary rights may also limit the degree of protection afforded to us. We also rely on unpatented proprietary technology, and we cannot ensure that others may not independently develop the same or similar technology or otherwise obtain access to our proprietary technology. We cannot ensure that our patents or other proprietary rights will be determined to be valid or enforceable if challenged in court or administrative proceedings or that we will not become involved in disputes with respect to the patents or proprietary rights of third parties. An adverse outcome from these proceedings could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties, or require us to stop using this technology, any of which would result in a material adverse effect on our results of operations.

 

Our viability will be affected if we incur product liability claims in excess of our insurance coverage.

 

The testing and marketing of medical products, even after FDA approval, have an inherent risk of product liability. We maintain limited product liability insurance coverage for our clinical trials in the

 

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total amount of $1 million. However, our profitability will be adversely affected by a successful product liability claim in excess of our insurance coverage. We cannot guarantee that product liability insurance will be available in the future or be available on reasonable terms.

 

We depend on the services of a limited number of key personnel.

 

Our success is highly dependent on the continued services of a limited number of skilled managers and scientists. The loss of any of these individuals could have a material adverse effect on us. In addition, our success will depend, among other factors, on the recruitment and retention of additional highly skilled and experienced management and technical personnel. We cannot ensure that we will be able to retain existing employees or to attract and retain additional skilled personnel on acceptable terms given the competition for such personnel among numerous large and well-funded pharmaceutical and health care companies, universities, and non-profit research institutions.

 

Health care reform and controls on health care spending may limit the price we can charge for Oxycyte and the amount we can sell.

 

The federal government and private insurers have considered ways to change, and have changed, the manner in which health care services are provided in the United States. Potential approaches and changes in recent years include controls on health care spending and the creation of large purchasing groups. In the future, it is possible that the government may institute price controls and limits on Medicare and Medicaid spending. These controls and limits might affect the payments we collect from sales of our product. Assuming we succeed in bringing Oxycyte to market, uncertainties regarding future health care reform and private market practices could affect our ability to sell Oxycyte in large quantities at profitable pricing.

 

Uncertainty of third-party reimbursement could affect our future profitability.

 

Sales of medical products largely depend on the reimbursement of patients’ medical expenses by governmental health care programs and private health insurers. There is no guarantee that governmental health care programs or private health insurers will reimburse our sales of Oxycyte, or permit us to sell our product at high enough prices to generate a profit.

 

Risks related to ownership of our stock

 

Our stock price could be volatile and your investment could suffer a decline in value.

 

The market price of our common stock has fluctuated significantly in response to a number of factors, many of which are beyond our control, including:

 

  Regulatory developments relating to our Oxycyte blood substitute product;

 

  Announcements by us relating to the results of our clinical trials of Oxycyte;

 

  Developments relating to our efforts to obtain additional financing to fund our operations;

 

  Announcements by us regarding transactions with potential strategic partners;

 

  Announcements relating to blood substitute products being developed by our competitors;

 

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  Changes in industry trends or conditions;

 

  Our issuance of additional debt or equity securities; and

 

  Sales of significant amounts of our common stock or other securities in the market.

 

In addition, the stock market in general, and the over-the-counter market and the biotechnology industry market in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of other public companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in substantial costs, potential liabilities, and the diversion of our management’s attention and resources.

 

There are a large number of shares that may be sold in the future in the public market, which may depress the market price of our common stock.

 

We intend to file a registration statement with the Securities and Exchange Commission to register resale by certain stockholders of approximately 26,171,967 shares of common stock now outstanding, 7,733,666 shares of common stock issuable under a subscription agreement, 14,533,666 shares of common stock issuable under warrants that Synthetic Blood has agreed to deliver under a subscription agreement, and 2,266,334 issuable on exercise of outstanding warrants. We currently have 113,808,876 shares of common stock outstanding, of which 34,524,598 shares are restricted from public sale under Rule 144 adopted under the Securities Act of 1933. Consequently, the intended registration will substantially increase the number of shares available for sale in the public market, which could cause the market price of our common stock to decline.

 

ITEM 2 – PROPERTIES

 

Synthetic Blood owns no real property and currently leases, on a month to month basis, its principal administrative and laboratory facilities at 3189 Airway Avenue, Building C, Costa Mesa, California 92626. The current rent is approximately $9,400 per month.

 

ITEM 3 - LEGAL PROCEEDINGS

 

Synthetic Blood is not presently involved in any legal proceedings and was not involved in any such proceedings during fiscal year 2004.

 

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matter was submitted to a vote of security holders during the quarter ended April 30, 2004.

 

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PART II

 

ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market price, number of shareholders, and dividend policy

 

Quotations for the common stock of Synthetic Blood are reported on the OTC Electronic Bulletin Board. The over-the-counter quotations set forth below reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. For the past two fiscal years, the minimum bid and highest ask prices were:

 

     2004

   2003

Quarter


   Low

   High

   Low

   High

1st

   $ 0.14    $ 0.35    $ 0.12    $ 0.40

2nd

   $ 0.20    $ 0.27    $ 0.12    $ 0.21

3rd

   $ 0.28    $ 0.90    $ 0.12    $ 0.20

4th

   $ 0.44    $ 0.66    $ 0.13    $ 0.20

 

At June 30, 2004 we had approximately 1,293 shareholders of record.

 

Since inception of Synthetic Blood, no dividends have been paid on the common stock. Synthetic Blood intends to retain any earnings for use in its business activities, so it is not expected that any dividends on the common stock will be declared and paid in the foreseeable future.

 

Recent sales of unregistered securities

 

On May 25, 2004, Synthetic Blood closed the acceptance of subscription agreements covering the sale of 10,000,000 shares of common stock, 10,000,000 Series A Warrants, 3,400,000 Series B Warrants, and 3,400,000 Series C Warrants for $3,030,000 in cash. The subscription agreements are with four foreign investors and were made in reliance on the exemption afforded by Regulation S adopted under the Securities Act of 1933. Synthetic Blood agreed to register the common stock sold in the offering, including the common stock underlying the warrants, for resale under the Securities Act of 1933. Synthetic Blood has received payment from three of the investors in the amount of $680,000. We are advised by Remobo AG, a company controlled by Giuseppe Coniglione and the fourth investor, that funds in the amount of $2,350,000 will be wired to us as soon as the Suisse bank managing Remobo’s account obtains written confirmations required to comply with U.S. and foreign currency transfer laws. There is no assurance that Remobo will be able to comply with these laws or that the funds will be wired to us. Assuming Synthetic Blood receives the full purchase price for the securities offered, it will pay $303,000 to Andreas Camenzind, a foreign financial consultant, as compensation for his assistance with the offering, and will pay him three percent of the funds derived from exercise of the warrants issued to the foreign investors. Under the Series A Warrants the holders have the right to purchase a total of 10,000,000 common shares at a price of $0.47 per share, or a total of $4,700,000, that expires on May 31, 2009. Under the Series B Warrants the holders have the right to purchase a total of 3,400,000 common shares at a price of $0.60 per share, or a total of $2,040,000, that expires 90 days from and including the effective date of the registration statement. Under the Series C Warrants the holders have the right to purchase a total of 3,400,000 common shares at a price of $0.60 per share, or a total of $2,040,000, that expires on May 31, 2009.

 

From October 2003 to February 2004, Synthetic Blood sold 12,897,779 shares of common stock, at prices ranging from $0.15 to $0.18 per share for a total of $2,001,600. The shares were sold to approximately 23 foreign investors under the exemption afforded by Regulation S of the Securities Act of 1933. Synthetic Blood intends to file the registration statement to register the restricted common stock purchased by the foreign investors for resale. In connection with the private placement, Synthetic Blood issued warrants for the purchase of 4,000,000 shares of its common stock that expire in September 2005, to five foreign financial consultants at an exercise price of $0.20 per share as part of the compensation

 

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given in connection with the total offering to foreign investors. Further, Synthetic Blood issued 12,122,223 shares of common stock to an individual, a foreign financial consultant, in consideration for his advisory services related to the offering.

 

In December 2003 Synthetic Blood issued a warrant to purchase 2,500 shares of common stock at an exercise price of $0.01 that expires December 2, 2008 to each of James Reavis and Robert Skalnik as compensation for services. Synthetic Blood issued options to purchase common stock during the fiscal year ended April 30, 2004 to its directors, officers, and employees as compensation for services. The following table lists the options granted during the year.

 

Name


  

No. of Shares

Covered by Option


  

Exercise

Price ($)


  

Grant

Date


  

Expiration

Date


Howard Jones

   10,000    0.15    05/01/03    05/01/13
     500,000    0.15    01/30/04    01/30/08

Roger A. Ekbom

   10,000    0.15    05/01/03    05/01/13

Robert W. Nicora

   150,000    0.22    08/01/03    08/01/13

Richard Kiral

   75,000    0.15    03/01/04    03/01/14

Joan Mahan

   15,000    0.44    03/01/04    03/01/14

Gary Clauson

   55,000    0.22    09/01/03    09/01/13
     20,000    0.44    03/01/04    03/01/14

David Evitts

   15,000    0.22    09/01/03    09/01/13

Yugi Higa

   10,000    0.22    09/01/03    09/01/13

 

Each of the foregoing warrants and options were issued in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933

 

ITEM 6 - SELECTED FINANCIAL DATA

 

    

April 30,

2004


   

April 30,

2003


   

April 30,

2002


   

April 30,

2001


   

April 30,

2000


 

Statement of Operations Data:

                                        

Other Income

   $ 18,002     $ 48,558     $ 130,288     $ 331,019     $ 16,141  

Total expenses

   $ 2,267,205     $ 2,275,895     $ 3,618,101     $ 2,003,261     $ 927,480  

Net loss

   $ (2,249,203 )   $ (2,227,337 )   $ (3,487,813 )   $ (1,672,242 )   $ (911,339 )

Weighted average number of shares

     95,327,891       88,651,158       87,198,320       86,401,830       65,365,438  

Net loss per share, basic and diluted

   $ (0.02 )   $ (0.03 )   $ (0.04 )   $ (0.02 )   $ (0.01 )

Balance Sheet Data:

                                        

Cash

   $ 302,310     $ 178,442     $ 2,424,015     $ 4,250,898     $ 5,466,391  

Working capital

   $ 127,592     $ 236,869     $ 2,352,474     $ 4,020,203     $ 5,592,016  

Total assets

   $ 1,047,979     $ 914,905     $ 3,275,820     $ 4,842,296     $ 6,199,651  

Total liabilities

   $ 293,698     $ 14,533     $ 179,078     $ 344,068     $ 345,440  

Stockholders’ equity

   $ 754,281     $ 900,372     $ 3,096,742     $ 4,498,228     $ 5,854,211  

 

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ITEM 7 - MANAGEMENT’S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our actual results may differ materially from those anticipated in the forward-looking statements made below as a result of various factors including those set forth in the caption “Item 1 – Business” and in other sections of this report.

 

The following is management’s discussion and analysis of financial condition and results of operations of Synthetic Blood for the fiscal years ended April 30, 2004, 2003, and 2002. This discussion and analysis should be read in conjunction with the section entitled “Item 6 - Selected Financial Data” and the financial statements and notes thereto included elsewhere herein.

 

Overview

 

Since 1990, Synthetic Blood International, Inc. has pursued the development of medical products based on perfluorocarbon technology. These products include Oxycyte , a synthetic blood substitute, and Fluorovent , an oxygen exchange fluid for facilitating the treatment of lung conditions. Since 1993 Synthetic Blood has also pursued development of a glucose biosensor implant.

 

The nature of our business is to spend years in development and testing of pharmaceutical and medical device products, take products through a lengthy and expensive process of regulatory review by the FDA, and, if successful in showing the product is efficacious and obtaining FDA approval, commercialize the product. During the periods of development and regulatory review we have no product to sell and no revenue. Nevertheless, we incur substantial costs pursuing this process, which require cash that comes from outside sources. We rely on outside financing to fund our operations, and will for the foreseeable future. That means we must continue to show progress with our products and be able to locate investors willing to commit their funds to a speculative venture that will ultimately be successful only if we can actually bring a product to market and gain a meaningful level of market acceptance and penetration. Because of these factors a larger number of biotechnology products under development fail, and there is no assurance that the products we have under development will not suffer the same fate.

 

We received approval of the Investigational New Drug application we filed with the FDA on Oxycyte and began Phase I clinical tests in October 2003. We completed the clinical tests in December 2003. The results of the Phase I tests were in line with our safety and efficacy expectations for the performance of Oxycyte. Our goal is to begin Phase II studies in 2004. We expect to commit a substantial portion of our financial and business resources over the next three years to testing Oxycyte and advancing this product to commercial distribution.

 

Fluorovent and our glucose biosensor implant are both in the animal testing stage. We do not believe we will be able to file any applications with the FDA for human testing on these products for at least another year. So while we will try to advance development of these products as best we can, our primary focus will be on advancing Oxycyte through the FDA review process in order to bring a product to market as soon as possible.

 

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Results of operations

 

Fiscal year 2004 compared to fiscal year 2003

 

For the fiscal year ended April 30, 2004, Other Income decreased to $18,002 from $48,558 in the fiscal year ended April 30, 2003. Other Income consists principally of interest income and rental income. This decrease is attributed to a reduction of the cash available for investment, a decline in the interest rate on invested funds from fiscal 2003 to 2004 and loss of a tenant in October 2003 from whom Synthetic Blood was receiving rents totaling $2,600 per month.

 

General and Administrative expenses of $990,982 for fiscal year 2004 increased $150,630 or 18 percent over fiscal year 2003 expenses of $840,352. This increase was the result of amortization of $98,916 of deferred compensation resulting from the value of common stock options granted to employees and a bonus of $40,000 paid to Synthetic Blood’s President offset by a reduction in travel expenses. General office and operating expenses have remained relatively constant from fiscal 2003 to 2004.

 

Research and Development expenses decreased 11 percent from $1,433,040 for the fiscal year ended April 30, 2003, to $1,276,223 for the fiscal year ended April 30, 2004. The decrease is attributed to significant expenditures in 2003 related to animal studies for our Oxycyte product in 2003. Because of the nature of our ongoing research and development activities, accounting periods may reflect significant changes in expenses resulting from the timing of research related to our three developmental products. We have increased expenditures relating to Oxycyte as the product entered Phase I clinical trials while decreasing expenditures on our two other products, whose development is current on hold. We intend to begin Phase II clinical trials in fiscal year 2005, so it should be expected that our expenditures on Oxycyte will continue to increase over the next fiscal year.

 

Interest expense decreased from $2,503 for fiscal year ended April 30, 2003 to zero for fiscal year ended April 30, 2004. This decrease resulted from the payment of all our short-term notes payable during fiscal 2003.

 

Fiscal year 2003 compared to fiscal year 2002

 

For the fiscal year ended April 30, 2003, Other Income decreased to $48,558 from $130,288 in the fiscal year ended April 30, 2002. Other Income consists principally of interest income and rental income. This decrease is attributed to a reduction of the cash available for investment and a decline in the interest rate on invested funds from fiscal 2002 to 2003.

 

General and Administrative expenses of $840,352 for fiscal year 2003 decreased $1,450,771 or 63 percent over fiscal year 2002 expenses of $2,291,123. This decrease is mainly the result of an expense recorded in 2002 of $1,549,000 for financial and investment services provided to Synthetic Blood in previous years. General office and operating expenses have remained relatively constant from fiscal 2002 to 2003.

 

Research and Development expenses increased 9 percent from $1,313,382 for the fiscal year ended April 30, 2002, to $1,433,040 for the fiscal year ended April 30, 2003. The increase is attributed to increased expenditures for consulting, laboratory supplies and increased depreciation on laboratory equipment. Synthetic Blood increased expenditures relating to Oxycyte as the product moved toward Phase I clinical trials while decreasing expenditures on its two other developmental products. Because of the nature of Synthetic Blood’s ongoing research and development activities, accounting periods may reflect significant changes in expenses resulting from the timing of research related to Synthetic Blood’s three developmental products.

 

Interest expense decreased to $2,503 for fiscal year ended April 30, 2003 from $13,596 for fiscal year ended April 30, 2002. This decrease resulted from the repayment of our short-term notes payable during 2003.

 

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Quarterly results of operations

 

The following table presents Synthetic Blood’s operating results for each of the eight fiscal quarters in the two-year period ended April 30, 2004. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited financial statements included in this Form 10-K. In the opinion of management, all necessary adjustments, which consist only of normal and recurring accruals, have been included to fairly present the unaudited quarterly results. This data should be read together with the financial statements and the notes thereto included in this Form 10-K.

 

Statements of operations data

 

 

    

Three Months Ended


 
    

July 31,

2002


    October 31,
2002


    January 31,
2003


   

April 30,

2003


   

July 31,

2003


    October 31,
2003


    January 31,
2004


    

April 30,

2004


 

Research and development expenses

   $ 176,289     $ 837,257     $ 243,214     $ 176,280     $ 233,080     $ 265,630     $ 501,488      $ 276,025  

General and administrative expenses

     240,594       202,422       230,419       166,917       226,297       202,003       314,035        248,647  

Interest expense

     1,538       808       157       —         —         —         —          —    
    


 


 


 


 


 


 


  


Total expenses

     418,421       1,040,487       473,790       343,197       459,377       467,633       815,523        524,672  

Other (Income) Expense

     (18,227 )     (13,311 )     (9,291 )     (7,729 )     (7,467 )     (7,207 )     (2,192 )      (1,136 )
    


 


 


 


 


 


 


  


Net loss

   $ (400,194 )   $ (1,027,176 )   $ (464,499 )   $ (335,468 )   $ (451,910 )   $ (460,426 )   $ (813,331 )    $ (523,536 )
    


 


 


 


 


 


 


  


Net loss per share, basic and diluted

   $ (0.005 )   $ (0.012 )   $ (0.005 )   $ (0.004 )   $ (0.005 )   $ (0.005 )   $ (0.008 )    $ (0.005 )

Weighted average shares outstanding, basic and diluted

     88,577,245       88,595,161       88,652,678       88,783,874       88,786,265       89,504,961       98,469,019        104,756,283  

 

Liquidity, capital resources and plan of operation

 

We have financed our operations since September 1990 through the issuance of debt and equity securities and loans from stockholders. As of April 30, 2004, we had $421,290 in total current assets and working capital of $127,592, compared to $251,402 in total current assets and working capital of $236,869 as of April 30, 2003.

 

During the year ended April 30, 2004, net cash provided by financing activities was $2,002,226, primarily from the sale of our common stock. Net cash of $1,773,460 was used to fund operating activities and $104,898 was used for investing activities, primarily for the purchase of additional laboratory equipment and additional patent expenditures. Consequently, our cash and cash equivalents increased from $178,442 at April 30, 2003 to $302,310 at April 30, 2004. We do not have any lines of credit or other borrowing arrangements with lenders.

 

We have had difficulty raising additional capital for research and development activities. During 2003, in order to fund the Phase I clinical studies for Oxycyte, we initiated a $2,001,601 private placement of common stock with foreign investors at prices ranging from $0.15 to $0.18 per share, which was completed in February 2004. In connection with this private placement, we issued to foreign consultants that assisted with placement of the offering warrants for the purchase of 4,000,000 shares of Synthetic Blood’s common stock at an exercise price of $0.20 per share and 12,122,223 shares of common stock. We intend to file a registration statement under the Securities Act to register the common stock sold and common stock underlying warrants for resale.

 

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In May 2004 Synthetic Blood offered common stock and warrants for sale overseas at a total purchase price of $3.03 million. We received subscription agreements from four foreign investors covering all of the offered securities, and we have received payment of $680,000 from three investors who subscribed for 2,266,334 shares of common stock and an equal number of warrants to purchase common shares at $0.47 per share over a period of five years. The fourth investor is Remobo AG, a company controlled by Giuseppe Coniglione. We are advised by Remobo that funds in the amount of $2,350,000 will be wired to us as soon as the Suisse bank managing Remobo’s account obtains written confirmations required to comply with U.S. and foreign currency transfer laws. There is no assurance that Remobo will be able to comply with these laws or that the funds will be wired to us. Assuming we receive all of the $3.03 million, we agreed to pay the foreign consultant who assisted with the placement $303,000 in cash and agreed to pay to the consultant three percent of the proceeds derived from the exercise of warrants sold in the offering. We intend to file a registration statement under the Securities Act to register the 10,000,000 shares of common stock sold and common stock underlying warrants for resale. We sold warrants in May 2004 in hopes that these outstanding rights will facilitate future funding. These warrants represent the right to purchase 10,000,000 shares for $4.7 million exercisable through May 31, 2009, 3,400,000 shares for $2.04 million exercisable through the 90 th day from and including the effective date of the registration statement filed to permit resale of the underlying common stock, and 3,400,000 shares for $2.04 million exercisable through May 31, 2009.

 

We are in the pre-clinical and clinical trial stages in the development of our products. Under an Investigational New Drug application filed with the FDA, we completed Phase I clinical studies on Oxycyte in December 2003. The results of the Phase I study were in line with our expectations for the performance of Oxycyte. We are in the process of completing our report on the test results for submission to the FDA, together with written protocols for two Phase II clinical studies on Oxycyte. We estimate that pursuing the review process with the FDA and implementing the Phase II clinical study will take approximately one year and cost approximately $2 million. Even if we are successful with our Phase II study, we must then conduct a Phase III clinical study and, if that is successful, file with the FDA and obtain approval of a Biologics License Application to begin commercial distribution, all of which will take more time and funding to complete. Our other products, Fluorovent and the glucose biosensor, must undergo further development and testing prior to submission to the FDA for approval to initiate clinical trials, which also requires additional funding. Management is actively pursuing private and institutional financing, as well as strategic alliances and/or joint venture agreements to obtain the necessary additional financing and reduce the cost burden related to the development and commercialization of our products. We expect our primary focus will be on funding the continued testing of Oxycyte, since this product is the furthest along in the regulatory review process. Our ability to continue to pursue testing and development of our products beyond 2004 depends on obtaining outside financial resources. There is no assurance that needed financing will occur or that we will succeed in obtaining the necessary resources.

 

We are almost entirely dependent on outside financing to continue our operations. We will not generate operating revenue unless and until one of our products is approved for commercial sale and sales activity begins. We will require substantial additional funds to complete clinical trials, pursue regulatory approval for our products, establish commercial scale manufacturing capabilities, and establish marketing, sales, and administrative capabilities. Expenditures for these purposes will result in substantial losses for at least the next several years. The expense and the time required to realize any product revenues or profitability are highly uncertain. We cannot ensure that we will be able to achieve product revenues or profitability on a sustained basis, or at all. The foregoing factors raise substantial doubt about our ability to continue as a going concern.

 

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Critical accounting policies

 

Our discussion and analysis of our financial condition and results of operations is based upon the financial statements presented in this report, which have been prepared in accordance with Generally Accepted Accounting Principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate our estimates, including those related to stock-based compensation and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:

 

Stock-Based Compensation - We account for stock-based employee compensation as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and, effective April 30, 2003, we adopted Statement of Financial Accounting Standards (“SFAS”) 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS 148”) that amends Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 123 and SFAS 148 require pro forma disclosures of net income and net income per share as if the fair value based method of accounting for stock-based awards had been applied for both employee and non-employee grants and require disclosure of option status on a more prominent and frequent basis. We account for stock options and warrants issued to non-employees based on the fair value method, but have not elected this treatment for grants to employees and board members. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.

 

The fair value of each option grant was estimated at the grant date using the Black-Scholes option-pricing model. The Black–Scholes option valuation model was developed for use in estimating the fair value of traded options and warrants that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our employee stock options and warrants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

 

Long-Lived Assets - Our intangible assets consist of patents related to our various technologies. These assets are amortized on a straight-line method over their estimated useful life, which ranges from eight to ten years. We review these intangible assets for in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). At April 30, 2004, management believes no indications of impairment existed.

 

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

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Table of Contents

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DA TA

 

The financial statements and supplementary data required by this item are set forth at the end of this report beginning with the index to financial statements on page F-1.

 

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

On September 22, 2003, Synthetic Blood received notice from Grant Thornton LLP of its resignation as its independent registered public accounting firm. In connection with its audits for the two most recent fiscal years and through September 22, 2003, there were no disagreements with Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement.

 

The audit reports of Grant Thornton LLP for the two most recent fiscal years ended April 30, 2003 and 2002 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, except as follows:

 

Grant Thornton LLP’s report on the financial statements of Synthetic Blood as of and for the year ended April 30, 2003, and the period from May 26, 1967 (inception) to April 30, 2003 contained an explanatory paragraph stating that:

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is a development stage enterprise engaged in developing certain medical products. The Company has accumulated deficit during the development stage of $18,700,730 as of April 30, 2003, and has used cash in operations of $2,093,762 during the year ended April 30, 2003. The Company will require substantial additional financing to fund operations until the necessary regulatory approvals are obtained, if ever. These factors, among others as described in Note A, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

In connection with its audits for the two most recent fiscal years and through September 22, 2003, there were no reportable events (as defined in Regulations S-K Item 304(a)(1)(v)).

 

Synthetic Blood engaged Haskell & White LLP as its new independent registered public accounting firm as of November 7, 2003. During the two most recent fiscal years and through the date of engagement, neither Synthetic Blood nor any one on behalf of Synthetic Blood consulted with Haskell & White LLP regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on its financial statements, or any other matters or reportable events required to be disclosed under Items 304(a)(2)(i) and (ii) of Regulation S-K.

 

ITEM 9A – CONTROLS AND PROCEDUR ES

 

With the participation of management, Synthetic Blood’s chief executive officer and chief financial officer evaluated its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the chief executive officer and the chief financial officer concluded that the disclosure controls and procedures are effective in connection with Synthetic Blood’s filing of its annual report on Form 10-K for the year ended April 30, 2004.

 

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Subsequent to April 30, 2003, through the date of this filing on Form 10-K for the year ended April 30, 2004, there have been no significant changes in Synthetic Blood’s internal controls or in other factors that could significantly affect these controls, including any significant deficiencies or material weaknesses of internal controls that would require corrective action.

 

ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

 

Directors and executive officers

 

Our officers and directors manage our business. The following persons are the officers and directors of Synthetic Blood:

 

Name


 

Age


 

Position


Howard Jones   66   Chairman of the Board
Roger A. Ekbom   77   Director
Robert W. Nicora   64   President and Chief Executive Officer Director
David Johnson   57   Chief Financial Officer
Richard Kiral, PhD   62   Vice President, Research and Development

 

Our directors serve for a term beginning with election and ending with the next meeting of stockholders at which directors are elected, when they may decline to stand for re-election or not be nominated for re-election, be nominated and re-elected for an additional term, or not be re-elected. Executive officers serve by appointment at the discretion of the board of directors. The following are brief biographies of each of our directors and officers.

 

Howard Jones, Ph.D., is Chairman of the Board of Directors. Dr. Jones’ most recent position was president of the biopharmaceutical business unit of Curative Health Services where he was responsible for R&D, licensing, and manufacturing of wound healing technology that incorporates growth factors from patient blood. He has more than 30 years of experience in directing research and development of drugs at Revlon, Bristol-Myers Squibb, Amylin Pharmaceuticals, and Cypros Pharmaceuticals, a company he co-founded. He started his career at Merck where he discovered Clinoril, a drug for the treatment of rheumatoid arthritis that has annual sales of $400,000,000. He has had more than 84 patents issued for his biopharmaceutical developments.

 

Roger A. Ekbom is Vice Chairman of the Board of Directors. Mr. Ekbom was Chief Executive Officer from 1991 to March 1998 and has extensive experience with medical device companies including managing companies from startup through full development and subsequent sales. He is the founder and former President of Cardio Vista Systems, Inc., and founder and Chairman of Tronomed, Inc. From 1976 until 1993, Mr. Ekbom was the Vice President of and a major stockholder in Respiratory Support Products, Inc. and Tronomed International, Inc. Mr. Ekbom was formerly the general manager of a division of Becton Dickinson, an international medical device company, and of Marion Scientific, a subsidiary of Marion Laboratories. Mr. Ekbom graduated from the University of Minnesota.

 

Robert W. Nicora became the President, Chief Executive Officer and Director on March 1, 1998. Mr. Nicora has BS in chemistry, five years of graduate study in biochemistry and medical sciences, and over 30 years of experience in various laboratory, management and regulatory positions with

 

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pharmaceutical and medical device companies. While at McGaw Laboratories, he was responsible for the development and FDA approval of hetastarch, a synthetic blood expander, now marketed by DuPont Pharma. He led the team that evaluated a joint partnership with Green Cross to develop their perfluorocarbon blood substitute, Fluosol. From 1994 through March 1998, he was director of scientific and regulatory services with Quintiles, the world’s largest global contact pharmaceutical company. He has provided preclinical and clinical drug and device consulting services to a number of startup biomedical companies.

 

David H. Johnson, CPA, is Chief Financial Officer. Mr. Johnson has over 25 years of financial and administrative management experience, including President and Chief Financial Officer of FirstPlus Bank. Previously Mr. Johnson was a regional partner at McGladrey and Pullen, a major public accounting firm. Mr. Johnson has a BA in accounting and is a certified public accountant.

 

Richard Kiral, Ph.D., Vice President of Research and Development, holds a Ph.D. in analytical chemistry and has over of 20 years of experience in the pharmaceutical and medical device industries. He has held vice president positions in R&D at Anthony Products, Ioptex Research, Allergan, and McGaw Laboratories, where he was responsible for development of a nutritional fat emulsion.

 

ITEM 11 - EXECUTIVE COMPENSATION

 

The following table provides certain summary information concerning compensation earned for services rendered in all capacities to Synthetic Blood for the fiscal years ended April 30, 2004, 2003 and 2002, by the other most highly compensated executive officers of Synthetic Blood (“Named Executive Officers”). This information includes the dollar amount of base salaries, bonus awards, stock options and all other compensation, if any, whether paid or deferred.

 

Summary compensation table

 

    

Year


   Annual
Compensation


   Long-term
Compensation


  

All Other

Compensation ($)(1)


Name and Position


      Salary($)

   Bonus($)

  

Securities Underlying

Options/SARs(#)


  

Robert Nicora

   2004    186,750    40,000    150,000    34,571

President

   2003    171,250    —      150,000    31,037
     2002    146,333    —      —      27,159

Richard Kiral

   2004    166,768    —      75,000    22,005

Vice President of

   2003    150,500    —      75,000    20,150

Product Development

   2002    144,833    —      —      18,397

(1) Mr. Nicora and Mr. Kiral received a $6,600 car allowance plus medical premiums and retirement contributions paid for by Synthetic Blood.

 

Option grants

 

Synthetic Blood adopted a stock option plan in October 1999, which was ratified by a vote of the shareholders during fiscal year ended April 30, 2001. The 1999 plan provides for the granting of incentive and non-qualified options to officers, directors, consultants and key employees to purchase up to 4,000,000 shares of Synthetic Blood’s common stock at prices not less than the fair market value of the stock at the date of grant for incentive options. The option expiration dates are determined at the date of grant, but may not exceed ten years. The total number of options issued under the Plan at April 30, 2004 were 2,370,000 with a weighted average exercise price of $0.24.

 

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In addition, Synthetic Blood has issued options outside the Plan. At April 30, 2004 the total non-qualified options outstanding were 3,020,000 with a weighted average exercise price of $0.14.

 

The following table summarizes certain information as of April 30, 2004 concerning the stock options granted to the Named Executive Officers during the fiscal year ended April 30, 2004. No stock appreciation rights, restricted stock awards or long-term performance awards have been granted as of the date hereof and no options have been exercised.

 

Option Grants in Last Fiscal Year

 

     Number of
Securities
Underlying
Options
Granted


   % of Total
Options
Granted to
Employees in
Fiscal Year


    Exercise
or Base
Price Per
Share


   Expiration
Date


  

Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation of
Option Terms (1)

5%                10%


             

Robert Nicora President

   150,000    17.4 %   $ 0.22    8/1/13    $ 20,754    $ 52,594

Richard Kiral Vice President

   75,000    8.7 %   $ 0.15    3/1/14    $ 7,075    $ 17,930

(1) Each option listed in the table vests over a three-year period and is exercisable over a ten-year period. The potential realizable value is calculated based on the ten-year term of the option at the time of grant. It is calculated based on assumed annualized rates of stock price appreciation from the exercise price at the date of grant of 5 percent and 10 percent (compounded annually) over the full term of the grant with appreciation determined as of the expiration date. The 5 percent and 10 percent assumed rates of appreciation are mandated by the Securities and Exchange Commission and do not represent Synthetic Blood’s estimate or projection of future common stock prices. Actual gains on, if any, on stock options exercised are dependent on the future performance of the common stock and overall stock market conditions. The amounts reflected in the table may not be achieved.

 

Aggregate Options Exercised in Last Fiscal Year and Year End Option Values

 

    

Shares

Acquired On
Exercise


   Value
Realized


  

Number of Securities

Underlying Unexercised

Options At Fiscal Year End


  

Value of Unexercised
In-the-Money Options

at Fiscal Year End


               Exercisable/ Unexercisable

   Exercisable/Unexercisable (1)

Robert Nicora President

   None    None    950,000/ 250,000    $ 225,000/ $78,750

Richard Kiral Vice President

   None    None    525,000/ 125,000    $ 167,250/ $35,750

(1) Based on the closing sale price on the OTC Bulletin Board on the last day of the 2004 fiscal year of $0.51 less the option exercise price payable per share.

 

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Employment contracts

 

During March 2002, the Board of Directors approved a three-year employment contract with Robert W. Nicora, as President and Chief Executive Officer. Mr. Nicora’s current base annual salary is $189,000 for the year ending July 2004 with minimum future annual increases of 5 percent and includes an automobile allowance, medical and dental coverage, participation in the Executive Bonus Plan, $500,000 life insurance payable by the corporation and payable to a beneficiary named by the insured, and participation in Synthetic Blood’s stock option plan with the grant of 150,000 options annually. At the end of the contract, Mr. Nicora’s contract will renew automatically annually unless terminated by either party. Mr. Nicora’s employment agreement provides that he may, at his election, receive a severance payment equal to 299 percent of his average annual salary and bonuses received during the prior two-year period in the event of a change in control as defined.

 

On February 1, 2000 the Board of Directors approved a two-year employment contract with Richard Kiral, as Vice President of Product Development. Mr. Kiral’s current base annual salary is $167,000 for the year ending January 2005 and includes an automobile allowance, medical and dental coverage, participation in the Executive Bonus Plan, $200,000 life insurance payable by the corporation and payable to a beneficiary named by the insured, and participation in Synthetic Blood’s stock option plan with the grant of an option for 75,000 shares annually. The contract will renew automatically annually unless terminated by either party. Mr. Kiral’s employment agreement provides that he is to receive a minimum severance payment equal to 9 months of his annual salary period in the event of a change in control as defined.

 

Compensation of directors

 

Synthetic Blood currently has two outside members of the Board of Directors. Each board member received compensation of $12,000 for fiscal year 2004 and options to purchase 10,000 shares of common stock exercisable over a term of ten years at an exercise price of $0.15 per share. The Chairman of the Board received additional options to purchase 500,000 shares of common stock vesting over 2 years, exercisable over a period of 10 years and an exercise price of $0.15 per share.

 

Board and Committees; Code of Ethics

 

In the fiscal year ended April 30, 2004, the Board of Directors of Synthetic Blood met four times and these meetings were attended by all of the directors. From time to time the directors also acted through written consents of the board. There are no standing committees of the board of directors. Due to the fact Synthetic Blood is in the development stage with no operating revenue and activities limited to research and development, the board of directors determined that it is not necessary or practical for Synthetic Blood to establish a Compensation Committee or Audit Committee, recruit a financial expert to serve on the board, or adopt charters for a compensation committee or audit committee. Synthetic Blood has adopted a Code of Ethics applicable to its principal executive officer and principal financial officer, a copy of which is filed with the Securities and Exchange Commission as an exhibit to this report.

 

Compensation committee interlocks and insider participation in compensation decisions

 

Synthetic Blood does not presently have a Compensation Committee of the Board of Directors, or other Board Committees performing equivalent functions, and did not at any time during the last four years. The Board of Directors presently performs these functions and participated in deliberations concerning executive officer compensation during the last fiscal year. None of Synthetic Blood’s executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of Synthetic Blood’s Board of Directors or Compensation Committee.

 

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Table of Contents

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of June 30, 2004, the number and percentage of the outstanding shares of common stock and warrants and options that, according to the information supplied to Synthetic Blood, were beneficially owned by (i) each person who is currently a director, (ii) each executive officer, (iii) all current directors and executive officers as a group and (iv) each person who, to the knowledge of Synthetic Blood, is the beneficial owner of more than five percent of the outstanding common stock. Except as otherwise indicated, the persons named in the table have sole voting and dispositive power with respect to all shares beneficially owned, subject to community property laws where applicable.

 

Name and Address


  

Common

Shares (1)


  

Percent

of Class (2)


 

Principal stockholders

           

Giuseppe Coniglione

Gutenswil, Switzerland

   22,266,666    16.86 %

Aurelio Landolt

Bach, Switzerland

   6,731,111    5.70 %

Officers and directors

           

Howard Jones

20454 Rancho Villa Rd.

Ramona, CA 92064

   411,666    0.36 %

Roger A. Ekbom

11850 N. Riveria

Tustin, CA 92762

   1,928,849    1.69 %

Robert W. Nicora

2535 Valencia Ave.

Santa Ana, CA 92706

   1,200,000    1.05 %

David Johnson

20470 Via Marwah

Yorba Linda, CA 92886

   166,666    0.15 %

Richard Kiral

25505 Nottingham Ct.

Laguna Hills, CA 92653

   525,000    0.46 %

All officers and directors as a group (5 persons)

   4,232,181    3.64 %

(1) These figures include vested options: for Mr. Jones options to purchase 411,666 shares of common stock; for Mr. Ekbom options to purchase 545,000 shares of common stock; for Mr. Nicora options to purchase 950,000 shares of common stock; for Mr. Johnson options to purchase 166,666 shares of common stock; and, for Mr. Kiral options to purchase 525,000 shares of common stock.
(2) These figures represent the percentage of ownership of the named individuals assuming each of them alone has exercised his options, and percentage ownership of all officers and directors as a group assuming all purchase rights held by such individuals are exercised.

 

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Table of Contents

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

During the fiscal year ended April 30, 2004 we paid $126,000 to PrimaPharm for the manufacture of Oxycyte used in clinical trials and testing. Richard Kiral, an officer of Synthetic Blood, is a director and minority stockholder of PrimaPharm.

 

ITEM 14 – PRINCIPAL ACCOUNTING FEES AND EXPENSES

 

The aggregate fees billed for professional services by Haskell & White LLP and Grant Thornton LLP in 2004 and 2003 were as follows:

 

     2004

    2003

     Haskell & White LLP

    Grant Thornton LLP

    Grant Thornton LLP

Audit Fees

   $ 41,640 (1)   $ 34,676 (2)   $ 63,440

Audit Related Fees

     —         —         —  

Tax Fees(4)

   $ 3,500 (3)     —       $ 4,470
    


 


 

Total

   $ 45,140     $ 34,676     $ 67,910
    


 


 


(1) Includes $15,000 of audit fees to be billed in Fiscal Year 2005.
(2) Includes $8,000 of audit fees to be billed in Fiscal Year 2005.
(3) To be billed in Fiscal Year 2005.
(4) Tax return and related services.

 

It is our Board of Directors’ policy and procedure to approve in advance all audit engagement fees and terms and all permitted non-audit services provided by our independent auditors. We believe that all audit engagement fees and terms and permitted non-audit services provided by our independent auditors as described in the above table were approved in advance by our Board of Directors.

 

PART IV

 

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

FINANCIAL STATEMENTS

 

  (a) Reports of Independent Registered Public Accounting Firms.

 

  (b) Balance Sheets as of April 30, 2004 and 2003.

 

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Table of Contents
  (c) Statements of Operations for each of the three years in the period ended April 30, 2004 and for the period May 26, 1967 (Date of Inception) to April 30, 2004.

 

  (d) Statements of Stockholders’ Equity for each of the three years in the period ended April 30, 2004 and for the period May 26, 1967 (Date of Inception) to April 30, 2004.

 

  (e) Statements of Cash Flows for each of the three years in the period ended April 30, 2004 and for the period May 26, 1967 (Date of Inception) to April 30, 2004.

 

  (f) Notes to the Financial Statements.

 

REPORTS ON FORM 8-K

 

Synthetic Blood filed Form 8-K on May 26, 2004 reporting under Item 5 its $3 million private placement to overseas investors.

 

INDEX TO EXHIBITS

 

Exhibit No.

 

Exhibits Required by Item 601 of Regulation S-K


3.1   Certificate of Incorporation, including all amendments
3.2   Amended and Restated Bylaws
10.1   Agreement with Leland C. Clark, Jr., Ph.D. dated November 20, 1992 with amendments, Assignment of Intellectual Property/ Employment
10.2   Agreement between the Registrant and Keith R. Watson, Ph.D., Assignment of Invention
10.3   Children’s Hospital Research Foundation License Agreement dated February 28, 2001
10.4   1999 Employee Stock Plan
10.5   Form of Option issued to Executive Officers and Directors
10.6   Form of Option issued to Employees
10.7   Stock Option Agreement issued to Andreas Camenzind, December 3, 2001
10.8   Form of Option (Warrant) Issued to Foreign Consultants – June 2003 (1)
10.9   Form of Warrant issued to Service Providers (2)
10.10   Form of Offshore Restricted Securities Subscription Agreement – Fiscal Year 2004
10.11   Employment Agreement with Robert W. Nicora
10.12   Employment Agreement with Richard Kiral
10.13   Form of Offshore Securities Purchase Agreement – May 2004 (3)

 

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Table of Contents
10.14   Form of Series A Warrant issued in May 2004 (3)
10.15   Form of Series B Warrant issued in May 2004 (3)
10.16   Form of Series C Warrant issued in May 2004 (3)
10.17   Registration Rights Agreement dated May 13, 2004 (3)
14.1   Code of Ethics
16.1   Letter from Grant Thornton LLP to the SEC dated September 25, 2003 (4)
31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) On September 3, 2004, Synthetic Blood issued this instrument for the purchase of common stock at an exercise price of $0.20 per share that expire September 5, 2004 to the following persons in the amounts shown:

Markus Beck

  500,000 shares

Victor Dario

  1,000,000 shares

Dusol Real Estate

  1,000,000 shares

Aurelio Landolt

  500,000 shares

Werner Rhaese

  1,000,000 shares
(2) This is the form of warrant to purchase common stock issued to certain service providers as follows:

 

Name


   No. of shares

   Exercise Price

   Expiration

James Reavis

   80,000
2,500
   $
$
0.15
0.01
   10/13/09
12/01/08

Robert J. Skalnik

   17,476
5,769
6,250
7,143
2,500
   $
$
$
$
$
0.01
0.01
0.01
0.01
0.01
   12/29/05
01/12/06
06/06/06
09/06/06
12/02/08

Jonathan Spees

   20,000    $ 0.20    09/17/05
(3) These documents were filed as exhibits to the current report on Form 8-K filed by Synthetic Blood with the Securities and Exchange Commission on May 26, 2004, and are incorporated herein by this reference.
(4) This document was filed as an exhibit to the current report on Form 8-K filed by Synthetic Blood with the Securities and Exchange Commission on September 26, 2003, and is incorporated herein by this reference.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

 

    SYNTHETIC BLOOD INTERNATIONAL, INC.
August 13, 2004  

/S/ Robert W. Nicora,


    Chief Executive Officer
    (Principal Executive Officer)
August 13, 2004  

/S/ David H. Johnson,


    Chief Financial Officer
    (Principal Financial Officer and Principal
    Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

 

/S/ Roger A. Ekbom,


   Date: August 13, 2004
Director     

/S/ Robert W. Nicora,


   Date: August 13, 2004
Director     

/S/ Howard Jones,


   Date: August 13, 2004
Director     

 

Supplemental Information to Be Furnished With Reports Filed Pursuant to Section 15(d) of the Act By Registrants Which Have Not registered Securities Pursuant to Section 12 of the Act

 

No annual report to stockholders or proxy materials were disseminated to the stockholders of Synthetic Blood during the fiscal year ended April 30, 2004.

 

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INDEX TO FINANCIAL STATEMENTS

 

C O N T E N T S

 

     Page

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   F-2

FINANCIAL STATEMENTS

    

BALANCE SHEETS

   F-4

STATEMENTS OF OPERATIONS

   F-6

STATEMENTS OF SHAREHOLDERS’ EQUITY

   F-7

STATEMENTS OF CASH FLOWS

   F-9

NOTES TO FINANCIAL STATEMENTS

   F-12

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders of

Synthetic Blood International, Inc.

 

We have audited the accompanying balance sheet of Synthetic Blood International, Inc. (a development stage company) (the “Company”) as of April 30, 2004, and the related statements of operations, stockholders’ equity and cash flows for year then ended and for the period from inception, May 26, 1967, through April 30, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The Company’s balance sheet as of April 30, 2003, and related statements of operations, stockholders’ equity and cash flows for the years ended April 30, 2003 and 2002, and for the period from inception, May 26, 1967, through April 30, 2003, were audited by other auditors whose report, dated June 30, 2003, included an explanatory paragraph regarding substantial doubt about the Company’s ability to continue as a going concern. The financial statements for the period from inception, May 26, 1967, through April 30, 2003, reflect cumulative net losses of $18,700,730. The other auditors’ report has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts for such prior periods, is based solely on the report of other auditors.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit, and the report of the other auditors, provide a reasonable basis for our opinion.

 

In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Synthetic Blood International, Inc. as of April 30, 2004, and the results of its operations and its cash flows for the year then ended and for the period from inception, May 26, 1967, through April 30, 2004, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is a development stage enterprise presently generating no revenues and the Company has a deficit accumulated during the development stage of $20,949,933. Further, the Company used cash in operations of $1,773,460 during the year ended April 30, 2004, and has limited working capital available as of April 30, 2004. The Company will require substantial additional financing to fund operations and development until the necessary regulatory approvals are obtained, if ever. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/S/ HASKELL & WHITE LLP

 

Irvine, California

June 4, 2004

 

F-2


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

Synthetic Blood International, Inc.

 

We have audited the accompanying balance sheet of Synthetic Blood International, Inc. (a Company in the development stage) as of April 30, 2003, and the related statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended April 30, 2003 and for the period from inception (May 26, 1967) to April 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Synthetic Blood International, Inc. as of April 30, 2003, and the results of its operations and its cash flows for each of the two years in the period ended April 30, 2003 and for the period from inception (May 26, 1967) to April 30, 2003, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is a development stage enterprise engaged in developing certain medical products. The Company has accumulated deficit during the development stage of $18,700,730 as of April 30, 2003, and has used cash in operations of $2,093,762 during the year ended April 30, 2003. The Company will require substantial additional financing to fund operations until the necessary regulatory approvals are obtained, if ever. These factors, among others as described in Note A, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/S/ GRANT THORNTON

 

Irvine, California

June 30, 2003

 

F-3


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

BALANCE SHEETS

 

April 30,

 

     2004

    2003

 

ASSETS

                

CURRENT ASSETS:

                

Cash and cash equivalents

   $ 302,310     $ 178,442  

Prepaid expenses and other current assets

     118,980       72,960  
    


 


Total current assets

     421,290       251,402  
    


 


PROPERTY AND EQUIPMENT

                

Laboratory equipment

     661,101       594,260  

Furniture and fixtures

     31,731       41,874  

Leasehold improvements

     4,810       4,810  
    


 


       697,642       640,944  

Less accumulated depreciation

     (290,448 )     (215,020 )
    


 


Property and equipment, net

     407,194       425,924  
    


 


PATENTS, net

     219,495       237,579  
    


 


     $ 1,047,979     $ 914,905  
    


 


 

The accompanying notes are an integral part of these financial statements.

 

F-4


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

BALANCE SHEETS

 

April 30,

 

     2004

    2003

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

                

CURRENT LIABILITIES

                

Accounts payable

   $ 237,249     $ 12,235  

Accrued expenses

     56,449       2,298  
    


 


Total current liabilities

     293,698       14,533  
    


 


COMMITMENTS AND CONTINGENCIES

                

STOCKHOLDERS’ EQUITY:

                

Preferred stock, undesignated; authorized 10,000,000 shares; none issued or outstanding at April 30, 2004 and 2003, respectively

     —         —    

Common stock, par value $0.01 per share; authorized 200,000,000 shares; 113,808,876 and 88,783,874 shares issued and outstanding at April 30, 2004 and 2003, respectively

     1,138,089       887,839  

Additional paid-in capital

     20,708,959       18,713,263  

Deferred compensation

     (142,834 )     —    

Deficit accumulated during the development stage

     (20,949,933 )     (18,700,730 )
    


 


Total stockholders’ equity

     754,281       900,372  
    


 


     $ 1,047,979     $ 914,905  
    


 


 

The accompanying notes are an integral part of these financial statements.

 

F-5


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

STATEMENTS OF OPERATIONS

 

For the Three Years Ended April 30, 2004 and for the Period

May 26, 1967 (Date of Inception) to April 30, 2004

 

     Period from
May 26, 1967
(inception) to
April 30, 2004


    2004

    2003

    2002

 

EXPENSES

                                

Research and development

   $ 8,192,931     $ 1,276,223     $ 1,433,040     $ 1,313,382  

General and administrative

     13,193,731       990,982       840,352       2,291,123  

Interest

     182,643       —         2,503       13,596  
    


 


 


 


Total expenses

     21,569,305       2,267,205       2,275,895       3,618,101  

OTHER INCOME (primarily interest)

     (619,372 )     (18,002 )     (48,558 )     (130,288 )
    


 


 


 


NET LOSS

   $ (20,949,933 )   $ (2,249,203 )   $ (2,227,337 )   $ (3,487,813 )
    


 


 


 


NET LOSS PER SHARE - Basic and diluted

           $ (0.02 )   $ (0.03 )   $ (0.04 )
            


 


 


WEIGHTED AVERAGE NUMBER OF COMMON SHARES

                                

OUTSTANDING - Basic and diluted

             95,327,891       88,651,158       87,198,320  
            


 


 


 

The accompanying notes are an integral part of these financial statements.

 

F-6


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

STATEMENTS OF STOCKHOLDERS’ EQUITY

 

For the Three Years Ended April 30, 2004 and for the Period

May 26, 1967 (Date of Inception) to April 30, 2004

 

     Common Stock

  

Additional
paid-in

capital


   Deferred
Compensation


   Deposits
on common
stock


  

Accumulated

deficit during
development
stage


    Total
stockholders’
equity


 
     Number of
shares


   Amount

             

BALANCES, May 26, 1967

   —      $ —      $ —      $ —      $ —      $ —       $ —    

Issuance of common stock

   65,089,741      650,897      12,152,360      —        —        —         12,803,257  

Issuance of common stock upon conversion of debentures

   1,401,399      14,014      818,234      —        —        —         832,248  

Issuance of common stock to employees and compensatory options

   218,800      2,188      157,045      —        —        —         159,233  

Issuance of common stock for services rendered

   1,098,994      10,990      255,895      —        —        —         266,885  

Issuance of common stock to officers to retire shareholder loans

   1,044,450      10,444      177,556      —        —        —         188,000  

Common stock issued in conjunction with funding agreements and services rendered

   5,376,365      53,764      883,160      —        —        —         936,924  

Common stock issued upon conversion of notes payable

   4,766,820      47,668      637,607      —        —        —         685,275  

Issuance of warrants and options

   —        —        232,980      —        —        —         232,980  

Exercise of warrants and options

   2,477,978      24,780      212,477      —        —        —         237,257  

Contributions of capital for cash and services rendered

   —        —        65,700      —        —        —         65,700  

Contribution of capital by shareholders

   —        —        581,818      —        —        —         581,818  

Issuance of common stock for promissory note

   3,000,000      30,000      370,000      —                       400,000  

Deposits received on common stock

   —        —        —        —        94,231      —         94,231  

Net loss

   —        —        —        —        —        (12,985,580 )     (12,985,580 )
    
  

  

  

  

  


 


Balances at April 30, 2001

   84,474,547      844,745      16,544,832      —        94,231      (12,985,580 )     4,498,228  
    
  

  

  

  

  


 


 

The accompanying notes are an integral part of these financial statements.

 

F-7


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

STATEMENTS OF STOCKHOLDERS’ EQUITY - CONTINUED

 

For the Three Years Ended April 30, 2004 and for the Period

May 26, 1967 (Date of Inception) to April 30, 2004

 

     Common Stock

  

Additional

paid-in

capital


  

Deferred

Compensation


   

Deposits

on common

stock


   

Deficit

accumulated

during the

development stage


   

Total

stockholders’

equity


 
     Number of
shares


   Amount

           

Balances at April 30, 2001

     84,474,547    $ 844,745    $ 16,544,832    $ —       $ 94,231     $ (12,985,580 )   $ 4,498,228  

Issuance of common stock for:

                                                  —    

Exercise of stock warrants

     2,787,698      27,877      369,400      —         —         —         397,277  

Exercise of stock options

     70,000      700      6,300      —         —         —         7,000  

Cash proceeds

     1,000,000      10,000      123,000      —         —         —         133,000  

Deposits on common stock

     245,000      2,450      91,781      —         (94,231 )     —         —    

Compensation on options and warrants issued

     —        —        1,549,050      —         —         —         1,549,050  

Net loss

     —        —        —        —         —         (3,487,813 )     (3,487,813 )
    

  

  

  


 


 


 


Balances at April 30, 2002

   $ 88,577,245    $ 885,772    $ 18,684,363    $ —       $ —       $ (16,473,393 )   $ 3,096,742  

Issuance of common stock for:

                                                     

Exercise of stock warrants

     36,629      367      —        —         —         —         367  

Services rendered

     170,000      1,700      28,900      —         —         —         30,600  

Net loss

     —        —        —        —         —         (2,227,337 )     (2,227,337 )
    

  

  

  


 


 


 


Balances at April 30, 2003

     88,783,874    $ 887,839    $ 18,713,263    $ —       $ —       $ (18,700,730 )   $ 900,372  

Issuance of common stock for:

                                                     

Exercise of stock options

     5,000      50      575      —         —         —         625  

Cash proceeds, net of offering costs

     25,020,002      250,200      1,751,401      —         —         —         2,001,601  

Issuance of stock options for services rendered

                   1,970      —         —         —         1,970  

Compensation on options and warrants issued

     —        —        241,750      (142,834 )     —         —         98,916  

Net loss

     —        —        —        —         —         (2,249,203 )     (2,249,203 )
    

  

  

  


 


 


 


Balances at April 30, 2004

     113,808,876    $ 1,138,089    $ 20,708,959    $ (142,834 )   $ —       $ (20,949,933 )   $ 754,281  
    

  

  

  


 


 


 


 

The accompanying notes are an integral part of these financial statements.

 

F-8


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

STATEMENTS OF CASH FLOWS

 

For Each of the Three Years in the Period Ended April 30, 2004 and for the Period

May 26, 1967 (Date of Inception) to April 30, 2004

 

    

Period from
May 26, 1967
(inception) to

April 30, 2004


    2004

    2003

    2002

 

Cash flows from operating activities:

                                

Net loss

   $ (20,949,933 )   $ (2,249,203 )   $ (2,227,337 )   $ (3,487,813 )

Adjustments to reconcile net loss to net cash used in operating activities:

                                

Depreciation and amortization

     876,201       141,712       137,049       110,262  

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

     150,409       —         8,325       —    

Issuance of compensatory stock options and warrants

     2,015,179       98,916       —         1,549,050  

Issuance of stock below fair market value

     695,248       —         —         —    

Issuance of stock for services rendered

     1,222,779       1,970       30,600       —    

Contribution of capital through services rendered by stockholders

     216,851       —         —         —    

Changes in operating assets and liabilities:

                                

Notes receivable

     —         —         —         30,000  

Prepaid expenses and other current assets

     (118,980 )     (46,020 )     16,577       (6,165 )

Accounts payable and accrued expenses

     470,290       279,165       (58,976 )     (93,202 )
    


 


 


 


Net cash used in operating activities

     (15,421,956 )     (1,773,460 )     (2,093,762 )     (1,897,868 )
    


 


 


 


Cash flows from investing activities:

                                

Purchase of property and equipment

     (1,007,898 )     (80,417 )     (37,872 )     (376,503 )

Proceeds from sale of property and equipment

     15,458       —         —         —    

Purchase of other assets

     (608,516 )     (24,481 )     (26,737 )     —    
    


 


 


 


Net cash used in investing activities

     (1,600,956 )     (104,898 )     (64,609 )     (376,503 )
    


 


 


 


 

The accompanying notes are an integral part of these financial statements.

 

F-9


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

STATEMENTS OF CASH FLOWS - CONTINUED

 

For Each of the Three Years in the Period Ended April 30, 2004 and for the Period

May 26, 1967 (Date of Inception) to April 30, 2004

 

     Period from
May 26, 1967
(inception) to
April 30, 2004


    2004

   2003

    2002

 

Cash flows from financing activities:

                               

Proceeds from stockholder debt

   $ 977,692     $ —      $ —       $ —    

Repayments of amounts due to stockholders

     (121,517 )     —        —         —    

Proceeds from issuance of notes payable

     465,065       —        —         189,817  

Proceeds from issuance of convertible debentures

     811,000       —        —         —    

Payments on short-term notes payable

     (425,991 )     —        (105,569 )     (261,606 )

Payments on long-term debt

     (238,971 )     —        —         —    

Payments on capital lease obligation

     (52,338 )     —        —         —    

Proceeds from exercise of stock options and warrants

     512,026       625      367       404,277  

Contribution of capital from stockholders

     40,700       —        —         —    

Net proceeds from issuance of common stock

     15,357,556       2,001,601      —         133,000  
    


 

  


 


Net cash provided by (used in) financing activities

     17,325,222       2,002,226      (105,202 )     465,488  
    


 

  


 


Net increase (decrease) in cash and cash equivalents

     302,310       123,868      (2,263,573 )     (1,808,883 )

Cash and cash equivalents, beginning of period

     —         178,442      2,442,015       4,250,898  
    


 

  


 


Cash and cash equivalents, end of period

   $ 302,310     $ 302,310    $ 178,442     $ 2,442,015  
    


 

  


 


Cash paid for:

                               

Interest

   $ 143,129     $ —      $ 2,503     $ 13,596  
    


 

  


 


Income taxes

   $ 15,450     $ 1,340    $ 4,570     $ 800  
    


 

  


 


 

The accompanying notes are an integral part of these financial statements.

 

F-10


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

STATEMENTS OF CASH FLOWS - CONTINUED

 

For Each of the Three Years in the Period Ended April 30, 2004 and for the Period

May 26, 1967 (Date of Inception) to April 30, 2004

 

Supplemental information:

 

During Fiscal Year 2004:

 

The Company issued 12,122,223 shares of common stock and warrants for the purchase of 4,000,000 shares of the Company’s common stock. The estimated fair value of the common stock issued of $7,030,000 and the warrants of $340,500 has been offset against Additional Paid-In Capital as a reduction of the proceeds from the private placement.

 

The Company issued 500,000 incentive stock options to a Director of the Company and 75,000 incentive stock options to the Company’s Vice President. Deferred compensation of $241,750 has been recorded for the difference between the market value of the shares at the date of grant over the strike price and will be amortized to compensation expense over the 2-year vesting period.

 

During Fiscal Year 2003:

 

The Company issued 170,000 shares of common stock for legal services rendered. The Company recorded an expense of $30,600, which represents the fair value of the common stock on the date the liability was settled.

 

During Fiscal Year 2002:

 

The Company issued warrants for the purchase of 12,500,000 shares of the Company’s common stock to two financial consultants at exercise prices ranging from $0.13 - $0.60 per share. The warrants were issued for financial and investment services provided to the Company. The warrants vest upon any new increase in the number of authorized common shares to be issued by the Company. The warrants have terms of one and three years from the date of vesting. The warrants became fully vested on April 10, 2002, when the stockholders’ approved an increase to the authorized number of common stock shares to 200 million. In connection with the issuance of these warrants, the Company recorded compensation expense of $1,524,915 based on the fair value method in fiscal 2002, which is included in general and administrative expenses in the accompanying financial statements.

 

The Company issued warrants for the purchase of 96,786 shares of the Company’s common stock to consultants at exercise prices ranging from $0.01 - $0.19 per share. The warrants were issued to consultants for general management services provided to the Company. The warrants have a term of five years and are fully vested. The Company recorded compensation expense of $24,135 in fiscal 2002, which is included in general and administrative expenses in the accompanying financial statements.

 

The accompanying notes are an integral part of these financial statements.

 

F-11


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE A – DESCRIPTION OF BUSINESS AND GOING CONCERN

 

Description of Business - Synthetic Blood International, Inc. (“the Company”) was incorporated on May 26, 1967 and was inactive through September 1990, when it began conducting operations for the purpose of developing a synthetic blood emulsion to act as a human blood substitute, and a method of using a perfluorocarbon compound to facilitate oxygen exchange for individuals with respiratory distress syndrome. Shortly after commencing these operations, the Company changed its name to Synthetic Blood International, Inc. The Company is also developing an implantable, continuous reading glucose biosensor to be used primarily by individuals with diabetes. The Company submitted an Investigational New Drug Application (IND) for Oxycyte to the Food and Drug Administration (FDA) in 2003 and successfully conducted a Phase I safety clinical study in the fourth quarter of 2003. The results of the Phase I study were consistent with the results of preclinical animal safety studies, and showed a good safety profile for Oxycyte. The Company plans to start Phase II clinical trials of Oxycyte in surgical patients in 2004. Fluorovent and the glucose biosensor are at the preclinical development stage, and are currently inactive, awaiting additional financing. The Company has not generated any revenues since inception.

 

Going Concern - Management believes the accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the company as a going concern. The Company has accumulated deficit during the development stage of $20,949,933 at April 30, 2004 and used cash in operations of $1,773,460 during the year ended April 30, 2004.

 

In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, to maintain present financing, and to generate cash from future operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

 

Management believes that the Company’s existing working capital, along with the proceeds expected from the sale of its common stock as described in Note J, will be sufficient to meet its continuing obligations for the foreseeable future; however, there can be no assurance that the Company will successfully implement its plan.

 

F-12


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Development Stage - The Company has not commenced its planned principal operations, and there have been no significant revenues, therefore it is considered a “Development Stage Enterprise.”

 

Property and Equipment - Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the shorter of the estimated useful lives of the related assets, ranging from three to ten years, or the lease term, if applicable.

 

Loss Per Share - Basic loss per share, which excludes antidilutive securities, is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding for that particular period. In contrast, diluted loss per share considers the potential dilution that could occur from other equity instruments that would increase the total number of outstanding shares of common stock. Potentially dilutive securities, however, have not been included in the diluted loss per share computation because their effect is antidilutive.

 

Income Taxes – Deferred tax assets and liabilities are recorded for differences between the financial statement and tax bases of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period.

 

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of other income and expenses during the reporting periods. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments - The Company’s balance sheet includes the following financial instruments: cash and cash equivalents. The Company considers the carrying amount in the financial statements to approximate fair value for these financial instruments because of liquidity and short-term nature of the instruments.

 

Stock-Based Compensation - The Company accounts for stock-based employee compensation as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and, effective April 30, 2003, has adopted Statement of Financial Accounting Standards (“SFAS”) 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS 148”) that amends Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 123 and SFAS 148 require pro

 

F-13


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

 

forma disclosures of net income and net income per share as if the fair value based method of accounting for stock-based awards had been applied for both employee and non-employee grants. They also require disclosure of option status on a more prominent and frequent basis. Such disclosure for the years ended April 30, 2004, 2003 and 2002 is presented immediately below. The Company accounts for stock options and warrants issued to non-employees based on the fair value method, but has not elected this treatment for grants to employees and board members. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.

 

The fair value of each option grant was estimated at the grant date using the Black-Scholes option-pricing model using the following assumptions: an average risk-free interest rate of 3.39% for 2004, 4.71% for 2003 and 5.03% for 2002; average volatility of 130% for 2004, 116% for 2003, and 119% for 2002; zero dividend yield for all years; and expected lives of 1 to 10 years.

 

The Black–Scholes option valuation model was developed for use in estimating the fair value of traded options and warrants that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options and warrants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options and warrants. The Company’s calculations are based on a single option valuation approach and forfeitures are recognized as they occur.

 

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested employee awards:

 

     Years ended April 30,

 
     2004

    2003

    2002

 

Net loss, as reported

   $ (2,249,203 )   $ (2,227,337 )   $ (3,487,813 )

Add: stock-based employee compensation expenses

     98,916       —         —    

Deduct: fair value based employee compensation expenses

     (232,767 )     (79,192 )     (26,717 )
    


 


 


Pro forma net loss

   $ (2,383,054 )   $ (2,306,529 )   $ (3,514,530 )
    


 


 


Earning per share:

                        

As reported

   $ (0.02 )   $ (0.03 )   $ (0.04 )

Pro forma

   $ (0.02 )   $ (0.03 )   $ (0.04 )

 

F-14


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

 

Recent Accounting Pronouncements - In December 2003, the Financial Accounting Standards Board (“FASB”) issued a revision to Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46R”). FIN 46R clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support provided by any parties, including the equity holders. FIN 46R requires the consolidation of these entities, known as variable interest entities (“VIEs”), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.

 

Among other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the Interpretation for public companies to the end of the first reporting period ending after March 15, 2004, except that all public companies must, at a minimum, apply the unmodified provisions of the Interpretation to entities that were previously considered “special-purpose entities” in practice and under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003. As of April 30, 2004 and 2003, management believes that the Company is not the primary beneficiary of any VIE’s.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 also requires that an issuer classify a financial instrument that is within its scope as a liability, many of which were previously classified as equity. SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective on July 1, 2003. The Company’s adoption of this statement had no impact on its financial statements.

 

F-15


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE C - PATENTS

 

The Company’s intangible assets consist of expenditures associated with patents related to the Company’s various technologies. Capitalized costs include amounts paid to third parties for legal fees, application fees and other direct costs incurred in the filing and prosecution of patent applications. These assets are amortized on a straight-line method over their estimated useful lives, which range from eight to ten years. The Company reviews these intangible assets for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). At April 30, 2004, management believes no indications of impairment existed.

 

Patents consist of the following at April 30:

 

     2004

    2003

 

Patents

   $ 489,088     $ 464,607  

Less accumulated amortization

     (269,593 )     (227,028 )
    


 


     $ 219,495     $ 237,579  
    


 


 

The amortization expense for years ended April 30, 2004, 2003 and 2002 was $42,565, $47,812 and $40,846, respectively. The unamortized balance of patents is estimated to be amortized over the next five years as follows:

 

Fiscal Year ending April 30:


    

2005

   $ 40,600

2006

   $ 38,200

2007

   $ 34,600

2008

   $ 30,100

2009

   $ 23,100

 

NOTE D - COMMITMENTS AND CONTINGENCIES

 

Litigation - The Company is subject to litigation in the normal course of business, none of which management believes will have a material adverse effect on the Company’s financial statements.

 

Employment Contracts - The Company’s Board of Directors has approved a three-year employment contract with its President and Chief Executive Officer at a base annual salary as determined by the Board (currently $189,000 with minimum 5% annual increases) and includes an annual stock option grant of 150,000 shares of the Company’s common stock. The initial contract period expires July 31, 2005, however, the contract will automatically renew annually thereafter unless terminated by either party. The contract provides that he may, at his election, receive a severance payment equal to

 

F-16


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE D - COMMITMENTS AND CONTINGENCIES – Continued

 

299% of his average annual salary and bonuses received during the prior two-year period in the event of a change in control, as defined.

 

The Company also has a two-year employment contract with its Vice President of Product Development at a base annual salary as determined by the Board (currently $167,000) and includes an annual stock option grant of 75,000 shares of the Company’s common stock. The initial contract period has expired, however, the contract automatically renews annually unless terminated by either party. The contract provides that he is to receive a severance payment equal to nine months of his average annual salary and bonuses received during the prior two-year period in the event of a change in control, as defined.

 

NOTE E- STOCKHOLDERS’ EQUITY

 

Fiscal Year 2004:

 

The Company received $2,001,601 for the sale of 12,897,779 shares of common stock, at prices ranging from $0.15 to $0.18 per share, in connection with a $2,000,000 private placement of its common stock. The stock was sold to eighteen foreign investors under the exemption afforded by Regulation S of the Securities Act of 1933 (the “Securities Act”). It is the Company’s intention to file a registration statement to register the restricted common stock purchased by investors in this private placement.

 

In addition, the Company issued 12,122,223 shares of common stock, and a warrant to purchase 4,000,000 shares of common stock at $0.20 per share (Note F), as compensation to foreign advisors and financial consultants for services rendered in connection with the $2,000,000 common stock placement. The estimated fair value of the common stock of $7,030,000 was determined using the stock price on February 11, 2004, the date the Company obtained the funds and was obligated to issue the shares. The fair value of the warrants of $340,500 was determined using the Black-Scholes option-pricing model using the following assumptions: an average risk-free interest rate of 1.67%, average volatility of 70.1%, zero dividend and expected lives of 2 years. The fair value of the warrants and common stock was offset against Additional Paid-In Capital as a reduction of the proceeds from the private placement when the shares were issued.

 

The Company issued 5,000 shares of common stock for cash proceeds of $625 resulting from the exercise of previously granted stock options issued for services.

 

F-17


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE E- STOCKHOLDERS’ EQUITY – Continued

 

Fiscal Year 2003:

 

The Company issued 170,000 shares of common stock for legal services rendered. The Company recorded an expense of $30,600, which represents the fair value of the common stock on the date the liability was settled.

 

The Company issued 36,629 shares of common stock for cash proceeds of $367 resulting from the exercise of previously issued stock warrants.

 

Fiscal Year 2002:

 

The Company issued 245,000 shares of common stock for $0.385 per share. The net proceeds received in connection with these shares of $94,231 were received during the year ended April 30, 2001.

 

The Company issued 2,857,698 shares of common stock in connection with the exercise of warrants and options at exercise prices ranging from $0.01 - $0.14, generating $404,277 in proceeds.

 

The Company issued 1,000,000 shares of common stock for cash proceeds of $133,000.

 

NOTE F - STOCK OPTIONS AND WARRANTS

 

In September 1999, the Company’s Board of Directors approved the 1999 Stock Plan (“the 1999 Plan”) which provides for the granting of incentive and nonstatutory stock options to employees, directors and consultants to purchase up to 4,000,000 shares of the Company’s common stock. The 1999 Plan was approved by stockholders on October 10, 2000. Options granted under the 1999 Plan are exercisable at various dates up to four years and have expiration periods of generally ten years. As of April 30, 2004, the Company had 2,370,000 qualified stock options outstanding under the 1999 Plan. In addition, the Company has 3,020,000 non-qualified stock options outstanding as of April 30, 2004.

 

Fiscal Year 2004:

 

The Company issued 285,000 stock options with a weighted average exercise price of $0.24 to its employees and one Director. All options were incentive stock options issued under the 1999 Stock Plan. The stock options granted had exercise prices equal to the fair market value of the Company’s stock on the dates of grant.

 

F-18


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE F - STOCK OPTIONS AND WARRANTS – Continued

 

The Company issued 500,000 non-qualified stock options to the Company’s Chairman of the Board of Directors. The options have an exercise price of $0.15 per share, vest over a three year period and expire in 2008. Also, 75,000 non-qualified stock options were issued to the Company’s Vice President of Product Development. The options have an exercise price of $0.15 per share, vest over a three year period and expire in 2014. Deferred compensation has been recorded for the difference between the market price and the exercise price at the date of grant and will be amortized over the respective vesting periods. Compensation expense associated with these grants totaled $98,916 for the year ended April 30, 2004.

 

Fiscal Year 2003:

 

The Company issued 490,000 stock options with a weighted average exercise price of $0.17 to its employees and one Director. All options were incentive stock options issued under the 1999 Stock Plan. The stock options granted have exercise prices equal to the fair market value of the Company’s stock on the dates of grant.

 

Fiscal Year 2002:

 

The Company issued 40,000 options with an exercise price of $0.20 per share to its Directors in consideration of Director services rendered during the nine months ended January 31, 2002. Two of the Company’s Directors resigned in January 2002. No compensation expense was recorded for these options in accordance with Accounting Principles Board Opinion No. 25 and SFAS No. 123.

 

The following table summarizes certain information related to the Company’s stock options:

 

     Year ended April 30, 2004

   Year ended April 30, 2003

     Options

    Weighted
Average
Exercise
Price


   Options

    Weighted
Average
Exercise
Price


Outstanding, beginning of year

   4,535,000     $ 0.18    4,135,000     $ 0.20

Granted

   860,000       0.24    490,000       0.17

Forfeited

   —         —      (90,000 )     0.30

Exercised

   (5,000 )     0.13    —         —  
    

 

  

 

Outstanding, end of year

   5,390,000     $ 0.18    4,535,000     $ 0.18
    

 

  

 

 

As of April 30, 2004, there were 1,630,000 options available for grant under the 1999 Plan.

 

F-19


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE F - STOCK OPTIONS AND WARRANTS – Continued

 

The following table summarizes information about stock options outstanding at April 30, 2004:

 

Range of

Exercise

Prices


   Number
Outstanding


   Weighted
Average
Remaining
Life


   Weighted
Average
Exercise
Price


   Number
Exercisable


   Weighted
Average
Exercise
Price


$0.11 to $0.13

   2,480,000    5.0    $ 0.12    2,480,000    $ 0.12

$0.14 to $0.16

   1,350,000    5.5    $ 0.15    898,334    $ 0.15

$0.17 to $0.30

   1,185,000    7.9    $ 0.21    731,667    $ 0.21

$0.30 to $0.80

   375,000    6.5    $ 0.62    340,000    $ 0.64
    
              
      
     5,390,000                4,450,001       
    
              
      

 

During fiscal 2004, the Company issued warrants for the purchase of 4,000,000 shares of the Company’s common stock to five foreign financial consultants at an exercise price of $0.20 per share. Based on a Black-Scholes analysis, the warrants had an estimated fair value of $340,500 on the date of grant. The warrants were issued for investor services provided to the Company in connection with a $2,000,000 private placement of its common stock. The warrants expire in September 2005. The estimated fair value of the warrants has been charged against Additional Paid-In Capital as a reduction of the proceeds from the private placement.

 

During fiscal 2002, the Company issued warrants for the purchase of 96,786 shares of the Company’s common stock to consultants at exercise prices ranging from $0.01 - $0.19 per share. The warrants were issued to consultants for general management services provided to the Company. The warrants have a term of five years and are fully vested. The Company recorded compensation expense of $24,135 in 2002, based upon the Black-Scholes option valuation model, which is included in general and administrative expenses in the accompanying financial statements.

 

During fiscal 2002, the Company issued warrants for the purchase of 12,500,000 shares of the Company’s common stock to two financial consultants at exercise prices ranging from $0.13 - $0.60 per share. The warrants were issued for financial and investment services provided to the Company. The warrants vest upon any new increase in the number of authorized common shares to be issued by the Company. The warrants have terms of one and three years from the date of vesting. Effective with the Company’s shareholder’s approval of an increase to the authorized number of common stock shares to 200 million on April 10, 2002, the warrants became fully vested. In connection with the issuance of these warrants, the Company recorded compensation expense of $1,524,915 in 2002, based upon the Black-Scholes option valuation model, which is included in general and administrative expenses in the accompanying financial statements.

 

F-20


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE F - STOCK OPTIONS AND WARRANTS – Continued

 

The following table summarizes the Company’s stock warrant information during the years ended April 30:

 

     2004

   2003

     Warrants

   Weighted
Average
Exercise
Price


   Warrants

    Weighted
Average
Exercise
Price


Outstanding, beginning of year

   2,136,629    $ 0.19    12,673,258     $ 0.30

Granted

   4,005,000      0.20    —         —  

Forfeited

   —        —      (10,500,000 )     0.29

Exercised

   —        —      (36,629 )     0.01
    
  

  

 

Outstanding, end of year

   6,141,629    $ 0.20    2,136,629     $ 0.19
    
  

  

 

 

NOTE G - INCOME TAXES

 

No provision for federal and state income taxes has been recorded as the Company has incurred net operating losses through April 30, 2004. The Company’s federal net operating loss carryforwards as of April 30, 2004 are approximately $20,267,000. The loss carryforwards expire in various years through 2024. Deferred tax assets of approximately $7.2 million and $6.4 million at April 30, 2004 and 2003, respectively, include the effects of these net operating loss carryforwards and research and development credit carryforwards. A valuation allowance has been provided for the full amount of the deferred tax assets due to the uncertainty of realization. Utilization of the Company’s net operating loss carryforwards may be limited based on ownership changes under Section 382 of the Internal Revenue Code.

 

The provision for income taxes consists of the following for the three years ended April 30, 2004:

 

     Years ended April 30,

 
     2004

    2003

    2002

 

Benefit from federal income taxes at statutory rate

   $ (800,000 )   $ (800,000 )   $ (1,186,000 )

Stock-based compensation

     —         —         527,000  

Other

     —         —         (32,000 )

Change in valuation allowance

     800,000       800,000       691,000  
    


 


 


Benefit

   $ —       $ —       $ —    
    


 


 


 

F-21


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE H - RELATED PARTIES

 

During fiscal year 2004, the Company paid $126,000 to a specialty contract manufacturer of pharmaceutical products to manufacture the Company’s perfluorocarbon-based blood substitute and therapuetic oxygen carrier, for upcoming clinical trials. An officer of the Company is a minority shareholder and director of this specialty manufacturer.

 

During fiscal 2002, the Company recorded expenses of approximately $9,000 for services provided by a company in which an officer of the Company has a controlling interest. There were no related party transactions in fiscal 2003.

 

NOTE I– QUARTERLY FINANCIAL DATA (Unaudited)

 

The following table summarizes the unaudited quarterly results of operations for fiscal years 2004 and 2003:

 

     Year Ended April 30, 2004

 
     First
Quarter


    Second
Quarter


    Third
Quarter


    Fourth
Quarter


    Year

 

Research and development expenses

   $ 233,080     $ 265,630     $ 501,488     $ 276,025     $ 1,276,223  

General and administrative expenses

     226,297       202,003       314,035       248,647       990,982  
    


 


 


 


 


Total expenses

     459,377       467,633       815,523       524,672       2,267,205  

Other income

     (7,467 )     (7,207 )     (2,192 )     (1,136 )     (18,002 )
    


 


 


 


 


Net loss

     (451,910 )     (460,426 )     (813,331 )     (523,536 )     (2,249,203 )
    


 


 


 


 


Basic and diluted loss per common share

   $ (0.005 )   $ (0.005 )   $ (0.008 )   $ (0.005 )   $ (0.020 )
    


 


 


 


 


 

F-22


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE I – QUARTERLY FINANCIAL DATA (Unaudited) - Continued

 

     Year Ended April 30, 2003

 
     First
Quarter


    Second
Quarter


    Third
Quarter


    Fourth
Quarter


    Year

 

Research and development expenses

   $ 176,289     $ 837,257     $ 243,214     $ 176,280     $ 1,433,040  

General and administrative expenses

     240,594       202,422       230,419       166,917       840,352  

Interest expense

     1,538       808       157       —         2,503  
    


 


 


 


 


Total expenses

     418,421       1,040,487       473,790       343,197       2,275,895  

Other income

     (18,227 )     (13,311 )     (9,291 )     (7,729 )     (48,558 )
    


 


 


 


 


Net loss

     (400,194 )     (1,027,176 )     (464,499 )     (335,468 )     (2,227,337 )
    


 


 


 


 


Basic and diluted loss per common share

   $ (0.005 )   $ (0.012 )   $ (0.005 )   $ (0.004 )   $ (0.030 )
    


 


 


 


 


 

Basic and diluted loss per common share for each of the quarters presented above is based on the respective weighted average number of common and dilutive potential common shares outstanding for each period and the sum of the quarters may not necessarily be equal to the full year basic and diluted loss per common share amounts. For the periods presented, the effect of the Company’s common stock options and warrants are excluded from the diluted loss per share calculations since inclusion of such items would be antidilutive for that period.

 

NOTE J – SUBSEQUENT EVENT

 

On May 25, 2004, the Company closed the acceptance of subscription agreements covering the sale of 10,000,000 shares of common stock, 10,000,000 Series A Warrants, 3,400,000 Series B Warrants, and 3,400,000 Series C Warrants for $3,030,000 in cash. The subscription agreements are with four foreign investors and were made in reliance on the exemption afforded by Regulation S adopted under the Securities Act of 1933. The Company agreed to register the common stock sold in the offering, including the common stock underlying the warrants, for resale under the Securities Act of 1933. The Company has received payment from three of the investors in the amount of $680,000. The Company has been advised by Remobo AG, a company controlled by Giuseppe Coniglione and the fourth investor, that funds in the amount of $2,350,000 will be wired to the Company as soon as the Suisse bank managing Remobo’s account obtains written confirmations required to comply with U.S. and foreign currency transfer laws. There is no assurance that Remobo will be able to comply with these laws or that the funds will be wired to the Company. Assuming the Company receives the full purchase price for the securities offered, it will pay $303,000 to Andreas Camenzind,

 

F-23


Table of Contents

SYNTHETIC BLOOD INTERNATIONAL, INC.

(A Development Stage Enterprise)

 

NOTES TO FINANCIAL STATEMENTS

 

April 30, 2004 and 2003

 

NOTE J – SUBSEQUENT EVENT - Continued

 

a foreign financial consultant, as compensation for his assistance with the offering, and will pay him three percent of the funds derived from exercise of the warrants issued to the foreign investors. Under the Series A Warrants the holders have the right to purchase a total of 10,000,000 common shares at a price of $0.47 per share, or a total of $4,700,000, that expires on May 31, 2009. Under the Series B Warrants the holders have the right to purchase a total of 3,400,000 common shares at a price of $0.60 per share, or a total of $2,040,000, that expires 90 days from and including the effective date of the registration statement. Under the Series C Warrants the holders have the right to purchase a total of 3,400,000 common shares at a price of $0.60 per share, or a total of $2,040,000, that expires on May 31, 2009.

 

F-24

Exhibit 3.1

 

CERTIFICATE OF INCORPORATION

 

OF

 

RUDOMINER, DAVID & ASSOCIATES, INC.

 


 

DATED: MAY 26, 1967

 


 

Burton B. Wiener, Esquire

12-45 River Road

Fair Lawn, New Jersey


CERTIFICATE OF INCORPORATION

 

OF

 

RUDOMINER, DAVID & ASSOCIATES, INC.

 

THIS IS TO CERTIFY that we, ARTHUR MINUSKIN, MILDRED HERSH and H. ROBERT MERRILL, do hereby associate ourselves into a corporation under and by virtue of the provisions of an act of legislature of the State of New Jersey (Revision of 1937) Title 14, and various supplements thereto and acts amendatory thereof and do severally agree to take the number of shares of capital stock set opposite our respective names.

 

FIRST: The name of the corporation is RUDOMINER, DAVID & ASSOCIATES, INC.

 

SECOND: The location of the principal office in this State is 12-45 River Road, Fair Lawn, New Jersey, and the name of the Statutory Agent therein and in charge thereof upon whom process against this corporation may be served is BURTON B. WIENER.

 

THIRD: The objects for which this corporation is formed are to plan, design and formulate advertising, merchandising and promotional programs, and to make, enter into, perform and carry out contracts and undertakings for such programs; for the analytical investigation of merchandising problems for business and commercial enterprises; to carry on in all its respective branches the business of a public relations and advertising agency, and such other occupations, enterprises and businesses as pertain to or are connected with all of the foregoing; to take over, acquire, purchase, lease or sell, hire, control, maintain and operate media lands and buildings for carrying on or pursuing any of the operations of the corporation.

 

Generally to buy, sell, import, export, manufacture, and deal in and with all kinds and descriptions of goods, wares and commodities.

 

To conduct its business and have one or more offices and unlimitedly and without restriction to hold, purchase, lease, mortgage and convey real and personal property in or out of the State and in such place and places in the several States of the United States as shall from time to time be found necessary or convenient for the purpose of the business of the company.

 

To the same extent as natural persons might or could do, to purchase or otherwise acquire, to hold, maintain, work, develop, sell, convey, mortgage or otherwise dispose of, without limit as to amount, within or without the State of New Jersey, and in any part of the world, real estate and real property, and any interest and rights therein.

 

To borrow money, to make and issue promissory notes, bills of exchange, debentures and obligations and evidences of indebtedness of all kinds, whether secured by mortgage, pledge or otherwise, without limit as to amount, to issue one or more classes of stock, with or without fixed or par value and to sell the one par value stock for such consideration as shall be determined by the Board of Directors.


To carry on any other business which may, in the discretion of the directors, seem capable of being conveniently carried on in connection with the above or calculated directly or indirectly to enhance the value of the company’s property, or

 

To do all and everything necessary, suitable, convenient or proper for the accomplishment of any of the purposes, or the attainment of any one or more of the objects herein enumerated, or incidental to the powers herein named, or which shall at any time appear conducive or expedient for the protection or benefit of the corporation, either as holders of or interested in any property or otherwise, with all the powers now or hereafter conveyed by the laws of New Jersey upon corporations under the act herein referred to.

 

The Board of Directors shall have power and authority to sell, assign, transfer, convey, or otherwise dispose of the property and assets of the corporation, as an entirety or going concern, on such terms and conditions as the Board of Directors shall deem fit, right and just, whether for cash or for securities of one or more corporations.

 

Dividends may be declared and paid at such times as may be determined by the Board of Directors.

 

FOURTH: The total authorized capital stock of the corporation is one thousand shares of capital stock without nominal or par value.

 

FIFTH: The names and post office addresses of the incorporators and the number of shares subscribed for by each, the aggregate of which thirty shares is the amount of capital stock with which this company will commence business are as follows:

 

ARTHUR MINUSKIN

 

8-17 Norma Avenue

Fair Lawn, N.J.

 

10 shares

MILDRED HERSH

 

12-31 Jerome Place

Fair Lawn, N.J.

 

10 shares

H. ROBERT MERRILL

 

278 Pines Lake Dr. E.

Wayne, N.J.

 

10 shares

 

SIXTH: The period of existence of this corporation is unlimited.

 

IN WITNESS WHEREOF, we have hereunto set our hands and seals this 26 th day of May, 1967.

 

Signed, Sealed and Delivered in the

 

/s/


 

, L.S.

Presence of

 

ARTHUR MINUSKIN

   

/s/


 

/s/


 

, L.S.

LUCILLE ZALENSKI

 

MILDRED HERSH

   
   

/s/


 

, L.S.

   

H. ROBERT MERRILL

   

 

2


STATE OF NEW JERSEY

 

)

   

) ss:

COUNTY OF BERGEN

 

)

 

BE IT REMEMBERED that on this 26 th day of May, 1967, before me the subscriber, a notary public of New Jersey, personally appeared ARTHUR MINUSKIN, MILDRED HERSH and H. ROBERT MERRILL, who, I am satisfied, are the persons named in and who executed the foregoing certificate, and I, having first made known to them the contents thereof, they did each acknowledge that they signed, sealed and delivered the same as their voluntary act and deed for the uses and purposes therein expressed.

 

/s/


LUCILLE ZALENSKI

Notary Public of New Jersey

My Commission Expires 10/24/67

 

3


CERTIFICATE OF AMENDMENT

 

OF

 

RUDOMINER, DAVID & ASSOCIATES, INC.

 

The Board of Directors of RUDOMINER, DAVID & ASSOCIATES, INC., a corporation of New Jersey, on this 31 st day of December, 1968, do hereby resolve and declare that it is advisable that the name of the corporation be changed from RUDOMINER, DAVID & ASSOCIATES, INC. to FEDERATED FRANCHISES, INC., and that the capital stock of the corporation be changed from 1,000 shares of common stock without nominal or par value to 1,000,000 shares of common stock with a par value of $.01 per share, fully paid and non-assessable, with full voting powers.

 

CERTIFICATE OF CHANGE

 

RUDOMINER, DAVID & ASSOCIATES, INC., a corporation of New Jersey, doth hereby certify that the foregoing is a true copy of a resolution adopted by the Board of Directors by a unanimous vote of the members thereof at a meeting held therein stated.

 

   

/s/


   

JULIUS RUDOMINER, President

   

/s/


   

IRVING DAVIDOFF, Secretary

ATTEST:

   

/s/


   

IRVING DAVIDOFF, Secretary

   


STATE OF NEW JERSEY

  

)

    

) ss:

COUNTY OF BERGEN

  

)

 

Be it Remembered, that on this 31 st day of December, 1968, before me, the subscriber, a notary public of New Jersey, personally appeared Irving Davidoff, Secretary of RUDOMINER, DAVID & ASSOCIATES, INC., the corporation named in and which executed the foregoing certificate, who, being by me duly sworn, according to law, does depose and say and make proof to my satisfaction that he is the Secretary of said corporation; that the seal affixed to said corporation certificate is the corporate seal of said corporation, the same being well known to him; that it was affixed by order of said corporation; that Julius Rudominer is President of said corporation; that he saw said Julius Rudominer as such president sign said certificate and affix said seal thereto and deliver said certificate, and heard him declare that he signed, sealed and delivered said certificate as the voluntary act and deed of said corporation, by its order and by authority of its Board of Directors and by the vote, either in person or by proxy, duly constituted and thereunto duly authorized, of more than two-thirds in interest of each class of said stockholders having voting powers, for the uses and purposes therein expressed; and that said Irving Davidoff signed his name thereto at the same time as subscribing witness.

 

/s/


IRVING DAVIDOFF

 

Sworn and Subscribed to before

me the day and year aforesaid.

 

/s/


LUCILLE ZALENSKI

Notary Public of New Jersey

My Commission Expires 10/23/72

 

2


CERTIFICATE OF AMENDMENT

OF

FEDERATED FRANCHISES, INC.

 

The Board of Directors of Federated Franchises, Inc., a corporation of New Jersey, on this 10 th day of October, 1975, do hereby resolve and declare that it is advisable that the name of the corporation by changed from Federated Franchises, Inc. to the name of “Sinequanon Corporation”, and that the authorized capital of the corporation to be increased to $100,000.00 to be divided into ten million shares of common stock with the par value of $.01 per share fully paid and non-assessable, with full voting powers.

 

CERTIFICATE OF CHANGE

 

Federated Franchises, Inc., a corporation of New Jersey, doth hereby certify that the foregoing is a true copy of a resolution adopted by the Board of Directors by a unanimous vote of one number thereof at a meeting held as therein stated.

 

.

 

/s/


   

William L. Campbell

   

President

   

/s/


   

Carol M. Campbell

   

Secretary

Attest:

   

/s/


   

Carol M. Campbell

   


CERTIFICATE OF AMENDMENT TO THE

CERTIFICATE OF INCORPORATION OF

SINEQUANON CORPORATION

(For Use by Domestic Corporations Only)

 

To: The Secretary of State State of New Jersey

“FEDERAL EMPLOYER IDENTIFICTION NO.”

82-337600

 

Pursuant to the provisions of Section 14A:9-2(4) and Sectian14A:9-4 (3), Corporations, General, of the New Jersey Statutes, the undersigned corporation executes the following CertiScate.of Amendment to its Certificate of Incorporation:

 

1. The name of the corporation is:             Sinequanon Corporation

 

2. The following amendment to the Certificate of Incorporation was approved by the directors and thereafter duly adopted by the shareholders of the corporation on the 5th day of November , 1990 .

 

Resolved that Articles First and Fourth of the Certificate of Incorporation be amended to read as follows:

 

SEE EXHIBIT A ATTACHED

 

3. The number of shares outstanding at the time of the adoption of the amendment was: 4,918,830 . The total number of shares entitled to vote thereon was: 4,918,830 . If the shares of any class or series of shares are entitled to vote therein as a class, set forth below the designation and number of outstanding shaves entitled to vote thereon of each such class or series. (Omit if not applicable).

 

N/A

 

4. The number of shares voting for and against such amendment is as follows: (If the shares of any class or series are entitled to vote as a class, set forth the number of shares of each such class and series voting for and against the amendment, respectively).

 

Number of Shares Voting for

Amendment


  

Number of Shares Voting Against

Amendment


Article First             4,313,630    None
Article Fourth         4,313,330    300

 

(If the amendment is accompanied by a reduction of stated capital, the following clause may be inserted in the Certificate of Amendment, in lieu of filing a Certificate of Reduction under Section 14A:7-19, Corporations, General, of the New Jersey Statutes. Omit this clause if not applicable .)


5. The stated capital of the corporation is reduced in the following amount:                                  . The manner in which the reduction is effected is as follows:

 

The amount of stated capital of the corporation after giving effect to the reduction is $                      . (Must be set forth in dollars.)

 

6. If the amendment provides for an exchange, reclassification or cancellation of issued shares, set forth a statement of the manner in which the same shall be effected. (Omit if not applicable.)

 

(Use the following only if an effective date, not later than 30 days subsequent to the date of filing is desired.)

 

7. The effective date of this Amendment to the Certificate of Incorporation shall be                                           .

 

Dated this 6th day of Novembert, 1999.

 

SINEQUANON CORPORATION

By:

 

/s/ *

   
   

(signature)

   

W. Keith R. Watson, Vice President

   
   

(Type or Print Name and Title)


(*May be executed by the chairman of the board, or the president, or a vice-president of the corporation.)

 

Return to:

Secretary of State

CN 300

Trenton, NJ     08625

Attn: Corporation Filing

Filing Fee: $50.00

 

NOTE: No recording fees will be assessed.

 

2


EXHIBIT A

 

Certificate of Amendment to the Certificate of Incorporation of

 

SINEQUANON CORPORATION

 

Resolved, that Article “First” of the Certificate of Incorporation be amended to read as follows:

 

“The name of the Corporation shall be

 

SYNTHETIC BLOOD INTERNATIONAL, INC.”

 

Resolved, that Article “Fourth” of the Certificate of Incorporation be amended to read as follows:

 

“The Capital Stock of the Corporation shall consist

 

of 100,000,000 (one hundred million) shares of common

 

stock having a par value of $0.01 per share.”

 

November 6, 1990

 

SINEQUANON CORPORATION

   

/s/


   

W. Keith R. Watson,

   

Vice President

 

3


CERTIFICATE OF AMENDMENT TO THE

 

CERTIFICATE OF INCORPORATION OF

 

SYNTHETIC BLOOD INTERNATIONAL, INC.

 

To: The Secretary of State

State of New Jersey

 

Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(3), Corporations, General, of the New Jersey Statutes, the undersigned corporation executes the following Certificate of Amendment to its Certificate of Incorporation:

 

1. The name of the corporation is Synthetic Blood International, Inc.

 

2. The following amendment to the Certificate of Incorporation was approved by the directors and thereafter duly adopted by the shareholders of the corporation on the 23 rd day of May, 1996:

 

Resolved, that the Certificate of Incorporation be amended to add new Article Seventh, to read as follows:

 

Shareholders of the corporation shall have no preemptive or preferential rights to subscribe for or purchase any shares of any class of stock, whether now or hereafter authorized, or any obligations, bonds or other securities convertible into shares or securities.

 

3. The number of shares entitled to vote upon the amendment was 29,239,082.

 

4. That in lieu of a meeting and a vote of the shareholders and in accordance with the provisions of Section 14A:5-6, the amendment was adopted by the shareholders without a meeting pursuant to the written consents of the shareholders and the number of shares represented by such consents is 21,602,910 shares. The amendment was approved by the written consent of shareholders holding more than two-thirds of the outstanding voting stock of the corporation.

 

Dated this 29 th day of May, 1996.

 

Synthetic Blood International, Inc.

By:

 

/s/


   

Robert Larsen, Vice President


C-102a Rev 12/93

 

New Jersey Department of the Treasury

Division of Revenue

Certificate Of Amendment to the

Certificate of Incorporation

(For Use by Domestic Profit Corporations)

 

Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(3); Corporations, General, of the New Jersey Statutes, the undersigned corporation executes the following Certificate of Amendment to its Certificate of Incorporation:

 

5. The name of the corporation is:             Synthetic Blood International, Inc.

 

6. The following amendment to the Certificate of Incorporation was approved by the directors and thereafter duly adopted by shareholders of the corporation on the 20 th day of October, 2000:

 

Resolved, that Article              of the Certificate of Incorporation be amended to read as follows:

 

See EXHIBIT “A”

 

7. The number of shares outstanding at the time of the adoption of the amendment was: 85,735,042 . The total number of shares entitled to vote thereon was: 85,735,042 .

 

If the shares of any class or series of shares are entitled to vote thereon as a class, set forth below the designation and number outstanding shares entitled to vote thereon of each such class or series. (Omit if not applicable)

 

N/A

 

8. The number of shares voting for and against such amendment is as follows: (If the shares of any class or series are entitled to vote as a class, set forth the number of shares of each such class and series voting for and against the amendment, respectively).

 

Number of Shares Voting for Amendment


  

Number of Shares Voting Against Amendment


Proposal 1 58,188,027    1,601,261
Proposal 2 57,667,139    2,073,027

 

9. If the amendment provides for an exchange, reclassification or cancellation of issued shares, set forth a statement of the manner in which the same shall be effected. (Omit if not applicable).

 

N/A


10. Other provisions: (Omit if not applicable).

 

By:

 

/s/


   

Robert Nicora, President

 

Dated this 13 th day of February, 2001.

 

2


EXHIBIT A

TO FORM C-102 A

 

Certificate Of Amendment To The

Certificate Of Incorporation On

SYNTHETIC BLOOD INTERNATIONAL, INC.

 

Resolved, that Article “Fourth” of the Certificate of Incorporation be amended to read as follows:

 

“The Capital Stock of the Corporation shall consist of 100,000,000 (one hundred million) shares of commons tock having a par value of $0.01 per share,” AND 10,000,000 (ten million) shares of undesignated preferred stock, with rights, preferences and privileges of one or more series of the preferred stock without further vote of the shareholders.

 

Resolved, that an additional article headed – SEVENTH:

 

Requiring amendments to the Certificate of Incorporation to be a simple majority of the shares entitled to vote.

 

October 20, 2000

 

Synthetic Blood International, Inc.

   

/s/


   

Robert Nicora

   

President

 

3


New Jersey Department of the Treasury

Division of Revenue

Certificate Of Amendment to the

Certificate of Incorporation

(For Use by Domestic Profit Corporations)

 

Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(3); Corporations, General, of the New Jersey Statutes, the undersigned corporation executes the following Certificate of Amendment to its Certificate of Incorporation:

 

11. The name of the corporation is:             Synthetic Blood International, Inc.

 

12. The following amendment to the Certificate of Incorporation was approved by the directors and thereafter duly adopted by shareholders of the corporation on the 10 th day of April, 2002.

 

Resolved, that Article Fourth of the Certificate of Incorporation be amended to read as follows:

 

The Capital Stock of the Corporation shall consist of 200,000,000 (two hundred million) shares of common stock having a par value of $0.01 per share, AND 10,000,000 (ten million) shares of undesignated preferred stock; with rights, preferences and privileges of one or more series of the preferred stock without further vote of the shareholders.

 

13. The number of shares outstanding at the time of the adoption of the amendment was: 87,767,245. The total number of shares entitled to vote thereon was: 87,767,245.

 

14. The number of shares voting for and against such amendment is as follows:

 

Number of Shares Voting for Amendment


 

Number of Shares Voting Against Amendment


Proposal 1     72,329,182   1,089,557

 

By:

 

/s/


   

Robert Nicora, President

 

Dated this 25 th day of June, 2002.

Exhibit 3.2

 

AMENDED AND RESTATED BYLAWS

OF SYNTHETIC BLOOD INTERNATIONAL, INC.

 

ARTICLE 1

OFFICE

 

Section 1.1 Office The principal office of the Corporation outside the State of New Jersey shall be located at 3189 Airway Avenue, Bldg. C, Costa Mesa, CA 92626. The Corporation may maintain such other offices, within or without the State of New Jersey, as the Board of Directors may from time to time designate. The location of the principal office may be changed by the Board of Directors.

 

ARTICLE 2

SHAREHOLDERS’ MEETING

 

Section 2.1 Annual Meetings The annual meeting of the shareholders of the Corporation shall be held at such place within or without the State of New Jersey as shall be set forth in compliance with these Bylaws. The meeting shall be held on the 15th day of October of each year beginning with the year 2002 at 11:00 a.m. If such day is a legal holiday, the meeting shall be on the next business day. This meeting shall be for the election of directors and for the transaction of such other business as may properly come before it.

 

In the event that such annual meeting is omitted by oversight or otherwise on the date herein provided for, the directors shall cause a meeting in lieu thereof to be held as soon thereafter as conveniently may be called, and any business transacted or elections held at such meeting shall be as valid as if transacted or held at the annual meeting. If the election of directors shall not be held on the date designated herein for an annual meeting of shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of shareholders as soon thereafter as may conveniently be called. Such subsequent meetings shall be called in the same manner as is provided for the annual meeting of shareholders.

 

No change of the time or place of a meeting for the election of directors, as fixed by the Bylaws, shall be made within sixty (60) days before the election is to be held. In case of any change in such time or place for such election of directors, notice thereof shall be given to each stockholder entitled to vote, in person, or by letter mailed to his last known post office address as shown on the Corporate books, ten (10) days before the election is held.

 

Section 2.2 Special Meetings. Special meetings of shareholders, other than those regulated by statute, may be called at any time by the President, or by a majority of the directors, and must be called by the President upon written request of the holders of not less than 10° o of the issued and outstanding shares entitled to vote at such special meeting.

 

Section 2.3 Notice of Shareholders’ Meetings. The President, Vice President and Secretary shall give written notice stating the place, day and hour of the meeting, and in the case of a special meeting the purpose or purposes for which the meeting is called, which shall be


delivered not less then ten nor more than sixty days before the day of the meeting, either personally or by mail to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the books of the Corporation, with postage thereon prepaid.

 

Any meeting of which all shareholders shall at any time waive or have waived notice in writing shall be a legal meeting for the transaction of business notwithstanding that notice has not been given as hereinbefore provided.

 

Section 2.4 Waiver of Notice. Whenever any notice is required to be given by these Bylaws, or the Articles of Incorporation, or by any of the Corporation Laws of the State of New Jersey, a shareholder may waive the notice of meeting by attendance, either in person or by proxy, at the meeting, or by so stating in writing, either before or after such meeting. Attendance at a meeting for the express purpose of objecting that the meeting was not lawfully called or convened shall not, however, constitute a waiver of notice.

 

Section 2.5 Place of Meeting. The Board of Directors may designate any place, either within or without the State of New Jersey, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the office of the Corporation, in the City of Costa Mesa, CA.

 

Section 2.6 Closing of Transfer Books or Fixing Records Date For the purpose of determining shareholders entitled to notice or to vote at any meeting of shareholders or any adjournment thereof, or shareholder entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock transfer books be closed for a period not to exceed in any case fifty (50) days. If the stock transfer books shall be closed for the purpose of determining shareholders, such books shall be closed for at least ten (10) days immediately preceding the date determined to be the date of record. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days and in case of a meeting of shareholders not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice or to vote at a meeting of shareholders or shareholders entitled to receive payment of a dividend, the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be deemed the record for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof.

 

Section 2.7 Quorum of Shareholders Except as herein provided and as otherwise provided by law, at any meeting of shareholders a majority in interest of all the shares issued and outstanding represented by shareholders of record in person or by proxy shall constitute a quorum, but a less interest may adjourn any meeting and the meeting may be held as adjourned without further notice; provided, however, that directors shall not be elected at the meeting so adjourned.

 

2


If notice of such adjourned meeting is sent to the stockholders entitled to receive the same, such notice also containing a statement for the purpose of the meeting and that the previous meeting failed for lack of a quorum, and that under the provisions of this Section it is proposed to hold the adjourned meeting with a quorum of those present, then any number of stockholders, in person or by proxy, shall constitute a quorum at such meeting unless otherwise provided by statute. When a quorum is present at any meeting, a majority in interest of the shares represented thereat shall decide any question brought before such meeting, unless the question is one upon which the express provision of law or of the Articles of Incorporation or of these Bylaws a larger or different vote is required, in which case such express provision shall govern and control the decision of such question.

 

Section 2.8 Voting Lists. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder, for any purpose germane to the meeting, during the whole time of the meeting. The original stock transfer books shall be prima-facie evidence as to which shareholders are entitled to examine such list or transfer books or to vote at any meeting of shareholders.

 

Failure to comply with the requirements of this section shall not affect the validity of any action taken at such meeting of the shareholders.

 

Section 2.9 Voting. A holder of an outstanding share entitled to vote at a meeting may vote at such meeting in person or by proxy. Except as may otherwise be provided in the Articles of Incorporation, every shareholder shall be entitled to one vote for each share outstanding in his name on the record of shareholders. Except as herein or in the Articles of Incorporation otherwise provided, all corporate action shall be determined by a majority of the votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon.

 

Section 2.10 Proxies. At all meetings of shareholders, a shareholder may vote in person or by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy.

 

Section 2.11 Informal Action by Shareholders. Any action required to be taken at a meeting of the shareholders, or any action which may be taken at a meeting of the shareholders, may be taken without a meeting of the shareholders, if a consent in writing, setting forth the action so taken, shall be signed by a majority of the shareholders entitled to vote with respect to the subject matter thereof.

 

3


ARTICLE 3

BOARD OF DIRECTORS

 

Section 3.1 General Powers. The business and affairs of the Corporation shall be managed by its Board of Directors. The Board of Directors may adopt such rules and regulations for the conduct of their meetings and the management of the Corporation as they deem proper.

 

Section 3.2 Number, Tenure and Qualifications The number of directors for the Board of Directors of the Corporation shall be not less than three (3) nor more than eleven (11). Each director shall hold office until the next annual meeting of the shareholders and until his successor shall have been elected and qualified. Directors need not be residents of the State of New Jersey or shareholders of the Corporation.

 

Section 3.3 Election of the Board of Directors The Board of Directors shall be chosen by ballot at the annual meeting of shareholders or at any meeting held in place thereof as provided by law.

 

Section 3.4 Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than by this Bylaw, immediately following and at the same place as the annual meeting of the shareholders. The Directors may hold their meetings and have one or more offices, and keep the books of the corporation outside the State of New Jersey, at any office or offices of the Corporation or at any other place as they may from time to time by resolution determine.

 

Members of the Board of Directors may participate in a meeting of the Board by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other and participation in a meeting under this subsection shall constitute presence in person at the meeting, pursuant to New Jersey Permanent Statutes Section 14A:6-10.

 

Section 3.5 Special Meeting. Special meetings of the Board of Directors maybe called by order of the Chairman . of the Board, the President or by one-third of the directors. The Secretary shall give notice of the time, place and purpose or purposes of each special meeting by mailing the same at least two days before the meeting or by telephoning or telegraphing the same at least one day before the meeting to each director.

 

Section 3.6 Waiver of Notice. Whenever any notice whatsoever is required to be given by these Bylaws, or the Articles of Incorporation of the Corporation, or by any of the Corporation Laws of the State of New Jersey, a director may waive the notice of meeting by attendance in person at the meeting, or by so stating in writing, either before or after such meeting. Attendance at a meeting for the express purpose of objecting that the meeting was not lawfully called or convened shall not, however, constitute a waiver of notice.

 

Section 3.7 Quorum. A majority of the members of the Board of Directors shall constitute a quorum for the transaction of business, but less than a quorum may adjourn any meeting from time to time until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice. At any meeting at which every director shall be present, even though without any notice, any business may be transacted.

 

4


Section 3.8 Manner of Acting. At all meetings of the Board of Directors, each director shall have one vote. The act of a majority present at a meeting shall be the act of the Board of Directors, provided a quorum is present. Any action required to be taken or which may be taken at a meeting of the Board of Directors, may be taken without a meeting of the Directors, if a consent in writing setting forth the action so taken shall be signed by all the directors. The directors may conduct a meeting by means of a conference telephone or any similar communication equipment by which all persons participating in the meeting can hear each other.

 

Section 3.9 Powers of Directors. The Board of Directors shall have the responsibility for the entire management of the business of the Corporation. In the management and control of the property, business and affairs of the Corporation, the Board of Directors is hereby vested with all of the powers possessed by the Corporation itself so far as this delegation of authority is not inconsistent with the laws of the State of New Jersey and with the Articles of Incorporation or with these Bylaws. The Board of Directors shall have the power to determine what constitutes net earnings, profits and surplus, respectively, and what amounts shall be reserved for working capital and for any other purpose and what amounts shall be declared as dividends, and such determination by the Board of Directors shall be final and conclusive.

 

Section 3.10 Specific Powers of Directors Without prejudice to such general powers, it is hereby expressly declared that the directors shall have the following powers to-wit:

 

(a) To adopt and alter a common seal of the corporation.

 

(b) To make and change regulations, not inconsistent with these By-Laws, for the management of the corporation’s affairs and business.

 

(c) To purchase or otherwise acquire for the corporation any property, rights or privileges which the corporation is authorized to acquire.

 

(d) To pay for any property purchased for the corporation either wholly or partly in money, stock, bonds, debentures or other securities of the corporation.

 

(e) To borrow money and to make and issue notes, bonds, and other negotiable and transferable instruments, mortgages, deeds of trust and trust agreements, and to do every act and thing necessary to effectuate the same.

 

(f) To remove any officer for cause, or any officer other than the President summarily without cause, and in their discretion, from time to time, to develop the powers and duties of any officer upon any other person for the time being.

 

(g) To appoint and remove or suspend such subordinate officers, agents or factors as they may deem necessary and to determine their duties and fix, and from time to time change their salaries or remuneration, and to require security as and when they think fit.

 

(h) To confer upon any officer of the corporation the power to appoint, remove and suspend subordinate officers, agents and factors.

 

5


(i) To determine who shall be authorized on the corporation’s behalf to make and sign bills, notes, acceptances, endorsements, checks, releases, receipts, contracts and other instruments. (10) To determine who shall be entitled to vote in the name and behalf of the corporation, or to assign and transfer, any shares of stock, bonds, or other securities of other corporations held by this corporation.

 

(j) To delegate any of the powers of the Board in relation to the ordinary business of the corporation to any standing or special committee, or to any officer or agent (with power to sub-delegate), upon such terms as they think fit.

 

(k) To call special meetings of the stockholders for any purpose or purposes.

 

(l) The directors shall have the right and the power to propose any amendment to the By-Laws of this corporation at any meeting whether called for that purpose or not and to submit to the next regular meeting of directors said proposal or amendment to the By-Laws of this corporation.

 

Section 3.11 Vacancies. A vacancy in the Board of Directors shall be deemed to exist in case of death, resignation or removal of any director, or if the authorized number of directors be increased, or if the shareholders fail at any meeting of shareholders at which any director is to be elected, to elect the full authorized number to be elected at that meeting.

 

Any vacancy occurring in the Board of Directors may be filled by an affirmative vote of the majority of the remaining directors though less than a quorum of the Board of Directors, unless otherwise provided by law or the Articles of Incorporation. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors shall be filled by election at the annual meeting or at a special meeting of shareholders called for that purpose.

 

Section 3.12 Removals. Directors may be removed at any time, at a meeting called expressly for that purpose by a vote of the shareholders holding a majority of the shares issued and outstanding and entitled to vote. Such vacancy shall be filled by the directors then in office, though less than a quorum, to hold office until the next annual meeting or until his successor is duly elected and qualified, except that any directorship to be filled by reason of removal by the shareholders may be filled by election, by the shareholders, at the meeting at which the director is removed. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office.

 

Directors may be removed for cause at any time by the consent of a majority of the directors. Such vacancy shall be filled by the directors then in office, though less than a quorum, to hold office until the next annual meeting or until his successor is duly elected and qualified.

 

Section 3.13 Resignations. A director may resign at anytime by delivering written notification thereof to the President or Secretary of the Corporation. Such resignation shall become effective upon its acceptance by the Board of Directors; provided, however, that if the Board of Directors has not acted thereon within ten days from the date of its delivery, the resignation shall upon the tenth day be deemed accepted.

 

6


Section 3.14 Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

 

Section 3.15 Compensation. By resolution of the Board of Directors, the directors shall be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.

 

Section 3.16 Emergency Power. When, due to a national disaster or death, a majority of the directors are incapacitated or otherwise unable to attend the meetings and function as directors, the remaining members of the Board of Directors shall have all the powers necessary to function as a complete Board and, for the purpose of doing business and filling vacancies, shall constitute a quorum until such time as all directors can attend or vacancies can be filled pursuant to these Bylaws.

 

Section 3.17 Chairman. The Board of Directors may elect from its own number a Chairman of the Board, who shall preside at all meetings of the Board of Directors, and shall perform such other duties as may be prescribed from time to time by the Board of Directors.

 

ARTICLE 4

OFFICERS

 

Section 4.1 Number. The officers of the Corporation shall be a President, one or more Vice Presidents, a Secretary and a Chief Financial Officer or Treasurer, each of whom shall be elected by a majority of the Board of Directors. Such other officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. In its discretion, the Board of Directors may leave unfilled for any such period as it may determine any office except those of President and Secretary. Pursuant to New Jersey Permanent Statutes Section 14A-6-15 any two or more offices may be held by the same person, including the offices of the President and Secretary. Officers may or may not be directors or shareholders of the Corporation.

 

Section 4.2 Election and Term of Office. The officers of the Corporation are to be elected by the Board of Directors at the first , meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided.

 

Section 4.3 Resignation. Any officer may resign at any time by delivering a written resignation either to the President or to the Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery.

 

7


Section 4.4 Removal. Any officer or agent maybe removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Any such removal shall require a majority vote of the Board of Directors, exclusive of the officer in question if he is also a director.

 

Section 4.5 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, or if a new office shall be created, may be filled by the Board of Directors for the unexpired portion of the term.

 

Section 4.6 President. The President shall be the chief executive and administrative officer of the Corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, at meetings of the Board of Directors. He shall exercise such duties as customarily pertain to the office of President and shall have general and active supervision over the property, business and affairs of the Corporation and over its several officers. He may appoint officers, agents or employees other than those appointed by the Board of Directors. He may sign, execute and deliver in the name of the Corporation, powers of attorney, certificates of stock, contracts, bonds, deeds, mortgages and other obligations and shall perform such other duties as may be prescribed from time to time by the Board of Directors or by the Bylaws.

 

Section 4.7 Vice President. The Vice President shall have such powers and perform such duties as may be assigned to him by the Board of Directors or the President. In the absence or disability of the President, the Vice President designated by the board or the President shall perform the duties and exercise the powers of the President. In the event there is more than one Vice President and the Board of Directors has not designated which Vice President is to act as President, then the Vice President who was elected first shall act as President. A Vice President may sign and execute contracts and other obligations pertaining to the regular course of his duties.

 

Section 4.8 Secretary. The Secretary shall keep the minutes of all meetings of the shareholders and of the Board of Directors and to the extent ordered by the Board of Directors or the President, the minutes of meetings of all committees. He shall cause notice to be given of the meetings of shareholders, of the Board of Directors and any committee appointed by the Board. He shall have custody of the corporate seal and general charge of the records, documents and papers of the Corporation not pertaining to the performance of the duties vested in other officers, which shall at all reasonable times be open to the examination of any director. He may sign or execute contracts with the President or Vice President thereunto authorized in the name of the Corporation and affix the seal of the Corporation thereto. He shall perform such other duties as may be prescribed from time to time by the Board of Directors or by the Bylaws. He shall be sworn to the faithful discharge of his duties. Assistant Secretaries shall assist the Secretary and shall keep and record such minutes of meetings as shall be directed by the Board of Directors.

 

Section 4.9 Chief Financial Officer or Treasurer. The Chief Financial Officer or Treasurer shall have general custody of the collection and disbursement of funds of the Corporation for collection checks, notes, and other obligations, and shall deposit the same to the

 

8


credit of the Corporation in such bank or banks or depositories as the Board of Directors may designate. He may sign, with the President, or such other persons as may be designated for the purpose by the Board of Directors, all bills of exchange or promissory notes of the Corporation. He shall enter or cause to be entered regularly in the books of the Corporation full and accurate accounts of all monies received and paid by him on account of the Corporation; shall at all reasonable times exhibit his books and accounts to any director of the Corporation upon application at the office of the Corporation during business hours; and, whenever required by the Board of Directors or the President, shall render a statement of his accounts. Upon request by the Board of Directors, he shall give the corporation a bond for the faithful discharge of his duties in such amount and with such surety as the Board shall prescribe. He shall perform such other duties as may be prescribed from time to time by the Board of Directors or by the Bylaws.

 

Section 4.10 General Manager. The Board of Directors may employ and appoint a General Manager who may, or may not, be one of the officers or directors of the Corporation. If employed by the Board of Directors he shall be the chief operating officer of the Corporation and, subject to the directions of the Board of Direction, shall have general charge of the business operations of the Corporation and general supervision over its employees and agents. He shall have the exclusive management of the business of the Corporation and of all of its dealings, but at all times subject to the control of the Board of Directors. Subject to the approval of the Board of Directors or the executive committee, he shall employ all employees of the Corporation, or delegate such employment to subordinate officers, or such division officers, or such division chiefs, and shall have authority to discharge any person so employed. He shall make a quarterly report to the President and directors, or more often if required to do so, setting forth the result of the operations under his charge, together with suggestions looking to the improvement and betterment of the condition of the Corporation, and to perform such other duties as the Board of Directors shall require.

 

Section 4.11 Other Officers. Other officers shall perform such duties and have such powers as may be assigned to them by the Board of Directors.

 

Section 4.12 Salaries. The salaries or other compensation of the officers of the Corporation shall be fixed from time to time by the Board of Directors except that the Board of Directors may delegate to any person or group of persons the power to fix the salaries or other compensation of any subordinate officers or agents. No officer shall be prevented from receiving any such salary or compensation by reason of the fact that he is also a director of the Corporation.

 

Section 4.13 Surety Bonds. In case the Board of Directors shall so require, any officer or agent of the Corporation shall execute to the Corporation a bond in such sums and with sureties as the Board of Directors may direct, conditioned upon the faithful performance of his duties to the Corporation, including responsibility for negligence and for the accounting for all property, monies or securities of the Corporation which may come into his hands.

 

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ARTICLE 5

COMMITTEES

 

Section 5.1 Executive Committee. The Board of Directors may appoint from among its members an Executive Committee of not less than two (2) nor more than eleven (11) members, one of whom shall be the President, and shall designate one or more of its members as alternates to serve as a member or members of the Executive Committee in the absence of a regular member or members. The Board of Directors reserves to itself alone the power to declare dividends, issue stock, recommend to shareholders any action requiring their approval, change the membership of any committee at any time, fill vacancies therein, and discharge any committee either with or without cause at any time. Subject to the foregoing limitations, the Executive Committee shall possess and exercise all other powers of the Board of Directors during the intervals between meetings.

 

Section 5.2 Other Committees. The Board of Directors may also appoint from among its own members such other committees as the Board may determine, which shall in each case consist of not less than two directors, and which shall have such powers and duties as shall from time to time be prescribed by the Board. The President shall be a member ex officio of each committee appointed by the Board of Directors. A majority of the members of any committee may fix its rules of procedure.

 

ARTICLE 6

CONTRACTS. LOANS. DEPOSITS AND CHECKS

 

Section 6.1 Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.

 

Section 6.2 Loans. No loan or advances shall be contracted on behalf of the Corporation, no negotiable paper or other evidence of its obligations under any loan or advance shall be issued in its name, and no property of the Corporation shall be mortgaged, pledged, hypothecated or transferred as security for the payment of any loan, advance, indebtedness or liability of the Corporation unless and except as authorized by the Board of Directors. Any such authorization may be general or confined to specific instances.

 

Section 6.3 Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may select, or as may be selected by any officer or agent authorized to do so by the Board of Directors.

 

Section 6.4 Checks and Drafts. All notes, drafts, acceptances, checks, endorsements and evidences of indebtedness of the Corporation shall be signed by such officer or officers of such agent or agents of the Corporation and in such manner as the Board of Directors from time to time may determine. Endorsements for deposit to the credit of the Corporation in any of its duly authorized depositories shall be made in such manner as the Board of Directors from time to time may determine.

 

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Section 6.5 Bonds and Debentures. Every bond or debenture issued by the Corporation shall be evidenced by an appropriate instrument which shall be signed by the President or a Vice President and by the Treasurer or by the Secretary, and sealed with the seal of the Corporation. The seal may be facsimile, engraved or printed. Where such bond or debenture is authenticated with the manual signature of an authorized officer of the Corporation or other trustee designated by the indenture of trust or other agreement under which such security is issued, the signature of any of the Corporation’s officers named thereon may be facsimile. In case of any officer who signed, or whose facsimile signature has been used on any such bond or debenture, shall cease to be an officer of the Corporation for any reason before the same has been delivered by the Corporation, such bond or debenture may nevertheless be adopted by the Corporation and issued and delivered as though the person who signed it or whose facsimile signature has been used thereon had not ceased to be such officer.

 

ARTICLE 7

CAPITAL STOCK

 

Section 7.1 Certificate of Shares. The shares of the Corporation shall be represented by certificates prepared by the Board of Directors and signed by the President or the Vice President, and by the Secretary, or an Assistant Secretary, or the Treasurer, and sealed with the seal of the Corporation or a facsimile. The signatures of such officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or one of its employees. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors may prescribe.

 

Section 7.2 Transfer of Shares. Transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes.

 

Section 7.3 Transfer Agent and Registrar. The Board of Directors shall have power to appoint one or more transfer agents and registrars for the transfer and registration of certificates of stock of any class, and may require that stock certificates shall be countersigned and registered by one or more of such transfer agents and registrars.

 

Section 7.4 Lost or Destroyed Certificates. The Corporation may issue a new certificate to replace any certificate theretofore issued by it alleged to have been lost or destroyed. The Board of Directors may require the owner of such a certificate or his legal representatives to give the Corporation a bond in such sum and with such sureties as the Board of

 

11


Directors may direct to indemnify the Corporation and its transfer agents and registrars, if any, against claims that may be made on account of the issuance of such new certificates. A new certificate may be issued without requiring any bond.

 

Section 7.5 Consideration for Shares. The capital stock of the Corporation shall be issued for such consideration, but not less than the par value thereof, as shall be fixed from time to time by the Board of Directors. In the absence of fraud, the determination of the Board of Directors as to the value of any property or services received in full or partial payment of shares shall be conclusive.

 

Registered Shareholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact, and shall not be bound to recognize any equitable or other claim to or on behalf of the Corporation, any and all of the rights and powers incident to the ownership of such stock at any such meeting, and shall have power and authority to execute and deliver proxies and consents on behalf of the Corporation in connection with the exercise by the Corporation of the rights and powers incident to the ownership of such stock. The Board of Directors, from time to time may confer like powers upon any other person or persons.

 

ARTICLE 8

INDEMNIFICATION

 

Section 8.1 Indemnification. No officer or director shall be personally liable for any obligations arising out of any acts or conduct of said officer or director performed for or on behalf of the Corporation. The Corporation shall and does hereby indemnify and hold harmless each person and his heirs and administrators who shall serve at any time hereafter as a director or officer of the Corporation from and against any and all claims, judgments and liabilities to which such persons shall become subject by reason of any action alleged to have been heretofore or hereafter taken or omitted to have been taken by him as such director or officer, and shall reimburse each such person for all legal and other expenses reasonably incurred by him in connection with any such claim or liability; including power to defend such person from all suits as provided, however, that no such person shall be indemnified against, or be reimbursed for, any expense incurred in connection with any claim or liability arising out of his own negligence or willful misconduct. The rights accruing to any person under the foregoing provisions of this section shall not exclude any other rights to which he may lawfully be entitled, nor shall anything herein contained restrict the right of the Corporation to indemnify or reimburse such person in any proper case, even though not specifically herein provided for. The Corporation, its directors, officers, employees and agents shall be fully protected in taking any action or making any payment or in refusing so to do in reliance upon the advice of counsel.

 

Section 8.2 Other Indemnification. The indemnification herein provided shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of the heirs, executors and administrators of such a person.

 

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Section 8.3 Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer or employee of the Corporation, or is or was serving at the request of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any liability in any capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against liability under the provisions of this Article 8 or the laws of the State of New Jersey.

 

Section 8.4 Settlement by Corporation. The right of any person to be indemnified shall be subject always to the right of the Corporation by its Board of Directors, in lieu of such indemnity, to settle any such claim, action, suit or proceeding at the expense of the Corporation by the payment of the amount of such settlement and the costs and expenses incurred in connection therewith.

 

ARTICLE 9

AMENDMENTS

 

These Bylaws may be altered, amended, repealed, or added to by the affirmative vote of the holders of a majority of the shares entitled to vote in the election of any director at an annual meeting or at a special meeting called for that purpose, provided that a written notice shall have been sent to each shareholder of record entitled to vote at such meetings at least ten (10) days before the date of such annual or special meetings, which notice shall state the alterations, amendments, additions, or changes which are proposed to be made in such Bylaws. Only such changes shall be made as have been specified in the notice. The Bylaws may also be altered, amended, repealed, or new Bylaws adopted by a majority of the entire Board of Directors at any regular or special meeting. Any Bylaws adopted by the Board may be altered, amended, or repealed by a majority of the shareholders entitled to vote.

 

ARTICLE 10

FISCAL YEAR

 

The fiscal year of the Corporation shall commence on the first day of May and may be varied by resolution of the Board of Directors.

 

ARTICLE 11

DIVIDENDS

 

The Board of Directors may at any regular or special meeting, as they deem advisable, declare dividends payable out of the unreserved and unrestricted earned surplus of the Corporation, such declaration shall be made in accord with New Jersey Permanent Statutes Section 14A:7-14.1 and 14A:7-15.1.

 

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ARTICLE 12

CORPORATE SEAL

 

The corporate seal may be used by causing it or a facsimile thereof to be impressed affixed or reproduced or otherwise.

 

Adopted by resolution of the Board of Directors this 25th day of February 2002.

 

/s/ Robert Nicora
Secretary

 

14

Exhibit 10.1

 

AGREEMENT

 

SYNTHETIC BLOOD INTERNATIONAL, INC.

 

402 West Broadway Street, Suite 400

 

San Diego, California, 92101

 

THIS AGREEMENT is by and between Leland C. Clark, Jr., Ph.D., (hereinafter referred to as “Clark”) and Synthetic Blood International, Inc. (hereinafter referred to as “Synthetic”).

 

As used in this agreement the following terms shall have the following meaning:

 

Invention : All improvements and discoveries dealing with synthetic blond substitutes, whether or not patented and whether or not reduced to practice, made or conceived by Clark, whether made solely by Clark or jointly with others, from the time of entering this Agreement with Synthetic until termination thereof.

 

Confidential Information : All information, and data relating to the research, and development of a commercial oxygen carrier that can be used as an artificial blood substitute, owned by Synthetic.

 

Trade Secret : All confidential information that is treated as a secret by Synthetic.

 

Abandonment : Any patents, patent applications, or disclosure fitLngs that are developed as part of Clark’s work with Synthetic in the development of artificial blood substitutes that are not pursued or exploited by Synthetic and remain unexploited and not pursued for more than one (1) year.

 

Upon the mutual covenants, terms and conditions hereinafter.

 

Synthetic hereby agrees to employ Clark and Clark hereby agrees to accept such employment as a member of the Board of Directors and Vice President in Charge of Research


and Development of Synthetic for a period of five years beginning October l, 1991. In this position Clark shall take responsibility for and direct the Research and Development of the company’s proprietary line of artificial blood substitute products. Clark shall be compensated at the initial rate of $120,000 per year, for full time effort. The actual payment for file first year, will. be $84,000 based on 70% of Clark’s time being spent on the company’s business. The amount will be increased annually based on the amount of time spent on the project, but in any event no less than 70% of time, the success of the research, and an inflation factor. At Clark’s request this compensation may be assigned to Clark Biomedical Research, Inc. Clark shall also be compensated by the issuance of 500,000 shares of common stock of Synthetic.

 

Clark hereby assigns to Synthetic all of his interest in intellectual, properties that relate to synthetic or artificial blood substitutes that have not been assigned or contractually obligated to be assigned to other persons or organizations. In exchange for this assignment, Synthetic will issue 2, 000,000 shares of common stock of Synthetic to Clark. In addition Synthetic will cause to be issued to Clark an additional 2,338,830 shares of common stock.

 

Synthetic represents that upon the issuance of the 4,838,830 shares of common voting stock of Synthetic to Clark, there will. be 17,598,830 shares of common voting stock Issued and outstanding and no other class of stock is authorized.

 

Clark here binds himself to communicate fully and promptly to Synthetic and preserve as confidential, all inventions dealing with an artificial blood substitute that result from the work performed by Clark for Synthetic, or that relate, at the time of conception or reduction to practice, to the business of Synthetic, regardless or not if such invention was developed on Clark’s own time or substantially using Synthetic’s equipment, supplies, facilities or trade secrets. It is understood that Clark shall assign to Synthetic any invention which is developed at

 

2


least in part on Synthetic’s time, or which related at the time of conception or reduction to practice, to the business of or actual development by Synthetic. Any inventions that do not fall within these provisions shall be released by Synthetic to Clark so that Clark may freely exploit the inventions without interference from Synthetic and Synthetic shall claim no right, title or interest in such inventions.

 

Clark bind himself to execute, acknowledge, and deliver to Synthetic all paper dealing with artificial blood substitutes including applications for patents and assignments of inventions and patents on such inventions to be issued therefore as Synthetic may doom necessary or desirable to obtain patents on such inventions in any and all countries and/or to protect the interest or Synthetic in such inventions and patents and to vest title thereto in Synthetic.

 

Clark binds himself to keep confidential, all Confidential Information, and not to communicate or divulge to or use for the benefit of Clark or any other person, firm, association, or corporation without the consent of Synthetic, any information concerning any inventions, discoveries, improvement, processes, formulas, apparatus, equipment methods, trade secrets, research, secret data, costs, uses or purchases of Synthetic’s products or services or other confidential matters possessed, owned or used by Synthetic. All records, files, plans, documents, equipment and the like relating to the business of Synthetic which Clark shall use or prepare or come in contact with shall remain the sole property of Synthetic.

 

It is understood that all inventions that Clark made prior to joining in this relationship with Synthetic are excluded from the scope of this Agreement, except those relating to artificial blood that are specifically assigned to Synthetic in consideration for the equity position with Synthetic.

 

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It is also understood that if an Abandonment by Synthetic occurs with reference to an invention, patent, or other intellectual property developed by Clark during his tenure with Synthetic, or an invention, patent or intellectual property assigned by Clark to Synthetic as herein provided, said invention, patent or intellectual property, at Clark’s request, shall be assigned to Clark and Synthetic shall have no further right of ownership or interest in said assigned invention, patents, or intellectual property. In the event of Synthetic’s failure to assign these abandoned properties to Clark fowl request, this document shah. serve as the assignment thereof.

 

Clark has invented and/or patented many inventions relating to artificial blood in the past. Synthetic understands and acknowledges that most of these have been assigned to other organizations. Synthetic agrees that if the use of any of these assigned patents become important or necessary to the development of Synthetic’s products, that Synthetic will use its best efforts to obtain the right, through license or other agreement, to the use of said inventions so that they could be used by Clark in developing Synthetic’s products.

 

Notwithstanding anything to the contrary herein, Clark shall have the right, in his sole discretion, to terminate and rescind this Agreement by giving thirty (30) days written notice to Synthetic at any time during its term in this event o€ any o€ the following:

 

1. Synthetic’s dilution without Clark’s written consent, of Clark’s equity interest in Synthetic’s common voting stock below ten percent (10%), or the issuance of any other class of stock without Clark’s written consent;

 

2. Synthetic’s failure to permit Clark to control the direction and methodology of research and development.

 

Clark shall have the right, upon thirty (30) days written notice to Synthetic, in his sole discretion, to terminate this Agreement and his obligations hereunder in the event that without

 

4


his written approval a material portion of the assets of Synthetic are sold, transferred or otherwise assigned, Synthetic is purchased or merged into another company or a material change in the management of Synthetic occurs. In the event Clark elects such termination, all of Clark’s right, title and interest to Clark’s inventions, patents and other intellectual properties shall be transferred to Clark and Clark shall be released from any confidentiality covenants herein contained.

 

Clark shall have the right, upon thirty (30) days written notice to Synthetic, in his sole discretion, to terminate his employment for health or retirement reasons. In the event Clark elects such termination, Synthetic will retain all right, title and interest in Clark’s work relating to artificial blood substitutes and any other invention, patents or intellectual property that may have been separately assigned to Synthetic by another document.

 

Synthetic hereby agrees that without Clark’s prior consent, it shall not sell, transfer or assign any invention, confidential information or other intellectual property. Any attempted transfer in derogation of this provision shall be null and void.

 

It is expressly agreed and understood that nothing contained in this Agreement shall preclude, restrict, or inhibit Clark from pursuing researching, developing, and/or inventing individually or with any other separate and apart from Synthetic any other matters not dealing with synthetic or artificial blood substitutes. Any such inventions, patents or other intellectual property developed by Clark shall be his sole and exclusive property and Synthetic shall claim no right, title or other interest therein.

 

This shall be binding upon Clark’s and Synthetic’s heirs, executors, administrators or other legal representatives, successors of assigns.

 

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The undersigned Clark hereby acknowledges reading and understanding all of the above and agrees to promptly disclose to Synthetic any invention during the term of this contractual relationship:

 

/s/


     

/s/


Witness

     

Leland C. Clark, Jr, Ph.D.

   

Date:

 

11/20/92

   

Synthetic Blood International, Inc.

/s/


 

By:

 

/s/ Robert Larson


Witness

 

Date:

 

11/20/92


SYNTHETIC BLOOD INTERNATIONAL, INC.

402 West Broadway Street, Suite 400

San Diego, California 92101

 

January 16, 1993

 

Leland C. Clark, Jr., Ph.D.

111 South Walnut Street

Yellow Springs, Ohio 45387

 

Dear Dr. Clark:

 

Reference is made to the Employment Agreement between Clark and Synthetic. This Amendment No 1. to the Employment Agreement (the “Amendment No. 1”) is entered into to amend and clarify certain provisions of the Employment Agreement, which Clark and Synthetic desire to do. Accordingly, the Employment Agreement is hereby amended and clarified as follows:

 

(1) Synthetic and Clark hereby acknowledge and agree that the Employment Agreement supersedes in its entirety the Employment Agreement, dated October 1, 1991 (as amended on October 15, 1992), between Clark and Synthetic (the “original Employment Agreement”), which Original Employment Agreement is deemed to be, and is, null and void and of no further force and effect effective as of November 20, 1992, the date of the Employment Agreement.

 

(2) The second full paragraph on Page 5 of the Employment Agreement (which begins “Notwithstanding anything to the contrary herein” and ends with “2. Synthetic’s failure to permit Clark to control the direction and methodology of research and development”) and the carryover paragraph beginning at the bottom of page 5 of the Employment Agreement and continuing on page b (which begins “Clark shall have the right” and ends with “confidentiality covenants herein contained”) are hereby deleted in their entirety and replaced with the following:

 

“Notwithstanding anything to the contrary herein, Clark shall have the right in his sole discretion, to terminate his employment under the Agreement by giving thirty (30) days written notice to Synthetic at any time during its term in the event of Synthetic’s failure to permit Clark to control the direction and methodology of research and development of Synthetic far reasons other than Clark’s physical or mental disability (as defined below). In the event Clark elects such termination, all of Clark’s right, title and interest. to Clark’s inventions, patents and other intellectual properties shall be transferred to Clark and Clark shall be released from any confidentiality covenants herein contained.

 

For purposes of this agreement, “physical or mental disability” shall mean Clark’s inability, due to health reasons, to discharge properly his duties of employment for Synthetic for a period of either (i) any 45 consecutive days or (ii) any 180 days in any 365 day period, in each case during the term of this agreement and supported by the opinion of a physician reasonably satisfactory to both Clark (or Clark’s representative) and Synthetic.


Clark hereby agrees that in the event of (i) Synthetic’s dilution of Clark’s equity investment in Synthetic’s common voting stock, (ii) Synthetic’s failure to permit Clark to control the direction and methodology of research and development due to the physical or mental disability of Clark (as defined above), or (iii) a sale, transfer car other assignment of a material portion of the assets of Synthetic, or if Synthetic is purchased or merged into another company or a material change in the management of Synthetic occurs then., in any of these events which are set forth on pages 5 & 6 of the Employment Agreement, Synthetic will retain all right, title and interest in Clark’s work relating to artificial blood substitutes. and any other invention, patents or intellectual property that way have been separately assigned to Synthetic by Clark pursuant to the terms and conditions of another document, and Clark shall also remain subject to, and bound by, all of the confidentiality covenants, agreement and other conditions set forth in the Employment Agreement.”

 

(3) Clark hereby acknowledges and consent to (a) the execution by Synthetic of a Security Agreement, dated November 20, 1992 (the “Security Agreement”), in favor of Cato Portfolio AG and certain Switzerland banks (collectively, the “Secured Parties”) granting the Secured Parties a security interest all the assets of Synthetic described in said Security Agreement, and (b) the execration of all of the documents to be executed and the consummation of all the transactions to be consummated in connection therewith, as contemplated by and set forth in the Private Placement Memorandum of Synthetic, dated November 23, 1992 (the “Private Placement Memorandum”). Clark further acknowledges and agrees that none of the execution of the Security Agreement, the taking of actions necessary to perfect said Security Agreement, the issuance of the Convertible Debentures or the offering of the Units pursuant to the Private Placement Memorandum, in each case prior to the date of this Amendment No 1, shall constitute a breach by Synthetic of any of the terms and conditions of the Employment Agreement.

 

This Amendment No. 1 which is in full force and effect as of the date signed below was requested by Cato Portfolio AG in order to clarify certain aspects of Dr. Clark’s Employment Agreement. In the event Cato Portfolio AG is not successful in closing the Regulation S funding as per the Private Placement Memorandum dated November 23, 1992, this Amendment No. 1 shall be cancelled and no longer remain in farce or effect.

 

All other provisions of the Employment Agreement remain in full force and effect and are not effected by this Amendment No. 1.

 

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If the foregoing correctly Sets forth the understanding between Clark and Synthetic, please so Indicate in the space provided below for the purpose whereupon this letter shall constitute a binding amendment to the Employment Agreement. This Amendment No. l may be executed in counterparts, each of which shall be deemed to be an original and both of which together shall be deemed to be one and the same instrument.

 

Very truly yours,

 

SYNTHETIC BLOOD INTERNATIONAL, INC.

By:

 

/s/


   

Roger A. Ekbom

   

Chairman of the Board

 

CONFIRMED AND AGREED TO:

 

/s/


Leland C Clark, Jr., Ph.D. 1993.

 

Dated: January 16, 1993.

 

3


SYNTHETIC BLOOD INTERNATIONAL, INC.

402 West Broadway Street, Suite 400

San Diego, California 92101

 

March 6, 1993

 

Leland C. Clark, Jr., Ph.D.

111 South Walnut Street

Yellow Springs, Ohio 45387

 

  Re: Amendment No. 2 to Employment Agreement dated November 20, 1992, between Synthetic Blood International, Inc. (“Synthetic”) and Leland C. Clark, Jr., Ph.D. (“Clark”), as amended by Amendment No. 1 thereto, dated January 16, 1993 (“Amendment No. 1 and collectively with the November 20, 1992 Employment Agreement, the “Employment Agreement”).

 

Dear Dr. Clark:

 

Reference is made to the Employment Agreement between Clark and synthetic and to Amendment No. 1 thereto. This Amendment No. 2 to the Employment Agreement (the “Amendment No. 2”) is being entered into to amend and clarify certain provisions of Amendment No. 1, which Clark and Synthetic desire to do. Accordingly, Amendment No. 1 is hereby amended and clarified as follows (defined trims used herein and not defined herein shall have the meanings set forth in Amendment No. 1).

 

1. The term “Employment Agreement” as used in Amendment No. 1 shall mean the Employment Agreement, dated November 20, 1992, between Synthetic and Clark.

 

2. The term “Convertible Debentures” as used in Amendment No. 1 shall mean an aggregate of $780,000.00 in principal amount of Convertible Debentures (and the associated warrants issued in connection therewith) issued on April 3, 1992 ($210,000.00 in principal amount), April 24, 1992 ($214,000.00 in principal amount), July 24,1992 ($160,000.00 in principal amount), September 30, 1992 ($100,000.00 principal amount) and November 20, 1992 ($100,000.00 in principal amount).

 

3. The words “which are set Earth on pages 5 & 6 of the Employment agreement” set forth in the ninth and tenth lines of the first full paragraph on page 2 of Amendment No. 1 (which begins “Clark hereby agrees. . .” and ends with” . . . set forth in the Employment Agreement”) are hereby deleted.


4. Paragraph (3) of Amendment No. 1 (which begins “(3) Clark hereby acknowledges and consents to . . .” and ends with “. . . any of the terms and conditions of the Employment Agreement” is hereby renumbered paragraph 3(a), and the following paragraph 3(b) is hereby added:

 

“(b) in the event that Synthetic defaults on its obligations under the Convertible Debentures and the Secured Parties foreclose and take title to the Intellectual property rights (or any portion thereof) constituting a portion of the security interest granted to the Secured Parties pursuant to the Security Agreement, more particularly described as all right, title and interest of Synthetic in and to the general intangibles (directly by license or otherwise), described as (i) Synthetic’s interests and rights in U.S. Patent No. 4,105,798 and its foreign counterpart patents and the U.S. Patent No. 3,911,238 and its foreign counterpart patents, and (ii) all intellectual property rights, trade secrets, formulae, data, know-how, copyrights and copyright applications (such intellectual property rights collectively referred to herein as the “Intellectual Property Rights”), then for a period of two (2) years from the date on which the Secured Parties obtain title to such Intellectual Property Rights Clark shall have the right to purchase from Secured Parties all, but not less than all, of the Intellectual Property Rights so transferred to the Secured Parties at a purchase price equal to the full amount of the default in payment obligations under the Convertible Debentures which default resulted in the foreclosure by the Secured Parties, plus accrued interest from the date of each such default to the date of repurchase of the Intellectual Property Rights by Clark at a simple rate of interest equal to the lesser of (a) 7% or (b) the highest rate of interest permitted to be charged pursuant to the laws of the State of California governing usury then in effect.

 

5. The last two fall paragraphs on page 2 of Amendment No. 1 (which begins “This Amendment No. 1 which is in full force . . .” and ends with “. . . are not effected by this Amendment No. 1” are hereby deleted in their entirety and replaced with the following:

 

“This Amendment No. I is in full force and effect as of January 16, 1993, the date of its execution. Notwithstanding the foregoing, in the event that an Initial Closing (as defined in the Private Placement Memorandum) with respect to the sale of Units does not occur in accordance with the terms and conditions of the Private Memorandum, as such document may be amended or supplemented, then paragraph number (2) (and only paragraph number (2) of the text of this Amendment No. 1 (as in effect on the date hereof or as may subsequently be amended by Synthetic and Clark) shall be rescinded and shall be null and void and of no force and effect. All other provisions of the Employment Agreement and this Amendment No. 1 are in full force and effect and shall remain in full force and effect regardless of whether an initial Closing with respect to the Units occurs.”

 

If the foregoing correctly, sets forth the understanding between Clark and Synthetic, please so indicate in the space provided below for that purpose whereupon this letter shall constitute a binding amendment to Amendment No. 1, and together with the Employment Agreement shall constitute the entire agreement of the parties hereto with respect to the subject matter hereof and shall supersede all prior arrangements, understandings, negotiations and

 

2


agreements of the parties hereto with respect to the subject matter hereof. This Amendment No. 2 may be executed in counterpart, each of which shall be deemed to be an original and both of which together shall be deemed to be one and the same instrument.

 

Very truly yours,

 

SYNTHETIC BLOOD INTERNATIONAL, INC.

By:

 

/s/


   

Roger A. Ekbom

   

Chairman of the Board

 

CONFIRMED AND AGREED TO:

/s/


Leland C. Clank, Jr., Ph.D.

Date: March 7,1993

 

3

Exhibit 10.2

 

ASSIGNMENT OF INTEREST

 

WHEREAS, W. KEITH R. WATSON, a citizen of United Kingdom residing in Rosarito Beach, Baja California, Mexico, has developed a new molecule, employing combinations of fluorochemicals with suitable emulsifying agents, that is stable at room temperatures and possesses enhanced oxygen carrying capacity and overcomes the toxic reaction problem in the use of synthetic phospholipids in substitute blood when fluorochemicals are used, therefore making it useful in the synthesis of artificial blood,

 

AND WHEREAS, this new molecule is being readied for patent application in Mexico, the United States, and world wide,

 

THEREFORE BE IT RESOLVED THAT, I do hereby assign to SINEQUONAN CORPORATION of New Jersey, all interests, rights, and ownership of this new molecule, and all improvements made thereon, for Twelve Million Six Hundred & Eighty Thousand (12,680,000) shares of the stock of SINEQUONAN CORP., or not less that seventy-two (72%) per cent of the issued and outstanding stock after the above 12,680,000 shares are issued.

 

EXECUTED THIS 19th DAY OF SEPTEMBER, 1990, in Rosarito Beach, Baja California, Mexico.

 

WITNESS:

 

/s/


 

SIGNED:

 

/s/


   

ROBERT LARSON

     

W. KEITH R. WATSON

Exhibit 10.3

 

LICENSE AGREEMENT

 

THIS AGREEMENT made and effective as of the date of last signing (herein the “Effective Date”) by and between SYNTHETIC BLOOD INTERNATIONAL, INC., hating a principal place of business at 3189 Airway Avenue, Building C, Costa Mesa, CA 92626 (hereinafter “Company”), and CHILDREN’S HOSPITAL RESEARCH FOUNDATION an operating, division of Children’s Hospital Medical Center (hereinafter “CHRF”), having a principal place of business at 3333 Burnet Avenue, Cincinnati, Ohio 45229-3039, TJSA.

 

INTRODUCTION

 

1. WHEREAS, CHRF has developed and is continuing research in the area of Technology, as defined in Article 1.1 of this Agreement, and

 

2. WHEREAS, Company desires to obtain certain rights in and to the Technology; and

 

3. WHEREAS, Company has represented to CHRF, to induce CHRF to enter into this Agreement, that Company has the desire, expertise and knowledge to develop, produce, market and sell Products and/or to us Processes and that it shall commit itself to a thorough, vigorous and diligent program of exploratory the Technology such that public utilization shall result therefrom; and

 

4. WHEREAS, Company and CHRF mutually desire to formalize an agreement which delineates their respective rights and obligations with respect to the Technology, and

 

5. WHEREAS, CHRF is the lawful owner of the Technology and Know-how and has the right to grant the license as provided herein.

 

NOW, THEREFORE, in consideration of the mutual covenants and promises contained in this Agreement and other good and valuable consideration, CHRF and Company agree as follows:

 

ARTICLE 1 - DEFINITIONS

 

In the terms defined and used herein, the singular shall include the plural and vice versa. Terms in this Agreement (other than names of parties and Article headings) which we set forth in upper case letters have the meanings established for such terms in the succeeding paragraphs of this Article 1.

 

1.1 “Affiliate” mans any company, corporation of business which is at least fifty percent owned or controlled by Company, or which owns or controls at least fifty percent of Company, or which together with Company is commonly owned or controlled by a third party who owns or controls at least fifty percent of each

 

1.2 “Effective Date” of this Agreement means the date of last signing.

 

1.3 “Field” means the continuous monitoring of blood glucose levels iii diabetes.


1.4 “Government” means the United States Government.

 

1.5 “Know-how” means the data and information embodied in the Technology.

 

1.6 “Improvement” means any modification of Product and/or Process made within the Term of this Agreement in the course of research supported by Company hereunder.

 

1.7 “Patents” means any and all patent applications filed in any country of the world by or on behalf of CHRF claiming the Technology and/or any patents maturing from such patent applications, specifically including United States Patents No. 4,458,686 entitled “Cutaneous Methods of Measuring Body Substances” and No. 4,680,268 and divisional patent No. 4,721,677 both entitled “Implantable Gas-Containing Biosensor and Method for Measuring an Analyte Such as Glucose” and corresponding foreign patents No. 0215678 for the countries of Austria, Belgium, Switzerland, dance, United Kingdom, Italy; No. 1,284,454 For Canada; No. P3687871.5 for German and No. 2638593 for Japan, Luxembourg, Netherlands and Sweden.

 

1.8 “Process” means any and all processes embodying the Technology, Know-how and/or the Patents.

 

1.9 “Product” means any and all products embodying the Technology, Know-how and/or the Patents.

 

1.10 “Technology” means Implantable glucose biosensor of CHRF as described and claimed in the Patents; and Improvement thereto.

 

1.11 “Term” means the period beginning on the Effective Date and extending to the expiration of the last to expire Patent, or for Fifteen (15) years, whichever is longer.

 

1.12 “Territory” means the world.

 

ARTICLE 2 - LICENSE

 

2.1 CHRF hereby grants and agrees to grant to Company an exclusive license within the Territory, only in the Field, to make, have made, use, distribute and market Products and practice the Processes under the Technology, the Know-how and/or the Patents.

 

2.2 The exclusive license specified in Paragraph 2.1 is subject to the rights of CHRF to utilize the Technology, the Know-how, the Processes and/or the Patents for the non-commercial research purposes of CHRF.

 

2.3 The exclusive license specified in Paragraph 2.1 may be subject to certain rights of the Government if the Technology, the Know-how, and/or the Patents were created or invented in the course of Government-funded research. Such rights may include, for example, a royalty-free license to the Government and the requirement that any Product produced for sale in the United States will be manufactured substantially in the United States.

 

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ARTICLE 3 - DUE DILIGENCE

 

3.1 Company shall use its best efforts to bring one or more Products or Processes to market through thorough, vigorous and diligent programs of research, development, testing and marketing of the Technology and to continue active, diligent marketing efforts for one or more Products or Processes throughout the life of this Agreement.

 

3.2 Company’s failure to perform in accordance with any and all portions of Paragraphs 3.1 above shall be grounds for CHRF to terminate this agreement pursuant to Article 10.

 

ARTICLE 4 - PATENTS AND PATENT COSTS

 

4.1 CHRF shall retain title to the Technology, the Know-how and the Patents.

 

4.2 CHRF shall maintain Patents in the United States and in all foreign countries designated within Paragraph 1.7 herein.

 

4.3 Company agrees promptly to reimburse CHRF for its outside legal costs incurred under Paragraph 4.2.

 

4.4 Failure of Company to pay the amounts required under Paragraph 4.1 within thirty (30) days of the receipt of a written statement will be a breach of this Agreement.

 

ARTICLE 5 - PAYMENTS

 

5.1 Upon execution of this Agreement, Company shall pay to CHRF a license fee (“License Fee”) of thirty-six thousand sixty-two dollars and thirteen cents ($36,062.13) within thirty days (30) days of the Effective Date.

 

5.2 Company agrees to pay CHRF for all future patent maintenance and legal fees associated with the Patents within thirty (30) days of receipt of invoice from CHRF.

 

5.3 In addition, Company agrees to issue to CHRF within thirty (30) days of the Effective Date, a certificate for fifteen thousand (15,000) shares of duly authorized common stock of Company, subject to CHRF’s due diligence of Company and agreement on the value of said shares.

 

ARTICLE 6 - INFRINGEMENT

 

6.1 Each party shall promptly report in writing to the other party daring the Term of this Agreement any infringement or suspected infringement of any patent, or unauthorized use or misappropriation of the Technology or Know-how by a third pasty of which it becomes aware, and shall provide the other party with all available evidence supporting said infringement, suspected infringement, suspected infringement or unauthorized use or misappropriation.

 

6.2 Except as provided in Paragraph 6.3, Company shall have the right. to initiate an infringement suit or other appropriate action against any third party who at any time has

 

3


infringed or is suspected of infringing any of the Patents or of using without proper authorization all or any portion of the Technology or Know-how. Company shall give CHRF sufficient advance written notice of its intent to initiate such action and the reasons therefore, and shall provide CHRF with an opportunity to make suggestions and comments regarding such action. Company shall keep CHRF promptly informed of the status of any such action. Company shall have the sole and exclusive right to select counsel for and shall pay all expenses of such action. CHRF shall offer reasonable assistance to Company ire connection there-with at no charge to Company except for reimbursement of reasonable out-of-pocket expenses. Company may settle any such action without prior approval of CHRF. CHRF shall receive ten percent (10%) of all damages, profits or awards of whatever nature recovered from such action under this Agreement after Company has been compensated for its costs in handling such action.

 

6.3 In the event that Company does not within six (6) months (a) secure cessation of the infringement, or (b) enter suit against the infringer, CHRF shall thereafter have the right but not the obligation to convert Company’s exclusive license hereunder to a non-exclusive license, and/or to take action against the infringer at CHRF’s own expense. Company shall offer reasonable assistance to CHRF in connection with such action at no charge to CHRF except for the reimbursement of reasonable out-of-pocket expenses. Any damages, profits or awards of whatever nature recovered from. such action shall belong solely to CHRF.

 

ARTICLE 7 - WARRANTY DISCLAIMER

 

7.1 Nothing in this Agreement shall be construed as:

 

  (a) A warranty or representation by CHRF as to the validity or scope of any Patent.;

 

  (b) A warranty or representation that anything made, used, sole, or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents, copyrights and/or trademarks of third parties;

 

  (c) An obligation of CHRF to bring or prosecute actions or suits against third parties for infringement;

 

  (d) Conferring rights to use in advertising, publicity or otherwise any trademark or the name of CHRF or the Children’s Hospital Medical Center of Cincinnati, Ohio; or

 

  (e) Granting by implication, estoppel or otherwise any licenses under patents of CHRF other than Patents, regardless of whether such other patents are dominant of or subordinate to any Patent.

 

7.2 Except as expressly set forth in this Agreement, CHRF MAKES NO REPRESENTATIONS, EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, AND ASSUMES NO RESPONSIBILITIES WHATEVER WITH RESPECT TO THE USE, SALE OR OTHER DISPOSITION BY COMPANY OR ITS VENDEES OR OTHER TRANSFEREES OF PRODUCTS INCORPORATING

 

4


OR MADE BY USE OF INVENTIONS LICENSED UNDER THIS AGREEMENT OR INFORMATION, IF ANY, FURNISHED UNDER THIS AGREEMENT. SUCH INVENTIONS AND INFORMATION ARE PROVIDED AS IS, WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED.

 

ARTICLE 8 - NOTICES

 

8.1 Communications to Company concerning this Agreement should be addressed to:

 

Synthetic Blood International, Inc.

3189 Airway Avenue, Building C

Costa Mesa, CA 92626

ATTN: Robert W. Nicara

              President

 

8.2 Communications to CHRF concerning this Agreement should be addressed to:

 

Director, Technology Transfer

Children’s Hospital Research Foundation

3333 Burnet Avenue

Cincinnati, Ohio 45229-3039

Fax: 513/636-x453

ATTN: Joseph D. Fondacaro, Ph.D.

 

ARTICLE 9 – TERMINATION

 

9.1 Company may terminate this Agreement at any time by providing one (1) year’s written notice to CHRF.

 

9.2 In the event that Company should be in default of any of its obligations hereunder, CHRF may at its sole option: (a) terminate this Agreement or (b) convert the exclusive license hereunder to a non-exclusive license. This option (a) or (b) of CHRF shall be exercised by written notice to Company specifying the nature of the and shall be effective thirty (30) days following receipt of said notice by Company unless Company cures paid default prior to the expiration of said period of thirty (30) days.

 

9.3 Upon termination of this Agreement or conversion to a non-exclusive license as provided under Paragraphs 9.1 or 9.2, neither party shall be relieved of any obligations incurred prior to such termination or conversion, and the obligations of the Parties under Articles 4 and 7 and Paragraphs 10.3 and 10.4 or any provisions which by their nature are intended to survive any such termination or conversion shall survive and continue to be enforceable.

 

ARTICLE 10 - MISCELLANEOUS

 

10.1 Company agrees to defend CHRF at Company’s cost and expense, and will indemnify and hold harmless CHRF from and against any and all losses, costs, damages, fees or expenses arising out of or in connection with the manufacture, use, commercialization, marketing or sale by Company of any Product and/or Process hereunder.

 

5


10.2 Neither this Agreement nor any of the rights or obligations hereunder may be assigned by either party without the prior written consent of the other party.

 

10.3 It is understood that CHRF is subject to United States laws and regulations controlling the export of technical data, computer software, laboratory prototypes and other commodities, and that its obligations hereunder are contingent on compliance with all applicable United States export laws and regulations. The transfer of certain technical data and/or commodities may require a license from the cognizant agency of the United States Government and/or written assurances by Company that Company shall not export data or commodities to certain foreign countries without prior approval of such agency. CHRF neither represents nor warrants that a license shall not be required nor that, if require, it shall be issued. In any event, Company specifically agrees not to export or re-export any information and/or technical data and/or products in violation of any applicable USA laws and/or regulations.

 

10.4 This Agreement shall be construed under and interpreted under the Laws of the State of Ohio, USA, except that questions affecting the construction and effect of any Patent shall be determined by the national law of the country in which the Patent has been granted.

 

10.5 In the event that either party is prevented from performing or is unable to perform any of its obligation under this Agreement due to any act of God, fire, casualty, flood, war, strike, lockout, failure of public utilities, government regulation or the like, such party shall give notice to the other party in writing promptly, and thereupon the affected party’s performance shall be excused and the time for performance shall be extended for the period of delay or inability to perform due to such occurrence.

 

10.6 The waiver by either party of a breach or default of any provisions of this Agreement by the other party must be in written form and signed by both parties, and shall not be construed as a waiver of any succeeding breach of the same or any other provision.

 

10.7 This Agreement contains the frill understanding of the parties with respect to the subject matter hereof and supersedes all prior understandings and writings relating thereto.

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their properly and duly authorized officers or representatives as of the date first above written.

 

CHILDREN’S HOSPITAL

RESEARCH FOUNDATION

 

SYNTHETIC BLOOD

INTERNATIONAL, INC.

/s/


 

/s/


Thomas F. Boat, M.D.

Director

 

Robert W. Nicora

President

02/27/01

Date

 

02/28/01

Date

 

6

Exhibit 10.4

 

SYNTHETIC BLOOD INTERNATIONAL, INC.

 

1999 STOCK PLAN

 

1. Purpose of the Plan . The purpose of the Synthetic Blood International, Inc. 1999 Stock Plan is to enable Synthetic Blood International, Inc. to provide an incentive to eligible employees, consultants, directors and officers whose present and potential contributions are important to the continued success of the Company, to afford those individuals the opportunity to acquire a proprietary interest in the Company, and to enable the Company to enlist and retain in its employment the best available talent for the successful conduct of its business. It is intended that this purpose will be effected through the granting of (a) stock options, (b) stock purchase rights, (c) stock appreciation rights, and (d) long-term performance awards.

 

2. Definitions . As used herein, the following definitions shall apply.

 

(a) “Administrator” means the Board or such of its Committees as shall be administering the Plan, in accordance with Section 5 of the Plan.

 

(b) “Applicable Laws” means the legal requirements relating to the administration of stock option plans under applicable securities laws and the Code.

 

(c) “Board” means the Board of Directors of the Company.

 

(d) “Code” means the Internal Revenue Code of 1986, as amended.

 

(e) “Committee” means a Committee appointed by the Board in accordance with Section 5 of the Plan.

 

(f) “Common Stock” means the Common Stock of the Company.

 

(g) “Company” means Synthetic Blood International, Inc., a New Jersey corporation.

 

(h) “Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services and who is compensated for such services provided that the term “Consultant” shall not include Directors who are paid only a director’s fee by the Company or who are not compensated by the Company for their services as Directors.

 

(i) “Continuous Status as an Employee or Consultant” means that the employment or consulting relationship is not interrupted or terminated by the Company, any Parent or Subsidiary. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) any leave of absence approved by the Company, including sick leave, military leave, or other personal leave, provided, however that for purposes of Incentive Stock Options, any such leave may not exceed ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; or (ii) transfers between locations of the Company or between the Company, its parent, its Subsidiaries or its successor.


(j) “Director” means a member of the Board.

 

(k) “Disability” means total and permanent disability as defined in Section 22(c)(3) of the Code.

 

(l) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

 

(m) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

(n) “Family Member” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Employee’s or Consultant’s household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the Employee or Consultant) control the management of assets, and any other entity in which these persons (or the Employee or Consultant) own more than fifty percent of the voting interests, including any changes as may be made from time to time to the definition of “Family Member” as promulgated by the Securities and Exchange Commission in connection with the general instructions for Form S-8 promulgated under the Securities Act of 1933, as amended, or any successor form.

 

(o) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

 

(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation (“NASDAQ”) System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

 

(ii) If the Common Stock is quoted on the NASDAQ system (but not on the National Market System thereof), the OTC Bulletin Board, or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

 

(iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator.

 

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(p) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

 

(q) “Long-Term Performance Award” means an award under Section 9 below. A Long-Term Performance Award shall permit the recipient to receive a cash or stock bonus (as determined by the Administrator) upon satisfaction of such performance factors as are set out in the recipient’s individual grant. Long-Term Performance Awards will be based upon the achievement of Company, Subsidiary and/or individual performance factors or upon such other criteria as the Administrator may deem appropriate.

 

(r) “Long-Term Performance Award Agreement” means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Long-Term Performance Award grant. The Long-Term Performance Award Agreement is subject to the terms and conditions of the Plan.

 

(s) “Nonstatutory Stock Option” means any Option that is not an Incentive Stock Option.

 

(t) “Notice of Grant” means a written notice evidencing certain terms and conditions of an individual Option, Stock Purchase Right, SAR or Long-Term Performance Award grant. The Notice of Grant is part of the Option Agreement, the SAR Agreement and the Long-Term Performance Award Agreement.

 

(u) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

 

(v) “Option” means a stock option granted pursuant to the Plan.

 

(w) “Option Agreement” means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

 

(x) “Option Exchange Program” means a program whereby outstanding options are surrendered in exchange for options with a lower exercise price.

 

(y) “Optioned Stock” means the Common Stock subject to an Option or Right.

 

(z) “Optionee” means an Employee or Consultant who holds an outstanding Option or Right.

 

(aa) “Outside Director” means a Director of the Company who either (i) is not a current employee of the Company or an “affiliated corporation” (within the meaning of Treasury Regulations promulgated under Section 152(m) of the Code), is not a former employee of the Company or an “affiliated corporation” receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an

 

3


“affiliated corporation” at any time, and is not currently receiving direct or indirect remuneration from the Company or an “affiliated corporation” for services in any capacity other than as a Director or (ii) is otherwise considered an “outside director” for purposes of Section 162(m) of the Code.

 

(bb) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(c) of the Code.

 

(cc) “Plan” means this 1999 Stock Plan.

 

(dd) “Restricted Stock” means shares of Common Stock subject to a Restricted Stock Purchase Agreement acquired pursuant to a grant of Stock Purchase Rights under Section 8 below.

 

(ee) “Restricted Stock Purchase Agreement” means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant.

 

(ff) “Right” means and includes SARs, Long-Term Performance Awards and Stock Purchase Rights granted pursuant to the Plan.

 

(gg) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor rule thereto, as in effect when discretion is being exercised with respect to the Plan.

 

(hh) “SAR” means a stock appreciation right granted pursuant to Section 7 of the Plan.

 

(ii) “SAR Agreement” means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual SAR grant. The SAR Agreement is subject to the terms and conditions of the Plan.

 

(jj) “Share” means a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan.

 

(kk) “Stock Purchase Right” means the right to purchase Common Stock pursuant to Section 8 of the Plan, as evidenced by a Notice of Grant.

 

(ll) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

 

3. Eligibility. Nonstatutory Stock Options and Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. If otherwise eligible, an Employee or Consultant who has been granted an Option or Right may be granted additional Options or Rights.

 

4. Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan, the total number of shares reserved and available for distribution under the Plan is 4,000,000

 

4


shares. Subject to Section 11 of the Plan, if any shares that have been optioned under an Option cease to be subject to such Option (other than through exercise of the Option), or if any Option or Right granted hereunder is forfeited or any such award otherwise terminates prior to the issuance of Common Stock to the participant, the shares that were subject to such Option or Right shall again be available for distribution in connection with future Option or Rights grants under the Plan; provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Right, shall not in any event be returned to the Plan and shall not become available for future distribution under the Plan.

 

5. Administration.

 

(a) Composition of Administrator.

 

(i) Multiple Administrative Bodies. In the discretion of the Board, different Committees may administer the Plan with respect to Employees, Directors and Consultants.

 

(ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more “Outside Directors” within the meaning of Section 162(m) of the Code.

 

(iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

 

(iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws.

 

(v) General. Once a Committee has been appointed pursuant to subsection (ii) or (iii) of this Section 5(a), such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members, remove members (with or without cause) and appoint new members in substitution, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and in the case of a Committee appointed under subsection (iii), to the extent permitted by Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary grant or award plan.

 

(b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

 

(i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(o) of the Plan;

 

5


(ii) to select the Consultants and Employees to whom Options and Rights may be granted hereunder;

 

(iii) to determine whether and to what extent Options and Rights or any combination thereof, are granted hereunder;

 

(iv) to determine the number of shares of Common Stock to be covered by each Option and Right granted hereunder;

 

(v) to approve forms of agreement for use under the Plan;

 

(vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Rights may be exercised (which may be based on performance criteria), any vesting, acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Rights or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

 

(vii) to construe and interpret the terms of the Plan;

 

(viii) to prescribe, amend and rescind rules and regulations relating to the Plan;

 

(ix) to determine whether and under what circumstances an Option or Right may be settled in cash instead of Common Stock or Common Stock instead of cash;

 

(x) to reduce the exercise price of any Option or Right;

 

(xi) to modify or amend each Option or Right (subject to Section 13 of the Plan);

 

(xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Right previously granted by the Administrator;

 

(xiii) to institute an Option Exchange Program;

 

(xiv) to determine the terms and restrictions applicable to Options and Rights and any Restricted Stock; and

 

(xv) to make all other determinations deemed necessary or advisable for administering the Plan.

 

(c) Effect of Administrator’s Decision. The Administrator’s decisions, determinations and interpretations shall be final and binding on all optionees and any other holders of Options or Rights.

 

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(d) Limitations on Grants. The following limitations will apply to grants of Options or SARs under the Plan:

 

(i) no Employee, Director or Consultant will be granted Options or SARs under the Plan to receive more than 200,000 shares of Common Stock in any one fiscal year; provided that, the Company may make an additional one-time grant of up to 300,000 shares to newly-hired Employees, Directors and Consultants; and

 

(ii) no Employee, Director or Consultant will be granted Options or SARs under the Plan to purchase more than 1,000,000 shares over the term of the Plan, provided that, if the number of shares available for issuance under Paragraph 4 of the Plan is increased, the maximum number of options or SARs that any Employee, Director or Consultant may be granted also automatically will increase by an amount equal to 100,000 shares for each additional fiscal year in which shares are allocated for issuance under the Plan.

 

6. Duration of the Plan. The Plan shall remain in effect until terminated by the Board under the terms of the Plan, provided that in no event may Incentive Stock Options be granted under the Plan later than 10 years from the date the Plan was adopted by the Board.

 

7. Options and SARs.

 

(a) Options. The Administrator, in its discretion, may grant Options to eligible participants and shall determine whether such Options shall be Incentive Stock Options or Nonstatutory Stock Options. Each Option shall be evidenced by a Notice of Grant/Option Agreement which shall expressly identify the Options as Incentive Stock Options or as Nonstatutory Stock Options, and be in such form and contain such provisions as the Administrator shall from time to time deem appropriate. The Notice of Grant/Option Agreement shall govern each Optionee’s rights and obligations with respect to each such particular Option. Without limiting the foregoing, the Administrator may at any time authorize the Company, with the consent of the respective recipients, to issue new Options or Rights in exchange for the surrender and cancellation of outstanding Options or Rights. Option agreements shall contain the following terms and conditions:

 

(i) Exercise Price; Number of Shares. The per Share exercise price for the Shares issuable pursuant to an Option shall be such price as is determined by the Administrator; provided, however, that in the case of an Incentive Stock Option, the price shall be no less than 100% of the Fair Market Vale of the Common Stock on the date the Option is granted, subject to any additional conditions set out in Section 7(a)(iv) below.

 

The notice of Grant shall specify the number of Shares to which it pertains.

 

(ii) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator will determine the terms and conditions to be satisfied before Shares may be purchased, including the dates on which Shares subject to the Option may first be purchased. The Administrator may specify that an Option may not be exercised until the completion of the service period specified at the time of grant. (Any such period is referred to herein as the “waiting period.”) At the item an Option is granted, the Administrator shall fix the period within which the Option may be exercised, which shall not be earlier than the end of the

 

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waiting period, if, any, nor, in the case of an Incentive Stock Option, later than ten (10) years, from the date of grant.

 

(iii) Form of Payment. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of gra